New Economics Papers
on Financial Markets
Issue of 2008‒11‒04
six papers chosen by
  1. A multi-horizon scale for volatility By Alexander Subbotin
  2. Dynamic Analysis of the Insurance Linked Securities Index By Mathieu Gatumel; Dominique Guegan
  3. The measurement of financial intermediation in Japan By Gunther Capelle-Blancard; Jézabel Couppey-Soubeyran; Laurent Soulat
  4. The Conditional Capital Asset Pricing Model: Evidence from Karachi Stock Exchange By Attiya Y. Javid; Eatzaz Ahmad
  5. Option Pricing under GARCH models with Generalized Hyperbolic innovations (I) : Methodology By Christophe Chorro; Dominique Guegan; Florian Ielpo
  6. Option Pricing under GARCH models with Generalized Hyperbolic distribution (II) : Data and Results By Christophe Chorro; Dominique Guegan; Florian Ielpo
  1. By: Alexander Subbotin (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Higher School of Economics - State University)
    Abstract: We decompose volatility of a stock market index both in time and scale using wavelet filters and design a probabilistic indicator for valatilities, analogous to the Richter scale in geophysics. The peak-over-threshold method is used to fit the generalized Pareto probability distribution for the extreme values in the realized variances of wavelet coefficients. The indicator is computed for the daily Dow Jones Industrial Averages index data from 1986 to 2007 and for the intraday CAC 40 data from 1995 to 2006. The results are used for comparison and structural multi-resolution analysis of extreme events on the stock market and for the detection of financial crises.
    Keywords: Stock market, volatility, wavelets, multi-resolution analysis, financial crisis.
    Date: 2008–03
    URL: http://d.repec.org/n?u=RePEc:hal:paris1:halshs-00261514_v1&r=fmk
  2. By: Mathieu Gatumel (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, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper aims to provide a dynamic analysis of the insurance linked securities index. We are discussing the behaviour of the index for three years and pointing out the consequences of some major events like Katrina or the last and current financial crisis. Some stylized facts of the index, like the non-Gaussianity, the asymmetry or the clusters of volatility, are highlighted. We are using some GARCH-type models and the generalized hyperbolic distributions in order to capture these elements. The GARCH in Mean model with a Normal Inverse Gaussian distribution seems to be very efficient to fit the log-returns of the insurance linked securities index.
    Keywords: Insurance Linked Securities, Garch-type models, Normal Inverse Gaussian Distribution
    Date: 2008–09
    URL: http://d.repec.org/n?u=RePEc:hal:paris1:halshs-00320378_v1&r=fmk
  3. By: Gunther Capelle-Blancard (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Jézabel Couppey-Soubeyran (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Laurent Soulat (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: In this paper, we examine the evolution of the Japanese financial structure, in order to challenge the expected incidences of the financial liberalization. We compute financial intermediation ratios for Japan (1979-2004) on a book value basis. According to our results, the intermediation ratio has remained quite stable, at around 85%. This stability is the result of two opposite trends: a decrease in credits and an increase in financial securities owned by financial (mostly, non-banking) institutions. These two trends are partly the consequence of the heavier weight of the Government in domestic external financing, which is traditionally less financed by credits than companies are. Besides, these two trends would not have appeared if we had used intermediation ratios in market value or other traditional indicators (Deposits/GDP, Loans to private sector/GDP, stock market capitalization/GDP, etc.). Our results provide evidence for a very close relationship between intermediate financings and market financings and tend to reject the hypothesis of the Japanese financial system’s convergence toward a capital market-based system.
    Keywords: Disintermediation, financial system, intermediaries, capital markets
    Date: 2008–01
    URL: http://d.repec.org/n?u=RePEc:hal:paris1:halshs-00265547_v1&r=fmk
  4. By: Attiya Y. Javid (Pakistan Institute of Development Economics, Islamabad); Eatzaz Ahmad (Quaid-i-Azam University, Islamabad)
    Abstract: This is an attempt to empirically investigate the risk and return relationship of individual stocks traded at Karachi Stock Exchange (KSE), the main equity market in Pakistan. The analysis is based on daily as well as monthly data of 49 companies and KSE 100 index is used as market factor covering the period from July 1993 to December 2004. The natural startingpoint of this study is to test the adequacy of the standard Capital Asset Pricing Model (CAPM) of Sharpe (1964) and Lintner (1965). The empirical findings do not support the standard CAPM model as a model to explain assets pricing in Pakistani equity market. The critical condition of CAPM—that there is a positive trade-off between risk and return—is rejected and residual risk plays some role in pricing risky assets. This allows for the return distribution to vary over time. The empirical results of the conditional CAPM, with time variation in market risk and risk premium, are more supported by the KSE data, where lagged macroeconomic variables, mostly containing business cycle information, are used for conditioning information. The information set includes the first lag of the following business cycle variables: market return, call money rate, term structure, inflation rate, foreign exchange rate, growth in industrial production, growth in real consumption, and growth in oil prices. In a nutshell, the results confirm the hypothesis that risk premium is time-varying type in Pakistani stock market and it strengthens the notion that rational asset pricing is working, although inefficiencies are also present in unconditional and conditional settings. The observation is that the dynamic size and book-to-market value coefficient explain the cross-section of expected returns in a few sub-periods. The conditional approach to testing the CAPM and the three-factor CAPM shows that the asset prices relationship is better explained by accommodating business cycle variables as information set. The findings of the conditional three-factor CAPM also give support to the fact that time-varying firm attributes have only a limited role in Pakistani market to explain the asset price behaviour.
    Keywords: Capital Asset Pricing Model, Fama-French Three Factor Model, Market Risk, Residual Risk, Size, Book-to-market Value, Information Set, Business Cycle Variables
    JEL: C53 E44 G11
    Date: 2008
    URL: http://d.repec.org/n?u=RePEc:pid:wpaper:2008:48&r=fmk
  5. 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, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); 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:paris1:halshs-00281585_v1&r=fmk
  6. 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); Florian Ielpo (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: In this paper, we provide a new dynamic asset pricing model for plain vanilla options and we discuss its ability to produce minimum mispricing errors on equity option books. The data set is the daily log returns of the French CAC40 index, on the period January 2, 1988, October 26, 2007. Under the historical measure, we adjust, on this data set, an EGARCH model with Generalized Hyperbolic innovations. We have shown (Chorro, Guégan and Ielpo, 2008) that when the pricing kernel is an exponential affine function of the state variables, the risk neutral distribution is unique and implies again a Generalized Hyperbolic dynamic, with changed parameters. Thus, using this theoretical result associated to Monte Carlo simulations, we compare our approach to natural competitors in order to test its efficiency. More generally, our empirical investigations analyze the ability of specific parametric innovations to reproduce market prices in the context of the exponential affine specification of the stochastic discount factor.
    Keywords: Generalized Hyperbolic Distribution - Option pricing - Incomplete market - CAC40
    Date: 2008–07
    URL: http://d.repec.org/n?u=RePEc:hal:paris1:hal-00308687_v1&r=fmk
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