nep-cfn New Economics Papers
on Corporate Finance
Issue of 2005‒02‒13
thirty papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Money and the (C)CAPM: Theory and Evaluation By Ronald J. Balvers; Dayong Huang
  2. Real-world options: smile and residual risk By Jean-Philippe Bouchaud; Didier Sornette; Giulia Iori
  3. Option pricing in the presence of extreme fluctuations By Marc Potters; Jean-Philippe Bouchaud; Didier Sornette
  4. Random matrix theory and financial correlations By Marc Potters; Jean-Philippe Bouchaud; Laurent Laloux; Pierre Cizeau
  5. Back to basics: historical option pricing revisited By Marc Potters; Jean-Philippe Bouchaud
  6. Option pricing and hedging with temporal correlations By Marc Potters; Jean-Philippe Bouchaud; Lorenzo Cornalba
  7. Option pricing and hedging with minimum expected shortfall By Jean-Philippe Bouchaud; Benoit Pochard
  8. Explaining venture capital firms’ syndication behavior: A longitudinal study By D. DE CLERCQ; D. P. DIMOV
  9. Managing debt stability By Alessandro MISSALE; Emanuele BACCHIOCCHI
  10. Monetary Policy, Asset-Price Bubbles and the Zero Lower Bound By Tim Robinson; Andrew Stone
  11. Noise dressing of financial correlation matrices By Marc Potters; Jean-Philippe Bouchaud; Laurent Laloux; Pierre Cizeau
  12. Valutation, Liquidity and Risk in Government Bond Markets By Carlo Favero; Marco Pagano; Ernst-Ludwig von Thadden
  13. Generalized dynamic linear models for financial time series By Campagnoli Patrizia; Muliere Pietro; Petrone Sonia
  14. On the Predictability of Global Stock Returns By Hjalmarsson, Erik
  15. Predictive regressions with panel data By Hjalmarsson, Erik
  17. The Financing of Innovation: Learning and Stopping By Dirk Bergemann; Ulrich Hege
  18. Internal Capital Market Efficiency of Belgian Holding Companies By Axel, GAUTIER; Malika, HAMADI
  19. Financial Market Development and the Rise in Firm Level Uncertainty By Thesmar, David; Thoenig, Mathias
  20. Dynamic Security Design By Biais, Bruno; Mariotti, Thomas; Plantin, Guillaume; Rochet, Jean Charles
  21. The Rise of Fund Managers in Foreign Exchange By Gehrig, Thomas; Menkhoff, Lukas
  22. A Variance Ratio Related Prediction Tool with Application to the NYSE Index 1825-2002 By Kandel, Shmuel; Zilca, Shlomo
  23. Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program By Banerjee, Abhijit; Duflo, Esther
  24. Exact Multivariate Tests of Asset Pricing Models with Stable Asymmetric Distributions By Marie-Claude Beaulieu; Jean-Marie Dufour; Lynda Khalaf
  25. The Comovement of Credit Default Swap, Bond and Stock Markets: An Empirical Analysis By Norden, Lars; Weber, Martin
  26. Hedged Monte-Carlo: low variance derivative pricing with objective probabilities By Marc Potters; Jean-Philippe Bouchaud; Dragan Sestovic
  27. Hedging large risks reduces the transaction costs By Jean-Philippe Bouchaud; Farhat Selmi
  28. Path dependent option pricing: the path integral partial averaging method By Andrew Matacz
  29. Financial modeling and option theory with the truncated Lévy process By Andrew Matacz
  30. Elements for a theory of financial risks By Jean-Philippe Bouchaud

  1. By: Ronald J. Balvers (Division of Economics and Finance, West Virginia University); Dayong Huang (Division of Economics and Finance, West Virginia University)
    Abstract: We consider asset pricing in a monetary economy where liquid assets are held to lower transaction costs. The ensuing model extends the CAPM and the Consumption CAPM by deriving real money growth as an additional factor determining returns. Empirically, the unconditional version of this model compares favorably to other theoretical asset pricing models. Allowing for conditional variation in factor sensitivities improves model performance so the model performs as well as the a-theoretical Fama-French three factor model. The paper further introduces a technique that facilitates derivation of dynamic asset pricing results in discrete time by generalizing Stein’s Lemma to multivariate cases.
