C.G. de Vries (Casper)
http://repub.eur.nl/ppl/38/
List of Publicationsenhttp://repub.eur.nl/eur_logo.png
http://repub.eur.nl/
RePub, Erasmus University RepositoryThe number of active bidders in internet auctions
http://repub.eur.nl/pub/40955/
Mon, 01 Jul 2013 00:00:01 GMT<div>L.F.M. de Haan</div><div>C.G. de Vries</div><div>C. Zhou</div>
Internet auctions attract numerous agents, but only a few become active bidders. Under the Independent Private Values Paradigm the valuations of the active bidders form a specific record sequence. This record sequence implies that if the number n of potential bidders is large, the number of active bidders is approximately 2log. n, potentially explaining the relative inactivity. Moreover, if the arrival of potential bidders forms a non-homogeneous Poisson process due to a time preference for auctions that are soon to close, then the arrival process of the active bidders is approximately a Poisson arrival process. Extreme Linkages in Financial Markets: Macro Shocks and Systemic Risk
http://repub.eur.nl/pub/38841/
Fri, 01 Feb 2013 00:00:01 GMT<div>C. Leuwattanachotina</div><div>C.G. de Vries</div>
Fat tails, VaR and subadditivity
http://repub.eur.nl/pub/37654/
Wed, 19 Sep 2012 00:00:01 GMT<div>J. Danielsson</div><div>B.N. Jorgensen</div><div>G. Samorodnitsky</div><div>M. Sarma</div><div>C.G. de Vries</div>
Financial institutions rely heavily on Value-at-Risk (VaR) as a risk measure, even though it is not globally subadditive. First, we theoretically show that the VaR portfolio measure is subadditive in the relevant tail region if asset returns are multivariate regularly varying, thus allowing for dependent returns. Second, we note that VaR estimated from historical simulations may lead to violations of subadditivity. This upset of the theoretical VaR subadditivity in the tail arises because the coarseness of the empirical distribution can affect the apparent fatness of the tails. Finally, we document a dramatic reduction in the frequency of subadditivity violations, by using semi-parametric extreme value techniques for VaR estimation instead of historical simulations. Heavy tails of OLS
http://repub.eur.nl/pub/37658/
Tue, 18 Sep 2012 00:00:01 GMT<div>T. Mikosch</div><div>C.G. de Vries</div>
Suppose the tails of the noise distribution in a regression exhibit power law behavior. Then the distribution of the OLS regression estimator inherits this tail behavior. This is relevant for regressions involving financial data. We derive explicit finite sample expressions for the tail probabilities of the distribution of the OLS estimator. These are useful for inference. Simulations for medium sized samples reveal considerable deviations of the coefficient estimates from their true values, in line with our theoretical formulas. The formulas provide a benchmark for judging the observed highly variable cross country estimates of the expectations coefficient in yield curve regressions. Simulating and calibrating diversification against black swans
http://repub.eur.nl/pub/76783/
Wed, 01 Aug 2012 00:00:01 GMT<div>N. Hyung</div><div>C.G. de Vries</div>
An investor concerned with the downside risk of a black swan only needs a small portfolio to reap the benefits from diversification. This matches actual portfolio sizes, but does contrast with received wisdom from mean-variance analysis and intuition regarding fat tailed distributed returns. The concern for downside risk and the fat tail property of the distribution of returns can explain the low portfolio diversification. A simulation and calibration study is used to demonstrate the relevance of the theory and to disentangle the relative importance of the different effects.IMF Support and Inter-Regime Exchange Rate Volatility
http://repub.eur.nl/pub/38974/
Wed, 01 Feb 2012 00:00:01 GMT<div>I.J.M. Arnold</div><div>R. MacDonald</div><div>C.G. de Vries</div>
It is widely agreed that when moving from fixed to floating exchange rates the increase in exchange rate volatility is not matched by an equivalent rise in the volatility of fundamentals. We argue and demonstrate that in inter-regime comparisons one has to account for 'missing variables' that compensate for the fundamental variables' volatility under fixed exchange rates. Previous studies have often used foreign exchange reserves, but without much success. We argue why reserves are not a reliable measure, while IMF credit support is. Our empirical analysis identifies IMF support as a crucial and significant compensating variable. The Herodotus paradox
http://repub.eur.nl/pub/32015/
Sun, 01 Jan 2012 00:00:01 GMT<div>M.R. Baye</div><div>D. Kovenock</div><div>C.G. de Vries</div>
The Babylonian bridal auction, described by Herodotus, is regarded as one of the earliest uses of an auction in history. Yet, to our knowledge, the literature lacks a formal equilibrium analysis of this auction. We provide such an analysis for the two-player case with complete and incomplete information, and in so doing identify what we call the "Herodotus paradox". Risk Measures for Autocorrelated Hedge Fund Returns
http://repub.eur.nl/pub/23653/
Mon, 02 May 2011 00:00:01 GMT<div>A. Di Cesare</div><div>Ph.A. Stork</div><div>C.G. de Vries</div>
