New Economics Papers
on Banking
Issue of 2013‒06‒04
24 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Household debt and social interactions By Georgarakos, Dimitris; Haliassos, Michael; Pasini, Giacomo
  2. Pricing Default Events : Surprise, Exogeneity and Contagion By Christian Gouriéroux; Alain Monfort; Jean-Paul Renne
  3. Goodhart, Charles A.E. and Tsomocos, Dimitros P.: The challenge of financial stability: a new model and its applications By Jean-Bernard Chatelain
  4. Robust Portfolio Allocation with Systematic Risk Contribution Restrictions By Serge Darolles; Christian Gouriéroux; Emmanuelle Jay
  5. Uncertainty in an Interconnected Financial System, Contagion, and Market Freezes By Mei Li; Frank Milne; Junfeng Qui
  6. Systemic Risk Allocation for Systems with A Small Number of Banks By Xiao Qin; Chen Zhou
  7. Liquidation Equilibrium with Seniority and Hidden CDO By Christian Gouriéroux; Jean-Cyprien Heam; Alain Monfort
  8. The dynamics of spillover effects during the European sovereign debt turmoil By Alter, Adrian; Beyer, Andreas
  9. The Impact of Default Dependency and Collateralization on Asset Pricing and Credit Risk Modeling By Xiao, Tim
  10. Inward entry of Japanese banks into the Russian market By Victor Gorshkov
  11. Has the Basel II Accord Encouraged Risk Management During the 2008-09 Financial Crisis? By Michael McAleer; Juan-Angel Jimenez-Martin; Teodosio Pérez-Amaral
  12. Duration dependence and change-points in the likelihood of credit booms ending By Vítor Castro; Megumi Kubota
  13. The 2011 FDIC assessment on banks managed liabilities: interest rate and balance-sheet responses By Lawrence L Kreicher; Robert N McCauley; Patrick McGuire
  14. Funding Cost and a New Capital Model By Hannah, Lincoln
  15. Borrowing High vs. Borrowing Higher: Sources and Consequences of Dispersion in Individual Borrowing Costs By Victor Stango; Jonathan Zinman
  16. Some international trends in the regulation of mortgage markets.Implications for Spain By Santiago Fernandez de Lis, Saifeddine Chaibi, Jose Felix Izquierdo, Felix Lores, Ana Rubio and Jaime Zurita; Saifeddine Chaibi; Jose Felix Izquierdo; Felix Lores; Ana Rubio; Jaime Zurita
  17. An Accurate Solution for Credit Value Adjustment (CVA) and Wrong Way Risk By Xiao, Tim
  18. GFC-Robust Risk Management under the Basel Accord using Extreme Value Methodologies By Juan-Angel Jimenez-Martin; Michael McAleer; Teodosio Perez Amaral; Paulo Araujo Santos
  19. Assessing Macroprudential Policies: Case of Korea By Valentina Bruno; Hyun Song Shin
  20. Credit-less recoveries : neither a rare nor an insurmountable challenge By Sugawara, Naotaka; Zalduendo, Juan
  21. "Lessons from the Cypriot Deposit Haircut for EU Deposit Insurance Schemes" By Jan Kregel
  22. Banking Competition in Africa: Sub-regional Comparative Studies By Stephen Hall
  23. Ambiguous Networks By Marco Pelliccia
  24. Forecasting Value-at-Risk using Block Structure Multivariate Stochastic Volatility Models By Manabu Asai; Massimiliano Caporin; Michael McAleer

  1. By: Georgarakos, Dimitris; Haliassos, Michael; Pasini, Giacomo
    Abstract: Debt-induced crises, including the subprime, are usually attributed exclusively to supply-side factors. We examine the role of social influences on debt culture, emanating from perceived average income of peers. Utilizing unique information from a household survey representative of the Dutch population, that circumvents the issue of defining the social circle, we consider collateralized, consumer, and informal loans. We find robust social effects on borrowing, especially among those who consider themselves poorer than their peers; and on indebtedness, suggesting a link to financial distress. We employ a number of approaches to rule out spurious associations and to handle correlated effects. --
    Keywords: Household Finance,Household Debt,Social Interactions,Mortgages,Consumer Credit,Informal Loans
    JEL: G11 E21
    Date: 2012
  2. By: Christian Gouriéroux (CREST and University of Toronto); Alain Monfort (CREST, Banque de France and University of Maastricht); Jean-Paul Renne (Banque de France)
    Abstract: In order to derive closed-form expressions of the prices of credit derivatives, the standard models for credit risk usually price the default intensities but not the default events themselves. The default indicator is replaced by an appropriate prediction and the prediction error, that is the default-event surprise, is neglected. Our paper develops an approach to get closed-form expressions for the prices of credit derivatives written on multiple names without neglecting default-event surprises. The approach differs from the standard one, since the default counts cause the factor process under the risk-neutral probability Q, even if this is not the case under the historical probability. This implies that the default intensities under Q do not exist. A numerical illustration shows the potential magnitude of the mispricing when the surprise on credit events is neglected. We also illustrate the effect of the propagation of defaults on the prices of credit derivatives.
