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Market Risk (market + risk)

Distribution by Scientific Domains

Business, Economics, Finance and Accounting	90%
2 Other Domains	10%

Distribution within Business, Economics, Finance and Accounting

General & Introductory Economics	30%
General & Introductory Finance & Investments	20%
7 Other Subdomains	30%

Selected Abstracts

The Impact of Macroeconomic and Financial Variables on Market Risk: Evidence from International Equity Returns

EUROPEAN FINANCIAL MANAGEMENT, Issue 4 2002
Dilip K. Patro
Using a GARCH approach, we estimate a time,varying two,factor international asset pricing model for the weekly equity index returns of 16 OECD countries. We find significant time,variation in the exposure (beta) of country equity index returns to the world market index and in the risk,adjusted excess returns (alpha). We then explain these world market betas and alphas using a number of country,specific macroeconomic and financial variables with a panel approach. We find that several variables including imports, exports, inflation, market capitalisation, dividend yields and price,to,book ratios significantly affect a country's exposure to world market risk. Similar conclusions are obtained by using lagged explanatory variables, and thus these variables may be useful as predictors of world market risks. Several variables also significantly impact the risk,adjusted excess returns over this time period. Our results are robust to a number of alternative specifications. We further discuss some economic hypotheses that may explain these relationships. [source]

Mergers with Product Market Risk

JOURNAL OF ECONOMICS & MANAGEMENT STRATEGY, Issue 3 2006
Albert Banal-Estañol
This paper studies the causes and the consequences of horizontal mergers among risk-averse firms. The amount of diversification depends on the allocation of shares among the merging firms, with a direct risk-sharing effect and an indirect strategic effect. If firms compete in quantities, consolidation makes firms more aggressive. Mergers involving few firms are then profitable with a relatively low level of risk aversion. With strong enough risk aversion, mergers reduce prices and improve social welfare. If firms instead compete in prices, consumers do not benefit from mergers in markets with demand uncertainty, but can easily benefit with cost uncertainty. [source]

Stock Returns and Volatility: Pricing the Short-Run and Long-Run Components of Market Risk

THE JOURNAL OF FINANCE, Issue 6 2008
TOBIAS ADRIAN
ABSTRACT We explore the cross-sectional pricing of volatility risk by decomposing equity market volatility into short- and long-run components. Our finding that prices of risk are negative and significant for both volatility components implies that investors pay for insurance against increases in volatility, even if those increases have little persistence. The short-run component captures market skewness risk, which we interpret as a measure of the tightness of financial constraints. The long-run component relates to business cycle risk. Furthermore, a three-factor pricing model with the market return and the two volatility components compares favorably to benchmark models. [source]

Market risk and process uncertainty in production operations

NAVAL RESEARCH LOGISTICS: AN INTERNATIONAL JOURNAL, Issue 7 2006
Bardia Kamrad
Abstract By adopting a real options framework we develop a production control model that jointly incorporates process and market uncertainties. In this model, process uncertainty is defined by random fluctuations in the outputs' yield and market risk through demand uncertainty for the output. In our approach, production outputs represent commodities or items for which financial contracts do not trade. Outputs are also functionally linked to the level of input inventories. To extend the model's applicability to a wide range of production industries, inputs are modeled to reflect either renewable or partially renewable or non-renewable resources. Given this setting, techniques of stochastic control theory are employed to obtain value maximizing production policies in a constrained capacity environment. The rate of production is modeled as an adapted positive real-valued process and analogously evaluated as a sequence of complex real options. Since optimal adjustments to the rate of production also functionally depend on the outputs' yield, we optimally establish "trigger boundaries" justifying controlled variations to the rate of production over time. In this context, we provide closed form analytic results and demonstrate their robustness with respect to the stochastic (including mean reverting) processes considered. Using these results, we also demonstrate that the value (net of holding costs) accrued to the producer from having an inventory of the output is equivalent to the producer's reservation price to operationally curb its process yield. These generalizations extend the scope of model applicability and provide a basis for applying the real options methodology in the operations arena. The model is explored numerically using a stylized example that allows for both output and demand uncertainty and achieves greater realism by incorporating an element of smoothing into the sequence of production decisions. © 2006 Wiley Periodicals, Inc. Naval Research Logistics, 2006 [source]

The Impact of Macroeconomic and Financial Variables on Market Risk: Evidence from International Equity Returns

A best choice among asset pricing models?

