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on Corporate Finance |
| By: | Jean-Pierre Zigrand; Jon Danielsson |
| Abstract: | We provide an equilibrium multi-asset pricing model with micro-founded systemic risk and heterogeneous investors. Systemic risk arises due to excessive leverage and risk taking induced by free-riding externalities. Global risk-sensitive financial regulations are introduced with a view of tackling systemic risk, with Value -at - Risk a key component. The model suggests that risk sensitive regulation can lower systemic risk in equilibrium, at the expense of poor risk-sharing, an increase in risk premia, higher and asymmetric asset volatility, lower liquidity, more comovement in prices, and the chance that markets may not clear.Journal of Economics Literature classification numbers: G12, G18, G20, D50.Keywords: systemic risk, value-at-risk, risk sensitive regulation, general equilibrium |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp561&r=cfn |
| By: | Paola Robotti |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp560&r=cfn |
| By: | Massimo Guidolin; Stuart Hyde |
| Abstract: | We calculate optimal portfolio choices for a long-horizon, We use multivariate regime switching vector autoregressive models to characterize the time-varying linkages among the Irish stock market, one of the top world performers of the 1990s, and the US and UK stock markets. We find that two regimes, characterized as bear and bull states, are required to characterize the dynamics of excess equity returns both at the univariate and multivariate level. This implies that the regimes driving the small open economy stock market are largely synchronous with those typical of the major markets. However, despite the existence of a persistent bull state in which the correlations among Irish and UK and US excess returns are low, we find that state comovements involving the three markets are so relevant to reduce the optimal mean variance weight carried by ISEQ stocks to at most one-quarter of the overall equity portfolio. We compute time-varying Sharpe ratios and recursive mean-variance portfolio weights and document that a regime switching framework produces out-of-sample portfolio performance that outperforms simpler models that ignore regimes. These results appear robust to endogenizing the effects of short term interest rates on excess stock returns. |
| Keywords: | Stock exchanges |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-029&r=cfn |
| By: | Ivo J.M. Arnold; Evert B. Vrugt (Nyenrode Business Universiteit) |
| Abstract: | This paper provides empirical evidence on the link between stock market volatility and macroeconomic uncertainty. We show that US stock market volatility is significantly related to the dispersion in economic forecasts from SPF survey participants over the period from 1969 to 1996. This link is much stronger than that between stock market volatility and the more traditional time-series measures of macroeconomic volatility, but disappears after 1996. |
| Keywords: | Stock market volatility, macro-economic factors, survey data |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:nijrep:2006-08&r=cfn |
| By: | Ivo J.M. Arnold; Ronald MacDonald; Casper G. de Vries (Nyenrode Business Universiteit) |
| Abstract: | A widely held notion holds that freely floating exchange rates are excessively volatile when judged against fundamentals and when moving from fixed to floating exchange rates. We re-examine the data and conclude that the disparity between the fundamentals and exchange rate volatility is more apparent than real, especially when the Deutsche Mark, rather than the dollar is chosen as the numeraire currency. We also argue, and indeed demonstrate, that in cross-regime comparisons one has to account for certain ‘missing variables’ which compensate for the fundamental variables’ volatility under fixed rates. |
| Keywords: | Exchange rates; Exchange rate regimes; Excess volatility. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:nijrep:2006-04&r=cfn |
| By: | Juan Ignacio Pena; Santiago Forte |
| Abstract: | This paper presents a procedure for computing homogeneous measures of credit risk from stocks, bonds and CDSs. The measures are based on bond spreads (BS), CDS spreads (CDS) and implied stock market credit spreads (ICS). We compute these measures for a sample of North American and European firms and find that in most cases, the stock market leads the credit risk discovery process with respect to bond and CDS markets. |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wbrepe:wb063310&r=cfn |
| By: | John Armour |
| Abstract: | The characterisation of a security interest as 'fixed' or 'floating' has generated much litigation in English courts. This is because a floating charge is subordinated by statute to other claims in the debtor's insolvency, whereas a fixed charge is not. This paper uses the example of the floating charge to argue that such statutory redistribution between claimants in corporate insolvency is generally undesirable. |
| Keywords: | corporate insolvency, law and finance, history of floating charge, bankruptcy priorities, secured credit. |
| JEL: | G32 G33 H23 K22 N43 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:cbr:cbrwps:wp319&r=cfn |
| By: | Colm Kearney; Valerio Poti |
| Abstract: | We examine the dynamics of idiosyncratic risk, market risk and return correlations in European equity markets using weekly observations from 3515 stocks listed in the 12 Euro area stock markets over the period 1974-2004. Similarly to Campbell, Lettau, Malkiel and Xu (2001), we find a rise in idiosyncratic volatility, implying that it now takes more stocks to diversify away idiosyncratic risk. Contrary to the United States , however, market risk is trended upwards in Europe and correlations are not trended downwards. Both the volatility and correlation measures are pro-cyclical, and they rise during times of low market returns. Market and average idiosyncratic volatility jointly predict market wide returns, and the latter impact upon both market and idiosyncratic volatility. This has asset pricing and risk management implications. |