    Keywords: Asset Pricing, Money Supply Growth, Consumption CAPM, Stein’s Lemma
    JEL: G12
  2. By: Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Didier Sornette (UCLA; Science & Finance, Capital Fund Management); Giulia Iori
    Abstract: We present a theory of option pricing and hedging, designed to address non-perfect arbitrage, market friction and the presence of `fat' tails. An implied volatility `smile' is predicted. We give precise estimates of the residual risk associated with optimal (but imperfect) hedging.
    JEL: G10
  3. By: Marc Potters (Science & Finance, Capital Fund Management); Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Didier Sornette (UCLA; Science & Finance, Capital Fund Management)
    Abstract: We discuss recent evidence that B. Mandelbrot's proposal to model market fluctuations as a Lévy stable process is adequate for short enough time scales, crossing over to a Brownian walk for larger time scales. We show how the reasoning of Black and Scholes should be extended to price and hedge options in the presence of these `extreme' fluctuations. A comparison between theoretical and experimental option prices is also given.
    JEL: G10
  4. By: Marc Potters (Science & Finance, Capital Fund Management); Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Laurent Laloux (Science & Finance, Capital Fund Management); Pierre Cizeau (Science & Finance, Capital Fund Management)
    JEL: G10
  5. By: Marc Potters (Science & Finance, Capital Fund Management); Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;)
    Abstract: We reconsider the problem of option pricing using historical probability distributions. We first discuss how the risk-minimisation scheme proposed recently is an adequate starting point under the realistic assumption that price increments are uncorrelated (but not necessarily independent) and of arbitrary probability density. We discuss in particular how, in the Gaussian limit, the Black-Scholes results are recovered, including the fact that the average return of the underlying stock disappears from the price (and the hedging strategy). We compare this theory to real option prices and find these reflect in a surprisingly accurate way the subtle statistical features of the underlying asset fluctuations.
    JEL: G10
  6. By: Marc Potters (Science & Finance, Capital Fund Management); Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Lorenzo Cornalba
    Abstract: We consider the problem of option pricing and hedging when stock returns are correlated in time. Within a quadratic-risk minimisation scheme, we obtain a general formula, valid for weakly correlated non-Gaussian processes. We show that for Gaussian price increments, the correlations are irrelevant, and the Black-Scholes formula holds with the volatility of the price increments on the scale of the re-hedging. For non-Gaussian processes, further non trivial corrections to the `smile' are brought about by the correlations, even when the hedge is the Black-Scholes Delta-hedge. We introduce a compact notation which eases the computations and could be of use to deal with more complicated models.
    JEL: G10
  7. By: Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Benoit Pochard (Centre de mathematiques appliquees, Ecole Polytechnique, Palaiseau, FRANCE)
    Abstract: We propose a versatile Monte-Carlo method for pricing and hedging options when markets are inco;plete, for an arbitrary risk criterion (chosen here to be the expected shortfall), for a large class of stochastic processes, and in the presence of transaction costs. We illustrate the method on plain vanilla options when the price returns follow a Student-t distribution. We show that in the presence of fat tails, our strategy allows to significantly reduce extreme risks, and generically leads to low Gamma hedging. Similarly, the inclusion of transaction costs reduces the Gamma of the optimal strategy.
    JEL: G10
  8. By: D. DE CLERCQ; D. P. DIMOV
    Abstract: Using a unique methodological approach, we examine factors related to venture capital firms’ (VCFs’) involvement in syndication. We argue that VCFs’ investment strategy matters in terms of the extent to which VCFs engage in syndication. We test several hypotheses pertaining to VCFs’ syndication behavior based on a longitudinal data set of realized strategies of 200 U.S.-based VCFs over a twelve-year period. Overall, we find support for both knowledge-based and financial arguments for why VCFs engage in syndication. We discuss our results and provide avenues for future research.