Standard risk metrics tend to underestimate the true risks of hedge funds because of serial correlation in the reported returns. Getmansky et al. (2004) derive mean, variance, Sharpe ratio, and beta formulae adjusted for serial correlation. Following their lead, adjusted downside and global measures of individual and systemic risks are derived. We distinguish between normally and fat tailed distributed returns and show that adjustment is particularly relevant for downside risk measures in the case of fat tails. A hedge fund case study reveals that the unadjusted risk measures considerably underestimate the true extent of individual and systemic risks.Global Stochastic Properties of Dynamic Models and their Linear Approximations
http://repub.eur.nl/pub/20748/
Wed, 01 Sep 2010 00:00:01 GMT<div>A.M. Babus</div><div>C.G. de Vries</div>
The dynamic properties of micro based stochastic macro models are often analyzed through a linearization around the associated deterministic steady state. Recent literature has investigated the error made by such a deterministic approximation. Complementary to this literature we investigate how the linearization affects the stochastic properties of the original model. We consider a simple real business cycle model with noisy learning by doing. The solution has a stationary distribution that exhibits moment failure and has an unbounded support. The linear approximation, however, yields a stationary distribution with possibly a bounded support and all moments finite.The Herodotus Paradox
http://repub.eur.nl/pub/20754/
Thu, 01 Jul 2010 00:00:01 GMT<div>M.R. Baye</div><div>D. Kovenock</div><div>C.G. de Vries</div>
The Babylonian bridal auction, described by Herodotus, is regarded as one of the earliest uses of an auction in history. Yet, to our knowledge, the literature lacks a formal equilibrium analysis of this auction. We provide such an analysis for the twoplayer case with complete and incompete information, and in so doing identify what we call the "Herodotus Paradox".The Downside Risk of Heavy Tails induces Low Diversification
http://repub.eur.nl/pub/20749/
Tue, 01 Jun 2010 00:00:01 GMT<div>N. Hyung</div><div>C.G. de Vries</div>
Actual portfolios contain fewer stocks than are implied by standard financial analysis that balances the costs of diversification against the benefits in terms of the standard deviation of the returns. Suppose a safety first investor cares about downside risk and recognizes the heavy tail feature of the asset return distributions. Then we show that optimal portfolio sizes are smaller than traditional correlation based diversification analysis suggests.Global stochastic properties of dynamic models and their linear approximations
http://repub.eur.nl/pub/18600/
Sat, 01 May 2010 00:00:01 GMT<div>A.M. Babus</div><div>C.G. de Vries</div>
The dynamic properties of micro based stochastic macro models are often analyzed through a linearization around the associated deterministic steady state. Recent literature has investigated the errors made by such a deterministic approximation. Complementary to this literature we investigate how the linearization affects the stochastic properties of the original model. We consider a simple real business cycle model with noisy learning by doing. The solution has a stationary distribution that exhibits moment failure and has an unbounded support. The linear approximation, however, yields a stationary distribution with possibly a bounded support and all moments finite.Heavy tails and currency crises
http://repub.eur.nl/pub/19466/
Mon, 01 Mar 2010 00:00:01 GMT<div>P. Hartmann</div><div>S. Straetmans</div><div>C.G. de Vries</div>
In affine models of foreign exchange rate returns, the nature of cross sectional interdependence in crisis periods hinges on the tail properties of the fundamentals' distribution. If the fundamentals exhibit thin tails like the normal distribution, the dependence vanishes asymptotically; while the dependence remains in the case of heavy tailed fundamentals as in case of the Student-t distribution. The linearity of the monetary model and heavy tail distributed fundamentals are sufficient conditions for fundamentals-based repeated joint currency crises. An estimator for the extreme exchange rate interdependencies is obtained and applied to Western, Asian and Latin American currency block data.Contests with rank-order spillovers
http://repub.eur.nl/pub/17030/
Mon, 31 Aug 2009 00:00:01 GMT<div>M.R. Baye</div><div>D. Kovenock</div><div>C.G. de Vries</div>
This paper presents a unified framework for characterizing symmetric equilibrium in simultaneous move, two-player, rank-order contests with complete information, in which each player's strategy generates direct or indirect affine "spillover" effects that depend on the rank-order of her decision variable. These effects arise in natural interpretations of a number of important economic environments, as well as in classic contests adapted to recent experimental and behavioral models where individuals exhibit inequality aversion or regret. We provide the closed-form solution for the symmetric Nash equilibria of this class of games, and show how it can be used to directly solve for equilibrium behavior in auctions, pricing games, tournaments, R&D races, models of litigation, and a host of other contests.Contests with Rank-Order Spillovers
http://repub.eur.nl/pub/16514/
