New Economics Papers
on Financial Markets
Issue of 2007‒09‒02
eight papers chosen by

  1. Implications of Asymmetry Risk for Portfolio Analysis and Asset Pricing By Fousseni Chabi-Yo; Dietmar Leisen; Eric Renault
  2. Testing for Instability in Factor Structure of Yield Curves By Dennis Philip; Chihwa Kao; Giovanni Urga
  3. The Price of Ethics: Evidence from Socially Responsible Mutual Funds By Renneboog, L.D.R.; Horst, J.R. ter; Zhang, C.
  4. GARCH Modeling of Robust Market Returns By Lucía Cuadro Sáez; Manuel Moreno
  5. The pricing of risk in European credit and corporate bond markets. By Antje Berndt; Iulian Obreja
  6. The CFS International Capital Flow Database: A User’s Guide By Christian Offermanns; Marcus Pramor
  7. Rational bubbles in emerging stockmarkets By Nunes, Mauricio; Da Silva, Sergio
  8. Volatility dependence across Asia-Pacific on-shore and off-shore U.S. dollar futures markets By Colavecchio , Roberta; Funke, Michael

  1. By: Fousseni Chabi-Yo; Dietmar Leisen; Eric Renault
    Abstract: Asymmetric shocks are common in markets; securities' payoffs are not normally distributed and exhibit skewness. This paper studies the portfolio holdings of heterogeneous agents with preferences over mean, variance and skewness, and derives equilibrium prices. A three funds separation theorem holds, adding a skewness portfolio to the market portfolio; the pricing kernel depends linearly only on the market return and its squared value. Our analysis extends Harvey and Siddique's (2000) conditional mean-variance-skewness asset pricing model to non-vanishing risk-neutral market variance. The empirical relevance of this extension is documented in the context of the asymmetric GARCH-in-mean model of Bekaert and Liu (2004).
    Keywords: Financial markets; Market structure and pricing
    JEL: C52 D58 G11 G12
    Date: 2007
  2. By: Dennis Philip (Cass Business School, City University, 106 Bunhill Road, London EC1Y 8TZ, UK); Chihwa Kao (Center for Policy Research, Maxwell School, Syracuse University, Syracuse, NY 13244-1020); Giovanni Urga (Cass Business School, City University, 106 Bunhill Row, London EC1Y 8TZ, U.K.)
    Abstract: A widely relied upon but a formally untested consideration is the issue of stability in actors underlying the term structure of interest rates. In testing for stability, practitioners as well as academics have employed ad yhoc techniques such as splitting the sample into a few sub-periods and determining whether the factor loadings have appeared to be similar over all sub-periods. Various authors have found mixed evidence on stability in the actors. In this paper we develop a formal testing procedure to evaluate the factor structure stability of the US zero coupon yield term structure. We find the factor structure of level to be unstable over the sample period considered. The slope and curvature factor structures are however found to be stable. Common structural changes affecting all interest rate maturities have fostered instability in the level factor. We corroborate the literature that variances (volatility) explained by the level, slope, and curvature factors are unstable over time. We find that the volatility of slope factor is sensitive to shocks affecting the short rates and the volatility of curvature factor is sensitive to shocks affecting the medium and long rates. Finally, we find evidence of the presence of common economic shocks affecting the level and slope factors, unlike slope and curvature factors that responded differently to economic shocks and were unaffected by any common instabilities.
    Keywords: Stability, factor structure, principal component analysis, term structure of interest rates.
    JEL: C12 C13 C14 C51
    Date: 2007–07
  3. By: Renneboog, L.D.R.; Horst, J.R. ter; Zhang, C. (Tilburg University, Center for Economic Research)
    Abstract: This paper estimates the price of ethics by studying the risk-return relation in socially responsible investment (SRI) funds. Consistent with investors paying a price for ethics, SRI funds in many European and Asia-Pacific countries strongly underperform domestic benchmark portfolios by about 5% per annum, although UK and US SRI funds do not significantly underperform their benchmarks. The underperformance of SRI funds does not seem to be driven by the loadings on an ethical risk factor. SRI funds do not suffer a cost of reduced selectivity nor do SRI funds managers time the market. There is mixed evidence of a smart money effect: SRI investors are unable to identify the funds that will outperform in the future, whereas they show some fund-selection ability in identifying ethical funds that will perform poorly. The screening activities of SRI funds have a significant impact on funds? riskadjusted returns and loadings on risk factors: corporate governance and social screens generate better risk-adjusted returns whereas other screens (e.g. environmental ones) yield significantly lower returns.