    Date: 2004–11
  9. By: Alessandro MISSALE; Emanuele BACCHIOCCHI
    Abstract: This paper presents a simple model in which debt management stabi lizes the debt-to-GDP ratio in face of shocks to real returns and output growth and thus supports fiscal restraint in ensuring sus tainability. The optimal composition of public debt is derived by looking at the relative impact of the risk and cost of alternati ve debt instruments on the cost of missing the stabilization targ et. The optimal debt structure is a function of the expected retu rn differentials between debt instruments, of the conditional var iance of their returns and of the conditional covariances of thei r returns with output growth and inflation. We then explore how t he relevant covariances and thus the optimal choice of debt instr uments depend on the monetary regime and on Central Bank preferen ces for output stabilization, inflation control and interest-rate smoothing. Finally, we estimate the composition of public debt t hat would have supported debt stabilization in OECD countries ove r the last two decades. The empirical evidence suggests that the public debt should have a long maturity and a large share of it s hould be indexed to the price level
    Keywords: Debt management, debt structure, debt stabilization, inflation indexation, interest rates
  10. By: Tim Robinson; Andrew Stone
    Abstract: We use a simple model of a closed economy to study the recommendations of monetary policy-makers, attempting to respond optimally to an asset-price bubble whose stochastic properties they understand. We focus on the impact which the zero lower bound (ZLB) on nominal interest rates has on the recommendations of such policy-makers. For a given target inflation rate, we identify several different forms of `insurance' which policy-makers could potentially take out against encountering the ZLB due to the future bursting of a bubble. Even with perfect knowledge of the bubble process, however, which of these will be optimal varies from one type of bubble to another and, for certain bubbles, from one period to the next. It is therefore difficult to say whether the ZLB should cause policy-makers to operate policy more tightly or loosely than they would otherwise do, while a bubble is growing -- even after abstracting from the informational difficulties they face in practice. We also examine the implications of the ZLB for policy-makers' preferences as to their inflation target. Policy-makers who wish to avoid concerns about the ZLB should take care not to set too low a target -- especially if the neutral real interest rate is low.
    JEL: E32 E52 E60
    Date: 2005–02
  11. By: Marc Potters (Science & Finance, Capital Fund Management); Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Laurent Laloux (Science & Finance, Capital Fund Management); Pierre Cizeau (Science & Finance, Capital Fund Management)
    Abstract: We show that results from the theory of random matrices are potentially of great interest to understand the statistical structure of the empirical correlation matrices appearing in the study of price fluctuations. The central result of the present study is the remarkable agreement between the theoretical prediction (based on the assumption that the correlation matrix is random) and empirical data concerning the density of eigenvalues associated to the time series of the different stocks of the S&P500 (or other major markets). In particular the present study raises serious doubts on the blind use of empirical correlation matrices for risk management.
    JEL: G10
  12. By: Carlo Favero; Marco Pagano; Ernst-Ludwig von Thadden
    Abstract: We explore the determinants of yield differentials between sovereign bonds in the Euro area. There is a common trend in yield differentials, which is correlated with a measure of the international risk factor. In contrast, liquidity differentials display sizeable heterogeneity and no common factor. We present a model that predicts that yield differentials should increase in both liquidity and risk, with an interaction term whose magnitude and sign depends on the size of the liquidity differential with respect to the reference country. Testing these predictions on daily data, we find that the international risk factor is consistently priced, while liquidity differentials are priced only for a subset of countries and their interaction with the risk factor is crucial to detect their effect.
  13. By: Campagnoli Patrizia (University of Pavia, Italy); Muliere Pietro (University of Bocconi, Italy); Petrone Sonia (Department of Economics, University of Insubria, Italy)
    Abstract: In this paper we consider a class of conditionally Gaussian state space models and discuss how they can provide a flexible and fairly simple tool for modelling financial time series, even in presence of different components in the series, or of stochastic volatility. Estimation can be computed by recursive equations, which provide the optimal solution under rather mild assumptions. In more general models, the filter equations can still provide approximate solutions. We also discuss how some models traditionally employed for analysing financial time series can be regarded in the state-space framework. Finally, we illustrate the models in two examples to real data sets.
    Keywords: dynamic linear models; conditionally gaussian models; Kalman filter; stochastic regressors; stochastic volatility; GARcH models.
