nep-rmg New Economics Papers
on Risk Management
Issue of 2005‒12‒14
two papers chosen by
Stan Miles
York University

  1. Phase Distribution and Phase Correlation of Financial Time Series By Ming-Chya Wu; Ming-Chang Huang; Hai-Chin Yu; Thomas Chiang
  2. The Implied Equity Risk Premium - An Evaluation of Empirical Methods By David Schröder

  1. By: Ming-Chya Wu (Academic Sinica, Taiwan); Ming-Chang Huang (Chung Yuan University, Taiwan); Hai-Chin Yu (Chung Yuan University, Taiwan); Thomas Chiang (Drexel University, USA)
    Abstract: Scaling, phase distribution and phase correlation of financial time series are investigated based on the Dow Jones Industry Average (DJIA) and NASDAQ 10-minute intraday data for a period from Aug. 1 1997 to Dec. 31 2003. The returns of the two indices are shown to have nice scaling behaviors and belong to stable distributions according to the criterion of Levy's alpha stable distribution condition. A novel approach catching characteristic features of financial time series based on the concept of instantaneous phase is further proposed to study phase distribution and correlation. The analysis of phase distribution concludes return time series fall into a class which is different from other non-stationary time series. The correlation between returns of the two indices probed by the distribution of phase difference indicates there was a remarkable change of trading activities after the event of 911 attack, and this change persisted in later trading activities.
    Keywords: Phase Distribution, High Frequency Data, Scaling Analysis, Levy Distribution, Stock Market, Frequency Variant
    JEL: G
    Date: 2005–12–10
  2. By: David Schröder
    Abstract: A new approach of estimating a forward-looking equity risk premium (ERP) is to calculate the implied risk premium using present value (PV) formulas. This paper compares implied risk premia obtained from dierent PV models and evaluates them by analyzing their underlying firmspecific cost-of-capital estimates. It is shown that specific versions of dividend discount models (DDM) and residual income models (RIM) lead to similar ERP estimates. However, the results of cross-sectional regression tests of individual firm risk suggest that there are qualitative dierences between both approaches. Expected firm risk obtained from the DDM is more in line with standard asset pricing models and performs better in predicting future stock returns than estimates from the RIM.
    Keywords: equity risk premium, cost of capital, expected stock returns
    JEL: G12
    Date: 2005–05

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