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on Financial Markets |
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Issue of 2009‒08‒02
seven papers chosen by |
| By: | Fares Triki (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | This paper investigates the relation between liquidity and asset prices. It shows that, when banks balance sheets are marked to market and banks are targeting a financial leverage level - a situation similar to current environment - formation of Leverage Bubble phenomenon and suggests a new regulation rule based on a Dynamic Leverage Ratio (DLR) rule. |
| Keywords: | Financial crises, rational bubbles, Dynamic Leverage Ratio, mark to market accounting, asset pricing, macroprudential regulation, market liquidity. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00390688_v1&r=fmk |
| By: | Taylor D. Nadauld; Shane M. Sherlund |
| Abstract: | We analyze the structure and attributes of subprime mortgage-backed securitization deals originated between 1997 and 2007. Our data set allows us to link loan-level data for over 6.7 million subprime loans to the securitization deals into which the loans were sold. We show that the securitization process, including the assignment of credit ratings, provided incentives for securitizing banks to purchase loans of poor credit quality in areas with high rates of house price appreciation. Increased demand from the secondary mortgage market for these types of loans appears to have facilitated easier credit in the primary mortgage market. To test this hypothesis, we identify an event which represents an external shock to the relative demand for subprime mortgages in the secondary market. We show that following the SEC's adoption of rules reducing capital requirements on certain broker dealers in 2004, five large deal underwriters disproportionately increased their purchasing activity relative to competing underwriters in ZIP codes with the highest realized rates of house price appreciation but lower average credit quality. We show that these loans subsequently defaulted at marginally higher rates. Finally, using the event as an instrument, we demonstrate a causal link between the demand for mortgages in the secondary mortgage market and the supply of subprime credit in the primary mortgage market. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2009-28&r=fmk |
| By: | Daniel L. Thornton; Giorgio Valente |
| Abstract: | This paper investigates the source of predictability of bond risk premia by means of long-term forward interest rates. We show that the predictive ability of forward rates could be due to the high serial correlation and cross-correlation of bond prices. We show that the predictive ability of forward rates could be due to the high serial correlation and cross-correlation of bond prices. After a simple reparametrization of models used to predict spot rates or excess returns, we find that forward rates exhibit much less predictive power than previously recorded. Furthermore, our economic value analysis indicates that there are no economic gains to mean-variance investors who use the predictions of these models in a stylized dynamic asset allocation strategy. |
| Keywords: | Bonds ; Bond market ; Risk |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-009&r=fmk |
| By: | David Büttner (Faculty of Business Administration and Economics, Philipps Universitaet Marburg); Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet Marburg) |
| Abstract: | We analyse the determinants of stock market integration among EU member states for the period 1999–2007. First, we apply bivariate DCC-MGARCH models to extract dynamic conditional correlations between European stock markets, which are then explained by interest rate spreads, exchange rate risk, market capitalisation, and business cycle synchronisation in a pooled OLS model. By grouping the countries into euro area countries, “old” EU member states outside the euro area, and new EU member states, we also evaluate the impact of euro introduction and the European unification process on stock market integration. We find a significant trend toward more stock market integration, which is enhanced by the size of relative and absolute market capitalisation and hindered by foreign exchange risk between old member states and the euro area. Interest rate spreads and business cycle synchronisation do not appear to play an important role in explaining equity market integration. |
| Keywords: | Stock Market Integration, European Unification, DCC-MGARCH model |
| JEL: | E44 F3 F36 G15 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:200932&r=fmk |
| By: | Alexander Subbotin (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Thierry Chauveau (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Kateryna Shapovalova (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | We overview different methods of modeling volatility of stock prices and exchange rates, focusing on their ability to reproduce the empirical properties in the corresponding time series. The properties of price fluctuations vary across the time scales of observation. The adequacy of different models for describing price dynamics at several time horizons simultaneously is the central topic of this study. We propose a detailed survey of recent volatility models, accounting for multiple horizons. These models are based on different and sometimes competing theoretical concepts. They belong either to GARCH or stochastic volatility model families and often borrow methodological tools from statistical physics. We compare their properties and comment on their pratical usefulness and perspectives. |
| Keywords: | Volatility modeling, GARCH, stochastic volatility, volatility cascade, multiple horizons in volatility. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00390636_v1&r=fmk |
| By: | Abdou Kâ Diongue (UFR SAT - Université Gaston Berger - Université Gaston Berger de Saint-Louis); Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Bertrand Vignal (EDF - EDF - Recherche et Développement) |
| Abstract: | In this article, we investigate conditional mean and variance forecasts using a dynamic model following a k-factor GIGARCH process. We are particularly interested in calculating the conditional variance of the prediction error. We apply this method to electricity prices and test spot prices forecasts until one month ahead forecast. We conclude that the k-factor GIGARCH process is a suitable tool to forecast spot prices, using the classical RMSE criteria. |
| Keywords: | Conditional mean - conditional variance - forecast - electricity prices - GIGARCH process |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00307606_v1&r=fmk |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Jing Zhang (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, ECNU - East China Normal University) |
| Abstract: | This paper develops the method for pricing bivariate contingent claims under General Autoregressive Conditionally Heteroskedastic (GARCH) process. In order to provide a general framework being able to accommodate skewness, leptokurtosis, fat tails as well as the time varying volatility that are often found in financial data, generalized hyperbolic (GH) distribution is used for innovations. As the association between the underlying assets may vary over time, the dynamic copula approach is considered. Therefore, the proposed method proves to play an important role in pricing bivariate option. The approach is illustrated for Chinese market with one type of better-of-two-markets claims : call option on the better performer of Shanghai Stock Composite Index and Shenzhen Stock Composite Index. Results show that the option prices obtained by the GARCH-GH model with time-varying copula differ substantially from the prices implied by the GARCH-Gaussian dynamic copula model. Moreover, the empirical work displays the advantage of the suggested method. |
| Keywords: | Call-on-max option - GARCH process - generalized hyperbolic (GH) distribution - normal inverse Gaussian (NIG) distribution - copula - dynamic copula |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00368336_v1&r=fmk |