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

dynamic global linkages of the brics stock markets with the united states and europe under external crisis shocks implications for portfolio risk forecasting crisis shocks often lead to changes in the interdependence across stock markets and thus risk assessment and management this paper investigates the extent to which the global financial crisis of 2008 2009 which was triggered by the us subprime crisis in 2007 and the european debt crisis started at the end of 2009 affect the interdependence of the leading emerging markets of the brics countries with those of the united states and europe our empirical analysis makes use of the fiaparch model combined with the dynamic equicorrelation deco fiaparch which allows for the estimation of market linkage for a large group of countries as a whole while controlling for asymmetric volatility and long memory the results reveal the presence of important changes in the time varying linkages of the brics stock markets with the us and european ones in particular the average linkages have significantly been higher between 2007 and the first half of 2012 than the remaining part of the sample and there is also evidence of structural change around the lehman brothers collapse we also show the effects of these stylized facts on portfolio risk assessment and forecasting

rolling sampled parameters of arch and levy stable models in this paper an asymmetric autoregressive conditional heteroskedasticity arch model and a levy stable distribution are applied to some well known financial indices dax30 ftse20 ftse100 and sp500 using a rolling sample of constant size in order to investigate whether the values of the estimated parameters of the models change over time although there are changes in the estimated parameters reflecting that structural properties and trading behaviour alter over time the arch model adequately forecasts the one day ahead volatility a simulation study is run to investigate whether the time variant attitude holds in the case of a generated arch data process revealing that even in that case the rolling sampled parameters are time varying

a model of ethnic conflict we present a model of conflict in which discriminatory government policy or social intolerance is responsive to various forms of ethnic activism including violence it is this perceived responsiveness captured by the probability that the government gives in and accepts a proposed change in ethnic policy that induces individuals to mobilize in support for their cause yet mobilization is costly and demonstrators have to be compensated accordingly individuals have to weigh their ethnic radicalism with their material well being to determine the size of their money contribution to the cause our main results are i a one sided increase in radicalism or in population size increases conflict ii a one sided increase in income has ambiguous effects depending on the elasticity of contributions to income iii an increase in within group inequality increases conflict and iv an increase in the correlation between ethnic radicalism and inequality also increases conflict

cross commodity news transmission and volatility spillovers in the german energy markets this study investigates volatility spillovers to electric power from large exogenous shocks in the prices of gas coal and carbon emission allowances in the german energy market our sample ranges from 2008 to 2016 and covers periods of different market conditions we use a general var bekk model and the volatility impulse response function methodology to analyze and evaluate the spillover effects special attention is paid to selecting an appropriate econometric volatility model our results show that the spillover effects often are of a significant magnitude and display considerable variation over time and across commodities coal and gas generate non negligible spillovers during almost the entire sample period carbon has very little impact during the early and late parts of the sample but generates significant and highly variable spillovers during the period from 2011 to the end of 2014

the optimal value at risk hedging strategy under bivariate regime switching arch framework unlike the majority of other hedging literatures in which variance is taken as the risk indicator this article uses the value at risk var as the risk management tool of the hedged portfolio this article adopts a bivariate markov regime switching autoregressive conditional heteroscedastic swarch model to formulate the optimal var hedging strategy and then compares it with the other dynamic futures hedging strategies mentioned in the literature in hedging performance using taiwan stock exchange capitalization weighted stock index taiex futures data the in sample and out of sample results shows that when var is used as the criterion to measure the futures hedging effectiveness the performance of the dynamic hedging strategy is superior to that of the static hedging strategy and the performance of the optimal var hedging strategy is better than that of the minimum variance and mean variance hedging strategies besides from the standpoint that the volatility of hedge ratio and hedged portfolio var

breaking the bank a probabilistic assessment of euro area bank profitability this paper explores the determinants of profitability across large euro area banks using an approach based on conditional profitability distributions the most reliable determinants of bank profitability are real gdp growth and the nonperforming loan npl ratio the estimated conditional distributions reveal that while higher growth would raise profits on average a large swath of banks would most likely continue to struggle even amid a strong economic recovery therefore for some banks a determined reduction in npls combined with cost efficiency improvements and customized changes to their business models appears to be the most promising strategy for durably raising profitability

