nep-fmk New Economics Papers
on Financial Markets
Issue of 2009‒04‒05
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Rating Assignments: Lessons from International Banks By Guglielmo Maria Caporale; Roman Matousek; Chris Stewart
  2. A Liquidity Risk Stress-Testing Framework with Interaction between Market and Credit Risks By Eric Wong; Cho-Hoi Hui
  3. Market Dispersion and the Profitability of Hedge Funds By Gregory Connor; Sheng Li
  4. Financial Convergence in the New EU Member States By Kalin Hristov; Rossen Rozenov
  5. How Does the European Integration Affect the European Stock Markets? By Burcu Erdogan
  6. Volatility Spillovers and Contagion from Mature to Emerging Stock Markets By John Beirne; Guglielmo Maria Caporale; Marianne Schulze-Ghattas; Nicola Spagnolo

  1. By: Guglielmo Maria Caporale; Roman Matousek; Chris Stewart
    Abstract: This paper estimates ordered logit and probit regression models for bank ratings which also include a country index to capture country-specific variation. The empirical findings provide support to the hypothesis that the individual international bank ratings assigned by Fitch Ratings are underpinned by fundamental quantitative financial analyses. Also, there is strong evidence of a country effect. Our model is shown to provide accurate predictions of bank ratings for the period prior to the 2007 - 2008 banking crisis based upon publicly available information. However, our results also suggest that quantitative models are not likely to be able to predict ratings with complete accuracy. Furthermore, we find that both quantitative models and rating agencies are likely to produce highly inaccurate predictions of ratings during periods of financial instability.
    Keywords: International banks, ratings, ordered choice models, country index
    JEL: C25 C51 C52 G21
    Date: 2009
    URL: http://d.repec.org/n?u=RePEc:diw:diwwpp:dp868&r=fmk
  2. By: Eric Wong (Research Department, Hong Kong Monetary Authority); Cho-Hoi Hui (Research Department, Hong Kong Monetary Authority)
    Abstract: This study develops a stress-testing framework to assess liquidity risk of banks, where liquidity and default risks can stem from the crystallisation of market risk arising from a prolonged period of negative asset price shocks. In the framework, exogenous asset price shocks increase banks¡¯ liquidity risk through three channels. First, severe mark-to-market losses on the banks¡¯ assets increase banks¡¯ default risk and thus induce significant deposits outflows. Secondly, the ability to generate liquidity from asset sales continues to evaporate due to the shocks. Thirdly, banks are exposed to contingent liquidity risk, as the likelihood of drawdowns on their irrevocable commitments increases in such stressful financial environments. In the framework, the linkage between market and default risks of banks is implemented using a Merton-type model, while the linkage between default risk and deposit outflows is estimated econometrically. Contagion risk is also incorporated through banks¡¯ linkage in the interbank and capital markets. Using the Monte Carlo method, the framework quantifies liquidity risk of individual banks by estimating the expected cash-shortage time and the expected default time. Based on publicly available data as at the end of 2007, the framework is applied to a group of banks in Hong Kong. The simulation results suggest that liquidity risk of the banks would be contained in the face of a prolonged period of asset price shocks. However, some banks would be vulnerable when such shocks coincide with interest rate hikes due to monetary tightening. Such tightening is, however, relatively unlikely in a context of such shocks.
    Keywords: Liquidity risk, stress testing, default risk, banks
    JEL: C60 G13 G28
    Date: 2009–03
    URL: http://d.repec.org/n?u=RePEc:hkg:wpaper:0906&r=fmk
  3. By: Gregory Connor (Economics,Finance & Accounting, National University of Ireland, Maynooth); Sheng Li (Citigroup)
    Abstract: We examine the impact of market dispersion on the performance of hedge funds. Market dispersion is measured by the cross-sectional volatility of equity returns in a given month.Using hedge fund indices and a panel of monthly returns on individual hedge funds, we find that market dispersion and the performance of hedge funds are positively related. We also find that the cross-sectional dispersion of hedge fund returns is positively related to the levelof market dispersion.
    Date: 2009
    URL: http://d.repec.org/n?u=RePEc:may:mayecw:n2000109&r=fmk
  4. By: Kalin Hristov; Rossen Rozenov
    Abstract: In this paper we explore the issue of financial convergence in the new EU member states (NMS). For the purposes of our analysis the countries falling into the category NMS are Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia, i.e. all countries that joined the EU in the last decade, except Cyprus and Malta.
    Date: 2009
    URL: http://d.repec.org/n?u=RePEc:diw:diwfin:diwfin1020&r=fmk
  5. By: Burcu Erdogan
    Abstract: This paper examines the integration of stock markets in Germany, France, Netherlands, Ireland and UK over the January 1973- August 2008 period at the aggregate market and industry level considering the following industries: basic materials, consumer goods, industrials, consumer services, health care and financials. The analysis is practised by using correlation analysis, $\beta$-convergence and $\sigma$-convergence methods. $\beta$- convergence serves to measure the speed of convergence and $\sigma$-convergence serves to measure the degree of financial integration. We might expect priori that European stock markets have been more integrated during the process of monetary, economic and financial integration in Europe. We find evidence for an increasing degree of integration both at the aggregate level and also at the industry level, although some differences in the speed and degree of convergence exist among stock markets. To our surprise, there is a downward trend in convergence for certain industries in certain countries in 2000s; especially for those industries, which are more prone to regional shocks, such as health care, financials and consumer services. Moreover, the cross sectional dispersion in health care industry has not shown a regular descending trend. Additionally, EU wide factors can better explain the changes in returns than those of US.
    Keywords: Financial integration, EU, stock markets, correlation analysis
    JEL: C22 G15 G12 F36
    Date: 2009
    URL: http://d.repec.org/n?u=RePEc:diw:diwfin:diwfin1011&r=fmk
  6. By: John Beirne; Guglielmo Maria Caporale; Marianne Schulze-Ghattas; Nicola Spagnolo
    Abstract: This paper examines volatility spillovers from mature to emerging stock markets and tests for changes in the transmission mechanism-contagion-during turbulences in mature markets. Tri-variate GARCH-BEKK models of returns in global (mature), regional, and local markets are estimated for 41 emerging market economies (EMEs), with a dummy capturing parameter shifts during turbulent episodes. LR tests suggest that mature markets influence conditional variances in many emerging markets. Moreover, spillover parameters change during turbulent episodes. Conditional variances in most EMEs rise during these episodes, but there is only limited evidence of shifts in conditional correlations between mature and emerging markets.
    Keywords: Volatility spillovers, contagion, stock markets, emerging markets
    JEL: F30 G15
    Date: 2009
    URL: http://d.repec.org/n?u=RePEc:diw:diwwpp:dp873&r=fmk

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