http://repub.eur.nl/res/concept/jel-G10/ Recent publications classified by JEL Code G10 en http://repub.eur.nl/static-eur/img/logo.png http://repub.eur.nl http://repub.eur.nl/res/pub/38216/ 2012-12-12T00:00:00Z We assess the effect of aggregate stock market illiquidity on U.S. Treasury bond risk premia. We find that the stock market illiquidity variable adds to the well established Cochrane-Piazzesi and Ludvigson-Ng factors. It explains 10%, 9%, 7%, and 7% of the one-year-ahead variation in the excess return for two-, three-, four-, and ve-year bonds respectively and increases the adjusted R2 by 3-6% across all maturities over Cochrane and Piazzesi (2005) and Ludvigson and Ng (2009) factors. The effects are highly statistically and economically significant both in and out of sample. We find that our result is robust to and is not driven by information from open interest in the futures market, long-run inflation expectations, dispersion in beliefs, and funding liquidity. We argue that stock market illiquidity is a timely variable that is related to " right-to-quality" episodes and might contain information about expected future business conditions through funding liquidity and investment channels. Bouwman, K.E. Sojli, E. Tham, W.W. http://repub.eur.nl/res/pub/38199/ 2012-11-12T00:00:00Z This paper documents that speed is crucially important for high frequency trading strategies based on U.S. macroeconomic news releases. Using order level data of the highly liquid S&P500 ETF traded on NASDAQ from January 6, 2009, to December 12, 2011, we find that a delay of 300 milliseconds (1 second) significantly reduces returns by 3.08% (7.33%) compared to instantaneous execution over all announcements in the sample. This reduction is stronger in case of high impact news and on days with high volatility. In addition, we assess the effect of algorithmic trading on market quality around macroeconomic news. Increases in algorithmic trading activity have a positive (mixed) effect on market quality measures when we use algorithmic trading proxies that capture the top of the orderbook (full orderbook). Scholtus, M.L. Dijk, D.J.C. van Frijns, B.P.M. http://repub.eur.nl/res/pub/31778/ 2012-02-01T00:00:00Z This paper investigates the importance of speed for technical trading rule performance for three highly liquid ETFs listed on NASDAQ over the period January 6, 2009 up to September 30, 2009. In addition we examine the characteristics of market activity over the day and within subperiods corresponding to hours, minutes, and seconds. Speed has a clear impact on the return of technical trading rules. For strategies that yield a positive return when they experience no delay, a delay of 200 milliseconds is enough to lower performance significantly. On low volatility days this is already the case for delays larger than 50 milliseconds. In addition, the importance of speed for trading rule performance increases over time. Market activity follows a U-shape over the day with a spike at 10:00AM due to macroeconomic announcements and is characterized by periodic activity within the day, hour, minute, and second. Scholtus, M.L. Dijk, D.J.C. van http://repub.eur.nl/res/pub/19732/ 2010-12-01T00:00:00Z This paper examines the relation between the Canadian dollar/US dollar (CAD) exchange rate and foreign exchange order flow employing a novel data set on CAD order flow over the period 1994–2005. We investigate empirically the predictive information content and the determinants of order flow. The results suggest that order flow has strong out-of-sample predictive power for CAD returns, yielding significant market timing ability and tangible economic gains in a stylized dynamic asset allocation context. In terms of its determinants, order flow appears to reflect not only the menu of macroeconomic variables typically suggested in the literature but is also closely related to commodity price fluctuations, as expected from a ‘commodity currency’. King, M. Sarno, L. Sojli, E. http://repub.eur.nl/res/pub/17525/ 2009-12-10T00:00:00Z Bubbles can persist because investors are better off riding bubbles. We define bubbles in a natural way as significant, prolonged deviations from fundamental values measured by the well-known asset pricing models. Our real-time bubble detection system shows that –using US industry returns– periods of both higher volatility and higher abnormal returns follow noisy positive bubble signals. However, for the typical investor the risk-return trade-off improves. Riding bubbles generates annual abnormal returns of three to nine percent. These conclusions are robust to different assumptions and our system allows for alternative multifactor models as proxies for fundamental