nep-rmg New Economics Papers
on Risk Management
Issue of 2007‒04‒21
ten papers chosen by
Stan Miles
Thompson Rivers University

  1. Evidence Of Chaotic Behavior In American Stock Markets By Espinosa Méndez, Christian
  2. Portfolio Value-at-Risk with Time-Varying Copula: Evidence from the Americas By Ozun, Alper; Cifter, Atilla
  3. US Corporate Default Swap Valuation: The Market Liquidity Hypothesis and Autonomous Credit Risk By Kwamie Dunbar
  4. Impact of Derivatives Trading on Emerging Capital Markets: A Note on Expiration Day Effects in India By Sumon Bhaumik; Suchismita Bose
  5. Time-Varying Comovements in Developed and Emerging European Stock Markets: Evidence from Intraday Data By Balázs Égert; Evžen Kocenda
  6. Speculative Attacks and Risk Management By PATHAK, Parag; TIROLE, Jean
  7. Default Rates in the Loan Market for SMEs: Evidence from Slovakia By Jarko Fidrmuc; Christa Hainz; Anton Malesich
  9. Copula-based measures of dependence structure in assets returns By Viviana Fernandez
  10. Capital Adequacy Ratios, Efficiency and Governance: a Comparison Between Islamic and Western Banks By Lucia Dalla Pellegrina

