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on Financial Markets |
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Issue of 2007‒11‒10
ten papers chosen by |
| By: | Thomas B. King; Andrew T. Levin; Roberto Perli |
| Abstract: | Over the Great Moderation period in the United States, we find that corporate credit spreads embed crucial information about the one-year-ahead probability of recession, as evidenced by both in- and out-of-sample fit. Furthermore, the incidence of “false positive” predictions of recession is dramatically reduced by utilizing a bivariate model that includes a measure of credit spreads along with the slope of the yield curve; indeed, these bivariate models provide much better forecasting performance than any combination of univariate models. We also find that optimal (Bayesian) model combination strongly dominates simple averaging of model forecasts in predicting recessions. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-57&r=fmk |
| By: | Parantap Basu; Andrei Semenovz; Kenji Wadax |
| Abstract: | This paper develops an integrated model, which addresses the recent Brandt, Cochrane and Santa-Clara (2006) puzzle of reconciling low international risk sharing with a high and variable equity premium. In addition, a new currency risk premium puzzle is also addressed. Following Kocherlakota and Pistaferri (2007), we examine two market structures: (i) where private risk cannot be insured and (ii) where the private risk can be partially insured by striking long term insurance contract with truth revelation constraint. Our GMM estimation based on the US-UK .nancial and cross-sectional household spending data lends support to the second market environment. |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmacp:0701&r=fmk |
| By: | Monica Billio (Department of Economics, University Of Venice Cà Foscari); Mila Getmansky (Isenberg School of Management, University of Massachusetts); Loriana Pelizzon (Department of Economics, University Of Venice Cà Foscari) |
| Abstract: | We measure dynamic risk exposure of hedge funds to various risk factors during different market volatility conditions using the regime-switching beta model. We find that in the high-volatility regime (when the market is rolling-down) most of the strategies are negatively and significantly exposed to the Large-Small and Credit Spread risk factors. This suggests that liquidity risk and credit risk are potentially common factors for different hedge fund strategies in the down-state of the market, when volatility is high and returns are very low. We further explore the possibility that all hedge fund strategies exhibit idiosyncratic risk in a high volatility regime and find that the joint probability jumps from approximately 0% to almost 100% only during the Long-Term Capital Management (LTCM) crisis. Out-of-sample forecasting tests confirm the economic importance of accounting for the presence of market volatility regimes in determining hedge funds risk exposure. |
| Keywords: | Hedge Funds; Risk Management; Regime-Switching Models, Liquidity |
| JEL: | G12 G29 C51 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:17_07&r=fmk |
| By: | Barbara Luppi (CEFIN and University of Modena and Reggio Emilia, Italy); Massimiliano Marzo (University of Bologna and The Rimini Centre for Ecomonic Analysis, Italy); Antonello E. Scorcu (University of Bologna and The Rimini Centre for Ecomonic Analysis, Italy) |
| Abstract: | We estimate a model of credit risk for portfolios of Small and Medium-sized enterprises, conditional on being a non-profit or for-profit firms. The estimation is based on a unique dataset on Italian firms provided by a large commercial bank. We show that the main variables to identify creditworthiness are different for non-profit andcrucial for non-profit firms. Classification-JEL: G21, G28 |
| Keywords: | SME finance; Basel II; Retail banking; Non-profit |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:30-07&r=fmk |
| By: | Brent Bundick |
| Abstract: | This paper utilizes a Markov-switching framework to model excess returns in federal funds futures contracts. This framework identifies a high-volatility state where excess returns are large, positive, and volatile and a low-volatility state where excess returns have a lower volatility and are small in absolute value. Federal funds futures rates require adjustment for excess returns only in the high-volatility state. Intermeeting rate cuts of the federal funds rate target always correspond with the high-volatility regime and can explain much of the variation in excess returns. This paper also examines previous return models and helps clarify the relationship between excess returns, business cycles, and intermeeting rate cuts. In real-time forecasting, however, the unadjusted futures rates outperform three different forecasting models. This result strengthens the case for unadjusted futures rates as a measure of monetary policy expectations. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp07-08&r=fmk |
| By: | Thomas Philippon; Yuliy Sannikov |
| Abstract: | We study investment options in a dynamic agency model. Moral hazard creates an option to wait and agency conflicts affect the timing of investment. The model sheds light, theoretically and quantitatively, on the evolution of firms' dynamics, in particular the decline of the failure rate and the decrease in the age of IPOs. |
