New Economics Papers
on Financial Markets
Issue of 2008‒09‒20
four papers chosen by

  1. Value-at-Risk on Central and Eastern European Stock Markets: An Empirical Investigation Using GARCH Models By Vít Bubák
  2. Volatility transmission and volatility impulse response functions in European electricity forward markets By Yannick LE PEN; Benoît SEVI
  3. Macro-model-based stress testing of Basel II capital requirements By Jokivuolle, Esa; Virolainen, Kimmo; Vähämaa, Oskari
  4. Operational Risk Management and Implications for Bank’s Economic Capital – a Case Study By Radovan Chalupka; Petr Teplý

  1. By: Vít Bubák (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; MSE, Université de Paris I. Panthéon-Sorbonne)
    Abstract: Using daily return data from the four major Central and Eastern European stock markets including fourteen highly liquid stocks and ATX (Vienna), PX (Prague), BUX (Budapest), and WIG20 (Warsaw) market indices, we model the value-at-risk using a set of univariate GARCH-type models. Our results show that, in both in-sample and out-of-sample value-at-risk estimations, the models based on asymmetric distribution of the error term tend to perform better or at least as well as the models based on symmetric distribution (i.e., Normal or Student) when the left tails of daily return distributions are concerned. Evaluation of the same models is less clear, however, when the right tails of the distribution of daily returns must be modelled. We suggest an asset-specific approach to selecting the correct parametric VaR model that depends not only on the risk level considered but also on the position in the underlying asset.
    Keywords: Value-at-Risk, Expected Shortfall, Backtesting
    JEL: C14 C32 C52 C53 G12
    Date: 2008–09
  2. By: Yannick LE PEN; Benoît SEVI
    Abstract: Using daily data from March 2001 to June 2005, we estimate a VAR-BEKK model and find evidence of return and volatility spillovers between the German, the Dutch and the British forward electricity markets. We apply Hafner and Herwartz [2006, Journal of International Money and Finance 25, 719-740] Volatility Impulse Response Function(VIRF) to quantify the impact of shock on expected conditional volatility. We observe that a shock has a high positive impact only if its size is large compared to the current level of volatility. The impact of shocks are usually not persistent, which may be an indication of market efficiency. Finally, we estimate the density of the VIRF at different forecast horizon. These fitted distributions are asymmetric and show that extreme events are possible even if their probability is low. These results have interesting implications for market participants whose risk management policy is based on option prices which themselves depend on the volatility level.
    Keywords: volatility impulse response function, GARCH, non Gaussian distributions, electricity market, forward markets
    JEL: C3 G1 Q43
    Date: 2008
  3. By: Jokivuolle, Esa (Bank of Finland Research); Virolainen, Kimmo (Financial Markets and Statistics Department); Vähämaa, Oskari (Bank of Finland Research)
    Abstract: Basel II framework requires banks to conduct stress tests on their potential future minimum capital requirements and consider ‘at least the effect of mild recession scenarios’. We propose a stress testing framework for minimum capital requirements in which banks’ corporate credit risks are modeled with macroeconomic variables. We can thus define scenarios such as a mild recession and consider the resulting credit risk developments and consequent changes in minimum capital requirements. We also emphasize the importance of stress testing future minimum capital requirements jointly with credit losses. Our illustrative results based on Finnish data underline the importance of such joint modeling. We also find that stress tests based on scenarios envisaged by regulators are not likely to imply binding capital constraints on banks.
    Keywords: Basel II; capital requirements; credit risk; loan losses; stress tests
    JEL: C15 G21 G28 G33
    Date: 2008–09–02
  4. By: Radovan Chalupka (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Petr Teplý (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: In this paper we review the actual operational data of an anonymous Central European Bank, using two approaches described in the literature: the loss distribution approach and the extreme value theory (“EVT”). Within the EVT analysis, two estimation methods were applied; the standard maximum likelihood estimation method and the probability weighted method (“PWM”). Our results proved a heavy-tailed pattern of operational risk data consistent with the results documented by other researchers in this field. Additionally, our research demonstrates that the PWM is quite consistent even when the data is limited since our results provide reasonable and consistent capital estimates. From a policy perspective, it should be noted that banks from emerging markets such as Central Europe are exposed to these operational risk events and that successful estimates of the likely distribution of these risk events can be derived from more mature markets.
    Keywords: operational risk, economic capital, Basel II, extreme value theory, probability weighted method
    JEL: G18 G21 G32
    Date: 2008–09

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