New Economics Papers
on Financial Markets
Issue of 2008‒02‒02
five papers chosen by

  1. Idiosyncratic Risk in Emerging Markets By Timotheos Angelidis
  2. 110 common errors in company valuations By Fernandez, Pablo; Bilan, Andrada
  3. Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison By Carmen M. Reinhart; Kenneth S. Rogoff
  4. Volatility Regimes in Central and Eastern European Countries’ Exchange Rates By M. FRÖMMEL
  5. Bond Markets and Banks in Inter-War Japan By Makoto Kasuya

  1. By: Timotheos Angelidis
    Abstract: It is well documented that idiosyncratic risk is the most important component of total volatility in developed markets. However, little research has been conducted on the properties of asset-specific risk in emerging markets, though they are more volatile, characterized by substantial returns, and represent at least 7.5% of the total world investable market capitalization. Using firm level data for 24 emerging markets, idiosyncratic risk explains 55% of the total volatility, and there is no evidence for an upward trend. Asset-specific risk is negatively correlated with future market returns, whereas market risk is not related. Idiosyncratic volatility and the correlation between security returns affects the number of stocks included in a portfolio, and thus, an investor must always adjust the number of holdings to achieve a given level of risk.
    Keywords: Emerging markets, Idiosyncratic risk, Portfolio management, Tracking error volatility.
    Date: 2008
  2. By: Fernandez, Pablo (IESE Business School); Bilan, Andrada (IESE Business School)
    Abstract: This paper contains a classified collection of 110 errors seen in company valuations performed by financial analysts, investment banks and financial consultants. The author had access to most of the valuations referred to in this paper in his capacity as a consultant in company acquisitions, sales, mergers, and arbitrage processes. We classify the errors into six main categories: 1) errors in the discount rate calculation and concerning the riskiness of the company; 2) errors when calculating or forecasting the expected cash flows; 3) errors in the calculation of the residual value; 4) inconsistencies and conceptual errors; 5) errors when interpreting the valuation; and 6) organizational errors.
    Keywords: company valuation; valuation errors; valuation;
    JEL: G12 G31 M21
    Date: 2007–11–05
  3. By: Carmen M. Reinhart; Kenneth S. Rogoff
    Abstract: Is the 2007-2008 U.S. sub-prime mortgage financial crisis truly a new and different phenomena? Our examination of the longer historical record finds stunning qualitative and quantitative parallels to 18 earlier post-war banking crises in industrialized countries. Specifically, the run-up in U.S. equity and housing prices (which, for countries experiencing large capital inflows, stands out as the best leading indicator in the financial crisis literature) closely tracks the average of the earlier crises. Another important parallel is the inverted v-shape curve for output growth the U.S. experienced as its economy slowed in the eve of the crisis. Among other indicators, the run-up in U.S. public debt and is actually somewhat below the average of other episodes, and its pre-crisis inflation level is also lower. On the other hand, the United States current account deficit trajectory is worse than average. A critical question is whether the U.S. crisis will prove similar to the most severe industrialized-country crises, in which case growth may fall significantly below trend for an extended period. Or will it prove like one of the milder episodes, where the recovery is relatively fast? Much will depend on how large the shock to the financial system proves to be and, to a lesser extent, on the efficacy of the subsequent policy response.
    JEL: E44 F30 N20
    Date: 2008–01
  4. By: M. FRÖMMEL
    Abstract: The choice of an exchange rate arrangement affects exchange rate volatility: higher flexibility goes ahead with increasing volatility and vice versa (Flood and Rose 1995, 1999). We investigate five Central and Eastern European countries between 1994 and 2004. The analysis merges two approaches, the GARCH-model (Bollerslev 1986) and the Markov Switching- Model (Hamilton 1989). We discover switches between high and low volatility regimes consistent with policy settings for Hungary, Poland and, less pronounced, the Czech Republic, whereas Romania and Slovakia do not show a clear picture.
    Keywords: CEEC, exchange rate volatility, regime switching GARCH, Markov switching model, transition economies
    JEL: E42 F31 F36
    Date: 2007–10
  5. By: Makoto Kasuya
    Abstract: Issues of bonds increased in inter-war Japan, the main investors in bonds being banks because demand for loans declined in this period. Banks that were more tolerant of risks (that is, whose capital ratio was higher) made a larger amount of loans, which were riskier than bonds. While national bonds were traded actively in secondary markets, local bonds, corporate bonds, and bank debentures were not traded actively during this period. After the formation of cartels of banks and securities firms for bond underwriting and trading during the Great Depression, bond trading in secondary markets diminished, except for national bonds.
    Keywords: Japanese Banks, bond markets, inter-war period, the Great Depression, national bonds, corporate bonds, cartels, capital.
    Date: 2007–08

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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.