New Economics Papers
on Risk Management
Issue of 2006‒05‒13
six papers chosen by

  1. Estimation of the Default Risk of Publicly Traded Canadian Companies By Georges Dionne; Sadok Laajimi; Sofiane Mejri; Madalina Petrescu
  2. Exploratory Graphics of a Financial Dataset By Antony Unwin; Martin Theus; Wolfgang Härdle
  3. Interpreting Prediction Market Prices as Probabilities By Justin Wolfers; Eric Zitzewitz
  4. Risk-Adjusted Forecasts of Oil Prices By Patrizio Pagano; Massimiliano Pisani
  5. The Expected Value Premium By Long Chen; Ralitsa Petkova; Lu Zhang
  6. Firm-Specific Information and the Efficiency of Investment By Anusha Chari; Peter Blair Henry

  1. By: Georges Dionne; Sadok Laajimi; Sofiane Mejri; Madalina Petrescu
    Abstract: In this paper, we investigate the hybrid contingent claim approach with publicly traded Canadian companies listed on the Toronto Stock Exchange. Our goal is to assess how combining their continuous valuation by the market with the value given in their financial statements improves our ability to predict their probability of default. Our results indicate that the predicted structural probabilities of default (PDs from the structural model) contribute significantly to explaining default probabilities when PDs are included alongside the retained accounting variables. We also show that quarterly updates to the PDs add a large amount of dynamic information to explain the probabilities of default over the course of a year. This flexibility would not be possible with a reduced-form model. We also conducted a preliminary analysis of correlations between sructural probabilities of default for the firms in our database. Our results indicate that there are substantial correlations in the studied data.
    Keywords: Default risk, public firm, structural model, reduced form model, hybrid model, probit model, Toronto Stock Exchange, correlations between default probabilities
    JEL: G21 G24 G28 G33
    Date: 2006
  2. By: Antony Unwin; Martin Theus; Wolfgang Härdle
    Keywords: company rating, default probability, support vector machines, colour coding
    JEL: C14 G33 C45
    Date: 2006–04
  3. By: Justin Wolfers; Eric Zitzewitz
    Abstract: While most empirical analysis of prediction markets treats prices of binary options as predictions of the probability of future events, Manski (2004) has recently argued that there is little existing theory supporting this practice. We provide relevant analytic foundations, describing sufficient conditions under which prediction markets prices correspond with mean beliefs. Beyond these specific sufficient conditions, we show that for a broad class of models prediction market prices are usually close to the mean beliefs of traders. The key parameters driving trading behavior in prediction markets are the degree of risk aversion and the distribution of beliefs, and we provide some novel data on the distribution of beliefs in a couple of interesting contexts. We find that prediction markets prices typically provide useful (albeit sometimes biased) estimates of average beliefs about the probability an event occurs.
    JEL: D4 D8 G13
    Date: 2006–05
  4. By: Patrizio Pagano (Bank of Italy, Economic Research Department); Massimiliano Pisani (Bank of Italy, Economic Research Department)
    Abstract: This paper documents the existence of a significant forecast error on crude oil futures, particularly evident since the mid-1990s, which is negative on average and displays a non-trivial cyclical component (risk premium). We show that the forecast error on oil futures could have been explained in part by means of real-time US business cycle indicators, such as the degree of utilized capacity in manufacturing. An out-of-the-sample prediction exercise reveals that futures which are adjusted to take into account this time-varying component produce significantly better forecasts than those of the unadjusted futures and random walk, particularly at horizons of more than 6 months.
    Keywords: Oil, Forecasting, Futures
    JEL: E37 E44 G13 Q4
    Date: 2006–03
  5. By: Long Chen; Ralitsa Petkova; Lu Zhang
    Abstract: Fama and French (2002) estimate the equity premium using dividend growth rates to measure the expected rate of capital gain. We use similar methods to study the value premium. From 1941 to 2002, the expected HML return is on average 5.1% per annum, consisting of an expected-dividend-growth component of 3.5% and an expected-dividend-to-price component of 1.6%. The ex-ante HML return is also countercyclical: a positive, one-standard-deviation shock to real consumption growth rate lowers this premium by about 0.45%. Unlike the equity premium, there is only mixed evidence suggesting that the value premium has declined over time.
    JEL: G1
    Date: 2006–05
  6. By: Anusha Chari; Peter Blair Henry
    Abstract: We use a new firm-level dataset to examine the efficiency of investment in emerging economies. In the three-year period following stock market liberalizations, the growth rate of the typical firm's capital stock exceeds its pre-liberalization mean by an average of 5.4 percentage points. Cross-sectional changes in investment are significantly correlated with the signals about fundamentals embedded in the stock price changes that occur upon liberalization. Panel data estimations show that a 1-percentage point increase in a firm's expected future sales growth predicts a 4.1-percentage point increase in its investment; country-specific changes in the cost of capital predict a 2.3-percentage point increase in investment; firm-specific changes in risk premia do not affect investment.
    JEL: E F G
    Date: 2006–05

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