http://repub.eur.nl/res/concept/jel-G12/ Recent publications classified by JEL Code G12 en http://repub.eur.nl/static-eur/img/logo.png http://repub.eur.nl 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/38949/ 2012-11-01T00:00:00Z The effectiveness of any sanction depends on the costs of avoiding its restrictions. We examine whether bearish option strategies were substitutes for short sales during the September 2008 short-sale ban. We find a significant diminution in option volumes and a significant increase in option bid-ask spreads for banned stock relative to unbanned stock during the ban period. Apparent violations of the put-call parity bound became significantly more frequent for banned stocks during the ban period. We conclude that the ban acted as an effective restriction on trading in options. Grundy, B.D. Lim, B. Verwijmeren, P. http://repub.eur.nl/res/pub/32837/ 2012-07-01T00:00:00Z We examine how commonality in liquidity varies across countries and over time in ways related to supply determinants (funding liquidity of financial intermediaries) and demand determinants (correlated trading behavior of international and institutional investors, incentives to trade individual securities, and investor sentiment) of liquidity. Commonality in liquidity is greater in countries with and during times of high market volatility (especially, large market declines), greater presence of international investors, and more correlated trading activity. Our evidence is more reliably consistent with demand-side explanations and challenges the ability of the funding liquidity hypothesis to help us understand important aspects of financial market liquidity around the world, even during the recent financial crisis. Karolyi, G.A. Lee, K.-H. Dijk, M.A. van 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/32160/ 2012-01-27T00:00:00Z We use earnings forecasts from a cross-sectional model to proxy for cash flow expectations and estimate the implied cost of capital (ICC) for a large sample of firms over 1968-2008. The earnings forecasts generated by the cross-sectional model are superior to analysts' forecasts in terms of coverage, forecast bias, and earnings response coefficient. Moreover, the model-based ICC is a more reliable proxy for expected returns than the ICC based on analysts' forecasts. We present evidence on the cross-sectional relation between firm-level characteristics and ex ante expected returns using the model-based ICC. Hou, K. Dijk, M.A. van Zhang, Y. http://repub.eur.nl/res/pub/37925/ 2012-01-01T00:00:00Z While in previous literature foreign currency exposure is estimated to be surprisingly small and insignificant, we question in this paper the rationality assumption and show that the traditional use of realized exchange rate changes to approximate unexpected currency shocks leads to a strong underestimation of the influence that exchange rates play in determining firm valuations. In light of a unique survey data base of individual exchange rate expectations, we distinguish between ‘realized’ and ‘unexpected’ foreign currency movements and find that half of our sample of 935 U.S. firms with real operations in foreign countries is significantly exposed to ‘unexpected’ exchange rate movements. In line with previously reported results, foreign exchange risk exposure is found to become increasingly perceptible when the return horizon is lengthened. The difference between the exposure to ‘realized’ versus ‘unexpected’ exchange rate movements is however decreasing when lengthening the horizon, suggesting that the more market participants disagree about the future path of currency values, the less investors and/or managers are likely to use the publicly available forecasts in their pricing and hedging decisions Verschoor, W.F.C. Jongen, R. Muller, A. http://repub.eur.nl/res/pub/31781/ 2011-11-11T00:00:00Z U.S. stock portfolios sorted on size, momentum, transaction costs, M/B, I/A and ROA ratios, and industry classi…cation show considerable levels and variation of return predictability, inconsistent with asset pricing models. This means that a predictable risk premium is not equal to compensation for systematic risk as implied by asset pricing theory (Kirby 1998). We show that introducing market frictions relaxes these asset pricing moments from a strict equality to a range. Empirically, it is not short sales constraints but transaction costs (below 35 basis points) that help to reconcile the observed predictability with the Fama-French-Carhart four- factor model and the Chen-Novy-Marx-Zhang three factor model, and partly with the Durable Consumption model. Across the sorts, predictability in industry returns can be reconciled with all models considered with only 25 basis points transaction costs, whereas for momentum and ROA portfolios up to 115 basis points are needed. Roon, F.A. de Szymanowska, M. 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/23653/ 2011-05-02T00:00:00Z 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. Di Cesare, A. Stork, Ph.A. Vries, C.G. de http://repub.eur.nl/res/pub/23120/ 2011-04-27T00:00:00Z This paper examines risk transmission and migration among six US measures of credit and market risk during the full period 2004-2011 period and the 2009-2011 recovery subperiod, with a focus on four sectors related to the highly volatile oil price. There are more long-run equilibrium risk relationships and short-run causal relationships among the four oil-related Credit Default Swaps (CDS) indexes, the (expected equity volatility) VIX index and the (swaption expected volatility) SMOVE index for the full period than for the recovery subperiod. The auto sector CDS spread is the most error-correcting in the long run and also leads in the risk discovery process in the short run. On the other hand, the CDS spread of the highly regulated, natural monopoly utility sector does not error correct. The four oil-related CDS spread indexes are responsive to VIX in the short- and long-run, while no index is sensitive to SMOVE which, in turn, unilaterally assembles risk migration from VIX. The 2007-2008 Great Recession seems to have led to “localization” and less migration of credit and market risk in the oil-related sectors. Hammoudeh, S.M. Liu, T. Chang, C.L. McAleer, M.J. http://repub.eur.nl/res/pub/21596/ 2010-12-01T00:00:00Z