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on Financial Markets |
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Issue of 2011‒04‒09
five papers chosen by |
| By: | Michael McAleer (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, and Institute of Economic Research, Kyoto University); Juan-Ángel Jiménez-Martín (Department of Quantitative Economics, Complutense University of Madrid); Teodosio Pérez-Amaral (Department of Quantitative Economics, Complutense University of Madrid) |
| Abstract: | The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing sensibly from a variety of risk models, and discuss the selection of optimal risk models. A new approach to model selection for predicting VaR is proposed, consisting of combining alternative risk models, and comparing conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008-09 financial crisis. These issues are illustrated using Standard and Poor's 500 Index, with an emphasis on how market risk management practices were encouraged by the Basel II Accord regulations during the financial crisis. |
| Keywords: | Value-at-Risk (VaR), daily capital charges, exogenous and endogenous violations, violation penalties, optimizing strategy, risk forecasts, aggressive or conservative risk management strategies, Basel II Accord, global financial crisis. |
| JEL: | G32 G11 C53 C22 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:767&r=fmk |
| By: | john cotter; kevin dowd |
| Abstract: | This paper presents non-parametric estimates of spectral risk measures applied to long and short positions in 5 prominent equity futures contracts. It also compares these to estimates of two popular alternative measures, the Value-at-Risk (VaR) and Expected Shortfall (ES). The spectral risk measures are conditioned on the coefficient of absolute risk aversion, and the latter two are conditioned on the confidence level. Our findings indicate that all risk measures increase dramatically and their estimators deteriorate in precision when their respective conditioning parameter increases. Results also suggest that estimates of spectral risk measures and their precision levels are of comparable orders of magnitude as those of more conventional risk measures. Running head: financial risk measures for futures positions |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1103.5666&r=fmk |
| By: | john cotter; kevin dowd |
| Abstract: | This paper measures and compares the tail risks of limit and market orders using Extreme Value Theory. The analysis examines realised tail outcomes using the Dealing 2000-2 electronic broking system based on completed transactions rather than the more common analysis of indicative quotes. In general, limit and market orders exhibit broadly similar tail behaviour, but limit orders have significantly heavier tails and larger tail quantiles than market orders. |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1103.5661&r=fmk |
| By: | Andrew S. Duncan; Alain Kabundi |
| Abstract: | This paper studies domestic volatility transmission in an emerging economy. Daily volatility spillover indices, relating to South African (SA) currencies, bonds and equities, are estimated using variance decompositions from a generalised vector autoregressive (GVAR) model (Pesaran and Shin 1998). The results suggest substantial time-variation in volatility linkages between October 1996 and June 2010. Typically, large increases in volatility spillovers coincide with domestic and foreign financial crises. Equities are the most important source of volatility spillovers to other asset classes. However, following the 2001 currency crisis, and up until mid-2006, currencies temporarily dominate volatility transmission. Bonds are a consistent net receiver of volatility spillovers. In comparison to similar research focussing on the United States (Diebold and Yilmaz 2010), volatility linkages between SA asset classes are relatively strong. |
| Keywords: | Asset Market Linkages, Dynamic Correlation, Financial Crisis, Generlised Vector Autoregression, Variance Decomposition, Volatility Spillover. |
| JEL: | G1 F3 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:202&r=fmk |
| By: | Joel Hinaunye Eita |
| Abstract: | This paper investigates the macroeconomic determinants of stock market prices in Namibia. The investigation was conducted using a VECM econometric methodology and revealed that Namibian stock market prices are chiefly determined by economic activity, interest rates, inflation,money supply and exchange rates. An increase in economic activity and the money supply increases stock market prices, while increases in inflation and interest rates decrease stock prices. The results suggest that equities are not a hedge against inflation in Namibia, and contractionary monetary policy generally depresses stock prices. Increasing economic activity promotes stock market price development |
| Keywords: | stock market prices; arbitrage pricing theory; cointegration; impulse reponses; Namibia |
| JEL: | G10 G11 C23 C32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:209&r=fmk |