nep-fmk New Economics Papers
on Financial Markets
Issue of 2009‒05‒09
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Testing for Exceptional Bulls and Bears: a Non-Parametric Perspective By Candelon Bertrand; Metiu Norbert
  2. Test of the Gaussian Copula on the Swedish Stock Market By Söderberg, Jonas
  3. Financial Integration of North Africa Stock Markets By Onour, Ibrahim
  4. The term structure of equity premia in an affine arbitrage-free model of bond and stock market dynamics. By Wolfgang Lemke; Thomas Werner
  5. Pricing basket default swaps in a tractable shot-noise model By Herbertsson, Alexander; Jang, Jiwook; Schmidt, Thorsten
  6. Money-Market Segmentation in the Euro Area: What has Changed During the Turmoil? By Zagaglia, Paolo

  1. By: Candelon Bertrand; Metiu Norbert (METEOR)
    Abstract: This paper investigates exceptional phases of stock market cycles. Defined in Pagan and Sossounov (2003) as unusual, they are detected as outliers in the historical distribution. Moreover, this study completes the growing literature on stock market bulls and bears in several aspects. First,it extends the description of financial cy- cles by going beyond solely the duration feature. Second, a new strategy to test for single and multiple outliers is presented. Based on this procedure, the exceptional bulls and bears that occurred since 1973 are detected. A complementary analysis deals with the specific cross-country patterns of the current sub-prime crisis. Our results are mixed, in the sense that they do not support the idea that the ongoing bear is exceptional for all the analyzed countries. Moreover, the results indicate that the stock market indices are still far away from the thresholds beyond which the current bear phase will become exceptional worldwide.
    Keywords: monetary economics ;
    Date: 2009
    URL: http://d.repec.org/n?u=RePEc:dgr:umamet:2009019&r=fmk
  2. By: Söderberg, Jonas (Centre for Labour Market Policy Research (CAFO))
    Abstract: This paper examines whether the pairwise comovement between stocks quoted on the Stockholm stock exchange can be correctly quantified by the Gaussian copula, i.e., by linear correlation. Two different methods are used to test whether the dependence on the Swedish stock market can be modeled by the Gaussian copula. From these tests, we come to the conclusion that the Gaussian copula is not an appropriate choice of copula for the Swedish stock market. We also come to the same conclusion when observing sector and industry indices on the Swedish stock market. However, if performing a GARCH filtering of the return series, there is a substantial decrease in the number of pairs of either stocks or indices for which the Gaussian copula can be rejected. For the two test methods, a notable difference in the rejection rate of the Gaussian copula can also be observed.
    Keywords: Risk management; Gaussian copula; Swedish stock markets; GARCH filtering
    JEL: C52 G11 G32
    Date: 2008–12–01
    URL: http://d.repec.org/n?u=RePEc:hhs:vxcafo:2009_009&r=fmk
  3. By: Onour, Ibrahim
    Abstract: This paper investigates long-term relationship that links stock prices of three major North African stock markets: Egypt, Morocco, and Tunisia . The paper shows, there is strong evidence of multivariate and bivariate nonlinear long-term relationship between stock prices of these markets. Nonlinear cointegration between stock prices imply portfolios in these markets are inefficient (systematic risk cannot be diversified away), as movement in the price of one market influence the movement in another market in a predictable direction and disproportionately.
    Keywords: cointegration; portfolio; diversification; nonparametric
    JEL: E44 C01
    Date: 2009–04–10
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:14938&r=fmk
  4. By: Wolfgang Lemke (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Thomas Werner (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We estimate time-varying expected excess returns on the US stock market from 1983 to 2008 using a model that jointly captures the arbitrage-free dynamics of stock returns and nominal bond yields. The model nests the class of affine term structure (of interest rates) models. Stock returns and bond yields as well as risk premia are affine functions of the state variables: the dividend yield, two factors driving the one-period real interest rate and the rate of inflation. The model provides for each month the `term structure of equity premia', i.e. expected excess stock returns over various investment horizons. Model-implied equity premia decrease during the `dot-com' boom period, show an upward correction thereafter, and reach highest levels during the financial turmoil that started with the 2007 subprime crisis. Equity premia for longer-term investment horizons are less volatile than their short-term counterparts. JEL Classification: E43, G12.
    Keywords: Equity premium, affine term structure models, asset pricing.
    Date: 2009–04
    URL: http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901045&r=fmk
  5. By: Herbertsson, Alexander (Department of Economics, School of Business, Economics and Law, Göteborg University); Jang, Jiwook (Department of Actuarial Studies, Faculty of Business and Economics, Macquarie University); Schmidt, Thorsten (Department of Mathematics, University of Chemnitz)
    Abstract: We value CDS spreads and kth-to-default swap spreads in a tractable shot noise model. The default dependence is modelled by letting the individual jumps of the default intensity be driven by a common latent factor. The arrival of the jumps is driven by a Poisson process. By using conditional independence and properties of the shot noise processes we derive tractable closed-form expressions for the default distribution and the ordered survival distributions in a homogeneous portfolio. These quantities are then used to price and study CDS spreads and kth-to-default swap spreads as function of the model parameters. We study the kth-to-default spreads as function of the CDS spread, as well as other parameters in the model. All calibrations lead to perfect fits.<p>
    Keywords: Credit risk; intensity-based models; dependence modelling; shot noise; CDS; kth-to-default swaps
    JEL: C02 C63 G13 G32 G33
    Date: 2009–04–27
    URL: http://d.repec.org/n?u=RePEc:hhs:gunwpe:0359&r=fmk
  6. By: Zagaglia, Paolo (Dept. of Economics, Stockholm University)
    Abstract: I study how the pattern of segmentation in the Euro area money market has been affected by the recent turmoil in financial markets. I use nonparametric estimates of realized volatility to test for volatility spillovers between rates at different maturities. For the pre-turmoil period, exogeneity tests from VAR models suggest the presence of a transmission channel from longer maturities to the overnight. This disappears in the subsample starting in August 9 2007. Quantile measures of comovements in volatility report evidence of an increase in contagion within the longer end of the money market curve.
    Keywords: Money market; high-frequency data; time-series methods
    JEL: C22 E58
    Date: 2009–04–23
    URL: http://d.repec.org/n?u=RePEc:hhs:sunrpe:2009_0011&r=fmk

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