auditors response to political connections and cronyism in malaysia this paper extends the literature on the role of political economy in financial reporting and auditing by testing two hypotheses the first hypothesis predicts that there will be a greater increase in audit effort and audit fees for malaysian firms with political connections as a result of the asian financial crisis than for non politically connected firms because these firms have a higher risk of financial misstatements the second hypothesis predicts that the audit fees of politically connected firms will decline when capital controls are introduced by the government as a ploy to financially assist politically connected firms to rebound from the crisis and thus reduces the risk of financial misstatements the results show that there is a greater increase in audit fees for firms with political connections than for non politically connected firms as a result of the asian financial crisis however there is a decline in audit fees for politically connected firms after the capital controls are implemented

forecasting crude oil price volatility and value at risk evidence from historical and recent data abstract this paper adopts the markov switching multifractal msm model and a battery of generalized autoregressive conditional heteroscedasticity garch type models to model and forecast oil price volatility extending previous work by wei et al 2010 and wang et al 2016 we evaluate the forecasting performance of all these models via a superior predictive ability spa test we go beyond previous research by i considering oil price volatility in the nineteenth century along with recent data ii applying different types of msm models and iii considering value at risk predictions besides our forecasting of volatility confirming its successful performance in other studies the new msm model comes out as the model that most often across forecasting horizons and subsamples cannot be outperformed by other models this superiority also applies to forecasting of value at risk

the drivers of international migration to the uk a panel based bayesian model averaging approach a heterogeneous panel based bayesian model averaging approach is used to identify the robust economic and policy drivers of international migration to the uk from 14 different source regions over 1980 2007 around three quarters of the increase in net immigration over the last decade which is particularly pronounced for selected source regions is associated with structural change which may be attributed to uk and foreign immigration policy the remainder of the rise is largely explained by friends and family effects there are considerable uncertainties associated both with the effects of particular economic drivers of immigration and with forecasts of immigration

an unintended consequence of book tax conformity a loss of earnings informativeness increasing the conformity between accounting earnings and taxable income has been proposed to improve financial reporting and curtail aggressive tax planning we find however that increasing conformity results in earnings that are less informative our inquiry exploits a unique sample of firms forced to change from the cash method to the accrual method for tax purposes thereby increasing their book tax conformity we find that these firms experienced a decrease in earnings informativeness compared to control firms unaffected by the change to our knowledge this is the first evidence of tax law changes affecting the informativeness of accounting earnings

the value relevance of reputation for sustainability leadership this study investigates whether the market valuation of the two summary accounting measures book value of equity and net income is higher for firms with reputation for sustainability leadership when compared to firms that do not enjoy such reputation the results are interpreted through the lens of a framework combining signalling theory and resource based theory according to which firms signal their commitment to sustainability to influence the external perception of reputation a firm s reputation for being committed to sustainability is an intangible resource that can increase the value of a firm s expected cash flows and or reduce the variability of its cash flows our findings are according to expectations and show that the net income of firms with good sustainability reputation has a higher valuation by the market when compared to their counterparts

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

discussion of international differences in the timeliness conservatism and classification of earnings pope and walker examine differences in the timeliness and conservatism of u s and u k reported earnings they conclude that the u s accounting regime appears significantly more conservative than the u k regime when comparing earnings before extraordinary items however when comparing bottom line earnings they find the opposite the paper contributes to research on international differences in accounting and their causes and consequences the conference discussion focused on accounting differences between the united kingdom and the united states the assumptions underlying the analyses in the paper and the interpretation of the results in the following sections i discuss the authors research design choices examining in turn the motivation research agenda and specification issues

can fat tail create the momentum and reversal we suggest that fat tail variations can cause both short term momentum and long term reversal simultaneously in both the time series and cross sectional returns of securities the fat tail of the

