http://repub.eur.nl/res/aut/4534/ List of Publications en http://repub.eur.nl/static-eur/img/logo.png http://repub.eur.nl http://repub.eur.nl/res/pub/19466/ 2010-03-01T00:00:00Z 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. http://repub.eur.nl/res/pub/12372/ 2006-01-01T00:00:00Z Paper prepared for the NBER project on “Risks of Financial Institutions”. We benefited from suggestions and criticism by many participants in the NBER project on “Risks of financial institutions”, in particular by the organizers Mark Carey (also involving Dean Amel and Allen Berger) and Rene Stulz, by our discussant Tony Saunders and by Patrick de Fontnouvelle, Gary Gorton, Andy Lo, Jim O’Brien and Eric Rosengren. Furthermore, we are grateful for comments we received at the 2004 European Finance Association Meetings in Maastricht, in particular by our discussant Marco da Rin and by Christian Upper, at the 2004 Ottobeuren seminar in economics, notably the thoughts of our discussant Ernst Baltensberger, of Friedrich Heinemann and of Gerhard Illing, as well as at seminars of the Max Planck Institute for Research on Collective Goods, the Federal Reserve Bank of St. Louis, the ECB and the University of Frankfurt. Gabe de Bondt and David Marques Ibanez supported us enormously in finding yield spread data, Lieven Baele and Richard Stehle kindly made us aware of pitfalls in Datastream equity data. Very helpful research assistance by Sandrine Corvoisier, Peter Galos and Marco Lo Duca as well as editorial support by Sabine Wiedemann are gratefully acknowledged. Any views expressed only reflect those of the authors and should not be interpreted as the ones of the ECB or the Eurosystem. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. This paper derives indicators of the severity and structure of banking system risk from asymptotic interdependencies between banks’ equity prices. We use new tools available from multivariate extreme value theory to estimate individual banks’ exposure to each other (“contagion risk”) and to systematic risk. Moreover, by applying structural break tests to those measures we study whether capital markets indicate changes in the importance of systemic risk over time. Using data for the United States and the euro area, we can also compare banking system stability between the two largest economies in the world. Finally, for Europe we assess the relative importance of cross-border bank spillovers as compared to domestic bank spillovers. The results suggest, inter alia, that systemic risk in the US is higher than in the euro area, mainly as cross-border risks are still relatively mild in Europe. On both sides of the Atlantic systemic risk has increased during the 1990s. http://repub.eur.nl/res/pub/12459/ 2004-03-30T00:00:00Z It is by now well known that Þnancial returns exhibit heavy tails and are thus nonnormally distributed. This implies that extreme market conditions tend to happen more frequently than expected on the basis of the normal distribution, which is used so often in standard asset pricing approaches. From the point of view of international Þnan- cial stability and portfolio diversiÞcation, the strength of asset linkages during crisis periods matters even more, as the linkages determine the stability of the system as a whole. Several papers talk about increased correlation between Þnancial assets or markets during crisis periods. As has been argued before, the use of correlation analysis is not without problems though. Since the correlation concept is just an intermediary step in calculating probabilities, we prefer to deÞne market linkages in terms of conditional probabilities and the expected number of market crashes. http://repub.eur.nl/res/pub/12376/ 2004-01-01T00:00:00Z We characterize asset return linkages during periods of stress by an extremal dependence measure. Contrary to correlation analysis, this nonparametric measure is not predisposed toward the normal distribution and can allow for nonlinear relationships. Our estimates for the G-5 countries suggest that simultaneous crashes between stock markets are much more likely than between bond markets. However, for the assessment of financial system stability the widely disregarded cross-asset perspective is particularly important. For example, our data show that stock-bond contagion is approximately as frequent as flight to quality from stocks into bonds. Extreme cross-border linkages are surprisingly similar to national linkages, illustrating a potential downside to international financial integration. http://repub.eur.nl/res/pub/6858/ 2001-07-19T00:00:00Z We characterize asset return linkages during periods of stress by an extremal dependence measure. Contrary to correlation analysis, this non-parametric measure is not predisposed towards the normal distribution and can account for non-linear relationships. Our estimates for the G-5 countries suggest that simultaneous crashes in stock markets are about two times more likely than in bond markets. Moreover, stock-bond contagion is about as frequent as flight to quality from stocks into bonds. Extreme cross-border linkages are surprisingly similar to national linkages, illustrating a potential downside to international financial integration. http://repub.eur.nl/res/pub/12476/ 1997-08-16T00:00:00Z Univariate time series regressions of the forex return on the forward premium generate mostly negative slope coefficients. Simple and refined panel estimation techniques yield slope estimates that are much closer to unity. We explain the two apparently opposing results by allowing for both additive and multiplicative news. No arbitrage arguments imply that the multiplicative news component must be identical across all exchange rates at a given point in time. Cross section estimates reveal that the movements in the multiplicative news component are so large that a negative slope coefficient for the post Bretton Woods time series regressions is not inprobable. http://repub.eur.nl/res/pub/7820/ 1997-01-30T00:00:00Z We investigate the potential presence of time variation in the coefficients of the ''Fama regression'' for Uncovered Interest Rate Parity. We implement coefficient constancy tests, rolling regression techniques, and stochastic coefficient models based on state space modelling. Among six major US bilateral exchange rates we find significant evidence for stochastic time variation. Using the statistical equivalence between stochastically varying coefficients and conditional heteroscedasticity we derive a proxy for time-varying 'risk', and investigate whether it explains the well known "negative bias" or "foreign discount bias puzzle" in the foreign exchange rate literature. We contrast our identification scheme to the ARCH-in-mean approach for empirically identifying risk premia. http://repub.eur.nl/res/pub/12407/ 1996-01-01T00:00:00Z The behaviour of the Hill estimator for the tail index of fat tailed distributions in the presence of local alternatives which have a thin tail is investigated. The converse problem is also briefly addressed. A local thin tail alternative can severely bias the Hill statistic. The relevance of this issue for the class of stable distributions is discussed. We conduct a small simulation study to support the analysis. In the conclusion it is argued that for moderate out of sample quantile analysis the problem of local alternatives may be less pressing.