nep-cfn New Economics Papers
on Corporate Finance
Issue of 2015‒02‒16
two papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Centrality-based capital allocations By Alter, Adrian; Craig, Ben; Raupach, Peter
  2. Equity Premium Prediction: Are Economic and Technical Indicators Instable? By Fabian Baetje; Lukas Menkhoff

  1. By: Alter, Adrian; Craig, Ben; Raupach, Peter
    Abstract: We look at the effect of capital rules on a banking system that is connected through correlated credit exposures and interbank lending. The rules, which combine individual bank characteristics and interconnectivity measures of interbank lending, are to minimize a measure of system-wide losses. Using the detailed German Credit Register for estimation, we find capital rules based on eigenvectors to dominate any other centrality measure, followed by closeness. Compared to the baseline case, capital reallocation based on the Adjacency Eigenvector saves 14.6% in system losses as measured by expected bankruptcy costs.
    Keywords: Capital Requirements,Centrality Measures,Contagion,Financial Stability
    JEL: G21 G28 C15 C81
    Date: 2015
  2. By: Fabian Baetje; Lukas Menkhoff
    Abstract: We show that technical indicators deliver economic value in predicting the U.S. equity premium. A crucial element of this value stems from the stability of return predictability over the full sample period from 1950 to 2013. Results tentatively improve over time and beat alternatives over sub-periods. By contrast, economic indicators work well only until the 1970s, thereafter they lose predictive power, even when the last crisis is considered. Translating the predictive power of technical indicators into a standard investment strategy delivers an average Sharpe Ratio of 0.6 p.a. for investors who had entered the market at any point in time
    Keywords: Equity premium predictability; economic indicators; technical indicators; break tests
    JEL: G17 G12
    Date: 2015–01

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