nep-fmk New Economics Papers
on Financial Markets
Issue of 2014‒12‒19
nine papers chosen by

  1. Up- and Downside Variance Risk Premia in Global Equity Markets By Matthias Held; Marcel Omachel
  2. An Assessment of the Impact of Earthquakes on Global Capital Markets By Ferreira, Susana; Karali, Berna
  3. Consumption-based asset pricing with rare disaster risk By Grammig, Joachim; Sönksen, Jantje
  4. Generalized Dynamic Factor Models and Volatilities. Recovering the Market Volatility Shocks By Matteo Barigozzi; Marc Hallin
  5. Detecting Performance Persistence of Hedge Funds : A Runs-Based Analysis By Rania Hentati Kaffel; Philippe De Peretti
  6. Measuring capital market efficiency: Long-term memory, fractal dimension and approximate entropy By Kristoufek, Ladislav; Vosvrda, Miloslav
  7. Sovereign spreads and financial market behavior before and during the crisis By Pawel Gajewski; ; ;
  8. Competing for Order Flow in OTC Markets By Benjamin Lester; Guillaume Rocheteau; Pierre-Olivier Weill
  9. A Quadratic Optimization Framework for Credit Portfolio By Boguk Kim

  1. By: Matthias Held (Faculty of Finance, WHU - Otto Beisheim School of Management); Marcel Omachel (Faculty of Finance, WHU - Otto Beisheim School of Management)
    Abstract: This paper studies the variance risk premium from a new perspective by disaggregating the total premium into upper and lower semivariance premia. To this end, we provide novel tools for computing conditional expectations using traded options as well as moment generating functions. Across a dataset of global stock market indices, we find that the variance premium is almost exclusively driven by downside risk. Our results are robust with respect to the sample period. These findings substantiate the hypothesis found in the literature that the variance premium is largely driven by the left tail of the index return distribution.
    Keywords: variance risk premium, semivariance, derivatives
    JEL: G12
    Date: 2014–09
  2. By: Ferreira, Susana; Karali, Berna
    Keywords: Demand and Price Analysis, International Development, Risk and Uncertainty,
    Date: 2014
  3. By: Grammig, Joachim; Sönksen, Jantje
    Abstract: The rare disaster hypothesis suggests that the extraordinarily high postwar U.S. equity premium resulted because investors ex ante demanded compensation for unlikely but calamitous risks that they happened not to incur. Although convincing in theory, empirical tests of the rare disaster explanation are scarce. We estimate a disaster-including consumption-based asset pricing model (CBM) using a combination of the simulated method of moments and bootstrapping. We consider several methodological alternatives that differ in the moment matches and the way to account for disasters in the simulated consumption growth and return series. Whichever specification is used, the estimated preference parameters are of an economically plausible size, and the estimation precision is much higher than in previous studies that use the canonical CBM. Our results thus provide empirical support for the rare disaster hypothesis, and help reconcile the nexus between real economy and financial markets implied by the consumption-based asset pricing paradigm.
    Keywords: equity premium,rare disaster risk,asset pricing,simulated method of moments
    JEL: G10 G12 C58
    Date: 2014
  4. By: Matteo Barigozzi; Marc Hallin
    Keywords: volatility; dynamic factor models; block structure
    JEL: C32
    Date: 2014–11
  5. By: Rania Hentati Kaffel (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Philippe De Peretti (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: In this paper, we use nonparametric runs-based tests to analyze the randomness of returns and the persistence of relative returns of hedge funds. Runs tests are implemented on a universe of hedge extracted from HFR database over the period spanning January 2000 to December 2012. Our findings suggest that i) For about 80% of the funds, we fail to reject the null of randomness of returns, ii) A similar ...gure is found out when focusing on relative returns, iii) Hedge funds that do present clustering in their relative returns are mainly found within Event Driven and Relative Value strategies, iv) For relative returns, results vary with the benchmark nature (hedge or traditional). The paper also emphasizes that runs tests may be a useful tool for investors in their fund' s selection process.
    Keywords: Hedge Funds; Randomness;Runs Tests; Persistence; clustering
    Date: 2014–02–01
  6. By: Kristoufek, Ladislav; Vosvrda, Miloslav
    Abstract: We utilize long-term memory, fractal dimension and approximate entropy as input variables for the Efficiency Index [Kristoufek & Vosvrda (2013), Physica A 392]. This way, we are able to comment on stock market efficiency after controlling for different types of inefficiencies. Applying the methodology on 38 stock market indices across the world, we find that the most efficient markets are situated in the Eurozone (the Netherlands, France and Germany) and the least efficient ones in the Latin America (Venezuela and Chile).
    Keywords: capital market efficiency,long-term memory,fractal dimension,approximate entropy
    Date: 2014
  7. By: Pawel Gajewski (University of Lodz, Faculty of Economics and Sociology); ; ;
    Abstract: This paper aims at shedding some light on the mechanisms of pricing the EMU countries’ sovereign bonds in financial markets. Employing the Augmented Mean Group (AMG) estimator, we find that major changes have occurred in terms of variables underlying sovereign risk. Since 2009, macroeconomic and fiscal fundamentals has started to play a more important role, but only those that capture domestic demand evolution. In contrast, price competitiveness seems less important. The second conclusion lies in reversed attitude towards banking sector imbalances, as compared to the earlier period. One of the problems addressed concerns the horizon of projected macroeconomic and fiscal variables taken into account. The paper presents some evidence that financial markets have become more myopic and started to rely on short-term forecasts, whilst they had tended to encompass longer-term forecast horizon before the crisis.
    Keywords: financial crisis, fiscal policy, EMU, panel estimation
    JEL: C23 E43 E62 F34 G01 G12 H60
    Date: 2014–09
  8. By: Benjamin Lester; Guillaume Rocheteau; Pierre-Olivier Weill
    Abstract: We develop a model of a two-sided asset market in which trades are intermediated by dealers and are bilateral. Dealers compete to attract order flow by posting the terms at which they execute trades-- which can include prices, quantities, and execution speed--and investors direct their orders toward dealers that offer the most attractive terms. We characterize the equilibrium in a general setting, and illustrate how the model can account for several important trading patterns in over-the-counter markets which do not emerge from existing models. We then study two special cases which allow us to highlight the differences between these existing models, which assume investors engage in random search for dealers and then use ex post bargaining to determine prices, and our model, which utilizes the concept of competitive search in which dealers post terms of trade. Finally, we calibrate our model, illustrate that it generates reasonable quantitative outcomes, and use it to study how trading frictions affect the per-unit trading costs that investors pay in equilibrium.
    JEL: D53 D83 G1 G12
    Date: 2014–10
  9. By: Boguk Kim
    Abstract: A novel quadratic optimization framework for credit portfolio is introduced when the portfolio risk is measured by Conditional Value-at-Risk (CVaR). This method is formulated in terms of the Lagrange multiplier method subjected under an artificial quadratic error term, which is comparable to the amount or cost of total portfolio adjustment, as the necessary constraint. The route toward the optimal portfolio state can be searched from the initial portfolio state via a continuation process through the maximally three-parameter space described by the total portfolio budget, the increment of the total return or the tolerance of the additional risk, and the total portfolio adjustment cost.
    Date: 2014–11

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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.