    Keywords: Credit Derivative, Default Event, Default Intensity, Frailty, Contagion, Mispricing
    Date: 2013–01
  3. By: Jean-Bernard Chatelain (CES, EEP-PSE, UP1)
    Abstract: This review of the book "The Challenge of Financial Stability: A New Model and its Applications" by Goodhart C.A.E. and Tsomocos D.P. highlights the potential of the framework of strategic partial default of banks with credit chain on the interbank market for further theoretical and applied research on financial stability.
    Date: 2013–05
  4. By: Serge Darolles (Paris-Dauphine University and CREST); Christian Gouriéroux (CREST and University of Toronto); Emmanuelle Jay (Quantitative Asset Management Laboratory)
    Abstract: The standard mean-variance approach can imply extreme weights in some assets in the optimal allocation and a lack of stability of this allocation over time. To improve the robustness of the portfolio allocation, but also to better control for the portfolio turnover and the sensitivity of the portfolio to systematic risk, it is proposed in this paper to introduce additional constraints on both the total systematic risk contribution of the portfolio and its turnover. Our paper extends the existing literature on risk parity in three directions: i) we consider other risk criteria than the variance, such as the Value-at-Risk (VaR), or the Expected Shortfall; ii) we manage separately the systematic and idiosyncratic components of the portfolio risk; iii) we introduce a set of portfolio management approaches which control for the degree of market neutrality of the portfolio, for the strength of the constraint on systematic risk contribution and for the turnover
    Keywords: Asset Allocation, Portfolio Turnover, Risk Diversification, Minimum Variance Portfolio, Risk Parity Portfolio, Systematic Risk, Euler Allocation, Hedge Fund
    JEL: G12 C23
    Date: 2012–12
  5. By: Mei Li (University of Guelph); Frank Milne (Queen's University); Junfeng Qui (Central University of Finance and Economics)
    Abstract: This paper studies contagion and market freezes caused by uncertainty in financial network structures and provides theoretical guidance for central banks. We establish a formal model to demonstrate that, in a financial system where financial institutions are interconnected, a negative shock to an individual financial institution could spread to other institutions, causing market freezes because of creditors’ uncertainty about the financial network structure. Central bank policies to alleviate market freezes and contagion, such as information policy, bailout policy and the lender of last resort policy, are examined.
    Keywords: Interconnection, Market Freezes, Contagion, Financial Crises
    JEL: D82 G2
    Date: 2013–05
  6. By: Xiao Qin; Chen Zhou
    Abstract: This paper provides a new estimation method for the marginal expected shortfall (MES) based on multivariate extreme value theory. In contrast to previous studies, the method does not assume specific dependence structure among bank equity returns and is applicable to both large and small systems. Furthermore, our MES estimator inherits the theoretical additive property. Thus, it serves as a tool to allocate systemic risk. We apply the proposed method to 29 global systemically important financial institutions (G-SIFIs) to evaluate the cross sections and dynamics of the systemic risk allocation. We show that allocating systemic risk according to either size or individual risk is imperfect and can be unfair. Between the allocation with respect to individual risk and that with respect to size, the former is less unfair. On the time dimension, both allocation fairness across all the G-SIFIs has decreased since 2008.
