New Economics Papers
on Financial Markets
Issue of 2010‒05‒29
five papers chosen by

  1. Index Mutual Fund Replication By Jin Zhang; Dietmar Maringer
  2. International Reserves and Underdeveloped Capital Markets By Kathryn M.E. Dominguez
  3. The Global Financial Crisis and its Impact on the Chilean Banking System By Jorge A. Chan-Lau
  4. Is the Leverage of European Commercial Banks Pro-Cyclical? By Angelo Baglioni; Andrea Boitani; Massimo Liberatore; Andrea Monticini
  5. Multivariate Option Pricing with Time Varying Volatility and Correlations By Jeroen V.K. Rombouts; Lars Stentoft

  1. By: Jin Zhang; Dietmar Maringer
    Abstract: This paper discusses the application of an index tracking technique to mutual fund replication problems. By using a tracking error (TE) minimization method and two tactical rebalancing strategies (i.e. the calendar based strategy and the tolerance triggered strategy), a multi-period fund tracking model is developed that replicates S&P 500 mutual fund returns. The impact of excess returns and loss aversion on overall tracking performance is also discussed in two extended cases of the original TE optimization respectively. An evolutionary method, namely Differential Evolution, is used for optimizing the asset weights. According to the experiment results, it is found that the proposed model replicates the first two moments of the fund returns by using only five equities. The TE optimization strategy under loss aversion with tolerance triggered rebalancing dominates other combinations studied with regard to tracking ability and cost efficiency.
    Keywords: Passive Portfolio Management, Fund Tracking, MultiPeriod Optimization, Differential Evolution
    Date: 2010–05–17
  2. By: Kathryn M.E. Dominguez (University of Michigan & NBER)
    Abstract: International reserve accumulation by developing countries is just one example of the puzzling behavior of international capital flows. Capital should flow to where its return is highest, which ought to be where capital is scare. Yet recent data suggest the opposite Ð net capital flows from developing countries to industrialized countries. This paper examines the role of financial market development in the accumulation of international reserves. In countries with underdeveloped capital markets the governmentÕs accumulation of reserves may substitute for what would otherwise be private sector capital outflows. Effectively, these governments are acting as financial intermediaries, channeling domestic savings away from local uses and into international capital markets, thereby offsetting the effects of domestic financial constraints that lead to excessive private sector exposure to potential capital shortfalls.
    Keywords: foreign reserves, financial development, external liabilities
    JEL: F21 F32 F33 F34 F41
    Date: 2009–08
  3. By: Jorge A. Chan-Lau
    Abstract: This paper explores how the global turmoil affected the risk of banks operating in Chile, and provides evidence that could help strengthen work on vulnerability indicators and off-site supervision. The analysis is based on the study of default risk codependence, or CoRisk, between Chilean banks and global financial institutions. The results suggest that the impact of the global financial crisis was limited, inducing at most a one-rating downgrade to banks operating in Chile. The paper concludes by assessing government measures aimed at reducing systemic risk in the domestic banking sector and the recommendations to allocate SWF assets to domestic banks.
    Keywords: Banking sector , Chile , Credit risk , Economic models , Financial crisis , Financial systems , Fiscal policy , Global Financial Crisis 2008-2009 , International banking , International banks , Stabilization measures ,
    Date: 2010–04–28
  4. By: Angelo Baglioni (DISCE, Università Cattolica); Andrea Boitani (DISCE, Università Cattolica); Massimo Liberatore (DISCE, Università Cattolica); Andrea Monticini (DISCE, Università Cattolica)
    Abstract: Detecting whether banks?leverage is indeed procyclical is relevant to support the view that booms and crises may be reinforced by some sort of supply side ?nancial accelerator, whilst ?nding a plausible ex- planation of banks?behaviour is crucial to trace the road for a sensible reform of ?nancial regulation and managers? incentives. The paper shows that procyclical leverage appears to be well entrenched in the behaviour of a sample of major European banks, which are commonly labelled as mainly "commercial banks".
    Keywords: Banks, Pro-cyclicality, Financial Regulation.
    JEL: G21 E3
    Date: 2010–05
  5. By: Jeroen V.K. Rombouts; Lars Stentoft
    Abstract: In recent years multivariate models for asset returns have received much attention, in particular this is the case for models with time varying volatility. In this paper we consider models of this class and examine their potential when it comes to option pricing. Specifically, we derive the risk neutral dynamics for a general class of multivariate heteroskedastic models, and we provide a feasible way to price options in this framework. Our framework can be used irrespective of the assumed underlying distribution and dynamics, and it nests several important special cases. We provide an application to options on the minimum of two indices. Our results show that not only is correlation important for these options but so is allowing this correlation to be dynamic. Moreover, we show that for the general model exposure to correlation risk carries an important premium, and when this is neglected option prices are estimated with errors. Finally, we show that when neglecting the non-Gaussian features of the data, option prices are also estimated with large errors.
    Keywords: Multivariate risk premia, option pricing, GARCH models
    JEL: C11 C15 C22 G13
    Date: 2010

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