New Economics Papers
on Financial Markets
Issue of 2007‒03‒17
seven papers chosen by

  1. World Real Interest Rates: A Global Savings and Investment Perspective By Brigitte Desroches; Michael Francis
  2. Stock Market Interactions and the Impact of Macroeconomic News – Evidence from High Frequency Data of European Futures Markets By Bea Canto; Roman Kräussl
  3. The Impact of Oil Price Shocks on the U.S. Stock Market By Kilian, Lutz; Park, Cheolbeom
  4. Hedging Exposure to Electricity Price Risk in a Value at Risk Framework By Huisman, R.; Mahieu, R.J.; Schlichter, F.
  5. Portfolio Optimization wehn Risk Factors are Conditionally Varying and Heavy Tailed By Toker Doganoglu; Christoph Hartz; Stefan Mittnik
  6. Credit Risk in the Czech Economy By Petr Jakubík
  7. Stress testing of the stability of the Italian banking system: a VAR approach By Renato Filosa

  1. By: Brigitte Desroches; Michael Francis
    Abstract: Over the past 15 years, long-term interest rates have declined to levels not seen since the 1970s. This paper explores possible shifts in global savings and investment that have led to this fall in the world real interest rate. There are several key findings. First, the authors identify the relative weakness in investment demand as more important than the relative increase in desired global savings to explain the decline in global interest rates. Second, the results indicate that the key factors explaining movements in savings and investment are variables that evolve relatively slowly over time, such as labour force growth and age structure. The conclusions suggest that over the coming years, world real interest rates are likely to continue to adjust slowly, reflecting longterm trends.
    Keywords: Interest rates; International topics
    JEL: E2 E4 F3
    Date: 2007
  2. By: Bea Canto (Watson Wyatt Brans & Co.); Roman Kräussl (Vrije Universiteit Amsterdam and CFS)
    Abstract: This study analyzes the short-term dynamic spillovers between the futures returns on the DAX, the DJ Eurostoxx 50 and the FTSE 100. It also examines whether economic news is one source of international stock return co-movements. In particular, we test whether stock market interdependencies are attributable to reactions of foreign traders to public economic information. Moreover, we analyze whether cross-market linkages remain the same or whether they do increase during periods in which economic news is released in one of the countries. Our main results can be summarized as follows: (i) there are clear short term international dynamic interactions among the European stock futures markets; (ii) foreign economic news affects domestic returns; (iii) futures returns adjust to news immediately; (iv) announcement timing of macroeconomic news matters; (v) stock market dynamic interactions do not increase at the time of the release of economic news; (vi) foreign investors react to the content of the news itself more than to the response of the domestic market to the national news; and (vii) contemporaneous correlation between futures returns changes at the time of macroeconomic releases.
    Keywords: Market Microstructure,Stock Market Dynamic Interactions, Macroeconomic News, High Frequency Data, VAR Modeling, Variance Decomposition
    JEL: G14 G15
    Date: 2006–12–06
  3. By: Kilian, Lutz; Park, Cheolbeom
    Abstract: While there is a strong presumption in the financial press that oil prices drive the stock market, the empirical evidence on the impact of oil price shocks on stock prices has been mixed. This paper shows that the response of aggregate stock returns may differ greatly depending on whether the increase in the price of crude oil is driven by demand or supply shocks in the crude oil market. The conventional wisdom that higher oil prices necessarily cause lower returns is shown to apply only to oil-market specific demand shocks such as increases in the precautionary demand for crude oil that reflect fears about the availability of future oil supplies. In contrast, positive shocks to the global aggregate demand for industrial commodities are shown to cause both higher real oil prices and higher stock prices. Shocks to the global production of crude oil, while not trivial, are far less important for understanding changes in stock prices than shocks to global aggregate demand and shocks to the precautionary demand for oil. Further insights can be gained from the responses of industry-specific stock returns to demand and supply shocks in the crude oil market. We identify the sectors most sensitive to these shocks and study the opportunities for adjusting one’s portfolio in response to oil market disturbances.
