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on Risk Management |
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Issue of 2012‒10‒20
25 papers chosen by |
| By: | Carlos Castro (Faculty of Economics, Universidad del Rosario, Colombia); Stijn Ferrari (National Bank of Belgium) |
| Abstract: | This paper analyses Delta CoVaR proposed by Adrian and Brunnermeier (2008) as a tool for identifying/ranking systemically important institutions and assessing interconnectedness. We develop a test of significance of Delta CoVaR that allows determining whether or not a financial institution can be classified as being systemically important on the basis of the estimated systemic risk contribution, as well as a test of dominance aimed at testing whether or not, according to Delta CoVaR, one financial institution is more systemically important than another. We provide two applications on a sample of 26 large European banks to show the importance of statistical testing when using Delta CoVaR, and more generally also other market-based systemic risk measures, in this context. |
| Keywords: | Systemic risk, SIFIs, interconnectedness, quantile regression, stochastic dominance test |
| JEL: | C21 C58 G32 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201210-228&r=rmg |
| By: | Zhiguo He (University of Chicago, Booth School of Business; NBER); Arvind Krishnamurthy (Northwestern University,Kellogg School of Management; NBER) |
| Abstract: | Systemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. We present a macroeconomic model with a financial intermediary sector subject to an equity capital constraint. The novel aspect of our analysis is that the model produces a stochastic steady state distribution for the economy, in which only some of the states correspond to systemic risk states. The model allows us to examine the transition from “normal” states to systemic risk states. We calibrate our model and use it to match the systemic risk apparent during the 2007/2008 financial crisis. We also use the model to compute the conditional probabilities of arriving at a systemic risk state, such as 2007/2008. Finally, we show how the model can be used to conduct a Fed “stress test” linking a stress scenario to the probability of systemic risk states. |
| Keywords: | Liquidity, Delegation, Financial Intermediation, Crises, Financial Friction, Constraints |
| JEL: | G12 G2 E44 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201210-233&r=rmg |
| By: | Francesca Biagini; Alessandra Cretarola; Eckhard Platen |
| Abstract: | We study the pricing and hedging of derivatives in incomplete financial markets by considering the local risk-minimization method in the context of the benchmark approach, which will be called benchmarked local risk-minimization. We show that the proposed benchmarked local risk-minimization allows to handle under extremely weak assumptions a much richer modeling world than the classical methodology. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1210.2337&r=rmg |
| By: | Bielecki, Tomasz R. (Illinois Institute of Technology and Université Lyon 1); Cousin, Areski (Université d'Évry Val d'Essonne); Crépey, Stéphane (Université d'Évry Val d'Essonne); Herbertsson, Alexander (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | We consider a bottom-up Markovian copula model of portfolio credit risk where dependence among credit names mainly stems from the possibility of simultaneous defaults. Due to the Markovian copula nature of the model, calibration of marginals and dependence parameters can be performed separately using a two-steps procedure, much like in a standard static copula set-up. In addition, the model admits a common shocks interpretation, which is a very important feature as, thanks to it, efficient convolution recursion procedures are available for pricing and hedging CDO tranches, conditionally on any given state of the underlying multivariate Markov process. As a result this model allows us to dynamically hedge CDO tranches using single-name CDSs in a theoretically sound and practically convenient way. To illustrate this we calibrate the model against market data on CDO tranches and the underlying single-name CDSs. We then study the loss distributions as well as the min-variance hedging strategies in the calibrated portfolios.<p> |
| Keywords: | Portfolio Credit Risk; Basket Credit Derivatives; Dynamic Min-Variance Hedging; Common Shocks; Markov Copula Model; |
| JEL: | G11 |
| Date: | 2011–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0502&r=rmg |
| By: | Mikhail Zolotko; Ostap Okhrin; ; |
| Abstract: | This study proposes a novel framework for the joint modelling of commodity forward curves. Its key contribution is twofold. First, dynamic correlation models are applied in this context as part of the modelling scheme. Second, we introduce a family of dynamic conditional correlation models based on hierarchical Archimedean copulae (HAC DCC), which are flexible, but parsimonious instruments that capture a wide range of dynamic dependencies. The conducted analysis allows us to obtain precise out-of-sample forecasts of the distribution of the returns of various commodity futures portfolios. The Value-at-Risk analysis shows that HAC DCC models outperform other introduced benchmark models on a consistent basis. |
