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on Financial Markets |
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Issue of 2008‒01‒12
three papers chosen by |
| By: | Wolfgang Härdle; Julius Mungo |
| Abstract: | Empirical studies have shown that a large number of financial asset returns exhibit fat tails and are often characterized by volatility clustering and asymmetry. Also revealed as a stylized fact is Long memory or long range dependence in market volatility, with significant impact on pricing and forecasting of market volatility. The implication is that models that accomodate long memory hold the promise of improved long-run volatility forecast as well as accurate pricing of long-term contracts. On the other hand, recent focus is on whether long memory can affect the measurement of market risk in the context of Value-at- Risk (V aR). In this paper, we evaluate the Value-at-Risk (V aR) and Expected Shortfall (ESF) in financial markets under such conditions. We examine one equity portfolio, the British FTSE100 and three stocks of the German DAX index portfolio (Bayer, Siemens and Volkswagen). Classical V aR estimation methodology such as exponential moving average (EMA) as well as extension to cases where long memory is an inherent characteristics of the system are investigated. In particular, we estimate two long memory models, the Fractional Integrated Asymmetric Power-ARCH and the Hyperbolic-GARCH with different error distribution assumptions. Our results show that models that account for asymmetries in the volatility specifications as well as fractional integrated parametrization of the volatility process, perform better in predicting the one-step as well as five-step ahead V aR and ESF for short and long positions than short memory models. This suggests that for proper risk valuation of options, the degree of persistence should be investigated and appropriate models that incorporate the existence of such characteristic be taken into account. |
| Keywords: | Backtesting, Value-at-Risk, Expected Shortfall, Long Memory, Fractional Integrated Volatility Models |
| JEL: | C14 C32 C52 C53 G12 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2008-006&r=fmk |
| By: | Fagan, Stephen; Gencay, Ramazan |
| Abstract: | Futures contracts on the New York Mercantile Exchange are the most liquid instruments for trading crude oil, which is the world’s most actively traded physical commodity. Under normal market conditions, traders can easily find counterparties for their trades, resulting in an efficient market with virtually no return predictability. Yet even this extremely liquid instrument suffers from liquidity shocks that induce periods of increased volatility and significant return predictability. This paper identifies an important and recurring cause of these shocks: the accumulation of extreme and opposing positions by the two main trader classes in the market, namely hedgers and speculators. As positions become extreme, approaching their historical limits, counterparties for trades become scarce and prices must adjust to induce trade. These liquidity-induced price adjustments are found to be driven by systematic speculative behavior and are determined to be significant. |
| Keywords: | Liquidity; Futures Markets; Return Predictability; Volatility; Trader Positions; Directional Realized Volatility; Hedgers; Speculators; Position Bounds |
| JEL: | G14 C53 G13 G10 C1 |
| Date: | 2008–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6677&r=fmk |
| By: | Svetlana Andrianova; Panicos Demetriades; Chenggang Xu |
| Abstract: | This paper contributes to the finance-growth literature by examining the political economy origins of some of the most successful financial markets in Europe and Asia. It provides historical evidence from London, Amsterdam and Hong Kong that highlights the essential role played by the government sector in kick-starting financial development. We show that the emergence of financial systems did not occur through laissez-faire approaches and that secure property rights alone were not sufficient for financial development. In the cases of London and Amsterdam, governments created large trade monopolies which were responsible for all the major financial innovations of the time. In the case of Hong Kong, where the financial developmentmodel was bank-based, large banking monopolies with close links to the state were created. We argue that the three examples are not special cases and the role of government in the early stages of financial development has been widespread world-wide. |
| Keywords: | Monopoly; politics; institutions; finance |
| JEL: | G18 N20 O16 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:08/1&r=fmk |