http://repub.eur.nl/res/concept/jel-G11/ Recent publications classified by JEL Code G11 en http://repub.eur.nl/static-eur/img/logo.png http://repub.eur.nl http://repub.eur.nl/res/pub/38776/ 2013-01-22T00:00:00Z Allen, D.E. Anwar, A.M. McAleer, M.J. Powell, R.J. Singh, A.K. http://repub.eur.nl/res/pub/38773/ 2013-01-18T00:00:00Z The purpose of this paper is to examine the asymmetric relationship between price and implied volatility and the associated extreme quantile dependence using linear and non linear quantile regression approach. Our goal in this paper is to demonstrate that the relationship between the volatility and market return as quantified by Ordinary Least Square (OLS) regression is not uniform across the distribution of the volatility-price return pairs using quantile regressions. We examine the bivariate relationship of six volatility-return pairs, viz. CBOE-VIX and S&P-500, FTSE-100 Volatility and FTSE-100, NASDAQ-100 Volatility (VXN) and NASDAQ, DAX Volatility (VDAX) and DAX-30, CAC Volatility (VCAC) and CAC-40 and STOXX Volatility (VSTOXX) and STOXX. The assumption of a normal distribution in the return series is not appropriate when the distribution is skewed and hence OLS does not capture the complete picture of the relationship. Quantile regression on the other hand can be set up with various loss functions, both parametric and non-parametric (linear case) and can be evaluated with skewed marginal based copulas (for the non linear case). Which is helpful in evaluating the non-normal and non-linear nature of the relationship between price and volatility. In the empirical analysis we compare the results from linear quantile regression (LQR) and copula based non linear quantile regression known as copula quantile regression (CQR). The discussion of the properties of the volatility series and empirical findings in this paper have significance for portfolio optimization, hedging strategies, trading strategies and risk management in general. Allen, D.E. Singh, A.K. Powell, R.J. McAleer, M.J. Taylor, J. Thomas, L. http://repub.eur.nl/res/pub/38233/ 2013-01-08T00:00:00Z The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing from a variety of risk models, and discuss the selection of optimal risk models. A new approach to model selection for predicting VaR is proposed, consisting of combining alternative risk models, and we compare conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008-09 global financial crisis. These issues are illustrated using Standard and Poor’s 500 Composite Index. McAleer, M.J. Jimenez-Martin, J-A. http://repub.eur.nl/res/pub/38775/ 2013-01-01T00:00:00Z Research papers in empirical finance and financial econometrics are among the most widely cited, downloaded and viewed articles in the discipline of Finance. The special issue presents several papers by leading scholars in the field on “Recent Developments in Financial Economics and Econometrics”. The breadth of coverage is substantial, and includes original research and comprehensive review papers on theoretical, empirical and numerical topics in Financial Economics and Econometrics by leading researchers in finance, financial economics, financial econometrics and financial statistics. The purpose of this special issue on “Recent Developments in Financial Economics and Econometrics” is to highlight several novel and significant developments in financial economics and financial econometrics, specifically dynamic price integration in the global gold market, a conditional single index model with local covariates for detecting and evaluating active management, whether the Basel Accord has improved risk management during the global financial crisis, the role of banking regulation in an economy under credit risk and liquidity shock, separating information maximum likelihood estimation of the integrated volatility and covariance with micro-market noise, stress testing correlation matrices for risk management, whether bank relationship matters for corporate risk taking, with evidence from listed firms in Taiwan, pricing options on stocks denominated in different currencies, with theory and illustrations, EVT and tail-risk modelling, with evidence from market indices and volatility series, the economics of data using simple model free volatility in a high frequency world, arbitrage-free implied volatility surfaces for options on single stock futures, the non-uniform pricing effect of employee stock options using quantile regression, nonlinear dynamics and recurrence plots for detecting financial crisis, how news sentiment impacts asset volatility, with evidence from long memory and regime-switching approaches, quantitative evaluation of contingent capital and its applications, high quantiles estimation with Quasi-PORT and DPOT, with an application to value-at-risk for financial variables, evaluating inflation targeting based on the distribution of inflation and inflation volatility, the size effects of volatility spillovers for firm performance and exchange rates in tourism, forecasting volatility with the realized range in the presence of noise and non-trading, using CARRX models to study factors affecting the volatilities of Asian equity markets, deciphering the Libor and Euribor spreads during the subprime crisis, information transmission between sovereign debt CDS and other financial factors for Latin America, time-varying mixture GARCH models and asymmetric volatility, and diagnostic checking for non-stationary ARMA models with an application to financial data. Chang, C.L. Allen, D.E. McAleer, M.J. http://repub.eur.nl/res/pub/38695/ 2013-01-01T00:00:00Z Research papers in empirical finance and financial econometrics are among the most widely cited, downloaded and viewed articles in the discipline of Finance. The special issue presents several papers by leading scholars in the field on “Recent Developments in Financial Economics and Econometrics”. The breadth of coverage is substantial, and includes original research and comprehensive review papers on theoretical, empirical and numerical topics in Financial Economics and Econometrics by leading researchers in finance, financial economics, financial econometrics and financial statistics. The purpose of this special issue on “Recent Developments in Financial Economics and Econometrics” is to highlight several novel and significant developments in financial economics and financial econometrics, specifically dynamic price integration in the global gold market, a conditional single index model with local covariates for detecting and evaluating active management, whether the Basel Accord has improved risk management during the global financial crisis, the role of banking regulation in an economy under credit risk and liquidity shock, separating information maximum likelihood estimation of the integrated volatility and covariance with micro-market noise, stress testing correlation matrices for risk management, whether bank relationship matters for corporate risk taking, with evidence from listed firms in Taiwan, pricing options on stocks denominated in different currencies, with theory and illustrations, EVT and tail-risk modelling, with evidence from market indices and volatility series, the economics of data using simple model free volatility in a high frequency world, arbitrage-free implied volatility surfaces for options on single stock futures, the non-uniform pricing effect of employee stock options using quantile regression, nonlinear dynamics and recurrence plots for detecting financial crisis, how news sentiment impacts asset volatility, with evidence from long memory and regime-switching approaches, quantitative evaluation of contingent capital and its applications, high quantiles estimation with Quasi-PORT and DPOT, with an application to value-at-risk for financial variables, evaluating inflation targeting based on the distribution of inflation and inflation volatility, the size effects of volatility spillovers for firm performance and exchange rates in tourism, forecasting volatility with the realized range in the presence of noise and non-trading, using CARRX models to study factors affecting the volatilities of Asian equity markets, deciphering the Libor and Euribor spreads during the subprime crisis, information transmission between sovereign debt CDS and other financial factors for Latin America, time-varying mixture GARCH models and asymmetric volatility, and diagnostic checking for non-stationary ARMA models with an application to financial data. Chang, C.L. Allen, D. McAleer, M.J. http://repub.eur.nl/res/pub/37470/ 2012-10-23T00:00:00Z We introduce a Mixed-Frequency Factor Model (MFFM) to estimate vast dimensional covari- ance matrices of asset returns. The MFFM uses high-frequency (intraday) data to estimate factor (co)variances and idiosyncratic risk and low-frequency (daily) data to estimate the factor loadings. We propose the use of highly liquid assets such as exchange traded funds (ETFs) as factors. Prices for these contracts are observed essentially free of microstructure noise at high frequencies, allowing us to obtain precise estimates of the factor covariances. The factor loadings instead are estimated from daily data to avoid biases due to market microstructure effects such as the relative illiquidity of individual stocks and non-synchronicity between the returns on factors and stocks. Our theoretical, simulation and empirical results illustrate that the performance of the MFFM is excellent, both compared to conventional factor models based solely on low-frequency data and to popular realized covariance estimators based on high-frequency data. Bannouh, K. Martens, M.P.E. Oomen, R.C.A. Dijk, D.J.C. van http://repub.eur.nl/res/pub/37284/ 2012-08-01T00:00:00Z We are the first to investigate the cross-section of stock returns in the new emerging equity markets, the so-called frontier emerging markets. Our unique survivorship-bias free data set consists of more than 1,400 stocks over the period 1997 to 2008 and covers 24 of the most liquid frontier emerging markets. The major benefit of using individual stock characteristics is that it allows us to investigate whether return factors that have been documented in developed countries also exist in these markets. We document the presence of economically and statistically significant value and momentum effects, and a local size effect. Our results indicate that the value and momentum effects still exist when incorporating conservative assumptions of transaction costs. Additionally, we show that value, momentum, and local size returns in frontier markets cannot be explained by global risk factors. Groot, W. de Pang, J. Swinkels, L.A.P. http://repub.eur.nl/res/pub/32021/ 2012-03-05T00:00:00Z We examine the performance of passively managed exchange-traded funds (ETFs) that provide exposure to global emerging markets equities. We find that the tracking errors of these funds are substantially higher than previously reported levels for developed markets ETFs. ETFs that use statistical index replication techniques turn out to be especially prone to high tracking errors, and particularly so during periods of high cross-sectional dispersion in stock returns. At the same time, we find no convincing evidence that these funds earn higher returns than ETFs that rely on full-replication techniques. Blitz, D.C. Huij, J.J. http://repub.eur.nl/res/pub/25718/ 2012-02-01T00:00:00Z Several studies report that abnormal returns associated with short-term reversal investment strategies diminish once trading costs are taken into account. We show that the impact of trading costs on the strategies' profitability can largely be attributed to excessively trading in small cap