We develop and estimate a dynamic heterogeneous agent model for the EMS period. Our empirical results suggest that the existence of heterogeneous interacting agents is indeed a possible explanation for the dynamics of exchange rates during the EMS. We find strong evidence of heterogeneous boundedly rational beliefs, and the fact that agents switch between these beliefs. Moreover, we show that the dynamic heterogeneous agent model outperforms the random walk and the static heterogeneous agents’ model in out-of-sample forecasting in the large majority of country-horizon combinations. Jong, E. de Verschoor, W.F.C. Zwinkels, R.C.J. http://repub.eur.nl/res/pub/21593/ 2010-11-01T00:00:00Z This paper develops and tests a heterogeneous agents model for the option market. Our agents have different beliefs about the future level of volatility of the underlying stock index and trade accordingly. We consider two types of agents: fundamentalists and chartists, who are able to switch between groups according to a multinomial logit switching rule. The model simplifies to a GARCH-type specification with time-varying parameters. Estimation results for DAX30 index options reveal that different types of traders are actively involved in trading volatility. Our model improves frequently used standard GARCH-type models in terms of pricing performance. Frijns, B.P.M. Lehnert, T. Zwinkels, R.C.J. http://repub.eur.nl/res/pub/21598/ 2010-11-01T00:00:00Z In this paper, we develop and test a heterogeneous agent model for the oil market. The demand for oil is divided in a speculative component and a real component. Speculators are boundedly rational in forming price expectations. Expectations are formed by one of two boundedly rational rules of thumb: fundamentalist and chartist. While fundamentalists trade on mean-reversion, chartists follow the trend in prices. Speculators then choose between these rules based on past profitability. Estimation results on Brent and WTI oil reveal that both groups are active in the oil market, and that speculators often switch between the groups. The model outperforms both the random walk and VAR models in out-of-sample forecasting. Ellen, S. ter Zwinkels, R.C.J. 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/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/23936/ 2010-08-01T00:00:00Z We show that dispersion-based uncertainty about the future course of monetary policy is the single most important determinant of Treasury bond volatility across all maturities. The link between Treasury bond volatility and uncertainty about macroeconomic variables is much stronger than for the more traditional time series measures of macroeconomic volatility and adds beyond the information contained in lagged bond market volatility. Uncertainty about monetary policy subsumes the uncertainty about future inflation (consumer price index and the deflator) and economic activity (unemployment, real and nominal gross domestic product and industrial production). In addition, causality clearly runs one way: from monetary policy uncertainty to Treasury bond volatility. Vrugt, E.B. Arnold, I.J.M. http://repub.eur.nl/res/pub/16957/ 2010-04-01T00:00:00Z We show that inflation risk is priced in international asset returns. We analyze inflation risk in a framework that encompasses the International Capital Asset Pricing Model (ICAPM) of Adler and Dumas (1983). In contrast to the extant empirical literature on the ICAPM, we relax the assumption that inflation rates are constant. We estimate and test a conditional version of the model for the G5 countries (France, Germany, Japan, the U.K., and the U.S.) over the period 1975-1998 and find evidence of statistically and economically significant prices of inflation risk (in addition to priced nominal exchange rate risk). Our results imply a rejection of the restrictions imposed by the ICAPM. In an extension of our analysis to 2003, we show that even after the termination of nominal exchange rate fluctuations in the euro area in 1999, differences in inflation rates across countries entail non-trivial real exchange rate risk premia. Moerman, G.A. Dijk, M.A. van http://repub.eur.nl/res/pub/19217/ 2010-04-01T00:00:00Z Abstract This paper establishes a robust link between the trading behavior of institutions and the book-to-market effect. Building on work by Daniel and Titman (2006), who argue that the book-to-market effect is driven by the reversal of intangible returns, I find that institutions tend to buy (sell) shares in response to positive (negative) intangible information and that the reversal of the intangible return is most pronounced among stocks for which a large proportion of active institutions trade in the direction of intangible information. Furthermore, the book-to-market effect is large and significant in stocks with intense past institutional trading but nonexistent in stocks with moderate institutional trading. This influence of institutional trading on the book-to-market effect is distinct from that of firm size. These results are consistent with the view that the tendency of institutions to trade in the direction of intangible information exacerbates price overreaction, thereby contributing to the value premium. Jiang, H. http://repub.eur.nl/res/pub/18038/ 2010-02-08T00:00:00Z This paper examines the market efficiency of oil spot and futures prices by using a stochastic dominance (SD) approach. As there is no evidence of an SD relationship between oil spot and futures, we conclude that there is no arbitrage opportunity between these two markets, and that both market efficiency and market rationality are not rejected in the oil spot and futures markets. Lean, H.H. McAleer, M.J. Wong, W-K. http://repub.eur.nl/res/pub/17665/ 2010-01-04T00:00:00Z The equity premium puzzle holds that the coefficient of relative risk aversion estimated from the consumption based CAPM under power utility is excessively high. Moreover, estimates in the literature vary considerably across countries. We gauge the uncertainty pertaining to the country risk aversion estimates by means of jackknife resampling and pooling. The confidence band for the world risk aversion estimate from the pooled country data is much tighter and the pooled point estimate presents less of a puzzle than the individual country estimates. Pozzi, L.C.G.