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on Financial Markets |
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Issue of 2009‒12‒11
ten papers chosen by |
| By: | Demyanyk , Yuliya (Federal Reserve Bank of Cleveland); Hasan, Iftekhar (Rensselaer Polytechnic Institute, USA and Bank of Finland) |
| Abstract: | In this article we provide a summary of empirical results obtained in several economics and operations research papers that attempt to explain, predict, or suggest remedies for financial crises or banking defaults, as well as outlines of the methodologies used. We analyze financial and economic circumstances associated with the US subprime mortgage crisis and the global financial turmoil that has led to severe crises in many countries. The intent of the article is to promote future empirical research that might help to prevent bank failures and financial crises. |
| Keywords: | financial crises; banking failures; operations research; early warning methods; leading indicators; subprime markets |
| JEL: | C44 C45 C53 G21 |
| Date: | 2009–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2009_035&r=fmk |
| By: | Malcolm Baker; Xin Pan; Jeffrey Wurgler |
| Abstract: | The use of judgmental anchors or reference points in valuing corporations affects several basic aspects of merger and acquisition activity including offer prices, deal success, market reaction, and merger waves. Offer prices are biased towards the 52-week high, a highly salient but largely irrelevant past price, and the modal offer price is exactly that reference price. An offer's probability of acceptance discontinuously increases when the offer exceeds the 52-week high; conversely, bidder shareholders react increasingly negatively as the offer price is pulled upward toward that price. Merger waves occur when high recent returns on the stock market and on likely targets make it easier for bidders to offer the 52-week high. |
| JEL: | G34 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15551&r=fmk |
| By: | Kaplan, Steven N. (University of Chicago - Booth School of Business); Strömberg, Per (Institute for Financial Research) |
| Abstract: | We describe and present time series evidence on the leveraged buyout/private equity industry, both firms and transactions. We discuss the existing empirical evidence on the economics of the firms and transactions. We consider similarities and differences between the recent private equity wave and the wave of the 1980s. Finally, we speculate on what the evidence implies for the future of private equity. |
| Keywords: | PrivateEquity |
| JEL: | G30 |
| Date: | 2009–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sifrwp:0065&r=fmk |
| By: | Martin T. Bohl; Christian A. Salm; Bernd Wilfling |
| Abstract: | This paper investigates the impact of introducing index futures trading on the volatility of the underlying stock market. We exploit a unique institutional setting in which presumably uninformed individuals are the dominant trader type in the futures markets. This enables us to investigate the destabilization hypothesis more accurately than previous studies do and to provide evidence for or against the in uence of individuals trading in index futures on spot market volatility. To overcome econometric shortcomings of the existing literature we employ a Markov-switching-GARCH approach to endogenously identify distinct volatility regimes. Our empirical evidence for Poland surprisingly suggests that the introduction of index futures trading does not destabilize the spot market. This nding is robust across 3 stock market indices and is corroborated by further analysis of a control group. |
| Keywords: | Individual Investors, Uninformed Trading, Stock Index Futures, Emerging Capital Markets, Stock Market Volatility, Markov-Switching-GARCH Model |
| JEL: | C32 G10 G14 G20 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:cqe:wpaper:0609&r=fmk |
| By: | Martin T. Bohl; Michael Schuppli; Pierre L. Siklos |
| Abstract: | This paper investigates whether seasonalities in daily stock returns are related to the trading behavior of individual and institutional investors. The change in the investor structure of B-share markets in Shanghai and Shenzhen after the abolition of ownership restrictions in 2001 provides a unique testing environ- ment. We show that day-of-the-week eects are attenuated after the market entrance of Chinese individual investors who had previously not been allowed to trade in B-shares. Our empirical results suggest that institutional rather than individual investors are a main driving force behind such anomalies. In addi- tion, we nd evidence of reduced index return autocorrelation and US spillover eects in the post-liberalization period. |
| Keywords: | Institutional Investors, Individual Investors, Stock Return Seasonalities, Chinese Stock Markets, GARCH Model |
| JEL: | G12 G14 G18 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:cqe:wpaper:0709&r=fmk |
| By: | Hakim, A.; McAleer, M. (Erasmus Econometric Institute) |
| Abstract: | The paper investigates the interdependence and conditional correlations between futures contracts and their underlying assets, both for stock and bond markets, and the impact of the interdependence and conditional correlations on VaR forecasts. The paper finds evidence of volatility spillovers from spot (futures) to futures (spot) markets, and time-varying conditional correlations between futures and their underlying assets. It also finds evidence that the DCC model of Engle (2002) provides slightly better VaR forecasts as compared with the CCC model of Bollerslev (1990) and the BEKK model of Engle and Kroner (1995). |
| Keywords: | interdependence;dynamic conditional correlations;spot;futures;stocks;bonds;VaR |
