New Economics Papers
on Risk Management
Issue of 2005‒01‒09
two papers chosen by

  1. Structural VAR identification in asset markets using short-run market inefficiencies By Gultekin Isiklar
  2. The Precautionary Premium and the Risk-Downside Risk Tradeoff By X. H. Wang; Carmen Menezes

  1. By: Gultekin Isiklar (State University of New York at Albany)
    Abstract: We impose a structure on the short-run market inefficiencies in the asset markets and use this structure to identify a structural vector autoregressive model. This novel identification method is based on more reasonable assumptions than the standard approaches and also gives estimates for inefficiency measures in the markets, which are important on their own. Applying our method on the major European stock markets, we find that while the UK shocks were dominant in Europe until 1999, German innovations have been more important since 1999. We also find that the pattern of inefficiencies are consistent with the rational inattention model of Sims (2003).
    Keywords: Structural VAR; Overreaction and Underreaction; Stock Market
    JEL: C32 G15 D84
    Date: 2005–01–01
  2. By: X. H. Wang (Department of Economics, University of Missouri-Columbia); Carmen Menezes (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.
    Keywords: Precautionary premium, risk, downside risk
    JEL: D80

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.