http://repub.eur.nl/res/aut/1773/ List of Publications en http://repub.eur.nl/static-eur/img/logo.png http://repub.eur.nl http://repub.eur.nl/res/pub/13885/ 2008-03-01T00:00:00Z Increasing correlation during turbulent market conditions implies a reduction in portfolio diversification benefits. We investigate the robustness of recent empirical results that indicate a breakdown in the correlation structure by deriving theoretical truncated and exceedance correlations using alternative distributional assumptions. Analytical results show that the increase in conditional correlation could be a result of assuming conditional normality for the return distribution. When assuming a popular alternative distribution – the bivariate Student-tr – we find significantly less support for an increase in conditional correlation and conclude that this is due to the presence of fat tails when assuming normality in the return distribution. http://repub.eur.nl/res/pub/10774/ 2007-12-07T00:00:00Z We review Irving Fisher’s seminal work on UIP and on the closely related equation linking interest rates and inflation. Like Fisher, we find that the failures of UIP are connected to individual episodes in which errors surrounding exchange rate expectations are persistent, but eventually transitory. We find considerable commonality in deviations from UIP and PPP, suggesting that both of these deviations are driven by a common factor. Using a dynamic latent factor model, we find that deviations from UIP are almost entirely due to expectational errors in exchange rates, rather than attributable to the risk premium; a result consistent with those reported by Fisher a century ago. http://repub.eur.nl/res/pub/241/ 2002-10-22T00:00:00Z It is widely known that the small but looming possibility of default renders the expected return distribution for financial products containing credit risk to be highly skewed and fat tailed. In this paper we apply recent techniques developed for incorporating the additional risk faced by changes in swap spreads. Using data from the US, UK, Germany, and Japan, we find that the risk faced from large spread widenings and tightenings is grossly underestimated. Estimation of swap spread risk is dramatically improved when the severity of the fat tails is measured and incorporated into current estimation techniques. http://repub.eur.nl/res/pub/306/ 2001-09-07T00:00:00Z This thesis aims to address many of the issues raised concerning the appropriate definition and measurement of risk. An alternative approach to the estimation of risk, and the risk-return trade-off in international financial markets is investigated. Rather than focusing on the deviation of returns as the appropriate measure for risk, the more relevant negative domain when defining risk is focused upon. The notion of downside risk is applied as a more appropriate measure for risk. The focus is on a variety of international financial markets and applications of downside risk are used for improving market risk and credit risk management models. A downside risk approach for portfolio management is also derived, providing a pragmatic approach to implementing an alternative risk measure into international finance.