| Keywords: | commodity forward curves, multivariate GARCH, hierarchical Archimedean copula, Value-at-Risk |
| JEL: | C13 C53 Q40 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2012-060&r=rmg |
| By: | Valerie De Bruyckere (Ghent University, Department of Financial Economics); Maria Gerhardt (Ghent University, Department of Financial Economics); Glenn Schepens (Ghent University, Department of Financial Economics); Rudi Vander Vennet (Ghent University, Department of Financial Economics) |
| Abstract: | This paper investigates contagion between bank risk and sovereign risk in Europe over the period 2006-2011. Since this period covers various stages of the banking and sovereign crisis, it offers a fertile ground to analyze bank/sovereign risk spillovers. We define contagion as excess correlation, i.e. correlation between banks and sovereigns over and above what is explained by common factors, using CDS spreads at the bank and at the sovereign level. Moreover, we investigate the determinants of contagion by analyzing bank-specific as well as country-specific variables and their interaction. We provide empirical evidence that various contagion channels are at work, including a strong home bias in bank bond portfolios, using the EBA’s disclosure of sovereign exposures of banks. We find that banks with a weak capital and/or funding position are particularly vulnerable to risk spillovers. At the country level, the debt ratio is the most important driver of contagion. |
| Keywords: | Contagion, bank risk, sovereign risk, bank business models, bank regulation, sovereign debt crisis |
| JEL: | G01 G21 G28 H6 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201210-232&r=rmg |
| By: | Hau, Harald; Langfield, Sam; Marqués Ibañez, David |
| Abstract: | This paper examines the quality of credit ratings assigned to banks in Europe and the United States by the three largest rating agencies over the past two decades. We interpret credit ratings as relative assessments of creditworthiness, and define a new ordinal metric of rating error based on banks’ expected default frequencies. Our results suggest that rating agencies assign more positive ratings to large banks and to those institutions more likely to provide the rating agency with additional securities rating business (as indicated by private structured credit origination activity). These competitive distortions are economically significant and help perpetuate the existence of ‘too-big-to-fail’ banks. We also show that, overall, differential risk weights recommended by the Basel accords for investment grade banks bear no significant relationship to empirical default probabilities. |
| Keywords: | conflicts of interest; credit ratings; prudential regulation; rating agencies; sovereign risk |
| JEL: | E44 G21 G23 G28 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9171&r=rmg |
| By: | Jason DeBacker; Bradley Heim; Vasia Panousi; Shanthi Ramnath; Ivan Vidangos |
| Abstract: | Our paper represents the first attempt in the literature to estimate the properties of business income risk from privately held businesses in the US. Using a new, large, and confidential panel of US income tax returns for the period 1987-2009, we extensively document the empirical stylized facts about the evolution of various business income risk measures over time. We find that business income is much riskier than labor income, not only because of the probability of business exit, but also because of higher income fluctuations, conditional on no exit. We show that business income is less persistent, but is also characterized by higher probabilities of extreme upward transition, compared to labor income. Furthermore, the distribution of percent changes for business income is more dispersed than that for labor income, and it also indicates that business income faces substantially higher tail risks. Our results suggest that the high-income households are more likely to bear both the big positive and the big negative business income percent changes. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-69&r=rmg |
| By: | Hans Dewachter (National Bank of Belgium, Research Department; University of Leuven); Raf Wouters (National Bank of Belgium, Research Department) |