value. Günster, N.K. Kole, H.J.W.G. Jacobsen, B. http://repub.eur.nl/res/pub/17308/ 2009-11-24T00:00:00Z This study examines the conditional volatility and correlation dependency and interdependency for the four major precious metals (that is, gold, silver, platinum and palladium), while accounting for geopolitics within a multivariate system. The implications of the estimated results for portfolio designs and hedging strategies are also analyzed. The results for the four metals system show significant short-run and long-run dependencies and interdependencies to news and past volatility. These results have become more pervasive when the exchange rate and FFR are included. Monetary policy also has a differential impact on the precious metals and the exchange rate volatilities. Finally, the applications of the results show the optimal weights in a two-asset portfolio and the hedging ratios for long positions. Hammoudeh, S.M. Yuan, Y. McAleer, M.J. Thompson, M.A. http://repub.eur.nl/res/pub/17296/ 2009-11-23T00:00:00Z The paper models the dynamic conditional correlations in emerging stock, bond and foreign exchange markets using the DCC model of Engle (2002) and the GARCC model of McAleer et al. (2008). The highly restrictive DCC model suggests that the conditional correlations of the overall returns are constant. In contrast, the GARCC model finds that the conditional correlations between bond-bond markets and between stock-stock markets are relatively constant across developed-emerging markets, while those between emerging-emerging markets are dynamic. The conditional correlations between stock-bond markets across developed-emerging markets are also more dynamic as compared with those between emerging-emerging markets. Hakim, A. McAleer, M.J. http://repub.eur.nl/res/pub/22276/ 2009-06-01T00:00:00Z We analyse the relationship between credit default swap (CDS), bond and stock markets during 2000–2002. Focusing on the intertemporal co-movement, we examine monthly, weekly and daily lead-lag relationships in a vector autoregressive model and the adjustment between markets caused by cointegration. First, we find that stock returns lead CDS and bond spread changes. Second, CDS spread changes Granger cause bond spread changes for a higher number of firms than vice versa. Third, the CDS market is more sensitive to the stock market than the bond market and the strength of the co-movement increases the lower the credit quality and the larger the bond issues. Finally, the CDS market contributes more to price discovery than the bond market and this effect is stronger for US than for European firms. Norden, L. Weber, M. http://repub.eur.nl/res/pub/13591/ 2008-09-01T00:00:00Z We analyze the importance of firm-specific and country-specific factors in the leverage choice of firms from 42 countries around the world. Our analysis yields two new results. First, we find that firm-specific determinants of leverage differ across countries, while prior studies implicitly assume equal impact of these determinants. Second, although we concur with the conventional direct impact of country-specific factors on the capital structure of firms, we show that there is an indirect impact because country-specific factors also influence the roles of firm-specific determinants of leverage. Jong, A. de Kabir, R. Nguyen, T.T. http://repub.eur.nl/res/pub/13586/ 2008-04-01T00:00:00Z We show that results in the recent strand of the literature, which tries to explain stock returns by weather induced mood shifts of investors, might be data-driven inference. More specifically, we consider two recent studies [Kamstra, Mark J., Kramer, Lisa A., Levi, Maurice D., 2003a. Winter blues: A SAD stock market cycle. American Economic Review 93(1), 324–343; Cao, Melanie, Wei, Jason, 2005. Stock market returns: A note on temperature anomaly. Journal of Banking and Finance 29(6), 1559–1573] that claim that a seasonal anomaly in stock returns is caused by mood changes of investors due to lack of daylight and temperature variations, respectively. While we confirm earlier results in the literature that there is indeed a strong seasonal effect in stock returns in many countries: stock market returns tend to be significantly lower during summer and fall months than during winter and spring months as documented by Bouman and Jacobsen [Bouman, Sven, Jacobsen, Ben, 2002. The Halloween indicator, Sell in May and go away: Another puzzle. American Economic Review, 92(5), 1618–1635], there is little evidence in favor of a SAD or temperature explanation. In fact, we find that a simple winter/summer dummy best describes this seasonality. Our results suggest that without any further evidence the correlation between