nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒07‒11
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Modeling the Interactions between Volatility and Returns By Andrew Harvey and Rutger-Jan Lange
  2. The Spectral Stress VaR (SSVaR) By Dominique Guegan; Bertrand K. Hassani; Kehan Li
  3. The impact of international swap lines on stock returns of banks in emerging markets By Alin Marius Andries; Andreas M. Fischer; Pinar Yesin
  4. Is there a too-big-to-fail discount in excess returns on German banks' stocks? By Thomas Nitschka

  1. By: Andrew Harvey and Rutger-Jan Lange
    Abstract: Volatility of a stock may incur a risk premium, leading to a positive correlation between volatility and returns. On the other hand the leverage effect, whereby negative returns increase volatility, acts in the opposite direction. We propose a reformulation and extension of the ARCH in Mean model, in which the logarithm of scale is driven by the score of the conditional distribution. This EGARCH-M model is shown to be theoretically tractable as well as practically useful. By employing a two component extension we are able to distinguish between the long and short run effects of returns on volatility. The EGARCH formulation allows more flexibility in the asymmetry of the response (leverage) and this enables us to find that the short-term response is, in some cases, close to being anti-asymmetric. The long and short run volatility components are shown to have very different effects on returns, with the long-run component yielding the risk premium. A model in which the returns have a skewed t distribution is shown to fit well to daily and weekly data on some of the major stock market indices.Keywords: Asymmetric price transmission, cost pass-through, electricity markets, price theory, rockets and feathers
    Date: 2015–07–02
  2. By: Dominique Guegan (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS); Bertrand K. Hassani (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS); Kehan Li (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    Abstract: One of the key lessons of the crisis which began in 2007 has been the need to strengthen the risk coverage of the capital framework. In response, the Basel Committee in July 2009 completed a number of critical reforms to the Basel II framework which will raise capital requirements for the trading book and complex securitisation exposures, a major source of losses for many international active banks. One of the reforms is to introduce a stressed value-at-risk (VaR) capital requirement based on a continuous 12-month period of significant financial stress (Basel III (2011) [1]. However the Basel framework does not specify a model to calculate the stressed VaR and leaves it up to the banks to develop an appropriate internal model to capture material risks they face. Consequently we propose a forward stress risk measure “spectral stress VaR” (SSVaR) as an implementation model of stressed VaR, by exploiting the asymptotic normality property of the distribution of estimator of VaR p. In particular to allow SSVaR incorporating the tail structure information we perform the spectral analysis to build it. Using a data set composed of operational risk factors we fit a panel of distributions to construct the SSVaR in order to stress it. Additionally we show how the SSVaR can be an indicator regarding the inner model robustness for the bank.
    Date: 2015–06
  3. By: Alin Marius Andries; Andreas M. Fischer; Pinar Yesin
    Abstract: This paper investigates the impact of international swap lines on stock returns using data from banks in emerging markets. The analysis shows that swap lines by the Swiss National Bank (SNB) had a positive impact on bank stocks in Central and Eastern Europe. It then highlights the importance of individual bank characteristics in identifying the impact of swap lines on bank stocks. Bank-level evidence suggests that stock prices of local and less-well capitalized banks responded strongly to SNB swap lines. This new evidence is consistent with the view that swap lines not only enhanced market liquidity but also reduced risks associated with micro-prudential issues.
    Keywords: Swap lines, foreign currency loans, bank stocks, emerging markets
    JEL: F15 F21 F32 F36 G15
    Date: 2015
  4. By: Thomas Nitschka
    Abstract: This paper shows that standard multifactor asset pricing models provide an adequate description of excess returns on stock indexes of German industrial sectors. The only exception is the banking sector index. It offers lower monthly excess returns than suggested by exposures to risk factors in the sample period from 1973 to 2014. This evidence is robust to various changes in the specification of the empirical model. Rolling time window regressions highlight that this finding has been most pronounced since the peak of the global financial crisis in 2008/2009 when the government guarantee for big, systemically important German banks became explicit.
    Keywords: banking sector, multifactor models, risk factors, risk premia
    JEL: G10 G21
    Date: 2015

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