credit spreads an empirical analysis on the informational content of stocks bonds and cds this paper explores the dynamic relationship between stock market implied credit spreads cds spreads and bond spreads a general vecm representation is proposed for changes in the three credit spread measures which accounts for zero one or two independent cointegration equations depending on the evidence provided by any particular company empirical analysis on price discovery based on a proprietary sample of north american and european firms and tailored to the specific vecm at hand indicates that stocks lead cds and bonds more frequently than the other way round it likewise confirms the leading role of cds with respect to bonds

developing a stress testing framework based on market risk models the basel 2 accord requires regulatory capital to cover stress tests yet no coherent and objective framework for stress testing portfolios exists we propose a new methodology for stress testing in the context of market risk models that can incorporate both volatility clustering and heavy tails empirical results compare the performance of eight risk models with four possible conditional and unconditional return distributions over different rolling estimation periods when applied to major currency pairs using daily data spanning more than 20 years we find that stress test results should have little impact on current levels of foreign exchange regulatory capital

answering the skeptics yes standard volatility models do provide accurate forecasts a voluminous literature has emerged for modeling the temporal dependencies in financial market volatility using arch and stochastic volatility models while most of these studies have documented highly significant in sample parameter estimates and pronounced intertemporal volatility persistence traditional ex post forecast evaluation criteria suggest that the models provide seemingly poor volatility forecasts contrary to this contention we show that volatility models produce strikingly accurate interdaily forecasts for the latent volatility factor that would be of interest in most financial applications new methods for improved ex post interdaily volatility measurements based on high frequency intradaily data are also discussed

uncertainty risk and the financial crisis of 2008 the distinction between uncertainty and risk originally drawn by frank knight and john maynard keynes in the 1920s remains fundamentally important today in the presence of uncertainty market actors and economic policy makers substitute other methods of decision making for rational calculation specifically actors decisions are rooted in social conventions drawing from innovations in financial markets and deliberations among top american monetary authorities in the years before the 2008 crisis we show how economic actors and policy makers live in worlds of risk and uncertainty in that world social conventions deserve much greater attention than conventional ipe analyses accords them such conventions must be part of our toolkit as we seek to understand the preferences and strategies of economic and political actors

estimating financial risk measures for options abstract this paper proposes a simulation lattice procedure to estimate financial risk measures for option positions the framework proposed can be applied to many different kinds of options including exotic and vanilla options it can take account of early exercise features heavy tails in underlying processes estimate different risk measures including var expected shortfall and spectral risk measures and in a limited way it can be generalized to accommodate multiple factors it avoids many of the limitations of existing approaches and in particular avoids the problems associated approaches based on delta gamma and similar approximations it also generates some interesting results about the risk measures of some illustrative options positions

nonlinearly weighted convex risk measure and its application abstract we propose a new class of risk measures which satisfy convexity and monotonicity two well accepted axioms a reasonable and realistic risk measure should satisfy through a nonlinear weight function the new measure can flexibly reflect the investor s degree of risk aversion and can control the fat tail phenomenon of the loss distribution a realistic portfolio selection model with typical market frictions taken into account is established based on the new measure real data from the chinese stock markets and american stock markets are used for empirical comparison of the new risk measure with the expected shortfall risk measure the in sample and out of sample empirical results show that the new risk measure and the corresponding portfolio selection model can not only reflect the investor s risk averse attitude and the impact of different trading constraints but can find robust optimal portfolios which are superior to the corresponding optimal portfolios obtained under the expected shortfall risk measure

competition and corporate governance in transition this paper examines the elements of institutional development critical to the enhancement of company performance in transition economies this includes initial conditions forms of privatization institutional frameworks and the competitiveness of markets comparing empirical evidence the paper concludes that there is a clear distinction in effectiveness of policies followed and their impact between central europe and cis countries this divergence is attributed to fundamentally different political attitudes toward reform the need of cis governments to gain political support for reform and as a consequence of the desire of central european countries to join european union