| Abstract: | This paper proposes a perturbation-based approach to implement the idea of endogenous financial risk in a standard DSGE macro-model. Recent papers, such as Mendoza (2010), Brunnermeier and Sannikov (2012) and He and Krishnamurthy (2012), that have stimulated the research field on endogenous risk in a macroeconomic context, are based on sophisticated solution methods that are not easily applicable in larger models. We propose an approximation method that allows us to capture some of the basic insights of this literature in a standard macro-model. We are able to identify an important risk-channel that derives from the risk aversion of constrained intermediaries and that contributes significantly to the overall financial and macro volatility. With this procedure, we obtain a consistent and computationally-efficient modelling device that can be used for integrating financial stability concerns within the traditional monetary policy analysis. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201210-235&r=rmg |
| By: | Delphine Lautier (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine); Franck Raynaud (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine) |
| Abstract: | This article uses graph theory to provide novel evidence regarding market integration, a favorable condition for systemic risk to appear in. Relying on daily futures returns covering a 12-year period, we examine cross- and inter-market linkages, both within the commodity complex and between commodities and other financial assets. In such a high dimensional analysis, graph theory enables us to understand the dynamic behavior of our price system. We show that energy markets - as a whole - stand at the heart of this system. We also establish that crude oil is itself at the center of the energy complex. Further, we provide evidence that commodity markets have become more integrated over time. |
| Keywords: | Systemic risk; Energy; Derivative markets; High dimensional analysis; Graph theory; Minimum spanning trees. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00738201&r=rmg |
| By: | Abdul Razaque; Christian Bach; Nyembo salama; Aziz Alotaibi |
| Abstract: | Deployment of emerging technologies and rapid change in industries has created a lot of risk for initiating the new projects. Many techniques and suggestions have been introduced but still lack the gap from various prospective. This paper proposes a reliable project scheduling approach. The objectives of project scheduling approach are to focus on critical chain schedule and risk management. Several risks and reservations exist in projects. These critical reservations may not only foil the projects to be finished within time limit and budget, but also degrades the quality, and operational process. In the proposed approach, the potential risks of project are critically analyzed. To overcome these potential risks, fuzzy failure mode and effect analysis (FMEA) is introduced. In addition, several affects of each risk against each activity are evaluated. We use Monte Carlo simulation that helps to calculate the total time of project. Our approach helps to control risk mitigation that is determined using event tree analysis and fault tree analysis. We also implement distribute critical chain schedule for reliable scheduling that makes the project to be implemented within defined plan and schedule. Finally, adaptive procedure with density (APD) is deployed to get reasonable feeding buffer time and project buffer time. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1210.2021&r=rmg |
| By: | Alfred Mbairadjim Moussa; Jules Sadefo Kamdem; Michel Terraza |
| Abstract: | In this paper, following the notion of probabilistic risk adjusted performance measures; we introduce that of fuzzy risk adjusted measures (FRAM). In order to deal efficiently with the closing-based returns bias induced by market microstructure noise, as well as to handle their uncertain variability, we combine fuzzy set theory and probability theory. The returns are first represented as fuzzy random variables and then used in defining fuzzy versions of some adjusted performance measures. Using a recent ordering method for fuzzy numbers, we propose a ranking of funds based on these fuzzy performance measures. Finally, empirical studies carried out on fifty French Hedge Funds confirm the effectiveness and give the benefits of our approach over the classical performance ratios. |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:lam:wpaper:12-24&r=rmg |
| By: | Cesar Sosa-Padilla |
| Abstract: | Episodes of sovereign default feature three key empirical regularities in connection with the banking systems of the countries where they occur: (i) sovereign defaults and banking crises tend to happen together, (ii) commercial banks have substantial holdings of government debt, and (iii) sovereign defaults result in major contractions in bank credit and production. This paper provides a rationale for these phenomena by extending the traditional sovereign default framework to incorporate bankers that lend to both the government and the corporate sector. When these bankers are highly exposed to government debt a default triggers a banking crisis which leads to a corporate credit collapse and subsequently to an output decline. When calibrated to Argentina's 2001 default episode the model produces default on equilibrium with a frequency in line with actual default frequencies, and when it happens credit experiences a sharp contraction which generates an output drop similar in magnitude to the one observed in the data. Moreover, the model also matches several moments of the cyclical dynamics of macroeconomic aggregates. |
