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on Risk Management |
| By: | John Galbraith; Serguei Zernov |
| Abstract: | Dependence among large observations in equity markets is usually examined using second-moment models such as those from the GARCH or SV classes. Such models treat the entire set of returns, and tend to produce very similar estimates on the major equity markets, with a sum of estimated GARCH parameters, for example, slightly below one. Using dependence measures from extreme value theory, however, it is possible to characterie dependence among only the largest (or largest negative) financial returns; these alternative characterizations of clustering have important applications in risk management. In this paper we compare the NASDAQ and degree of extreme dependence. Although GARCH-type characterizations of second-moment dependence in the two markets produce similar results, the same is not true in the extremes: we find significantly more extreme dependence in the NASDAQ returns. More generally, the study of extreme dependence may reveal contrasts which are obscured when examining the conditional second moment. |
| JEL: | G10 G18 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:mcl:mclwop:2006-14&r=rmg |
| By: | Gerke, Wolfgang; Mager, Ferdinand; Reinschmidt, Timo; Schmieder, Christian |
| Abstract: | With this paper we seek to contribute to the literature on pension insurance systems. The financial literature tends to focus exclusively on the US pension insurance system. This is the first major empirical study to address the German occupational pension insurance (PSVaG) plan in Germany. The study is based on a Merton-type one-factor model, in which we determine the credit portfolio risk profile of the occupational pension insurance plan and compare two alternative pricing plans. We find that there is a low, yet non-negligible risk of very high losses that may threaten the existence of the occupational pension insurance plan (PSVaG). While relating risk premiums to firms’ default probabilities would cause them to diverge widely, a marginal risk contribution method would produce less pronounced differences compared to the current, uniform pricing plan. |
| Keywords: | Pension insurance, Risk-adjusted premiums, Credit portfolio risk |
| JEL: | C15 G18 G22 G23 G28 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp2:4772&r=rmg |
| By: | Risager, Ole (Department of Economics, Copenhagen Business School) |
| Abstract: | A number of influential studies have documented a strong value premium for US stocks over the period 1963 to 1990 (Fama and French (1992), Lakonishok et al. (1994)). Stocks with low price-earnings multiples, price-book values and other measures of value are reported to have given a higher mean return than the high multiple growth firms. Work by Basu (1997) and others have shown that the value dominance is also a feature of the earlier market history of the United States. The value premium is reported also to exist in a number of other countries over the period 1975 to 1995 (Fama and French (1998)). The results for these markets are based on Morgan Stanley (MSCI) data. Since these data are softer due to a relatively short time horizon and due to a small number of stocks in some cases down at 10 stocks, the conclusions are likely to be less robust. There is therefore a need for more research on this issue. The purpose of this paper is to report evidence for the Danish stock market and to test whether the value premium is a genuine long-term feature of the market or just a phenomenon that pops up now and then. To research this issue we have collected accounting and stock market data for more than half a century. We report in particular on the insights obtained when portfolios are formed on the basis of the price-earnings multiple. The paper shows that there is a value premium. The paper also analyzes whether the premium is likely to be due to risk (Fama and French (1992,98)) or mispricing as emphasized by the Behavioral Finance School (Chan et al. (2000), Lakonishok et al. (1994) and La Porta et al. (1997)). |
| Keywords: | Stock market; |
| JEL: | H00 |
| Date: | 2005–11–23 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cbsnow:2005_020&r=rmg |
| By: | Alejandro Balbás (Universidad Carlos III); Raquel Balbás (Universidad Autónoma de Madrid); Silvia Mayoral (Universidad de Navarra) |
| Abstract: | The minimization of general risk or dispersion measures is becoming more and more important in Portfolio Choice Theory. There are two major reasons. Firstly, the lack of symmetry in the returns of many assets provokes that the classical optimization of the standard deviation may lead to dominated strategies, from the point of view of the second order stochastic dominance. Secondly, but not less important, many institutional investors must respect legal capital requirements, which may be more easily studied if one deals with a risk measure related to capital losses. This paper proposes a new method to simultaneously minimize several risk or dispersion measures. The representation theorems of risk measures are applied to transform the general risk minimization problem in a minimax problem, and later in a linear programming problem between infinite-dimensional Banach spaces. Then, new necessary and sufficient optimality conditions are stated and a simplex-like algorithm is developed. The algorithm solves the dual (and therefore the primal) problem and provides both optimal portfolios and their sensitivities. The approach is general enough and does not depend on any particular risk measure, but some of the most important cases are specially analyzed. |
| Keywords: | Risk Measure. Deviation Measure. Portfolio Selection. Infinite-Dimensional Linear Programming. Simpl |
| JEL: | G11 |
| URL: | http://d.repec.org/n?u=RePEc:una:unccee:wp1106&r=rmg |
| By: | Harju, Kari (Swedish School of Economics and Business Administration); Hussain, Mujahid (Swedish School of Economics and Business Administration) |
| Abstract: | Using a data set consisting of three years of 5-minute intraday stock index returns for major European stock indices and U.S. macroeconomic surprises, the conditional mean and volatility behaviors in European market were investigated. The findings suggested that the opening of the U.S market significantly raised the level of volatility in Europe, and that all markets respond in an identical fashion. Furthermore, the U.S. macroeconomic surprises exerted an immediate and major impact on both European stock markets’ returns and volatilities. Thus, high frequency data appear to be critical for the identification of news that impacted the markets. |
| Keywords: | Macroeconomic surprises; intraday seasonality; Flexible Fourier Form; conditional mean; conditional volatility; information spillover |
| Date: | 2006–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhb:hanken:0512&r=rmg |
| By: | Harju, Kari (Swedish School of Economics and Business Administration); Hussain, Syed Mujahid (Swedish School of Economics and Business Administration) |
| Abstract: | Utilizing concurrent 5-minute returns, the intraday dynamics and inter-market dependencies in international equity markets were investigated. A strong intraday cyclical autocorrelation structure in the volatility process was observed to be caused by the diurnal pattern. A major rise in contemporaneous cross correlation among European stock markets was also noticed to follow the opening of the New York Stock Exchange. Furthermore, the results indicated that the returns for UK and Germany responded to each other’s innovations, both in terms of the first and second moment dependencies. In contrast to earlier research, the US stock market did not cause significant volatility spillover to the European markets. |
| Keywords: | Intraday; diurnal pattern; conditional mean; volatility spillovers; Flexible Fourier Form; VAR; EGARCH; asymmetry |
| Date: | 2006–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhb:hanken:0516&r=rmg |