nep-fmk New Economics Papers
on Financial Markets
Issue of 2011‒04‒23
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Risk Management of Risk under the Basel Accord Forecasting Value-at-Risk of VIX Futures By Chia-Lin Chang; Juan-Ángel Jiménez-Martín; Michael McAleer; Teodosio Pérez-Amaral
  2. The Forward Rate Premium Puzzle: A Resolution? By Stephen Hall; P. A. V. B. Swamy; George S. Tavlas; Amangeldi Kenjegaliev
  3. Are there disadvantaged clienteles in mutual funds? By Jank, Stephan
  4. The Greek financial crisis: growing imbalances and sovereign spreads By Heather D. Gibson; Stephan G. Hall; George S. Tavlas

  1. By: Chia-Lin Chang; Juan-Ángel Jiménez-Martín; Michael McAleer; Teodosio Pérez-Amaral
    Abstract: The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. McAleer, Jimenez-Martin and Perez-Amaral (2009) proposed a new approach to model selection for predicting VaR, consisting of combining alternative risk models, and comparing conservative and aggressive strategies for choosing between VaR models. This paper addresses the question of risk management of risk, namely VaR of VIX futures prices. We examine how different risk management strategies performed during the 2008-09 global financial crisis (GFC). We find that an aggressive strategy of choosing the Supremum of the single model forecasts is preferred to the other alternatives, and is robust during the GFC. However, this strategy implies relatively high numbers of violations and accumulated losses, though these are admissible under the Basel II Accord.
    Keywords: Median strategy; Value-at-Risk (VaR); daily capital charges; violation penalties; optimizing strategy; aggressive risk management; conservative risk management; Basel II Accord; VIX futures; global financial crisis (GFC)
    JEL: G32 G11 C53 C22
    Date: 2011–02–01
    URL: http://d.repec.org/n?u=RePEc:cbt:econwp:11/12&r=fmk
  2. By: Stephen Hall; P. A. V. B. Swamy; George S. Tavlas; Amangeldi Kenjegaliev
    Abstract: Empirical studies report that there is a negative relationship between the spot difference and forward premium. This result violates the forward rate unbiasedness theory. Using standard regression we found that recent samples give mixed results with both positive and negative coefficients. One possibility is that the negative coefficients could arise due to the non-linearities in the series and misspecification. To overcome these problems we employed a relatively novel technique. As an alternative to the standard regression we used a time-varying coefficient technique. This methodology estimates bias-free coefficients and thus should provide better estimates of the link between spot and forward rates. The findings of the time-varying coefficient model strongly support the forward rate unbiasedness hypothesis. All the parameters are very close to unity and significant. At the same time our results do not violate the efficient market theory.
    Keywords: Forward premium anomaly; Time-varying coefficients; spurious
    JEL: C51 E43
    Date: 2011–03
    URL: http://d.repec.org/n?u=RePEc:lec:leecon:11/23&r=fmk
  3. By: Jank, Stephan
    Abstract: This paper studies the flow-performance relationship of three different investor groups in mutual funds: Households, financial corporations, and insurance companies and pension funds, establishing the following findings: Financial corporations have a strong tendency to chase past performance and also hold an increased share in the top performing funds. Insurance companies and pension funds show some evidence of performance chasing, but are underrepresented in the best performing funds. Households chase performance, but they are also subject to status quo bias in their flows. Regarding investor composition the worst performing funds show no significant difference in their investor structure when compared to funds with average performance. --
    Keywords: Mutual Funds,Flow-Performance Relationship,Clientele
    JEL: G11 G20 G23
    Date: 2011
    URL: http://d.repec.org/n?u=RePEc:zbw:cfrwps:1102&r=fmk
  4. By: Heather D. Gibson; Stephan G. Hall; George S. Tavlas
    Abstract: We discuss the origins of the Greek financial crisis as manifested in the growing fiscal and current-account deficits since euro-area entry in 2001. We then provide an investigation of spreads on Greek relative to German long-term government debt. Using monthly data over the period 2000 to 2010, we estimate a cointegrating relationship between spreads and their long-term fundamental determinants, and compare the spreads predicted by this estimated relationship with actual spreads. We find periods of both undershooting and overshooting of spreads compared to what is predicted by the economic fundamentals.
    Keywords: Greek financial crisis; sovereign spreads
    JEL: E63 G12
    Date: 2011–03
    URL: http://d.repec.org/n?u=RePEc:lec:leecon:11/25&r=fmk

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