| Keywords: | sovereign default, banking crisis, credit crunch, optimal fiscal policy, Markov perfect equilibrium, endogenous cost of default, domestic Debt. |
| JEL: | F34 E62 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2012-09&r=rmg |
| By: | Jiaqi Chen; Michael L. Tindall |
| Abstract: | Many hedge funds attempt to achieve high returns by employing leverage. However, it is difficult to track the degree of leverage used by hedge funds over time because detailed timely information about their positions in asset markets is generally unavailable. This paper discusses how to combine shrinkage variable selection methods with dynamic regression to compute and track hedge fund leverage on a time-varying basis. We argue that our methodology measures leverage as well as hedge fund sensitivity to markets arising from other sources. Our approach employs the lasso variable selection method to select the independent variables in equations of hedge fund excess returns. With the independent variables selected by the lasso method, a state space model generates the parameter estimates dynamically. The hedge fund market sensitivity indicator is the average of the absolute values of the parameters in the excess return equations. Our indicator peaks at the time of the Long Term Capital Management meltdown in 1998 and again at a critical time in the 2008 financial crisis. In the absence of direct information from hedge fund balance sheets, our approach could serve as an important tool for monitoring market sensitivity and financial distress in the hedge fund industry. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddop:1&r=rmg |
| By: | Jean Pinquet (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) |
| Abstract: | This paper presents statistical models which lead to experience rating in insurance. Serial correlation for risk variables can receive endogeneous or exogeneous explanations. The interpretation retained by actuarial models is exogeneous and reflects the positive contagion usually observed for the number of claims. This positive contagion can be explained by the revelation throughout time of a hidden features in the risk distributions. These features are represented by fixed effects which are predicted with a random effects model. This article discusses identification issues on the nature of the dynamics of non-life insurance data. Example of predictions are given for count data models with a constant or time-varying random effects, one or several equations, and for cost-number models on events. |
| Keywords: | Fixed and random effects ; overdispersion ; expected value principle ; linear credibility approach. |
| Date: | 2012–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00677100&r=rmg |
| By: | Barrutia Legarreta, José María; Espinosa Alejos, María Paz |
| Abstract: | Loan mortgage interest rates are usually the result of a bank-customer negotiation process. Credit risk, consumer cross-buying potential, bundling, financial market competition and other features affecting the bargaining power of the parties could affect price. We argue that, since mortgage loan is a complex product, consumer expertise could be a relevant factor for mortgage pricing. Using data on mortgage loan prices for a sample of 1055 households for the year 2005 (Bank of Spain Survey of Household Finances, EFF-2005), and including credit risk, costs, potential capacity of the consumer to generate future business and bank competition variables, the regression results indicate that consumer expertise-related metrics are highly significant as predictors of mortgage loan prices. Other factors such as credit risk and consumer cross-buying potential do not have such a significant impact on mortgage prices. Our empirical results are affected by the credit conditions prior to the financial crisis and could shed some light on this issue. |
| Keywords: | credit risk, interest rates dispersion, mortgage loan pricing, consumer expertise, knowledge |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:dfaeii:8767&r=rmg |
| By: | Lina Escobar Rangel (CERNA - Centre d'économie industrielle - Mines ParisTech); François Lévêque (CERNA - Centre d'économie industrielle - Mines ParisTech) |
| Abstract: | What increase in probability the Fukushima Dai-ichi event does entail? Many models and approaches can be used to answer these questions. Poisson regression as well as Bayesian updating are good candidates. However, they fail to address these issues properly because the independence assumption in which they are based on is violated. We propose a Poisson Exponentially Weighted Moving Average (PEWMA) based in a state-space time series approach to overcome this critical drawback. We find an increase in the risk of a core meltdown accident for the next year in the world by a factor of ten owing to the new major accident that took place in Japan in 2011. |