  1. By: Espinosa Méndez, Christian
    Abstract: This article validates the chaotic behavior in the Argentinean, Brazilian, Canadian, Chilean, American, Peruvian and Mexican Stock Markets using the MERVAL, BOVESPA, S&P TSX COMPOSITE, IPSA, IGPA, S&P 500, DOW JONES INDUSTRIALS, NASDAQ, IGBVL and IPC Stock Indexes respectively. The results of different techniques and methods like: Graphic Analysis, Recurrence Analysis, Temporal Space Entropy, Hurst Coefficient, Lyapunov Exponential and Correlation Dimension support the hypothesis that the stock markets behave in a chaotic way and rejected the hypothesis of randomness. Our conclusion validates the use of prediction techniques in those stock markets. It’s remarkable the result of the Hurst Coefficient Technique, that in average was of 0,75 for the indexes of this study which would justify the use of ARFIMA models among others for the prediction of such series.
    Keywords: Chaos Theory; Recurrence Analysis; Temporal Space Entropy; Hurst Coefficient; Lyapunov Exponential; Correlation Dimension; BDS Test.
    JEL: G10 C14 G14 G15 C12
    Date: 2005–10–20
  2. By: Ozun, Alper; Cifter, Atilla
    Abstract: Model risk in the estimation of value-at-risk is a challenging threat for the success of any financial investments. The degree of the model risk increases when the estimation process is constructed with a portfolio in the emerging markets. The proper model should both provide flexible joint distributions by splitting the marginality from the dependencies among the financial assets within the portfolio and also capture the non-linear behaviours and extremes in the returns arising from the special features of the emerging markets. In this paper, we use time-varying copula to estimate the value-at-risk of the portfolio comprised of the Bovespa and the IPC Mexico in equal and constant weights. The performance comparison of the copula model to the EWMA portfolio model made by the Christoffersen back-test shows that the copula model captures the extremes most successfully. The copula model, by estimating the portfolio value-at-risk with the least violation number in the back-tests, provides the investors to allocate the minimum regulatory capital requirement in accordance with the Basel II Accord.
    Keywords: Time-varying Copula; portfolio value-at-risk; Latin American equity markets; portfolio GARCH
    JEL: C14 G1 C51
    Date: 2007–04–10
  3. By: Kwamie Dunbar (University of Connecticut, Stamford, and Sacred Heart University)
    Abstract: This paper develops a reduced form three-factor model which includes a liquidity proxy of market conditions which is then used to provide implicit prices. The model prices are then compared with observed market prices of credit default swaps to determine if swap rates adequately reflect market risks. The findings of the analysis illustrate the importance of liquidity in the valuation process. Moreover, market liquidity, a measure of investors. willingness to commit resources in the credit default swap (CDS) market, was also found to improve the valuation of investors. autonomous credit risk. Thus a failure to include a liquidity proxy could underestimate the implied autonomous credit risk. Autonomous credit risk is defined as the fractional credit risk which does not vary with changes in market risk and liquidity conditions.
    Keywords: Credit Default Swaps; Market Liquidity; Bid-Ask Spreads; Autonomous Credit Risk, Risk Premium
    Date: 2007–01
  4. By: Sumon Bhaumik; Suchismita Bose
    Abstract: The impact of expiration of derivatives contracts on the underlying cash market – on trading volumes, returns and volatility of returns – has been studied in various contexts. We use an AR-GARCH model to analyse the impact of expiration of derivatives contracts on the cash market at the largest stock exchange in India, an important emerging capital market. Our results indicate that trading volumes were significantly higher on expiration days and during the five days leading up to expiration days (“expiration weeks”), compared with nonexpiration days (weeks). We also find significant expiration day effects on daily returns to the market index, and on the volatility of these returns. Finally, our analysis indicates that it might be prudent to undertake analysis of expiration day effects (or other events) using methodologies that model the underlying data generating process, rather than depend on comparison of mean and median alone.
    Keywords: derivatives contracts, expiration day effect, India
    JEL: G14
    Date: 2007–03–01
  5. By: Balázs Égert; Evžen Kocenda
    Abstract: We study comovements between three developed (France, Germany, the United Kingdom) and three emerging (the Czech Republic, Hungary and Poland) European stock markets. The novelty of our paper is that we apply the Dynamic Conditional Correlation GARCH models proposed by Engle (2002) to five-minute tick intraday stock price data for the period from June 2003 to January 2006. We find a strong correlation between the German and French markets and also between these two markets and the UK stock market. By contrast, very little systematic positive correlation can be detected between the Western European stock markets and the three stock markets of Central and Eastern Europe, as well as within the latter group.
    Keywords: stock markets, intraday data, comovements, bi-variate GARCH, European integration
    JEL: F37 G15
    Date: 2007–03–01
  6. By: PATHAK, Parag; TIROLE, Jean
    JEL: D82 F33 F34
    Date: 2006–08
  7. By: Jarko Fidrmuc; Christa Hainz; Anton Malesich
    Abstract: Banks entering an emerging market face a lot of uncertainty about the risks involved in lending. We use a unique unbalanced panel of nearly 700 shortterm loans made to SMEs in Slovakia between January 2000 and June 2005. Of the loans granted, on average 6.0 per cent of the firms defaulted. Several probit models and panel probit models show that liquidity and profitability factors are important determinants of SMEs defaults, while debt factors are less robust. However, we find that above average indebtedness significantly increases the probability of default. Moreover, the legal form that determines liability has important incentive effects.
    Keywords: SME, Credit, Loan Default, Mortality Rates, Incentives, Probit, Panel Data
    JEL: G33 G21 C25
    Date: 2006–11–01
  8. By: Manolis Syllignakis; Georgios Kouretas
    Abstract: This paper examines the short- and long-term relationships between seven Central Eastern European (CEE) stock markets and two developed stock markets, namely the German market and the US market. Application of the Gonzalo and Granger (1995) methodology indicates that the examined stock markets are partially integrated, while there is also evidence that the five stock markets in the central Europe (Czech Republic, Hungary, Poland, Slovenia and Slovakia) together with the German and the US stock markets have a significant common permanent component, which drives this system of stock exchanges in the long run. Contrary, the Estonian and Romania markets are segmented. A DCC model indicates that the short – term interdependencies between the CEE stock markets and the developed stock markets have strengthened during the Asian and Russian crises but since then (except for the Czech Republic, Hungary, Poland) they returned almost to their initial (relatively low) levels. Moreover, significantly increased volatility is observed during the Russian crisis period for all the markets under enquiry.
    Keywords: Central Eastern European equity markets, Market Integration, Common trends, DCC, SWARCH-L.
    JEL: G15 C12 C32 F36
    Date: 2006–07–01
  9. By: Viviana Fernandez
    Abstract: Copula modeling has become an increasingly popular tool in finance to model assets returns dependency. In essence, copulas enable us to extract the dependence structure from the joint distribution function of a set of random variables and, at the same time, to separate the dependence structure from the univariate marginal behavior. In this study, based on U.S. stock data, we illustrate how tail-dependency tests may be misleading as a tool to select a copula that closely mimics the dependency structure of the data. This problem becomes more severe when the data is scaled by conditional volatility and/or filtered out for serial correlation. The discussion is complemented, under more general settings, with Monte Carlo simulations.
    Date: 2006
  10. By: Lucia Dalla Pellegrina
    Abstract: The profit and loss sharing principle that is peculiar to Islamic finance reformulates the allocation of risk between stakeholders. Since in Islamic banks depositors are closer to stockholders in terms of residual claiming on profits, the relationship between capitalization and efficiency should in principle be weaker than in their Western counterparts. Results, obtained by means of a stochastic cost frontier analysis on samples of European-15 and Islamic banks during the period 1996-2002, show that the ratio of equity to deposits negatively affects inefficiency in both types of banks, but this effect is considerably undersized in Islamic banks as compared to European ones. This supports the reluctance that has accompained the proposal of capital adequacy ratios for Islamic banks in accordance to Basel Agreements.
    Keywords: Islamic Banks, capital, governance.
    JEL: G21 G32
    Date: 2007–04

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