  14. By: Hjalmarsson, Erik (Department of Economics)
    Abstract: Stock return predictability is a central issue in empirical finance. Yet no comprehensive study of international data has been performed to test the predictive ability of lagged explanatory variables. In fact, most stylized facts are based on U.S. stock-market data. In this paper, I test for stock return predictability in the largest and most comprehensive data set analyzed so far, using four common forecasting variables: the dividend- and earnings-price ratios, the short interest rate, and the term spread. The data contain over 20,000 monthly observations from 40 international markets, including markets in 22 of the 24 OECD countries. <p> I also develop new asymptotic results for long-run regressions with overlapping observations. I show that rather than using auto-correlation robust standard errors, the standard t-statistic can simply be divided by the square root of the forecasting horizon to correct for the effects of the overlap in the data. Further, when the regressors are persistent and endogenous, the long-run OLS estimator suffers from the same problems as does the short-run OLS estimator, and similar corrections and test procedures as those proposed by Campbell and Yogo (2003) for the short-run case should also be used in the long-run; again, the resulting test statistics should be scaled due to the overlap. <p> The empirical analysis conducts time-series regressions for individual countries as well as pooled regressions. The results indicate that the short interest rate and the term spread are fairly robust predictors of stock returns in OECD countries. The predictive abilities of both the short rate and the term spread are short-run phenomena; in particular, there is only evidence of predictability at one and 12-month horizons. In contrast to the interest rate variables, no strong or consistent evidence of predictability is found when considering the earnings- and dividend-price ratios as predictors. Any evidence that is found is primarily seen at the long-run horizon of 60 months. Neither of these predictors yields any consistent predictive power for the OECD countries. <p> The interest rate variables also have out-of-sample predictive power that is economically significant; the welfare gains to a log-utility investor who uses the predictive ability of these variables to make portfolio decisions are substantial. <p>
    Keywords: Predictive regressions; long-horizon regressions; panel data; stock return predictability
    JEL: C22 C23 G12 G15
    Date: 2005–02–02
  15. By: Hjalmarsson, Erik (Department of Economics)
    Abstract: This paper analyzes econometric inference in predictive regressions in a panel data setting. In a traditional time-series framework, estimation and testing are often made difficult by the endogeneity and near persistence of many forecasting variables; tests of whether the dividend-price ratio predicts stock returns is a prototypical example. I show that, by pooling the data, these econometric issues can be dealt with more easily. When no individual intercepts are included in the pooled regression, the pooled estimator has an asymptotically normal distribution and standard tests can be performed. However, when fixed effects are included in the specification, a second order bias in the fixed effects estimator arises from the endogeneity and persistence of the regressors. A new estimator based on recursive demeaning is proposed and its asymptotic normality is derived; the procedure requires no knowledge of the degree of persistence in the regressors and thus sidesteps the main inferential problems in the time-series case. Since forecasting regressions are typically applied to financial or macroeconomic data, the traditional panel data assumption of cross-sectional independence is likely to be violated. New methods for dealing with common factors in the data are therefore also developed. The analytical results derived in the paper are supported by Monte Carlo evidence. <p>
    Keywords: Predictive regression; panel data; pooled regression; cross-sectional dependence; stock return predictability; fully modified estimation; local-to-unity
    JEL: C22 C23
    Date: 2005–02–02
  16. By: Dani?evsk?, P.; Jong, A. de; Verbeek, M. (Erasmus Research Institute of Management (ERIM), Erasmus University Rotterdam)
    Abstract: This paper investigates three capital structure decisions ? leverage, debt maturity and the source of debt ? in a simultaneous setting. Moreover, we investigate whether these choices are influenced by the involvement of banks in a firm. Our results based on a panel of Dutch firms show that bank relationships, measured by interlocking board memberships and equity ownership, have a significant impact on the relations among the three capital structure choices. First, less bank involvement strengthens the positive impact of leverage on maturity. This is consistent with the liquidity risk theory, because involved banks help firms to mitigate liquidity risk. Second, bank debt negatively effects leverage in firms with bank interlocks, while this relation is absent in firms without such bank involvement. This result suggests that banks maximize the value of their loans by reducing overall leverage. Third, we find a strong trade-off between bank debt and maturity, which is independent of the degree of bank involvement.
    Keywords: capital structure;debt maturity;bank relationships;international economics;financial economics;source of debt;
    Date: 2004–06–23
  17. By: Dirk Bergemann (Yale University); Ulrich Hege (ESSEC Business School, CEPR)
    Abstract: This paper considers the financing of a research project under uncertainty about the time of completion and the probability of eventual success. We distinguish between two financing modes, namely relationship financing, where the allocation decision of the entrepreneur is observable, and arm's length financing, where it is unobservable. We find that equilibrium funding stops altogether too early relative to the efficient stopping time in both financing modes. The rate at which funding is released becomes tighter over time under relationship financing, and looser under arm's length financing. The trade-off in the choice of financing modes is between lack of commitment with relationship financing and information rents with arm's length financing.