| Keywords: | nuclear risk, nuclear safety, time series count data |
| Date: | 2012–10–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00740684&r=rmg |
| By: | Castiglionesi, Fabio; Feriozzi, Fabio; Lóránth, Gyöngyi; Pelizzon, Loriana |
| Abstract: | Banks can deal with their liquidity risk by holding liquid assets (self-insurance), by participating in the interbank market (coinsurance), or by using flexible financing instruments, such as bank capital (risk-sharing). We study how the access to an interbank market affects banks' incentive to hold capital. A general insight is that from a risk-sharing perspective it is optimal to postpone payouts to capital investors when a bank is hit by a liquidity shock that it cannot coinsure on the interbank market. This mechanism produces a negative relationship between interbank activity and bank capital. We provide empirical support for this prediction in a large sample of U.S. commercial banks, as well as in a sample of European and Japanese commercial banks. |
| Keywords: | Bank Capital; Interbank Markets; Liquidity Coinsurance. |
| JEL: | G21 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9162&r=rmg |
| By: | Kris Boudt (KU Leuven; Lessius; V.U. University Amsterdam); Jon Danielsson (London School of Economics); Siem Jan Koopman (V.U. University Amsterdam; Tinbergen Institute); Andre Lucas (V.U. University Amsterdam; Tinbergen Institute) |
| Abstract: | We propose a parsimonious regime switching model to characterize the dynamics in the volatilities and correlations of US deposit banks' stock returns over 1994-2011. A first innovative feature of the model is that the within-regime dynamics in the volatilities and correlation depend on the shape of the Student t innovations. Secondly, the across-regime dynamics in the transition probabilities of both volatilities and correlations are driven by macro-financial indicators such as the Saint Louis Financial Stability index, VIX or TED spread. We find strong evidence of time-variation in the regime switching probabilities and the within-regime volatility of most banks. The within-regime dynamics of the equicorrelation seem to be constant over the period. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201210-227&r=rmg |
| By: | Gürtler, M.; Hibbeln, M.; Winkelvos, C. |
| Abstract: | CAT bonds are important instruments for the insurance of catastrophe risk. Due to a low degree of deal standardization, there is uncertainty about the determination of the CAT bond premium. In addition, it is not apparent how CAT bonds react after the financial crisis or a natural catastrophe. We empirically verify which factors determine the CAT bond premium and what effects arise if a catastrophe occurs. On a broad data set using secondary market premiums we find strong evidence that the recent financial crisis has a significant impact on CAT bond premiums. Furthermore, we find that after hurricane Katrina an increased risk perception for hurricanes can be observed. -- |
| Keywords: | CAT bonds,financial crisis,catastrophe events,risk premium |
| JEL: | G01 G22 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tbsifw:if40v1&r=rmg |
| By: | Bozic, Marin; Newton, John; Thraen, Cameron S.; Gould, Brian W. |
| Abstract: | A common approach in the literature, whether the investigation is about futures price risk premiums or biases in option-based implied volatility coefficients, is to use samples in which consecutive observations can be regarded as uncorrelated. That will be the case for non- overlapping forecast horizons constructed by either focusing on short time-to-maturity contracts or excluding some data. In this article we propose a parametric bootstrap procedure for uncovering futures and options biases in data characterized by overlapping horizons and correlated prediction errors. We apply our method to test hypotheses that futures prices are efficient and unbiased predictors of terminal prices, and that squared implied volatility, multiplied by time left to option expiry, is an unbiased predictor of terminal log-price variance. We apply the test to corn, soybean meal and Class III milk futures and options data for the period 2000-2011. We find evidence for downward bias in soybean meal futures, as well as downward volatility bias in Class III milk options. Importance of these results is illustrated on the example of premium determination for Livestock Gross Margin Insurance for Dairy Cattle (LGM-Dairy). |
| Keywords: | parametric bootstrap, risk premium, volatility bias, revenue insurance, LGM-Dairy, Demand and Price Analysis, Research Methods/ Statistical Methods, Risk and Uncertainty, |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:ags:umaesp:135077&r=rmg |
| By: | Tiexin Guo; Shien Zhao; Xiaolin Zeng |
