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on Financial Markets |
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Issue of 2008‒03‒08
twelve papers chosen by |
| By: | Andrew J. Patton |
| Abstract: | This paper presents an overview of the literature on applications of copulas in the modelling of financial time series. Copulas have been used both in multivariate time series analysis, where they are used to charaterise the (conditional) cross-sectional dependence between individual time series, and in univariate time series analysis, where they are used to characterise the dependence between a sequence of observations of a scalar time series process. The paper includes a broad, brief, review of the many applications of copulas in finance and economics. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:sbs:wpsefe:2008fe21&r=fmk |
| By: | Andrew J. Patton; Kevin Sheppard |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:sbs:wpsefe:2008fe22&r=fmk |
| By: | Eckhard Platen (School of Finance and Economics, University of Technology, Sydney); Hardy Hulley (School of Finance and Economics, University of Technology, Sydney) |
| Abstract: | In the years following the publication of Black and Scholes [7], numerous alternative models have been proposed for pricing and hedging equity derivatives. Prominent examples include stochastic volatility models, jump di®usion models, and models based on Levy processes. These all have their own shortcomings, and evidence suggests that none is up to the task of satisfactorily pricing and hedging extremely long-dated claims. Since they all fall within the ambit of risk-neutral pricing, it is thus natural to speculate that their defciencies are (at least in part) attributable to the modelling constraints imposed by the risk-neutral approach itself. To investigate this idea, we present a simple two-parameter model for a diversifed equity accumulation index. Although our model does not admit an equivalent risk-neutral probability measure, it nevertheless fulfils a minimal no-arbitrage condition for an economically viable financial market. Furthermore, we demonstrate that contingent claims can be priced and hedged, without the need for an equivalent change of probability measure. Convenient formulae for the prices and hedge ratios of a number of standard European claims are derived, and a series of hedge experiments for extremely long-dated claims on the S&P 500 total return index are conducted. Our model serves also as a convenient medium for illustrating and clarifying several points on asset price bubbles and the economics of arbitrage. |
| Keywords: | long-dated claims; risk-neutral pricing; real-world pricing; arbitrage; minimal market model; squared Bessel processes; hedge simulations; asset price bubbles |
| JEL: | G10 G12 G13 |
| Date: | 2008–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:214&r=fmk |
| By: | Constantinos Kardaras; Eckhard Platen (School of Finance and Economics, University of Technology, Sydney) |
| Abstract: | A financial market model where agents can only trade using realistic buyand-hold strategies is considered. Minimal assumptions are made on the nature of the asset-price process ? in particular, the semimartingale property is not assumed. Via a natural assumption of limited opportunities for unlimited resulting wealth from trading, coined the No-Unbounded-Profit-with-Bounded-Risk (NUPBR) condition, we establish that asset-prices have to be semimartingales, as well as a weakened version of the Fundamental Theorem of Asset Pricing that involves supermartingale deflators rather than Equivalent Martingale Measures. Further, the utility maximization problem is considered and it is shown that using only buy-and-hold strategies, optimal utilities and wealth processes resulting from continuous trading can be approximated arbitrarily well. |
| Keywords: | numeraire portfolio; semimartingales; buy-and-hold strategies; unbounded profit with bounded risk; supermartingale deflators; utility maximization. |
| Date: | 2008–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:213&r=fmk |
| By: | Zwart, G. de; Markwat, T.D.; Swinkels, L.; Dijk, D.J.C. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | We measure the economic value of information derived from macroeconomic variables and from technical trading rules for emerging markets currency investments. Using a sample of 23 emerging markets with a floating exchange rate regime over the period 1995-2007, we document that both types of information can be exploited to implement profitable trading strategies. In line with evidence from surveys of foreign exchange professionals concerning the use of fundamental and technical analysis, we find that combining the two types of information improves the risk-adjusted performance of the investment strategies. |
| Keywords: | emerging markets;foreign exchange rates;structural exchange rate models;technical trading;heterogeneous agents |
| Date: | 2007–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:1765010891&r=fmk |
| By: | Patrick Honohan |
| Abstract: | Partial credit guarantee schemes have experienced renewed interest from governments keen to promote financial access for small enterprises. While the market can find used for partial credit guarantees, the attractions for public policy can be illusory: indeed their most attractive feature for myopic politicians may be the ease with which the true cost of guarantees can be understated, at least at the outset. In practice, the actual fiscal cost of existing schemes has varied widely across countries and has represented a high per dollar subsidy in some cases. Despite the recent application of some innovative techniques, the social benefit of such schemes have proved difficult to estimate, not least because their goals have been vague. Operational design has influenced the cost and apparent effectiveness of different schemes and has also varied widely. Clear and precise goals, against which performance is regularly monitored, realistic pricing verified by consistent and transparent accounting, and attention to the incentive features of operational design, especially for the intermediaries, are among the prerequisites for such schemes to have a good chance of truly achieving improvements in social welfare. |
| Date: | 2008–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp244&r=fmk |
| By: | Ulf Axelson; Tim Jenkinson; Per Strömberg; Michael S. Weisbach |