immigration conflict and redistribution we study how the possibility of a conflict between natives and immigrants shapes income redistribution in democracies conflict erupts when immigrants are given less than what they could obtain by resorting to confrontation that in turn can make natives vote for lower tax rates and lower public spending we show that income redistribution both vertical from the rich to the poor and horizontal from natives to migrants decreases with the level of immigration this is because the threat of conflict intensifies as the migrant population becomes bigger inequality softens the effect of immigration on tax rates but reduces horizontal redistribution despite the threat of conflict the welfare of the native population unambiguously increases with the stock of migrants

the impact of immigration on the structure of wages theory and evidence from britain immigration to the uk particularly among more educated workers has risen appreciably over the past 30 years and as such has raised labor supply however studies of the impact of immigration have failed to find any significant effect on the wages of native born workers in the uk this is potentially puzzling since there is evidence that changes in the supply of educated natives have had significant effects on their wages using a pooled time series of british cross sectional micro data on male wages and employment from the mid 1970s to the mid 2000s this paper offers one possible resolution to this puzzle namely that in the uk natives and foreign born workers are imperfect substitutes we show that immigration has primarily reduced the wages of immigrants and in particular of university educated immigrants with little discernable effect on the wages of the native born

value at risk estimation of energy commodities a long memory garch evt approach abstract in this paper we evaluate value at risk var and expected shortfall es for crude oil and gasoline market we adopt three long memory models including figarch hygarch and fiaparch to forecast energy commodity volatility by capturing some volatility stylized fact such as long range memory heteroscedasticity asymmetry and fat tails then we consider extreme value theory which concentrates on the tail distribution rather than the entire distribution evt is considered as a potential framework for the separate treatment of tails of distributions which allows for asymmetry our results show that the fiaparch model with extreme value theory performs better in predicting the one day ahead var using the fitted long memory garch model and a simulation approach to estimate var for horizons over than one day backtesting results show that our approach still performs for lower estimation frequencies overall our findings confirm that taking into account long range memory asymmetry and fat tails in the behavior of energy commodity prices returns combined with filtering process such as evt are important in improving risk management assessments and hedging strategies in the high volatile energy market

conflict and distribution abstract we develop a behavioral model that links the level and pattern of social conflict to the societywide distribution of individual characteristics the model can be applied to groups that differ in characteristics such as wealth ethnicity religion and political ideology we settle questions of existence and uniqueness of conflict equilibrium conflict is seen to be closely connected with the bimodality of the underlying distribution of characteristics however in general the conflict distribution relationship is nonlinear and surprisingly complex our results on conflict patterns also throw light on the phenomena of extremism and moderation journal of economic literature classification numbers d63 d72 d74

value at risk estimation by threshold stochastic volatility model this article proposes a threshold stochastic volatility model that generates volatility forecasts specifically designed for value at risk var estimation the method incorporates extreme downside shocks by modelling left tail returns separately from other returns left tail returns are generated with a t distributional process based on the historically observed conditional excess kurtosis this specification allows var estimates to be generated with extreme downside impacts yet remains empirically widely applicable this article applies the model to daily returns of seven major stock indices over a 22 year period and compares its forecasts to those of several other forecasting methods based on back testing outcomes and likelihood ratio tests the new model provides reliable estimates and outperforms others

sustaining fiscal policy through immigration this paper explores the fiscal implications of immigration to the us and argues that immigration policy should be viewed as a vital part of fiscal policy in particular a case is made that skill

an energy reference bus independent lmp decomposition algorithm the volatility of the price of electricity in a locational marginal price lmp market makes it necessary to introduce financial price risk hedging instruments the congestion related and marginal loss related revenue surpluses collected by the regional transmission operator rto are proposed to be redistributed to market players it is important to be able to correctly decompose the lmp into its congestion and marginal loss components which are critical for the valuation and settlement of these financial instruments a new energy reference bus independent lmp decomposition model using an ac optimal power flow opf model is presented to overcome the reference bus dependency disadvantage of the conventional approach the marginal effect of the generators output variation with respect to load variation are used as the basis of this decomposition model the theoretical derivation and a proof are given the new model achieves a set of reference bus independent results an example is presented comparing the new model with the conventional model

