nep-fmk New Economics Papers
on Financial Markets
Issue of 2018‒06‒25
four papers chosen by

  1. Investors’ Uncertainty and Stock Market Risk By Escobari, Diego; Jafarinejad, Mohammad
  2. The Impact of Regulatory Stress Testing on Bank's Equity and CDS Performance By Lukas Ahnert; Pascal Vogt; Volker Vonhoff; Florian Weigert
  3. Modeling Euro STOXX 50 Volatility with Common and Market–specific Components By Fabrizio Cipollini; Giampiero M. Gallo
  4. The Risk-Adjusted Performance of Alternative Investment Funds and UCITS: A Comparative Analysis By Camilleri, Silvio John; Farrugia, Ritienne

  1. By: Escobari, Diego; Jafarinejad, Mohammad
    Abstract: We propose a novel approach to model investors' uncertainty using the conditional volatility of investors' sentiment. Working with weekly data on investor sentiment, six major U.S. stock indices, and alternative measures of uncertainty, we run various tests to validate our proposed measure. The estimates show that investors' uncertainty is greater during economic downturns, and it is linked with lower investors' sentiment. In addition, the results support the existence of a positive conditional correlation between sentiment and returns. This positive spillover between sentiment and returns is interpreted as a positive link between investors' uncertainty and market risk. We also find that investors’ uncertainty and market risk are strongly driven by their lagged values. Our measure consistently captures periods of high uncertainty as shown by a positive and highly statistically significant correlation with other existing measures of uncertainty.
    Keywords: Conditional Volatility; Dynamic Correlation; DCC-GARCH; Investors’ Uncertainty; Sentiment; Stock Market Risk
    JEL: G20 G21 G23 R3 R31
    Date: 2018–05
  2. By: Lukas Ahnert; Pascal Vogt; Volker Vonhoff; Florian Weigert
    Abstract: This paper investigates the impact of stress testing results on bank's equity and CDS performance using a large sample of ten tests from the US CCAR and the European EBA regimes in the time period between 2010 and 2017. We find that passing banks experience positive abnormal equity returns and tighter CDS spreads, while failing banks show strong drops in equity prices and widening CDS spreads. Interestingly, we also document strong market reactions at the announcement date of the stress tests. A bank’s asset quality and its return on equity at the time of the announcement are significant predictors of the pass/fail outcome of a bank.
    Keywords: Banks, Stress Testing, Equity Performance, CDS Performance
    JEL: G00 G21 G28
    Date: 2018–05
  3. By: Fabrizio Cipollini (Dipartimento di Statistica “G. Parenti”, Università di Firenze, Italy); Giampiero M. Gallo (Sezione Regionale di Controllo per la Lombardia, Corte dei Conti, Italy; Rimini Centre for Economic Analysis)
    Abstract: Similar volatility patterns are observables in the Euro area across national indices, suggesting the possibility of an underlying common component as a consequence of financial and monetary integration. This peculiar interdependence across market volatilities is captured by an additive component vector Multiplicative Error Model (vMEM) where the volatility dynamics is split between a common and a vector of market–specific components. When extracted from five major market indices and used as additional regressors in a HAR specification for the Euro STOXX 50 (a Euro area wide index) volatility, these components replace the terms that mimic long memory in the HAR, providing an interesting interpretation for volatility dynamics.
    Keywords: Realized Volatility, (vector) Multiplicative Error Models, GMM, HAR, Common Component, Euro area
    Date: 2018–06
  4. By: Camilleri, Silvio John; Farrugia, Ritienne
    Abstract: This study evaluates the performance of a selection of Alternative Investment Funds (AIFs), and Undertakings for Collective Investment in Transferable Securities Funds (UCITS) which followed a global geographic focus strategy during the period 2010-2016. These two fund structures are governed by different regulatory frameworks, which have evolved and re-shaped over the years. Various yardsticks are employed to evaluate the risk-adjusted performance of the sampled funds, and Monte-Carlo simulations are used to gauge the possible out-of-sample returns. Most of the sampled funds underperformed the benchmark index in terms of their Sharpe and Treynor ratios. Whilst UCITS registered a better overall performance, AIFs outperformed UCITS towards the end of the sample period. This suggests that investors should not assume that one fund structure is inherently superior to the other, since the relative performance may vary over time.
    Keywords: AIFs; collective investment funds; performance evaluation; performance persistence; Sharpe ratio; Treynor ratio; UCITS; value-at-risk
    JEL: G11 G17 G23
    Date: 2018–05

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