nep-fmk New Economics Papers
on Financial Markets
Issue of 2011‒05‒07
two papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Testing option pricing models: complete and incomplete markets By Olesia Verchenko
  2. What do Basel Capital Accords mean for SMEs? By Clara Cardone Riportella; Antonio Trujillo; Anahí Briozzo

  1. By: Olesia Verchenko (Kyiv School of Economics, Kyiv Economic Institute)
    Abstract: This paper examines the empirical performance of several complete and incomplete market models of stock price dynamics using S&P 500 options and stock market data. The main contribution of this work is that it suggests and implements an empirical approach to estimating a complete model with uncertain volatility, and then judges it against other popular option pricing processes. The performance of alternative models is evaluated from four perspectives: (1) in-sample fit to stock returns data, (2) in-sample fit to options data, (3) consistency of physical and risk-neutral parameter estimates and (4) out-of-sample option pricing. Overall, the complete model with uncertain volatility is found to .t the data much better than models with constant and price-level-dependent volatilities, and the variance gamma process, and its performance is comparable to that of a stochastic volatility model.
    Keywords: Option pricing, complete and incomplete markets, stochastic volatility
    JEL: G13
    Date: 2011–04
    URL: http://d.repec.org/n?u=RePEc:kse:dpaper:38&r=fmk
  2. By: Clara Cardone Riportella; Antonio Trujillo; Anahí Briozzo
    Abstract: This paper analyses the impact of the new Basel Capital Accords (Basel II and Basel III) on the bank’s capital requirements in a portfolio of Small and Medium-sized Enterprises (SMEs) when the internal ratings-based (IRB) approach is used. To do this, the study uses a large database of Spanish firms and covers the period from 2005 to 2009. We also examine the effect on the credit risk premium charged by banks of the guarantee offered by a Loan Guarantee Association (LGA) to a SME; and whether this foreseeable decrease in the interest rates applicable to the SME is compensated by the cost of this guarantee
    Keywords: Bank capital requirements, Credit risk mitigation, Bank financing of SMEs, Basel II, Basel III Loan Guarantee Association
    JEL: G21 G32
    Date: 2011–04
    URL: http://d.repec.org/n?u=RePEc:cte:wbrepe:wb111004&r=fmk

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