1,721,292 research outputs found
Specification tests in parametric value-at-risk models
No full textOne of the implications of the creation of Basel Committee on Banking Supervision was the implementation of Value-at-Risk (VaR) as the standard tool for measuring market risk and of out-of-sample backtesting for banking risk monitoring. We stress in this article that the results derived from this exercise can be spurious if one does not carry out a previous in-sample specification test to determine the adequacy of the VaR model. We study in this paper specification tests that, unlike the existing ones, are able to control the type-I error probability. More concretely, we show that not taking into account the effect of estimating the parameters of the VaR model in the in-sample specification tests can lead to invalid inferences, which in turn may imply wrong conclusions about the out-of-sample backtesting procedures. The first aim of this article is to quantify the effect of estimating the parameters of the model and to stress its impact in specification tests, and the second is then to propose a corrected method taking into account such risk, and thereby to provide a valid econometric framework for measuring and evaluating market risk. The results are given for general dynamic parametric models and illustrated with a Monte-Carlo simulation for location-scale models and with an empirical application for S&P500 Index
Exploiting intraday and overnight price variation for daily VaR prediction
No full textThis study investigates the practical importance of several VaR modeling and forecasting issues in the context of intraday stock returns. Value-at-Risk (VaR) predictions obtained from daily GARCH models extended with additional information such as the realized volatility and squared overnight returns, are confronted with those from ARFIMA realized volatility models. The out-of-sample evaluation is based on a novel difference-in-proportions test that exploits the frequency of individual VaR rejections and a block-bootstrap unconditional coverage test that is robust to estimation uncertainty and model risk. We find that the overnight surprise does not improve the out-of-sample forecastability of the next-day VaR but there is evidence that intraday jumps have forecasting potential. ARFIMA models produce better backtesting results than GARCH models but the latter fare better in terms of independence of the hits sequence. Encompassing tests further suggest that GARCH and ARFIMA models can be fruitfully combined to produce more competitive VaR measures. The techniques are illustrated for a small portfolio of large-cap stocks
Semiparametric density forecasts of daily financial returns from intraday data
No full textIn this article we propose a new method for producing semiparametric density forecasts for daily financial returns from high-frequency intraday data. The daily return density is estimated directly from intraday observations that have been appropriately rescaled using results from the theory of unifractal processes. The method preserves information concerning both the magnitude and sign of the intraday returns and allows them to influence all properties of the daily return density via the use of nonparametric specifications for the daily return distribution. The out-of-sample density forecasting performance of the method is shown to be competitive with existing methods based on intraday data for exchange rate and equity index data.<br/
Investor sentiment and bond risk premia
Full text linkThis article studies the statistical significance of the set of market sentiment variables proposed by Baker and Wurgler (2006) to predict the risk premium on U.S. sovereign bonds. We show that these variables can be summarized in one single market sentiment factor similar in spirit to the single-return forecasting factor proposed by Cochrane and Piazzesi (2005). Our findings reveal that this factor has predictive power beyond that contained in the yield curve and benchmark macroeconomic factors. The predictive power of this variable is time-varying, exhibiting more relevance during recession periods
Exchange rates, macroeconomic fundamentals and risk aversion
No full textThis paper proposes a theoretical model for determining the exchange rate based on the interaction between international bond markets with different maturities. The model accommodates the presence of risk premia between short- and long-term bonds. The difference in risk premium between international bond markets produces imbalances between their yields and is responsible for the differences in equilibrium between the future spot exchange rate and the corresponding forward price. These departures from the expectations hypothesis of the international term structure of interest rates lead to unintended effects on the efficacy of monetary policy in open economies. The existence of imbalances in the risk premium between countries can be considered by monetary authorities as an alternative tool for conducting monetary policy and boosting real output
Uncovered interest parity: are empirical rejections of it valid?
