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on Financial Markets |
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Issue of 2008‒11‒25
ten papers chosen by |
| By: | Mathieu Gatumel (Centre d'Economie de la Sorbonne); Dominique Guegan (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | This paper aims to provide a dynamic analysis of the insurance linked securities index. We are discussing the behaviour of the index for three years and pointing out the consequences of some major events like Katrina or the last and current financial crisis. Some stylized facts of the index, like the non-Gaussianity, the asymmetry or the clusters of volatility, are highlighted. We are using some GARCH-type models and the generalized hyperbolic distributions in order to capture these elements. The GARCH in Mean model with a Normal Inverse Gaussian distribution seems to be very efficient to fit the log-returns of the insurance linked securities index. |
| Keywords: | Insurance Linked Securities, Garch-type models, normal Inverse Gaussian Distribution. |
| JEL: | G12 G14 C16 C22 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:b08049&r=fmk |
| By: | Fabio Tramontana (Università Politecnica delle Marche & Dipartimento di Economia e Metodi Quantitativi, Università di Urbino); Laura Gardini (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy)); Roberto Dieci (Università di Bologna); Frank Westerhoff (University of Bamberg) |
| Abstract: | We develop a three-dimensional nonlinear dynamic model in which the stock markets of two countries are linked through the foreign exchange market. Connections are due to the trading activity of heterogeneous speculators. Using analytical and numerical tools, we seek to explore how the coupling of the markets may affect the emergence of 'bull and bear' market dynamics. The dimension of the model can be reduced by restricting investors' trading activity, which enables the dynamic analysis to be performed stepwise, from low-dimensional cases up to the full three-dimensional model. In Part I of our paper, we focus on the one and two-dimensional case. |
| Keywords: | Heterogeneous speculators, bull and bear markets, nonlinear dynamics, homoclinic bifurcations. |
| JEL: | C61 C63 D84 G15 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:urb:wpaper:08_07&r=fmk |
| By: | Fabio Tramontana (Università Politecnica delle Marche & Dipartimento di Economia e Metodi Quantitativi, Università di Urbino); Laura Gardini (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy)); Roberto Dieci (Università di Bologna); Frank Westerhoff (University of Bamberg) |
| Abstract: | In the fi rst part of our paper we proposed a three-dimensional nonlinear dynamic model of interacting stock and foreign exchange markets, jointly driven by the speculative activity of heterogeneous investors. We focused, in particular, on the typical 'bull and bear' scenario that emerges from simpli ed one- and two-dimensional settings. The goal of this part of the paper is to provide a global analysis of the dynamics of the full model. As it turns out, the results we obtained in the fi rst part may serve as a road map to develop an initial understanding of the much more complicated three-dimensional model. |
| Keywords: | Heterogeneous speculators, bull and bear markets, nonlinear dynamics, homoclinic bifurcations. |
| JEL: | C61 C63 D84 G15 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:urb:wpaper:08_08&r=fmk |
| By: | Marie Brière (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussel and Credit Agricole Asset Management SGR, Paris.); Alexandre Burgues (Credit Agricole Asset Management SGR, Paris.); Ombretta Signori (Credit Agricole Asset Management SGR, Paris.) |
| Abstract: | This paper examines the advantages of incorporating equity volatility exposure into a global balanced portfolio. We consider two sets of strategies: long implied volatility and long volatility risk premium strategies. To calibrate and assess the risk/return profile of the portfolio, we present an analytical framework, offering pragmatic solutions for long-term investors seeking exposure to volatility. The benefit of volatility exposure for a conventional portfolio is shown through a mean / Value-at-Risk portfolio optimization. Pure volatility investment makes it possible to partially hedge downside equity risk, thus reducing the risk profile of the portfolio. Investing in the volatility risk premium substantially increases returns for a given level of risk. A well calibrated combination of the two strategies allows for enhanced absolute and risk-adjusted returns for the portfolio. |
| Keywords: | variance swap, volatility risk premium, higher moments, portfolio choice, Value at Risk |
| JEL: | G11 G12 G13 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:08-034&r=fmk |
| By: | Brajesh Kumar, Singh Priyanka |
| Abstract: | This paper is based on an empirical study of volatility, risk premium and seasonality in risk-return relation of the Indian stock and commodity markets. This investigation is conducted by means of the General Autoregressive Conditional Heteroscedasticity in the mean model (GARCH-in-Mean) introduced by Engle et al. (1987). A systematic approach to model volatility in returns is presented. Volatility clustering and asymmetric nature is examined for Indian stock and commodity markets. The risk-return relationship and seasonality in risk-return are also investigated through GARCH-in-Mean modeling in which seasonal dummies are used for return as well as volatility equation. The empirical work has been carried out on market index S&P CNX Nifty for a period of 18 years from January 1990 to December 2007. Gold prices from 22nd July 2005 to 20th February 2008 and Soybean from October 2004 – December 2007 are also considered. The stock and commodity markets returns show persistence as well as clustering and asymmetric properties. Risk-return relationship is positive though insignificant for Nifty and Soybean where as significant positive relationship is found in the case of Gold. Seasonality in risk and return is also found which suggests the asymmetric nature of return, i.e. negative correlation between return and its volatility. |