    Keywords: Systemic risk allocation; marginal expected shortfall; systemically important financial institutions; extreme value theory
    JEL: G21 C14 G32
    Date: 2013–05
  7. By: Christian Gouriéroux (CREST and University of Toronto); Jean-Cyprien Heam (CREST and ACP); Alain Monfort (CREST and University of Maastricht)
    Abstract: The aim of our paper is to price credit derivatives written on a single name when this name is a bank. Indeed, due to the special structure of the balance sheet of a bank and to the interconnections with other institutions of the financial system, the standard pricing formulas do not apply and their use can imply severe mispricing. The pricing of credit derivatives written on a single bank name requires a joint analysis of the risks of all banks directly or indirectly interconnected with the bank of interest. Each name cannot be priced in isolation, but the banking system must be treated as a whole. It is necessary to analyze the contagion of losses among banks, especially the equilibrium of joint defaults and recovery rates at liquidation time. We show the existence and uniqueness of such an equilibrium. Then the standard pricing formulas are modified by adding a premium to capture the contagion effects.
    Keywords: Collateralized Debt Obligation, Contagion, Solvency Risk, Value-of-the Firm Model, Liquidation Equilibrium, Contagion premium, Systemic Risk, Stress-Test
    Date: 2013–02
  8. By: Alter, Adrian; Beyer, Andreas
    Abstract: In this paper we develop empirical measures for the strength of spillover effects. Modifying and extending the framework by Diebold and Yilmaz (2011), we quantify spillovers between sovereign credit markets and banks in the euro area. Spillovers are estimated recursively from a vector autoregressive model of daily CDS spread changes, with exogenous common factors. We account for interdependencies between sovereign and bank CDS spreads and we derive generalised impulse response functions. Specifically, we assess the systemic effect of an unexpected shock to the creditworthiness of a particular sovereign or country-specific bank index to other sovereign or bank CDSs between October 2009 and July 2012. Channels of transmission from or to sovereigns and banks are aggregated as a Contagion index (CI). This index is disentangled into four components, the average potential spillover: i) amongst sovereigns, ii) amongst banks, iii) from sovereigns to banks, and iv) vice-versa. We highlight the impact of policy-related events along the different components of the contagion index. The systemic contribution of each sovereign or banking group is quantified as the net spillover weight in the total net-spillover measure. Finally, the captured time-varying interdependence between banks and sovereigns emphasises the evolution of their strong nexus. --
    Keywords: CDS,Contagion,Sovereign Debt,Systemic Risk,Impulse Responses
    JEL: C58 G01 G18 G21
    Date: 2012
  9. By: Xiao, Tim
    Abstract: This article presents a comprehensive framework for valuing financial instruments subject to credit risk and collateralization. In particular, we focus on the impact of default dependence on asset pricing, as correlated default risk is one of the most pervasive threats to financial markets. Some well-known risky valuation models in the markets can be viewed as special cases of this framework. We introduce the concept of comvariance (or comrelation) into the area of credit risk modeling to capture the default relationship among three or more parties. Accounting for default correlations and comrelations becomes important, especially during the credit crisis. Moreover, we find that collateralization works well for financial instruments subject to bilateral credit risk, but fails for ones subject to multilateral credit risk.
    Keywords: asset pricing; credit risk modeling; unilateral, bilateral, multilateral credit risk; collateralization; comvariance; comrelation; correlation.
    JEL: E44 G12 G21 G33
    Date: 2013–05–01
  10. By: Victor Gorshkov (PhD student, Graduate School of Economics, Kyoto University)
    Abstract: The paper represents a case study of Japanese banks operating on the Russian banking market. We particularly analyze motivation, organizational representation, entry modes and strategies of Japanese banks. We argue that in case of Japanese banks both the specificity of the home country (Japan) (relationship banking, main bank system) and host country (Russia) indeed plays an important role in expanding their businesses abroad. The shares of Japanese banks in total banking assets, deposits and lending rate of the Russian banking sector remain low, and in general Japanese banks in Russia might be regarded as “followers” of the Japanese business in Russia. Meanwhile, we also provide evidence that PULL factors are the driving forces providing reasoning for the exceptions from this rule in the behavioral patterns of Japanese banks. The paper summarizes history of foreign expansion of Japanese banks into the Russian market and aims to conduct analysis under the framework of the multinational banking theory.
