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1 – 10 of 574Martin Eling, Simone Farinelli, Damiano Rossello and Luisa Tibiletti
Recent literature discusses the persistence of skewness and tail risk in hedge fund returns. The aim of this paper is to suggest an alternative skewness measure, Azzalini's…
Abstract
Purpose
Recent literature discusses the persistence of skewness and tail risk in hedge fund returns. The aim of this paper is to suggest an alternative skewness measure, Azzalini's skewness parameter delta, which is derived as the normalized shape parameter from the skew‐normal distribution. The paper seeks to analyze the characteristics of this skewness measure compared with other indicators of skewness and to employ it in some typical risk and performance measurements.
Design/methodology/approach
The paper first provides an overview of the skew‐normal distribution and its mathematical formulation. Then it presents some empirical estimations of the skew‐normal distribution for hedge fund returns and discusses the characteristics of using delta with respect to classical skewness coefficients. Finally, it illustrates how delta can be used in risk management and in a performance measurement context.
Findings
The results highlight the advantages of Azzalini's skewness parameter delta, especially with regard to its interpretation. Delta has a limpid financial interpretation as a skewness shock on normally distributed returns. The paper also derives some important characteristics of delta, including that it is more stable than other measures of skewness and inversely related to popular risk measures such as the value‐at‐risk (VaR) and the conditional value‐at‐risk (CVaR).
Originality/value
The contribution of the paper is to apply the skew‐normal distribution to a large sample of hedge fund returns. It also illustrates that using Azzalini's skewness parameter delta as a skewness measure has some advantages over classical skewness coefficients. The use of the skew‐normal and related distributions is a relatively new, but growing, field in finance and not much has been published on the topic. Skewness itself, however, has been the subject of a great deal of research. Therefore, the results contribute to three fields of research: skewed distributions, risk measurement, and hedge fund performance.
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James R. DeLisle and Terry V. Grissom
The purpose of this paper is to investigate changes in the commercial real estate market dynamics as a function of and conditional to the shifts in market state-space environment…
Abstract
Purpose
The purpose of this paper is to investigate changes in the commercial real estate market dynamics as a function of and conditional to the shifts in market state-space environment that can influence agent responses.
Design/methodology/approach
The analytical design uses a comparative computational experiment to address the performance of property assets in the current market based on comparison with prior structural patterns. The latent variables developed across market sectors are used to test agent behavior contingent on the perspectives of capital asset pricing conditionals (CAPM) and a behavioral momentum/herd construct. The state-space momentum analysis can assist the comparative analysis of current levels and shifts in property asset performance given the issues that have arisen with the financial crisis of 2007-2009.
Findings
An analytic approach is employed framed by a situation-dependent model. This frame considers risk profiles characterizing the perspectives and preferences guiding a delineated market state. This perspective is concerned with the possibility of shifts in market momentum and representativeness conditioning investor expectations. It is observed that the current market (post-crisis) has changed significantly from the prior operations (despite the diversity observed in prior market states). The dynamics of initial findings required an additional test anchored to the performance of the general capital market and the real economy across time. This context supports the use of a modified CAPM model allowing the consideration of opportunity cost in a space-time dynamic anchored with the consideration of equity, debt, riskless asset and liquidity options as they varied for the representative agents operating per market state.
Research limitations/implications
This paper integrates neoclassical and behavioral economic constructs. Combines asset pricing with prospect theory and allows the calculation of endogenous time-preferences, risk attitudes and formulation and testing of hyperbolic discounting functions.
Practical implications
The research shows that market structure and agent behavior since the financial crisis has changed from the investment and valuation perspectives operating as observed and measured from 1970 up to 2007. In contradiction to the long-term findings of Reinhart and Rogoff (2008), but in compliance with common perspectives and decision heuristics often employed by investors, this time things have changed! Discounting and expected rates of return are dynamic and are hyperbolic and not constant. Returns and investment for property assets are situational (market state-space specific) and offer a distinct asset class, not appropriately estimated by many of the traditional financial models.
Social implications
Assist in supporting insights to measure in errors and equations that result in inefficient resource allocation and beta discounting that supports the financial crisis created by assets subject to long-term decision needs (delta function).
Originality/value
The paper offers a combination and comparison of neoclassic asset pricing using a modified CAPM (two-pass) approach within the structural frame of Kahneman and Tversky’s (1979) prospect theory. This technique allows the consideration of the effects of present bias, beta-delta functions and the operation of the Allais Paradox in market states that are characterized by gains and losses and thus risk aversion and risk seeking behavior. This ability for differentiation allows for the development of endogenous time-preferences and hyperbolic discounting factors characteristic of commercial property investment.
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Ahmed Ghorbel, Mohamed Fakhfekh, Ahmed Jeribi and Amine Lahiani
The paper analyzes downside and upside risk spillovers between stock markets of G7 countries and China before and during the COVID-19 pandemic.
Abstract
Purpose
The paper analyzes downside and upside risk spillovers between stock markets of G7 countries and China before and during the COVID-19 pandemic.
Design/methodology/approach
By using VAR-ADCC models and conditional value at risk (CoVaR) techniques, downside and upside risk spillovers between stock markets of G7 countries and China are analyzed before and during the COVID-19 pandemic.
Findings
The results suggested existence of a significant and asymmetrical two-way risk transmission between majority of pair markets, but the degree of asymmetry differs according to the use of the entire cumulative distributions or distribution tails. Downside and upside risk spillovers are significantly larger before the COVID-19 pandemic in all cases except between CAC 40/DAX and S&P/SSE pairs.
Originality/value
The paper used CoVaR and delta-CoVaR to investigate the downside and upside spillovers between stock markets of G7 countries and China before and during the COVID-19 pandemic.
