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on Financial Markets |
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Issue of 2013‒01‒19
eight papers chosen by |
| By: | Michael McAleer (Erasmus University Rotterdam); Juan-Ángel Jiménez-Martín (Complutense University of Madrid); Teodosio Pérez-Amaral (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 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 we compare conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008-09 global financial crisis. These issues are illustrated using Standard and Poor’s 500 Composite Index. |
| Keywords: | Value-at-Risk (VaR); daily capital charges; violation penalties; optimizing strategy; risk forecasts; aggressive or conservative risk management strategies; Basel Accord; global financial crisis |
| JEL: | G32 G11 G17 C53 C22 |
| Date: | 2013–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20130010&r=fmk |
| By: | Clemens Bonner; Sylvester Eijffinger |
| Abstract: | This paper analyzes the impact of a liquidity requirement similar to the Basel 3 Liquidity Coverage Ratio (LCR) on the unsecured interbank money market and therefore on the implementation of monetary policy. Combining two unique datasets of Dutch banks from 2005 to 2011, we show that banks which are just above/below their short-term regulatory liquidity requirement pay and charge higher interest rates for unsecured interbank loans. The effect is larger for maturities longer than the liquidity requirement’s 30 day horizon. Being close to the minimum liquidity requirement induces banks to increase borrowing volumes in general while it only decreases lending volumes for maturities longer than 30 days. These results also hold when controlling for an institution’s riskiness, the solvency of its counterparts, relationship-lending and period-specific effects. |
| Keywords: | Monetary Policy; Liquidity; Interbank Market; Basel 3 |
| JEL: | G18 G21 E42 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:364&r=fmk |
| By: | Timothy Bianco; Dieter Gramlich; Mikhail V. Oet; Stephen J. Ong |
| Abstract: | This paper develops a new financial stress measure (Cleveland Financial Stress Index, CFSI) that considers the supervisory objective of identifying risks to the stability of the financial system. The index provides a continuous signal of financial stress and broad coverage of the areas that could indicate it. The construction methodology uses daily public market data collected from different sectors of financial markets. A unique feature of the index is that it employs a dynamic weighting method that captures the changing relative importance of the different sectors of the financial system. This study shows how the index can be applied to monitoring and analyzing financial system conditions. |
| Keywords: | Financial markets ; Time-series analysis ; Interest rates ; Business cycles ; Econometric models |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1237&r=fmk |
| By: | Jan A. Lipski; Ryszard Kutner |
| Abstract: | The three-state agent-based 2D model of financial markets in the version proposed by Giulia Iori in 2002 has been herein extended. We have introduced the increase of herding behaviour by modelling the altering trust of an agent in his nearest neighbours. The trust increases if the neighbour has foreseen the price change correctly and the trust decreases in the opposite case. Our version only slightly increases the number of parameters present in the Iori model. This version well reproduces the main stylized facts observed on financial markets. That is, it reproduces log-returns clustering, fat-tail log-returns distribution and power-law decay in time of the volatility autocorrelation function. |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1301.1824&r=fmk |
| By: | Hou, Kewei (OH State University); Loh, Roger (Singapore Management University) |
| Abstract: | We propose a simple methodology to evaluate a large number of potential explanations for the negative relation between idiosyncratic volatility and subsequent stock returns (the idiosyncratic volatility puzzle). We find that surprisingly many existing explanations explain less than 10% of the puzzle. On the other hand, explanations based on investors' lottery preferences, short-term return reversal, and earnings shocks show greater promise in explaining the puzzle. Together they account for 60-80% of the negative idiosyncratic volatility-return relation. Our methodology can be applied to evaluate competing explanations for a broad range of topics in asset pricing and corporate finance. |
| JEL: | G12 G14 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2012-28&r=fmk |
| By: | David E. Allen (Edith Cowan University); Michael McAleer (Econometric Institute, Erasmus University Rotterdam, Complutense University of Madrid, and Kyoto University); R.J. Powell (Edith Cowan University); A.K. Singh (Edith Cowan University) |
| Abstract: | This paper features an analysis of volatility spillover eects from the US market, represented by the S&P500 index to the Australian capital market as represented by the Australian S&P200 for a period running from 12th September 2002 to 9th September 2012. This captures the impact of the Global Financial Crisis (GFC). The GARCH analysis features an exploration of whether there are any spillover eects in the mean equations as well as in the variance equations. We adopt a bi-mean equation to model the conditional mean in the Australian markets plus an ARMA model to capture volatility spillovers from the US. We also apply a Markov Switching GARCH model to explore the existence of regime changes during this period and we also explore the non-constancy of correlations between the markets and apply a moving window of 120 days of daily observations to explore time-varying conditional and tted correlations. There appears to be strong evidence of regime switching behaviour in the Australian market and changes in correlations between the two markets particularly in the period of the GFC. We also apply a tri-variate Cholesky-GARCH model to include potential eects from the Chinese market, as represented by the Hang Seng Index |
| Keywords: | Volatility spillovers; Markov-switching GARCH; Cholesky-GARCH; Time-varying correlations |
| JEL: | C22 C32 G11 G15 |
| Date: | 2013–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20130009&r=fmk |
| By: | José Soares da Fonseca (Faculty of Economics University of Coimbra and GEMF, Portugal) |
| Abstract: | This article studies the international integration of twelve Eastern Europe Stock Markets and two Middle East Stock Markets. It is commonly accepted that the returns in these markets have a low correlation with the other markets, which means that they are still weakly integrated in the world financial market. This assumption is the object of the empirical analysis in the present article, in which the co-integration of each of these national stock markets with the international market is estimated. Co-integration is a well adapted methodology to study the international integration of stock markets, since it puts in evidence, simultaneously, the long-term relation between the stock prices of a domestic market and those representing the international market and the short-term relation between the changes in those prices. The results obtained show that, in general, these stock markets are co-integrated with one or more international indexes. |
| Keywords: | financial integration, stock markets, structure breaks. |
| JEL: | F36 F37 G15 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2013-01.&r=fmk |
| By: | Agarwal, Sumit (National University of Singapore); Ben-David, Itzhak (OH State University); Yao, Vincent (Fannie Mae) |
| Abstract: | Financially-constrained borrowers have the incentive to influence the appraisal process in order to increase borrowing or reduce the interest rate. The average valuation bias for residential refinance transactions is above 5%. The bias is larger for highly leveraged transactions, and for transactions mediated through a broker, especially where competition is high. Mortgages with inflated valuations default more often; however, lenders partially account for the valuation bias through pricing. |
| JEL: | G01 G21 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2012-29&r=fmk |