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on Financial Markets |
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Issue of 2012‒03‒28
six papers chosen by |
| By: | Acharya, Viral V; Pedersen, Lasse H; Philippon, Thomas; Richardson, Matthew P |
| Abstract: | We present a simple model of systemic risk and we show that each financial institution's contribution to systemic risk can be measured as its systemic expected shortfall (SES), i.e., its propensity to be undercapitalized when the system as a whole is undercapitalized. SES increases with the institution's leverage and with its expected loss in the tail of the system's loss distribution. Institutions internalize their externality if they are ‘taxed’ based on their SES. We demonstrate empirically the ability of SES to predict emerging risks during the financial crisis of 2007-2009, in particular, (i) the outcome of stress tests performed by regulators; (ii) the decline in equity valuations of large financial firms in the crisis; and, (iii) the widening of their credit default swap spreads. |
| Keywords: | bailout; financial regulation; systemic risk; value at risk |
| JEL: | G01 G18 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8824&r=fmk |
| By: | Georges Prat (Université Paris 10) |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:afc:wpaper:12-06&r=fmk |
| By: | Hau, Harald; Lai, Sandy |
| Abstract: | The early stage of the recent financial crisis was marked by large value losses for bank stocks. This paper identifies the equity funds most affected by this valuation shock and examines its consequences for the non-financial stocks owned by the respective funds. We find that (i) ownership links to these 'distressed equity funds' lead to large underperformance of the most exposed non-financial stocks, and in aggregate this contributes an additional 10.9% to the overall stock market downturn; (ii) distressed fire sales and the associated price discounts are concentrated among those exposed stocks which perform relatively well; and (iii) stocks with higher fund ownership generally performed much better throughout the crisis. |
| Keywords: | Financial Crisis Propagation; Fire Sales; Mutual Funds |
| JEL: | G11 G14 G23 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8819&r=fmk |
| By: | Amélie Charles (Audencia - Audencia); Olivier Darné (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272) |
| Abstract: | We determine the events that cause large shocks in volatility of the DJIA index over the period 1928-2010, using intervention analysis and conditional heteroscedasticity model. We use a moving subsample window to take into account the periods with high or low volatility, allowing thus to identify large shocks as extraordinary movements perceived by the investors. We show that these large shocks can be associated with particular events (financial crashes, elections, wars, monetary policies, . . . ). We show that some shocks are not identified as extraordinary movements due to their occurring during high volatility episodes, especially the 1929-1934, 1937-1938 and 2008-2010 periods. |
| Date: | 2012–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00678932&r=fmk |
| By: | Serguey Khovansky; Zhylyevskyy, Oleksandr |
| Abstract: | We apply a new econometric method -- the generalized method of moments under a common shock -- to estimate idiosyncratic volatility premium and average idiosyncratic stock volatility. In contrast to the popular two-pass estimation approach of Fama and MacBeth (1973), the method requires using only a cross-section of return observations. We apply it to cross-sections of weekly U.S. stock returns in January and October 2008 and fiÂ…nd that during these months, the idiosyncratic volatility premium is nearly always negative and statistically signiÂ…cant. The results also indicate that the average idiosyncratic stock volatility increased by at least 50% between January and October. |
| Keywords: | Generalized method of moments; Idiosyncratic volatility; Cross-section of stock returns; Idiosyncratic volatility premium |
| JEL: | C21 C51 G12 |
| Date: | 2012–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:34990&r=fmk |
| By: | Zhylyevskyy, Oleksandr |
| Abstract: | Heston's stochastic volatility model is frequently employed by finance researchers and practitioners. Fast pricing of European-style options in this setting has considerable practical significance. This paper derives a computationally efficient formula for the value of a European-style put under Heston's dynamics, by utilizing a transform approach based on inverting the characteristic function of the underlying stock's log-price and by exploiting the characteristic function's symmetry. The value of a European-style call is computed using a parity relationship. The required characteristic function is obtained as a special case of a more general solution derived in prior research. Computational advantage of the option value formula is illustrated numerically. The method can help to mitigate the time cost of algorithms that require repeated evaluation of European-style options under Heston's dynamics. |
| Keywords: | characteristic function inversion; Heston's model; European-style option |
| JEL: | G13 |
| Date: | 2012–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:34827&r=fmk |