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on Financial Markets |
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Issue of 2010‒03‒20
six papers chosen by |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Wayne Tarrant (Wingate University - Department of Mathematics) |
| Abstract: | The banking systems that deal with risk management depend on underlying risk measures. Following the recommendation of the Basel II accord, most banks have developed internal models to determine their capital requirement. The Value at Risk measure plays an important role in computing this capital. In this paper we analyze in detail the errors produced by use of this measure. We then discuss other measures, pointing out their strengths and shortcomings. We give detailed examples, showing the need for five risk measures in order to compute a capital in relation to the risk to which the bank is exposed. In the end, we suggest using five different risk measures for computing capital requirements. |
| Keywords: | Risk measure ; Value at Risk ; Bank capital ; Basel II Accord |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00460901_v1&r=fmk |
| By: | David I. Harvey; Stephen J. Leybourne; A. M. Robert Taylor |
| Abstract: | In this paper we analyse evidence for level breaks in the price series comprising the NASDAQ-100 index over the period 2001-2007. We make use of a recently developed methodology that allows robust inference regarding the presence of breaks to be drawn irrespective of whether or not a unit root is present in the data, and whether the underlying innovations are normally or non-normally distributed. We find evidence for one or more level breaks in almost half the series considered, suggesting that appropriate allowance for breaks should be made when modelling or forecasting using these data. |
| Keywords: | Level breaks; unit root; non-normality; stock prices |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:not:notgts:10/02&r=fmk |
| By: | Ulrich Horst; Traian A. Pirvu; Gonçalo Dos Reis |
| Abstract: | We propose an equilibrium framework within which to price financial securities written on non- tradable underlyings such as temperature indices. We analyze a financial market with a finite set of agents whose preferences are described by a convex dynamic risk measure generated by the solution of a backward stochastic differential equation. The agents are exposed to financial and non-financial risk factors. They can hedge their financial risk in the stock market and trade a structured derivative whose payoff depends on both financial and external risk factors. We prove an existence and uniqueness of equilibrium result for derivative prices and characterize the equilibrium market price of risk in terms of a solution to a non-linear BSDE. |
| Keywords: | Backward stochastic differential equations, dynamic risk measures, partial equilibrium, equilibrium pricing, market completion |
| JEL: | G12 D52 C62 C68 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2010-010&r=fmk |
| By: | Liuling Li (Nankai University); Bruce Mizrach (Rutgers University) |
| Abstract: | We compare several models for Bear Stearns' credit default swap spreads estimated via a Markov chain Monte Carlo algorithm. The Bayes Factor selects a CKLS model with GARCH-EPD errors as the best model. This model captures the volatility clustering and extreme tail returns of the swaps during the crisis. Prior to November 2007, only four months ahead of Bear Stearns' collapse though, the swap spreads were indistinguishable statistically from the risk free rate. |
| Keywords: | Bear Stearns, credit default swap, Bayesian analysis, exponential power distribution |
| JEL: | C11 G13 G24 |
| Date: | 2010–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:201003&r=fmk |
| By: | Suarez, Ronny |
| Abstract: | In this paper we estimated not-overlapped monthly historic standard deviations of the S&P 500 Index returns for the period 1950 – 2009, then using extreme value theory we defined extreme volatility events and introduced an alternative “fear scale” that is compared with the “fear index”. |
| Keywords: | Extreme Value Theory; Peak Over Threshold; Generalized Pareto Distribution; Return Level; Extreme Volality Event |
| JEL: | C0 G0 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21053&r=fmk |
| By: | Damiano Brigo; Mirela Predescu; Agostino Capponi |
| Abstract: | We review different approaches for measuring the impact of liquidity on CDS prices. We start with reduced form models incorporating liquidity as an additional discount rate. We review Chen, Fabozzi and Sverdlove (2008) and Buhler and Trapp (2006, 2008), adopting different assumptions on how liquidity rates enter the CDS premium rate formula, about the dynamics of liquidity rate processes and about the credit-liquidity correlation. Buhler and Trapp (2008) provides the most general and realistic framework, incorporating correlation between liquidity and credit, liquidity spillover effects between bonds and CDS contracts and asymmetric liquidity effects on the Bid and Ask CDS premium rates. We then discuss the Bongaerts, De Jong and Driessen (2009) study which derives an equilibrium asset pricing model incorporating liquidity effects. Findings include that both expected illiquidity and liquidity risk have a statistically significant impact on expected CDS returns. We finalize our review with a discussion of Predescu et al (2009), which analyzes also data in-crisis. This is a statistical model that associates an ordinal liquidity score with each CDS reference entity and allows one to compare liquidity of over 2400 reference entities. This study points out that credit and illiquidity are correlated, with a smile pattern. All these studies highlight that CDS premium rates are not pure measures of credit risk. Further research is needed to measure liquidity premium at CDS contract level and to disentangle liquidity from credit effectively. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1003.0889&r=fmk |