nep-fmk New Economics Papers
on Financial Markets
Issue of 2011‒08‒02
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The "CAPS" Prediction System and Stock Market Returns By Avery, Christopher; Chevalier, Judith; Zeckhauser, Richard J.
  2. Risk Management of Risk Under the Basel Accord: A Bayesian Approach to Forecasting Value-at-Risk of VIX Futures By Roberto Casarin; Chia-Lin Chang; Juan-Ángel Jiménez-Martín; Michael McAleer; Teodosio Pérez Amaral
  3. Bond Market Development in Asia: An Empirical Analysis of Major Determinants By Bhattacharyay, Biswa Nath
  4. A Map of the Brazilian Stock Market By Leonidas Sandoval Junior

  1. By: Avery, Christopher (Harvard University); Chevalier, Judith (Yale University); Zeckhauser, Richard J. (Harvard University)
    Abstract: We study the predictive power of approximately 2.5 million stock picks submitted by individual users to the "CAPS" website run by the Motley Fool company ( These picks prove to be surprisingly informative about future stock prices. Indeed, a strategy of shorting stocks with a disproportionate number of negative picks on the site and buying stocks with a disproportionate number of positive picks produces a return of over nine percent per annum over the sample period. These results are mostly driven by the fact that negative picks on the site strongly predict future stock price declines; positive picks on the site produce returns that are statistically indistinguishable from the market. A Fama French decomposition suggests that these results are largely due to stock-picking rather than style factors or market timing.
    Date: 2011–07
  2. By: Roberto Casarin; Chia-Lin Chang; Juan-Ángel Jiménez-Martín; Michael McAleer (University of Canterbury); Teodosio Pérez Amaral
    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: 2011–07–01
  3. By: Bhattacharyay, Biswa Nath (Asian Development Bank Institute)
    Abstract: One of the reasons behind the financial crisis in 1997 was the excessive dependence of Asian economies on commercial banks for domestic financing. Banks were the major source of corporate financing because bond markets were underdeveloped and small. To enhance corporate bond financing, it is important to examine the factors that promote effective development of bond markets. This study attempts to identity the determinants of bond market development in Asian economies, through examining its relationship with selected key financial and economic factors, and to provide policy recommendations for further development.
    Keywords: asia bond market; bond market development integration; asia financial crisis; asia banking sector; corporate financing
    JEL: F36 G15 O16 O53
    Date: 2011–07–28
  4. By: Leonidas Sandoval Junior
    Abstract: We use the correlation matrix of stocks returns in order to create maps of the S\~ao Paulo Stock Exchange (BM&F-Bovespa), Brazil's main stock exchange. The data reffer to the year 2010, and the correlations between stock returns lead to the construction of a minimum spanning tree and of asset graphs with a variety of threshold values. The results are analised using techniques of network theory.
    Date: 2011–07

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