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on Risk Management |
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Issue of 2005‒01‒02
five papers chosen by |
| By: | Trino-Manuel Niguez; Javier Perote |
| Abstract: | In this paper we introduce a transformation of the Edgeworth-Sargan series expansion of the Gaussian distribution, that we call Positive Edgeworth-Sargan (PES). The main advantage of this new density is that it is well defined for all values in the parameter space, as well as it integrates up to one. We include an illustrative empirical application to compare its performance with other distributions, including the Gaussian and the Student's t, to forecast the full density of daily exchange-rate returns by using graphical procedures. Our results show that the proposed function outperforms the other two models for density forecasting, then providing more reliable value-at-risk forecasts. |
| Keywords: | Density forecasting, Edgeworth-Sargan distribution, probability integral transformations, P-value plots, VaR |
| JEL: | C16 C53 G12 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:cep:stiecm:/2004/479&r=rmg |
| By: | De Schepper A.; Heijnen B. |
| Abstract: | In spite of the power of the Black & Scholes option pricing method, there are situations in which the hypothesis of a lognormal model is too restrictive. One possibility to deal with this problem, consists of a weaker hypothesis, fixing only successive moments and eventually the mode of the price process of a risky asset, and not the complete distribution. The consequence of this generalization is the fact that the option price is no longer a unique value, but a range of several possible values. We show how to find upper and lower bounds, resulting in a rather narrow range. We give results in case two moments, three moments, or two moments and the mode of the underlying price process are fixed. |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:ant:wpaper:2004004&r=rmg |
| By: | X. H. Wang (Department of Economics, University of Missouri-Columbia) |
| Abstract: | This paper shows that the precautionary premium embodies a tradeoff between risk and downside risk. It is the size of a mean-preserving spread for thish the strength of aversion to risk just offsets the strength of aversion to downside risk. Using this result, decreasing absolute prudence can be interpreted as meaning that the amount of exposure to risk (as measured by a spread) for which aversion to risk just offsets aversion to downside risk decreases as wealth increases. This happens when an increase in wealth causes a smaller percentage change in absolute downside risk aversion than in absolute risk aversion. |
| JEL: | D80 |
| Date: | 2004–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:0204&r=rmg |
| By: | Anne Vila Wetherilt; Simon Wells |
| Abstract: | This paper revisits the issue of long-horizon equity return predictability for the United Kingdom in the context of the dynamic dividend discount model of Campbell and Shiller. This model attributes predictable variation in equity prices to predictable variation in expected returns. The model is supported by the theoretical asset pricing literature, which shows how the variation in expected returns can be related to investors' time-varying preferences for risk. The paper considers various empirical specifications that are consistent with the Campbell and Shiller model and finds that they are supported by UK equity data. In particular, there is weak evidence that the dividend yield has predictive ability for long-horizon excess returns. The paper also examines some of the econometric issues brought up by recent research, in particular the small-sample bias, and applies appropriate statistical corrections. It further shows that the model's predictive ability depends greatly on the sample period over which the model is estimated. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:244&r=rmg |
| By: | X. Henry Wang; Carmen F. Menezes (Department of Economics, University of Missouri-Columbia) |
| Abstract: | Recent empirical research has established that the distributions of a wide range of economic variables are kurtotic in that they have higher peak(s) in the neighborhood of the mean and greater elongation in the tails than the normal distribution. This paper provides a formal characterization of the empirically significant notions of kurtotic distributions by formulating the concept of outer risk. An increase in outer risk corresponds to a dispersion transfer from the center of a distribution to its tails. In terms of the relocation of probability mass, such a dispersion transfer accentuates the peak(s) of the distribution and elongates its tails. It is shown that ordering distributions by outer risk is equivalent to the ordering of distributions resulting from unanimous choice by all individuals whose utility function has a negative fourth derivative. |
| Keywords: | Outer risk, outer risk aversion |
| JEL: | D81 |
| Date: | 2004–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:0413&r=rmg |