    Keywords: Innovation, venture capital, relationship financing, arm's length financing, learning, time-consistency, stopping, renegotiation-proofness
    JEL: D83 D92 G24 G31
    Date: 2001–02
  18. By: Axel, GAUTIER (CEREC, Facultés Universitaires Saint-Louis and CORE); Malika, HAMADI (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: In this paper, we raise the following two questions : (1) do Belgian holding companies operate an internal capital market to transfer financial resources in between their subsidiaries ? And if yes, (2) is the internal capital market efficient ? To answer the first question, we check if the group cash flow is a determinant of the investment’s spending of group members. The answer is positive if the holding’s subsidiary is affilliated to a coordinate center and negative otherwise. To answer the second question, we evaluate if internal transfers are driven by efficiency. From our estimations, we cannot conclude that Belgian Holding companies have an efficient internal capital market.
    Keywords: Investment; Holding; Internal capital market
    JEL: G31
    Date: 2005–01–04
  19. By: Thesmar, David; Thoenig, Mathias
    Abstract: This Paper posits that firms can choose the degree of risk inherent to their technological/ marketing/organizational strategies. Financial market development, by improving risk sharing between owners of listed firms, increases the willingness of these firms to take risky bets. This in turn increases firm level uncertainty in sales, employment and profits. In equilibrium, this effect diffuses to non-listed firms, a group not directly involved in risk sharing. The effect is larger when competition increases, and when labour market institutions are flexible. This Paper thus provides a finance-based, instead of technology-based, rationale for the increase of firm level uncertainty that has recently been documented in France and the US. We then use the French stock market reforms of the late 1980s to test our predictions, using listed firms as the treated group and privately held firms as a control group. Consistent with our model’s testable predictions, we find that (1) for listed firms, firm sales volatility has increased markedly after the reforms; and (2) this effect is stronger where product market competition is the strongest. Such evidence holds in front of various robustness checks. In particular, we seek to control for the exposure to international competition and the adoption of new technologies, two forces that may have affected our treatment and control groups differently.
    Keywords: financial development; firm-level uncertainty; risk sharing
    JEL: G10 J63
    Date: 2004–11
  20. By: Biais, Bruno; Mariotti, Thomas; Plantin, Guillaume; Rochet, Jean Charles
    Abstract: We analyse dynamic financial contracting under moral hazard. The ability to rely on future rewards relaxes the tension between incentive and participation constraints, relative to the static case. Managers are incited by the promise of future payments after several successes and the threat of liquidation after several failures. The more severe the moral hazard problem, the greater the liquidation risk. The optimal contract can be implemented by holding cash reserves and by issuing debt and equity. The firm is liquidated when it runs out of cash. Dividends are paid only when accumulated earnings reach a certain threshold. In the continuous time limit of the model, stocks follow a diffusion process, with a stochastic volatility that increases after price drops. In line with empirical findings, performance shocks induce long lasting changes in leverage.
    Keywords: asset pricing; Dynamic Financial Contracting; moral hazard; security design
    JEL: D82 G12 G32 G35
    Date: 2004–11
  21. By: Gehrig, Thomas; Menkhoff, Lukas
    Abstract: This Paper analyses the behaviour and motivation of fund managers in foreign exchange markets reflected in questionnaire evidence. We find that fund managers and FX dealers differ significantly. Fund managers rely more on fundamentals, basically due to their longer forecasting horizons, and reject non-fundamental influences on exchange rates more than FX dealers. Neither can fund managers be considered as pure fundamentalists, however. Non-fundamentalist positions markedly influence short-term decision-making. They inspire ambivalent views about market imperfections and these views seem to become stronger over time. This latter change counterbalances the strengthening fundamental influences resulting from the rise of fund managers.
    Keywords: foreign exchange; fund management; fundamentals; market microstructure
    JEL: F31 G23
    Date: 2004–10
  22. By: Kandel, Shmuel; Zilca, Shlomo
    Abstract: Cochrane’s variance ratio is a leading tool for detection of deviations from random walks in financial asset prices. This Paper develops a variance ratio related regression model that can be used for prediction. We suggest a comprehensive framework for our model, including model identification, model estimation and selection, bias correction, model diagnostic check, and an inference procedure. We use our model to study and model mean reversion in the NYSE index in the period 1825-2002. We demonstrate that in addition to mean reversion, our model can generate other characteristic properties of financial asset prices, such as short-term persistence and volatility clustering of unconditional returns.
