nep-fmk New Economics Papers
on Financial Markets
Issue of 2017‒05‒21
five papers chosen by

  1. Connecting VIX and Stock Index ETF By Chang, C-L.; Hsieh, T-L.; McAleer, M.J.
  2. Murphy Diagrams: Forecast Evaluation of Expected Shortfall By Johanna F. Ziegel; Fabian Kr\"uger; Alexander Jordan; Fernando Fasciati
  3. Gradual Portfolio Adjustment: Implications for Global Equity Portfolios and Returns By Philippe Bacchetta; Eric van Wincoop
  4. Stock Market Integration in Asia: Global or Regional? Evidence from Industry Level Panel Convergence Tests By Guglielmo Maria Caporale; Kefei You
  5. Forecasting the Volatility of Nikkei 225 Futures By Asai, M.; McAleer, M.J.

  1. By: Chang, C-L.; Hsieh, T-L.; McAleer, M.J.
    Abstract: As stock market indexes are not tradeable, the importance and trading volume of Exchange Traded Funds (ETFs) cannot be understated. ETFs track and attempt to replicate the performance of a specific index. Numerous studies have demonstrated a strong relationship between the S&P500 Composite Index and the Volatility Index (VIX), but few empirical studies have focused on the relationship between VIX and ETF returns. The purpose of the paper is to investigate whether VIX returns affect ETF returns by using vector autoregressive (VAR) models to determine whether daily VIX returns with different moving average processes affect ETF returns. The ARCH-LM test shows conditional heteroskedasticity in the estimation of ETF returns, so that the diagonal BEKK model is used to accommodate multivariate conditional heteroskedasticity in the VAR estimates of ETF returns. Daily data on ETF returns that follow different stock indexes in the USA and Europe are used in the empirical analysis. The estimates show that daily VIX returns have: (1) significant negative effects on European ETF returns in the short run; (2) stronger significant effects on single market ETF returns than on European ETF returns; and (3) lower impacts on the European ETF returns than on S&P500 returns.
    Keywords: Stock market indexes, Exchange Traded Funds, Volatility Index (VIX), Vector autoregressions, moving average processes, conditional heteroskedasticity, diagonal BEKK
    JEL: C32 C58 G12 G15
    Date: 2017–01–15
  2. By: Johanna F. Ziegel; Fabian Kr\"uger; Alexander Jordan; Fernando Fasciati
    Abstract: Motivated by the Basel 3 regulations, recent studies have considered joint forecasts of Value-at-Risk and Expected Shortfall. A large family of scoring functions can be used to evaluate forecast performance in this context. However, little intuitive or empirical guidance is currently available, which renders the choice of scoring function awkward in practice. We therefore develop graphical checks (Murphy diagrams) of whether one forecast method dominates another under a relevant class of scoring functions, and propose an associated hypothesis test. We illustrate these tools with simulation examples and an empirical analysis of S&P 500 and DAX returns.
    Date: 2017–05
  3. By: Philippe Bacchetta; Eric van Wincoop
    Abstract: Modern open economy macro models assume the continuous adjustment of international portfolio allocation. We introduce gradual portfolio adjustment into a global equity market model. Our approach differs from related literature in two key dimensions. First, the time interval between portfolio decisions is stochastic rather than fixed, leading to a smoother response to shocks. Second, rather than only considering asset returns, we also use data on portfolio shares to confront the model to the data. Conditional on reasonable risk aversion, we find that the data is consistent with infrequent portfolio decisions, with a frequency of at most once in 15 months on average.
    JEL: F30 F41 G11 G12
    Date: 2017–04
  4. By: Guglielmo Maria Caporale; Kefei You
    Abstract: This paper examines global and regional stock market integration in Asia at both the aggregate and disaggregate (industry) level by applying the Phillips-Sul (2007) tests for panel and club convergence. The main findings can be summarised as follows. In the pre-2008 crisis period, no integration/convergence of any kind is found. By contrast, in the post-crisis period, the Asian stock markets appear to be integrated both globally and regionally at the aggregate level; at the industry level, there is evidence of both global and regional integration in 6 out of 10 cases, the exceptions being Financials and Telecommunication, both in a turn-around phase, and Gas & Oil and Technology, for which there is no panel convergence. Club convergence tests reveal the existence of convergence clubs and divergent economies within the full panel, which explains why panel convergence is not found for the pre-crisis period and for the Gas & Oil and Technology sectors in the post-crisis period.
    Keywords: Asian stock markets, global and regional integration, Phillips-Sul tests, panel and club convergence
    JEL: C32 C33 G11 G15
    Date: 2017
  5. By: Asai, M.; McAleer, M.J.
    Abstract: For forecasting volatility of futures returns, the paper proposes an indirect method based on the relationship between futures and the underlying asset for the returns and time-varying volatility. For volatility forecasting, the paper considers the stochastic volatility model with asymmetry and long memory, using high frequency data for the underlying asset. Empirical results for Nikkei 225 futures indicate that the adjusted R2 supports the appropriateness of the indirect method, and that the new method based on stochastic volatility models with the asymmetry and long memory outperforms the forecasting model based on the direct method using the pseudo long time series.
    Keywords: Forecasting, Volatility, Futures, Realized Volatility, Realized Kernel, Leverage Effects, Long Memory
    JEL: C22 C53 C58 G17
    Date: 2017–01–15

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.