stocks. Limiting the stock universe to large cap stocks significantly reduces trading costs. Applying a more sophisticated portfolio construction algorithm to lower turnover reduces trading costs even further. Our finding that reversal strategies generate 30-50 basis points per week net of trading costs poses a serious challenge to standard rational asset pricing models. Our findings also have important implications for the understanding and practical implementation of reversal strategies. Groot, W. de Huij, J.J. Zhou, W. http://repub.eur.nl/res/pub/25992/ 2011-10-01T00:00:00Z We study individual portfolio choice in a laboratory experiment and find strong evidence for heuristic behavior. The subjects tend to focus on the marginal distribution of an asset, while largely ignoring its diversification benefits. They follow a conditional 1/n diversification heuristic as they exclude the assets with an "unattractive" marginal distribution and divide the available funds equally between the remaining "attractive" assets. This strategy is applied even if it leads to allocations that are dominated in terms of first-order stochastic dominance and is clearly irrational. In line with these findings, we find that framing and problem presentation have substantial influence on portfolio decisions. http://repub.eur.nl/res/pub/25610/ 2011-07-01T00:00:00Z In McAleer et al. (2010b), a robust risk management strategy to the Global Financial Crisis (GFC) was proposed under the Basel II Accord by selecting a Value-at-Risk (VaR) forecast that combines the forecasts of different VaR models. The robust forecast was based on the median of the point VaR forecasts of a set of conditional volatility models. In this paper we provide further evidence on the suitability of the median as a GFC-robust strategy by using an additional set of new extreme value forecasting models and by extending the sample period for comparison. These extreme value models include DPOT and Conditional EVT. Such models might be expected to be useful in explaining financial data, especially in the presence of extreme shocks that arise during a GFC. Our empirical results confirm that the median remains GFC-robust even in the presence of these new extreme value models. This is illustrated by using the S&P500 index before, during and after the 2008-09 GFC. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria, including several tests for independence of the violations. The strategy based on the median, or more generally, on combined forecasts of single models, is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions. Santos, P.A. Jimenez-Martin, J-A. McAleer, M.J. Perez-Amaral, T. http://repub.eur.nl/res/pub/22252/ 2011-06-01T00:00:00Z Conventional momentum strategies exhibit substantial time-varying exposures to the Fama and French factors. We show that these exposures can be reduced by ranking stocks on residual stock returns instead of total returns. As a consequence, residual momentum earns risk-adjusted profits that are about twice as large as those associated with total return momentum; is more consistent over time; and less concentrated in the extremes of the cross-section of stocks. Our results are inconsistent with the notion that the momentum phenomenon can be attributed to a priced risk factor or market microstructure effects. Blitz, D.C. Huij, J.J. Martens, M.P.E. http://repub.eur.nl/res/pub/22553/ 2011-02-04T00:00:00Z This paper explores the interaction between retirement flexibility and portfolio choice in an overlapping-generations model of a closed economy. Retirement flexibility is often seen as a hedge against capital market risks which justifies more risky asset portfolios. We show, however, that this positive relationship between risk taking and retirement flexibility is weakened - and under some conditions even turned around - if not only capital market risks but also productivity risks are considered. Productivity risk in combination with a high elasticity of substitution between consumption and leisure creates a positive correlation between asset returns and labour income, reducing the willingness of consumers to bear risk. Moreover, it turns out that general equilibrium effects can either increase or decrease the equity exposure, depending on the degree of substitutability between consumption and leisure. Adema, Y. Bonenkamp, J. Meijdam, L. http://repub.eur.nl/res/pub/21681/ 2010-12-01T00:00:00Z We analyze the impact of (alliance) network exposure on the speed and extent of adoption of the business model as being one explanatory factor for diffusion controlling for actor specific characteristics and embeddedness in the network. In order to explain how existing national regulation moderated this relationship and whether it succeeded in its risk-limiting mission by moderating global adoption patterns and risk-bearing behavior among financial institutions we estimate various history event analysis model i.e. standard Cox and extended frailty models. We find strong support for the role of network exposure rather than social learning, the impact of regulatory effort on patterns of adoption and the role of country clusters for diffusion in the financial sector. Cuntz, A.N. Blind, K. http://repub.eur.nl/res/pub/22199/ 2010-12-01T00:00:00Z This study examines the liability hedging characteristics of both direct and indirect real estate with the advent of fair value accounting obligations for pension funds. We explicitly model pension obligations as being subject to interest and inflation risk to analyze the ability of real estate investments in hedging the fair value of pension liabilities and to quantify its role in an asset liability management (ALM) portfolio. We find that the portfolio composition differs depending on the definition of liability return. When liability returns solely follow actuarial changes, the