nep-rmg New Economics Papers
on Risk Management
Issue of 2006‒02‒19
four papers chosen by
Stan Miles
York University

  1. Simulating Stock Returns under switching regimes - a new test of market efficiency By Meenagh, David; Minford, Patrick; Peel, David
  2. Five Open Questions About Prediction Markets By Justin Wolfers; Eric Zitzewitz
  4. Hedging Effectiveness in the Index Futures Market By Copeland, Laurence; Zhu, Yanhui

  1. By: Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Peel, David
    Abstract: A model of profits switches between four regimes with fixed probabilities; the rationally expected profits stream implies the stock market value. This efficient market model is not rejected by UK post-war time-series behaviour of either profits or the FTSE index.
    Keywords: regime switching; stock returns; efficient markets; rational expectations
    JEL: C15 C5 G14
    Date: 2006–02
  2. By: Justin Wolfers (Wharton, University of Pennsylvania, CEPR, NBER and IZA Bonn); Eric Zitzewitz (Stanford GSB)
    Abstract: Interest in prediction markets has increased in the last decade, driven in part by the hope that these markets will prove to be valuable tools in forecasting, decision-making and risk management - in both the public and private sectors. This paper outlines five open questions in the literature, and we argue that resolving these questions is crucial to determining whether current optimism about prediction markets will be realized.
    Keywords: prediction markets, information markets, event futures, political forecasting, prediction IVs
    JEL: C9 D7 D8 G1 M2
    Date: 2006–02
  3. By: Ángel León (Universidad de Alicante); Gonzalo Rubio (Universidad del País Vasco); Gregorio Serna (Universidad de Castilla-La Mancha)
    Abstract: This paper proposes a GARCH-type model allowing for time-varying volatility, skewness and kurtosis. The model is estimated assuming a Gram-Charlier series expansion of the normal density function for the error term, which is easier to estimate than the non-central t distribution proposed by Harvey and Siddique (1999). Moreover, this approach accounts for time-varying skewness and kurtosis while the approach by Harvey and Siddique (1999) only accounts for nonnormal skewness. We apply this method to daily returns of a variety of stock indices and exchange rates. Our results indicate a significant presence of conditional skewness and kurtosis. It is also found that specifications allowing for time-varying skewness and kurtosis outperform specifications with constant third and fourth moments.
    Keywords: Conditional volatility, skewness and kurtosis; Gram-Charlier series expansion; Stock indices.
    JEL: G12 G13 C13 C14
    Date: 2004–03
  4. By: Copeland, Laurence (Cardiff Business School); Zhu, Yanhui
    Abstract: This paper addresses the question of how far hedging effectiveness can be improved by the use of more sophisticated models of the relationship between futures and spot prices. Working with daily data from six major index futures markets, we show that, when the cost of carry is incorporated in to the model, the two series are cointegrated, as anticipated. Fitting an ECM with a GJR-GARCH model of the variance process, we derive the implied optimal hedge ratios and compare their out-of-sample hedging effectiveness with OLS-based hedges. The results suggest little or no improvement over OLS.
    Date: 2006–02

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