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on Risk Management |
| By: | Stanislav Anatolyev (NES) |
| Abstract: | We develop and evaluate sequential testing tools for a class of nonparametric tests for predictability of financial returns that includes, in particular, the directional accuracy and excess profitability tests. We consider both the retrospective context where a researcher wants to track predictability over time in a historical sample, and the monitoring context where a researcher conducts testing as new observations arrive. Throughout, we elaborate on both two-sided and one-sided testing, focusing on linear monitoring boundaries that are continuations of horizontal lines corresponding to retrospective critical values. We illustrate our methodology by testing for directional and mean predictability of returns in a dozen of young stock markets in Eastern Europe. |
| Keywords: | Testing, monitoring, predictability, stock returns |
| JEL: | C12 C22 C52 C53 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0071&r=rmg |
| By: | Christine Wilson (Department of Agricultural Economics, College of Agriculture, Purdue University); Allen Featherstone (Department of Agricultural Economics, Kansas State University) |
| Abstract: | The dynamics in stock returns and the market return for 21 food and agribusiness firms are estimated in a threshold switching-regression framework. Threshold adjustment levels and capital asset pricing model risk parameters are estimated and tested. Results indicate risk parameters differ for alternative regimes and are not constant over time. Accounting for periods of temporary disequilibrium leads to notably more stable risk measurement estimates. |
| Keywords: | CAPM, Cointegration, Risk, Threshold |
| JEL: | G1 G12 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:pae:wpaper:06-08&r=rmg |
| By: | Christos Ioannidis and Alexandros Kontonikas |
| Abstract: | This paper investigates the impact of monetary policy on stock returns in thirteen OECD countries over the period 1972-2002. Our results indicate that monetary policy shifts significantly affect stock returns, thereby supporting the notion of monetary policy transmission via the stock market. Our contribution with respect to previous work is threefold. First, we show that our findings are robust to various alternative measures of stock returns. Second, our inferences are adjusted for the non-normality exhibited by the stock returns data. Finally, we take into account the increasing co-movement among international stock markets. The sensitivity analysis indicates that the results remain largely unchanged. |
| JEL: | E44 E52 E60 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2006_12&r=rmg |
| By: | Bacchetta, Philippe; Mertens, Elmar; van Wincoop, Eric |
| Abstract: | There is widespread evidence of excess return predictability in financial markets. In this paper we examine whether this predictability is related to expectational errors. To consider this issue, we use data on survey expectations of market participants in the stock market, the foreign exchange market, and the bond and money markets in various countries. We find that the predictability of expectational errors coincides with the predictability of excess returns: when a variable predicts expectational errors in a given market, it typically predicts the excess return as well. Understanding expectational errors appears crucial for explaining excess return predictability. |
| Keywords: | excess returns; expectations survey; predictability |
| JEL: | F31 G12 G14 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5770&r=rmg |
| By: | MacMinn, Richard; Richter, Andreas |
| Abstract: | In 2003, Swiss Re introduced a mortality-based security designed to hedge excessive mortality changes for its life book of business. The concern was apparently brevity risk, i.e., the risk of premature death. The brevity risk due to a pandemic is similar to the property risk associated with catastrophic events such as earthquakes and hurricanes and the security used to hedge the risk is similar to a CAT bond. This work looks at the incentives associated with insurance-linked securities. It considers the trade-offs an insurer or reinsurer faces in selecting a hedging strategy. We compare index and indemnity-based hedging as alternative design choices and ask which is capable of creating the greater value for shareholders. Additionally, we model an insurer or reinsurer that is subject to insolvency risk, which creates an incentive problem known as the judgment proof problem. The corporate manager is assumed to act in the interests of shareholders and so the judgment proof problem yields a conflict of interest between shareholders and other stakeholders. Given the fact that hedging may improve the situation, the analysis addresses what type of hedging tool would be best to use. We show that an indemnity-based security tends to worsen the situation, as it introduces an additional incentive problem. Index-based hedging, on the other hand, under certain conditions turns out to be beneficial and therefore clearly dominates indemnity-based strategies. This result is further supported by showing that for the same strike prices the current shareholder value is greater with the index-based security than the indemnity-based security. |
| Keywords: | alternative risk transfer; insurance; default risk |
| JEL: | G22 G32 D82 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:msmdpa:1219&r=rmg |
| By: | Gregory Connor; Oliver Linton |
| Abstract: | We introduce an alternative version of the Fama-French three-factor model of stockreturns together with a new estimation methodology. We assume that the factorbetas in the model are smooth nonlinear functions of observed securitycharacteristics. We develop an estimation procedure that combines nonparametrickernel methods for constructing mimicking portfolios with parametric nonlinearregression to estimate factor returns and factor betas simultaneously. Themethodology is applied to US common stocks and the empirical findings comparedto those of Fama and French. |
| Keywords: | characteristic-based factor model, arbitrage pricing theory, kernelestimation, nonparametric estimation. |
| JEL: | G12 C14 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cep:stiecm:/2006/506&r=rmg |