ACCOUNTING & FINANCE, Issue 2 2004
The Conditional Capital Asset Pricing Model in Australia
Abstract We use Australian data to test the Conditional Capital Asset Pricing Model (Jagannathan and Wang, 1996). Our results are generally supportive: the model performs well compared with a number of competing asset pricing models. In contrast to the study by Jagannathan and Wang, however, we find that the inclusion of the market for human capital does not save the concept of the time-independent market beta (it remains insignificant). We find support for the role of a small-minus-big factor in pricing the cross-section of returns and find grounds to disagree with Jagannathan and Wang's argument that this factor proxies for misspecified market risk. [source]

Market Price of Risk: A Comparison among the United States, United Kingdom, Australia and Japan,

INTERNATIONAL REVIEW OF FINANCE, Issue 4 2009
KENT WANG
ABSTRACT This study examines and compares the market price of risk of the S&P 500, FTSE 100, All Ordinaries, and Nikkei 225 markets from 1984 to 2009 in the framework of Intertemporal Capital Asset Pricing Model (ICAPM). We follow the Vector Autoregressive instrumental variable approach in identifying the risk and hedge components of market returns and argue that in the context of market integration, covariance with a world market portfolio is a better measure of market risk than conditional market variance. Evidence is documented in support of using covariance as a risk measure in explaining market risk premiums in the Australian and Japanese markets. CAY, the consumption wealth ratio from the US market is found to be a robust state variable that helps to explain both conditional variance and covariance processes in the four markets. The market prices of risk, after controlling for the hedging demands, are positive and significant with the United States having the highest price of risk. The results are confirmed using a series of robustness tests that include varying the sampling interval. [source]

An Evaluation of the Compensation Required by European Union Cereal Growers to Accept the Removal of Price Support

JOURNAL OF AGRICULTURAL ECONOMICS, Issue 3 2003
Rob Fraser
Motivated by the policy trend of exposing European Union farmers to more market risk by reducing price support, this paper evaluates the compensation required by EU cereal growers to accept the complete removal of price support. Additional considerations are whether this policy change also includes the removal of set-aside, or features only a partial removal of price support. A model is developed which captures the main on- and off-farm factors influencing grower perceptions of the impact of this policy change. This model is subjected to a numerical analysis which shows that divergent assessments of the expected profitability of releasing to production land previously set-aside mean growers are unlikely to agree whether compensation is even required. It is concluded that the retention of set-aside for environmental purposes is likely to mean growers are more united in their perception of the need for, and amount of, compensation to accept the removal of price support. [source]

CREATING VALUE IN PENSION PLANS (OR, GENTLEMEN PREFER BONDS)

JOURNAL OF APPLIED CORPORATE FINANCE, Issue 4 2003
Jeremy Gold
Pension funds are typically one-half to two-thirds invested in equities because equities are expected to outperform other financial assets over the long term, and the long-term nature of pension fund liabilities seems well suited to absorbing any short-term return volatility. What's more, U.S. GAAP currently makes it possible to take credit in advance for the higher anticipated earnings on equity investments without acknowledging their inherent risk. But by allowing the higher expected returns from stocks to reduce a company's current pension expenses, the accounting treatment conflicts with some very basic principles of finance (in particular, the idea that investors must earn higher returns on riskier investments just to "break even"), conceals systematic biases in the actuarial analysis, and gives managers considerable latitude to manipulate the bottom line. The authors suggest a startlingly different approach. They argue that pension assets should be invested entirely in duration-matched debt instruments for two reasons: (1) to capture the full tax benefits of pre-funding their pension obligations and (2) to improve overall corporate risk profiles by converting general stock market risk into firm-specific operating risk, where corporate managers should have a comparative advantage and can generate real value. Investing exclusively in bonds would take better advantage of the tax-exempt status of pension plans and greatly reduce fund management costs, while at the same time helping o shore up fund quality and sharpening corporate executives' focus on their real operating assets. [source]