entry mode organizational learning and r d in foreign affiliates evidence from japanese firms this paper develops hypotheses concerning the role of entry mode and experience based organizational learning as determinants of the r d intensity of foreign affiliates and tests these hypotheses on a sample of 420 japanese manufacturing affiliates abroad entry mode has a major impact on r d activities the r d intensities of acquired affiliates substantially exceed those in wholly owned greenfield affiliates while the r d intensities of minority owned ventures are higher if japanese parent firms lack strong r d capabilities at home for greenfield operations support is found for an incremental growth pattern of foreign r d as a function of organizational learning and affiliate capability building the results are consistent with the view that part of the explanation for japanese firms relative lack of involvement in overseas r d must be sought in their status as latecomers in the establishment of overseas manufacturing networks at the same time a number of japanese firms have actively used foreign acquisitions and joint ventures to gain access to overseas technology and to establish overseas r d capabilities at a faster pace copyright 2002 john wiley sons ltd

mean var portfolio optimization a nonparametric approach portfolio optimization involves the optimal assignment of limited capital to different available financial assets to achieve a reasonable trade off between profit and risk we consider an alternative markowitz s mean variance model in which the variance is replaced with an industry standard risk measure value at risk var in order to better assess market risk exposure associated with financial and commodity asset price fluctuations realistic portfolio optimization in the mean var framework is a challenging problem since optimizing var leads to a non convex np hard problem which is computationally intractable in this work an efficient learning guided hybrid multi objective evolutionary algorithm mode gl is proposed to solve mean var portfolio optimization problems with real world constraints such as cardinality quantity pre assignment round lot and class constraints a learning guided solution generation strategy is incorporated into the multi objective optimization process to promote efficient convergence by guiding the evolutionary search towards promising regions of the search space the proposed algorithm is compared against the non dominated sorting genetic algorithm nsga ii and the strength pareto evolutionary algorithm spea2 experimental results using historical daily financial market data from s p 100 and s p 500 indices are presented experimental results shows that mode gl outperforms two existing techniques for this important class of portfolio investment problems in terms of solution quality and computational time the results highlight that the proposed algorithm is able to solve the complex portfolio optimization without simplifications while obtaining good solutions in reasonable time and has significant potential for use in practice

tail risk of electricity futures abstract this paper compares the in sample and out of sample performance of several models for computing the tail risk of one month and one year electricity futures contracts traded in the nordpool french german and spanish markets in 2008 2017 as measures of tail risk we use the one day ahead value at risk var and the expected shortfall es with var the ar 1 garch 1 1 model with student t distribution is the best performing specification with 88 cases in which the fisher test accepts the model with a success rate of 94 in the left tail and of 81 in the right tail the model passes the test of model adequacy in the 100 of the cases in the nordpool and german markets but only in the 88 and 63 of the cases in the spanish and french markets with es this model passes the test of model adequacy in 100 of cases in all markets historical simulation and quantile regression based approaches misestimate tail risks the right hand tail of the returns is more difficult to model than the left hand tail and therefore financial regulators and the administrators of futures markets should take these results into account when setting additional regulatory capital requirements and margin account regulations to short positions

do banks overstate their value at risk abstract this paper is the first empirical study of banks risk management systems based on non anonymous daily value at risk var and profit and loss data using actual data from the six largest canadian commercial banks we uncover evidence that banks exhibit a systematic excess of conservatism in their var estimates the data used in this paper have been extracted from the banks annual reports using an innovative matlab based data extraction method out of the 7354 trading days analyzed in this study there are only two exceptions i e days when the actual loss exceeds the disclosed var whereas the expected number of exceptions with a 99 var is 74 for each sample bank we extract from historical vars a risk overstatement coefficient ranging between 19 and 79 we attribute var overstatement to several factors including extreme cautiousness and underestimation of diversification effects when aggregating vars across business lines and or risk categories we also discuss the economic and social cost of reporting inflated vars

