nep-fmk New Economics Papers
on Financial Markets
Issue of 2007‒01‒28
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Term structure of interest rate. european financial integration. By Hortènsia Fontanals; Elisabet Ruiz; Catalina Bolancé
  2. Risk, Return and Dividends By Andrew Ang; Jun Liu
  3. Phase-Locking and Switching Volatility in Hedge Funds By Monica Billio; Mila Getmansky; Loriana Pelizzon
  4. Modeling Financial Return Dynamics by Decomposition By Stanislav Anatolyev; Nikolay Gospodinov
  5. Modeling Stock Pinning By Marc Jeannin; Giulia Iori; David Samuel

  1. By: Hortènsia Fontanals (Faculty of Economics, University of Barcelona.); Elisabet Ruiz (Universitat Oberta de Catalunya.); Catalina Bolancé (Faculty of Economics, University of Barcelona.)
    Abstract: In this paper we estimate, analyze and compare the term structures of interest rate in six different countries, during the period 1992-2004. We apply Nelson and Siegel model to obtain them with a weekly frequency. Four European Monetary Union countries, Spain, France, Germany and Italy are included. UK is also included as a European country, but not integrated in the Monetary Union. Finally US completes the analysis. The goal is to determine the differences in the shape of curves between these countries. Likewise, we can determinate the most usual term structure shapes that appear in every country.
    Keywords: Term structure of interest rate, parsimonious models, level parameter, slope parameter, European interest rate.
    JEL: C14 C51 C82 E43 G15
    Date: 2006–12
    URL: http://d.repec.org/n?u=RePEc:ira:wpaper:200610&r=fmk
  2. By: Andrew Ang; Jun Liu
    Abstract: We characterize the joint dynamics of dividends, expected returns, stochastic volatility, and prices. In particular, with a given dividend process, one of the processes of the expected return, the stock volatility, or the price-dividend ratio fully determines the other two. For example, together with dividends, the stock volatility process fully determines the dynamics of the expected return and the price-dividend ratio. By parameterizing one or more of expected returns, volatility, or prices, common empirical specifications place strong, and sometimes counter-factual, restrictions on the dynamics of the other variables. Our relations are useful for understanding the risk-return trade-off, as well as characterizing the predictability of stock returns.
    JEL: G12
    Date: 2007–01
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:12843&r=fmk
  3. By: Monica Billio (Department of Economics, University Of Venice Ca’ Foscari); Mila Getmansky (msherman@som.umass.edu); Loriana Pelizzon (pelizzon@unive.it)
    Abstract: This article aims to investigate the phase-locking and switching volatility in the idiosyncratic risk factor of hedge funds using switching regime beta models. This approach allows the analysis of hedge fund tail event behavior and in particular the changes in hedge fund exposure to various risk factors potentially related to liquidity risk, conditional on different states of the market. We and that in a normal state of the market, the exposure to risk factors could be very low but as soon as the market risk factor captured by the S&P500 moves to a down-market state characterized by negative returns and high volatility, the exposure of hedge fund indexes to the S&P500 and especially to other risk factors changes signi?cantly presenting evidence of phase-locking. We further extend the regime switching model to allow for non-linearity in residuals and show that switching regime models are able to capture and forecast the evolution of the idiosyncratic risk factor in terms of changes from a low volatility regime to a distressed state that are not directly related to market risk factors.
    Keywords: Hedge Funds; Risk Management; Regime-Switching Models, Liquidity
    JEL: G12 G29 C51
    Date: 2006
    URL: http://d.repec.org/n?u=RePEc:ven:wpaper:54_06&r=fmk
  4. By: Stanislav Anatolyev (New Economic School); Nikolay Gospodinov (Concordia University)
    Abstract: While the predictability of excess stock returns is statistically small, their sign and volatility exhibit a substantially larger degree of dependence over time. We capitalize on this observation and consider prediction of excess stock returns by decomposing the equity premium into a product of sign and absolute value components and carefully modeling the marginal predictive densities of the two parts. Then we construct the joint density of a positively valued (absolute returns) random variable and a discrete binary (sign) random variable by copula methods and discuss computation of the conditional mean predictor. Our empirical analysis of US stock return data shows among other interesting ndings that despite the large unconditional correlation between the two multiplicative components they are conditionally very weakly dependent.
    Keywords: Stock returns predictability; Directional forecasting; Absolute returns; Joint predictive distribution; Copulas.
    Date: 2007–01
    URL: http://d.repec.org/n?u=RePEc:cfr:cefirw:w0095&r=fmk
  5. By: Marc Jeannin; Giulia Iori (Department of Economics, City University, London); David Samuel
    Abstract: The paper investigates the effect of hedging strategies on the so called pinning effect, i.e. the tendency of stock’s prices to close near the strike price of heavily traded options as the expiration date nears. In the paper we extend the analysis of Avellaneda and Lipkin (2003) who propose an explanation of stock pinning in terms of delta hedging strategies for long option positions. We adopt a model introduced by Frey and Stremme (1997) and show that in this case pinning is driven by two effects: a hedging dependent drift term that pushes the stock price toward the strike price and a hedging dependent volatility term that constrains the stock price near the strike as it approaches it. Finally we show that pinning can be gnerated by dynamic hedging strategies under more realistic market conditions by simulating trading in a double auction model.
    Date: 2006–05
    URL: http://d.repec.org/n?u=RePEc:cty:dpaper:0604&r=fmk

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