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on Financial Markets |
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Issue of 2014‒09‒25
three papers chosen by |
| By: | Tae-Hwy Lee (Department of Economics, University of California Riverside); Weiping Yang (Capital One Financial Research) |
| Abstract: | This paper considers the Granger-causality in conditional quantile and examines the potential of improving conditional quantile forecasting by accounting for such a causal relationship between financial markets. We consider Granger-causality in distributions by testing whether the copula function of a pair of two financial markets is the independent copula. Among returns on stock markets in the US, Japan and U.K., we find significant Granger-causality in distribution. For a pair of the financial markets where the dependent (conditional) copula is found, we invert the conditional copula to obtain the conditional quantiles. Dependence between returns of two financial markets is modeled using a parametric copula. Different copula functions are compared to test for Granger-causality in distribution and in quantiles. We find significant Granger-causality in the different quantiles of the conditional distributions between foreign stock markets and the US stock market. Granger-causality from foreign stock markets to the US stock market is more significant from UK than from Japan, while causality from the US stock market to UK and Japan stock markets is almost equally significant. |
| Keywords: | Contagion in Financial Markets. Copula Functions. Inverting Conditional Copula. Granger-causality in Conditional Quantiles. |
| JEL: | C5 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:ucr:wpaper:201406&r=fmk |
| By: | Yoshiyuki Fukuda (Bank of Japan); Kazutoshi Kan (Bank of Japan); Yoshihiko Sugihara (Bank of Japan) |
| Abstract: | In this paper, we analyze the optimal asset composition ratio of stocks and bonds for a bank taking into consideration the correlation between the interest rate risk and equity risk in the financial capital market using a portfolio model. The analysis reveals that in determining the asset composition ratio in Japan, the correlation coefficient between the interest rate and stock prices as well as the stock price volatility plays a more important role than the interest rate volatility. We also show that in the present circumstances, the stockholding ratios of most financial institutions in Japan are higher than the levels calculated from the model. It is suggested that when the market is exposed to severe stress such as a surge in stock price volatility or reversal of the correlation between the interest rate and stock prices, the stockholding ratios would be even more excessive than the levels obtained from the model. |
| Date: | 2013–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:13-e-6&r=fmk |
| By: | Joscha Beckmann; Theo Berger; Robert Czudaj |
| Abstract: | This study deals with the issue whether gold actually exhibits the function of a hedge or a safe haven as often referred to in the media and academia. In order to test the Baur and Lucey (2010) hypotheses, we contribute to the existing literature by the augmentation of their model to a smooth transition regression (STR) using an exponential transition function which splits the regression model into two extreme regimes. One accounts for periods in which stock returns are on average and therefore allows to test whether gold acts as a hedge for stocks, the other one accounts for periods characterized by extreme market conditions where the volatility of the stock returns is high. The latter state enables us to test whether gold can be regarded as a safe haven for stocks. The study includes a broad set of 18 individual markets as well as five regional indices and covers a sample period running from January 1970 to March 2012 on a monthly frequency. Overall, our findings show that gold serves as a hedge and a safe haven. However, this ability seems to be market-specific. In addition, by applying a portfolio analysis we also show that our findings are useful for investors. |
| Keywords: | Gold; hedge; safe haven; smooth transition; stock prices |
| JEL: | G11 G14 G15 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0502&r=fmk |