| Date: | 2009–11–23 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureir:1765017295&r=fmk |
| By: | Alvaro Cartea; Dimitrios Karyampas |
| Abstract: | Using high frequency data for the price dynamics of equities we measure the impact that market microstructure noise has on estimates of the: (i) volatility of returns; and (ii) variance-covariance matrix of n assets. We propose a Kalman-filter-based methodology that allows us to deconstruct price series into the true efficient price and the microstructure noise. This approach allows us to employ volatility estimators that achieve very low Root Mean Squared Errors (RMSEs) compared to other estimators that have been proposed to deal with market microstructure noise at high frequencies. Furthermore, this price series decomposition allows us to estimate the variance covariance matrix of $n$ assets in a more efficient way than the methods so far proposed in the literature. We illustrate our results by calculating how microstructure noise affects portfolio decisions and calculations of the equity beta in a CAPM setting. |
| Keywords: | Volatility estimation, High-frequency data, Market microstructure theory, Covariation of assets, Matrix process, Kalman filter |
| JEL: | G12 G14 C22 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wbrepe:wp097609&r=fmk |
| By: | Silvia Muzzioli |
| Abstract: | The aim of this paper is twofold: to investigate how the information content of implied volatility varies according to moneyness and option type, and to compare option-based forecasts with historical volatility in order to see if they subsume all the information contained in historical volatility. The different information content of implied volatility is examined for the most liquid at-the-money and out-of-the-money options: put (call) options for strikes below (above) the current underlying asset price, i.e. the ones that are usually used as inputs for the computation of the smile function. In particular, since at-the-money implied volatilities are usually inserted in the smile function by computing some average of both call and put implied ones, we investigate the performance of a weighted average of at-the-money call and put implied volatilities with weights proportional to trading volume. Two hypotheses are tested: unbiasedness and efficiency of the different volatility forecasts. The investigation is pursued in the Dax index options market, by using synchronous prices matched in a one-minute interval. It was found that the information content of implied volatility has a humped shape, with out-of-the-money options being less informative than at-the-money ones. Overall, the best forecast is at-the-money put implied volatility: it is unbiased (after a constant adjustment) and efficient, in that it subsumes all the information contained in historical volatility. |
| Keywords: | Implied Volatility; Volatility Smile; Volatility forecasting; Option type |
| JEL: | G13 G14 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:mod:wcefin:09122&r=fmk |
| By: | Veiga, B. da; Chan, F.; McAleer, M. (Erasmus Econometric Institute) |
| Abstract: | The internal models amendment to the Basel Accord allows banks to use internal models to forecast Value-at-Risk (VaR) thresholds, which are used to calculate the required capital that banks must hold in reserve as a protection against negative changes in the value of their trading portfolios. As capital reserves lead to an opportunity cost to banks, it is likely that banks could be tempted to use models that underpredict risk, and hence lead to low capital charges. In order to avoid this problem the Basel Accord introduced a backtesting procedure, whereby banks using models that led to excessive violations are penalised through higher capital charges. This paper investigates the performance of five popular volatility models that can be used to forecast VaR thresholds under a variety of distributional assumptions. The results suggest that, within the current constraints and the penalty structure of the Basel Accord, the lowest capital charges arise when using models that lead to excessive violations, thereby suggesting the current penalty structure is not severe enough to control risk management. In addition, this paper suggests an alternative penalty structure that is more effective at aligning the interests of banks and regulators. |
| Keywords: | Value-at-Risk (VaR);GARCH;risk management;violations;forecasting;simulations;Basel accord penalties |
| Date: | 2009–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureir:1765017309&r=fmk |
| By: | Nathalie Rey (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII) |
| Abstract: | Through a long-period analysis of the inter-temporal relations between the French markets for credit default swaps (CDS), shares and bonds between 2001 and 2008, this article shows how a financial innovation like CDS could heighten financial instability. After describing the operating principles of credit derivatives in general and CDS in particular, we construct two difference VAR models on the series: the share return rates, the variation in bond spreads and the variation in CDS spreads for thirteen French companies, with the aim of bringing to light the relations between these three markets. According to these models, there is indeed an interdependence between the French share, CDS and bond markets, with a strong influence of the share market on the other two. This interdependence increases during periods of tension on the markets (2001-2002, and since the summer of 2007). |
| Keywords: | credit derivatives ; credit risk ; credit default swap ; inter-temporal relations between markets ; VAR models |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00433883_v1&r=fmk |