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on Financial Markets |
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Issue of 2009‒05‒23
five papers chosen by |
| By: | Juan-Angel Jimenez-Martin (Dpto. de Fundamentos de Análisis Económico II, Universidad Complutense); Michael McAleer; Teodosio Pérez-Amaral (Dpto. de Fundamentos de Análisis Económico II, Universidad Complutense) |
| Abstract: | The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing sensibly from a variety of risk models, discuss the selection of optimal risk models, consider combining alternative risk models, discuss the choice between a conservative and aggressive risk management strategy, and evaluate the effects of the Basel II Accord on risk management. We also examine how risk management strategies performed during the 2008-09 financial crisis, evaluate how the financial crisis affected risk management practices, forecasting VaR and daily capital charges, and discuss alternative policy recommendations, especially in light of the financial crisis. These issues are illustrated using Standard and Poor’s 500 Index, with an emphasis on how risk management practices were monitored and encouraged by the Basel II Accord regulations during the financial crisis. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:0918&r=fmk |
| By: | Sabrina R. Pellerin; John R. Walter; Patricia E. Wescott |
| Keywords: | Financial services industry |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:09-08&r=fmk |
| By: | Jan Piplack; Stefan Straetmans |
| Abstract: | This paper assesses the linkages between the most important U.S.financial asset classes (stocks, bonds, T-bills and gold) during periods of financial turmoil. Our results have potentially important implications for strategic asset allocation and pension fund management. We use multivariate extreme value theory to estimate the exposure of one asset class to extreme movements in the other asset classes. By applying structural break tests to those measures we study to what extent linkages in extreme asset returns and volatilities are changing over time. Univariate results andch bivariate comovement results exhib significant breaks in the 1970s and 1980s corresponding to the turbulent times of e.g. the oil shocks, Volcker's presidency of the Fed or the stock market crash of 1987. |
| Keywords: | Flight to quality, financial market distress, extreme value theory |
| JEL: | G15 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0909&r=fmk |
| By: | Michel Beine; Bertrand Candelon; Jan Piplack |
| Abstract: | This paper analyzes common factors in the continuous volatility component, co-extreme and co-jump behavior of a sample of stock market indices. In order to identify those components in stock price processes during a trading day we use high-frequency data and techniques. We show that in most of the cases one common factor is enough to describe the largest part of the international variation in the continuous part of volatility and that this factor's importance has increased over time. Furthermore, we find strong evidence for asymmetries between extremely negative and positive co-extreme close-open returns and of negative and positive co-jumps across countries.. |
| Keywords: | Volatility, realized volatility, high-frequency, comovements, cojumps |
| JEL: | G15 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0910&r=fmk |
| By: | Rihab Bedoui; Makram Ben Dbadis |
| Abstract: | With hedge funds, managers develop risk management models that mainly aim to play on the effect of decorrelation. In order to achieve this goal , companies use the correlation coefficient as an indicator for measuring dependencies existing between (i) the various hedge funds strategies and share index returns and (ii) hedge funds strategies against each other. Otherwise, copulas are a statistic tool to model the dependence in a realistic and less restrictive way, taking better account of the stylized facts in finance. This paper is a practical implementation of the copulas theory to model dependence between different hedge fund strategies and share index returns and between these strategies in relation to each other on a "normal" period and a period during which the market trend is downward. Our approach based on copulas allows us to determine the bivariate VaR level curves and to study extremal dependence between hedge funds strategies and share index returns through the use of some tail dependence measures which can be made into useful portfolio management tools. |
| Keywords: | Hedge fund strategies, share index, dependence, copula, tail dependence, bivariate Value at Risk |
| JEL: | C13 C14 C15 G23 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2009-19&r=fmk |