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on Risk Management |
| By: | Fabrizio Ferriani (Bank of Italy); Giovanni Veronese (Bank of Italy) |
| Abstract: | Using more than a decade of firm-level data on U.S. oil producers' hedging portfolios, we document for the first time a strong positive link between net worth and hedging in the oil producing sector. We exploit as quasi-natural experiments two similarly dramatic oil price slumps, in 2008 and in 2014-2015, and we show how a shock to net worth differently affects risk management practices among E\&P firms depending on their initial financial positions. The link between net worth and hedging decisions holds in both episodes, but in the second oil slump we also find a significant role of leverage and credit constraints in reducing the hedging activity, a result that we attribute to the marked increase in leverage following the diffusion of the shale technology. Finally, we test if collateral constraints also impinge the extensive margin of risk management. Though in this case the effect is less apparent, our results generally points to a more limited use of linear derivative contracts when firms' net worth increases. |
| Keywords: | dynamic risk management, hedging, derivatives, shale revolution, oil price collapse |
| JEL: | D22 G00 G32 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1211_19&r=all |
| By: | Papp, Gábor; Caccioli, Fabio; Kondor, Imre |
| Abstract: | The optimization of a large random portfolio under the expected shortfall risk measure with an ℓ 2 regularizer is carried out by analytical calculation for the case of uncorrelated Gaussian returns. The regularizer reins in the large sample fluctuations and the concomitant divergent estimation error, and eliminates the phase transition where this error would otherwise blow up. In the data-dominated region, where the number N of di?erent assets in the portfolio is much less than the length T of the available time series, the regularizer plays a negligible role even if its strength η is large, while in the opposite limit, where the size of samples is comparable to, or even smaller than the number of assets, the optimum is almost entirely determined by the regularizer. We construct the contour map of estimation error on the N/T versus η plane and find that for a given value of the estimation error the gain in N/T due to the regularizer can reach a factor of about four for a suffciently strong regularizer. |
| Keywords: | cavity and replica method; quantitative finance; risk measure and management |
| JEL: | F3 G3 G32 |
| Date: | 2019–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:100294&r=all |
| By: | McAleer, M.J. |
| Abstract: | In order to hedge efficiently, persistently high negative covariances or, equivalently, correlations, between risky assets and the hedging instruments are intended to mitigate against financial risk and subsequent losses. If there is more than one hedging instrument, multivariate covariances and correlations will have to be calculated. As optimal hedge ratios are unlikely to remain constant using high frequency data, it is essential to specify dynamic time-varying models of covariances and correlations. These values can either be determined analytically or numerically on the basis of highly advanced computer simulations. Analytical developments are occasionally promulgated for multivariate conditional volatility models. The primary purpose of the paper is to analyse purported analytical developments for the only multivariate dynamic conditional correlation model to have been developed to date, namely Engle’s (2002) widely-used Dynamic Conditional Correlation (DCC) model. Dynamic models are not straightforward (or even possible) to translate in terms of the algebraic existence, underlying stochastic processes, specification, mathematical regularity conditions, and asymptotic properties of consistency and asymptotic normality, or the lack thereof. The paper presents a critical analysis, discussion, evaluation and presentation of caveats relating to the DCC model, and an emphasis on the numerous dos and don’ts in implementing the DCC and related model in practice |
| Keywords: | Hedging, covariances, correlations, existence, mathematical regularity, invertibility, likelihood function, statistical asymptotic properties, caveats, practical implementation |
| JEL: | C22 C32 C51 C52 C58 C62 G32 |
| Date: | 2019–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:ems:eureir:115611&r=all |
| By: | Daniel Poh; Stephen Roberts; Martin Tegn\'er |
