New Economics Papers
on Risk Management
Issue of 2006‒12‒09
three papers chosen by

  1. International Stock Return Comovements By Bekaert, Geert; Hodrick, Robert J; Zhang, Xiaoyan
  2. Liquidity and Expected Returns: Lessons from Emerging Markets By Bekaert, Geert; Harvey, Campbell; Lundblad, Christian T.
  3. Determinants of banks' engagement in loan securitization By Christina E. Bannier; Dennis N. Hänsel

  1. By: Bekaert, Geert; Hodrick, Robert J; Zhang, Xiaoyan
    Abstract: We examine international stock return comovements using country-industry and country-style portfolios. We first establish that parsimonious risk-based factor models capture the covariance structure of the data better than the popular Heston-Rouwenhorst (1994) model. We then establish the following stylized facts regarding stock return comovements. First, we do not find evidence for an upward trend in return correlations, excpet for the European stock markets. Second, the increasing imporatnce of industry factors relative to country factors was a short-lived, temporary phenomenon. Third, we find no evidence for a trend in idiosyncratic risk in any of the countries we examine.
    Keywords: comovements; correlation dynamics; country debate; factor models; international diversification
    JEL: C52 G11 G12
    Date: 2006–11
  2. By: Bekaert, Geert; Harvey, Campbell; Lundblad, Christian T.
    Abstract: Given the cross-sectional and temporal variation in their liquidity, emerging equity markets provide an ideal setting to examine the impact of liquidity on expected returns. Our main liquidity measure is a transformation of the proportion of zero daily firm returns, averaged over the month. We find that our liquidity measures significantly predict future returns, whereas alternative measures such as turnover do not. Consistent with liquidity being a priced factor, unexpected liquidity shocks are positively correlated with contemporaneous return shocks and negatively correlated with shocks to the dividend yield. We consider a simple asset pricing model with liquidity and the market portfolio as risk factors and transaction costs that are proportional to liquidity. The model differentiates between integrated and segmented countries and time periods. Our results suggest that local market liquidity is an important driver of expected returns in emerging markets, and that the liberalization process has not fully eliminated its impact.
    Keywords: emerging markets; liquidity pricing; return predictability
    JEL: F3 G3
    Date: 2006–11
  3. By: Christina E. Bannier; Dennis N. Hänsel
    Abstract: This paper provides new insights into the nature of loan securitization. We analyze the use of collateralized loan obligation (CLO) transactions by European banks from 1997 to 2004 and try to identify the influence that various firm-specific and macroeconomic factors may have on an institution's securitization decision. We find that not only regulatory capital arbitrage under Basel I has been driving the market. Rather, our results suggest that loan securitization is an optimal funding tool for banks with high risk and low liquidity. It may also have been used by commercial banks to indirectly access investment-bank activities and the associated gains.
    Keywords: Securitization, credit risk transfer, collateralized loan obligations
    JEL: G21
    Date: 2006–10

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