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on Risk Management |
| By: | Guillaume Plantin |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:cmu:gsiawp:1108152504&r=rmg |
| By: | Eckhard Platen (School of Finance and Economics, University of Technology, Sydney) |
| Abstract: | This paper proposes a unified framework for portfolio optimization, derivative pricing, modeling and risk measurement in financial markets with security price processes that exhibit intensity based jumps. It is based on the natural assumption that investors prefer more for less, in the sense that for two given portfolios with the same variance of its increments, the one with the higher expected increment is preferred. If one additionally assumes that the market together with its monetary authority acts to maximize the long term growth of the market portfolio, then this portfolio exhibits a very particular dynamics. In a market without jumps the resulting dynamics equals that of the growth optimal portfolio (GOP). Conditions are formulated under which the well-known capital asset pricing model is generalized for markets with intensity based jumps. Furthermore, the Markowitz efficient frontier and the Sharpe ratio are recovered in this continuous time setting. In this paper the numeraire for derivative pricing is chosen to be the GOP. Primary security account prices, when expressed in units of the GOP, turn out to be supermartingales. In the proposed framework an equivalent risk neutral martingale measure need not exist. Fair derivative prices are obtained as conditional expectations of future payoff structures under the real world probability measure. The concept of fair pricing is shown to generalize the classical risk neutral and the actuarial net present value pricing methodologies. |
| Keywords: | benchmark model; jump diffusions; growth optimal portfolio; market portfolio; effiient frontier; Sharpe ratio; fair pricing; actuarial pricing |
| JEL: | G10 G13 |
| Date: | 2004–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:143&r=rmg |
| By: | Guillaume Plantin; Haresh Sapra; Hyun Shin |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:cmu:gsiawp:1805083183&r=rmg |
| By: | Lundtofte, Frederik (Department of Economics, Lund University) |
| Abstract: | We show in a theoretical model that the expected excess return on any asset depends on its covariance not only with the market portfolio, but also with changes in the representative agent’s estimate. In the empirical specification, this ”estimation factor” is based on realized growth in aggregate dividends and earnings. We test our model by using GMM and compare it to the Fama-French model. The results suggest that the estimation factor is priced. Moreover, the Hansen-Jagannathan distances show that the conditional and static versions of our derived model perform on a par with the corresponding versions of the Fama-French model. |
| Keywords: | learning; incomplete information; equilibrium; factor pricing models |
| JEL: | C13 G12 |
| Date: | 2005–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2005_018&r=rmg |
| By: | Morten Christensen; Eckhard Platen (School of Finance and Economics, University of Technology, Sydney) |
| Abstract: | This paper extends the benchmark framework of Platen (2002) by introducing a sequence of incomplete markets, having uncertainty driven by a Wiener process and a marked point process. By introducing an idealized market, in which all relevant economical variables are observed, but may not all be traded, a generalized growth optimal portfolio (GOP) is obtained and calculated explicitly. The problem of determining the GOP is solved in a general setting which extends existing treatments and provides a clear link to the market prices of risk. The connection between traded securities, arbitrage and market incompleteness is analyzed. This provides a framework for analyzing the degree of incompleteness associated with jump processes, a problem well-known from insurance and credit risk modeling. By staying under the empirical measure, the resulting benchmark model has potential advantages for various applications in finance and insurance. |
| Date: | 2004–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:139&r=rmg |
| By: | Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Xue-Zhong He (School of Finance and Economics, University of Technology, Sydney); Duo Wang |
| Abstract: | We develop a simple behavioural asset pricing model with fundamentalists and chartists to study price behaviour in financial markets. Within our model, the market impact of the weighting process of the conditional mean and variance of the chartists and investors' reactions are analysed. Price dynamics of the deterministic model under/over-reactions are analyzed. It shows different price dynamics and routes to complicated price behaviour when the chartists act as either trend followers or contrarians. It is found that (in a separate paper Chiarella et al (2004)) this analysis can be used to establish some connections between the statistical properties of the nonlinear stochastic system (such as distribution density and autocorrelation patterns of returns, in particular the stylised facts, such as fat tails, skewness, high kurtosis and long memory, observed in high frequency financial data) and the stability and bifurcation of the underlying deterministic system are established. |