    Keywords: ethics;mutual funds;socially responsible investing;investment screens;smart money;risk loadings
    JEL: G12 A13 Z13
    Date: 2007
  4. By: Lucía Cuadro Sáez; Manuel Moreno
    Abstract: Daily financial market returns (as log difference in closing prices) may be quite sensitive to operations with low trading volumes and big changes in prices frequently traded at market closing times. This paper proposes a more robust estimation of market, returns by providing a new indicator that accounts for the information content in prices and trading volumes: the volume weighted return. Then we estimate a GARCH (1,1) model for the IBEX-35 futures market that includes shocks arising from countries linked to the Spanish economy. Our empirical findings suggest that the new measure of market evolution provide more moderate estimates of the impact of the relevant news coming from abroad and thus, it might be relevant to assess the linkages of one market to other economies.
    Keywords: volume weighted return, trading volumes, international transmission of news, GARCH
    JEL: G14 G15 G10
    Date: 2007–05
  5. By: Antje Berndt (Tepper School of Business, GSIA Room 317A, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213, USA.); Iulian Obreja (Tepper School of Business, GSIA Room 317A, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213, USA.)
    Abstract: This paper investigates the determinants of the default risk premia embedded in the European credit default swap spreads. Using a modified version of the intertemporal capital asset pricing model, we show that default risk premia represent compensation for bearing exposure to systematic risk and to a new common factor capturing the proneness of the asset returns to extreme events. This new factor arises naturally because the returns on defaultable securities are more likely to have fat tails. The pricing implications of this new factor are not limited to credit markets only. We find that this common factor is priced consistently across a broad spectrum of corporate bond portfolios. In addition, our asset pricing tests also document patterns that are consistent with the so called "flight to quality" effect. JEL Classification: G12, G13, G15.
    Keywords: Credit default swap, default risk premium, European credit market, European corporate bond markets, risk factors.
    Date: 2007–08
  6. By: Christian Offermanns (Frankfurt University and Deutsche Bundesbank); Marcus Pramor (Center for Financial Studies)
    Abstract: This paper documents the methodology underlying the construction of a global database of gross foreign asset and liability positions for 153 countries over the period 1970 to 2004 and illustrates some key data characteristics. The data cover both inflows and outflows of capital and thus allow for an assessment of the degree of international financial integration. In addition to net foreign asset stocks, we also provide details on the composition of the main asset and liability categories, namely the foreign direct investment, equity investment and debt components. Finally, we report on valuation changes as one of the main sources of discrepancy between transaction-based capital flow data and stock values of investment positions. The dataset is available for download at
    Keywords: Net Foreign Assets; Valuation Adjustment; International Financial Integration
    JEL: F21 F34 F32
    Date: 2007–08–24
  7. By: Nunes, Mauricio; Da Silva, Sergio
    Abstract: We detected rational bubbles in 22 emerging stockmarkets using both standard and threshold cointegration. Eighteen stockmarkets experienced explosive bubbles (and some of them periodically collapsing bubbles as well). The remaining four markets experienced periodically collapsing bubbles only.
    Keywords: bubbles; stockmarkets; emerging markets
    JEL: G12 E44
    Date: 2007–08–29
  8. By: Colavecchio , Roberta (BOFIT); Funke, Michael (BOFIT)
    Abstract: This paper estimates switching autoregressive conditional heteroscedasticity (SWARCH) time series models for weekly returns of nine Asian forward exchange rates. We find two regimes with different volatility levels, whereby each regime displays considerable persistence. Our analysis provides evidence that the knock-on effects from China´s U.S. dollar future rates upon other Asian countries have been modest, in that little evidence exists for co-dependence of volatility regimes.
    Keywords: China; renminbi; Asia; forward exchange rates; non-deliverable forward market; SWARCH models
    JEL: C22 F31 F36
    Date: 2007–08–29

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