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on Financial Markets |
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Issue of 2009‒05‒02
four papers chosen by |
| By: | Charlotte Christiansen (School of Economics and Management, Aarhus University and CREATES); Angelo Ranaldo (Research Department, Swiss National Bank, Switzerland); Paul Söderllind (Swiss Institute for Banking and Finance, University of St. Gallen) |
| Abstract: | To capture time-variation in the risk exposure of exchange rates, this paper suggests a factor model with stock and bond markets as the explana- tory factors- but where the betas are allowed to depend on the exchange rate volatility. Empirical results on daily data from 1995 to 2008 show that a typical carry trade strategy based on 10 currencies from major industrialized countries has much higher exposure to the stock market and also more mean reversion in volatile periods. The findings are robust to various extensions, including adding more currencies and other regime variables. |
| Keywords: | carry trade, factor model, smooth transition regression, time- varying betas |
| JEL: | F31 G15 G11 |
| Date: | 2009–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2009-15&r=fmk |
| By: | Ingmar Nolte (Warwick Business School,FERC, CoFE); Valeri Voev (University of Aarhus, CoFE and CREATES) |
| Abstract: | The expected value of sums of squared intraday returns (realized variance) gives rise to a least squares regression which adapts itself to the assumptions of the noise process and allows for a joint inference on integrated volatility (IV), noise moments and price-noise relations. In the iid noise case we derive the asymptotic variance of the regression parameter estimating the IV, show that it is consistent and compare its asymptotic efficiency against alternative consistent IV measures. In case of noise which is correlated with the efficient return process, we postulate a new “asymptotically increasing” type of dependence and analyze its ability to cope with the empirically observed price-noise dependence in quote data. In the empirical section of the paper we apply the LS methodology to estimate the integrated volatility as well as the noise properties of 25 liquid stocks both with midquote and transaction price data. We find that while iid noise is an oversimplification, its non-iid characteristics have a decidedly negligible effect on volatility estimation within our framework, for which we provide a sound theoretical reason. In terms of noise-price endogeneity, we are not able to find empirical support for simple ad hoc theoretical models and we provide an alternative explanation for the observed patterns in midquote data, based on market microstructure theory. |
| Keywords: | High frequency data, Subsampling, Realized volatility, Market microstructure |
| JEL: | G10 F31 C32 |
| Date: | 2009–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2009-16&r=fmk |
| By: | Carolyne Spackman; Manmohan Singh |
| Abstract: | Credit Default Swap spreads have been used as a leading indicator of distress. Default probabilities can be extracted from CDS spreads, but during distress it is important to take account of the stochastic nature of recovery value. The recent episodes of Landbanski, WAMU and Lehman illustrate that using the industry-standard fixed recovery rate assumption gives default probabilities that are low relative to those extracted from stochastic recovery value as proxied by the cheapest-to-deliver bonds. Financial institutions using fixed rate recovery assumptions could have a false sense of security, and could be faced with outsized losses with potential knock-on effects for other institutions. To ensure effective oversight of financial institutions, and to monitor the stability of the global financial system especially during distress, the stochastic nature of recovery rates needs to be incorporated. |
| Keywords: | Credit risk , Financial institutions , Risk premium , Bond markets , Asset prices , Bankruptcy , |
| Date: | 2009–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/62&r=fmk |
| By: | Nada Oulidi; Laurence Allain |
| Abstract: | In this paper we use a disequilibrium framework common in the “credit crunch†literature, first to examine whether the slow credit growth in Morocco during the rapid expansion of liquidity in the first half of the decade can be attributed to credit rationing, and second to investigate the role of asset price increases in the recent acceleration of credit growth. Our results do not support the credit rationing hypothesis in the first half of the decade. They do however, show that the recent increase in real estate prices stimulated credit supply and demand, with a stronger effect on the latter. |
| Keywords: | Credit expansion , Morocco , Asset prices , Real estate prices , Credit demand , Credit controls , Economic models , |
| Date: | 2009–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/53&r=fmk |