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on Financial Markets |
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Issue of 2018‒10‒15
six papers chosen by |
| By: | Fischer, Thomas (Department of Economics, Lund University); Lundtofte , Frederik (Department of Economics, Lund University) |
| Abstract: | We apply the Atkinson (1970) inequality index to time series of asset returns to offer a novel measure of financial risk consistent with expected-utility theory. This measure is converted to a certainty-equivalent return serving as a performance measure. We extend the Atkinson index to HARA utility and derive closed-form solutions to our measures for a number of preference-return combinations. Further, we establish relationships between risk aversion and the weights assigned to the cumulants of the return distribution for our performance measure. Using data from hedge funds and asset-pricing anomalies, we find that our performance measure contains additional, economically meaningful information. |
| Keywords: | risk; performance; non-Gaussian distributions; cumulants; hedge funds |
| JEL: | G11 |
| Date: | 2018–10–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2018_025&r=fmk |
| By: | Van Tassel, Peter (Federal Reserve Bank of New York) |
| Abstract: | This paper provides empirical evidence that volatility markets are integrated through the time-varying term structure of variance risk premia. These risk premia predict the returns from selling volatility for different horizons, maturities, and products, including variance swaps, straddles, and VIX futures. In addition, the paper derives a closed-form relationship between the prices of variance swaps and VIX futures. While tightly linked, VIX futures exhibit deviations of varying significance from the no-arbitrage prices and bounds implied by the variance swap market. The paper examines these pricing errors and their relationship to VIX futures’ return predictability. |
| Keywords: | variance swaps; term structure; variance risk premium; VIX futures; options; return predictability |
| JEL: | C58 G12 G13 |
| Date: | 2018–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:867&r=fmk |
| By: | Simon Oh; Jessica A. Wachter |
| Abstract: | This paper evaluates skewness in the cross-section of stock returns in light of predictions from a well-known class of models. Cross-sectional skewness in monthly returns far exceeds what the standard lognormal model of returns would predict. However, skewness in long-run returns substantially understates what the lognormal model would predict. Nonstationary share dynamics imply a breakdown in the distinction between market and idiosyncratic risk in the lognormal model. We present an alternative model that matches the skewness in the data and implies stationary wealth shares. In this model, idiosyncratic risk is the primary driver of growth in the economy. |
| JEL: | G12 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25113&r=fmk |
| By: | Nikolai Roussanov; Hongxun Ruan; Yanhao Wei |
| Abstract: | Marketing and distribution expenses are responsible for about a third of the cost of active management in the mutual fund industry. We develop and estimate a structural model of mutual fund marketing with learning about unobserved skill and costly investor search. Our estimates suggest that marketing is nearly as important as performance and fees for determining fund size. Eliminating marketing substantially improves welfare, as capital shifts towards cheaper funds and competition decreases fees. Average alpha increases as active funds shrink, and capital allocation becomes more closely aligned with manager skill net of fees. Declining investor search costs over time imply a reduction in marketing expenses and management fees as well as a shift towards passive investing, as observed empirically. |
| JEL: | D14 D83 G11 G23 G28 M3 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25056&r=fmk |
| By: | Eraslan, Sercan; Ali, Faek Menla |
| Abstract: | We use volatility impulse response analysis estimated from the bivariate GARCH-BEKK model to quantify the size and the persistence of different types of oil price shocks on stock return volatility and the covariance between oil price changes and stock returns for a wide range of net oil-importing and oil-exporting countries. We find that precautionary demand followed by aggregate demand-side shocks, compared to supply-side ones, have higher positive and persistent effects on the conditional variances of stock returns for all countries. Moreover, we show that precautionary demand shocks, unlike the other types of shocks, mostly affect the covariances between oil price changes and stock returns; their effects being negative for all countries except China, Norway and Russia, where they are positive. |
| Keywords: | Oil price shocks,Stock returns,Volatility impulse response analysis |
| JEL: | C32 Q43 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:382018&r=fmk |
| By: | Caporale Guglielmo Maria; Luis A. Gil-Alana; Trilochan Tripathy |
| Abstract: | This paper applies a fractional integration framework to analyse the stochastic behaviour of two Russian stock market volatility índices (namely the originally created RTSVX and the new RVI that has replaced it), using daily data over the period 2010-2018. The empirical findings are consistent and imply in all cases that the two series are mean-reverting, i.e. they are not highly persistent and the effects of shocks disappear over time. This is true regardless of whether the errors are assumed to follow a white noise or autocorrelated process, it is confirmed by the rolling window estimation, and it holds for both subsamples, before and after the detected break. On the whole, it seems that shocks do not have permanent effects on investor sentiment in the Russian stock market. |
| Keywords: | RTSVX, RVI, volatility, persistence, fractional integration, long memory |
| JEL: | C22 G12 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7243&r=fmk |