    Keywords: foreign banking, Japanese banks, motivation, entry modes, strategie
    JEL: F21 F23 P31
    Date: 2013–05
  11. By: Michael McAleer (Erasmus University Rotterdam, The Netherlands; National Chung Hsing University, Taiwan); Juan-Angel Jimenez-Martin (Complutense University of Madrid, Spain); Teodosio Pérez-Amaral (Complutense University of Madrid, Spain)
    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, discuss the selection of optimal risk models, consider combining alternative risk models, discuss the choice between a conservative and aggressive risk management strategy, and evaluate the effects of the Basel II Accord on risk management. We also examine how risk management strategies performed during the 2008-09 financial crisis, evaluate how the financial crisis affected risk management practices, forecasting VaR and daily capital charges, and discuss alternative policy recommendations, especially in light of the financial crisis. These issues are illustrated using Standard and Poor’s 500 Index, with an emphasis on how risk management practices were monitored and 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, financial crisis
    JEL: G32 G11 G17 C53 C22
  12. By: Vítor Castro (Universidade de Coimbra - NIPE); Megumi Kubota (The World Bank)
    Abstract: Whether the likelihood of credit booms ending is dependent on its age or not, or whether the respective behaviour is smooth or bumpy are important issues to which the economic literature has not given attention yet. This paper tries to fill that gap in the literature, exploring those issues with a proper duration analysis. Credit booms are identified considering two criteria well established in the literature: (i) the Mendoza-Terrones criteria; (ii) and the Gourinchas-Valdes-Landarretche criteria. A continuous-time Weibull duration model is employed over a group of 71 countries for the period 1975q1-2010q4 to investigate whether credit booms are duration dependent or not. Our findings show that the likelihood of credit booms ending increases over its duration and that these events have become longer over the last decades. Additionally, we extend the baseline Weibull duration model in order to allow for change-points in the duration dependence parameter. The empirical findings support the presence of a change-point: increasing positive duration dependence is observed in booms that last less than eight to ten quarters, but it becomes decreasing or even irrelevant for longer events. Analogous results are found for those credit boom episodes that are followed by systemic banking crisis (bad credit booms). Our findings also show that credit booms are, on average, longer in Industrial than in Developing countries.
    Keywords: Credit booms, duration analysis, Weibull model, duration dependence, change-points
    JEL: C41 E32 E51
    Date: 2013
  13. By: Lawrence L Kreicher; Robert N McCauley; Patrick McGuire
    Abstract: The global financial crisis led to discussion of corrective bank taxes to promote financial stability. This paper interprets the widening of the FDIC assessment base from deposits to assets less equity for US-chartered banks in April 2011 as such a corrective or Pigovian tax. In terms of yields, banks shifted its cost to wholesale funders, benefiting floating-rate borrowers, while the linkage between onshore and offshore dollar money markets weakened. In terms of quantities, US-chartered banks shifted funding to more stable deposits. At the same time, the US branches of non-US banks, which were unaffected by the widened assessment base, increased US assets, funding their take-up of most of the Fed's reserve injection of $600 billion offshore. Thus, a new internationally uncoordinated policy had the expected effect on US banks' funding structure, but also redistributed dollar intermediation to non-US banks that continue to rely on wholesale funding. The implication for global financial stability is at best ambiguous.
    Keywords: Deposit insurance, reserve balances, money markets, federal funds, repo, eurodollars, wholesale funding, flow of funds, large-scale asset purchases, Dodd-Frank
    Date: 2013–05
  14. By: Hannah, Lincoln
    Abstract: In asset and derivative pricing, funding costs and capital costs are usually considered separately. A derivative will be funded at a given rate such as OIS, LIBOR or the bank’s cost of borrowing, and a cost of capital will be added separately. This paper presents a model that combines the two, using funding attributions from a capital model based on the bank’s Expected Loss (EL) rather than the market standard Probability of Default (PD). The basic idea is: A bank could fund a new asset with the combination of debt and equity that leaves its EL constant. The debt-equity mix gives a funding cost that reflects the risk of the asset rather than the bank, so is a more appropriate rate for assessing the asset than the bank’s Weighted Average Cost of Capital (WACC). In this way, the model facilitates decisions consistent with the Modigliani and Miller theorem (i.e. decisions based on the risk of the asset rather than the bank’s cost of funding). A result of the model is that, in accordance with the view of Hull and White (2012), the cost of funding a derivative is given by its CVA-DVA adjusted price and does not require an additional Funding Value Adjustment (FVA). Some of the funding ideas produced by the model have already been suggested by others, such as Piterbarg (2010) and Burgard and Kjaer (2011).