is integrated reporting determined by a country s legal system an exploratory study in recent years companies responsibilities towards society have expanded significantly and former business models have been revised in line with a more pluralist approach which takes stakeholders sustainability business ethics and transparency into account these considerations are increasingly reflected in corporate sustainability reporting i e statements reflecting the impact of business practices related to economic environmental and social perspectives however the data contained in such documents are reported independently of the financial aspects implying a disconnection between the three pillars of business strategy in order to avoid this shortcoming some leading companies have developed integrated reporting which expresses the interconnections between a firm s strategy governance performance and prospects as well as the contexts within which it operates the aim of this paper is to examine the influence of one of the most important institutional factors the legal system on the development of integrated reports the analysis of a non balanced sample of 750 international companies for the years 2008 2010 in which a logit methodology is applied to panel data reveals the impact of this institutional factor the results show that companies located in civil law countries and where indices of law and order are high are more likely to create and publish a broad range of integrated reports thus favouring decision taking by the different stakeholders on the basis of these findings two policy recommendations are proposed first it may be necessary to establish national laws and protection mechanisms to promote and ensure holistic transparency second managers must be able to decide on the appropriate disclosure practices in the context of their own legal environment in order to obtain maximum benefits from their decisions the results should be considered as having only preliminary value due to the limited number of firms that disclose this typology of reporting and because of the limitations of the data sample

value at risk estimation with the optimal dynamic biofuel portfolio abstract in the past petroleum companies only paid attention to hedging the variation in the crude oil price and volatility however they have now expanded their analysis to encompass renewable sources such as corn and soybeans under the current low carbon biofuel obligations this paper employs garch 1 1 and arji models to estimate the one day ahead value at risk var of the optimal dynamic biofuel portfolio which consists of crude oil corn and soybeans the optimal blended standard is subject to the dual limitations of minimum production costs and the lowest biofuel using requirements our empirical findings confirm that the arji model is more suitable than the garch 1 1 model and further captures the discontinuous jump behavior from the in the sample data the results of out of sample forecasts also are represented that our models play important roles in var estimation and risk management for biofuel portfolio we therefore suggest that the petroleum companies should simultaneously pay attention to jump risk in hedging material costs in the prices of energy related crops

are interest rate options important for the assessment of interest rate risk abstract fixed income options contain substantial information on the price of interest rate volatility risk in this paper we ask if those options will also provide information related to other moments of the objective distribution of interest rates based on dynamic term structure models within the class of affine models we find that interest rate options are useful for the identification of interest rate quantiles two three factor models are adopted and their adequacy to estimate value at risk of zero coupon bonds is tested we find significant difference on the quantitative assessment of risk when options are or not included in the estimation process of each of these dynamic models statistical backtests indicate that bond estimated risk is clearly more adequate when options are adopted although not yet completely satisfactory

evaluating interval forecasts a complete theory for evaluating interval forecasts has not been worked out to date most of the literature implicitly assumes homoskedastic errors even when this is clearly violated and proceed by merely testing for correct unconditional coverage consequently i set out to build a consistent framework for conditional interval forecast evaluation which is crucial when higher order moment dynamics are present the new methodology is demonstrated in an application to the exchange rate forecasting procedures advocated in risk management

unexpected tails in risk measurement some international evidence risk management critically depends on the assumptions made about the distribution of stock returns this paper applies extreme value methods to investigate the limiting distribution of the extreme returns of the nikkei225 ftse100 and s p500 indices as well as the indices of some of largest sectors in japan uk and us the results indicate that the much celebrated generalised extreme value distribution does not provide the most accurate description of the minima since the generalised logistic distribution performs better due to its ability to better capture the fat tails of returns the time varying nature of extremes is also confirmed while a simulation exercise adds to the robustness of our results it is also shown that the findings may have important implications for risk models such as var and expected shortfall since risk measures which cannot capture the fatness of tails of the empirical distribution function of returns may lead to serious underestimation of downside risk

