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on Financial Markets |
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Issue of 2016‒07‒09
five papers chosen by |
| By: | Geert Dhaene; Piet Sercu; Jianbin Wu |
| Abstract: | We study international asset pricing in a large-dimensional multivariate GARCH-in-mean framework. We examine different estimation methods and find that the two-step estimation method proposed by Bali and Engle (2010) tends to underestimate the risk-return coefficient and the corresponding standard error. We also show that the estimate is improved by one-step estimation and by increasing the cross-sectional dimension. Using stock index returns for up to 24 countries and 4 major currencies in the period 2001-2015, one-step estimation gives a market risk-return coefficient of around 6. The estimate is robust to variations in model specification, data frequency, and the number of stock markets considered. |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:ete:afiper:544332&r=fmk |
| By: | Chiaki Hara (Kyoto Institute of Economic Research, Kyoto University); Toshiki Honda (Graduate School of International Corporate Strategy, Hitotsubashi University) |
| Abstract: | We study the optimal portfolio choice problem for an ambiguity-averse investor having a utility function of the form of Klibanoff, Marinacci, and Mukerji (2005) and Maccheroni, Marinacci, and Rufino (2013) in an ambiguity-inclusive CARA-normal setup. We extend the mutual fund theorem to accommodate ambiguity, identify a necessary and sufficient condition for a given portfolio to be optimal for some ambiguity- averse investor, characterize all the ambiguity structure under which the given portfolio is optimal, and find the minimal ones in two senses to be made precise. We also calculate the minimal ambiguity structures based on the U.S. equity market data and find the smallest coefficient of ambiguity aversion with which the market portfolio is optimal is equal to 9.31. |
| Keywords: | Ambiguity aversion, optimal portfolio, mutual fund theorem, FF6 portfolios, market portfolio |
| JEL: | C38 D81 G11 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:943&r=fmk |
| By: | Tiziano Squartini; Guido Caldarelli; Giulio Cimini |
| Abstract: | The spreading of financial distress in capital markets and the resulting systemic risk strongly depend on the detailed structure of financial interconnections. Yet, while financial institutions have to disclose their aggregated balance sheet data, the information on single positions is often unavailable due to privacy issues. The resulting challenge is that of using the aggregate information to statistically reconstruct financial networks and correctly predict their higher-order properties. However, standard approaches generate unrealistically dense networks, which severely underestimate systemic risk. Moreover, reconstruction techniques are generally cast for networks of bilateral exposures between financial institutions (such as the interbank market), whereas, the network of their investment portfolios (i.e., the stock market) has received much less attention. Here we develop an improved reconstruction method, based on statistical mechanics concepts and tailored for bipartite market networks. Technically, our approach consists in the preliminary estimation of connection probabilities by maximum-entropy inference driven by entities capitalizations and link density, followed by a density-corrected gravity model to assign position weights. Our method is successfully tested on NASDAQ, NYSE and AMEX filing data, by correctly reproducing the network topology and providing reliable estimates of systemic risk over the market. |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1606.07684&r=fmk |
| By: | Alessio Emanuele Biondo; Alessandro Pluchino; Andrea Rapisarda |
| Abstract: | We introduce a new Self-Organized Criticality (SOC) model for simulating price evolution in an artificial financial market, based on a multilayer network of traders. The model also implements, in a quite realistic way with respect to previous studies, the order book dy- namics, by considering two assets with variable fundamental prices. Fat tails in the probability distributions of normalized returns are observed, together with other features of real financial markets. |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1606.09194&r=fmk |
| By: | Lubos Komarek; Kristyna Ters; Jorg Urban |
| Abstract: | We examine the role of the CDS and bond markets during and before the recent euro area sovereign debt crisis as transmission channels for credit risk contagion between sovereign entities. We analyse an intraday dataset for GIIPS countries as well as Germany, France and central European countries. Our findings suggest that, prior to the crisis, the CDS and bond markets were similarly important in the transmission of financial shock contagion, but that the importance of the bond market waned during the crisis. We find flight-to-safety effects during the crisis in the German bond market that are not present in the pre-crisis sample. Our estimated sovereign risk contagion was greater during the crisis, with an average timeline of one to two hours in GIIPS countries. By using an exogenous macroeconomic news shock, we can show that, during the crisis period, increased credit risk was not related to economic fundamentals. Further, we find that central European countries were not affected by sovereign credit risk contagion, independent of their debt level and currency. |
| Keywords: | Contagion, credit default swaps, panel VAR, sovereign credit risk, sovereign debt crisis, spillover |
| JEL: | E44 G12 G14 G15 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2016/04&r=fmk |