| JEL: | D82 D86 D92 E22 G31 G32 G33 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13584&r=fmk |
| By: | Herbertsson, Alexander (Department of Economics, School of Business, Economics and Law, Göteborg University); Rootzén, Holger (Department of Mathematical Statistic) |
| Abstract: | We study a model for default contagion in intensity-based credit risk and its consequences for pricing portfolio credit derivatives. The model is specified through default intensities which are assumed to be constant between defaults, but which can jump at the times of defaults. The model is translated into a Markov jump process which represents the default status in the credit portfolio. This makes it possible to use matrix-analytic methods to derive computationally tractable closed-form expressions for single-name credit default swap spreads and kth-to-default swap spreads. We ”semicalibrate” the model for portfolios (of up to 15 obligors) against market CDS spreads and compute the corresponding kth-to-default spreads. In a numerical study based on a synthetic portfolio of 15 telecom bonds we study a number of questions: how spreads depend on the amount of default interaction; how the values of the underlying market CDS-prices used for calibration influence kth-th-to default spreads; how a portfolio with inhomogeneous recovery rates compares with a portfolio which satisfies the standard assumption of identical recovery rates; and, finally, how well kth-th-to default spreads in a nonsymmetric portfolio can be approximated by spreads in a symmetric portfolio.<p> |
| Keywords: | Portfolio credit risk; intensity-based models; default dependence modelling; default contagion; CDS; kth-to-default swaps; Markov jump processes; Matrix-analytic methods |
| JEL: | C02 C63 G13 G32 G33 |
| Date: | 2007–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0269&r=fmk |
| By: | Alquist, Ron; Kilian, Lutz |
| Abstract: | Based on a two-country, two-period general equilibrium model of the spot and futures markets for crude oil, we show that there is no theoretical support for the common view that oil futures prices are good predictors of the spot price in the mean-squared error sense; yet under certain conditions there is support for the view that oil futures prices are unbiased predictors. Our empirical analysis documents that futures-based forecasts are biased and typically inferior to simple and easy-to-use forecasting methods such as the no-change forecast. This does not mean that there is no useful information in oil futures prices. We demonstrate that fluctuations in the oil futures basis are larger and more persistent than fluctuations in the basis of foreign exchange futures. Within the context of our theoretical model, this anomaly can be explained by the marginal convenience yield of oil inventories. We show that increased uncertainty about future oil supply shortfalls causes the basis to decline and precautionary demand for crude oil to increase, resulting in an immediate increase in the real spot price that is not necessarily associated with an accumulation of oil inventories. Our main result is that the negative of the basis may be viewed as an index of fluctuations in the price of crude oil driven by precautionary demand for oil. Our empirical analysis of this index provides independent evidence of how shifts in market expectations about future oil supply shortfalls affect the spot price of crude oil. Such expectation shifts have been difficult to quantify, yet have been shown to play an important role in explaining oil price fluctuations. Our empirical results are consistent with related evidence in the literature obtained by alternative methodologies. |
| Keywords: | basis; crude oil; expectations; forecasting; futures market; precautionary demand; spot market; spread |
| JEL: | C53 D51 G13 G15 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6548&r=fmk |
| By: | HUD - PD&R |
| Abstract: | It is commonly accepted that a well-developed primary residential mortgage market promotes homeownership and that homeownership in turn promotes economic and political stability. Secondary mortgage markets (SMMs) serve to enhance primary mortgage markets by separating the mortgage investment and origination functions. This separation increases the number of mortgage investors and, ultimately, the amount of capital available in the market. Increased competition in the primary market leads to more choices and lowers costs for borrowers. The net effect is to expand the benefits accruing from a primary mortgage market: making homeownership cheaper and more affordable, and expanding the ability of citizens to become homeowners. |
| JEL: | G00 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:hud:wpaper:39146&r=fmk |
| By: | HUD - PD&R |
| Abstract: | The housing finance system of the United States is a marvel in its size, scope, and efficiency. One key feature of the U.S. housing finance system is its integration into the broader financial markets, providing Americans with access to cheap sources of capital. As a result, Americans enjoy high-quality housing and high homeownership rates. Thus, housing finance is of central importance to two critical sectors of the national economy: one obvious—the housing industry— and the other less obvious—the larger financial system of the United States. |
| JEL: | G00 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:hud:wpaper:39147&r=fmk |