nep-fmk New Economics Papers
on Financial Markets
Issue of 2013‒05‒22
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. CAPM, Components of Beta and the Cross Section of Expected By Tolga Cenesizoglu; Jonathan J. Reeves
  2. Repo funding and internal capital markets in the financial crisis By Düwel, Cornelia
  3. Restructuring counterparty credit risk By Albanese, Claudio; Brigo, Damiano; Oertel, Frank

  1. By: Tolga Cenesizoglu; Jonathan J. Reeves
    Abstract: This paper demonstrates that a conditional version of the Capital Asset Pricing Model (CAPM) explains the cross section of expected returns, just as well as the three factor model of Fama and French. This is achieved by measuring beta (systematic risk) with short-, medium- and long-run components. The short-run component of beta is computed from daily returns over the prior year. While the medium-run beta component is from daily returns over the prior 5 years and the long-run component from monthly returns over the prior 10 years. More immediate changes in risk such as changes in portfolio characteristics are captured in the short-run beta component, whereas, more slowly changing risk due to the business cycle is captured in the medium- and long-run beta components. <P>
    Keywords: Asset Pricing, Systematic Risk, Mixed Frequency Data, Realized Beta, Component Models,
    Date: 2013–04–01
  2. By: Düwel, Cornelia
    Abstract: This paper examines how the exposure of German parent banks to the disruptions on sale and repurchase markets (repo markets) during the financial crisis has affected their provision of funds to their foreign branches and subsidiaries via bank-internal capital markets. The collapse of the subprime market, the rescue of Bear Stearns and the bankruptcy of Lehman Brothers are analyzed with regard to their role as amplifiers of uncertainty about the value of collateral used in repo transactions and mistrust among market participants. The results show that parent banks which were more exposed to these disruptions were more likely to withdraw bank-internal funds from their branches and subsidiaries located abroad. Among the three events, the rescue of Bear Stearns triggered the largest contraction on internal capital markets from the part of the parent bank, possibly because this event demonstrated for the first time the fragility of even very large financial institutions. After the subprime market collapse, branches were briefly more protected as core investment locations, while subsidiaries were used as core funding locations up to the Lehman Brothers bankruptcy. All in all, funding via repo markets is found to be one channel that transmitted shocks primarily related to the US financial system abroad. --
    Keywords: repo,funding structure,multinational banks,internal capital market,intra-bank lending,financial crisis
    JEL: G21 G15 F34 E44
    Date: 2013
  3. By: Albanese, Claudio; Brigo, Damiano; Oertel, Frank
    Abstract: We introduce an innovative theoretical framework for the valuation and replication of derivative transactions between defaultable entities based on the principle of arbitrage freedom. Our framework extends the traditional formulations based on credit and debit valuation adjustments (CVA and DVA). Depending on how the default contingency is accounted for, we list a total of ten different structuring styles. These include bi-partite structures between a bank and a counterparty, tri-partite structures with one margin lender in addition, quadripartite structures with two margin lenders and, most importantly, configurations where all derivative transactions are cleared through a central counterparty (CCP). We compare the various structuring styles under a number of criteria including consistency from an accounting standpoint, counterparty risk hedgeability, numerical complexity, transaction portability upon default, induced behaviour and macro-economic impact of the implied wealth allocation. --
    Keywords: counterparty credit risk,CVA,DVA,margin lending,securitisation,Basel III,CCP,clearing,collateral,OTC
    JEL: C51 C54 C63 E51 G01 G32 G33
    Date: 2013

This nep-fmk issue is ©2013 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.