the level and quality of value at risk disclosure by commercial banks in this paper we study both the level of value at risk var disclosure and the accuracy of the disclosed var figures for a sample of us and international commercial banks to measure the level of var disclosures we develop a var disclosure index that captures many different facets of market risk disclosure using panel data over the period 1996 2005 we find an overall upward trend in the quantity of information released to the public we also find that historical simulation is by far the most popular var method we assess the accuracy of var figures by studying the number of var exceedances and whether actual daily vars contain information about the volatility of subsequent trading revenues unlike the level of var disclosure the quality of var disclosure shows no sign of improvement over time we find that var computed using historical simulation contains very little information about future volatility

confronting the environmental kuznets curve t he environmental kuznets curve posits an inverted u relationship between pollution and economic development kuznets s name was apparently attached to the curve by grossman and krueger 1993 who noted its resemblance to kuznets s inverted u relationship between income inequality and development in the first stage of industrialization pollution in the environmental kuznets curve world grows rapidly because people are more interested in jobs and income than clean air and water communities are too poor to pay for abatement and environmental regulation is correspondingly weak the balance shifts as income rises leading industrial sectors become cleaner people value the environment more highly and regulatory institutions become more effective along the curve pollution levels off in the middle income range and then falls toward pre industrial levels in wealthy societies the environmental kuznets curve model has elicited conflicting reactions from researchers and policymakers applied econometricians have generally accepted the basic tenets of the model and focused on measuring its parameters their regressions typically fitted to cross sectional observations across countries or regions suggest that air and water pollution increase with development until per capita income reaches a range of 5000 to 8000 when income rises beyond that level pollution starts to decline as shown in the conventional ekc line in figure 1 in developing countries some policymakers have interpreted such results as conveying a message about priorities grow first then clean up numerous critics have challenged the conventional environmental kuznets curve both as a representation of what actually happens in the development process and as a policy prescription some pessimistic critics argue that crosssectional evidence for the environmental kuznets curve is nothing more than a

a note on the importance of overnight information in risk management models this paper examines the economic value of overnight information to users of risk management models in addition to the information revealed by overseas markets that trade during the domestic overnight period this paper exploits information generated via recent innovations in the structure of financial markets in particular certain securities and associated derivative products can now be traded at any time over a 24 h period as such it is now possible to make use of information generated by trading in almost identical securities during the overnight period of the securities that are available over such time periods s p 500 related products are by far the most actively traded and are therefore the subject of this paper using a variety of conditional volatility models that allow time dependent information flow within and across three different s p 500 markets the results show that overnight information flow has a significant impact on the conditional volatility of daytime traded s p 500 securities moreover time consistent forecasts from models that incorporate overnight information are shown to have economic value to risk managers in particular value at risk var models based on these conditional volatility models are shown to be more accurate than var models that ignore overnight information

bank regulation and international financial stability a case against the 2006 basel framework for controlling tail risk in trading books abstract in attempting to promote international financial stability the basel committee on banking supervision 2006 provided a framework that sought to control the amount of tail risk that large banks around the world would take in their trading books relative to their corresponding minimum capital requirements however many of these banks suffered significant trading losses during the recent financial crisis our paper examines whether the basel framework allowed banks to take substantive tail risk in their trading books without a capital requirement penalty we find that it allowed banks to do so and that its minimum capital requirements can be notably procyclical hence focusing on the way the basel framework sought to control the amount of tail risk in trading books relative to their corresponding minimum capital requirements our paper supports the view that it was not properly designed to promote financial stability we also discuss alternative regulatory frameworks that would potentially be more effective than the basel framework in preventing banks from taking substantive tail risk in their trading books without a capital requirement penalty

