New Economics Papers
on Financial Markets
Issue of 2009‒09‒19
eight papers chosen by

  1. Credit Derivatives and Sovereign Debt Crises By Goderis, Benedikt; Wagner, Wolf
  2. Hedge Funds as Liquidity Providers: Evidence from the Lehman Bankruptcy By George O. Aragon; Philip E. Strahan
  3. Informed Trading in Parallel Bond Markets By Paiardini, Paola
  4. "Asymmetry and Leverage in Realized Volatility" By Manabu Asai; Michael McAleer; Marcelo C. Medeiros
  5. Forecasting Stocks of Government Owned Companies (GOCS):Volatility Modeling By Erie Febrian; Aldrin Herwany
  6. Volatility Model for Financial Market Risk Management : An Analysis on JSX Index Return Covariance Matrix By Erie Febrian; Aldrin Herwany
  7. "Value-at-Risk for Country Risk Ratings" By Michael McAleer; Bernardo da Veiga; Suhejla Hoti
  8. Co-integration and Causality Analysis on Developed Asian Markets For Risk Management & Portfolio Selection By Aldrin Herwany; Erie Febrian

  1. By: Goderis, Benedikt; Wagner, Wolf
    Abstract: Credit derivatives allow for buying protection on corporate debt, but also on sovereign debt. In this paper we examine the implications for sovereign debt crises. We show that the availability of credit protection lowers ex-ante debtor moral hazard by allowing a bondholder to improve his bargaining position in negotiations with the sovereign, thus forcing the sovereign to internalize more of the costs of a crisis. When bondholders use credit protection strategically, we additionally find that credit derivatives do not hinder an efficient resolution of crises. Crisis resolution may even be improved by facilitating conditionality. When protection is not chosen strategically, however, credit protection may also be detrimental to crisis resolution by making restructuring more difficult. In either case we identify a role for government policy as bondholders' choice of protection is not necessarily socially efficient.
    Keywords: credit derivatives; sovereign debt crisis; moral hazard
    JEL: G14 F34 F33
    Date: 2009–03–19
  2. By: George O. Aragon; Philip E. Strahan
    Abstract: Using the September 15, 2008 bankruptcy of Lehman Brothers as an exogenous shock to funding costs, we show that hedge funds act as liquidity providers. Hedge funds using Lehman as prime broker could not trade after the bankruptcy, and these funds failed twice as often as otherwise-similar funds after September 15 (but not before). Stocks traded by the Lehman-connected hedge funds in turn experienced greater declines in market liquidity following the bankruptcy than other stocks; and, the effect was larger for ex ante illiquid stocks. We conclude that shocks to traders’ funding liquidity reduce the market liquidity of the assets that they trade.
    JEL: G12 G2 G21
    Date: 2009–09
  3. By: Paiardini, Paola
    Abstract: In this paper we investigate the presence of asymmetric information in the parallel trading of ten-year government fixed rate bonds (BTP) on two secondary electronic platforms: the business-to-business (B2B) MTS platform and the business-to-customer (B2C) BondVision one. The two platforms are typified by a different degree of transparency. We investigate whether the probability to encounter an informed trader on the less transparent market is higher than the corresponding probability on the more transparent one. Our results show that on BondVision, that is the less transparent platform, the probability of encountering an informed trader is higher. Finally we perform a series of tests to check the robustness of our estimates. Two tests do not meet the hypothesis of independence. Nevertheless, these findings do not controvert the hypothesis of our model, but call for further analysis.
    Keywords: Market microstructure; Informed trading; Parallel trading; Transparency
    JEL: C51 G10 G14
    Date: 2009–09–09
  4. By: Manabu Asai (Faculty of Economics, Soka University); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute and Center for International Research on the Japanese Economy (CIRJE), Faculty of Economics, University of Tokyo); Marcelo C. Medeiros (Department of Economics Pontifical Catholic University of Rio de Janeiro)
    Abstract: A wide variety of conditional and stochastic variance models has been used to estimate latent volatility (or risk). In both the conditional and stochastic volatility literature, there has been some confusion between the definitions of asymmetry and leverage. In this paper, we first show the relationship among conditional, stochastic, integrated and realized volatilities. Then we develop a new asymmetric volatility model, which takes account of small and large, and positive and negative, shocks. Using the new specification, we examine alternative volatility models that have recently been developed and estimated in order to understand the differences and similarities in the definitions of asymmetry and leverage. We extend the new specification to realized volatility by taking account of measurement errors. As an empirical example, we apply the new model to the realized volatility of Standard and Poor's 500 Composite Index using Efficient Importance Sampling to show that the new specification of asymmetry significantly improves the goodness of fit, and that the out-of-sample forecasts and VaR thresholds are satisfactory.