arch models properties estimation and testing abstract the aim of this survey paper is to provide an account of some of the important developments in the autoregressive conditional heteroskedasticity arch model since its inception in a seminal paper by engle 1982 this model takes account of many observed properties of asset prices and therefore various interpretations can be attributed to it we start with the basic arch models and discuss their different interpretations arch models have been generalized in different directions to accommodate more and more features of the real world we provide a comprehensive treatment of many of the extensions of the original arch model next we discuss estimation and testing for arch models and note that these models lead to some interesting and unique problems there have been numerous applications and we mention some of these as we present different models the paper includes a glossary of the acronyms for the models we describe

estimation of value at risk for energy commodities via fat tailed garch models the choice of an appropriate distribution for return innovations is important in var applications owing to its ability to directly affect the estimation quality of the required quantiles this study investigates the influence of fat tailed innovation process on the performance of one day ahead var estimates using three garch models garch n garch t and garch ht daily spot prices of five energy commodities wti crude oil brent crude oil heating oil 2 propane and new york harbor conventional gasoline regular are used to compare the accuracy and efficiency of the var models empirical results suggest that for asset returns that exhibit leptokurtic and fat tailed features the var estimates generated by the garch ht models have good accuracy at both low and high confidence levels additionally mrsb indicates that the garch ht model is more efficient than alternatives for most cases at high confidence levels these findings suggest that the heavy tailed distribution is more suitable for energy commodities particularly var calculation

the day of the week effects on the volatility the role of the asymmetry in this paper we propose to evaluate whether asymmetry influences the day of the week effects on volatility we also investigate empirically the impact of the day of the week effect in major international stock markets using garch family models from a forecast framework indeed the existence of calendar effects might be interesting only if their incorporation in a model results in better volatility forecasts

conditional volatility and the informational efficiency of the phlx currency options market abstract the relative performance of implied and historical volatility predictors is compared for four exchange rates from 1985 to 1991 for three currencies arch models estimated up to 1989 show that phlx implied volatilities provide specifications for daily conditional variances which can not be significantly improved by using past returns this result is consistent with the informational efficiency of the philadelphia currency options market out of sample forecasts of the average volatility over four week periods are evaluated for 1990 and 1991 once more the implied predictors are superior to historical predictors

a general formulation for lmp evaluation the evaluation of locational marginal prices or lmps which constitute the basis of the new generation of market design in the u s is a critical need in the side by side operation of electricity markets and power systems their use in various applications such as congestion management and hedging requires specific lmp components in the computations we provide a general formulation for the evaluation of the lmp components by making explicit use of the important role played by the nodes with generators with free capacity on the other hand the lmps of the nodes without generation or with the generators at their limits are a function of the lmps at the marginal nodes and the impacts of the network constraints including the losses in the network in the formulation we pay special attention to the importance of the assumptions and specifications the so called policy specification in the determination of the components we obtain a very general formulation that brings under a single framework the different decomposition approaches that exist the formulation s comprehensiveness brings numerous insights into the various decompositions provides a platform for their comparative analysis and allows us to understand the direct implications and the role of the policy specified moreover the formulation reveals the limitations of any decomposition into the components due to the underlying structural interdependencies among them which is clearly shown in this paper we provide an example to illustrate the capabilities and the insights obtainable with the use of this formulation

accurate minimum capital risk requirements a comparison of several approaches in this paper we estimate for several investment horizons minimum capital risk requirements for short and long positions using the unconditional distribution of three daily indexes futures returns and a set of short and long memory stochastic volatility and garch type models we consider the possibility that errors follow a t student distribution in order to capture the kurtosis of the returns series the results suggest that accurate modelling of extreme observations obtained for long and short trading investment positions is possible with an autoregressive stochastic volatility model moreover modelling futures returns with a long memory stochastic volatility model produces in general excessive volatility persistence and consequently leads to large minimum capital risk requirement estimates finally the models predictive ability is assessed with the help of out of sample conditional tests

