New Economics Papers
on Financial Markets
Issue of 2013‒01‒26
five papers chosen by

  1. Financial Frictions and the Credit Transmission Channel: Capital Requirements and Bank Capital By Lucyna Gornicka; Sweder van Wijnbergen
  2. The present value model of U.S. stock prices revisited: long-run evidence with structural breaks, 1871-2010 By Vicente Esteve; Manuel Navarro-Ibáñez; María A. Prats
  3. Stock market integration between the CEE-4 and the G7 markets: Asymmetric DCC and smooth transition approach. By Baumöhl, Eduard
  4. Empirical studies in a multivariate non-stationary, nonparametric regression model for financial returns By Gürtler, Marc; Rauh, Ronald
  5. A Non-Parametric and Entropy Based Analysis of the Relationship between the VIX and S&P 500 By David E. Allen; Michael McAleer; Robert Powell; Abhay K. Singh

  1. By: Lucyna Gornicka (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam)
    Abstract: We investigate actual capital chosen by banks in presence of capital minimum requirements and ex-post penalties for violating them. The model yields excess capital that is always positive and increases during times of distress in the economy, which is in line with empirical evidence. Next, we show that in presence of ex-post violation penalties the introduction of the conservation buffer under Basel III will not contribute to lowering the pro-cyclicality of capital regulations. The countercyclical buffer proposed under Basel III is then even more desirable as it significantly attenuates fluctuations of actual capital also when the penalties are accounted for.
    Keywords: capital requirements; Basel regulatory framework; excess capital; countercyclical buffer; market discipline
    JEL: G21 G28 E32 E44
    Date: 2013–01–14
  2. By: Vicente Esteve (Universidad de Valencia and Universidad de La Laguna, Spain); Manuel Navarro-Ibáñez (Universidad de La Laguna, Spain); María A. Prats (Universidad de Murcia)
    Abstract: According to several empirical studies, the Present Value model fails to explain the behaviour of stock prices in the long-run. In this paper we consider the possibility that a linear cointegrated regression model with multiple structural changes would provide a better empirical description of the Present Value model of U.S. stock prices. Our methodology is based on instability tests recently proposed in Kejriwal and Perron (2008, 2010) as well as the cointegration tests developed in Arai and Kurozumi (2007) and Kejriwal (2008). The results obtained are consistent with the existence of linear cointegration between the log stock prices and the log dividends. However, our empirical results also show that the cointegrat- ing relationship has changed over time. In particular, the Kejriwal-Perron tests for testing multiple structural breaks in cointegrated regression mod- els suggest a model of three or two regimes.
    Keywords: Present value model; Stock prices; Dividends; Cointegration; Multiple Structural Breaks
    JEL: C22 G12
    Date: 2013–01
  3. By: Baumöhl, Eduard
    Abstract: We study the transition process of emerging CEE-4 stock markets from segmented to integrated markets and hypothesize that this process has been gradual over time. As a proxy for integration, co-movements with developed G7 markets are estimated using the asymmetric DCC-GARCH model. A smooth transition logistic trend model is then fitted to the dynamic correlations to examine the integration process. Evidence of strengthening relationships among the markets under study is provided. In the case of Czech stock market, the results suggest that the transition began between the end of 2005 and first half of 2006. The transition midpoints for the Hungarian and Polish markets seem to overlap with the recent financial crisis. Correlations between CEE-4 and G7 markets have been approximately 0.6 in the last few years. The only exception is the Slovak stock market, which still appears to be more segmented and isolated from others in the CEE region and from the developed markets of the G7.
    Keywords: stock market co-movements; G7; CEE-4; asymmetric GARCH models; ADCC; smooth transition model
    JEL: C32 G15 G01
    Date: 2013–01–16
  4. By: Gürtler, Marc; Rauh, Ronald
    Abstract: In this paper we analyze a multivariate non-stationary regression model empirically. With the knowledge about unconditional heteroscedasticty of financial returns, based on univariate studies and a congruent paradigm in Gürtler and Rauh (2009), we test for a time-varying covariance structure firstly. Based on these results, a central component of our non-stationary model is a kernel regression for pairwise covariances and the covariance matrix. Residual terms are fitted with an asymmetric Pearson type VII distribution. In an extensive study we estimate the linear dependence of a broad portfolio of equities and fixed income securities (including credit and currency risks) and fit the whole approach to provide distributional forecasts. Our evaluations verify a reasonable approximation and a satisfactory forecasting quality with an out performance against a traditional risk model. --
    Keywords: heteroscedasticity,non-stationarity,nonparametric regression,volatility,covariance matrix,innovation modeling,asymmetric heavy-tails,multivariate distributional forecast,empirical studies
    JEL: C14 C5
    Date: 2013
  5. By: David E. Allen (Edith Cowan University); Michael McAleer (Erasmus University Rotterdam, Complutense University of Madrid, Spain, and Kyoto University, Japan); Robert Powell (Edith Cowan University); Abhay K. Singh (Edith Cowan University)
    Abstract: This paper features an analysis of the relationship between the S&P 500 Index and the VIX using daily data obtained from both the CBOE website and SIRCA (The Securities Industry Research Centre of the Asia Pacic). We explore the relationship between the S&P 500 daily continuously compounded return series and a similar series for the VIX in terms of a long sample drawn from the CBOE running from 1990 to mid 2011 and a set of returns from SIRCA's TRTH datasets running from March 2005 to-date. We divide this shorter sample, which captures the behaviour of the new VIX, introduced in 2003, into four roughly equivalent sub-samples which permit the exploration of the impact of the Global Financial Crisis. We apply to our data sets a series of non-parametric based tests utilising entropy based metrics. These suggest that the PDFs and CDFs of these two return distributions change shape in various subsample periods. The entropy and MI statistics suggest that the degree of uncertainty attached to these distributions changes through time and using the S&P 500 return as the dependent variable, that the amount of information obtained from the VIX also changes with time and reaches a relative maximum in the most recent period from 2011 to 2012. The entropy based non-parametric tests of the equivalence of the two distributions and their symmetry all strongly reject their respective nulls. The results suggest that parametric techniques do not adequately capture the complexities displayed in the behaviour of these series. This has practical implications for hedging utilising derivatives written on the VIX, which will be the focus of a subsequent study.
    Keywords: S&P 500; VIX; Entropy; Non-Parametric Estimation; Quantile Regressions
    JEL: C14 C22 G24 G32
    Date: 2013–01–17

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