| Abstract: | To provide a solid analytic foundation for the module approach to conditional risk measures, this paper establishes a complete random convex analysis over random locally convex modules by simultaneously considering the two kinds of topologies (namely the $(\varepsilon,\lambda)$--topology and the locally $L^0$-- convex topology). It should be also mentioned that D. Filiporvi\'{c}, M. Kupper and N. Vogelpoth first studied random convex analysis under the framework of locally $L^{0}$--convex modules in [D. Filipovi\'{c}, M. Kupper, N. Vogelpoth, Separation and duality in locally $L^0$--convex modules, J. Funct. Anal. 256 (2009) 3996-4029] (briefly, the FKV paper), where they made some important contributions to the subject and presented some good ideas of financial applications. Unfortunately, there are serious shortcomings in the FKV paper. First, most of the principal results in the FKV paper were based on the premise that the locally $L^{0}$--convex topology for every locally $L^{0}$--convex module may be induced by a family of $L^{0}$--seminorms and the FKV paper ever gave a proof of this premise, but there was a hole in this proof, in fact, it remains open up to now whether the premise is valid or not. In this paper we overcome the difficulty by working with random locally convex modules endowed with the locally $L^0$--convex topology rather than locally $L^0$--convex modules. Besides, some basic and key results in the FKV paper are also false so that some more interesting and essential things are covered, so we first correct these mistakes and further give a thorough treatment of random convex analysis. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1210.1848&r=rmg |
| By: | Imre Kondor; Istv\'an Csabai; G\'abor Papp; Enys Mones; G\'abor Czimbalmos; M\'at\'e Csaba S\'andor |
| Abstract: | Correlations and other collective phenomena in a schematic model of heterogeneous binary agents (individual spin-glass samples) are considered on the complete graph and also on 2d and 3d regular lattices. The system's stochastic dynamics is studied by numerical simulations. The dynamics is so slow that one can meaningfully speak of quasi-equilibrium states. Performing measurements of correlations in such a quasi-equilibrium state we find that they are random both as to their sign and absolute value, but on average they fall off very slowly with distance in all instances that we have studied. This means that the system is essentially non-local, small changes at one end may have a strong impact at the other. Correlations and other local quantities are extremely sensitive to the boundary conditions all across the system, although this sensitivity disappears upon averaging over the samples or partially averaging over the agents. The strong, random correlations tend to organize a large fraction of the agents into strongly correlated clusters that act together. If we think about this model as a distant metaphor of economic agents or bank networks, the systemic risk implications of this tendency are clear: any impact on even a single strongly correlated agent will spread, in an unforeseeable manner, to the whole system via the strong random correlations. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1210.3324&r=rmg |
| By: | Lönnbark, Carl (Department of Economics, Umeå University) |
| Abstract: | We introduce the notions of short and long term asymmetric effects in volatilities. With short term asymmetry we mean the conventional one, i.e. the asymmetric response of current volatility to the most recent return shocks. However, there may be asymmetries in the way the effect of past return shocks propagate over time as well. We refer to this as long term asymmetry. We propose a model that enables the study of such a feature. In an empirical application using stock market index data we found evidence of the joint presence of short and long term asymmetric effects. |
| Keywords: | Financial econometrics; GARCH; memory; nonlinear; risk prediction; time series |
| JEL: | C22 C51 C58 G15 G17 |
| Date: | 2012–10–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0848&r=rmg |
| By: | Lönnbark, Carl (Department of Economics, Umeå University) |
| Abstract: | The empirically most relevant stylized facts when it comes to modeling time varying financial volatility are the asymmetric response to return shocks and the long memory property. Up till now, these have largely been modeled in isolation though. To more flexibly capture asymmetry also with respect to the memory structure we introduce a new model and apply it to stock market index data. We find that, although the effect on volatility of negative return shocks is higher than for positive ones, the latter are more persistent and relatively quickly dominate negative ones. |
| Keywords: | Financial econometrics; GARCH; news impact; nonlinear; risk prediction; time series |
| JEL: | C12 C51 C58 G10 G15 |
| Date: | 2012–10–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0849&r=rmg |