New Economics Papers
on Risk Management
Issue of 2005‒04‒30
eleven papers chosen by

  1. Some Aspects of the Economics of Catastrophe Risk Insurance By Christian Gollier
  2. The Generalized Extreme Value (GEV) Distribution, Implied Tail Index and Option Pricing By Sheri Markose; Amadeo Alentorn
  3. Minimum Variance Unbiased Maximum Likelihood Estimation of the Extreme Value Index By Roger Gay
  4. Are International Equity Markets Really Skewed? By Colm Kearney; Margaret Lynch
  5. Do Institutional Investors Destabilize Stock Prices? Evidence from an Emerging Market By Martin T. Bohl; Janusz Brzeszczynski
  6. Psychological Barriers in Gold Prices By Brian Lucey; Raj Aggarwal
  7. Linkages and relationships between Emerging European and Developed Stock Markets before and after the Russian Crisis of 1997-1998 By Brian Lucey; Svitlana Voronkova
  8. The Evolving Relationship between Gold and Silver 1978-2002: Evidence from a Dynamic Cointegration Analysis: A Note Crisis of 1997-1998 By Brian Lucey; Edel Tully
  9. Are Local or International influences responsible for the pre-holiday behaviour of Irish equities? By Brian Lucey; Edel Tully
  10. Seasonality, Risk And Return In Daily COMEX Gold And Silver Data 1982-2002 By Brian Lucey; Edel Tully
  11. An Analysis of the Impacts of Non-Synchronous Trading On By Silvio John Camilleri; Christopher J. Green