THE TEN COMMANDMENTS FOR OPTIMIZING VALUE-AT-RISK AND DAILY CAPITAL CHARGES

JOURNAL OF ECONOMIC SURVEYS, Issue 5 2009
Michael McAleer
Abstract Credit risk is the most important type of risk in terms of monetary value. Another key risk measure is market risk, which is concerned with stocks and bonds, and related financial derivatives, as well as exchange rates and interest rates. This paper is concerned with market risk management and monitoring under the Basel II Accord, and presents Ten Commandments for optimizing value-at-risk (VaR) and daily capital charges, based on choosing wisely from (1) conditional, stochastic and realized volatility; (2) symmetry, asymmetry and leverage; (3) dynamic correlations and dynamic covariances; (4) single index and portfolio models; (5) parametric, semi-parametric and non-parametric models; (6) estimation, simulation and calibration of parameters; (7) assumptions, regularity conditions and statistical properties; (8) accuracy in calculating moments and forecasts; (9) optimizing threshold violations and economic benefits; and (10) optimizing private and public benefits of risk management. For practical purposes, it is found that the Basel II Accord would seem to encourage excessive risk taking at the expense of providing accurate measures and forecasts of risk and VaR. [source]

Selection of Value-at-Risk models

JOURNAL OF FORECASTING, Issue 4 2003
Mandira Sarma
Abstract Value-at-Risk (VaR) is widely used as a tool for measuring the market risk of asset portfolios. However, alternative VaR implementations are known to yield fairly different VaR forecasts. Hence, every use of VaR requires choosing among alternative forecasting models. This paper undertakes two case studies in model selection, for the S&P 500 index and India's NSE-50 index, at the 95% and 99% levels. We employ a two-stage model selection procedure. In the first stage we test a class of models for statistical accuracy. If multiple models survive rejection with the tests, we perform a second stage filtering of the surviving models using subjective loss functions. This two-stage model selection procedure does prove to be useful in choosing a VaR model, while only incompletely addressing the problem. These case studies give us some evidence about the strengths and limitations of present knowledge on estimation and testing for VaR.,Copyright © 2003 John Wiley & Sons, Ltd. [source]

Corporate Reputation and Social Performance: The Importance of Fit

JOURNAL OF MANAGEMENT STUDIES, Issue 3 2006
Stephen J. Brammer
abstract Utilizing data on a sample of large firms, we estimate a model of corporate reputation. We find reputation, derived from the assessments of managers and market analysts, to be determined by a firm's social performance, financial performance, market risk, the extent of long-term institutional ownership, and the nature of its business activities. Furthermore, the reputational effect of social performance is found to vary both across sectors, and within sectors across the various types of social performance. Specifically, our results demonstrate the need to achieve a ,fit' among the types of corporate social performance undertaken and the firm's stakeholder environment. For example, a strong record of environmental performance may enhance or damage reputation depending on whether the firm's activities ,fit' with environmental concerns in the eyes of stakeholders. [source]