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In this paper, we search to evaluate the systemic risk of the Moroccan banking sector. Indeed, we concentrate on the analysis and the evaluation on transverse dimension of the…
Abstract
In this paper, we search to evaluate the systemic risk of the Moroccan banking sector. Indeed, we concentrate on the analysis and the evaluation on transverse dimension of the systemic. From this point of view, two approaches were used. First is based on the estimate on value at risk conditional allowing to measure the systemic importance of each banking institution. In addition, the second approach uses the heteroscedasticity models in order to consider the conditional correlations, making it possible, to measure the dependence between the Moroccan banks and with the whole of the financial system. The results obtained with through these two approaches confirm that ATW, BMCI and the BMCE are the most systemic banks in Moroccan banking system and who can initiate a systemic crisis. On another register and by using the conditional correlations of each bank we built an index of systemic risk. Moreover, a macrofinancial model was developed, connecting the index of the systemic risk and the principal macroeconomic variables. This model affirmed that the contagion dimension of systemic risk is procyclical.
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I survey applications of Markov switching models to the asset pricing and portfolio choice literatures. In particular, I discuss the potential that Markov switching models have to…
Abstract
I survey applications of Markov switching models to the asset pricing and portfolio choice literatures. In particular, I discuss the potential that Markov switching models have to fit financial time series and at the same time provide powerful tools to test hypotheses formulated in the light of financial theories, and to generate positive economic value, as measured by risk-adjusted performances, in dynamic asset allocation applications. The chapter also reviews the role of Markov switching dynamics in modern asset pricing models in which the no-arbitrage principle is used to characterize the properties of the fundamental pricing measure in the presence of regimes.
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Lijuan Cao, Zhang Jingqing, Lim Kian Guan and Zhonghui Zhao
This paper studies the pricing of collateralized debt obligation (CDO) using Monte Carlo and analytic methods. Both methods are developed within the framework of the reduced form…
Abstract
This paper studies the pricing of collateralized debt obligation (CDO) using Monte Carlo and analytic methods. Both methods are developed within the framework of the reduced form model. One-factor Gaussian Copula is used for treating default correlations amongst the collateral portfolio. Based on the two methods, the portfolio loss, the expected loss in each CDO tranche, tranche spread, and the default delta sensitivity are analyzed with respect to different parameters such as maturity, default correlation, default intensity or hazard rate, and recovery rate. We provide a careful study of the effects of different parametric impact. Our results show that Monte Carlo method is slow and not robust in the calculation of default delta sensitivity. The analytic approach has comparative advantages for pricing CDO. We also employ empirical data to investigate the implied default correlation and base correlation of the CDO. The implication of extending the analytical approach to incorporating Levy processes is also discussed.
Soumya Bhadury, Vidya Kamate and Siddhartha Nath
The study provides medium-term estimates of recovery paths for Indian economy using a dynamic factor (DF)-based approach that employs data on high-frequency indicators à la…
Abstract
The study provides medium-term estimates of recovery paths for Indian economy using a dynamic factor (DF)-based approach that employs data on high-frequency indicators à la Bhadury, Ghosh, and Kumar (2020). The DFs are used to analyze the post-pandemic recovery and convergence with its pre-COVID-19 trend for India between March 2021 and March 2022. A broad sectoral assessment of the impact of COVID-19 is also conducted. In addition, forward-looking measures based on stock returns are used to analyze the transmission of additional banking sector risks to the real sectors by constructing daily delta conditional value-at-risk (CoVaR) estimates. Our estimates based on the DFs suggest that the aggregate economic activities may catch up to the estimated pre-COVID trend by March 2021 predominantly driven by the growth in services sector. The industrial sector and consumer goods sector continue to show moderate signs of recovery. Our CoVaR estimates corroborate these findings. Banking sector transmission risk is among the lowest for services such as healthcare and information technology (IT), for both the lockdown period between March 25 and June 8, 2020, and for the latter months. The transmission risk continues to remain high for metal, oil and gas, and capital goods sector. Broadly, the evidence on forward-looking banking sector risk transmission for major sectors is in alignment with our finding on their recovery based on DF models, after easing of COVID-19 lockdown.
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Thomas Gehrig and Maria Chiara Iannino
This paper aims to analyze systemic risk in and the effect of capital regulation on the European insurance sector. In particular, the evolution of an exposure measure (SRISK) and…
Abstract
Purpose
This paper aims to analyze systemic risk in and the effect of capital regulation on the European insurance sector. In particular, the evolution of an exposure measure (SRISK) and a contribution measure (Delta CoVaR) are analyzed from 1985 to 2016.
Design/methodology/approach
With the help of multivariate regressions, the main drivers of systemic risk are identified.
Findings
The paper finds an increasing degree of interconnectedness between banks and insurance that correlates with systemic risk exposure. Interconnectedness peaks during periods of crisis but has a long-term influence also during normal times. Moreover, the paper finds that the insurance sector was greatly affected by spillovers from the process of capital regulation in banking. While European insurance companies initially at the start of the Basel process of capital regulation were well capitalized according to the SRISK measure, they started to become capital deficient after the implementation of the model-based approach in banking with increasing speed thereafter.
Practical implications
These findings are highly relevant for the ongoing global process of capital regulation in the insurance sector and potential reforms of Solvency II. Systemic risk is a leading threat to the stability of the global financial system and keeping it under control is a main challenge for policymakers and supervisors.
Originality/value
This paper provides novel tools for supervisors to monitor risk exposures in the insurance sector while taking into account systemic feedback from the financial system and the banking sector in particular. These tools also allow an evidence-based policy evaluation of regulatory measures such as Solvency II.
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