| Abstract: | The non-storability of electricity makes it unique among commodity assets, and it is an important driver of its price behaviour in secondary financial markets. The instantaneous and continuous matching of power supply with demand is a key factor explaining its volatility. During periods of high demand, costlier generation capabilities are utilised since electricity cannot be stored---this has the impact of driving prices up very quickly. Furthermore, the non-storability also complicates physical hedging. Owing to this, the problem of joint price-quantity risk in electricity markets is a commonly studied theme. To this end, we investigate the use of coregionalized (or multi-task) sparse Gaussian processes (GPs) for risk management in the context of power markets. GPs provide a versatile and elegant non-parametric approach for regression and time-series modelling. However, GPs scale poorly with the amount of training data due to a cubic complexity. These considerations suggest that knowledge transfer between price and load is vital for effective hedging, and that a computationally efficient method is required. To gauge the performance of our model, we use an average-load strategy as comparator. The latter is a robust approach commonly used by industry. If the spot and load are uncorrelated and Gaussian, then hedging with the expected load will result in the minimum variance position. The main contribution of our work is twofold. Firstly, in developing a multi-task sparse GP-based approach for hedging. Secondly, in demonstrating that our model-based strategy outperforms the comparator, and can thus be employed for effective hedging in electricity markets. |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1903.09536&r=all |
| By: | Geert Bekaert; Eric C. Engstrom; Nancy R. Xu |
| Abstract: | We develop measures of time-varying risk aversion and economic uncertainty that are calculated from financial variables at high frequencies. We formulate a dynamic no-arbitrage asset pricing model for equities and corporate bonds. The joint dynamics among asset-specific cash flows, macroeconomic fundamentals and risk aversion feature heteroskedasticity and non-Gaussianity. Variance risk premiums on equity are very informative about risk aversion, whereas credit spreads and corporate bond volatility are highly correlated with economic uncertainty. Model-implied risk premiums outperform standard instruments for predicting excess returns on equity and corporate bonds. A financial proxy to our economic uncertainty predicts output growth significantly negatively. |
| JEL: | C01 G10 G12 G13 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25673&r=all |
| By: | Berner, Richard; Cecchetti, Stephen G; Schoenholtz, Kermit |
| Abstract: | Stress tests applied to individual institutions are an important tool for evaluating financial resilience. However, financial systems are typically complex, heterogeneous and rapidly changing, raising questions about the adequacy of conventional tests. In this paper, we interpret the current stress test practice from a network perspective, highlighting central counterparties (CCPs) as an example of a critical network hub. Networks that include CCPs involve deep and broad interconnections, making stress testing a challenging task. We propose supplementing both private and supervisory CCP stress tests with a high-frequency indicator constructed from a market-based estimate of the conditional capital shortfall (SRISK) of the CCP's clearing members. Applying our measure to two large CCPs, we analyze how they can transmit and amplify shocks across borders, conditional on the exhaustion of prefunded resources. Our results highlight how the network created by central clearing can act as an important transmission mechanism for shocks emanating from Europe. |
| Keywords: | CCP; central counterparties; financial network; financial regulation; Financial Stability; Resolution; SRISK; Stress Testing |
| JEL: | G18 G23 G28 G32 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13604&r=all |
| By: | Iori, G.; Gurgone, A. |
| Abstract: | We propose a multi-agent approach to compare the effectiveness of macro-prudential capital requirements, where banks are embedded in an artificial macroeconomy. Capital requirements are derived from systemic- risk metrics that reflect both the vulnerability or impact of financial in- stitutions. Our objective is to explore how systemic-risk measures could be translated in capital requirements and test them in a comprehensive framework. Based on our counterfactual scenarios, we find that macro- prudential capital requirements can mitigate systemic risk, but there is a trade-off between market- and balance-sheet-based policies in terms of banks’ losses and credit supply. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:cty:dpaper:19/05&r=all |
| By: | Gu, Xi; Marsh, Thomas L.; Fortenbery, Randy |
| Abstract: | Driven in part by increasing demand of beer, the rising price of critical inputs, such as hops and barley, reduce the profit margin of the craft breweries in United States. However, brewers are left with limited tools to manage risk. Considering cross-hedging in futures market, we investigate price linkages and volatility spillover among hops, barley, and other selected agricultural products. Based on previous studies, hard red wheat, soft red wheat and corn are selected as the grain inputs most relevant to the brewery industry. We use monthly price data and nearby future price data, estimate VAR and VEC models to capture short and long-run price relationships, then estimate a BEKK-ARCH model to analyse the volatility spillover effects. The empirical results provide evidence supporting bidirectional long-run price relationship between hops and barley, but only short-run relationships between hops and other grain inputs. For barley, the long-run price relationships are found in all barley related pairs, e.g. barley-soft red wheat, barley-hard red wheat and barley-corn. Moreover, we identify volatility spillover transmission from soft red wheat and barley to hops. And soft red wheat, hard red wheat and corn exhibit volatility spillover effects on barley. In addition, the in-sample prediction shows the great fitting performance. This provides the empirical evidence to cross hedge the price risk of hops and barley using soft red wheat, hard red wheat and corn in brewery industry for the future studies. |