diversification and value at risk a pervasive and puzzling feature of banks value at risk var is its abnormally high level which leads to excessive regulatory capital a possible explanation for the tendency of commercial banks to overstate their var is that they incompletely account for the diversification effect among broad risk categories e g equity interest rate commodity credit spread and foreign exchange by underestimating the diversification effect bank s proprietary var models produce overly prudent market risk assessments in this paper we examine empirically the validity of this hypothesis using actual var data from major us commercial banks in contrast to the var diversification hypothesis we find that us banks show no sign of systematic underestimation of the diversification effect in particular diversification effects used by banks is very close to and quite often larger than our empirical diversification estimates a direct implication of this finding is that individual vars for each broad risk category just like aggregate vars are biased risk assessments

the evolution of intracorporate domains divisional charter losses in high technology multidivisional corporations modern corporations have become synonymous with the multidivisional form of organization variously interdependent divisions are chartered to look after one or more business areas in effect defining the turf of the division and its purpose within the corporation and collectively defining the corporate domain however once created these divisional charters should not be regarded as rigid they are susceptible to change particularly in fast paced environments such as in high technology industries divisional charters are liable to change as divisions add or subtract businesses to their charter responsibilities these charter changes are seen as an adaptive device for large multidivisional corporations in fast paced environments this paper presents a process model of how divisions change their domains in hypercompetitive contexts focusing on the specific question of how divisions lose all or portions of their business charters the paper is based on a larger inductive study of charter changes in

an evaluation of bank measures for market risk before during and after the financial crisis abstract we study the performance and behavior of value at risk measures used by a number of large u s banks before during and after the financial crisis alternative benchmark var measures including garch based measures are estimated directly from the banks trading revenues to explain the bank var performance results while overly conservative in both the pre crisis and post crisis periods bank var exceedances were excessive and clustered in the crisis period this contrasted with mostly unbiased benchmark hs and garch vars in the pre crisis and post crisis periods and vastly superior garch based var performance in the crisis period with lower exceedance rates and no exceedance clustering our results document the bank vars very slow adjustment to changing market conditions and their systematic bias in all studied periods our results indicate that bank vars could be improved by the use of models with time varying volatility and built on banks knowledge of their current positions

the impact of inward fdi on the performance of chinese manufacturing firms recent years have witnessed the emergence of china as one of the most important destinations for foreign direct investment fdi which reached us 403 98 billion by the end of 1999 moftec 2000 china is now the largest recipient of fdi in the developing world however the amount of fdi will underestimate its overall consequences if spillover effects are significant murphy 1992 o malley 1994 buckwalter 1995 this study investigates the impact of fdi on the performance of chinese locally owned firms in manufacturing

an evaluation of the basle guidelines for backtesting banks internal risk management models the 1996 amendment to the baste capital accord to incorporate market risks constitutes a breakthrough in the determination of capital requirements rather than dictating these requirements through a uniform supervisory approach banks are allowed to use their own internal models for computing the capital required in order to mitigate moral hazard problems and stimulate banks to use adequate internal models the models must be subjected to a backtesting procedure if a model produces too many incorrect predictions increased capital requirements result this paper provides an evaluation of the current internal models approach in conjunction with the proposed backtesting procedure in particular using a stylized representation of the present supervisory framework we investigate whether banks are provided with the right incentives to come up with the correct internal model we find that under the current regulatory framework banks are prone to under reporting their true market risk a much stricter penalty scheme is required in order to align banks incentives with those of the supervisor we check the sensitivity of our results to changes in the length of the planning horizon portfolio risk time preferences risk attitudes and the distribution of financial returns

semiglobalization and international business strategy if markets were either completely isolated by or integrated across borders there would be little room for international business strategy to have content distinctive from mainstream strategy but a review of the economic evidence about the international integration of markets indicates that we fall in between these extremes into a state of incomplete cross border integration that i refer to as semiglobalization more specifically most measures of market integration have scaled new heights in the last few decades but still fall far short of economic theory s ideal of perfect integration the diagnosis of semiglobalization does more than just supply a relatively stable frame of reference for thinking about the environment of cross border operations it also calls attention to the critical role of location specificity in the prospects of distinctive content for international business strategy relative to mainstream business and corporate strategy in addition it flags factors products subject to location specificity as being salient from the perspective of international business finally it highlights the scope for strategies that strive to capitalize on the large residual barriers to cross border integration as well as those that simply try to cope with them

