New Economics Papers
on Financial Markets
Issue of 2011‒01‒16
five papers chosen by

  1. Identifying the global transmission of the 2007-09 financial crisis in a GVAR Model By Alexander Chudik; Marcel Fratzscher
  2. Corporate bond spreads and real activity in the euro area - Least Angle Regression forecasting and the probability of the recession By Marco Buchmann
  3. Yield Curve Analysis: Choosing the optimal maturity date of investments and financing By Lenz, Rainer
  4. Option data and modeling BSM implied volatility By Matthias Fengler
  5. Technical analysis in the foreign exchange market By Christopher J. Neely; Paul A. Weller

  1. By: Alexander Chudik (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The paper analyses and compares the role that the tightening in liquidity conditions and the collapse in risk appetite played for the global transmission of the financial crisis. Dealing with identification and the large dimensionality of the empirical exercise with a Global VAR approach, the findings highlight the diversity of the transmission process. While liquidity shocks have had a more severe impact on advanced economies, it was mainly the decline in risk appetite that affected emerging market economies. The tightening of financial conditions was a key transmission channel for advanced economies, whereas for emerging markets it was mainly the real side of the economy that suffered. Moreover, there are some striking differences also within types of economies, with Europe being more adversely affected by the fall in risk appetite than other advanced economies. JEL Classification: E44, F3, C5.
    Keywords: Liquidity, risk, financial crisis, global transmission, global VAR (GVAR), shocks, modelling, US, advanced economies, emerging market economies.
    Date: 2011–01
  2. By: Marco Buchmann (European Central Bank, DG Financial Stability, Financial Stability Assessment Division, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper aims at providing a detailed analysis of the leading indicator properties of corporate bond spreads for real economic activity in the euro area. In- and out-of-sample predictive content of corporate bond spreads are examined along three dimensions: the bonds’ quality, their term to maturity, as well as the forecast horizon at which one intends to predict a change in real activity. Numerous alternative leading indicators capturing macroeconomic and financial conditions are included in the analysis. Along with standard time series forecast models, the Least Angle Regression (LAR) technique is used to build multivariate models recursively. Models built via LAR can be used to produce forecasts and allow one to analyze how the composition and the number of relevant model variables evolve over time. Corporate bond spreads turn out to be valuable predictors for real activity, in particular at forecast horizons beyond one year; Medium risk bond spreads with maturities between 5 and 10 years appear particularly rich in content. The spreads also belong to the group of indicators that implied the highest probability of a recession occurring from a pre-crisis perspective. JEL Classification: E32, E37, E44, G32.
    Keywords: Corporate bond spreads, point and density forecasting, automatic model building, least angle regression.
    Date: 2011–01
  3. By: Lenz, Rainer
    Abstract: The shape of the yield curve determines the relationship between interest rate risk and return of investments. The analysis of the yield curve can help the investor or financier decide whether to take a short- or long term bond or loan. The management decision of choosing an optimal maturity depends on three form-giving factors of the yield curve: the general level of interest rates, the slope and the curvature of the curve. By using implicit forward rates the decision situation of investors and financiers is modeled and general decision rules for financial managers are derived.
    Keywords: yield curve; term structure of interest rates; implicit forward rates; expectation theory; optimal maturity of investments;
    JEL: E43 G31 G3 G32
    Date: 2010–12–30
  4. By: Matthias Fengler
    Abstract: This contribution to the Handbook of Computational Finance, Springer-Verlag, gives an overview on modeling implied volatility data. After introducing the concept of Black-Scholes-Merton implied volatility (IV), the empirical stylized facts of IV data are reviewed. We then discuss recent results on IV surface dynamics and the computational aspects of IV. The main focus is on various parametric, semi- and nonparametric modeling strategies for IV data, including ones which respect no-arbitrage bounds.
    Keywords: Implied volatility
    JEL: G13
    Date: 2010–12
  5. By: Christopher J. Neely; Paul A. Weller
    Abstract: This article introduces the subject of technical analysis in the foreign exchange market, with emphasis on its importance for questions of market efficiency. Technicians view their craft, the study of price patterns, as exploiting traders’ psychological regularities. The literature on technical analysis has established that simple technical trading rules on dollar exchange rates provided 15 years of positive, risk-adjusted returns during the 1970s and 80s before those returns were extinguished. More recently, more complex and less studied rules have produced more modest returns for a similar length of time. Conventional explanations that rely on risk adjustment and/or central bank intervention are not plausible justifications for the observed excess returns from following simple technical trading rules. Psychological biases, however, could contribute to the profitability of these rules. We view the observed pattern of excess returns to technical trading rules as being consistent with an adaptive markets view of the world.>
    Keywords: Foreign exchange rates
    Date: 2011

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