| Abstract: | This paper provides an empirical analysis of the financial structure of large recent buyouts. We collect detailed information of the financings of 153 large buyouts (averaging over $1 billion in enterprise value). We document the manner in which these important transactions are financed. Buyout leverage is cross-sectionally unrelated to the leverage of matched public firms, and is largely driven by other factors than what explains leverage in public firms. In particular, the economy-wide cost of borrowing seems to drive leverage. Prices paid in buyouts are related to the prices observed for matched firms in the public market, but are also strongly affected by the economy-wide cost of borrowing. These results are consistent with a view in which the availability of financing impacts booms and busts in the private equity market. |
| Keywords: | Private equity, capital structure, buyouts |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:sbs:wpsefe:2008fe20&r=fmk |
| By: | JUAN PEDRO GOMEZ (Instituto de Empresa) |
| Abstract: | There are several economic reasons why investors might want to hedge local risk resulting from relative wealth concerns; namely, keeping up with the Joneses preferences and competition for local assets in short supply. In equilibrium, hedging for these purposes results in a negative risk Premium for the local risk factors. We study the empirical implications of this equilibrium at the level of the nine US census divisions. As a proxy for the local risk factor we use regional labor income growth. In explaining the cross-section of stock returns, the model performs substantially better than the CAPM, and as well as the Fama-French three factor model. |
| Keywords: | Local risk, Negative risk premium, Relative wealth concerns |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:emp:wpaper:wp08-12&r=fmk |
| By: | Alper, C. Emre; Fendoglu, Salih; Saltoglu, Burak |
| Abstract: | We explore the relative weekly stock market volatility forecasting performance of the linear univariate MIDAS regression model based on squared daily returns vis-a-vis the benchmark model of GARCH(1,1) for a set of four developed and ten emerging market economies. We first estimate the two models for the 2002-2007 period and compare their in-sample properties. Next we estimate the two models using the data on 2002-2005 period and then compare their out-of-sample forecasting performance for the 2006-2007 period, based on the corresponding mean squared prediction errors following the testing procedure suggested by West (2006). Our findings show that the MIDAS squared daily return regression model outperforms the GARCH model significantly in four of the emerging markets. Moreover, the GARCH model fails to outperform the MIDAS regression model in any of the emerging markets significantly. The results are slightly less conclusive for the developed economies. These results may imply superior performance of MIDAS in relatively more volatile environments. |
| Keywords: | Mixed Data Sampling regression model; Conditional volatility forecasting; Emerging Markets. |
| JEL: | C53 C52 C22 G10 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7460&r=fmk |
| By: | Caitlin Ann Greatrex (Fordham University, Department of Economics) |
| Abstract: | This paper explores the ability of variables suggested by structural models to explain variation in CDS spread changes. Using monthly changes in CDS spreads for 333 firms from January, 2001 – March, 2006, I find that these variables are able to explain thirty percent of the variation in CDS spread changes. A rating-based CDS index that accounts for both credit risk and overall market conditions is the single best predictor of CDS spread changes. Leverage and volatility, however, are also key determinants, as these two variables can explain almost half of the explained variation in monthly CDS spread changes. |
| Keywords: | Credit default swap, credit risk, leverage, stock returns, equity volatility. |
| JEL: | G12 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:frd:wpaper:dp2008-05&r=fmk |
| By: | Caitlin Ann Greatrex (Fordham University, Department of Economics) |
| Abstract: | This paper examines the efficiency of the CDS market by conducting a comparative event study in which both the CDS and the stock markets’ responses to earnings announcements are considered. I find that both markets have statistically significant reactions to earnings announcements and both markets anticipate these informational events up to 90 trading days prior to announcement. I further find that neither markets’ reaction to earnings announcements is entirely efficient as there is evidence of both over- and under-reaction to earnings news. However, results are sensitive to both the categorization of earnings and the model used to generate abnormal performance. |
| Keywords: | Credit default swap, market efficiency, earnings announcements, credit ratings. |
| JEL: | G14 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:frd:wpaper:dp2008-06&r=fmk |
| By: | Dimitrios Thomakos; Michail Koubouros |
| Abstract: | Using a newly developed dataset of daily, value-weighted market returns we construct and analyze the monthly realized volatility of the Athens Stock Exchange (A.S.E.) from 1985 to 2003. Our analysis focuses on the distributional and time series properties of the realized volatility series and on assessing the connection between realized volatility and returns through an multi-factor asset pricing model. In particular, we finnd strong evidence on the existence of a volatility feedback e¤ect and the leverage e¤ect, and on the existence of asymmetries between lagged returns and volatility. Furthermore, we examine the cross-sectional distribution of unconditional loadings on the realized risk factor(s) for different sets of characteristics-sorted common stock portfolios. We find that realized risk is a significantly priced factor in A.S.E. and its high explanatory power for the cross-section of portfolio average returns is independent of any return variation related to the market (CAPM) or size and book-to-market (Fama-French) factors. We discuss our findings in the context of the recent literature on realized volatility and feedback effects, as well as the literature on the pricing power of realized risk. |
| Keywords: | realized volatility, leverage e¤ect, volatility feedback e¤ect, asset pricing, A.S.E. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:uop:wpaper:0020&r=fmk |