New Economics Papers
on Risk Management
Issue of 2009‒01‒24
eight papers chosen by

  1. Risk-taking by Russian banks: Do location, ownership and size matter? By Fungácová , Zuzana; Solanko, Laura
  2. The Effects of Credit Risk on Dynamic Portfolio Management: A New Computational Approach By Kwamie Dunbar
  3. Global and local sources of risk in Eastern European emerging stock markets By Fedorova , Elena; Vaihekoski, Mika
  4. Riots, Battles and Cycles By Stéphane Auray; Aurélien Eyquem; Frédéric Jouneau-Sion
  5. Predicting Stock Volatility Using After-Hours Information By Chun-Hung Chen; Wei-Choun Yu; Eric Zivot
  6. Conditional Style Rotation Model on Enhanced Value and Growth Portfolios: The European Experience By Ron Bird; Lorenzo Casavecchia
  7. The Impact of Foreign Macroeconomic News on Financial Markets in the Czech Republic, Hungary, and Poland By David Büttner; Bernd Hayo; Matthias Neuenkirch
  8. Stock Market Integration and Volatility Spillover:India and its Major Asian Counterparts By Mukherjee, Dr. Kedar nath; Mishra, Dr. R. K.

  1. By: Fungácová , Zuzana (BOFIT); Solanko, Laura (BOFIT)
    Abstract: The Russian banking sector has experienced enormous growth rates during the last 6-7 years. The rapid growth of assets has, however, contributed to a decrease in the capital adequacy ratio, thus influencing the ability of banks to cope with risk. Using quarterly data spanning from 1999 to 2007 on all Russian banks, we investigate the relationship between bank characteristics and risk-taking by Russian banks. The analysis of financial ratios reveals that, on average, the risk levels are still below those observed in Central and Eastern Europe. Combining the group-wise comparisons of financial ratios and the results of insolvency risk analysis based on fixed effects vector decomposition, three main conclusions emerge. First, controlling for bank characteristics, large banks have higher insolvency risk than small ones. Second, foreign-owned banks exhibit higher insolvency risk than domestic banks and large state-controlled banks are, unlike other state-controlled banks, more stable. Third, we find that the regional banks engage in significantly more risk-taking than their counterparts in Moscow.
    Keywords: bank risk-taking; banks in transition; Russia
    JEL: G21 G32 P34
    Date: 2009–01–13
  2. By: Kwamie Dunbar (University of Connecticut and Sacred Heart University)
    Abstract: The study investigates the role of credit risk in a continuous time stochastic asset allocation model, since the traditional dynamic framework does not provide credit risk flexibility. The general model of the study extends the traditional dynamic efficiency framework by explicitly deriving the optimal value function for the infinite horizon stochastic control problem via a weighted volatility measure of market and credit risk. The model's optimal strategy was then compared to that obtained from a benchmark Markowitz-type dynamic optimization framework to determine which specification adequately reflects the optimal terminal investment returns and strategy under credit and market risks. The paper shows that an investor's optimal terminal return is lower than typically indicated under the traditional mean-variance framework during periods of elevated credit risk. Hence I conclude that, while the traditional dynamic mean-variance approach may indicate the ideal, in the presence of credit-risk it does not accurately reflect the observed optimal returns, terminal wealth and portfolio selection strategies.
    Keywords: Dynamic Strategies; Credit Risk; Mean-Variance Analysis; Optimal Portfolio Selection; Viscosity Solution; Credit Default Swaps; Default Risk; Dynamic Control
    JEL: G0 G10 C02 C15
    Date: 2009–01
  3. By: Fedorova , Elena (BOFIT); Vaihekoski, Mika (BOFIT)
    Abstract: We study a pricing model for global and local sources of risk in six Eastern European emerging stock markets. Utilizing GMM estimation and an unconditional asset-pricing framework with and without time-varying betas, we perform estimations based on monthly data from 1996 to 2007 for Poland, Czech Republic, Hungary, Bulgaria, Slovenia and Russia. Most of these markets display considerable segmentation; the aggregate emerging market risk, as opposed to global market risk, is the significant driver for their stock market returns. It also appears that currency risk is priced into stock prices. The difference between local and global interest rates can be used to model the time-variation in the betas for both sources of risk.
    Keywords: market integration; segmentation; asset pricing; emerging markets; Eastern Europe country risk
    JEL: G12 G15 G32
    Date: 2009–01–13
  4. By: Stéphane Auray (Université Lille 3 (GREMARS), Université de Sherbrooke (GREDI) and CIRPÉE); Aurélien Eyquem (GATE, UMR 5824, Université de Lyon and Ecole Normale Supérieure Lettres et Sciences Humaines, France); Frédéric Jouneau-Sion (EQUIPPE (EA 4018), Université Lille Nord de France)
    Abstract: This paper proposes a conceptual framework to investigate the impact of military conflicts on business cycles, as well as defense policies through enrolment mechanisms. Our framework is a variation of a Real Business Cycle model first proposed by Hercowitz and Sampson (1991) that admits explicit solutions. We extend and estimate the initial model on US data to account for specific shocks that destroy the stock of capital and that may be as large as desired. We consider two types of dynamics on the depreciation rate of capital: short-term shocks, that may be interpreted as riots and captured by a Moving Average specification, and mid-term shocks, that may be interpreted as wars and captured by a Markov Switching process. Destructions may be limited by publicly decided enrolment, which allows to question the goals defense policies should aim at. First our model reproduces usual business cycle facts. Second, it allows to characterize the macroeconomic dynamics after shocks on the depreciation rate of capital. Finally, it provides a simple framework to quantify the welfare effects of alternative (simple) defense technologies.
