New Economics Papers
on Financial Markets
Issue of 2010‒04‒04
four papers chosen by

  1. S&P 500 returns revisited By Kitov, Ivan; Kitov, Oleg
  2. Cointegration and conditional correlations among German and Eastern Europe equity markets By Guidi, Francesco; Gupta, Rakesh
  3. Testing non-linear dependence in the hedge fund industry By Javier Mencía
  4. Post Crisis Challenges to Bank Regulation By Xavier Freixas

  1. By: Kitov, Ivan; Kitov, Oleg
    Abstract: The predictions of the S&P 500 returns made in 2007 have been tested and the underlying models amended. The period between 2003 and 2008 should be described by the dependence of the S&P 500 stock market index on real GDP because the population pyramid was highly inaccurate. The 2008 trough and 2009 rally are well predicted by the original model, however. The rally will end in March/April 2010 and the S&P 500 level will be decreasing into 2011. This prediction should validate the model.
    Keywords: S&P 500; returns; prediction; population pyramid; GDP
    JEL: G1 J1 D4
    Date: 2010–03–29
  2. By: Guidi, Francesco; Gupta, Rakesh
    Abstract: This paper aims to examine the long term relationship between German and three Central and Eastern Europe (CEE) equity markets. Application of Johansen as well as Engle-Granger cointegration tests show that there is no long-term relationship among these markets while the Gregory-Hansen cointegration test rejects the null hypothesis of no cointegration with structural break. An additional objective is to capture the time-varying correlation among these markets through the dynamic conditional correlation models. Empirical results suggest that correlations increased after the accession of the CEE countries into the European Union.
    Keywords: Equity markets; Cointegration; Dynamic conditional correlation models.
    JEL: C53 G15 C22
    Date: 2010–01
  3. By: Javier Mencía (Banco de España)
    Abstract: This paper proposes a parsimonious approach to test non-linear dependence on the conditional mean and variance of hedge funds with respect to several market factors. My approach introduces non-linear dependence by means of empirically relevant polynomial functions of the factors. For comparison purposes, I also consider multifactor extensions of tests based on piecewise linear alternatives. I apply these tests to a database of monthly returns on 1,071 hedge funds. I find that non-linear dependence on the mean is highly sensitive to the factors that I consider. However, I obtain a much stronger evidence of nonlinear dependence on the conditional variance.
    Keywords: Generalised Hyperbolic Distribution, Correlation, Asymmetry, Multifactor Models
    JEL: C12 G11 C32 C22
    Date: 2010–03
  4. By: Xavier Freixas
    Abstract: The current crisis has swept aside not only the whole of the US investment banking industry but also the consensual perception of banking risks, contagion and their implication for banking regulation. As everyone agrees now, risks where mispriced, they accumulated in neuralgic points of the financial system, and where amplified by procyclical regulation as well as by the instability and fragility of financial institutions. The use of ratings as carved in stone and lack of adequate procedure to swiftly deal with systemic institutions bankruptcy (whether too-big-to-fail, too complex to fail or too-many to fail). The current paper will not deal with the description and analysis of the crisis, already covered in other contributions to this issue will address the critical choice regulatory authorities will face. In the future regulation has to change, but it is not clear that it will change in the right direction. This may occur if regulatory authorities, possibly influenced by public opinion and political pressure, adopt an incorrect view of financial crisis prevention and management. Indeed, there are two approaches to post-crisis regulation. One is the rare event approach, whereby financial crises will occur infrequently, but are inescapable.
    Date: 2009–12

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.