No full textThere is a vast empirical literature rejecting uncovered interest parity (UIP) on the basis of regressions of the actual exchange rate change against the forward premium/discount. In this paper, whilst we confirm the conventional regression analyses, we argue that they constitute only an indirect test of UIP and that there are serious econometric flaws in such regressions that make them an unreliable means of testing for UIP. Instead, we propose a two new profitability based tests of the UIP condition based on actual dollar returns of being in the domestic and foreign currency and we find evidence that in fact the UIP condition in fact seems to be holding for three of the four parities studied even though the conventional test would have rejected UIP in all four cases. Not only do our economically more meaningful profitability based tests lead us to accept the UIP condition for three of four currencies studied but they also seem to offer superior econometric properties compared to the conventional regression analyses
A new family of consistent and asymptotically normal estimators for the extremal index
No full textThe extremal index (?) is the key parameter for extending extreme value theory results from i.i.d. to stationary sequences. One important property of this parameter is that its inverse determines the degree of clustering in the extremes. This article introduces a novel interpretation of the extremal index as a limiting probability characterized by two Poisson processes and a simple family of estimators derived from this new characterization. Unlike most estimators for ? in the literature, this estimator is consistent, asymptotically normal and very stable across partitions of the sample. Further, we show in an extensive simulation study that this estimator outperforms in finite samples the logs, blocks and runs estimation methods. Finally, we apply this new estimator to test for clustering of extremes in monthly time series of unemployment growth and inflation rates and conclude that runs of large unemployment rates are more prolonged than periods of high inflation
Changes in the transmission of monetary policy during crisis episodes: evidence from the Euro area and the U.S.
Full text linkThis paper proposes a bank-based theoretical model for the credit market that accommodates different types of creditors. The equilibrium relationships between monetary aggregates, credit interest rates and real income are derived from banks' optimizing behavior. This model is used to theoretically establish the effects of a crisis on the bank lending channel and, more specifically, on the equilibrium relationships between the main economic and monetary variables. The model is also used to explore the potential effects of unconventional monetary policies focused on reducing risk aversion during crisis episodes. These effects are empirically assessed applying cointegration techniques to macroeconomic data of the euro area and the United States before and after the collapse of the Lehman Brothers. The results support the efficacy of unconventional measures in restoring the conventional transmission channels between monetary aggregates but shed some doubts on the ability of these measures to boost economic activity
Overnight news and daily equity trading risk limits
No full textThis paper proposes a new bivariate modeling approach for setting daily equity-trading risk limits using high-frequency data. We construct one-day-ahead Value-at-Risk (VaR) forecasts by taking into account the different dynamics of the overnight and daytime return processes and their covariance. The covariance is motivated by market microstructure effects such as price staleness and news spillover. Among the competitors we include a simpler bivariate model where the overnight return is redefined by moving the open price further into the trading day, and a univariate model based on the close-to-close return and an overnight-adjusted realized volatility. We illustrate the different approaches using data on the S&P 500 and Russell 2000 indices. The evidence in favour of modeling the covariance is more convincing for the latter index due to the lower trading volumes and, relatedly, the less efficient price discovery at market open for small-cap stocks
Bank characteristics and the interbank money market: A distributional approach
No full textThis paper studies the relationship between bank characteristics, such as size, nationality, operating currency and sovereign debt in the parent country, and the distribution of funding spreads observed in the e-MID interbank money market during the Great financial crisis. Our setup is a pseudo-panel with a random number of international banks acting in the interbank market in each period. We develop new econometric tools for panel data with random effects and discrete covariates, such as a nonparametric kernel estimator of the distribution function of the response variable conditional on a set of covariates and a consistent test of first order stochastic dominance. Our empirical results, based on these tests, shed light on the survivorship bias in the e-Mid market, and reveal the existence of a risk premium on small banks, banks with currencies different from the Euro, and banks based on countries under sovereign debt distress in the periphery of the European Union. Finally we assess the impact of policy intervention in the aftermath of the financial crisis
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