| Keywords: | Production Economics |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aare19:285042&r=all |
| By: | Lis Sintha (Universitas Kristen Indonesia, Jl. Mayjen Soetoyo no.2, Cawang, Jakarta (13630), Indonesia Author-2-Name: Author-2-Workplace-Name: Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:) |
| Abstract: | Objective – The purpose of this study is to examine the influence of capital on bankruptcy banks. The hypothesis of this research is that capital has an effect on the bankruptcy of a bank. Methodology/Technique – This research examines financial reports between 2005-2014. An econometric model with a logistical regression analysis technique is used. In this study, capital is measured by CAR, taking into account credit risk; CAR by taking into account market risk; Ratio of Obligation to Provide Minimum Capital for Credit Risk and Operational Risk; Ratio of Minimum Capital Adequacy Ratio for Credit Risk, Operational Risk and Market Risk; Capital Adequacy Requirements (CAR). Findings – The results show that the capital adequacy ratio for market ratio and capital adequacy ratio for credit ratio and operational ratio support the research hypothesis and can form a logit model. The test results of CAR by taking into account credit risk, Minimum Capital Requirement Ratio for Credit Risk, Operational Risk and Market Risk and Minimum Capital Provision Obligations do not support the research hypothesis. Novelty – This paper contribute to bank bankruptcy prediction models based on time dimension and bank groups using financial ratios which are expected can influence bank in bankrupt condition. Type of Paper: Empirical. |
| Keywords: | Banking crisis, Cost of bankruptcy, Adequacy Ratio, Financial ratios, Prediction models |
| JEL: | G32 G33 G39 |
| Date: | 2019–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:gtr:gatrjs:jfbr152&r=all |
| By: | Mehmet Selman Colak |
| Abstract: | There are several indicators and univariate ratios that measure the soundness of firms' balance sheets (Leverage, profitability, liquidity ratio, etc.). However, each indicator alone cannot measure the overall financial risk or the financial distress level of firms. In this study, we measure the financial strength of the real sector firms quoted in Borsa Istanbul (BIST) by producing a composite index score which is a combination of several different corporate finance ratios. In the first part, we will apply multiple discriminant analysis to the variables used in Altman Z-score (1968), which is the most prevalent composite index score measuring the firms’ financial risks in the literature. In the second part, a new index, named as MFA-score (Multivariate Firm Assessment Score) will be introduced by using the ratios that best explain the characteristics of the BIST companies. Both the tailored version of Altman Z-score and our new index score have a predictive power around 90 percent. Furthermore, MFA-score is capable of detecting the impact of macro-economic developments on firm balance sheets, which enables us to use MFA-score as an early warning indicator of financial distress for Turkish firms. Our analyses with MFA-score suggest that non-exporter firms and firms with FX open position have relatively weaker balance sheets. |
| Keywords: | Balance sheets, Financial risk, Altman Z-score, Multiple discriminant analysis, Financial distress, MFA-score |
| JEL: | G30 G33 C18 C43 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1904&r=all |
| By: | Tahsin Deniz Akt\"urk; \c{C}a\u{g}{\i}n Ararat |
| Abstract: | We provide a closed-form analytical solution to a static portfolio optimization problem with two coherent risk measures. The use of two risk measures is motivated by joint decision-making for portfolio selection where the risk perception of the portfolio manager is of primary concern, hence, it appears in the objective function, and the risk perception of an external authority needs to be taken into account as well, which appears in the form of a risk constraint. The problem covers the risk minimization problem with an expected return constraint and the expected return maximization problem with a risk constraint, as special cases. We also consider a variant of the problem with size and magnitude constraints which we formulate using binary variables. In this case, only numerical solutions are possible. |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1903.10454&r=all |
| By: | Min Hua (Swansea University); Wei Song (Swansea University); Oleksandr Talavera (University of Birmingham) |
