New Economics Papers
on Financial Markets
Issue of 2013‒06‒04
six papers chosen by

  1. 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
  2. Cross-Sectional Distribution of GARCH Coefficients across S&P 500 Constituents: Time-Variation over the Period 2000-2012 By David Ardia; Lennart F. Hoogerheide
  3. US Corporate Bond Yield Spread. A default risk debate By Shah, Syed Noaman; Kebewar, Mazen
  4. Survival of Hedge Funds : Frailty vs Contagion By Serge Darolles; Patrick Gagliardini; Christian Gouriéroux
  5. Multiperiod portfolio selection with transaction and market-impact costs By Víctor de Miguel; Xiaoling Mei; Francisco J. Nogales
  6. "More Swimming Lessons from the London Whale" By Jan Kregel

  1. By: Vicente Esteve (Universidad de Valencia and Universidad de La Laguna); Manuel Navarro-Ibáñez (Universidad de La Laguna); 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: 2013–05
  2. By: David Ardia; Lennart F. Hoogerheide
    Abstract: We investigate the time-variation of the cross-sectional distribution of asymmetric GARCH model parameters over the S&P 500 constituents for the period 2000-2012. We find the following results. First, the unconditional variances in the GARCH model obviously show major time-variation, with a high level after the dot-com bubble and the highest peak in the latest financial crisis. Second, in these more volatile periods it is especially the persistence of deviations of volatility from is unconditional mean that increases. Particularly in the latest financial crisis, the estimated models tend to Integrated GARCH models, which can cope with an abrupt regime-shift from low to high volatility levels. Third, the leverage effect tends to be somewhat higher in periods with higher volatility. Our findings are mostly robust across sectors, except for the technology sector, which exhibits a substantially higher volatility after the dot-com bubble. Further, the financial sector shows the highest volatility during the latest financial crisis. Finally, in an analysis of different market capitalizations, we find that small cap stocks have a higher volatility than large cap stocks where the discrepancy between small and large cap stocks increased during the latest financial crisis. Small cap stocks also have a larger conditional kurtosis and a higher leverage effect than mid cap and large cap stocks.
    Keywords: GARCH, GJR, equity, leverage effect, S&P 500 universe
    JEL: C22 C52
    Date: 2013
  3. By: Shah, Syed Noaman; Kebewar, Mazen
    Abstract: According to theoretical models of valuing risky corporate securities, risk of default is primary component in overall yield spread. However, sizable empirical literature considers it otherwise by giving more importance to non-default risk factors. Current study empirically attempts to provide relative solution to this conundrum by presuming that problem lies in the subjective empirical treatment of default risk. By using post-hoc estimator approach of Lubotsky & Wittenberg (2006), we construct an efficient indicator for risk of default, by using sample of 252 US non-financial corporate data (2000-2010). On average, our results validate that almost 48% of change in yield spread is explained by default risk especially in recent financial crisis period (2007-2009). Hence, our results relatively suggest that potential problem lies in the ad-hoc measurement methods used in existing empirical literature. --
    Keywords: Default risk,Credit spread,Risk-aversion,Measurement error,Index construction
    JEL: C1 C30 G12 G14
    Date: 2013–03–08
  4. By: Serge Darolles (Paris-Dauphine University and CREST); Patrick Gagliardini (University of Lugano); Christian Gouriéroux (CREST and University of Toronto)
    Abstract: In this paper we examine the dependence between the liquidation risks of individual hedge funds. This dependence can result either from common exogenous shocks (shared frailty), or from contagion phenomena, which occur when an endogenous behaviour of a fund manager impacts the Net Asset Values of other funds. We introduce dynamic models able to distinguish between frailty and contagion phenomena, and test for the presence of such dependence effects, according to the age and management style of the fund. We demonstrate the empirical relevance of our approach by measuring the magnitudes of contagion and exogenous frailty in liquidation risk dependence in the TASS database. The empirical analysis is completed by stress-tests on portfolios of hedge funds.
    Keywords: Hedge Fund, Liquidation Correlation, Frailty, Contagion, Dynamic Count Model, Autoregressive Gamma Process, Systemic Risk, Stress-tests, Liquidation Swap, Funding Liquidity, Market Liquidity.
    JEL: G12 C23
    Date: 2012–11
  5. By: Víctor de Miguel; Xiaoling Mei; Francisco J. Nogales
    Abstract: We carry out an analytical investigation on the optimal portfolio policy for a multiperiod mean-variance investor facing multiple risky assets. We consider the case with proportional, market impact, and quadratic transaction costs. For proportional transaction costs, we find that a buy-and-hold policy is optimal: if the starting portfolio is outside a parallelogram-shaped no-trade region, then trade to the boundary of the no-trade region at the first period, and hold this portfolio thereafter. For market impact costs, we show that the optimal portfolio policy at each period is to trade to the boundary of a state-dependent movement region. Moreover, we find that the movement region shrinks along the investment horizon, and as a result the investor trades throughout the entire investment horizon. Finally, we show numerically that the utility loss associated with ignoring transaction costs or investing myopically may be large
    Keywords: Portfolio optimization, Multiperiod utility, No-trade region
    Date: 2013–05
  6. By: Jan Kregel
    Abstract: This policy brief by Senior Scholar and Program Director Jan Kregel builds on an earlier analysis (Policy Note 2012/6) of JPMorgan Chase and the actions of the "London Whale," and what this episode reveals about the larger risks inherent in the financial system. It is clear that the Dodd-Frank Act failed to prevent massive losses by one of the world's largest banks. This is undeniable evidence that work remains to be done to reform the financial system. Toward this end, Kregel reviews the findings of a recent report by the Senate Permanent Subcommittee on Investigations and expands on the lessons that we can draw from the evolution of the London Whale episode.
    Date: 2013–04

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