    Keywords: CVA - Credit Value Adjustment DVA - Debit Value Adjustment FVA - Funding Value Adjustment EL - Expected Loss Capital Debt CVA - Credit Value Adjustment DVA - Debit Value Adjustment FVA - Funding Value Adjustment PD – Probability of Default EL - Expected Loss Capital Debt Attribution
    JEL: G11 G12 G13
    Date: 2013–05–21
  15. By: Victor Stango; Jonathan Zinman
    Abstract: We document cross-individual variation in U.S. credit card borrowing costs (APRs) that is large enough to explain substantial differences in household saving rates. Borrower default risk and card characteristics explain roughly 40% of APRs. The remaining dispersion exists because a borrower can receive offers and hold cards with wide-ranging APRs, as different issuers price the same observable risk metrics quite differently. Borrower debt (mis)allocation across cards explains little dispersion. But self-reported borrower search/shopping (along with instruments for shopping implied by Fair Lending law) can explain APR differences comparable to moving someone from the worst credit score decile to the best.
    JEL: D14 D22 D4 D83 G21 G23
    Date: 2013–05
  16. By: Santiago Fernandez de Lis, Saifeddine Chaibi, Jose Felix Izquierdo, Felix Lores, Ana Rubio and Jaime Zurita; Saifeddine Chaibi; Jose Felix Izquierdo; Felix Lores; Ana Rubio; Jaime Zurita
    Abstract: In this document, the main characteristics of the mortgage markets regulation in developed countries will be analyzed, trying to extract implications in terms of the resilience of the different systems during this crisis. The note is organized in four sections, covering the most relevant issues of (i) the mortgage product, (ii) the financial entities that offer these products, (iii) the client to whom these products are sold and (iv) the relationship between mortgage regulation and macroprudential oversight.
    Keywords: mortgage, regulation, developed countries, loan-to-value, responsible lending, tax, covered bonds
    JEL: G21 R21 R31 E62
    Date: 2013–04
  17. By: Xiao, Tim
    Abstract: This paper presents a new framework for credit value adjustment (CVA) that is a relatively new area of financial derivative modeling and trading. In contrast to previous studies, the model relies on the probability distribution of a default time/jump rather than the default time itself, as the default time is usually inaccessible. As such, the model can achieve a high order of accuracy with a relatively easy implementation. We find that the prices of risky contracts are normally determined via backward induction when their payoffs could be positive or negative. Moreover, the model can naturally capture wrong or right way risk.
    Keywords: credit value adjustment (CVA), wrong way risk, right way risk, credit risk modeling, risky valuation, default time approach (DTA), default probability approach (DPA), collateralization, margin and netting.
    JEL: E44 G12 G32 G33
    Date: 2013–05–01
  18. By: Juan-Angel Jimenez-Martin (Complutense University of Madrid, Spain); Michael McAleer (Complutense University of Madrid, Spain, Erasmus School of Economics, Erasmus University Rotterdam, The Netherlands, and Kyoto University, Japan); Teodosio Perez Amaral (Complutense University of Madrid, Spain); Paulo Araujo Santos (University of Lisbon, Portugal)
    Abstract: In this paper we provide further evidence on the suitability of the median of the point VaR forecasts of a set of models as a GFC-robust strategy by using an additional set of new extreme value forecasting models and by extending the sample period for comparison. These extreme value models include DPOT and Conditional EVT. Such models might be expected to be useful in explaining financial data, especially in the presence of extreme shocks that arise during a GFC. Our empirical results confirm that the median remains GFC-robust even in the presence of these new extreme value models. This is illustrated by using the S&P500 index before, during and after the 2008-09 GFC. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria, including several tests for independence of the violations. The strategy based on the median, or more generally, on combined forecasts of single models, is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions.
    Keywords: Value-at-Risk (VaR), DPOT, daily capital charges, robust forecasts, violation penalties, optimizing strategy, aggressive risk management, conservative risk management, Basel, global financial crisis
    JEL: G32 G11 G17 C53 C22
    Date: 2013–05–21
  19. By: Valentina Bruno; Hyun Song Shin
    Abstract: This paper develops methods for assessing the sensitivity of capital flows to global financial conditions, and applies the methods in assessing the impact of macroprudential policies introduced by Korea in 2010. Relative to a comparison group of countries, we find that the sensitivity of capital flows into Korea to global conditions decreased in the period following the introduction of macroprudential policies.