| Abstract: | We extend the existing literature on the role of CEO personal characteristics in bank risktaking by showing that the economic conditions at the time when bank CEOs enter the labor market have a significant impact on risk-taking. Specifically, using a unique hand-collected dataset of bank CEOs’ career profiles and demographic characteristics, we find that banks managed by CEOs who started their careers during recessions (i.e., recession CEOs) take less risk than their non-recession counterparts. We also show that recession CEOs are more likely to implement conservative bank policies, have a traditional bank business model, and are negatively related to bank opaqueness. Furthermore, banks with recession CEOs produce superior performance during the recent financial crisis, while they do not outperform those with non-recession CEOs in general or over the pre-crisis period. The negative effect of recession CEOs on bank risk-taking persists after we attempt to address endogeneity concerns and is robust to the introduction of additional robustness checks. Overall, these findings highlight the empirical relevance of the association between the initial labor market conditions when a bank CEO starts her career and bank risk-taking. |
| Keywords: | banks, CEOs, labor market condition, risk-taking |
| JEL: | G01 G21 G32 G34 J24 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:19-04&r=all |
| By: | Thomas Dohmen; Simone Quercia; Jana Willrodt |
| Abstract: | We show that the disposition to focus on favorable or unfavorable outcomes of risky situations affects willingness to take risk as measured by the general risk question. We demonstrate that this disposition, which we call risk conception, is strongly associated with optimism, a stable facet of personality, and that it predicts real-life risk taking. The general risk question captures this disposition alongside pure risk preference. This likely contributes to the predictive power of the general risk question across domains. Our results also rationalize why risk taking is related to optimism. |
| Keywords: | Risk taking behavior,optimism,preference measure,risk conception |
| JEL: | D91 C91 D81 D01 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp1026&r=all |
| By: | Jordà, Òscar; Schularick, Moritz; Taylor, Alan M. |
| Abstract: | The risk premium puzzle is worse than you think. Using a new database for the U.S. and 15 other advanced economies from 1870 to the present that includes housing as well as equity returns (to capture the full risky capital portfolio of the representative agent), standard calculations using returns to total wealth and consumption show that: housing returns in the long run are comparable to those of equities, and yet housing returns have lower volatility and lower covariance with consumption growth than equities. The same applies to a weighted total-wealth portfolio, and over a range of horizons. As a result, the implied risk aversion parameters for housing wealth and total wealth are even larger than those for equities, often by a factor of 2 or more. We find that more exotic models cannot resolve these even bigger puzzles, and we see little role for limited participation, idiosyncratic housing risk, transaction costs, or liquidity premiums. |
| Keywords: | Consumption-based asset pricing; Equity premium; housing premium; risk aversion |
| JEL: | E44 G12 G15 N20 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13595&r=all |
| By: | Jorda, Oscar (Federal Reserve Bank of San Francisco); Schularick, Moritz (University of Bonn); Taylor, Alan M. (University of California, Davis;) |
| Abstract: | The risk premium puzzle is worse than you think. Using a new database for the U.S. and 15 other advanced economies from 1870 to the present that includes housing as well as equity returns (to capture the full risky capital portfolio of the representative agent), standard calculations using returns to total wealth and consumption show that: housing returns in the long run are comparable to those of equities, and yet housing returns have lower volatility and lower covariance with consumption growth than equities. The same applies to a weighted total-wealth portfolio, and over a range of horizons. As a result, the implied risk aversion parameters for housing wealth and total wealth are even larger than those for equities, often by a factor of 2 or more. We find that more exotic models cannot resolve these even bigger puzzles, and we see little role for limited participation, idiosyncratic housing risk, transaction costs, or liquidity premiums. |
| JEL: | E44 G12 G15 N20 |
| Date: | 2019–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2019-10&r=all |
| By: | Yener Altunbaş (Bangor University); John Thornton (Office of Technical Assistance, US Department of the Treasury; Bangor University); Tianshu Zhao (Birmingham Business School, University of Birmingham) |
| Abstract: | We examine the impact of banks’ internal capital markets (ICMs) before the 2008-09 financial crisis on bank risk-taking during the crisis in a panel of 8,068 banks across 16 countries. The size of ICMs was an important driver of risk during the crisis when banks with larger ICMs exhibited lower risk levels. Larger ICMs reduced risk further for well capitalized banks. Banks more likely to be in trouble in a crisis are likely to have smaller ICMs, be larger in size, less well capitalized, less efficient, less profitable, and more dependent on market funding. |
| Keywords: | Banks, governance, risk, CEO power, boards of directors, institutional investors |
