nep-fmk New Economics Papers
on Financial Markets
Issue of 2016‒03‒06
four papers chosen by

  1. More Accurate Measurement for Enhanced Controls: VaR vs ES? By Dominique Guegan; Bertrand K. Hassani
  2. Local Volatility Models in Commodity Markets and Online Calibration By Vinicius Albani; Uri M. Ascher; Jorge P. Zubelli
  3. The Circular Relationship between Inequality, Leverage, and Financial Crises By Rémi Bazillier; Jérôme Hericourt
  4. Stock Market Liberalizations and Efficiency: The Case of Latin America By Vieito, João Paulo; Wong, Wing-Keung; Chow, Sheung Chi

  1. By: Dominique Guegan (Centre d'Economie de la Sorbonne); Bertrand K. Hassani (Grupo Santander et Centre d'Economie de la Sorbonne)
    Abstract: This paper analyses how risks are measured in financial institutions, for instance Market, Credit, Operational, etc with respect to the choice of the risk measures, the choice of the distributions used to model them and the level of confidence selected. We discuss and illustrate the characteristics, the paradoxes and the issues observed comparing the Value-at-Risk and the Expected Shortfall in practice. This paper is built as a differential diagnosis and aims at discussing the reliability of the risk measures as long as making some recommendations
    Keywords: Risk measures; Marginal distributions; Level of confidence; Capital requirement
    JEL: G28 G32 C14
    Date: 2016–02
  2. By: Vinicius Albani; Uri M. Ascher; Jorge P. Zubelli
    Abstract: We introduce a local volatility model for the valuation of options on commodity futures by using European vanilla option prices. The corresponding calibration problem is addressed within an online framework, allowing the use of multiple price surfaces. Since uncertainty in the observation of the underlying future prices translates to uncertainty in data locations, we propose a model-based adjustment of such prices that improves reconstructions and smile adherence. In order to tackle the ill-posedness of the calibration problem we incorporate a priori information through a judiciously designed Tikhonov-type regularization. Extensive empirical tests with market as well as synthetic data are used to demonstrate the effectiveness of the methodology and algorithms.
    Date: 2016–02
  3. By: Rémi Bazillier (LEO - Laboratoire d'Economie d'Orléans - CNRS - Université d'Orléans); Jérôme Hericourt (LEM - Lille - Economie et Management - Université Lille 1 - Sciences et technologies - Fédération Universitaire et Polytechnique de Lille - CNRS - Centre National de la Recherche Scientifique, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique)
    Abstract: In this paper, we put into perspective the recent literature which points to inequality as a possible cause of credit bubbles, by reintegrating it into a more general analysis on the two-way relationship between inequality and finance. We focus more specifically on situations where high inequalities and widespread access to credit coexist, and argue that, even when institutions maintain more or less equal access to finance, there may be a dynamic, positive circular relationship between inequality and financial development. However, if we find robust evidence in the literature of a positive causal impact of inequality on credit, the conclusions concerning the distributional impact of financial development, financial deregulation, and financial crises become less clear. A survey of the empirical literature highlights several issues that must be tackled. First, endogeneity: reverse causality and coincidental factors are major concerns. Second, the choice of consistent measurements for the key variables (both credit and inequality) has strong empirical implications, and must be grounded on relevant theoretical channels. Third, those circular dynamics have substantial policy implications for emerging countries, since an increasing number face a joint increase in inequality and credit.
    Keywords: Institutions,Inequality,Causality,Finance
    Date: 2016–01–06
  4. By: Vieito, João Paulo; Wong, Wing-Keung; Chow, Sheung Chi
    Abstract: This investigation is among the first to examine the impact of stock market liberalization on the efficiency of Latin American stock markets. It is also among the first to apply the martingale hypothesis test and a stochastic dominance approach to study the issue of efficient markets. Daily stock indices from Latin American countries, including Brazil, Mexico, Chile, Peru, Jamaica, and Trinidad and Tobago, are used in our analysis. To examine the impact of stock market liberalization on efficiency, we employ several approaches, including the runs test, Chow-Denning multiple variation ratio test, Wright variance ratio test, the martingale hypothesis test and the SD test, the stock market indices of the countries above. We find that stock market liberalization does not significantly improve stock market efficiency in Latin America.
    Keywords: Market Liberalization; Market Efficiency; Stochastic Dominance, Latin
    JEL: G14 G15
    Date: 2016

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