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on Financial Markets |
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Issue of 2008‒11‒11
five papers chosen by |
| By: | Caprio, Gerard, Jr.; Demirguc-Kunt, Asli; Kane, Edward J. |
| Abstract: | The intensity of recent turbulence in financial markets has surprised nearly everyone. This paper searches out the root causes of the crisis, distinguishing them from scapegoating explanations that have been used in policy circles to divert attention from the underlying breakdown of incentives. Incentive conflicts explain how securitization went wrong, why credit ratings proved so inaccurate, and why it is superficial to blame the crisis on mark-to-market accounting, an unexpected loss of liquidity, or trends in globalization and deregulation in financial markets. The analysis finds disturbing implications of the crisis for Basel II and its implementation. The paper argues that the principal source of financial instability lies in contradictory political and bureaucratic incentives that undermine the effectiveness of financial regulation and supervision in every country in the world. The paper concludes by identifying reforms that would improve incentives by increasing transparency and accountability in government and industry alike. |
| Keywords: | Debt Markets,Banks&Banking Reform,Emerging Markets,Access to Finance,Bankruptcy and Resolution of Financial Distress |
| Date: | 2008–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4756&r=fmk |
| By: | Tony BERRADA (University of Geneva and Swiss Finance Institute); Julien HUGONNIER (University of Lausanne and Swiss Finance Institute) |
| Abstract: | We develop a q-theoretic model of investment under incomplete information that explains the link between idiosyncratic volatility and stock returns. When calibrated to match properties of the US business cycles as well as various firms and industry characteristics, the model generates a negative relation between idiosyncratic volatility and stock returns. We show that conditional on earning surprises, the link is positive after good news and negative after bad news. This result provides new insights on the nature of stock return predictability. |
| Keywords: | Idiosyncratic volatility, incomplete information, cross-section of returns, q-theory of investment |
| JEL: | G12 D83 D92 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp0823&r=fmk |
| By: | Jesús P. Colino |
| Abstract: | In the present paper, we study both the approximation of a continuous-time model by a sequence of discrete-time price models driven by semimargingales with credit risk, and the convergence of these price processes (in terms of the triplets) under a framework that allows the practitioner a multiple set of models (semimartingale) and credit conditions (migration and default). |
| Keywords: | Weak convergence, Semimartingales, incomplete markets, Corporate bonds |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:ws085518&r=fmk |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Cyril Caillault (FORTIS Investments - Fortis investments) |
| Abstract: | Using non-parametric (copulas) and parametric models, we show that the bivariate distribution of an Asian portfolio is not stable along all the period under study. We suggest several dynamic models to compute two market risk measures, the Value at Risk and the Expected Shortfall: the RiskMetric methodology, the Multivariate GARCH models, the Multivariate Markov-Switching models, the empirical histogram and the dynamic copulas. We discuss the choice of the best method with respect to the policy management of bank supervisors. The copula approach seems to be a good compromise between all these models. It permits taking financial crises into account and obtaining a low capital requirement during the most important crises. |
| Keywords: | Value at Risk - Expected Shortfall - Copula - RiskMetrics - Risk management -GARCH models - Switching models. |
| Date: | 2008–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00185374_v1&r=fmk |
| By: | Jens H.E. Christensen; Francis X. Diebold; Glenn D. Rudebusch |
| Abstract: | The Svensson generalization of the popular Nelson-Siegel term structure model is widely used by practitioners and central banks. Unfortunately, like the original Nelson-Siegel specification, this generalization, in its dynamic form, does not enforce arbitrage-free consistency over time. Indeed, we show that the factor loadings of the Svensson generalization cannot be obtained in a standard finance arbitrage-free affine term structure representation. Therefore, we introduce a closely related generalized Nelson-Siegel model on which the no-arbitrage condition can be imposed. We estimate this new arbitrage-free generalized Nelson-Siegel model and demonstrate its tractability and good in-sample fit. |
| JEL: | G1 G12 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14463&r=fmk |