Real estate and corporate valuation: an asset pricing perspective

MANAGERIAL AND DECISION ECONOMICS, Issue 7 2001
Liow Kim Hiang
Property is a significant asset in the balance sheets of some Singapore industrial/commerce firms and hotel corporations. In this research, we take on the task of examining the relationship between real estate and stock market valuation of these business firms from an asset pricing perspective. Specifically, the real estate sensitivity of ,property-intensive', non-real estate stocks is investigated in both a three-index (market, sector and property) of stock returns and in an arbitrage pricing theory (APT) framework. The APT model is further recast as a multivariate non-linear regression model with across-equation restrictions. Using weekly returns on ,property-intensive' stocks in the period 1989,1998 and three shorter-sample periods, iterated non-linear seemingly regression techniques (ITNSUR) are employed to obtain joint estimates of stock sensitivities and their associated APT risk ,prices'. The ,real estate' sensitivity is found to be systematic and priced in the APT sense of corporations being paid an ex ante premium for bearing property market risk in investing and owning properties in two of the three sample periods (1989,1991, 1992,1994). The empirical results provide some support that property is a factor in corporate valuation, and is broadly consistent with the efficient markets hypothesis. The implications for portfolio and corporate management are examined. Copyright © 2001 John Wiley & Sons, Ltd. [source]

Modelling Operational Losses: A Bayesian Approach

QUALITY AND RELIABILITY ENGINEERING INTERNATIONAL, Issue 5 2004
Paolo Giudici
Abstract The exposure of banks to operational risk has increased in recent years. The Basel Committee on Banking Supervision (known as Basel II) has established a capital charge to cover operational risks other than credit and market risk. According to the advanced methods defined in ,The New Basel Capital Accord' to quantify the capital charge, in this paper we present an advanced measurement approach based on a Bayesian network model that estimates an internal measure of risk of the bank. One of the main problems faced when measuring the operational risk is the scarcity of loss data. The methodology proposed solves this critical point because it allows a coherent integration, via Bayes' theorem, of different sources of information, such as internal and external data, and the opinions of ,experts' (process owners) about the frequency and the severity of each loss event. Furthermore, the model corrects the losses distribution by considering the eventual relations between different nodes of the network that represent the losses of each combination of business line/event type/bank/process and the effectiveness of the corresponding internal and external controls. The operational risk capital charge is quantified by multiplying the value at risk (VaR) per event, a percentile of the losses distribution determined, by an estimate of the number of losses that may occur in a given period. Furthermore, it becomes possible to monitor the effectiveness of the internal and external system controls in place at the bank. The methodology we present has been experimented as a pilot project in one of the most important Italian banking groups, Monte dei Paschi di Siena. Copyright © 2004 John Wiley & Sons, Ltd. [source]

Risk and Return in the U.S. Housing Market: A Cross-Sectional Asset-Pricing Approach

REAL ESTATE ECONOMICS, Issue 4 2006
Susanne Cannon
This article carries out an asset-pricing analysis of the U.S. metropolitan housing market. We use ZIP code,level housing data to study the cross-sectional role of volatility, price level, stock market risk and idiosyncratic volatility in explaining housing returns. While the related literature tends to focus on the dynamic role of volatility and housing returns within submarkets over time, our risk,return analysis is cross-sectional and covers the national U.S. metropolitan housing market. The study provides a number of important findings on the asset-pricing features of the U.S. housing market. Specifically, we find (i) a positive relation between housing returns and volatility, with returns rising by 2.48% annually for a 10% rise in volatility, (ii) a positive but diminishing price effect on returns and (iii) that stock market risk is priced directionally in the housing market. Our results on the return-volatility-price relation are robust to (i) metropolitan statistical area clustering effects and (ii) differences in socioeconomic characteristics among submarkets related to income, employment rate, managerial employment, owner-occupied housing, gross rent and population density. [source]

The High-Volume Return Premium

THE JOURNAL OF FINANCE, Issue 3 2001
Simon Gervais
The idea that extreme trading activity contains information about the future evolution of stock prices is investigated. We find that stocks experiencing unusually high (low) trading volume over a day or a week tend to appreciate (depreciate) over the course of the following month. We argue that this high-volume return premium is consistent with the idea that shocks in the trading activity of a stock affect its visibility, and in turn the subsequent demand and price for that stock. Return autocorrelations, firm announcements, market risk, and liquidity do not seem to explain our results. [source]

The Impact of Macroeconomic and Financial Variables on Market Risk: Evidence from International Equity Returns

