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on Risk Management |
| By: | Pierdzioch, Christian; Kizys, Renatas |
| Abstract: | An important question for stock market investors and bank supervisors is to which extent the stock returns of banks reflect business-cycle sensitive risk in the banking industry. In order to find an answer to this question, we built on the stochastic discount factor model to derive a multivariate exponential GARCH-in-mean model. We used monthly U.S. data for the period from 1980 to 2006 to estimate the model. The novel feature of our empirical analysis is that we used both real-time and revised macroeconomic data to measure the business cycle. Our empirical results suggest that using real-time rather than revised macroeconomic data can significantly alter estimates of the risk premium that stock market investors require for bearing business-cycle sensitive risk in the banking industry. |
| Keywords: | Stochastic discount factor model; multivariate exponential GARCH-in-mean model; risk in the banking industry; real-time macroeconomic data |
| JEL: | E32 C32 G12 E44 |
| Date: | 2007–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2658&r=rmg |
| By: | Abdul Qayyum (Pakistan Institute of Development Economics, Islamabad); A. R. Kemal (Formerly of the Pakistan Institute of Development Economics, Islamabad) |
| Abstract: | Our paper examines the volatility spillover between the stock market and the foreign exchange market in Pakistan. For the longrun relationship we use the Engle Granger two-step procedure and the volatility spillover is modelled through the bivariate EGARCH method. The estimated results from cointegration analysis show that there is no long-run relationship between the two markets. The results from the volatility modelling show that the behaviours of both the stock exchange and the foreign exchange markets are interlinked. The returns of one market are affected by the volatility of the other market. Particularly, the returns of the stock market are sensitive to the returns as well as the volatility of the foreign exchange market. On the other hand, returns in the foreign exchange market are mean-reverting, and they are affected by the volatility of stock market returns. There is a strong relationship between the volatility of the foreign exchange market and the volatility of returns in the stock market |
| Keywords: | Stock Market, Forex Market, EGARCH, Volatility Spillover, Stock Market Returns, Foreign Exchange Return, Pakistan |
| JEL: | G1 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:pid:wpaper:2006:7&r=rmg |
| By: | Parker, John |
| Abstract: | This paper analyzes the impact of economic news, that is, the difference between economic announcements and what was anticipated, on financial markets. The three contributions of this paper are, first, the market expectation is derived from economic derivative prices that allow a full distribution for the market expectation to be derived. Economic derivatives data better predict financial market movements and also allow for testing whether there is information in the high moments of the distribution. Second, high frequency financial data allows us to test for the optimal window and discover how long it takes financial markets to digest and react to news. Finally, by using a U.S. and a European economic announcement and a wide range of financial markets, this paper compares announcements to show which are important for which markets. I find that high frequency financial data leads to a much bigger and more significant news announcement effect over previous studies that used end-of day data. Further, financial markets react very quickly to news. Unlike other studies that have assumed a 25-30 minute window, I have demonstrated that the announcement window is often as little as just one minute. Using the richness of the economic derivatives-based expectations data I determine when higher moments of the expectations distribution are useful in determining the announcement effect. I also show in which markets, and for which announcements, good news and bad news have asymmetric effects; and, in which markets are most responsive to which announcements. Finally, I have highlighted some of the interesting results that traders or risk managers might want to delve into in more detail. |
| Keywords: | Economic Derivatives; Economic Announcements; News; Financial Markets; Market Expectations; Real-Time Financial Data. |
| JEL: | G14 |
| Date: | 2007–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2675&r=rmg |
| By: | William W. Lang; Loretta J. Mester; Todd A. Vermilyea |
| Abstract: | The authors analyze the potential competitive effects of the proposed Basel II capital regulations on U.S. bank credit card lending. They find that bank issuers operating under Basel II will face higher regulatory capital minimums than Basel I banks, with differences due to the way the two regulations treat reserves and gain-on-sale of securitized assets. During periods of normal economic conditions, this is not likely to have a competitive effect; however, during periods of substantial stress in credit card portfolios, Basel II banks could face a significant competitive disadvantage relative to Basel I banks and nonbank issuers. ; Payment Cards Center Discussion Paper No. 07-04 |
| Keywords: | Basel capital accord ; Credit cards |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:07-9&r=rmg |
| By: | Gropp, Reint Eberhard; Kadareija, Arjan |
| Abstract: | We propose a new approach to measuring the effect of unobservable private information or beliefs on volatility. Using high-frequency intraday data, we estimate the volatility effect of a well identified shock on the volatility of the stock returns of large European banks as a function of the quality of available public information about the banks. We hypothesise that, as the publicly available information becomes stale, volatility effects and its persistance should increase, as the private information (beliefs) of investors become more important. We find strong support for this idea in the data. We argue that the results have implications for debate surrounding the opacity of banks and the transparency requirements that may be imposed on banks under Pillar III of the New Basel Accord |
| Keywords: | Realized volatility, public information, transparency |
| JEL: | G14 G21 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:5499&r=rmg |