forecasting portfolio value at risk with nonparametric lower tail dependence estimates abstract we propose to forecast the value at risk of bivariate portfolios using copulas which are calibrated on the basis of nonparametric sample estimates of the coefficient of lower tail dependence we compare our proposed method to a conventional copula garch model where the parameter of a clayton copula is estimated via canonical maximum likelihood the superiority of our proposed model is exemplified by analyzing a data sample of nine different bivariate and one nine dimensional financial portfolio a comparison of the out of sample forecasting accuracy of both models confirms that our model yields economically significantly better value at risk forecasts than the competing parametric calibration strategy

real time density forecasts from bayesian vector autoregressions with stochastic volatility central banks and other forecasters are increasingly interested in various aspects of density forecasts however recent sharp changes in macroeconomic volatility including the great moderation and the more recent sharp rise in volatility associated with increased variation in energy prices and the deep global recession pose significant challenges to density forecasting accordingly this paper examines with real time data density forecasts of u s gdp growth unemployment inflation and the federal funds rate from bayesian vector autoregression bvar models with stochastic volatility the results indicate that adding stochastic volatility to bvars materially improves the real time accuracy of density forecasts this article has supplementary material online

liquidity adjusted intraday value at risk modeling and risk management an application to data from deutsche borse abstract this paper develops a high frequency risk measure the liquidity adjusted intraday value at risk livar our objective is to explicitly consider the endogenous liquidity dimension associated with order size by reconstructing the open limit order book of deutsche borse changes in the tick by tick ex ante frictionless return and actual return are modeled jointly the risk related to the ex ante liquidity premium is then quantified our model can be used to identify the impact of ex ante liquidity risk on total risk and to provide an estimation of the var for the actual return at a point in time in our sample liquidity risk can account for up to 32 of total risk depending on order size

estimating value at risk of crude oil price and its spillover effect using the ged garch approach estimation has been carried out using garch type models based on the generalized error distribution ged for both the extreme downside and upside value at risks var of returns in the wti and brent crude oil spot markets furthermore according to a new concept of granger causality in risk a kernel based test is proposed to detect extreme risk spillover effect between the two oil markets results of an empirical study indicate that the ged garch based var approach appears more effective than the well recognized hsaf i e historical simulation with arma forecasts moreover this approach is also more realistic and comprehensive than the standard normal distribution based var model that is commonly used results reveal that there is significant two way risk spillover effect between wti and brent markets supplementary study indicates that at the 99 confidence level when negative market news arises that brings about a slump in oil price return historical information on risk in the wti market helps to forecast the brent market conversely it is not the case when positive news occurs and returns rise historical information on risk in the two markets can facilitate forecasts of future extreme market risks for each other these results are valuable for anyone who needs evaluation and forecasts of the risk situation in international crude oil markets

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

forecasting quantiles of day ahead electricity load accurate load forecasting plays a crucial role in the decision making process of many market participants but probably is most important for the dispatch planning of an electricity market operator despite the competitive forecast accuracy achieved by existing point forecast models point forecasts can only provide limited information relating to the expected level of future load to account for the uncertainty of future load and provide a more complete picture of the future load conditions for dispatch planning purposes quantile forecasts can be useful this paper proposes a computationally efficient approach to forecasting the quantiles of electricity load which is then applied to forecasting in the national electricity market of australia the proposed model performs competitively in comparison with one industry standard and two recently proposed quantile forecasting methods one of the main advantages of the proposed approach is the ease with the number of covariates can be expanded this is a particularly important feature in the context of load forecasting where large numbers of important drivers are usually necessary to provide accurate load forecasts

comparison of historically simulated var evidence from oil prices abstract cabedo and moya cabedo j d moya i 2003 estimating oil price value at risk using the historical simulation approach energy economics 25 239 253 find that arma with historical simulation delivers var forecasts that are superior to those from garch we compare the arma with historical simulation to the semi parametric garch model proposed by barone adesi et al barone adesi g giannopoulos k vosper l 1999 var without correlations for portfolios of derivative securities journal of futures markets 19 5 583 602 the results suggest that the semi parametric garch model generates var forecasts that are superior to the var forecasts from the arma with historical simulation this is due to the fact that garch captures volatility clustering our findings suggest that cabedo and moya s conclusion is mainly driven by the normal distributional assumption imposed on the future risk structure in the garch model

