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on Risk Management |
| By: | Lorenzo Cappiello (European Central Bank); Nikolaos Panigirtzoglou (Queen Mary, University of London) |
| Abstract: | The goal of this study is to measure market prices of risk and the associated foreign exchange risk premia extending the approach proposed by Balduzzi and Robotti (2001) to an international framework. Estimations of minimum variance stochastic discount factors permits the determination of market prices of risk, which, in turn, in an international framework, allow to compute foreign exchange risk premia. Market prices of risk are time-varying and surge during financial turmoil. This may be interpreted as an increase of the investors’ coefficient of risk aversion during turbulent financial markets. Foreign exchange risk premia are also time-varying and they exhibit most variation from the early ‘70s onwards, when the Bretton Wood exchange rate system collapsed. |
| Keywords: | Foreign exchange, Risk premia, Pricing kernel |
| JEL: | G12 G15 F31 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp547&r=rmg |
| By: | Prasad Bidarkota (Department of Economics, Florida International University); J. Huston McCulloch (Department of Economics, Ohio State University) |
| Abstract: | We develop a framework in which information about firm value is noisily observed. Investors are then faced with a signal extraction problem. Solving this would enable them to probabilistically infer the fundamental value of the firm and, hence, price its stocks. If the innovations driving the fundamental value of the firm and the noise that obscures this fundamental value in observed data come from non-Gaussian thick-tailed probability distributions, then the implied stock returns could exhibit volatility clustering. We demonstrate the validity of this effect with a simulation study. |
| Keywords: | stock returns, volatility clusters, GARCH processes, signal extraction, thick-tailed distributions, simulations |
| JEL: | C22 E31 C53 |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:fiu:wpaper:0304&r=rmg |