| JEL: | G15 G21 G32 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:bng:wpaper:19004&r=all |
| By: | Lopes Moreira Da Veiga, María Helena; Marín Díazaraque, Juan Miguel; Zea Bermudez, Patrícia de |
| Abstract: | The paper proposes the use of data cloning (DC) to the estimation of general asymmetric stochastic volatility (ASV) models with flexible distributions for the standardized returns. These models are able to capture the asymmetric volatility, the leptokurtosis and the skewness of the distribution of returns. Data cloning is a general technique to compute maximum likelihood estimators, along with their asymptotic variances, by means of a Markov chain Monte Carlo (MCMC) methodology. The main aim of this paper is to illustrate how easily general ASV models can be estimated and consequently studied via data cloning. Changes of specifications, priors and sampling error distributions are done with minor modifications of the code. Using an intensive simulation study, the finite sample properties of the estimators of the parameters are evaluated and compared to those of a benchmark estimator that is also user-friendly.The results show that the proposed estimator is computationally efficient and robust, and can be an effective alternative to the exiting estimation methods applied to ASV models. Finally, we use data cloning to estimate the parameters of general ASV models and forecast the one-step-ahead volatility of S&P 500 and FTSE-100 daily returns. |
| Keywords: | Skewed and Heavy-Tailed distributions; Non-Gaussian Nonlinear Time Series Models; Data Cloning; Asymmetric Volatility |
| Date: | 2019–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:28214&r=all |
| By: | James Andreoni; Amalia Di Girolamo; John List; Claire Mackevicius; Anya Samek |
| Abstract: | We conduct experiments eliciting risk preferences with over 1,400 children and adolescents aged 3-15 years old. We complement our data with an assessment of cognitive and executive function skills. First, we find that adolescent girls display significantly greater risk aversion than adolescent boys. This pattern is not observed among young children, suggesting that the risk gap in risk preferences emerges in early adolescence. Second, we find that at all ages in our study, cognitive skills (specifically math ability) are positively associated with risk taking. Executive functions among children, and soft skills among adolescents, are negatively associated with risk taking. Third, we find that greater risk-tolerance is associated with higher likelihood of disciplinary referrals, which provides evidence that our task is equipped to measure a relevant behavioral outcome. For academics, our research provides a deeper understanding of the developmental origins of risk preferences and highlights the important role of cognitive and executive function skills to better understand the association between risk preferences and cognitive abilities over the studied age range. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:feb:artefa:00668&r=all |
| By: | An, Xudong (Federal Reserve Bank of Philadelphia); Cordell, Lawrence R. (Federal Reserve Bank of Philadelphia) |
| Abstract: | Mortgage loss-given-default (LGD) increased significantly when house prices plummeted and delinquencies rose during the financial crisis, but it has remained over 40 percent in recent years despite a strong housing recovery. Our results indicate that the sustained high LGDs post-crisis are due to a combination of an overhang of crisis-era foreclosures and prolonged foreclosure timelines, which have offset higher sales recoveries. Simulations show that cutting foreclosure timelines by one year would cause LGD to decrease by 5–8 percentage points, depending on the trade-off between lower liquidation expenses and lower sales recoveries. Using difference-in-differences tests, we also find that recent consumer protection programs have extended foreclosure timelines and increased loss severities in spite of their benefits of increasing loan modifications and enhancing consumer protections. |
| Keywords: | loss-given default (LGD); foreclosure timelines; regulatory changes; Heckman two-stage correction; accelerated failure time model |
| JEL: | C24 C41 G01 G18 G21 |
| Date: | 2019–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:19-19&r=all |
| By: | Giordana, Gaston; Ziegelmeyer, Michael |
| Abstract: | This paper uses representative individual household data from Luxembourg to evaluate how severe economic conditions could affect bank exposure to the household sector. Information on household income, expenses and liquid assets are used to calculate household-specific probabilities of default (PD), aggregate bank exposure at default (EAD) and aggregate bank loss given default (LGD). The exercise is repeated with scenarios combining severe but plausible shocks to real estate prices, bonds and stocks, household income and interest rates. Compared to the no-shock baseline, the LGD rises by a multiple of eight, reaching 4.2% of total bank exposure to the household sector. The high-stress scenario also generates a relatively high percentage of defaults among socio-economically disadvantaged households. Our main conclusion is that bank losses appear to be quite sensitive to financial stress, despite three mitigating factors in Luxembourg: indebted households tend to hold liquid assets that can help smooth shocks, household leverage tends to decline rapidly once mortgages have been serviced several years, and loan-to-value ratios at origination appear not to be excessive. JEL Classification: D10, D14, E44, G01, G21 |
