nep-fmk New Economics Papers
on Financial Markets
Issue of 2010‒10‒23
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Reform of the Global Financial Architecture By Garry J. Schinasi; Edwin M. Truman
  2. Stock Index Volatility: the case of IPSA By Alfaro, Rodrigo; Silva, Carmen Gloria
  3. Foreign Bond Markets and Financial Market Development: International Perspectives By Jonathan A. Batten; Peter G Szilagyi; Warren P. Hogan
  4. Credit ratings in structured finance and the role of systemic risk By Roberto Violi
  5. Credit Scoring Modelling: A Micro–Macro Approach By Ana-Maria Sandica
  6. A structural risk-neutral model for pricing and hedging power derivatives By René Aid; Luciano Campi; Nicolas Langrené

  1. By: Garry J. Schinasi; Edwin M. Truman (Peterson Institute for International Economics)
    Abstract: This paper examines the implications of the global financial crisis of 2007-10 for reform of the global financial architecture, in particular the International Monetary Fund and the Financial Stability Board and their interaction. These two institutions are not fully comparable, but they must work more closely in the future to help prevent global financial crises. To this end, the paper identifies institutional and substantive reforms separately and in their joint work that would be desirable and appropriate.
    Keywords: International Monetary Fund, Financial Stability Board, Bank for International Settlements, Group of Twenty, banking supervision and regulation, financial crises, financial stability, financial reform
    JEL: F30 F33 F36 F53 G28
    Date: 2010–10
  2. By: Alfaro, Rodrigo; Silva, Carmen Gloria
    Abstract: This paper introduces alternative measurements that use additional information of prices during the day: opening, minimum, maximum, and closing prices. Using the binomial model as the distribution of the stock price we prove that these alternative measurements are more efficient than the traditional ones that rely only in closing price. Following Garman and Klass (1980) we compute the relative efficiency of these measurements showing that are 3 to 4 times more efficient than using closing prices. Using daily data of the Chilean stock market index we show that a discrete-time approximation of the stock price seems to be more accurate than the continuous-time model. Also, we prove that there is a high correlation between intraday volatility measurements and implied ones obtained from options market (VIX). For that we propose the use of intraday information to estimate volatility for the cases where the stock markets do not have an associated option market.
    Keywords: Volatility; Binomial Model; VIX; Bias and Efficiency.
    JEL: G11 G12 C22
    Date: 2010–03–31
  3. By: Jonathan A. Batten; Peter G Szilagyi; Warren P. Hogan
    Abstract: The domestic bond markets of the Asia and Pacific region have grown considerably since the Asian financial crisis of 1997, although they remain undeveloped relative to the region’s weight in the world economy. This paper proposes that in order to encourage further development of these markets, regulators should make them more accessible to foreign borrowers. [ADBI Working Paper 173]
    Keywords: domestic, bond markets, Asia, Pacific, economy, markets
    Date: 2010
  4. By: Roberto Violi (Bank of Italy)
    Abstract: This paper explores the implications of systemic risk in Credit Structured Finance (CSF). Risk measurement issues loomed large during the 2007-08 financial crisis, as the massive, unprecedented number of downgrades of AAA senior bond tranches inflicted severe losses on banks, calling into question the credibility of Rating Agencies. I discuss the limits of the standard risk frameworks in CSF (Gaussian, Single Risk Factor Model; GSRFM), popular among market participants. If implemented in a ‘static’ fashion, GSRFM can substantially underprice risk at times of stress. I introduce a simple ‘dynamic’ version of GSRFM that captures the impact of large systemic shocks (e.g. financial meltdown) for the value of CSF bonds (ABS, CDO, CLO, etc.). I argue that a proper 'dynamic' modeling of systemic risk is crucial for gauging the exposure to default contagion (‘correlation risk’). Two policy implications are drawn from a 'dynamic' GSRFM: (i) when rating CSF deals, Agencies should disclose additional risk information (e.g. the expected losses under stressed scenarios; asset correlation estimates); and (ii) a ‘point-in-time’ approach to rating CSF bonds is more appropriate than a ‘through-the-cycle’ approach.
    Keywords: structured finance, systemic risk, credit risk measures, bond pricing
    JEL: E44 E65 G12 G13 G14 G18 G21 G24 G28 G34
    Date: 2010–09
  5. By: Ana-Maria Sandica
    Abstract: In order to reduce its capital requirement, banks use different credit risk models that are able to detect de difference between defaulter and a non-defaulter customer. In this paper I aim to make a comparison between these models and more to see which ones improve most when a macroeconomic variables is also introduce. What I would like to evidence in this paper is that more important than a particular model is the variables selection and the choice of a loss function that have to be minimized in order to treat the tradeoff between the profit considerations and best classification of customers.
    Keywords: credit risk models
    Date: 2010–10
  6. By: René Aid (FiME - Laboratoire de Finance des Marchés d'Energies - Université Paris Dauphine - Paris IX, EDF R&D - EDF); Luciano Campi (FiME - Laboratoire de Finance des Marchés d'Energies - Université Paris Dauphine - Paris IX, CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX); Nicolas Langrené (FiME - Laboratoire de Finance des Marchés d'Energies - Université Paris Dauphine - Paris IX, PMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Pierre et Marie Curie - Paris VI - Université Paris-Diderot - Paris VII)
    Abstract: We develop a structural risk-neutral model for energy market modifying along several directions the approach introduced in Aid et al. (2009). In particular a scarcity function is introduced to allow important deviations of the spot price from the marginal fuel price, producing price spikes. We focus on pricing and hedging electricity derivatives. The hedging instruments are forward contracts on fuels and electricity. The presence of production capacities and electricity demand makes such a market incomplete. We follow a local risk minimization approach to price and hedge energy derivatives. Despite the richness of information included in the spot model, we obtain closed-form formulae for futures prices and semi-explicit formulae for spread options and European options on electricity forward contracts. An analysis of the electricity price risk premium is provided showing the contribution of demand and capacity to the futures prices. We show that when far from delivery, electricity futures behave like a basket of futures on fuels.
    Keywords: Electricity spot and forward prices ; Fuels ; Capacity ; Electricity demand ; Scarcity function ; Local risk minimization ; Minimal martingale measure ; Power derivatives ; Spread options ; Extended incomplete Goodwin-Staton integral
    Date: 2010–10–12

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