New Economics Papers
on Financial Markets
Issue of 2008‒02‒16
nine papers chosen by

  1. Measuring downside risk-realised semivariance By Ole E. Barndorff-Nielsen; Silja Kinnebrock; Neil Shephard
  2. Hedge fund portfolio selection with modified expected shortfall By Boudt, Kris; Peterson, Brian; Carl, Peter
  3. High Frequency Market Microstructure Noise Estimates and Liquidity Measures By Yacine Ait-Sahalia; Jialin Yu
  4. Measuring Financial Asset Return and Volatility Spillovers, With Application to Global Equity Markets By Francis X. Diebold; Kamil Yilmaz
  5. Towards an understanding approach of the insurance linked securities market. By Mathieu Gatumel; Dominique Guegan
  6. Liquidity Risk and Syndicate Structure By Evan Gatev; Philip Strahan
  7. Bond Supply and Excess Bond Returns By Robin Greenwood; Dimitri Vayanos
  8. Bond positions, expectations, and the yield curve By Monika Piazzesi; Martin Schneider
  9. The TIPS yield curve and inflation compensation By Refet S. Gürkaynak; Brian Sack; Jonathan H. Wright

  1. By: Ole E. Barndorff-Nielsen (Dept of Mathematical Sciences, University of Aarhus); Silja Kinnebrock (Oxford-Man Institute and Merton College, University of Oxford); Neil Shephard (Oxford-Man Institute and Dept of Economics, Oxford University)
    Abstract: We propose a new measure of risk, based entirely on downwards moves measured using high frequency data. Realised semivariances are shown to have important predictive qualities for future market volatility. The theory of these new measures is spelt out, drawing on some new results from probability theory.
    Keywords: Market frictions; Quadratic variation; Realised variance; Semimartingale; Semivariance
    Date: 2008–01–21
  2. By: Boudt, Kris; Peterson, Brian; Carl, Peter
    Abstract: Modified Value-at-Risk (VaR) and Expected Shortfall (ES) are recently introduced downside risk estimators based on the Cornish-Fisher expansion for assets such as hedge funds whose returns are non-normally distributed. Modified VaR has been widely implemented as a portfolio selection criterion. We are the first to investigate hedge fund portfolio selection using modified ES as optimality criterion. We show that for the EDHEC hedge fund style indices, the optimal portfolios based on modified ES outperform out-of-sample the EDHEC Fund of Funds index and have better risk characteristics than the equal-weighted and Fund of Funds portfolios.
    Keywords: portfolio optimization; modified expected shortfall; non-normal returns
    JEL: C4
    Date: 2008–02–04
  3. By: Yacine Ait-Sahalia; Jialin Yu
    Abstract: Using recent advances in the econometrics literature, we disentangle from high frequency observations on the transaction prices of a large sample of NYSE stocks a fundamental component and a microstructure noise component. We then relate these statistical measurements of market microstructure noise to observable characteristics of the underlying stocks, and in particular to different financial measures of their liquidity. We find that more liquid stocks based on financial characteristics have lower noise and noise-to-signal ratio measured from their high frequency returns. We then examine whether there exists a common, market-wide, factor in high frequency stock-level measurements of noise, and whether that factor is priced in asset returns.
    JEL: C22 G12
    Date: 2008–02
  4. By: Francis X. Diebold; Kamil Yilmaz
    Abstract: We provide a simple and intuitive measure of interdependence of asset returns and/or volatilities. In particular, we formulate and examine precise and separate measures of return spillovers and volatility spillovers. Our framework facilitates study of both non-crisis and crisis episodes, including trends and bursts in spillovers, and both turn out to be empirically important. In particular, in an analysis of nineteen global equity markets from the early 1990s to the present, we find striking evidence of divergent behavior in the dynamics of return spillovers vs. volatility spillovers: Return spillovers display a gently increasing trend but no bursts, whereas volatility spillovers display no trend but clear bursts.
    JEL: G1
    Date: 2008–02
  5. By: Mathieu Gatumel (Axa et Centre d'Economie de la Sorbonne); Dominique Guegan (Centre d'Economie de la Sorbonne et Paris School of Economics)
    Abstract: The paper aims to present the insurance linked securities market behaviour, that has changed a lot the past three years, both in terms of structure and in terms of ceded risks. After having introduced some stylized facts characterizing the insurance linked securities we capture their market price of risk, following the methodologies of Wang (2004), Lane (2000) and Fermat Capital Management (2005). A dynamical study of the insurance linked securities is also provided in order to understand the elements driving the spreads : the consequences of the catastrophic events, the seasonality and the diversification effects between some different risks are highlighted.
    Keywords: Insurance linked securities, cat. bonds, market price of risk.
    JEL: G10 G12 G14
    Date: 2008–01
  6. By: Evan Gatev; Philip Strahan
    Abstract: We offer a new explanation of loan syndicate structure based on banks' comparative advantage in managing systematic liquidity risk. When a syndicated loan to a rated borrower has systematic liquidity risk, the fraction of passive participant lenders that are banks is about 8% higher than for loans without liquidity risk. In contrast, liquidity risk does not explain the share of banks as lead lenders. Using a new measure of ex-ante liquidity risk exposure, we find further evidence that syndicate participants specialize in liquidity-risk management while lead banks manage lending relationships. Links from transactions deposits to liquidity exposure are about 50% larger at participant banks than at lead arrangers.
    JEL: G2 G32
    Date: 2008–02
  7. By: Robin Greenwood; Dimitri Vayanos
    Abstract: We examine empirically how the maturity structure of government debt affects bond yields and excess returns. Our analysis is based on a theoretical model of preferred habitat in which clienteles with strong preferences for specific maturities trade with arbitrageurs. Consistent with the model, we find that (i) the supply of long- relative to short-term bonds is positively related to the term spread, (ii) supply predicts positively long-term bonds' excess returns even after controlling for the term spread and the Cochrane-Piazzesi factor, (iii) the effects of supply are stronger for longer maturities, and (iv) following periods when arbitrageurs have lost money, both supply and the term spread are stronger predictors of excess returns.
    JEL: G1 H6
    Date: 2008–02
  8. By: Monika Piazzesi; Martin Schneider
    Abstract: This paper implements a structural model of the yield curve with data on nominal positions and survey forecasts. Bond prices are characterized in terms of investors' current portfolio holdings as well as their subjective beliefs about future bond payoffs. Risk premia measured by an econometrician vary because of changes in investors' subjective risk premia that are identified from portfolios and subjective beliefs but also because subjective beliefs differ from those of the econometrician. The main result is that investors' systematic forecast errors are an important source of business cycle variation in measured risk premia. By contrast, subjective risk premia move less and more slowly over time.
    Date: 2008
  9. By: Refet S. Gürkaynak; Brian Sack; Jonathan H. Wright
    Abstract: For over ten years, the U.S. Treasury has issued index-linked debt. Federal Reserve Board staff have fitted a yield curve to these indexed securities at the daily frequency from the start of 1999 to the present. This paper describes the methodology that is used and makes the estimates public. Comparison with the corresponding nominal yield curve allows measures of inflation compensation (or breakeven inflation rates) to be computed. We discuss the interpretation of inflation compensation and its relationship to inflation expectations and uncertainty, offering some empirical evidence that these measures are affected by an inflation risk premium that varies considerably at high frequency. In addition, we also find evidence that inflation compensation was held down in the early years of the sample by a premium associated with the illiquidity of TIPS at the time. We hope that the TIPS yield curve and inflation compensation data, which are posted here and will be updated periodically, will provide a useful tool to applied economists.
    Date: 2008

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