dynamics of credit spread moments of european corporate bond indexes abstract traditional quantitative credit risk models assume that changes in credit spreads are normally distributed but empirical evidence shows that they are likely to be skewed fat tailed and change behaviour over time not taking into account such characteristics can compromise calculation of loss probabilities pricing of credit derivatives and profitability of trading strategies therefore the aim of this study is to investigate the dynamics of higher moments of changes in credit spreads of european corporate bond indexes using extensions of garch type models that allow for time varying volatility skewness and kurtosis of changes in credit spreads as well as a regime switching garch model which allows for regime shifts in the volatility of changes in credit spreads performance evaluation methods are used to assess which model captures the dynamics of observed distribution of the changes in credit spreads produces superior volatility forecasts and value at risk estimates and yields profitable trading strategies the results presented can have significant implications for risk management trading activities and pricing of credit derivatives

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

productivity gains from geographic concentration of human capital evidence from the cities abstract based on recent theoretical developments the argument is made that the average level of human capital is a local public good cities with higher average levels of human capital should therefore have higher wages and higher land rents after conditioning on the characteristics of individual workers and dwellings this prediction is supported by data for standard metropolitan statistical areas smsas in the united states where the smsa average levels of formal education and work experience are used as proxies for the average level of human capital the alternative explanations of omitted smsa variables and self selection are evaluated an estimate of the effect of an additional year of average education on total factor productivity is computed

book tax conformity earnings persistence and the association between earnings and future cash flows abstract calls for eliminating differences between accounting earnings and taxable income in the us have been debated extensively proponents of increased book tax conformity argue that tax compliance will increase and earnings quality will improve opponents argue that earnings quality will decline we examine whether the level of required book tax conformity affects earnings persistence and the association between earnings and future cash flows we develop a comprehensive book tax conformity measure and find that earnings have lower persistence and a lower association with future cash flows when conformity is higher our evidence suggests that increased book tax conformity may reduce earnings quality

a new pearson type qmle for conditionally heteroscedastic models this article proposes a novel pearson type quasi maximum likelihood estimator qmle of garch p q models unlike the existing gaussian qmle laplacian qmle generalized non gaussian qmle or lad estimator our pearsonian qmle pqmle captures not just the heavy tailed but also the skewed innovations under strict stationarity and some weak moment conditions the strong consistency and asymptotic normality of the pqmle are obtained with no further efforts the pqmle can be applied to other conditionally heteroscedastic models a simulation study is carried out to assess the performance of the pqmle two applications to four major stock indexes and two exchange rates further highlight the importance of our new method heavy tailed and skewed innovations are often observed together in practice and the pqmle now gives us a systematic way to capture these two coexisting features

roughing it up including jump components in the measurement modeling and forecasting of return volatility a rapidly growing literature has documented important improvements in financial return volatility measurement and forecasting via use of realized variation measures constructed from high frequency returns coupled with simple modeling procedures building on recent theoretical results in barndorff nielsen and shephard 2004a 2005 for related bi power variation measures the present paper provides a practical and robust framework for non parametrically measuring the jump component in asset return volatility in an application to the dm exchange rate the s p500 market index and the 30 year u s treasury bond yield we find that jumps are both highly prevalent and distinctly less persistent than the continuous sample path variation process moreover many jumps appear directly associated with specific macroeconomic news announcements separating jump from non jump movements in a simple but sophisticated volatility forecasting model we find that almost all of the predictability in daily weekly and monthly return volatilities comes from the non jump component our results thus set the stage for a number of interesting future econometric developments and important financial applications by separately modeling forecasting and pricing the continuous and jump components of the total return variation process