mean-variance efficient portfolio allocations toward direct real estate and fixed income decrease compared to the asset-only optimization. When accounting for nominal liability obligations, real estate offers hedging benefits against interest rates for short holding periods but not for long-term institutional portfolios. The inclusion of inflation risk renders a limited role for direct real estate in an ALM portfolio, while indirect real estate obtains no allocation. Inflation is at the heart of the discrepancy between reported and predicted pension plan allocations. Once accounting for inflation, the projected allocations come close to reported ones. Brounen, D. Porras Prado, M. Verbeek, M.J.C.M. http://repub.eur.nl/res/pub/21861/ 2010-11-01T00:00:00Z This paper documents that factors extracted from a large set of macroeconomic variables bear useful information for predicting monthly US excess stock returns and volatility over the period 1980-2005. Factor-augmented predictive regression models improve upon both benchmark models that only include valuation ratios and interest rate related variables, and possibly individual macro variables, as well as the historical average excess return. The improvements in out-of-sample forecast accuracy are both statistically and economically significant. The factor-augmented predictive regressions have superior market timing ability and volatility timing ability, while a mean-variance investor would be willing to pay an annual performance fee of several hundreds of basis points to switch from the predictions offered by the benchmark models to those of the factor-augmented models. An important reason for the superior performance of the factor-augmented predictive regressions is the stability of their forecast accuracy, whereas the benchmark models suffer from a forecast breakdown during the 1990s. Cakmakli, C. Dijk, D.J.C. van http://repub.eur.nl/res/pub/20964/ 2010-10-12T00:00:00Z A risk management strategy is proposed as being robust to the Global Financial Crisis (GFC) by selecting a Value-at-Risk (VaR) forecast that combines the forecasts of different VaR models. The robust forecast is based on the median of the point VaR forecasts of a set of conditional volatility models. This risk management strategy is GFC-robust in the sense that maintaining the same risk management strategies before, during and after a financial crisis would lead to comparatively low daily capital charges and violation penalties. The new method is illustrated by using the S&P500 index before, during and after the 2008-09 global financial crisis. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria. The median VaR risk management strategy is GFC-robust as it provides stable results across different periods relative to other VaR forecasting models. The new strategy based on combined forecasts of single models is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions. McAleer, M.J. Jimenez-Martin, J-A. Perez-Amaral, T. http://repub.eur.nl/res/pub/21398/ 2010-10-01T00:00:00Z This paper investigates the international spillovers of government debt and the associated risk of inflation within a monetary union when countries have different pension systems. I use a stochastic two-country two-period overlapping-generations model, where one country has PAYG pensions and the other country has funded pensions. The paper shows that the PAYG country can shift part of its long-term debt burden to the funded country. Moreover, the PAYG country gains from unexpected inflation at the cost of the funded country. In response to these conflicting interests about inflation, inflation risk may rise with the level of debt in the PAYG country. Higher inflation risk harms both countries. Actually, in contrast to the debt burden, the PAYG country cannot share the negative effects of a rise in inflation risk with the funded country. The scenarios analysed might be especially relevant for the years to come. Adema, Y. http://repub.eur.nl/res/pub/21590/ 2010-09-01T00:00:00Z The popular investment strategy in the literature is to use only past performance to select mutual funds. We investigate whether an investor can select superior funds by additionally using fund characteristics. After considering the fund fees, we find that combining information on past performance, turnover ratio, and ability produces a yearly excess net return of 8.0%, whereas an investment strategy that uses only past performance generates 7.1%. Adjusting for systematic risks, and then using fund characteristics, increases yearly alpha significantly from 0.8% to 1.7%. The strategy that also uses fund characteristics requires less turnover. Budiono, D.P. Martens, M.P.E. http://repub.eur.nl/res/pub/20750/ 2010-07-26T00:00:00Z For more than three decades, empirical analysis of stochastic dominance was restricted to settings with mutually exclusive choice alternatives. In recent years, a number of methods for testing efficiency of diversified portfolios have emerged, which can be classified into three main categories: 1) majorization, 2) revealed preference and 3) distribution-based approaches. Unfortunately, some of these schools of thought are developing independently, with little interaction or crossreferencing among them. Moreover, the methods differ in terms of their objectives, the information content of the results and their computational complexity. As a result, the relative merits of alternative approaches are difficult to compare. This paper presents the first systematic review of all three approaches in a unified methodological framework. We examine the main developments in this emerging literature, critically evaluating the advantages and disadvantages of the alternative approaches. We also point out some misleading arguments and propose corrections and improvements to some of the methods considered. Lizyayev, A.M.