nep-fmk New Economics Papers
on Financial Markets
Issue of 2011‒01‒23
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Pricing currency risk in the stock market: Empirical evidence from Finland and Sweden 1970-2009 By Jan Antell; Mika Vaihekoski
  2. Emerging Market Yield Spreads: Domestic, External Determinants, and Volatility Spillovers By Pierre L. Siklos
  3. Bank Market Structure, Systemic Risk, and Interbank Market Breakdowns By Marcella Lucchetta
  4. International Evidence on GFC-robust Forecasts for Risk Management under the Basel Accord By Michael McAleer; Juan-Ángel Jiménez-Martín; Teodosio Pérez-Amaral
  5. Introduction to the foreign exchange market By Violeta, Gaucan

  1. By: Jan Antell (Hanken School of Economics, Department of Finance and Statistics); Mika Vaihekoski (Turku School of Economics (TSE) and Lappeenranta University of Technology (LUT))
    Abstract: We investigate the role of currency risk on stock markets in two interlinked Nordic countries exhibiting a gradual move from fixed to floating exchange rates. We apply the Ding and Engle (2001) covariance stationary specification in a multivariate GARCH-M setup to test a conditional international asset pricing model. Using a sample period from 1970 to 2009, we find that the currency risk is priced in both stock markets as well as the price to be lower after the flotation of the currencies. We also find the cross-country exchange rate shock from Finland to affect the price of currency risk in Sweden, but not vice versa. Finally, we discuss some of the potential issues in applying multivariate GARCH-M specifications in tests of asset pricing models.
    Keywords: conditional, international asset pricing model, currency risk, devaluation, multivariate GARCH-M, Finland, Sweden
    JEL: G12 G15
    Date: 2011–01
    URL: http://d.repec.org/n?u=RePEc:tkk:dpaper:dp63&r=fmk
  2. By: Pierre L. Siklos (Wilfrid Laurier University and Viessmann European Research Centre, Waterloo, ON, Canada; The Rimini Centre for Economic Analysis (RCEA), Rimini, Italy)
    Abstract: This study examines the determinants of bond yield spreads for 22 emerging markets in the period 1998-2009. In addition to the usual EMBI index data from credit default swaps (CDS) are also used. Three sets of determinants are considered: domestic, external, and institutional factors. In addition, I consider the connection between volatility and bond yield spreads. Volatility, and central bank transparency, are two factors common to all countries examined whereas clear idiosyncrasies are found according to whether emerging markets are in Latin and South America, Europe, Asia or Africa. Most notably, the global financial financial crisis did not impact yield spreads in Asia which suggests that, in a sense, bond markets in that region were decoupled from those in other parts of the world.
    Keywords: emerging markets, yield spreads, volatility, transparency
    JEL: G15 C2 F34
    Date: 2011–01
    URL: http://d.repec.org/n?u=RePEc:rim:rimwps:03_11&r=fmk
  3. By: Marcella Lucchetta
    Abstract: This paper explores theoretically the implications of bank market structure and banking system risks concentration for the functioning of interbank markets. It employs a simple model where banks are exposed to both credit and liquidity risk, there is no asymmetric information, no market power, no friction in secondary markets and deposit contracts are fully contingent. We show that (a) the concentration of risks induced by changes in bank market structure makes interbank market breakdowns more likely; (b) welfare monotonically decreases in risk concentration; and (c) risk concentration and a high probability of interbank market breakdowns can be driven by risk control diseconomies of scale and scope and increases in financial firms’ size. As banking systems become more concentrated, improvement of risk control technologies in financial institutions and in regulatory bodies appear as important as other policies considered in the literature to minimize the probability of interbank market breakdowns.
    Keywords: bank market structure; systemic risk; interbank markets
    Date: 2010–10–01
    URL: http://d.repec.org/n?u=RePEc:rsc:rsceui:2010/76&r=fmk
  4. By: Michael McAleer (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, and Institute of Economic Research, Kyoto University); Juan-Ángel Jiménez-Martín (Department of Quantitative Economics, Complutense University of Madrid); Teodosio Pérez-Amaral (Department of Quantitative Economics, Complutense University of Madrid)
    Abstract: A risk management strategy that is designed to be robust to the Global Financial Crisis (GFC), in the sense of selecting a Value-at-Risk (VaR) forecast that combines the forecasts of different VaR models, was proposed in McAleer et al. (2010c). The robust forecast is based on the median of the point VaR forecasts of a set of conditional volatility models. Such a risk management strategy is robust to the GFC in the sense that, while maintaining the same risk management strategy before, during and after a financial crisis, it will lead to comparatively low daily capital charges and violation penalties for the entire period. This paper presents evidence to support the claim that the median point forecast of VaR is generally GFC-robust. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria. In the empirical analysis, we choose several major indexes, namely French CAC, German DAX, US Dow Jones, UK FTSE100, Hong Kong Hang Seng, Spanish Ibex35, Japanese Nikkei, Swiss SMI and US S&P500. The GARCH, EGARCH, GJR and Riskmetrics models, as well as several other strategies, are used in the comparison. Backtesting is performed on each of these indexes using the Basel II Accord regulations for 2008-10 to examine the performance of the Median strategy in terms of the number of violations and daily capital charges, among other criteria. The Median is shown to be a profitable and safe strategy for risk management, both in calm and turbulent periods, as it provides a reasonable number of violations and daily capital charges. The Median also performs well when both total losses and the asymmetric linear tick loss function are considered
    Keywords: Median strategy, Value-at-Risk (VaR), daily capital charges, robust forecasts, violation penalties, optimizing strategy, aggressive risk management, conservative risk management, Basel II Accord, global financial crisis (GFC).
    JEL: G32 G11 C53 C22
    Date: 2011–01
    URL: http://d.repec.org/n?u=RePEc:kyo:wpaper:757&r=fmk
  5. By: Violeta, Gaucan
    Abstract: Before I’ll describe forex market I’d like to say why I have choose this subject for this article. First of all I really think that still exist people which don’t know about this activity and I strongly believe that in our days it’s a must, especially for those people how want to double or triple their profits from their own business. This article was created from a collection of structured data and I wish that through this article to familiarize yourself, more with the currency market.
    Keywords: forex market; forex currency trading; analysis; psychology
    JEL: O24 F31 A11
    Date: 2010–12–15
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:28078&r=fmk

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