    Keywords: mean reversion; persistence; variance ratio
    Date: 2004–11
  23. By: Banerjee, Abhijit; Duflo, Esther
    Abstract: We begin the Paper by laying out a simple methodology that allows us to determine whether firms are credit constrained, based on how they react to changes in directed lending programs. The basic idea is that while both constrained and unconstrained firms may be willing to absorb all the directed credit that they can get (because it may be cheaper than other sources of credit), constrained firms will use it to expand production, while unconstrained firms will primarily use it as a substitute for other borrowing. We then apply this methodology to firms in India that became eligible for directed credit as a result of a policy change in 1998, and lost eligibility as a result of the reversal of this reform in 2000. Using firms that were already getting this kind of credit before 1998, and retained eligibility in 2000 to control for time trends, we show that there is no evidence that directed credit is being used as a substitute for other forms of credit. Instead the credit was used to finance more production – there was significant acceleration in the rate of growth of sales and profits for these firms. We conclude that many of the firms must have been severely credit constrained.
    Keywords: banking; credit constraints; India
    JEL: G20 O16
    Date: 2004–10
  24. By: Marie-Claude Beaulieu; Jean-Marie Dufour; Lynda Khalaf
    Abstract: In this paper, we propose exact inference procedures for asset pricing models that can be formulated in the framework of a multivariate linear regression (CAPM), allowing for stable error distributions. The normality assumption on the distribution of stock returns is usually rejected in empirical studies, due to excess kurtosis and asymmetry. To model such data, we propose a comprehensive statistical approach which allows for alternative - possibly asymmetric - heavy tailed distributions without the use of large-sample approximations. The methods suggested are based on Monte Carlo test techniques. Goodness-of-fit tests are formally incorporated to ensure that the error distributions considered are empirically sustainable, from which exact confidence sets for the unknown tail area and asymmetry parameters of the stable error distribution are derived. Tests for the efficiency of the market portfolio (zero intercepts) which explicitly allow for the presence of (unknown) nuisance parameter in the stable error distribution are derived. The methods proposed are applied to monthly returns on 12 portfolios of the New York Stock Exchange over the period 1926-1995 (5 year subperiods). We find that stable possibly skewed distributions provide statistically significant improvement in goodness-of-fit and lead to fewer rejections of the efficiency hypothesis. <P>Dans cet article, nous proposons des méthodes d’inférence exactes pour des modèles d’évaluation d’actifs (CAPM) qui sont formulés dans le contexte des modèles de régression linéaires multivariés. De plus, ces méthodes permettent de considérer des lois de probabilité stables sur les erreurs du modèle. Il est bien connu que l’hypothèse de normalité des rendements boursiers est habituellement rejetée dans les études empiriques à cause de la présence d’asymétrie et d’aplatissement dans les distributions. Afin de modéliser de tels attributs, nous suggérons une approche qui accommode l’asymétrie et l’aplatissement dans les distributions sans avoir recours à des approximations de grands échantillons. Les méthodes suggérées sont basées sur des tests de Monte Carlo. Des tests diagnostiques multivariés sont formellement inclus dans l’analyse afin de s’assurer que les distributions d’erreurs considérées sont raisonnables pour les données étudiées. Ces tests permettent la construction de régions de confiance exactes pour les paramètres d’asymétrie et d’aplatissement des erreurs dans le cas de lois stables. Nous proposons des tests d’efficacité du portefeuille de référence (i.e., pour la nullité des constantes) qui tiennent explicitement compte de la présence de paramètres de nuisance dans les distributions stables. Les méthodes proposées sont appliquées aux rendements de 12 portefeuilles constitués d’actifs négociés à la bourse de New York (NYSE) sur la période s’étalant de 1926 à 1995 (par sous-périodes de cinq ans). Nos résultats montrent que l’utilisation de distributions stables possiblement asymétriques produit une amélioration statistique importante dans la représentation de la distribution et mène à moins de rejet de l’hypothèse d’efficacité du portefeuille de marché.