weather-related variables and stock returns might be spurious and the conclusion that weather affects stock returns through mood changes of investors is premature. Jacobsen, B. Marquering, W.A. http://repub.eur.nl/res/pub/6988/ 2005-10-14T00:00:00Z Due to its non-storable nature, electricity is a commodity with probably the most volatile spot prices, exemplified by occasional spikes. Appropriate pricing, portfolio, and risk management models have to incorporate these characteristics, and the spikes in particular. We investigate the nature of power spikes in a number of different markets. We test what time-series model is best able to capture the dynamics of these disruptive spot prices. We use regime-switching models to infer whether the price spikes should be treated as abnormal and independent deviations from the ‘normal’ price dynamics or whether they form an integral part of the price process. We test the time-series models on day-ahead markets in Europe and the US. We find that regimeswitch models are better able to capture the market dynamics than a GARCH(1,1) or Poisson jump model. We also find clear differences between the markets and attribute part of the differences to the share of hydro-power in the total supply stack: hydro-power serves as an indirect means to store electricity, which has a dampening effect on spikes. Jong, C.M. de http://repub.eur.nl/res/pub/6922/ 2005-09-06T00:00:00Z The first three factors resulting from a principal components analysis of term structure data are in the literature typically interpreted as driving the level, slope and curvature of the term structure. Using slight generalisations of theorems from total positivity, we present sufficient conditions under which level, slope and curvature are present. These conditions have the nice interpretation of restricting the level, slope and curvature of the correlation surface. It is proven that the Schoenmakers-Coffey correlation matrix also brings along such factors. Finally, we formulate and corroborate our conjecture that the order present in correlation matrices causes slope. Lord, R. Pelsser, A.A.J. http://repub.eur.nl/res/pub/6602/ 2004-10-01T00:00:00Z Risk managers use portfolios to diversify away the un-priced risk of individual securities. In this paper we compare the benefits of portfolio diversification for downside risk in case returns are normally distributed with the case fat tailed distributed returns. The downside risk of a security is decomposed into a part which is attributable to the market risk, an idiosyncratic part and a second independent factor. We show that the fat-tailed based downside risk, measured as Value-at-Risk (VaR), should decline more rapidly than the normal based VaR. This result is confirmed empirically. Hyung, N. Vries, C.G. de http://repub.eur.nl/res/pub/272/ 2003-02-11T00:00:00Z Over the last decade we have witnessed the rise and fall of the so-called new economy stocks. One central question is to what extent these new firms differ from traditional firms. Empirical evidence suggests that stock returns are not normally distributed. In this article we investigate whether this also holds for portfolios of stocks from a growth industry. Furthermore, we will compare this type of portfolios with portfolios of stocks from a more traditional industry. Usually, only value weighted and equally weighted portfolios are used to describe and compare portfolio return characteristics. Instead, in our analysis, we use a novel approach in which we use an infinite number of portfolios that together represent the set of all feasible portfolio opportunities. Pouchkarev, I. Spronk, J. Vliet, P. van http://repub.eur.nl/res/pub/248/ 2002-10-29T00:00:00Z We examine the consequences of transparency in an experimental multiple-dealer market with asymmetrically informed dealers. Five professional securities traders make a market for a single security. In each trading round, one of the dealers (the "insider") is told the security's true value. We vary both pre-trade and post-trade transparency by changing the way quote and trade information is published. The insider's profits are greatest when price efficiency is lowest. Price efficiency, in turn, is reduced by pre-trade transparency and increased by posttrade transparency. Market liquidity, measured by dealers' bid-ask spreads, is improved by pre-trade transparency and reduced by post-trade transparency. Flood, M.D. Koedijk, C.G. Dijk, M.A. van Leeuwen, I.W. van http://repub.eur.nl/res/pub/234/ 2002-10-08T00:00:00Z We present an analysis of the performance of the DAX, German's major stock market index, over the last two years. Our analysis is broader than conventional benchmark approaches because we study the