New Economics Papers
on Financial Markets
Issue of 2009‒07‒03
six papers chosen by

  1. Are stock exchanges integrated in the world? - A critical Analysis By Varadi, Vijay Kumar; Boppana, Nagarjuna
  2. Forecasting volatility and spillovers in crude oil spot, forward and future markets By Chang, C-L.; McAleer, M.; Tansuchat, R.
  3. A nonparametric approach to forecasting realized volatility By Adam Clements; Ralf Becker
  4. Calibration of LIBOR Market Model: Comparison between the Separated and the Approximate Approach By Mihaela Tuca
  5. Mutual funds flows and the "Sheriff of Nottingham" effect By Lucia Milone; Paolo Pellizzari
  6. Bad Bank(s) and Recapitalization of the Banking Sector By Dorothea Schäfer; Klaus F. Zimmermann

  1. By: Varadi, Vijay Kumar; Boppana, Nagarjuna
    Abstract: In the recent rapid reforms made the global into a global village in nature and in terms of efficiency, transparency. The information flow in one market may affect the other markets in the world, because of its integration. In this regard, this paper explores the objective whether there is any integration of markets taken place or not. For reaching the objective, we have used rigorous time series techniques for the equal period of data (1st January, 2001 to 30th April, 2009) of 17 stock exchanges in the world, which includes Asia, Europe, north America, Latin America etc.,. Our findings are markets within the region are well integrated both in terms of short run and long run equilibrium, because of its less cross-country restrictions. Many of the markets are showing granger causal relations between each other.
    Keywords: Stock Markets; Cointegration; Economic Reforms
    JEL: C12 G15 C22 E44 G00
    Date: 2009–05
  2. By: Chang, C-L.; McAleer, M.; Tansuchat, R. (Erasmus Econometric Institute)
    Abstract: Crude oil price volatility has been analyzed extensively for organized spot, forward and futures markets for well over a decade, and is crucial for forecasting volatility and Value-at-Risk (VaR). There are four major benchmarks in the international oil market, namely West Texas Intermediate (USA), Brent (North Sea), Dubai/Oman (Middle East), and Tapis (Asia-Pacific), which are likely to be highly correlated. This paper analyses the volatility spillover effects across and within the four markets, using three multivariate GARCH models, namely the CCC, VARMA-GARCH and VARMA-AGARCH models. A rolling window approach is used to forecast the 1-day ahead conditional correlations. The paper presents evidence of volatility spillovers and asymmetric effects on the conditional variances for most pairs of series. In addition, the forecasted conditional correlations between pairs of crude oil returns have both positive and negative trends.
    Keywords: volatility spillovers;multivariate GARCH;conditional correlations;crude oil spot prices;spot returns;forward returns;futures returns
    Date: 2009–06–16
  3. By: Adam Clements (QUT); Ralf Becker (Manchester)
    Abstract: A well developed literature exists in relation to modeling and forecasting asset return volatility. Much of this relate to the development of time series models of volatility. This paper proposes an alternative method for forecasting volatility that does not involve such a model. Under this approach a forecast is a weighted average of historical volatility. The greatest weight is given to periods that exhibit the most similar market conditions to the time at which the forecast is being formed. Weighting occurs by comparing short-term trends in volatility across time (as a measure of market conditions) by the application of a multivariate kernel scheme. It is found that at a 1 day forecast horizon, the proposed method produces forecasts that are significantly more accurate than competing approaches.
    Keywords: Volatility, forecasts, forecast evaluation, model confidence set, nonparametric
    JEL: C22 G00
    Date: 2009–05–12
  4. By: Mihaela Tuca (Faculty of Finance and Banking, Bucharest University of Economics)
    Abstract: This paper empirically analyzes and compares two methods of calibration for the Libor Market Models, developed by Brace, Gatarek and Musiela (1997) using data on EUR swaptions and historical EUR yield curves. The first method of calibration proposed by Dariusz Gatarek is the separated approach, which gives good results but is computationally intensive. The second method of calibration – proposed by Ricardo Rebonato and Peter Jackel - uses an approximation for the instantaneous volatility and correlation functions of European swaptions in a forward rate based Brace-Gatarek-Musiela framework which enables us to calculate prices for swaptions without the need for Monte Carlo simulations. The method generates appropriate results in a fraction of a second. To this end we show that using an approximation for the volatility and correlation function can lead to an accurate calibration by optimizing the parameters of the two volatility and correlation functions.
    Keywords: LIBOR Market Model, calibration
    Date: 2009–03
  5. By: Lucia Milone (Department of Applied Mathematics, University of Venice); Paolo Pellizzari (Department of Applied Mathematics and SSAV, University of Venice)
    Abstract: Investors in mutual funds appear to reward disproportionately the best performing funds with large inflows while, at the same time, avoid to withdraw similar amounts from the poorly managed funds. We show that this peculiar flat-convex shape of the flow-performance curve for mutual funds can be generally explained by a model where profit chasing customers punish the bad funds by switching a fraction of their wealth to the best ones ("Sheriff of Nottingham" effect). In the absence of external flows, the model provably produces a constant curve when the standard deviation of excess returns is much larger than the level of the returns. This for the most part explains the apparent insensitivity of flows to below-average returns. The introduction of exogenous injections of money invested in the top funds completes the model and provides a realistic increase in the flows of the funds yielding above-average returns. We finally show by simulation that our results are robust to variations in the values of the parameters of the model.
    Keywords: Funds’flows, flow-performance curve, agent based models
    JEL: G11 G23 C63
    Date: 2009–06
  6. By: Dorothea Schäfer; Klaus F. Zimmermann
    Abstract: With banking sectors worldwide still suffering from the effects of the financial crisis, public discussion of plans to place toxic assets in one or more bad banks has gained steam in recent weeks. The following paper presents a plan how governments can efficiently relieve ailing banks from toxic assets by transferring these assets into a publicly sponsored work-out unit, a so-called bad bank. The key element of the plan is the valuation of troubled assets at their current market value - assets with no market would thus be valued at zero. The current shareholders will cover the losses arising from the depreciation reserve in the amount of the difference of the toxic assets' current book value and their market value. Under the plan, the government would bear responsibility for the management and future resale of toxic assets at its own cost and recapitalize the good bank by taking an equity stake in it. In extreme cases, this would mean a takeover of the bank by the government. The risk to taxpayers from this investment would be acceptable, however, once the banks are freed from toxic assets. A clear emphasis that the government stake is temporary would also be necessary. The government would cover the bad bank's losses, while profits would be distributed to the distressed bank's current shareholders. The plan is viable independent of whether the government decides to have one centralized bad bank or to establish a separate bad bank for each systemically relevant banking institute. Under the terms of the plan, bad banks and nationalization are not alternatives but rather two sides of the same coin. This plan effectively addresses three key challenges. It provides for the transparent removal of toxic assets and gives the banks a fresh start. At the same time, it offers the chance to keep the cost to taxpayers low. In addition, the risk of moral hazard is curtailed. The comparison of the proposed design with the bad bank plan of the German government reveals some shortcomings of the latter plan that may threaten the achievement of these key issues.
    Keywords: Financial crisis, financial regulation, toxic assets, Bad Bank
    JEL: G20 G24 G28
    Date: 2009

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