    Keywords: military policy, Real Business Cycle model, random coefficient autoregressive model
    JEL: E13 E32 H56
    Date: 2009
  5. By: Chun-Hung Chen (KPMG); Wei-Choun Yu (Winona State University); Eric Zivot (University of Washington)
    Abstract: We use realized volatilities based on after hours high frequency returns to predict next day volatility. We extend GARCH and long-memory forecasting models to include additional information: the whole night, the preopen, the postclose realized variance, and the overnight squared return. For four NASDAQ stocks (MSFT, AMGN, CSCO, and YHOO) we find that the inclusion of the preopen variance can improve the out-of-sample forecastability of the next day conditional day volatility. Additionally, we find that the postclose variance and the overnight squared return do not provide any predictive power for the next day conditional volatility. Our findings support the results of prior studies that traders trade for non-information reasons in the postclose period and trade for information reasons in the preopen period.
    Date: 2009–01
  6. By: Ron Bird (School of Finance and Economics, University of Technology, Sydney); Lorenzo Casavecchia (School of Finance and Economics, University of Technology, Sydney)
    Abstract: Academic and professional attention has been devoted in the past to the analysis of the potential value-enhancement generated by strategies based on macroeconomic models and applied to portfolios or indexes of style classes. In this paper, we analyse the extent of the excess returns that can be potentially generated by rotating a portfolio between value and growth stocks in the European markets. We extend the results obtained by Bird and Casavecchia (Bird, R. and Casavecchia. L. (2007) Sentiment and financial health indicators for value and growth stocks: the European experience, European Journal of Finance, 13, pp. 769-793) when applying market sentiment and financial health indicators to stocks and document the extent to which macroeconomic factors convey information that is not already impounded in these indicators. We find that a strategy to rotate between portfolios, constructed on either single valuation metrics or their enhancement by market sentiment and a company?s financial strength, is typically consistent, monotonic, and in the expected direction. This highlights the proposition that the macroeconomic factors capture a cross-sectional variation that is not typically impounded in unconditional regression models on value and growth portfolios.
    Keywords: style rotation; financial health; market sentiment; asset pricing anomalies
    JEL: G11 G15 F47
    Date: 2008–05–01
  7. By: David Büttner (Faculty of Business Administration and Economics, Philipps Universitaet Marburg); Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet Marburg); Matthias Neuenkirch (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: In this paper, we study the effects of euro area and US macroeconomic news on financial markets in the Czech Republic, Hungary, and Poland (CEEC-3) from 1999 to 2006. Using a GARCH model, we examine the impact on daily returns of three-month interest rates, stock market indices, exchange rates versus the euro, and the US dollar. First, foreign macroeconomic news has a significant impact on CEEC-3 financial markets. Second, neither US nor European news has a stronger effect over the whole observation period. Third, the process of European integration is accompanied by an increasing importance of euro area news relative to US news. Fourth, there are country-specific differences: the Czech markets become more affected by foreign news after the Copenhagen Summit than the other countries. Finally, testing the persistence of news over a business week confirms our main results.
    Keywords: Financial Markets, Czech Republic, Hungary, Poland, Macroeconomic News, European Monetary Union
    JEL: G12 G15 F30
    Date: 2009
  8. By: Mukherjee, Dr. Kedar nath; Mishra, Dr. R. K.
    Abstract: Return and volatility spillover among Indian stock market with that of 12 other developed and emerging Asian countries over a period from November 1997 to April 2008 is studied. Daily opening and closing prices of all major equity indices from the sample countries are examined by applying the GARCH model [Engle (1982) and Bollerslev (1986)] to explore the possibility of stock market integration and volatility spillover among India and its major Asian counterparties. Apart from different degrees of correlations, both in terms of return and squared return series, among Indian stock market with that of other Asian countries, the contemporaneous intraday return spillover among India and almost all the sample countries are found to be positively significant and bi-directional. More specifically, Hong Kong, Korea, Singapore and Thailand are found to be the four Asian markets from where there is a significant flow of information in India. Similarly, among others, stock markets in Pakistan and Sri Lanka are found to be strongly influenced by movements in Indian market. Though most of the information gets transmitted among the markets without much delay, some amount of information still remains and can successfully transmit as soon as the market opens in the next day.
    Keywords: Asian stock markets; Integration; Information spillover; GARCH model
    JEL: G14 G15 G10
    Date: 2008–12–26

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