    Date: 2009–08
  5. By: Erie Febrian (Finance & Risk Management Study Group (FRMSG) FE UNPAD); Aldrin Herwany (Research Division, Laboratory of Management FE UNPAD)
    Abstract: The development in forecasting techniques has been quite significant, which is indicated by the evolution on how researchers perceive characteristics of financial data. The researchers used to employ mean in their prediction model, but nowadays they tend to employ variance in developing the model. In addition, they also move from the static approaches (e.g., Autoregreesive (AR), Moving Average (MA), ARMA and ARIMA) to the dynamic ones (especially estimation model employing volatility change that just won Nobel prize in 2004). In this research, we try to develop the best prediction model by using volatility model, such as ARCH, GARCH, TARCH and EGARCH, and employing listed stocks of government-owned companies (GOCs) as the sample. The result proves that the employed volatility model and its derivatives are fairly accurate in predicting fluctuation of GOCs stock prices, which are reflected by the associated returns. In addition, the resulted model is capable to measure risk of the observed stock, as well as appropriate price of an asset.
    Keywords: Forecasting, Volatility Model, Risk and Return
    JEL: G0
    Date: 2009–09
  6. By: Erie Febrian (Finance & Risk Management Study Group (FRMSG) FE UNPAD); Aldrin Herwany (Research Division, Laboratory of Management FE UNPAD)
    Abstract: In measuring risk, practitioners have practiced one of the two extreme approaches for so long, i.e. historical simulation or risk metrics. Meanwhile, academicians tend to apply methods based on the latest development in financial econometrics. In this study, we try to assess one of important issues in financial econometric development that focuses on market risk measurement and management employing asset-based models, i.e. models that apply dimensional covariance matrix, which is relevant to practice world. We compare covariance matrix model with Exponential Smoothing Model and GARCH Derivation and the Associated Derivation Models, using JSX Stock price Index data in 2000-2005. The result of this study shows how applicable the observed financial econometric instrument in Financial Market Risk Management practice.
    Keywords: Risk Management, Volatility Model
    JEL: G0
    Date: 2009–09
  7. By: Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute and Center for International Research on the Japanese Economy (CIRJE), Faculty of Economics, University of Tokyo); Bernardo da Veiga (School of Economics and Finance, Curtin University of Technology); Suhejla Hoti (Department of Treasury and Finance, Western Australia)
    Abstract: The country risk literature argues that country risk ratings have a direct impact on the cost of borrowings as they reflect the probability of debt default by a country. An improvement in country risk ratings, or country creditworthiness, will lower a country's cost of borrowing and debt servicing obligations, and vice-versa. In this context, it is useful to analyse country risk ratings data, much like financial data, in terms of the time series patterns, as such an analysis provides policy makers and industry stakeholders with a more accurate method of forecasting future changes in the risks and returns associated with country risk ratings.
    Date: 2009–09
  8. By: Aldrin Herwany (Research Division, Laboratory of Management FE UNPAD); Erie Febrian (Finance & Risk Management Study Group (FRMSG) FE UNPAD)
    Abstract: Both practitioners and academicians demand a linkage model across financial markets, particularly among regional capital markets, for both risk management and portfolio selection purposes. Researchers frequently use co-integration and causality analysis in investigating the dependence or co-movement of three or more stock markets in different countries. However, they conducted the causality in mean tests but not the causality in variance tests. This study assesses the co-integration and causal relations among seven developed Asian markets, i.e Tokyo, Hongkong, Korea, Taiwan, Shanghai, Singapore, and Kuala Lumpur stock exchanges, using more frequent time series data. It employs the recently developed techniques for investigating unit roots, co-integration, time-varying volatility, and causality in variance. For estimating portfolio market risk, this study employs Value-at-Risk with delta-normal approach. The results show whether fund managers would be able to diversify their portfolio in these developed stock markets either in long run or short run.
    Keywords: Risk Management, Causality, Co-integration, Asian Stock Markets
    JEL: G0
    Date: 2009–09

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