  1. By: Christian Gollier
    Abstract: The ability to share risk efficiently in the economy is essential to welfare and growth. However, the increased frequency of natural catastrophes over the last decade has raised once again questions associated to the limits of insurability in a free-market economy, and to the relevance of public interventions on risk-sharing markets. In this paper, we explore the potential reasons for the lack of insurance specifically associated to catastrophe environmental risks. Our final aim is to link each source of possible market inefficiency to its possible remedies.
    JEL: D52
    Date: 2005
  2. By: Sheri Markose; Amadeo Alentorn
    Abstract: Crisis events such as the 1987 stock market crash, the Asian Crisis and the bursting of the Dot-Com bubble have radically changed the view that extreme events in financial markets have negligible probability. This paper argues that the use of the Generalized Extreme Value (GEV) distribution to model the Risk Neutral Density (RND) function provides a flexible framework that captures the negative skewness and excess kurtosis of returns, and also delivers the market implied tail index of asset returns. We obtain an original analytical closed form solution for the Harrison and Pliska (1981) no arbitrage equilibrium price for the European option in the case of GEV asset returns. The GEV based option prices successfully remove the well known pricing bias of the Black-Scholes model. We explain how the implied tail index is efficacious at identifying the fat tailed behaviour of losses and hence the left skewness of the price RND functions, particularly around crisis events.
    Date: 2005–04–25
  3. By: Roger Gay
    Abstract: New results for ratios of extremes from distributions with a regularly varying tail are presented. Deriving from independence results for certain functions of order statistics, 'consecutive' ratios of extremes are shown to be independent as well as non-distribution specific. They have tractable distributions related to beta distributions. The minimum variance unbiased maximum likelihood estimator has the form of Hill's estimator. It achieves the Cramer-Rao minimum variance bound and is a function of a sufficient statistic. For small sample sizes the form of the moment generating function of the estimator shows it has a gamma distribution.
    Keywords: Tail-index, Minimum variance unbiased, Maximum likelihood, Asymptotically normal
    JEL: C13
    Date: 2005–04
  4. By: Colm Kearney; Margaret Lynch
    Abstract: Although the extreme tails of the distributions of equity returns tend to exhibit more negative than positive returns, very few studies have analysed how pervasive is skewness across entire distributions. We use daily returns on 6 international stock market indices from Britain, France, Germany, Italy, Japan and the United States over 24 years from January 1978 to February 2002 to search for skewness in the tails, in different intervals, and in the entire distributions using binomial distribution tests and two distribution free tests, the Wilcoxon Rank Sum Test and the Siegel Tukey test. We find limited evidence of statistically significant skewness in the tails, with more skewness closer to the means. Classification-
    Keywords: Asymmetric returns, skewness, international equity markets.
    Date: 2005–04–20
  5. By: Martin T. Bohl; Janusz Brzeszczynski
    Abstract: In this paper, we provide empirical evidence on the impact of institutional investors on stock market returns dynamics in Poland. The Polish pension system reform in 1999 and the associated increase in institutional ownership due to the investment activities of pension funds are used as an unique institutional characteristic. Performing a variant of the event study methodology in an asymmetric GARCH framework we find robust empirical evidence that the increase of institutional ownership has changed the autocorrelation and volatility structure of aggregate stock returns. However, the findings do not support the hypothesis that institutional investors have destabilized stock prices. The results are interpretable in favor of a stabilizing effect on index stock returns induced by institutional trading.</font></p>
    Keywords: institutional traders, Polish stock market, pension fund investors, stock market volatility, asymmetric GARCH models
    JEL: G14 G23
    Date: 2005
  6. By: Brian Lucey; Raj Aggarwal
    Abstract: This paper examines for the first time the existence of psychological barriers in a variety of daily and intra-day gold price series. This paper uses a number of statistical procedures and presents evidence of psychological barriers in gold prices. We document that prices in round numbers act as barriers with important effects on the conditional mean and variance of the gold price series around psychological barriers. Classification-
    Date: 2005–04–20
  7. By: Brian Lucey; Svitlana Voronkova
    Abstract: This paper examines the linkages between the Russian stock market and those of its largest neighbors in Central and Eastern Europe, and the world stock markets over the 10 year period 1995-2004. What we find is that there was a major change in the nature of these relationships after the so called Russian Crisis of 1997-1998. The nature of this change is such that we can no longer rely on the the traditional methods used to examine linkages between equity markets. Using a more appropriate set of tools we find that the major influences on the Russian stock market have become the equity markets of the European Union and the USA. There is very little evidence of influence from (or to) regional markets such as Poland or Hungary. Classification-
    Keywords: Stock Market Integration, CEE Stock markets, Russian Stock Market, Cointegration
    Date: 2005–04–20
  8. By: Brian Lucey; Edel Tully
    Abstract: Traditionally, analysts and traders have expected to see a stable, reasonably predictable, relationship between the price (and thus the rate of return) of gold and silver. Both these metals retain important industrial, commercial and investment uses. Recent research has cast some doubt on this assumption. We find that while over the 1990’s the relationship may well have been more unstable, when a longer timeframe is examined the relationship is stable but weakening. This we hypothesise is due to the changing nature of the demand patterns for gold versus silver. Classification-
    Keywords: Cointegration, Gold
    Date: 2005–04–20
  9. By: Brian Lucey; Edel Tully
    Abstract: The preholiday behaviour of equity price and return indices on the Irish Stock Exchange do nor display consistent positive pre-holiday returns. This is contrary to the majority of studies on this area, and the result is found across a number of sectoral indices. The analysis also indicates that these curious results are driven by local, as opposed to international, influences Classification-
    Keywords: Ireland, Non-Parametric, Stock Returns
    Date: 2005–04–20
  10. By: Brian Lucey; Edel Tully
    Abstract: This paper examines the conditional and unconditional mean returns and variance of returns of daily gold and silver contracts over the 1982-2002 period. Despite the importance of these metals as industrial and investment products, they have received scant attention in recent years. In particular, we focus on the issue of whether there exists detectable daily seasonality in these moments. Using COMEX cash and futures data we find that under both parametric and nonparametric analysis the evidence is weak in the issue of daily seasonality for the mean but strong for the variance. There appears to be a negative Monday effect in both gold and silver, across cash and futures markets. When the mean and variance are analysed simultaneously in a GARCH framework we note that a leveraged GARCH model provides a best fit for the data and that in framework the Monday seasonal does not disappear, indicating that it is not a risk-related artefact, the Monday dummy in the variance equations being significant also. No evidence of an ARCH-in-Mean effect is found. Classification-
    Keywords: Seasonality GARCH Models, Gold, and Silver
    Date: 2005–04–20
  11. By: Silvio John Camilleri (Banking & Finance Dept. - University of Malta); Christopher J. Green (Economics Dept., - Loughborough University)
    Abstract: The serial correlation effects which non-synchronous trading can induce in financial data have been documented by various researchers. In this paper we investigate non-synchronous trading effects in terms of the predictability that may be induced in the values of stock indices. This analysis is applied to emerging-market data, on the grounds that such markets might be less liquid and thus prone to a higher degree of non- synchronous trading. We use both a daily data set and a higher frequency one, since the latter is a prerequisite for capturing intra-day variations in trading activity. When considering one-minute interval data, we obtain clear evidence of predictability between indices with different degrees of non-synchronous trading. We then propose a simple test to infer whether such predictability is mainly attributable to non- synchronous trading or an actual delayed adjustment on part of traders. The results obtained from an intra-day analysis suggest that the former cause seems a better explanation for the observed predictability. Future research in this area is needed to shed light on the degree of data predictability which may be exclusively attributed to non-synchronous trading, and how empirical results may be influenced by the chosen data frequency.
    Keywords: Non-Synchronous Trading, Stock Markets, National Stock Exchange of India, High-Frequency Data.
    JEL: G12 G14
    Date: 2005–04–27

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.