nep-fmk New Economics Papers
on Financial Markets
Issue of 2011‒01‒30
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. International Financial Contagion: the Role of Banks By Robert Kollmann; Frédéric Malherbe
  2. International Evidence on GFC-robust Forecasts for Risk Management under the Basel Accord By Michael McAleer; Juan-Ángel Jiménez-Martín; Teodosio Pérez-Amaral
  3. The microstructure of the money market before and after the financial crisis: a network perspective By Silvia Gabrieli
  4. Self-regulation in securities markets By Carson, John
  5. Asymmetric Shocks, Long-term Bonds and Sovereign Default By Zhu, Junjun; Xie, Shiyu
  6. A Copula-GARCH Model for Macro Asset Allocation of a Portfolio with Commodities: an Out-of-Sample Analysis By Luca RICCETTI

  1. By: Robert Kollmann; Frédéric Malherbe
    Abstract: This paper provides an overview of recent theories of international financial contagion, with a focus on models in which the balance sheet constraints of global banks (and other financial institutions) are the key of international transmission.
    Keywords: global financial crisis; international financial contagion; international financial multiplier; global banks; bank balance sheets; capital ratio; leverage ratio; international interbank market; asset prices; credit losses; bank runs
    Date: 2011–01
    URL: http://d.repec.org/n?u=RePEc:eca:wpaper:2013/73556&r=fmk
  2. By: Michael McAleer (Econometrisch Instituut (Econometric Institute), Faculteit der Economische Wetenschappen (Erasmus School of Economics) Erasmus Universiteit, Tinbergen Instituut (Tinbergen Institute).); Juan-Ángel Jiménez-Martín (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid); Teodosio Pérez-Amaral (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de 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
    URL: http://d.repec.org/n?u=RePEc:ucm:doicae:1101&r=fmk
  3. By: Silvia Gabrieli (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper provides an in depth microstructure analysis of the euro money market by taking a network perspective. Banks are the nodes of the networks; unsecured overnight loans form the links connecting the nodes. Daily interbank networks verify the same stylised facts documented for many real complex systems: they are highly sparse, far from being complete, exhibit the small world property and a power-law distribution of degree (the number of counterparties each bank establishes credit relationships with). On the other hand, the tendency of banks to cluster, i.e. to form groups where ties are relatively denser, is much lower than in other real networks. The time patterns of some network statistics provide interesting insights into the evolution of the potential for financial contagion; the partition of the network into smaller connected subnetworks documents a move against market integration; heterogeneous developments across banks of different size offer insights into banks’ behaviour. An analysis of banks’ prominence in the market is undertaken using centrality measures: the various indicators suggest that the biggest banks are also the most connected before the onset of the crisis; however, medium/small and very small banks’ centralities increase progressively after August 2007 as these banks increase their “influence” as liquidity providers. The rich set of measures described in this paper represents a key input for future research.
    Keywords: Network analysis; Network centrality indicators; Money market; Financial crisis
    JEL: D85 G10 G21
    Date: 2011–01–19
    URL: http://d.repec.org/n?u=RePEc:rtv:ceisrp:181&r=fmk
  4. By: Carson, John
    Abstract: This paper canvasses the trends in self-regulation and the role of self-regulation in securities markets in different parts of the world. The paper also describes the conditions in which self-regulation might be an effective element of securities markets regulation, particularly in emerging markets. Use of self-regulation and self-regulatory organizations is often recommended in emerging markets as part of a broader strategy aimed at improving the effectiveness of securities regulation and market integrity. According to the International Organization of Securities Commissions, reliance on self-regulation is an optional feature of a regulatory regime. Self-regulatory organizations may support better-regulated and more efficient capital markets, but the value of self-regulation is again being questioned in many countries. Forces such as commercialization of exchanges, development of stronger statutory regulatory authorities, consolidation of financial services industry regulatory bodies, and globalization of capital markets are affecting the scope and effectiveness of self-regulation -- and in particular the traditional role of securities exchanges as self-regulatory organizations.The paper reviews different models of self-regulation, including exchange self-regulatory organizations, member (or independent) self-regulatory organizations, and industry or dealers’ associations. It draws on examples of self-regulatory organizations from many markets to illustrate the degree of reliance on self-regulation, as well as the range of functions for which self-regulatory organizations are responsible, in markets around the world. Issues that are important to the effective operation of self-regulatory organizations are discussed, such as corporate governance, managing conflicts of interest, and regulatory oversight by government authorities.
    Keywords: Debt Markets,Regulatory Regimes,Public Sector Regulation,Emerging Markets,Markets and Market Access
    Date: 2011–01–01
    URL: http://d.repec.org/n?u=RePEc:wbk:wbrwps:5542&r=fmk
  5. By: Zhu, Junjun; Xie, Shiyu
    Abstract: We present a sovereign default model with asymmetric shocks and long-term bonds, and solve the model using discrete state dynamic programming. As result, our model matches the Argentinean economy over period 1993Q1-2001Q4 quite well. We show that our model can match high default frequency, high debt/output ratio and other cyclical features, such as countercyclical interest rate and trade balance in emerging countries. Moreover, with asymmetric shocks we are able to match high sovereign spread level and low spread volatility simultaneously in one model, which is till now not well solved. As another contribution of our paper, we propose a simulation-based approach to approximate transition function of output shocks between finite states, which is an indispensable step in discrete state dynamic programming. Comparing to Tauchen’s method, our approach is very flexible in transforming various econometric models to finite state transition function, so that our approach can be widely used in simulating different kinds of discrete state shocks.
    Keywords: Sovereign Default; Asymmetric Shocks; Transition Function; Long-term Bonds
    JEL: F34 E44
    Date: 2011–01–18
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:28236&r=fmk
  6. By: Luca RICCETTI (Universita' Politecnica delle Marche, Dipartimento di Economia)
    Abstract: Many authors have suggested that the mean-variance criterion, conceived by Markowitz (1952), is not optimal for asset allocation, because the investor expected utility function is better proxied by a function that uses higher moments and because returns are distributed in a non-Normal way, being asymmetric and/or leptokurtic, so the mean-variance criterion can not correctly proxy the expected utility with non-Normal returns. In Riccetti (2010) I apply a simple GARCH-copula model and I find that copulas are not useful for choosing among stock indices, but they can be useful in a macro asset allocation model, that is, for choosing the stock and the bond composition of portfolios. In this paper I apply that GARCH-copula model for the macro asset allocation of portfolios containing a commodity component. I find that the copula model appears useful and better than the mean-variance one for the macro asset allocation also in presence of a commodity index, even if it is not better than GARCH models on independent univariate series, probably because of the low correlation of the commodity index returns to the stock, the bond and the exchange rate returns.
    Keywords: Portfolio Choice
    JEL: C52 C53 G11
    Date: 2011–01
    URL: http://d.repec.org/n?u=RePEc:anc:wpaper:355&r=fmk

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