the pernicious effects of contaminated data in risk management banks hold capital to guard against unexpected surges in losses and long freezes in financial markets the minimum level of capital is set by banking regulators as a function of the banks own estimates of their risk exposures as a result a great challenge for both banks and regulators is to validate internal risk models we show that a large fraction of us and international banks uses contaminated data when testing their models in particular most banks validate their market risk model using profit and loss p l data that include fees and commissions and intraday trading revenues this practice is inconsistent with the definition of the employed market risk measure using both bank data and simulations we find that data contamination has dramatic implications for model validation and can lead to the acceptance of misspecified risk models moreover our estimates suggest that the use of contaminated data can significantly reduce market risk induced regulatory capital

a comparison of the original and revised basel market risk frameworks for regulating bank capital abstract recognizing that many banks suffered trading losses that notably exceeded their minimum capital requirements during the recent crisis the basel committee on banking supervision 2011 revised its regulatory framework for trading portfolios in this paper we compare 1 the relative effectiveness of risk management systems based on the original and revised frameworks in controlling tail risk and 2 the relative adequacy of these frameworks in setting minimum capital requirements our main findings are as follows first both systems allow the selection of portfolios with substantive tail risk but one based on the revised framework tends to be less effective in controlling tail risk second the minimum capital requirements set by the revised framework are much less likely to be wiped out by trading losses than those set by the original framework hence on balance the revised framework improves upon the original framework we also suggest further improvements for consideration by bank regulators

perspectives on multinational enterprises in emerging economies multinational enterprises mnes play a pivotal role in the development of many emerging economies in consequence they became the focus of scholarly research by economists and policy analysts in contrast international business scholars have been comparatively uninterested in analysing this role of mnes yet they could make important contributions to these debates first studies taking the individual firms as starting point would enhance understanding of the interaction between mnes and the local environment second theories and research methodologies developed in international business research could provide new insights into the dynamics of mnes in emerging economies the objective of this paper is to motivate more international business scholars to engage in research on positive and negative spillovers from foreign direct investment fdi in emerging economy societies to advance this research agenda scholars need to analyse the specific activities and capabilities of the firms involved and the impact of fdi on the broader social and environmental context for management this agenda raises the ethical question to what extent ought businesses to care about their local stakeholders

forecasting the var of crude oil market do alternative distributions help abstract accurate modeling of the empirical distribution of crude oil market returns is extremely important in estimating risk measures in addition to several commonly used distributions alternative distributions are explored in this study some of which account for the asymmetry and heavy tails simultaneously found in distributions and contain more tail parameters to separately depict the right and left tails when forecasting the value at risk var of crude oil markets during highly volatile periods seven backtests are also conducted to compare the var forecasting accuracy among different distributions the empirical results indicate that a highly volatile environment challenges the commonly used distributions and the four risk models based on commonly used distributions are rejected about 27 to 38 of the time the alternative distributions i e skewed general error distributions sged generalized hyperbolic skewed student t distributions ghst and generalized asymmetric student t gast distributions generally produce more accurate var measurement and gast gives the best measurement accuracy the empirical results imply that risk managers or policymakers should further consider more flexible distributions such as sged ghst or gast in particular when quantifying or managing the risk in turbulent market times

the tail risk premia of the carry trades abstract we study the relationship between the excess returns of portfolios invested in carry trade positions and an innovative global tail risk factor we find that high interest rate currencies are related to innovations in global currency tail risk they deliver low returns in times of unexpected high tail risk and high returns in times of unexpected low tail risk suggesting a standard asset pricing theory approach to explain the returns to the carry trade our tail risk factor can be understood as the interaction of moment based factors such as volatility skewness and kurtosis our results tend to indicate that the interaction of moments i e tail risk rather than the moments alone drives investor behavior this makes sense since the ultimate risk for carry traders is to reach their funding limits which are set because of the regulations on the back of tail risk statistics value at risk and not simply on the back of the volatility the skewness or the kurtosis alone the result holds in other cross sections of currencies and whether the global tail risk indicators are estimated in the currency the equity or the bond market

