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on Risk Management |
| By: | Guang Bi (Department of Economics, University of Victoria); David E. Giles (Department of Economics, University of Victoria) |
| Abstract: | In this paper we use extreme value theory to model the U.S. movie box-office returns, using weekly data for the period January 1982 to September 2006. The Peaks over Threshold method is used to fit the Generalized Pareto Distribution to the tails of the distributions of both positive weekly returns, and negative returns. Tail risk measures such as value-at-risk and expected shortfall are computed using likelihood and profile likelihood methods. These measures can be used as indicators for the film distributors in the preparation of movie prints, or as references for actual or potential investors in the movie industry. |
| Keywords: | Movie revenue, extreme values, generalized Pareto distribution, value at risk |
| JEL: | C16 C46 G1 Z1 |
| URL: | http://d.repec.org/n?u=RePEc:vic:vicewp:0705&r=rmg |
| By: | Francesco Audrino; Fabio Trojani |
| Abstract: | We propose a new multivariate GARCH model with Dynamic Conditional Correlations that extends previous models by admitting multivariate thresholds in conditional volatilities and correlations. The model estimation is feasible in large dimensions and the positive deniteness of the conditional covariance matrix is easily ensured by the structure of the model. Thresholds in conditional volatilities and correlations are estimated from the data, together with all other model parameters. We study the performance of our model in three distinct applications to US stock and bond market data. Even if the conditional volatility functions of stock returns exhibit pronounced GARCH and threshold features, their conditional correlation dynamics depends on a very simple threshold structure with no local GARCH features. We obtain a similar result for the conditional correlations between government and corporate bond returns. On the contrary, we ÃÂïnd both threshold and GARCH structures in the conditional correlations between stock and government bond returns. In all applications, our model improves signiÃÂïcantly the in-sample and out-of-sample forecasting power for future conditional correlations with respect to other relevant multivariate GARCH models. |
| Keywords: | Multivariate GARCH models, Dynamic conditional correlations, Tree-structured GARCH models |
| JEL: | C12 C13 C51 C53 C61 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2007:2007-25&r=rmg |
| By: | Francesco Audrino; Fabio Trojani |
| Abstract: | We propose a multivariate nonparametric technique for generating reliable shortterm historical yield curve scenarios and confidence intervals. The approach is based on a Functional Gradient Descent (FGD) estimation of the conditional mean vector and covariance matrix of a multivariate interest rate series. It is computationally feasible in large dimensions and it can account for non-linearities in the dependence of interest rates at all available maturities. Based on FGD we apply filtered historical simulation to compute reliable out-of-sample yield curve scenarios and confidence intervals. We back-test our methodology on daily USD bond data for forecasting horizons from 1 to 10 days. Based on several statistical performance measures we find significant evidence of a higher predictive power of our method when compared to scenarios generating techniques based on (i) factor analysis, (ii) a multivariate CCC-GARCH model, or (iii) an exponential smoothing covariances estimator as in the RiskMetricsTM approach. |
| Keywords: | Conditional mean and variance estimation, Filtered Historical Simulation, Functional Gradient Descent, Term structure; Multivariate CCC-GARCH models |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2007:2007-24&r=rmg |
| By: | Gary B. Gorton; Fumio Hayashi; K. Geert Rouwenhorst |
| Abstract: | Commodity futures risk premiums vary across commodities and over time depending on the level of physical inventories, as predicted by the Theory of Storage. Using a comprehensive dataset on 31 commodity futures and physical inventories between 1969 and 2006, we show that the convenience yield is a decreasing, non-linear relationship of inventories. Price measures, such as the futures basis, prior futures returns, and spot returns reflect the state of inventories and are informative about commodity futures risk premiums. The excess returns to Spot and Futures Momentum and Backwardation strategies stem in part from the selection of commodities when inventories are low. Positions of futures markets participants are correlated with prices and inventory signals, but we reject the Keynesian "hedging pressure" hypothesis that these positions are an important determinant of risk premiums. |
| JEL: | G1 G11 G12 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13249&r=rmg |
| By: | Campbell, John Y; Ramadorai, Tarun; Schwartz, Allie |
| Abstract: | Many questions about institutional trading can only be answered if one can track high-frequency changes in institutional ownership. In the U.S., however, institutions are only required to report their ownership quarterly in 13-F filings. We infer daily institutional trading behaviour from the âÃÂÃÂtapeâÃÂÃÂ, the Transactions and Quotes database of the New York Stock Exchange, using a sophisticated method that best matches quarterly 13-F data. We find that daily institutional trades are highly persistent and respond positively to recent daily returns but negatively to longer-term past daily returns. Institutional trades, particularly sells, appear to generate short-term losses - possibly reflecting institutional demand for liquidity - but longer-term profits. One source of these profits is that institutions anticipate both earnings surprises and post-earnings-announcement drift. These results are different from those obtained using a standard size cutoff rule for institutional trades. |
| Keywords: | earnings announcements; institutions; liquidity; post-earnings-announcement-drift; trading |
| JEL: | G12 G14 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6390&r=rmg |
| By: | John Donaldson; Rajnish Mehra |