    Keywords: capital asset pricing model; mean-variance efficiency; non-normality; multivariate linear regression; stable distribution; skewness; kurtosis; asymmetry; uniform linear hypothesis; exact test; Monte Carlo test; nuisance parameter; specification test; diagnostics, modèle d’évaluation d’actifs financiers; efficience de portefeuille; non-normalité; modèle de régression multivarié; loi stable; asymétrie; aplatissement; hypothèse linéaire uniforme; test exact; test de Monte Carlo; paramètres de nuisance; tests diagnostiques
    JEL: C3 C12 C33 C15 G1 G12 G14
    Date: 2005–02–01
  25. By: Norden, Lars; Weber, Martin
    Abstract: This Paper analyses the empirical relationship between credit default swap, bond and stock markets during the period 2000-02. Focusing on the intertemporal comovement, we examine weekly and daily lead-lag relationships in a vector autoregressive model and the adjustment between markets caused by cointegration. First, we find that stock returns lead CDS and bond spread changes. Second, CDS spread changes Granger cause bond spread changes for a higher number of firms than vice versa. Third, the CDS market is significantly more sensitive to the stock market than the bond market and the magnitude of this sensitivity increases when credit quality becomes worse. Finally, the CDS market plays a more important role for price discovery than the corporate bond market.
    Keywords: credit derivatives; credit risk; credit spreads; lead-lag relationship
    JEL: C32 G10 G14
    Date: 2004–10
  26. By: Marc Potters (Science & Finance, Capital Fund Management); Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Dragan Sestovic
    Abstract: We propose a new `hedged' Monte-Carlo (HMC) method to price financial derivatives, which allows to determine simultaneously the optimal hedge. The inclusion of the optimal hedging strategy allows one to reduce the financial risk associated with option trading, and for the very same reason reduces considerably the variance of our HMC scheme as compared to previous methods. The explicit accounting of the hedging cost naturally converts the objective probability into the `risk-neutral' one. This allows a consistent use of purely historical time series to price derivatives and obtain their residual risk. The method can be used to price a large class of exotic options, including those with path dependent and early exercise features.
    JEL: G10
  27. By: Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Farhat Selmi
    Abstract: As soon as one accepts to abandon the zero-risk paradigm of Black-Scholes, very interesting issues concerning risk control arise because different definitions of the risk become unequivalent. Optimal hedges then depend on the quantity one wishes to minimize. We show that a definition of the risk more sensitive to the extreme events generically leads to a decrease both of the probability of extreme losses and of the sensitivity of the hedge on the price of the underlying (the `Gamma'). Therefore, the transaction costs and the impact of hedging on the price dynamics of the underlying are reduced.
    JEL: G10
  28. By: Andrew Matacz (Science & Finance, Capital Fund Management)
    Abstract: In this paper I develop a new computational method for pricing path dependent options. Using the path integral representation of the option price, I show that in general it is possible to perform analytically a partial averaging over the underlying risk-neutral diffusion process. This result greatly eases the computational burden placed on the subsequent numerical evaluation. For short-medium term options it leads to a general approximation formula that only requires the evaluation of a one dimensional integral. I illustrate the application of the method to Asian options and occupation time derivatives.
    JEL: G10
  29. By: Andrew Matacz (Science & Finance, Capital Fund Management)
    Abstract: In this paper I develop a new computational method for pricing path dependent options. Using the path integral representation of the option price, I show that in general it is possible to perform analytically a partial averaging over the underlying risk-neutral diffusion process. This result greatly eases the computational burden placed on the subsequent numerical evaluation. For short-medium term options it leads to a general approximation formula that only requires the evaluation of a one dimensional integral. I illustrate the application of the method to Asian options and occupation time derivatives.
    JEL: G10
  30. By: Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;)
    Abstract: Estimating and controlling large risks has become one of the main concern of financial institutions. This requires the development of adequate statistical models and theoretical tools (which go beyond the traditionnal theories based on Gaussian statistics), and their practical implementation. Here we describe three interrelated aspects of this program: we first give a brief survey of the peculiar statistical properties of the empirical price fluctuations. We then review how an option pricing theory consistent with these statistical features can be constructed, and compared with real market prices for options. We finally argue that a true `microscopic' theory of price fluctuations (rather than a statistical model) would be most valuable for risk assessment. A simple Langevin-like equation is proposed, as a possible step in this direction.
    JEL: G10

This nep-cfn issue is ©2005 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.