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on Financial Markets |
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Issue of 2009‒06‒10
five papers chosen by |
| By: | Ostrup, Finn (Copenhagen Business School); Oxelheim, Lars (Research Institute of Industrial Economics (IFN)); Wihlborg, Clas (Chapman University, Orange, CA) |
| Abstract: | Since July 2007 the world economy has experienced a severe financial crisis originating in the U.S. housing market. The crisis has subsequently spread to the financial sectors in European and Asian economies and led to a severe worldwide recession. The existing literature on financial crises rarely distinguish between factors that create the original strain on the financial sector and factors that explain why these strains lead to system-wide contagion and a possible credit crunch. Most of the literature on financial crises refers to factors that cause an original disruption in the financial system. We argue that a financial crisis with its contagion within the system is caused by failures of legal, regulatory and political institutions. <p> One policy implication of our view is that the need for various forms of rescues of financial firms in times of crises would be reduced if appropriate institutions could be put in place Lacking appropriate institutions to avoid contagion within the financial system and a potential credit crunch, ad hoc financial crisis management is required. We draw on experiences from the financial crises in the Nordic countries at the end of the 1980s and the beginning of the 1990s. In particular, the Swedish model for crisis resolution, which has received attention during the current crisis, is discussed in order to illustrate the problems policy makers face in a financial crisis without appropriate institutions. Current European Union approaches to the crisis are discussed before turning to policy implications from an emerging market perspective in the current crisis. |
| Keywords: | Financial Crisis; Institutional Failure; Insolvency Procedures; Contagion; Systemic Effects; Macroeconomic Shock; Financial Crisis Management; Swedish Model |
| JEL: | D53 E44 E58 F32 F42 G15 G18 G21 G28 |
| Date: | 2009–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0796&r=fmk |
| By: | Zhongjun Qu (Boston University); Pierre Perron (Boston University) |
| Abstract: | Empirical ?ndings related to the time series properties of stock returns volatility indicate autocorrelations that decay slowly at long lags. In light of this, several long-memory models have been proposed. However, the possibility of level shifts has been advanced as a possible explanation for the appearance of long-memory and there is growing evidence suggesting that it may be an important feature of stock returns volatility. Nevertheless, it remains a conjecture that a model incorporating random level shifts in variance can explain the data well and produce reasonable forecasts. We show that a very simple stochastic volatility model incorporating both a random level shift and a short-memory component indeed provides a better in-sample fit of the data and produces forecasts that are no worse, and sometimes better, than standard stationary short and long-memory models. We use a Bayesian method for inference and develop algorithms to obtain the posterior distributions of the parameters and the smoothed estimates of the two latent components. We apply the model to daily S&P 500 and NASDAQ returns over the period 1980.1-2005.12. Although the occurrence of a level shift is rare, about once every two years, the level shift component clearly contributes most to the total variation in the volatility process. The half-life of a typical shock from the short-memory component is very short, on average between 8 and 14 days. We also show that, unlike common stationary short or long-memory models, our model is able to replicate keys features of the data. For the NASDAQ series, it forecasts better than a standard stochastic volatility model, and for the S&P 500 index, it performs equally well. |
| Keywords: | Bayesian estimation, Structural change, Forecasting, Long-memory, State-space models, Latent process |
| JEL: | C11 C12 C53 G12 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2008-007&r=fmk |
| By: | Mjøs, Aksel (Institute for Research in Economics and Business Administration); Persson, Svein-Arne (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration) |
| Abstract: | Banks and other financial institutions raise hybrid capital as part of their risk capital. Hybrid capital has no maturity, but, similarily to most corporate debt, includes an embedded issuer's call option. To obtain acceptance as risk capital, the first possible exercise date of the embedded call is contractually deferred by several years, generating a protection period. The existence of this call feature affects the issuer's optimal bankruptcy decision, in addition to the value of debt. We value the call feature as a European option on perpetual defaultable debt. We do this by first modifying the underlying asset process to incorporate a time dependent bankruptcy level before the expiration of the embedded option. We identify a call option on debt as a fixed number of put options using a modified exercise price on a modified asset, which is lognormally distributed, as opposed to the market value of debt. To include the possibility of default before the expiration of the option we apply barrier options results. The formulas are quite general and may be used for valuing both embedded and third-party options. All formulas are developed in the seminal and standard Black-Scholes-Merton model and, thus, standard analytical tools such as 'the greeks', are immediately available. |
| Keywords: | Callable perpetual debt; barrier options |
| JEL: | G12 G13 G33 |
| Date: | 2009–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2009_004&r=fmk |
| By: | Ibrahim Onour |
| URL: | http://d.repec.org/n?u=RePEc:api:apiwps:0908&r=fmk |
| By: | Walid Abdmoulah |
| URL: | http://d.repec.org/n?u=RePEc:api:apiwps:0907&r=fmk |