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on Risk Management |
| By: | Andrew Ang; Joseph chen |
| Abstract: | A conditional one-factor model can account for the spread in the average returns of portfolios sorted by book-to-market ratios over the long run from 1926-2001. In contrast, earlier studies document strong evidence of a book-to-market effect using OLS regressions in the post-1963 sample. However, the betas of portfolios sorted by book-to-market ratios vary over time and in the presence of time-varying factor loadings, OLS inference produces inconsistent estimates of conditional alphas and betas. We show that under a conditional CAPM with time-varying betas, predictable market risk premia, and stochastic systematic volatility, there is little evidence that the conditional alpha for a book-to-market trading strategy is statistically different from zero. |
| JEL: | C51 G12 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11903&r=rmg |
| By: | Geert Bekaert; Robert J. Hodrick; Xiaoyan Zhang |
| Abstract: | We examine international stock return comovements using country-industry and country-style portfolios. We first establish that parsimonious risk-based factor models capture the covariance structure of the data better than the popular Heston-Rouwenhorst (1994) model. We then establish the following stylized facts regarding stock return comovements. First, we do not find evidence for an upward trend in return correlations, excpet for the European stock markets. Second, the increasing imporatnce of industry factors relative to country factors was a short-lived, temporary phenomenon. Third, we find no evidence for a trend in idiosyncratic risk in any of the countries we examine. |
| JEL: | G12 G11 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11906&r=rmg |
| By: | Massimo Guidolin; Giovanna Nicodano |
| Abstract: | This paper investigates how variance risk affects the portfolio choice of an investor faced with an international asset menu that includes European and North American small equity portfolios. Small capitalization stocks are known to display asymmetric risk across bull and bear markets. Therefore we model stock returns as generated by a multivariate regime switching process that is able to account for both non-normality and predictability of stock returns. Non-normality matters for portfolio choice because the investor has a power utility function, implying a preference for positively skewed returns and aversion to kurtosis. We find that small cap portfolios, that are shown to display negative co-skewness with other assets, command large optimal weights only when regime switching, and hence variance risk, is ignored. Otherwise a rational investor ought to hold a well-diversified portfolio. However, the availability of small caps substantially increases expected utility, in the order of riskless annualized gains of 3 percent and higher. |
| Keywords: | Investments, Foreign |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-075&r=rmg |
| By: | Tony Guida (Université de Savoie); Olivier Matringe (UNCTAD) |
| Abstract: | This paper examines the forecasting performance of GARCH’s models used with agricultural commodities data. We compare different possible sources of forecasting improvement, using various statistical distributions and models. We have chosen to confine our analysis on four indices which are the cocoa LIFFE continuous futures, the cocoa NYBOT continuous futures, the coffee NYBOT continuous futures and the CAC 40, the French major stock index. As one may see the sample of indices is containing a genuine stock index also. The implied goal is to find out if the GARCH models are more fitted for stock indices than for agricultural commodities. The forecasts and the predictive power are evaluated using traditional methods such as the coefficient of determination in the regression of the true variance on the predicted one. We find that agricultural commodities time series could not be used with the same methodology than the financial series. Moreover it is interesting to point out that no real “model leader” was found in this sample of commodities. Finally increased forecast performance is not solely observed using non-gaussian distribution in commodities. |
| Keywords: | GARCH, commodities, volatility, forecasting, risk management |
| JEL: | C13 C32 C53 G15 |
| Date: | 2005–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0512021&r=rmg |
| By: | Dimitris Kenourgios (University of Athens); Aristeidis Samitas (University of Aegean); Panagiotis Drosos (University of Sheffield) |
| Abstract: | This paper investigates the hedging effectiveness of the Standard & Poor’s (S&P) 500 stock index futures contract using weekly settlement prices for the period July 3rd, 1992 to June 30th, 2002. Particularly, it focuses on three areas of interest: the determination of the appropriate model for estimating a hedge ratio that minimizes the variance of returns; the hedging effectiveness and the stability of optimal hedge ratios through time; an in-sample forecasting analysis in order to examine the hedging performance of different econometric methods. The hedging performance of this contract is examined considering alternative methods, both constant and time-varying, for computing more effective hedge ratios. The results suggest the optimal hedge ratio that incorporates nonstationarity, long run equilibrium relationship and short run dynamics is reliable and useful for hedgers. Comparisons of the hedging effectiveness and in-sample hedging performance of each model imply that the error correction model (ECM) is superior to the other models employed in terms of risk reduction. Finally, the results for testing the stability of the optimal hedge ratio obtained from the ECM suggest that it remains stable over time. |
| Keywords: | Hedging effectiveness; minimum variance hedge ratio (MVHR); hedging models; Standard & Poor’s 500 stock index futures |
| JEL: | G13 G15 |
| Date: | 2005–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0512018&r=rmg |
| By: | Ingyu Chiou (Eastern Illinois University); James Jordan- Wagner (Eastern Illinois University); Hai-Chin Yu (Chung Yuan University, Taiwan) |
| Abstract: | This paper studies how one currency market affects another currency market in a different time zone, using various contracts of the opening and closing yen-dollar exchange rates traded in Tokyo, London, and New York. We find strong and consistent evidence that the three major currency markets interact significantly. For each of five contracts we examine, Tokyo leads London and New York, London leads New York and Tokyo, and New York leads Tokyo and London. In particular, the causality relationship is much stronger when one market trades right after another. Although our results show violations of market efficiency, these findings cannot be interpreted as the existence of easy arbitrage opportunities among three markets. Instead, these strong causality relationships may be due to some unique characteristics of each of three currency markets, which cannot be observed directly. |
| Keywords: | price transmission, causality, VAR |
| JEL: | G15 |
| Date: | 2005–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0512024&r=rmg |
| By: | Bjuggren, Per-Olof (Jönköping International Business School, JIBS); Wiberg, Daniel (Jönköping International Business School, JIBS) |
| Abstract: | A necessary criterion for a performance measure in corporate governance is the degree to which it mirrors how well the management succeeds in maximizing firm value. Such a performance measure is marginal q which links changes in firm value to the investments decided by the management. Empirical studies of investment and performance based on marginal q have demonstrated the usefulness of this measure. Most research however, has mainly focused on long-term performance. This paper takes a short-term perspective and, based on the marginal q-theory, considers how market values change in the extreme stock price cycle of a stock market bubble. We find an anomaly in form of a new industry specific effect that, in addition to investment, explains changes in firm value. |
| Keywords: | Marginal q; Investment; Stock bubbles; Different industries |
| JEL: | G14 G31 G34 L21 |
| Date: | 2005–12–28 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cesisp:0045&r=rmg |