    Keywords: Demand shocks; Oil prices; Stock returns; Supply Shocks
    JEL: G12 Q43
    Date: 2007–03
  4. By: Huisman, R.; Mahieu, R.J.; Schlichter, F. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: This paper deals with the question how an electricity end-consumer or distribution company should structure its portfolio with energy forward contracts. This paper introduces a one period framework to determine optimal positions in peak and off-peak contracts in order to purchase future consumption volume. In this framework, the end-consumer or distribution company is assumed to minimize expected costs of purchasing respecting an ex-ante risk limit defined in terms of Value at Risk. Based on prices from the German EEX market, it is shown that a risk-loving agent is able to obtain lower expected costs than for a risk-averse agent.
    Keywords: Electricity prices;Mean variance;Hedge ratios;Forward risk premium;
    Date: 2007–02–21
  5. By: Toker Doganoglu (University of Munich); Christoph Hartz (University of Munich); Stefan Mittnik (University of Munich, Center for Financial Studies and ifo)
    Abstract: Assumptions about the dynamic and distributional behavior of risk factors are crucial for the construction of optimal portfolios and for risk assessment. Although asset returns are generally characterized by conditionally varying volatilities and fat tails, the normal distribution with constant variance continues to be the standard framework in portfolio management. Here we propose a practical approach to portfolio selection. It takes both the conditionally varying volatility and the fat-tailedness of risk factors explicitly into account, while retaining analytical tractability and ease of implementation. An application to a portfolio of nine German DAX stocks illustrates that the model is strongly favored by the data and that it is practically implementable.
    Keywords: Multivariate Stable Distribution, Index Model, Portfolio Optimization, Value-at-Risk, Model Adequacy
    JEL: C13 C32 G11 G14 G18
    Date: 2006–11–03
  6. By: Petr Jakubík (Czech National Bank; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This paper deals with credit risk in the Czech aggregate economy. It follows structural Merton's approach. A latent factor model is employed within this framework. Estimation of this model can help to understand relation between credit risk and macroeconomic indicators. The credit risk model of the Czech aggregate economy was estimated in this manner for purpose of stress testing. The results of this study can be used for stress testing of banking sector.
    Keywords: banking, credit risk, latent factor model, default rate, stress test
    JEL: G21 G28 G33
    Date: 2007–03
  7. By: Renato Filosa
    Abstract: With the aim of contributing to the use of stress testing techniques, by now a commonly-used practice adopted by the financial community to understand the determinants of financial instability, and to measure the size of financial risk, this work represents an application of macro stress testing to the Italian banking system. The paper tries to provide an answer to two interrelated questions. Whether, and the extent to which, procyclicality is a prominent feature of banks’ soundness and whether exogenous, or policy induced, tightening of monetary conditions (sharp and sustained increases in the interest rate and/or appreciation of the exchange rate) significantly increases banks’ fragility. The task is accomplished by the estimation of three alternative VAR models each using different indicators of banks’ soundness: the ratio of non performing loans (flow and stock data) and interest margins to outstanding loans. Two main conclusions emerge. First: the behaviour of either non performing loans or interest margins is only weakly procyclical: i.e. that the solidity of Italian banks could be seriously undermined only in case of falls in output far more severe than in any previous recession since the end of the World War II. The preoccupation expressed by the literature about the dangers of financial procyclicality seems, therefore, grossly exaggerated in the case of Italy. Second: in a hypothetical scenario where monetary conditions are drastically tightened our banks’ soundness indicators exhibit little variations. In this case too the importance attached by the literature to exchange rate swings, or monetary tightening more generally, for the setting off of financial crises is vastly overstated.
    Keywords: banking crises; financial crises; procyclicality; profitability; stress testing; VAR
    JEL: E32 E44 G21
    Date: 2007–03

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