nep-fmk New Economics Papers
on Financial Markets
Issue of 2011‒07‒27
two papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Risk Management of Risk Under the Basel Accord: A Bayesian Approach to Forecasting Value-at-Risk of VIX Futures By Michael McAleer; Roberto Casarin; Chia-Lin Chang; Juan-Ángel Jiménez-Martín; Teodosio Pérez-Amaral
  2. Is Regulation Essential to Stock Market Development? Going Public in London and Berlin, 1900-1913 By Carsten Burhop; David Chambers; Brian Cheffins

  1. By: Michael McAleer (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, Complutense University of Madrid, and Institute of Economic Research, Kyoto University); Roberto Casarin (Department of Economics Ca’Foscari University of Venice); Chia-Lin Chang (Department of Applied Economics Department of Finance National Chung Hsing University Taichung, Taiwan); Juan-Ángel Jiménez-Martín (Department of Quantitative Economics Complutense University of Madrid); Teodosio Pérez-Amaral (Department of Quantitative Economics Complutense University of Madrid)
    Abstract: It is well known that the Basel II Accord requires banks and other Authorized Deposit-taking Institutions (ADIs) to communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models, whether individually or as combinations, 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 et al. (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, and extends the approaches given in McAleer et al. (2009) and Chang et al. (2011) to examine how different risk management strategies performed during the 2008-09 global financial crisis (GFC). The empirical results suggest that an aggressive strategy of choosing the Supremum of single model forecasts, as compared with Bayesian and non-Bayesian combinations of models, is preferred to other alternatives, and is robust during the GFC. However, this strategy implies relatively high numbers of violations and accumulated losses, which are admissible under the Basel II Accord.
    Keywords: Median strategy, Value-at-Risk, daily capital charges, violation penalties, aggressive risk management, conservative risk management, Basel Accord, VIX futures, Bayesian strategy, quantiles, forecast densities.
    JEL: G32 C53 C22 C11
    Date: 2011–07
    URL: http://d.repec.org/n?u=RePEc:kyo:wpaper:784&r=fmk
  2. By: Carsten Burhop (Max Planck Institute for Research on Collective Goods, Bonn and University of Cologne); David Chambers (Judge Business School, University of Cambridge); Brian Cheffins (Faculty of Law, University of Cambridge)
    Abstract: This study of initial public offerings (IPOs) carried out on the Berlin and London stock exchanges between 1900 and 1913 casts doubt on the received “law and finance” wisdom that legally mandated investor protection is pivotal to the development of capital markets. IPOs that resulted in official quotations on the London Stock Exchange performed as well as Berlin IPOs despite the Berlin market being more extensively regulated than the laissez faire London market. Moreover, the IPO failure rate on these two stock markets was lower than it was with better regulated US IPOs later in the 20th century.
    Keywords: Regulation, Financial history, Law and finance, initial public offering, investor protection
    JEL: G32 K22 N23 G18 G38 G14 G24
    Date: 2011–07
    URL: http://d.repec.org/n?u=RePEc:mpg:wpaper:2011_15&r=fmk

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