    JEL: F32 F33 F34
    Date: 2013–05
  20. By: Sugawara, Naotaka; Zalduendo, Juan
    Abstract: This paper examines why some countries experience economic recoveries without pick-up of bank credit (credit-less) and how different this recovery pattern is from the case where credit is increased as an economy recovers (credit-with). To answer these questions, the paper uses quarterly data covering 96 countries and identifies 272 recovery episodes. It finds that more than 25 percent of all recoveries are credit-less and around 45 percent of all credit-less recoveries occurred in 2009-10. It also finds that output and investment growth tends to be lower in credit-less events but, by eight quarters after the trough date, the gap between credit-less and credit-with episodes is mostly exhausted. Results of the probit estimations show that the size of the downturn and the extent of external adjustment are associated with the likelihood of credit-less recoveries. Moreover, fiscal loosening tends to be related to credit-less events while monetary easing and a country's decision to seek an International Monetary Fund-supported program reduce the probability of credit-less recoveries. Finally, the model suggests that many countries in the Europe and Central Asia region were likely to experience credit-less recoveries following the global financial crisis in 2008/09. What is more worrisome for them is the fact that they are facing another negative external shock.
    Keywords: Economic Theory&Research,Access to Finance,Banks&Banking Reform,Investment and Investment Climate,Bankruptcy and Resolution of Financial Distress
    Date: 2013–05–01
  21. By: Jan Kregel
    Abstract: In March of this year, the government of Cyprus, in response to a banking crisis and as part of a negotiation to secure emergency financial support for its financial system from the European Union (EU) and International Monetary Fund (IMF), proposed the assessment of a tax on bank deposits, including a levy (later dropped from the final plan) on insured demand deposits below the 100,000 euro insurance threshold. An understanding of banks’ dual operations and of the relationship between two types of deposits—deposits of customers’ currency and coin, and deposit accounts created by bank loans—helps clarify some of the problems with the Cypriot deposit tax, while illuminating both the purposes and limitations of deposit insurance.
    Date: 2013–04
  22. By: Stephen Hall
    Abstract: This paper examines the extent of banking competition in African sub-regional markets. A dynamic version of the Panzar-Rosse model is adopted beside the static model to assess the overall extent of banking competition in each sub-regional banking market over the period 2002 to 2009. Consistent with other emerging economies, the results suggest that African banks generally demonstrate monopolistic competitive behaviour. Although the evidence suggests that the static Panzar-Rosse H-statistic is downward biased compared to the dynamic version, the competitive nature identified remains robust to alternative estimators.
    Keywords: Exchange Market Pressure; Currency Misalignment; Time-Varying-Coefficient
    JEL: G21 L10 L13 D40
    Date: 2013–05
  23. By: Marco Pelliccia (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: We investigate the impact of network structures describing reciprocal influence-relationships between agents on their perceived ambiguity. We argue that, under specific assumptions, the potential complexity of the link-structures creates extra uncertainty or ambiguity over the "right" probability distribution to consider. This result affects the optimal equilibrium structures which arise in a dynamic game where the agents/nodes strategically rewire their links to minimize the perceived uncertainty. The model could explain specific network dynamics observed in markets with asymmetric or not perfect information on the partners' outcomes. For instance, we propose an interpretation of the dynamic of the European Interbank Market structure before and after the recent financial crisis.
    Keywords: Ambiguity, Network, Interbank Market
    JEL: D85 D81 D82 G21
    Date: 2013–02
  24. By: Manabu Asai (Soka University, Japan); Massimiliano Caporin (University of Padova, Italy); Michael McAleer (Erasmus University Rotterdam, The Netherlands, Complutense University of Madrid, Spain, and Kyoto University, Japan)
    Abstract: Most multivariate variance or volatility models suffer from a common problem, the “curse of dimensionality”. For this reason, most are fitted under strong parametric restrictions that reduce the interpretation and flexibility of the models. Recently, the literature has focused on multivariate models with milder restrictions, whose purpose is to combine the need for interpretability and efficiency faced by model users with the computational problems that may emerge when the number of assets can be very large. We contribute to this strand of the literature by proposing a block-type parameterization for multivariate stochastic volatility models. The empirical analysis on stock returns on the US market shows that 1% and 5 % Value-at-Risk thresholds based on one-step-ahead forecasts of covariances by the new specification are satisfactory for the period including the Global Financial Crisis.
    Keywords: block structures; multivariate stochastic volatility; curse of dimensionality; leverage effects; multi-factors; heavy-tailed distribution
    JEL: C32 C51 C10
    Date: 2013–05–27

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