| Keywords: | financial stability, HFCS, household finance |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192254&r=all |
| By: | Ravi Bansal; Shane Miller; Dongho Song; Amir Yaron |
| Abstract: | We use traded equity dividend strips from U.S., Europe, and Japan from 2004-2017 to study the slope of the term structure of equity dividend risk premia. In the data, a robust finding is that the term structure of dividend risk premia (growth rates) is positively (negatively) sloped in expansions and negatively (positively) sloped in recessions. We develop a consumption-based regime switching model which matches these robust data-features and the historical probabilities of recession and expansion regimes. The unconditional population term structure of dividend-risk premia in the regime-switching model, as in standard asset pricing models (habits and long-run risks), is increasing with maturity. The regime-switching model also features a declining average term structure of dividend risk-premia if recessions are over-represented in a short sample, as is the case in the data sample from Europe and Japan. In sum, our analysis shows that the empirical evidence in dividend strips is entirely consistent with a positively sloped term structure of dividend risk-premia as implied by standard asset pricing models. |
| JEL: | E0 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25690&r=all |
| By: | Mundt, Philipp; Oh, Ilfan |
| Abstract: | We propose a parsimonious statistical model of firm competition where structural differences in the strength of competitive pressure and the magnitude of return fluctuations above and below the system-wide benchmark translate into a skewed Subbotin or asymmetric exponential power (AEP) distribution of returns to capital. Empirical evidence from US data illustrates that the AEP distribution compares favorably to popular alternative models such as the symmetric or asymmetric Laplace density in terms of goodness of fit when entry and exit dynamics of markets are taken into account. |
| Keywords: | return on capital,maximum entropy,asymmetric Subbotin distribution |
| JEL: | C16 D21 L10 E10 C12 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bamber:145&r=all |
| By: | Asai, M.; Gupta, R.; McAleer, M.J. |
| Abstract: | The paper investigates the impact of jumps in forecasting co-volatility in the presence of leverage effects. We modify the jump-robust covariance estimator of Koike (2016), such that the estimated matrix is positive definite. Using this approach, we can disentangle the estimates of the integrated co-volatility matrix and jump variations from the quadratic covariation matrix. Empirical results for daily crude oil and gold futures show that the co-jumps of the two futures have significant impacts on future co-volatility, but that the impact is negligible in forecasting weekly and monthly horizons |
| Keywords: | Commodity Markets, Co-volatility, Forecasting, Jump, Leverage Effects, Realized, Covariance, Threshold Estimation. |
| JEL: | C32 C33 C58 Q02 |
| Date: | 2019–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:ems:eureir:115614&r=all |
| By: | Yener Altunbaş (Bangor University); John Thornton (Office of Technical Assistance, US Department of the Treasury; Bangor University); Yurtsev Uymaz (Norwich Business School, University of East Anglia) |
| Abstract: | We test for a link between money laundering and bank risk in US banks. We find that money laundering increases bank risk according to several measures of risk, with the effect on risk only partly mitigated by large and independent executive boards and accentuated by powerful CEOs. |
| Keywords: | Banks, governance, risk, CEO power, boards of directors, institutional investors |
| JEL: | G20 G21 G34 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:bng:wpaper:19005&r=all |
| By: | Robert Breunig; Owen Freestone |
| Abstract: | This paper explores risk aversion among Australian households using panel data from the Household Income and Labour Dynamics in Australia (HILDA) survey. Using households’ share of risky assets, we test whether relative risk aversion is constant in wealth. After accounting for measurement error, we cannot reject the constant relative risk aversion (CRRA) assumption. Using an Euler equation that adjusts for measurement error in consumption data, we estimate the coefficient of relative risk aversion in the CRRA utility function. Point estimates from our preferred non-linear models suggest a moderate degree of risk aversion for the typical Australian household, with values ranging from 1.2 to 1.4. These findings can provide guidance for calibrating household preferences in macroeconomic models of the Australian economy. |
| Keywords: | risk aversion, intertemporal consumption choice, Euler equation, measurement error, GMM, instrumental variables |
| JEL: | D12 E21 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2019-27&r=all |