pseudo tie generator model implementation for california iso operations and lmp markets a pseudo tie resource model is a means by which a resource i e generation unit or load is operationally transferred from one balancing authority ba area in which the resource is physically located i e native ba to another i e attaining ba area the attaining ba has responsibility for operational control of the pseudo tie resource for both system reliability and electricity market purposes by implementing a pseudo tie the california in dependent system operator corporation iso ba is able to attain control of resources physically located external to its jurisdiction for its ba area services this paper discusses the implementation of a pseudo tie generator ptg with primary focus on its modeling in the iso full network model fnm and participation in the nodal based lmp electricity markets namely the integrated forward market ifm and real time market rtm the ptg has also been discussed in the context of system reliability and market operational principles resource scheduling and bidding outage reporting 5 min real time economic dispatch and pricing furthermore the paper highlights some of the key operational characteristics and differences between pseudo tie and conventional dynamically scheduled resources

market risk in commodity markets a var approach we put forward value at risk models relevant for commodity traders who have long and short trading positions in commodity markets in a 5 year out of sample study on aluminium copper nickel brent crude oil and wti crude oil daily cash prices and cocoa nearby futures contracts we assess the performance of the riskmetrics skewed student aparch and skewed student arch models while the skewed student aparch model performs best in all cases the skewed student arch model delivers good results and its estimation does not require non linear optimization procedures as such this new model could be relatively easily integrated in a spreadsheet like environment and used by market practitioners

how relevant is volatility forecasting for financial risk management it depends if volatility fluctuates in a forecastable way volatility forecasts are useful for risk management hence the interest in volatility forecastability in the risk management literature volatility forecastability however varies with horizon and different horizons are relevant in different applications moreover existing assessments of volatility forecastability are plagued by the fact that they are joint assessments of volatility forecastability and an assumed model and the results can vary not only with the horizon but also with the assumed model to address this problem we develop a model free procedure for assessing volatility forecastability across horizons perhaps surprisingly we find that volatility forecastability decays quickly with horizon volatility forecastability although clearly of relevance for risk management at the short horizons relevant for say trading desk management may be much less important at longer horizons

value at risk for long and short trading positions in this paper we model value at risk var for daily stock index returns using a collection of parametric models of the arch family based on the skewed student distribution we show that models that rely on a symmetric density distribution for the error term underperform with respect to skewed density models when the left and right tails of the distribution of returns must be modelled thus var for traders having both long and short positions is not adequately modelled using usual normal or student distributions we suggest using an aparch model based on the skewed student distribution to fully take into account the fat left and right tails of the returns distribution this allows for an adequate modelling of large returns defined on long and short trading positions the performances of all models are assessed on daily data for the cac40 dax nasdaq nikkei and smi stock indexes we also compute the expected short fall and the average multiple of tail event to risk measure for the new model

on the political economy of immigration and income redistribution in this article we analyze an economy in which agents vote over immigration policy and redistributive tax policy we show that natives preferences over immigration are influenced by the prospect that immigrants will be voting over future tax policy we also show that changes in the degree of international capital mobility the distribution of initial capital among natives the wealth or poverty of the immigrant pool and the future voting rights and entitlements of immigrants can have dramatic effects on equilibrium immigration and tax policies finally we provide some empirical support for the model s predictions

modeling asymmetric comovements of asset returns existing time varying covariance models usually impose strong restrictions on how past shocks affect the forecasted covariance matrix in this article we compare the restrictions imposed by the four most popular multivariate garch models and introduce a set of robust conditional moment tests to detect misspecification we demonstrate that the choice of a multivariate volatility model can lead to substantially different conclusions in any application that involves forecasting dynamic covariance matrices like estimating the optimal hedge ratio or deriving the risk minimizing portfolio we therefore introduce a general model which nests these four models and their natural asymmetric extensions the new model is applied to study the dynamic relation between large and small firm returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies