New Economics Papers
on Financial Markets
Issue of 2010‒09‒03
six papers chosen by

  1. Financial Policies and the Financial Crisis: How Important Was the Systemic Credit Contraction for Industrial Corporations? By Kathleen M. Kahle; René M. Stulz
  2. Simulation of Diversified Portfolios in a Continuous Financial Market By Eckhard Platen; Renata Rendek
  3. The Forecast Performance of Competing Implied Volatility Measures: The Case of Individual Stocks By Leonidas Tsiaras
  4. The log-linear return approximation, bubbles, and predictability By Tom Engsted; Thomas Q. Pedersen; Carsten Tanggaard
  5. Predictive Ability of Value-at-Risk Methods: Evidence from the Karachi Stock Exchange-100 Index By Javed Iqbal; Sara Azher; Ayesha Ijza
  6. Stock market reaction to debt financing arrangements in Russia By Godlewski, Christophe J.; Fungacova, Zuzana; Weill, Laurent

  1. By: Kathleen M. Kahle; René M. Stulz
    Abstract: Although firm financial policies were affected by a credit contraction during the recent financial crisis, the impact of increased uncertainty and decreased growth opportunities was stronger than that of the credit contraction per se. From the start of the financial crisis (third quarter of 2007) to its peak (first quarter of 2009), both large and investment-grade non-financial firms show no evidence of suffering from an exceptional systemic credit contraction. Instead of decreasing their cash holdings as would be expected with a temporarily impaired credit supply, these firms increase their cash holdings sharply (by 17.8% in the case of investment-grade firms) after the fall of Lehman. Though small and unrated firms have exceptionally low net debt issuance at the peak of the crisis, their net debt issuance in the first year of the crisis is no different from the last year of the credit boom. In contrast, however, the net equity issuance of small and unrated firms is low throughout 2008, whereas an impaired credit supply by itself would have encouraged firms to increase their equity issuance. On average, the cumulative financing impact of the decrease in net equity issuance from the start to the peak of the crisis is approximately twice the cumulative impact of the decrease in net debt issuance. The decrease in net equity issuance and the increase in cash holdings are also economically important for firms with no debt.
    JEL: E22 E32 E51 G32 G35 N1
    Date: 2010–08
  2. By: Eckhard Platen (School of Finance and Economics, University of Technology, Sydney); Renata Rendek (School of Finance and Economics, University of Technology, Sydney)
    Abstract: The paper analyzes the simulated long-term behavior of well diversi?ed portfolios in continuous financial markets. It focuses on the equi-weighted index and the market portfolio. The paper illustrates that the equally weighted portfolio constitutes a good proxy of the growth optimal portfolio, which maximizes expected logarithmic utility. The multi-asset market models considered include the Black-Scholes model, the Heston model, the ARCH diffusion model, the geometric Ornstein-Uhlenbeck volatility model and a multi-asset version of the minimal market model. All these models are simulated exactly or almost exactly over an extremely long period of time to analyze the long term growth of the respective portfolios. The paper illustrates the robustness of the diversification phenomenon when approximating the growth optimal portfolio by the equi-weighted index. Significant outperformance in the long run of the market capitalization weighted portfolio by the equi-weighted index is documented for different market models. Under the multi-asset minimal market model the equi-weighted index outperforms remarkably the market portfolio. In this case the benchmarked market portfolio is a strict supermartingale, whereas the benchmarked equi-weighted index is a martingale. Equal value weighting overcomes the strict supermartingale property that the benchmarked market portfolio inherits from its strict supermartingale constituents under this model.
    Keywords: Growth optimal portfolio; Diversi?cation Theorem; diversi?ed portfolios; market portfolio; equi-weighted index; almost exact simulation; minimal market model
    Date: 2010–08–01
  3. By: Leonidas Tsiaras (Department of Business Studies, ASB, Aarhus University and CREATES)
    Abstract: This study examines the information content of alternative implied volatility measures for the 30 components of the Dow Jones Industrial Average Index from 1996 until 2007. Along with the popular Black-Scholes and \model-free" implied volatility expectations, the recently proposed corridor implied volatil- ity (CIV) measures are explored. For all pair-wise comparisons, it is found that a CIV measure that is closely related to the model-free implied volatility, nearly always delivers the most accurate forecasts for the majority of the firms. This finding remains consistent for different forecast horizons, volatility definitions, loss functions and forecast evaluation settings.
    Keywords: Model-Free Implied Volatility, Corridor Implied Volatility, Volatility Forecasting
    JEL: C22 C53 G13 G14
    Date: 2010–02–01
  4. By: Tom Engsted (School of Economics and Management, Aarhus University and CREATES); Thomas Q. Pedersen (School of Economics and Management, Aarhus University and CREATES); Carsten Tanggaard (School of Economics and Management, Aarhus University and CREATES)
    Abstract: We study in detail the log-linear return approximation introduced by Campbell and Shiller (1988a). First, we derive an upper bound for the mean approximation error, given stationarity of the log dividendprice ratio. Next, we simulate various rational bubbles which have explosive conditional expectation, and we investigate the magnitude of the approximation error in those cases. We find that surprisingly the Campbell-Shiller approximation is very accurate even in the presence of large explosive bubbles. Only in very large samples do we find evidence that bubbles generate large approximation errors. Finally, we show that a bubble model in which expected returns are constant can explain the predictability of stock returns from the dividend-price ratio that many previous studies have documented.
    Keywords: Stock return, Taylor expansion, bubble, simulation, predictability
    JEL: C32 C52 C65 G12
    Date: 2010–07–01
  5. By: Javed Iqbal; Sara Azher; Ayesha Ijza
    Abstract: Value-at-risk (VaR) is a useful risk measure broadly used by financial institutions all over the world. VaR has been extensively used to measure systematic risk exposure in developed markets like of the US, Europe and Asia. This paper analyzes the accuracy of VaR measure for Pakistan’s emerging stock market using daily data from the Karachi Stock Exchange-100 index January 1992 to June 2008. We computed VaR by employing data on annual basis as well as for the whole 17 year period. Overall we found that VaR measures are more accurate when KSE index return volatility is estimated by GARCH (1,1) model especially at 95% confidence level. In this case the actual loss of KSE-100 index exceeds VaR in only two years 1998 and 2006. At 99% confidence level no method generally gives accurate VaR estimates. In this case ‘equally weighted moving average’, ‘exponentially weighted moving average’ and ‘GARCH’ based methods yield accurate VaR estimates in nearly half of the number of years. On average for the whole period 95% VaR is estimated to be about 2.5% of the value of KSE-100 index. That is on average in one out of 20 days KSE-100 index loses at least 2.5% of its value. We also investigate the asset pricing implication of downside risk measured by VaR and expected returns for decile portfolios sorted according to VaR of each stock. We found that portfolios with higher VaR have higher average returns. Therefore VaR as a measure of downside risk is associated with higher returns.
    Keywords: Downside risk; Emerging Markets; Value-at-Risk.
    JEL: C5 C52 G1 G10
    Date: 2010–08–18
  6. By: Godlewski, Christophe J. (BOFIT); Fungacova, Zuzana (BOFIT); Weill, Laurent (BOFIT)
    Abstract: This paper investigates stock market reaction to debt arrangements in Russia. The analysis of the valuation of debt arrangements by stock markets provides information about the use of debt by Russian companies. We apply the event study methodology to check whether debt announcements lead to abnormal returns using a sample of Russian listed companies that issued syndicated loans or bonds between June 2004 and December 2008. We find a negative reaction of stock markets to debt arrangements that can be explained by moral hazard behavior of shareholders at the expense of debtholders. Further, we observe no significant difference between announcements of syndicated loans and bonds. Thus, our findings support the view that Russian companies could have incentives to limit their reliance on external debt.
    Keywords: corporate bonds; event study; Russia; stock returns; syndicated loans
    JEL: G14 G20 P30
    Date: 2010–08–25

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