| Date: | 2008–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:iim:iimawp:2008-04-04&r=fmk |
| By: | Jackwerth, Jens Carsten; Kolokolova, Olga; Hodder, James E. |
| Abstract: | Numerous hedge funds stop reporting to commercial databases each year. An issue for hedgefund performance estimation is: what delisting return to attribute to such funds? This would be particularly problematic if delisting returns are typically very different from continuing funds’ returns. In this paper, we use estimated portfolio holdings for funds-of-funds with reported returns to back out maximum likelihood estimates for hedge-fund delisting returns. The estimated mean delisting return for all exiting funds is small, although statistically significantly different from the average observed returns for all reporting hedge funds. These findings are robust to relaxing several underlying assumptions. |
| Keywords: | Hedge Funds |
| JEL: | G23 |
| Date: | 2008–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11641&r=fmk |
| By: | Constantinides, George M.; Jackwerth, Jens Carsten; Czerwonko, Michal; Perrakis, Stylianos |
| Abstract: | American call and put options on the S&P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (2007) over 1983-2006 are identified as potentially profitable investment opportunities. Call bid prices more frequently violate their upper bound than put bid prices do, while evidence of underpriced calls and puts over this period is scant. In out-of-sample tests, the inclusion of short positions in such overpriced calls, puts, and, particularly, straddles in the market portfolio is shown to increase the expected utility of any risk averse investor and also increase the Sharpe ratio, net of transaction costs and bid-ask spreads. The results are strongly supportive of mispricing. (JEL G11, G13, G14) |
| Keywords: | Risk Averse; Option; Index Futures |
| JEL: | G14 G11 G13 |
| Date: | 2008–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11644&r=fmk |
| By: | Christophe Chorro (Centre d'Economie de la Sorbonne); Dominique Guegan (Centre d'Economie de la Sorbonne - Paris School of Economics); Florian Ielpo (Centre d'Economie de la Sorbonne et Dexia S.A.) |
| Abstract: | In this paper, we present an alternative to the Black Scholes model for a discrete time economy using GARCH-type models for the underlying asset returns with Generalized Hyperbolic (GH) innovations that are potentially skewed and leptokurtic. Assuming that the stochastic discount factor is an exponential affine function of the states variables, we show that this class of distributions is stable under the Risk neutral change of probability. |
| Keywords: | GARCH, Generalized Hyperbolic Distribution, pricing, risk neutral distribution. |
| JEL: | C02 C32 G13 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:b08037&r=fmk |
| By: | Christophe Chorro (Centre d'Economie de la Sorbonne); Dominique Guegan (Centre d'Economie de la Sorbonne - Paris School of Economics); Florian Ielpo (Centre d'Economie de la Sorbonne) |
| Abstract: | In this paper, we provide a new dynamic asset pricing model for plain vanilla options and we discuss its ability to produce minimum mispricing errors on equity option books. The data set is the daily log returns of the French CAC 40 index, on the period January 2, October 26, 2007. Under the historical measure, we estimate an EGARCH model with Generalized Hyperbolic innovations, using this dataset. We showed in Chorro, Guégan and Ielpo (2008) that when the pricing kernel is an exponential affine function of the state variables, the risk neutral distribution is unique and implies again a Generalized Hyperbolic dynamic, with changed parameters. Thus, using this theoretical result associated to Monte Carlo simulations, we compare our approach to natural competitors in order to test its efficiency. More generally, our empirical investigations analyze the ability of specific parametric innovations to reproduce market prices in the context of the exponential affine specification of the stochastic discount factor. |
| Keywords: | Generalized Hyperbolic Distribution, option pricing, incomplete market, CAC 40, GARCH models. |
| JEL: | G13 C22 G22 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:b08047&r=fmk |
| By: | Rodolfo Apreda |
| Abstract: | This paper sets forth another contribution to the long standing debate over cost of capital, firstly by introducing a multiplicative model that translates the inner structure of the weighted average cost of capital rate and, secondly, adjusting such rate for governance risk. The conventional wisdom states that the cost of capital may be figured out by means of a weighted average of debt and capital. But this is a linear approximation only, which may bring about miscalculations, whereas the multiplicative model not only takes account of that linear approximation but also the joint outcome of expected costs of debt and stock, and their proportions in the capital structure. And finally, we factor into the cost of capital expression a rate of governance risk. |
| Keywords: | cost of capital; governance risk; weighted average cost of capital; governance index; multiplicative model of returns |
| JEL: | G30 G32 G34 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cem:doctra:383&r=fmk |