Wed, 01 Apr 2009 00:00:01 GMT<div>M.R. Baye</div><div>C.G. de Vries</div>
This paper presents a unified framework for characterizing symmetric equilibrium in simultaneous move, two-player, rank-order contests with complete information, in which each player's strategy generates direct or indirect affine "spillover" effects that depend on the rank-order of her decision variable. These effects arise in natural interpretations of a number of important economic environments, as well as in classic contests adapted to recent experimental and behavioral models where individuals exhibit inequality aversion or regret. We provide the closed-form solution for the symmetric Nash equilibria of this class of games, and show how it can be used to directly solve for equilibrium behavior in auctions, pricing games, tournaments, R&D races, models of ligitation, and a host of other contests.Optimal portfolio allocation under the probabilistic VaR constraint and incentives for financial innovation
http://repub.eur.nl/pub/63155/
Tue, 01 Jul 2008 00:00:01 GMT<div>J. Danielsson</div><div>B.N. Jorgensen</div><div>C.G. de Vries</div><div>X. Yang</div>
We characterize the investor's optimal portfolio allocation subject to a budget constraint and a probabilistic VaR constraint in complete markets environments with a finite number of states. The set of feasible portfolios might no longer be connected or convex, while the number of local optima increases exponentially with the number of states, implying computational complexity. The optimal constrained portfolio allocation may therefore not be monotonic in the state-price density. We propose a type of financial innovation, which splits states of nature, that is shown to weakly enhance welfare, restore monotonicity of the optimal portfolio allocation in the state-price density, and reduce computational complexity.The Extent of Internet Auction Markets
http://repub.eur.nl/pub/13676/
Thu, 17 Apr 2008 00:00:01 GMT<div>L.F.M. de Haan</div><div>C.G. de Vries</div><div>C. Zhou</div>
Internet auctions attract numerous agents, but only a few become active bidders. A major difficulty in the structural analysis of internet auctions is that the number of potential bidders is unknown. Under the independent private value paradigm (IPVP)the valuations of the active bidders form a specific record sequence. This record sequence implies that if the number n of potential bidders is large, the number of active bidders is approximately 2 log n, explaining the relative inactivity. Empirical evidence for the 2 log n rule is provided. This evidence can also be interpreted as a weak test of the IPVP.The expected payoff to Internet auctions
http://repub.eur.nl/pub/14192/
Tue, 01 Jan 2008 00:00:01 GMT<div>L.F.M. de Haan</div><div>C.G. de Vries</div><div>C. Zhou</div>
In an Internet auction, the expected payoff acts as a benchmark of the reasonableness of the price that is paid for the purchased item. Since the number of potential bidders is not observable, the expected payoff is difficult to estimate accurately. We approach this problem by considering the bids as a record and 2-record sequence of the potential bidder's valuation and using the Extreme Value Theory models to model the tail distribution of the bidder's valuation and study the expected payoff. Along the discussions for three different cases regarding the extreme value index γ, we show that the observed payoff does not act as an accurate estimation of the expected payoff in all the cases except a subclass of the case γ = 0. Within this subclass and under a second order condition, the observed payoff consistently converges to the expected payoff and the corresponding asymptotic normality holds.Portfolio selection with heavy tails
http://repub.eur.nl/pub/12362/
Fri, 01 Jun 2007 00:00:01 GMT<div>N. Hyung</div><div>C.G. de Vries</div>
Consider the portfolio problem of choosing the mix between stocks and bonds under a downside risk constraint. Typically stock returns exhibit fatter tails than bonds corresponding to their greater downside risk. Downside risk criteria like the safety first criterion therefore often select corner solutions in the sense of a bonds only portfolio. This is due to a focus on the asymptotically dominating first order Pareto term of the portfolio return distribution. We show that if second order terms are taken into account, a balanced solution emerges. The theory is applied to empirical examples from the literature.The Forward Premium Puzzle only emerges gradually
http://repub.eur.nl/pub/9513/
Thu, 29 Mar 2007 00:00:01 GMT<div>K. Bernoth</div><div>J. von Hagen</div><div>C.G. de Vries</div>
The forward premium puzzle (FPP) is the negative correlation between the forward premium and the realized exchange rate return at maturities of a month and beyond. Some recent evidence shows that at maturities of multiple years and at the highest intra day frequency the correlation is positive and close to one. This paper contributes by using futures data instead of forwards to complete the maturity spectrum at the (multi-) day level. We find that the correlation only slowly turns negative as the number of days to maturity is increased to the monthly level. The typical shape of the premium correlation with regard to the forward maturity length appears to be V-shaped.