A Generalized Extreme Value Approach to Financial Risk Measurement

JOURNAL OF MONEY, CREDIT AND BANKING, Issue 7 2007
TURAN G. BALI
financial risk management; value at risk; extreme value theory; skewed fat-tailed distributions This paper develops an unconditional and conditional extreme value approach to calculating value at risk (VaR), and shows that the maximum likely loss of financial institutions can be more accurately estimated using the statistical theory of extremes. The new approach is based on the distribution of extreme returns instead of the distribution of all returns and provides good predictions of catastrophic market risks. Both the in-sample and out-of-sample performance results indicate that the Box,Cox generalized extreme value distribution introduced in the paper performs surprisingly well in capturing both the rate of occurrence and the extent of extreme events in financial markets. The new approach yields more precise VaR estimates than the normal and skewed t distributions. [source]

Semiparametric estimation of Value at Risk

THE ECONOMETRICS JOURNAL, Issue 2 2003
Jianqing Fan
Value at Risk (VaR) is a fundamental tool for managing market risks. It measures the worst loss to be expected of a portfolio over a given time horizon under normal market conditions at a given confidence level. Calculation of VaR frequently involves estimating the volatility of return processes and quantiles of standardized returns. In this paper, several semiparametric techniques are introduced to estimate the volatilities of the market prices of a portfolio. In addition, both parametric and nonparametric techniques are proposed to estimate the quantiles of standardized return processes. The newly proposed techniques also have the flexibility to adapt automatically to the changes in the dynamics of market prices over time. Their statistical efficiencies are studied both theoretically and empirically. The combination of newly proposed techniques for estimating volatility and standardized quantiles yields several new techniques for forecasting multiple period VaR. The performance of the newly proposed VaR estimators is evaluated and compared with some of existing methods. Our simulation results and empirical studies endorse the newly proposed time-dependent semiparametric approach for estimating VaR. [source]

Portfolio risk and self-directed retirement saving programmes*

THE ECONOMIC JOURNAL, Issue 494 2004
James M. Poterba
Defined contribution retirement plans expose retirement savers to financial market risks. This paper explores the costs of retirement wealth risk. It begins by describing the holding of company stock in 401(k) plans in the US, an investment choice that yields a poorly diversified retirement portfolio. It then summarises the composition of household wealth at retirement and investigates how the degree of diversification in retirement assets affects expected utility. The cost of holding a poorly diversified retirement portfolio is very sensitive to whether or not the retirement saver has other assets that provide a floor for retirement consumption. [source]

The global market for OTC derivatives: An analysis of dealer holdings

THE JOURNAL OF FUTURES MARKETS, Issue 1 2005
Ekaterina E. Emm
We provide a descriptive examination of the trading activities of one of the most important intermediaries in global financial markets,the OTC derivatives dealer. These dealers play a central role in the provision of derivative products and in the intermediation of market risks faced by financial and nonfinancial firms alike. Utilizing a unique database, we analyze the derivatives holdings of 264 dealers spanning 34 countries over the period 1995,2001. We document the geographic composition of dealers on both country and regional levels as well as analyze trends in dealer holdings on an aggregate and individual product level. We further analyze the extent of global merger activity among dealers and resulting consolidation effects. Finally, we investigate at the individual dealer level the extent and evolution of their array of product offerings. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:39,77, 2005 [source]

Risk Control of Pension Fund Management in China

CHINA AND WORLD ECONOMY, Issue 6 2007
Xiaoyan Qian
I18; I28; I38 Abstract Based on an analysis of China's current pension system, the present paper indicates that risk control of pension fund management is a serious policy challenge for the Chinese Government. Although some reform efforts have been made, there are still serious institutional and capital market risks that are difficult to overcome but are key in the success of China's pension reform. To ensure a smooth transition in pension reform, China not only needs to build a better institutional framework and facilitate capital market development, but also raise the risk awareness of individual pensioners. [source]