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on Financial Markets |
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Issue of 2008‒05‒31
six papers chosen by |
| By: | Jan Willem van den End |
| Abstract: | This paper presents a macro stress-testing model for market and funding liquidity risks of banks, which have been main drivers of the recent financial crisis. The model takes into account the first and second round (feedback) effects of shocks, induced by behavioural reactions of heterogeneous banks, and idiosyncratic reputation effects. The impact on liquidity risk is simulated by a Monte Carlo approach. This generates distributions of liquidity buffers for each scenario round, including the probability of a liquidity shortfall. An application to Dutch banks illustrates that the second round effects have more impact than the first round effects and hit all types of banks, indicative of systemic risk. This lends support policy initiatives to enhance banks' liquidity buffers and liquidity risk management, which could also contribute to prevent financial stability risks. |
| Keywords: | banking; financial stability; stress-tests; liquidity risk |
| JEL: | C15 E44 G21 G32 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:175&r=fmk |
| By: | Urs von Arx (CER-ETH, Swiss Federal Institute of Technology (ETH) Zurich, Center of Economic Research); Andreas Ziegler (University of Zurich, Center for Corporate Responsibility and Sustainability) |
| Abstract: | This paper provides new empirical evidence for the effect of corporate social responsibility (CSR) on corporate financial performance. In contrast to former studies, we examine two different regions, namely the USA and Europe. Our econometric analysis shows that environmental and social activities of a firm compared with other firms within the industry are valued by financial markets in both regions. However, the respective positive effects on average monthly stock returns between 2003 and 2006 appear to be more robust in the USA and, in addition, to be nonlinear. Our analysis furthermore points to biased parameter estimations if incorrectly specified econometric models are applied: The seemingly significantly negative effect of environmental and social performance of the industry to which a firm belongs vanishes if the explanation of stock performance is based on the Fama-French threefactor or the Carhart four-factor models instead of the simple Capital Asset Pricing Model. |
| Keywords: | Corporate social responsibility, Environmental performance, Financial performance, Asset pricing models. |
| JEL: | Q56 M14 G12 Q01 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:08-85&r=fmk |
| By: | Laurence Fung (Research Department, Hong Kong Monetary Authority); Ip-wing Yu (Research Department, Hong Kong Monetary Authority) |
| Abstract: | The predictability of stock market returns has been a challenge to market practitioners and financial economists. This is also important to central banks responsible for monitoring financial market stability. A number of variables have been found as predictors of future stock market returns with impressive in-sample results. Nonetheless, the predictive power of these variables has often performed poorly for out-of-sample forecasts. This study utilises a new method known as "Aggregate Forecasting Through Exponential Re-weighting (AFTER)" to combine forecasts from different models and achieve better out-of-sample forecast performance from these variables. Empirical results suggest that, for longer forecast horizons, combining forecasts based on AFTER provides better out-of-sample predictions than the historical average return and also forecasts from models based on commonly used model selection criteria. |
| Keywords: | Forecasting, Model combination, Model uncertainty |
| JEL: | G11 G12 C13 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0801&r=fmk |
| By: | Clara I. Gonzalez; Ricardo Gimeno |
| Abstract: | The arrival of new information helps financial markets to value assets, but it may has the side-effect of increasing their volatilities. A better knowledge of the mechanism that links relevant news and stock prices would help both private and institutional agents to improve the calibration of the risks implies in a given asset. Financial analysts play a key role in distinguishing which news are relevant for the valuation of a particular asset, and the changes in their recommendations are signals of new information in the market. This paper studies the impact those buy or sell recommendations have on returns and also on volatility instead of the traditional literature that focuses only on prices. The pharmaceutical companies in the New York Stock Exchange are especially suited for this type of analysis given the frequent discontinuities in their expected profits derived from the success or failure in the development of new drugs. Twenty stocks are daily tracked for five years along with the recommendations given by financial analysts. We have modeled stock returns by a Markov Regime Switching model as in Schaller and van Norden (1997) and found two states of low and high volatilities. We have also found strong evidence that the probability of being in the estate of high volatility increases when a Financial Analyst changes his recommendation. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2008-19&r=fmk |
| By: | Zagaglia, Paolo (Dept. of Economics, Stockholm University) |
| Abstract: | This note investigates the transmission of volatility from longer maturities to the overnight segment of the Euro area money market. I use non-parametric estimates of the daily variance of swap rates to test for block exogeneity with respect to the overnight. The results suggest that there exists transmission of volatility shocks from the 1-year swap rate to the overnight market. The reform of the operational framework of March 2004 has improved the segmentation of the market, as it has insulated the overnight segment from spillovers in volatility stemming from swap rates up to 6 months of maturity. |
| Keywords: | Money Market; High-Frequency Data; Granger Causality |
| JEL: | C22 E58 |
| Date: | 2008–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2008_0005&r=fmk |
| By: | Christophe Chorro (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Ecole d'économie de Paris - Paris School of Economics - Université Panthéon-Sorbonne - Paris I); Florian Ielpo (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, DEXIA - DEXIA S.A.) |
| Abstract: | In this paper, we present an alternative to the Black Scholes model for a discrete time economy using GARCH-type models for the underlying asset returns with Generalized Hyperbolic (GH) innovations that are potentially skewed and leptokurtic. Assuming that the stochastic discount factor is an exponential affine function of the states variables, we show that this class of distributions is stable under the Risk neutral change of probability. |
| Keywords: | GARCH, Generalized Hyperbolic Distribution, pricing, risk neutral distribution. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00281585_v1&r=fmk |