| Abstract: | This essay reviews the family of models that seek to provide aggregate risk based explanations for the empirically observed equity premium. Theories based on non-expected utility preference structures, limited financial market participation, model uncertainty and the small probability of enormous losses are detailed. We impose the additional requirements that candidate models yield consistent inter temporal portfolio choice and that a representative agent can be constructed which is independent of the underlying heterogeneous economy's initial wealth distribution. While many models are able to replicate a wide variety of financial statistics including the premium, few satisfy these latter criteria as well. |
| JEL: | D10 D11 D50 D52 D90 D91 E30 G00 G11 G12 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13220&r=rmg |
| By: | Ville, Simon (University of Wollongong) |
| Abstract: | The equity risk premium puzzle has received regular attention by economists since it was first invoked by Mehra and Prescott (1985) twenty years ago. In a recent paper, they revisit the question and reject many of the explanations offered but we are left with no clear alternative account. The current paper seeks to do two things. We provide matching historical evidence of the equity premium for Australia and compare the results for the two nations. Resulting from this, we argue that a closer understanding of phases of economic history helps to explain the puzzle. |
| JEL: | G12 N2 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:uow:depec1:wp06-25&r=rmg |
| By: | Ferrara, Laurent |
| Abstract: | In this paper, we propose a new coincident monthly indicator to detect in real-time the start and the end of an economic recession phase for the Euro area. In this respect, we use the methodology proposed in Anas and Ferrara (2002, 2004) as regards the recession indicator for the US, based on Markov-Switching processes popularized in economics by Hamilton (1989). By using a set of four monthly time series, we show that this start-end recession indicator (SERI) is able to reproduce all the recession phases experienced by the Euro area since 1970. Concerning the last low phase of the growth cycle in the Euro area, started in 2001, empirical results show that the Euro area experienced a ÃÂë quasi-recession ÃÂû phase, located between the end of the 2001 year and the beginning of 2002, without a global recession. This is due to a lack of diffusion of this phenomena among the main Eurozone countries, though it was synchronized. |
| Keywords: | Recession; real-time; probabilistic indicator; Euro area. |
| JEL: | C51 E32 C32 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4042&r=rmg |
| By: | Andrew K. Rose; Saktiandi Supaat |
| Abstract: | We use a quinquennial data set covering 87 countries between 1975 and 2005 to investigate the relationship between fertility and the real effective exchange rate. Theoretically a country experiencing a decline in its fertility rate can be expected to have higher savings, lower investment, a current account surplus, and accordingly a real depreciation. We test and confirm this hypothesis, controlling for a host of potential determinants such as PPP deviations and the Balassa-Samuelson effect. We find a statistically significant and robust link between fertility and the exchange rate. Our point-estimate is that a decline in the fertility rate of one child per woman is associated with a depreciation of approximately .15% in the real effective exchange rate. |
| JEL: | F32 J13 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13263&r=rmg |
| By: | Tomer Shachmurove (Social Science Computing Center, University of Pennsylvania); Yochanan Shachmurove (Department of Economics, University of Pennsylvania and The City College of The City University of New York) |
| Abstract: | This paper utilizes Vector Auto Regression (VAR) models to analyze the interdependence among exchange rates of twelve Asian-Pacific nations, Australia, China, Indonesia, Japan, Malaysia, New Zealand, Philippines, South Korea, Singapore, Taiwan, Thailand, and Vietnam. The daily data span from 1995 to 2004. It finds strong regional foreign exchange dependency, varying from 32 to 73 percent. This network of markets is highly correlated, with shocks to one reverberating throughout the region. Despite the linkages of the Chinese exchange rate to the United States dollar, the Chinese foreign exchange is not as independent with respect to its South-Asian neighbors as previously thought. |
| Keywords: | : Exchange rates, Asian- Pacific region, Australia, China, Indonesia, Japan, Malaysia, New Zealand, Philippines, South Korea, Singapore, Taiwan, Thailand, Vietnam, Correlograms, Impulse Responses, Variance Decompositions, Interdependence |
| JEL: | F0 F3 G0 C3 C5 E4 P0 |
| Date: | 2007–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:07-019&r=rmg |
| By: | Paul SÃÂöderlind; Angelo Ranaldo |
| Abstract: | We study high-frequency exchange rate movements over the sample 1993-2006. We document that the (Swiss) franc, euro, Japanese yen and the pound tend to appreciate against the U.S. dollar when (a) S&P has negative returns; (b) U.S. bond prices increase; and (c) when currency markets become more volatile. In these situations, the franc appreciates also against the other currencies, while the pound depreciates. These safe haven properties of the franc are visible for different time granularities (from a few hours to several days), during both "ordinary days" and crisis episodes and show some non-linear features. |
| Keywords: | high-frequency data, crisis episodes, non-linear effects |
| JEL: | F31 G15 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2007:2007-22&r=rmg |
| By: | Huisman, R. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | It is well known that day-ahead prices in power markets exhibit spikes. These spikes are sudden increases in the day-ahead price that occur because power production is not flexible enough to respond to demand and/or supply shocks in the short term. This paper focuses on how temperature influences the probability on a spike. The paper shows that the difference between the actual and expected temperature significantly influences the probability on a spike and that the impact of temperature on spike probability depends on the season. |
| Keywords: | Day-ahead power price;Power production;Temperature;Spike probability; |
| Date: | 2007–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:300011417&r=rmg |