nep-rmg New Economics Papers
on Risk Management
Issue of 2006‒03‒11
five papers chosen by
Stan Miles
York University

  1. The long-run relationship between market risk and return By John M Maheu; Thomas H McCurdy
  2. Evaluating a nonlinear asset pricing model on international data By Asgharian, Hossein; Karlsson, Sonnie
  3. Is There Hedge Fund Contagion? By Nicole M. Boyson; Christof W. Stahel; Rene M. Stulz
  4. Forecasting interest rates: A Comparative assessment of some second generation non-linear model By Dilip M. Nachane; Jose G. Clavel
  5. Investigating Nonlinear Speculation in Cattle, Corn and Hog Futures Markets Using Logistic Smooth Transition Regression Models By Andreas Röthig; Carl Chiarella

  1. By: John M Maheu; Thomas H McCurdy
    Abstract: Many finance applications require an annual measure of the market premium for equity. Using a long sample combined with a very parsimonious conditional variance function, we find a positive relationship between market risk and expected excess returns. Unlike traditional exponential-smoothing filters, our specification has a well-defined unconditional variance and allows for mean reverting volatility forecasts. Although total volatility is significantly priced, the smooth long-run component in volatility is more important for capturing the dynamics of the premium. This parameterization produces realistic time-varying market equity premium estimates over the entire 1840-2003 period. For example, our results show that the premium was relatively low in the mid-1990s but has recently increased. Results are robust to univariate specifications that condition on either levels or logs of past realized volatility (RV), as well as to a new bivariate risk-return model of returns and RV for which the conditional variance of excess returns is the conditional expectation of the realized volatility process.
    JEL: G12 C50
  2. By: Asgharian, Hossein (Department of Economics, Lund University); Karlsson, Sonnie (Department of Economics, Lund University)
    Abstract: The paper analyses the ability of a nonlinear asset pricing model suggested by Dittmar (2002) to explain the returns on international value and growth portfolios. For comparison we use some competing pricing models; such as the ICAPM, the exchange rate risk augmented ICAPM and the international two-factor model proposed by Fama and French (1998). All models are evaluated both unconditionally and conditionally. The models are evaluated by applying the Hansen and Jagannathan distance measure. We also employ several alternative measures to ensure a robust comparison of the models. We find support for the model of Dittmar (2002). Evaluated conditionally, this model successfully passes all the different diagnostic tests performed in the analysis.
    Keywords: nonlinear asset pricing; international markets; Hansen and Jagannathan distance; value effect
    JEL: G12 G15
    Date: 2006–02–27
  3. By: Nicole M. Boyson; Christof W. Stahel; Rene M. Stulz
    Abstract: We examine whether hedge funds experience contagion. First, we consider whether extreme movements in equity, fixed income, and currency markets are contagious to hedge funds. Second, we investigate whether extreme adverse returns in one hedge fund style are contagious to other hedge fund styles. To conduct this examination, we estimate binomial and multinomial logit models of contagion using daily returns on hedge fund style indices as well as monthly returns on indices with a longer history. Our main finding is that there is no evidence of contagion from equity, fixed income, and foreign exchange markets to hedge funds, except for weak evidence of contagion for one single daily hedge fund style index. By contrast, we find strong evidence of contagion across hedge fund styles, so that hedge fund styles tend to have poor coincident returns.
    JEL: G11 G12 G18
    Date: 2006–03
  4. By: Dilip M. Nachane (Indira Gandhi Institute of Development Research); Jose G. Clavel (Universidad de Murcia)
    Abstract: Modelling and forecasting of interest rates has traditionally proceeded in the framework of linear stationary models such as ARMA and VAR, but only with moderate success. We examine here four models which account for several specific features of real world asset prices such as non-stationarity and non-linearity. Our four candidate models are based respectively on wavelet analysis, mixed spectrum analysis, non-linear ARMA models with Fourier coefficients, and the Kalman filter. These models are applied to weekly data on interest rates in India, and their forecasting performance is evaluated vis-vis three GARCH models (GARCH (1,1), GARCH-M (1,1) and EGARCH (1,1)) as well as the random walk model. The Kalman filter model emerges at the top, with wavelet and mixed spectrum models also showing considerable promise.
    Keywords: Interest rates, wavelets, mixed spectra, non-linear ARMA, Kalman filter, GARCH, Forecast encompassing
    Date: 2005
  5. By: Andreas Röthig (Institute of Economics, Darmstadt University of Technology and Center for Empirical Marcroeconomics, University of Bielefeld); Carl Chiarella (School of Finance and Economics, University of Technology, Sydney)
    Abstract: This article explores nonlinearities in the response of speculators? trading activity to price changes in live cattle, corn, and lean hog futures markets. Analyzing weekly data from March 4, 1997 to December 27, 2005, we reject linearity in all of these markets. Using smooth transition regression models, we find a similar structure of nonlinearities with regard to the number of different regimes, the choice of the transition variable, and the value at which the transition occurs.
    Keywords: futures marktes; speculation; nonlinear dynamics; smooth transition regression model
    JEL: G10 G11 C22 C53
    Date: 2006–02–01

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