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on Risk Management |
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Issue of 2005‒11‒12
three papers chosen by |
| By: | Michal Benko; Alois Kneip |
| Abstract: | Functional data analysis (FDA) has become a popular technique in applied statistics. In particular, this methodology has received considerable attention in recent studies in empirical finance. In this talk we discuss selected topics of functional principal components analysis that are motivated by financial data. |
| Keywords: | nonparametric risk management, generalized hyperbolic distribution, functional data analysis |
| JEL: | C13 G19 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2005-016&r=rmg |
| By: | Sean D. Campbell; Francis X. Diebold |
| Abstract: | We explore the macro/finance interface in the context of equity markets. In particular, using half a century of Livingston expected business conditions data we characterize directly the impact of expected business conditions on expected excess stock returns. Expected business conditions consistently affect expected excess returns in a statistically and economically significant counter-cyclical fashion: depressed expected business conditions are associated with high expected excess returns. Moreover, inclusion of expected business conditions in otherwisestandard predictive return regressions substantially reduces the explanatory power of the conventional financial predictors, including the dividend yield, default premium, and term premium, while simultaneously increasing R-squared. Expected business conditions retain predictive power even after controlling for an important and recently introduced non-financial predictor, the generalized consumption/wealth ratio, which accords with the view that expected business conditions play a role in asset pricing different from and complementary to that of the consumption/wealth ratio. We argue that time-varying expected business conditions likely capture time-varying risk, while time-varying consumption/wealth may capture time-varying risk aversion. |
| JEL: | G12 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11736&r=rmg |
| By: | Q. Farooq Akram, (Norges Bank (Central Bank of Norway)); Dagfinn Rime (Norges Bank (Central Bank of Norway)); Lucio Sarno (University of Warwick and CEPR) |
| Abstract: | This paper investigates the presence and characteristics of arbitrage opportunities in the foreign exchange market using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency, obtained from Reuters on special order. We provide evidence on the fre- quency, size and duration of round-trip and one-way arbitrage opportunities in real time. The analysis unveils the existence of numerous short-lived arbitrage oppor- tunities, whose size is economically significant across exchange rates and comparable across different maturities of the instruments involved in arbitrage. The duration of arbitrage opportunities is, on average, high enough to allow agents to exploit devia- tions from the law of one price, but low enough to explain why such opportunities have gone undetected in much previous research using data at lower frequency. |
| Keywords: | exchange rates; arbitrage; foreign exchange microstructure |
| JEL: | F31 F41 G14 G15 |
| Date: | 2005–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2005_12&r=rmg |