| Keywords: | fundamentalists; chartists, stability; bifurcation; investors' under- and over-reactions; stylized facts |
| JEL: | D83 D84 E21 E32 C60 |
| Date: | 2004–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:141&r=rmg |
| By: | Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Xue-Zhong He (School of Finance and Economics, University of Technology, Sydney); Duo Wang |
| Abstract: | Stability and bifurcation analysis of deterministic systems has been widely used in modeling financial markets. However, the impact of such dynamic phenomena on various statistical properties of the corresponding stochastic model, including skewness and excess kurtosis, various autocorrelation (AC) patterns of under and over reactions, and volatility clustering characterised by the long-range dependence of ACs, is not clear and has been very little studied. This paper aims to study this issue. Through a simple behavioural asset pricing model with fundamentalists and chartists, we examine the statistical properties of the model and their connection to the dynamics of the underlying deterministic model. In particular, our analysis leads to some insights into the type of mechanism that may be generating some of the stylised facts, such as fat tails, skewness, high kurtosis and long memory, observed in high frequency financial data. |
| Keywords: | fundamentalists; chartists, stability; bifurcation; investors' under- and over-reactions; stylized facts |
| JEL: | D83 D84 E21 E32 C60 |
| Date: | 2004–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:142&r=rmg |
| By: | Mende, Alexander |
| Abstract: | We study the relationship between foreign exchange trading activity and volatility on the USD/EUR foreign exchange market on the basis of a unique data set around the events of 09/11/2001. We find that volatility and bid-ask spreads are by far larger at that time, but the shock is not persistent. The positive correlation between volume and volatility does not break up, but intensifies strongly indicating the arrival of new information and increased price risk. We conclude that the USD/EUR foreign exchange market maintains its liquid structure and its efficient processing of exogenous shocks. |
| Keywords: | foreign exchange, market microstructure, liquidity, sudden events |
| JEL: | F31 G14 G15 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-312&r=rmg |
| By: | Eckhard Platen (School of Finance and Economics, University of Technology, Sydney); Jason West; Wolfgang Breymann |
| Abstract: | This paper proposes an approach to the intraday analysis of the dynamics of electricity prices. The Growth Optimal Portfolio (GOP) is used as a reference unit in a continuous financial electricity price model. A diversified global portfolio in the form of a market capitalisation weighted index aproximates the GOP. The GOP, measured in units of electricity, is normalised and then modeled as a time transformed square root process of dimension four. The dynamics of the resulting process is empirically verified. Intraday spot electricity prices from the US and Australian markets are used for this analysis. The empirical findings identify a simple but realistic model for examining the volatile behaviours of electricity prices. The proposed model reflects the historical price evolution reasonably well by using a only a few robust but readily observable parameters. The evolution of the tranformed times is modeled via a rapidly evolving market activity. A periodic, ergodic process with deterministic volatility is used to model market activity. |
| Keywords: | intraday analysis; electricity price model; growth optimal portfolio; market activity |
| JEL: | G10 G13 |
| Date: | 2004–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:140&r=rmg |
| By: | Jorge Selaive (Central Bank of Chile); Vicente Tuesta R (Central Bank of Peru) |
| Abstract: | It is well documented that macroeconomic fundamentals are little help in predicting changes in nominal exchange rates compared to the predictions made by a simple random walk. Lettau and Ludvigson (2001) find that fluctuations in the common long-term trend in consumption, asset wealth, and labor income (hereby, consumption-wealth ratio) is a strong predictor of the excess returns. In this paper, we study the role of the consumption-wealth ratio in predicting the change in the nominal exchange rate of a large set of countries. We find evidence that fluctuations in the consumption-wealth ratio help to predict in-sample all the currencies. In terms of out-of-sample forecasts, our results suggest that the consumption-wealth ratio may play a significant role at predicting the Canadian dollar at all horizons and at short-intermediate horizons for some currencies. |
| Keywords: | Exchange Rates, Consumption-Wealth Ratio, Predictability |
| JEL: | C52 F31 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2005-002&r=rmg |