when more is less using multiple constraints to reduce tail risk abstract financial institutions suffered large trading losses during the 2007 2009 global financial crisis these losses cast doubt on the effectiveness of regulations and risk management systems based on a single value at risk var constraint while some researchers have recommended using conditional value at risk cvar to control tail risk var remains popular among practitioners and regulators accordingly our paper examines the effectiveness of multiple var constraints in controlling cvar under certain conditions we theoretically show that they are more effective than a single var constraint furthermore we numerically find that the maximum cvar permitted by the constraints is notably smaller than with a single constraint these results suggest that regulations and risk management systems based on multiple var constraints are more effective in reducing tail risk than those based on a single var constraint

incentives for effective risk management under the new capital accord banks choose between two different types of risk management systems the standard or the internal rating based approach the paper considers how a bank s preference for a risk management system is affected by the presence of supervision by bank regulators the model uses a principal agent setting between a bank s owner and its risk management the main conclusion is that previously unregulated institutions can be expected to switch to the lower quality standard approach subsequent to becoming regulated i e the presence of regulation may induce a bank to decrease the quality of its risk management system

another look at models of the short term interest rate the short term rate of interest is fundamental to much of theoretical and empirical finance yet no consensus has emerged on the dynamics of its volatility we show that models which parameterize volatility only as a function of interest rate levels tend to over emphasize the sensitivity of volatility to levels and fail to model adequately the serial correlation in condi tional variances on the other hand serial correlation based models like garch models fail to capture adequately the relationship between interest rate levels and volatility we introduce and test a new class of models for the dynamics of short term interest rate volatility which allows volatility to depend on both interest rate levels and information shocks two important conclusions emerge first the sensitivity of interest rate volatility to interest rate levels has been overstated in the literature while this relationship is important adequately modeling volatility as a function of unexpected information shocks is also important sec ond we conclude that the volatility processes in many existing theoretical models of interest rates are misspecified and suggest new paths toward improving the theory

risk models at risk the experience from the global financial crisis has raised serious concerns about the accuracy of standard risk measures as tools for the quantification of extreme downward risks a key reason for this is that risk measures are subject to a model risk due e g to specification and estimation uncertainty while regulators have proposed that financial institutions assess the model risk there is no accepted approach for computing such a risk we propose a remedy for this by a general framework for the computation of risk measures robust to model risk by empirically adjusting the imperfect risk forecasts by outcomes from backtesting frameworks considering the desirable quality of var models such as the frequency independence and magnitude of violations we also provide a fair comparison between the main risk models using the same metric that corresponds to model risk required corrections

generating volatility forecasts from value at risk estimates statistical volatility models rely on the assumption that the shape of the conditional distribution is fixed over time and that it is only the volatility that varies the recently proposed conditional autoregressive value at risk caviar models require no such assumption and allow quantiles to be modeled directly in an autoregressive framework although useful for risk management caviar models do not provide volatility forecasts such forecasts are needed for several other important applications such as option pricing and portfolio management it has been found that for a variety of probability distributions there is a surprising constancy of the ratio of the standard deviation to the interval between symmetric quantiles in the tails of the distribution such as the 0 025 and 0 975 quantiles this result has been used in decision and risk analysis to provide an approximation of the standard deviation in terms of quantile estimates provided by experts drawing on the same result we construct financial volatility forecasts as simple functions of the interval between caviar forecasts of symmetric quantiles forecast comparison using five stock indices and 20 individual stocks shows that the method is able to outperform generalized autoregressive conditional heteroskedasticity garch models and moving average methods