nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒06‒05
four papers chosen by

  1. Extreme Risk, excess return and leverage: the LP formula By Olivier Le Marois; Julia Mikhalevsky; Raphaël Douady
  2. Downside Risk Timing by Mutual Funds By Bodnaruk, Andriy; Chokaev, Bekhan; Simonov, Andrei
  3. An Emerging Market Financial Conditions Index: A VAR Approach By Rémy Charleroy; Michael A. Stemmer
  4. Systemic Risk in Conventional vs Islamic Equity Markets By Ahmet Sensoy

  1. By: Olivier Le Marois (fluks - FLUKS); Julia Mikhalevsky (FEDERIS Gestion d'Actifs - Federis Gestion d'Actifs); Raphaël Douady (Riskdata - Financial Risk Management Software, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    Abstract: The LP formula is based upon the substitution of the exogenous risk aversion hypothesis by a credit equilibrium hypothesis. This leads to a trade-off between expected blue-sky return – the expected return excluding default scenarios – and extreme risk estimated from scenarios leading to default. An empirical study on the past 90 years shows that this trade-off curve is almost identical across asset classes. In equilibrium, an asset expected blue-sky return is proportional to its contribution to extreme risk. Assuming normal returns, we obtain CAPM as a sub-case of the LP relation. This relationship makes extreme risk underestimation a strong driver of asset price bubbles.
    Date: 2014–12
  2. By: Bodnaruk, Andriy; Chokaev, Bekhan; Simonov, Andrei
    Abstract: We study whether mutual funds systematically manage downside risk of their portfolios in ways that improve their performance. We find that actively managed mutual funds on average possess positive downside risk timing ability. Funds investing in large-cap and value stocks have stronger downside risk timing skills. Managers adjust funds’ downside risk exposure in response to macroeconomic information. The economic value of downside risk timing is comparable to that of market timing.
    Keywords: downside risk; market timing; mutual funds
    JEL: G10 G11
    Date: 2015–05
  3. By: Rémy Charleroy (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS); Michael A. Stemmer (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    Abstract: The recent financial crisis has heightened the interest in the impact of financial sector developments on the macroeconomic condition of countries. By employing a rolling-window Vector Auto-Regressive method based on monthly data for a time span between January 2001 and March 2013, this article sets up a comprehensive financial conditions index for a set of major emerging countries. The index sheds light on the various triggers of financial crises during this period and captures both domestic developments as well as global spillover effects. Index dynamics exhibit an overall abrupt slowdown due to the 2007-2008 Financial Crisis, precipitated primarily through a global liquidity squeeze and overall financial sector strain. In some countries, rising volatility of financial conditions thereafter has substantially been sparked by nominal effective exchange rate movements. Tested on its forecasting applicability, the inclusion of macroeconomic and financial variables enables the index to also perform well as a leading indicator for business cycles.
    Abstract: La récente crise financière a montré l'importance du secteur financier sur les conditions macroéconomiques domestiques. En utilisant un modèle vectoriel auto-régressif entre janvier 2001 et mars 2013, nous construisons un indicateur des conditions financières pour un échantillon composé des principaux pays émergents. L'indice met en lumière les divers déclencheurs des crises financières au cours de cette période et capture à la fois le développement économique domestique et les effets de contagion de certaines variables externes aux pays concernés. Nos résultats montrent une chute brutale de l'indice pendant la crise financière de 2008 principalement due à une chute de la liquidité globale et à des turbulences dans le secteur financier globalisé. Dans certains pays, la volatilité croissante des conditions financières est également due à la forte volatilité des taux de change. Nous montrons également que l'inclusion des variables macroéconomiques et financières permet à notre indice d'être aussi compétitif que les autres indicateurs avancés en termes de prévisions des cycles économiques.
    Date: 2014–10
  4. By: Ahmet Sensoy
    Abstract: We aim to compare the aggregate systemic risk in Islamic and conventional equity markets by introducing two dynamic risk measures. Accordingly, the level of the systemic risk in conventional markets is slightly higher than the risk in Islamic markets for most of the time. However, this diference is significant in less than 3% of the sample period. More importantly, there is no significant difeerence in the levels of systemic risk during the global financial crisis of 2008, suggesting that Islamic equity markets are not able to provide a lower market risk compared to their conventional counterparts in financial turbulent times.
    Keywords: Systemic risk, Islamic finance, Conventional finance, Equity sectors, Dynamic Conditional Beta, Non-parametric tests
    JEL: C14 C58 G01 G15 G32
    Date: 2015–06

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