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on Financial Markets |
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Issue of 2012‒04‒23
six papers chosen by |
| By: | Pesaran, Hashem (University of Cambridge); Yamagata, Takashi (University of York) |
| Abstract: | This paper is concerned with testing the time series implications of the capital asset pricing model (CAPM) due to Sharpe (1964) and Lintner (1965), when the number of securities, N, is large relative to the time dimension, T, of the return series. In the case of cross-sectionally correlated errors, using a threshold estimator of the average squares of pair-wise error correlations a test is proposed and is shown to be valid even if N is much larger than T. Monte Carlo evidence show that the proposed test works well in small samples. The test is then applied to all securities in the S&P 500 index with 60 months of return data at the end of each month over the period September 1989-September 2011. Statistically significant evidence against Sharpe-Lintner CAPM is found mainly during the recent financial crisis. Furthermore, a strong negative correlation is found between a twelve-month moving average p-values of the test and the returns of long/short equity strategies relative to the return on S&P 500 over the period December 2006 to September 2011, suggesting that abnormal profits are earned during episodes of market inefficiencies. |
| Keywords: | CAPM, testing for alpha, market efficiency, long/short equity returns, large panels, weak and strong cross-sectional dependence |
| JEL: | C12 C15 C23 G11 G12 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6469&r=fmk |
| By: | Josselin Garnier; George Papanicolaou; Tzu-Wei Yang |
| Abstract: | We consider a system of diffusion processes that interact through their empirical mean and have a stabilizing force acting on each of them, corresponding to a bistable potential. There are three parameters that characterize the system: the strength of the intrinsic stabilization, the strength of the external random perturbations, and the degree of cooperation or interaction between them. The latter is the rate of mean reversion of each component to the empirical mean of the system. We interpret this model in the context of systemic risk and analyze in detail the effect of cooperation between the components, that is, the rate of mean reversion. We show that in a certain regime of parameters increasing cooperation tends to increase the stability of the individual agents but it also increases the overall or systemic risk. We use the theory of large deviations of diffusions interacting through their mean field. |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1204.3536&r=fmk |
| By: | Frédéric Abergel (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris); Riadh Zaatour (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris) |
| Abstract: | We rely on high frequency data to explore the joint dynamics of underlying and option markets. In particular, high frequency data make observable the realized variance process of the underlying, so its effects on option price dynamics are tested. Empirical results are confronted with the predictions of stochastic volatility models. The study reveals that while the modeling of stochastic volatility gives more robust models, the market does not process information on the realized variance to update option prices. |
| Keywords: | options, microstructure, smile, stochastic volatility |
| Date: | 2012–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00687675&r=fmk |
| By: | Mohsan Bilal; Manmohan Singh |
| Abstract: | This paper looks at some technical issues when using CDS data, and if these are incorporated, the analysis or regression results are likely to benefit. The paper endorses the use of stochastic recovery in CDS models when estimating probability of default (PD) and suggests that stochastic recovery may be a better harbinger of distress signals than fixed recovery. Similarly, PDs derived from CDS data are risk-neutral and may need to be adjusted when extrapolating to real world balance sheet and empirical data (e.g. estimating banks losses, etc). Another technical issue pertains to regressions trying to explain CDS spreads of sovereigns in peripheral Europe - the model specification should be cognizant of the under-collateralization aspects in the overall OTC derivatives market. One of the biggest drivers of CDS spreads in the region has been the CVA teams of the large banks that hedge their exposure stemming from derivative receivables due to non-posting of collateral by many sovereigns (and related entities). |
| Keywords: | Bond markets , Bonds , Economic models , Europe , |
| Date: | 2012–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/77&r=fmk |
| By: | Matteo Manera (University of Milan-Bicocca, Milan and Fondazione Eni Enrico Mattei, Milan); Marcella Nicolini (University of Pavia, Pavia and Fondazione Eni Enrico Mattei, Milan); Ilaria Vignati (Fondazione Eni Enrico Mattei, Milan) |
| Abstract: | This paper analyses futures prices for four energy commodities (light sweet crude oil, heating oil, gasoline and natural gas) and five agricultural commodities (corn, oats, soybean oil, soybeans and wheat), over the period 1986-2010. Using CCC and DCC multivariate GARCH models, we find that financial speculation is poorly significant in modelling returns in commodities futures while macroeconomic factors help explaining returns in commodities futures. Moreover, spillovers between commodities are present and the conditional correlations among commodities are high and time-varying. |
| Keywords: | Energy, Commodities, Futures Markets, Financial Speculation, Multivariate GARCH |
| JEL: | C32 G13 Q11 Q43 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2012.23&r=fmk |
| By: | Jia-Wen Gu; Wai-Ki Ching; Tak-Kuen Siu; Harry Zheng |
| Abstract: | In this paper we propose a simple and efficient method to compute the ordered default time distributions in both the homogeneous case and the two-group heterogeneous case under the interacting intensity default contagion model. We give the analytical expressions for the ordered default time distributions with recursive formulas for the coefficients, which makes the calculation fast and efficient in finding rates of basket CDSs. In the homogeneous case, we explore the ordered default time in limiting case and further include the exponential decay and the multistate stochastic intensity process. The numerical study indicates that, in the valuation of the swap rates and their sensitivities with respect to underlying parameters, our proposed model outperforms the Monte Carlo method. |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1204.4025&r=fmk |