properties of all feasible portfolios, i.e. portfolios composed given the same investment opportunity set and also given the same constraints as implied by the definition of the DAX. We estimate the distribution of performance values of all feasible portfolios according to different performance measures and evaluate the position of the DAX with respect to this feasible set. As in existing approaches, our analysis describes the 'average' development of the market over time. In addition, our analysis provides an insight into the development of the dynamics of the market over time by following the dispersion of the performance distributions over time. Hallerbach, W.G.P.M. Hundack, C. Pouchkarev, I. Spronk, J. http://repub.eur.nl/res/pub/6948/ 2000-07-05T00:00:00Z Most of the available monthly interest data series consist of monthly averages of daily observations. It is well- known that this averaging introduces spurious autocorrelation effects in the first differences of the series. It is exactly this differenced series we are interested in when estimating interest rate risk exposures e.g. This paper presents a method to filter this autocorrelation component from the averaged series. In addition we investigate the potential effect of averaging on duration analysis, viz. when estimating the relationship between interest rates and financial market variables like equity or bond prices. In contrast to interest rates the latter price series are readily available in ultimo month form. We find that combining monthly returns on market variables with changes in averaged interest rates leads to serious biases in estimated correlations (R2s), regression coefficients (durations) and their significance (t-statistics). Our theoretical findings are confirmed by an empirical investigation of US interest rates and their relationship with US equities (S&P 500 Index). Hallerbach, W.G.P.M. http://repub.eur.nl/res/pub/7723/ 1999-05-10T00:00:00Z An intensive and still growing body of research focuses on estimating a portfolio’s Value-at-Risk. Depending on both the degree of non-linearity of the instruments comprised in the portfolio and the willingness to make restrictive assumptions on the underlying statistical distributions, a variety of analytical methods and simulation-based methods are available. Aside from the total portfolio’s VaR, there is a growing need for information about (i) the marginal contribution of the individual portfolio components to the diversified portfolio VaR, (ii) the proportion of the diversified portfolio VaR that can be attributed to each of the individual components consituting the portfolio, and (iii) the incremental effect on VaR of adding a new instrument to the existing portfolio. Expressions for these marginal, component and incremental VaR metrics have been derived by Garman [1996a, 1997a] under the assumption that returns are drawn from a multivariate normal distribution. For many portfolios, however, the assumption of normally distributed returns is too stringent. Whenever these deviations from normality are expected to cause serious distortions in VaR calculations, one has to resort to either alternative distribution specifications or historical and Monte Carlo simulation methods. Although these approaches to overall VaR estimation have received substantial interest in the literature, there exist to the best of our knowledge no procedures for estimating marginal VaR, component VaR and incremental VaR in either a non-normal analytical setting or a Monte Carlo / historical simulation context. This paper tries to fill this gap by investigating these VaR concepts in a general distribution-free setting. We derive a general expression for the marginal contribution of an instrument to the diversified portfolio VaR ? whether this instrument is already included in the portfolio or not. We show how in a most general way, the total portfolio VaR can be decomposed in partial VaRs that can be attributed to the individual instruments comprised in the portfolio. These component VaRs have the appealing property that they aggregate linearly into the diversified portfolio VaR. We not only show how the standard results under normality can be generalized to non-normal analytical VaR approaches but also present an explicit procedure for estimating marginal VaRs in a simulation framework. Given the marginal VaR estimate, component VaR and incremental VaR readily follow. The proposed estimation approach pairs intuitive appeal with computational efficiency. We evaluate various alternative estimation methods in an application example and conclude that the proposed approach displays an astounding accuracy and a promising outperformance. Hallerbach, W.G.P.M.