| Keywords: | Idiosyncratic risk, correlation, portfolio management, asset pricing |
| Date: | 2006–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp132&r=cfn |
| By: | Ricardo Coehlo; Claire Gilmore; Brian M. Lucey |
| Abstract: | The minimum spanning tree concept from physics is used to study the process of market integration for a large group of national stock market indices. We show how the tree grows over time and describe the dynamics of its various characteristics. Over the period studied, 1997-2006, the tree shows a tendency to become less bushy. This implies that global equity markets are increasingly interrelated. The consequence for global investors is a potential reduction of the benefits of international portfolio diversification. |
| Keywords: | Econophysics, minimal spanning trees |
| Date: | 2006–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp142&r=cfn |
| By: | John Armour |
| Abstract: | This paper reviews the case for and against mandatory legal capital rules. It is argued that legal capital is no longer an appropriate means of safeguarding creditors' interests. This is most clearly the case as regards mandatory rules. Moreover, it is suggested that even an 'opt in' (or default) legal capital regime is unlikely to be a useful mechanism. However, the advent of regulatory arbitrage in European corporate law will provide a way of gathering information regarding investors' preferences in relation to such rules. Those creditor protection rules that do not further the interests of adjusting creditors will become subject to competitive pressures. Legislatures will be faced with the task of designing mandatory rules to deal with the issues raised by Ônon-adjustingÕ creditors in a proportionate and effective manner, consistent with the Gebhard formula. |
| Keywords: | Corporate Law, Creditor Protection, Legal Capital, Regulatory Competition |
| JEL: | G32 G38 K12 K22 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:cbr:cbrwps:wp320&r=cfn |
| By: | Fan, Xuejun; Jacobs, Jan; Lensink, Robert (Groningen University) |
| Abstract: | This paper contributes to the empirical finance-growth literature by examining the relationship between financial depth, banking sector development, stock market development and economic growth in China. After an extensive survey on recent financial reforms in China, we apply Granger (non-)causality tests for non-stationary variables to examine long-run and short-run causality between economic growth and financial development. We find positive relationships between financial depth, banking sector development and growth. However, stock market development does not seem to have a positive effect on long-run economic growth. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:rugccs:200509&r=cfn |
| By: | Prasad Bidarkota (Department of Economics, Florida International University); Brice Dupoyet (Department of Finance, Florida International University) |
| Abstract: | We study the consumption based asset pricing model in a discrete time pure exchange setting with incomplete information. Incomplete information leads to a filtering problem which agents solve using the Kalman filter. We characterize the solution to the asset pricing problem in such a setting. Empirical estimation with US consumption data indicates strong statistical support for the incomplete information model versus the benchmark complete information model. We investigate the ability of the model to replicate some key stylized facts about US equity and riskfree returns. |
| Keywords: | asset pricing, incomplete information, Kalman filter, equity returns, riskfree returns |
| JEL: | G12 G13 E43 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:fiu:wpaper:0603&r=cfn |
| By: | Chiaki Hara (Institute of Economic Research, Kyoto University); James Huang (Department of Accounting and Management, Lancaster University Management School); Christoph Kuzmics (MEDS, Kellogg School of Management, Northwestern University) |
| Abstract: | We study the representative consumerfs risk attitude and efficient risk-sharing rules in a singleperiod, single-good economy in which consumers have homogeneous probabilistic beliefs but heterogeneous risk attitudes. We prove that if all consumers have convex absolute risk tolerance, so must the representative consumer. We also identify a relationship between the curvature of an individual consumerfs individual risk sharing rule and his absolute cautiousness, the first derivative of absolute risk-tolerance. Furthermore, we discuss some consequences of these results and refinements of these results for the class of HARA utility functions. |
| Keywords: | Aggregation, heterogeneous consumers, absolute risk tolerance, mutual fund theorem. |
| JEL: | D51 D58 D81 G11 G12 G13 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:620&r=cfn |
| By: | Chiaki Hara (Institute of Economic Research, Kyoto University); James Huang (Department of Accounting and Management, Lancaster University Management School); Christoph Kuzmics (MEDS, Kellogg School of Management, Northwestern University) |
| Abstract: | In an exchange economy in which there is a complete set of markets for macroeconomic risks but no market for idiosyncratic risks, we consider how the efficient risk-sharing rules for the macroeconomic risk are affected by the heterogeneity in the consumersf risk attitudes and idiosyncratic risks. We provide sufficient conditions under which an idiosyncratic risk increases cautiousness (the derivative of the reciprocal of the absolute risk aversion), the determinant of the curvatures of the efficient risk-sharing rules. While the curvature of the risk-sharing rules at high consumption levels are governed by the consumersf risk attitudes, the curvature at low consumption levels depend not only on the risk attitudes but also on the lower tail distributions of the idiosyncratic risks. |
| Keywords: | Efficient risk-sharing rules, relative risk aversion, absolute risk tolerance, Inada condition, idiosyncratic risks, background risks, incomplete markets. |
| JEL: | D51 D58 D81 G11 G12 G13 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:621&r=cfn |