the value relevance of taxes international evidence on the proxy for profitability role of tax surprise abstract despite evidence that tax surprise is incrementally value relevant the literature has done little to broaden the investigation beyond the united states or examine circumstances that affect informativeness after extending to the international setting i examine the impact of tax enforcement i report strong results of greater value relevance when tax enforcement is high and that the value relevance of tax surprise is mostly contained within its interaction with tax enforcement these findings highlight the importance of tax enforcement in determining the information content of tax surprise and suggest that extant and future discussions should be broadened to include it

time series copulas for heteroskedastic data we propose parametric copulas that capture serial dependence in stationary heteroskedastic time series we suggest copulas for first order markov series and then extend them to higher orders and multivariate series we derive the copula of a volatility proxy based on which we propose new measures of volatility dependence including co movement and spillover in multivariate series in general these depend upon the marginal distributions of the series using exchange rate returns we show that the resulting copula models can capture their marginal distributions more accurately than univariate and multivariate generalized autoregressive conditional heteroskedasticity models and produce more accurate value at risk forecasts

forecast encompassing tests and probability forecasts we consider tests of forecast encompassing for probability forecasts for both quadratic and logarithmic scoring rules we propose test statistics for the null of forecast encompassing present the limiting distributions of the test statistics and investigate the impact of estimating the forecasting models parameters on these distributions the small sample performance is investigated in terms of small numbers of forecasts and model estimation sample sizes we show the usefulness of the tests for the evaluation of recession probability forecasts from logit models with different leading indicators as explanatory variables and for evaluating survey based probability forecasts copyright c 2010 john wiley sons ltd

modeling and forecasting extreme commodity prices a markov switching based extreme value model abstract we propose a markov switching multifractal peaks over threshold msm pot model to capture the dynamic behavior of the random occurrences of extreme events exceeding a high threshold in time series of returns this approach allows introducing changes of regimes in the conditional mean function of the inter exceedance times i e the time between two consecutive extreme events in order to admit the presence of short and long term memory patterns further through its multifractal structure the msm pot approach is able to capture the typical stylized facts of extreme events observed in financial time series such as temporal clustering of the size of exceedances and temporal behavior of tail thickness we compare the performance of the msm pot model with competing self exciting models and a garch evt approach in an in and out of sample var forecasting exercise based on the extreme returns of six daily commodity futures prices i e brent and wti crude oil cocoa cotton copper and gold empirical results suggest that the var estimates generated by the msm pot model for the returns analyzed produce the most accurate forecasts

multivariate density forecast evaluation and calibration in financial risk management high frequency returns on foreign exchange we provide a framework for evaluating and improving multivariate density forecasts among other things the multivariate framework lets us evaluate the adequacy of density forecasts involving cross variable interactions such as time varying conditional correlations we also provide conditions under which a technique of density forecast calibration can be used to improve deficient density forecasts and we show how the calibration method can be used to generate good density forecasts from econometric models even when the conditional density is unknown finally motivated by recent advances in financial risk management we provide a detailed application to multivariate high frequency exchange rate density forecasts

dynamic return volatility dependence and risk measure of covar in the oil market a time varying mixed copula model abstract this study investigates the risk level in the oil market measured by value at risk var and conditional var covar as well as the dynamic and asymmetric dependence between wti returns and crude oil volatility index ovx by constructing six time varying mixed copula models results show that mixed copula between t copula and the 270 degree rotated clayton copula is the optimal fitting copula to measure dynamic dependence the estimated time varying kendall coefficients indicate that wti returns and ovx present negative dependence most of the time there exists a structural change point of dependence between wti returns and ovx changes on april 17 2009 while the dependence characteristics within the subsamples are similar to that in the whole sample indicating the rationality of our time varying mixed copula models finally the tests show significant risk spillover from ovx to wti returns and also asymmetric effects for covars in response to different upside and downside extreme ovx movements

conservatism and international ipo underpricing we study the impact of country level accounting conservatism on international ipo underpricing examining 13 285 ipos from 36 countries we find that ipos are underpriced less in countries in which existing public firms practice more accounting conservatism the link between conservatism and underpricing is robust to alternative measures of conservatism country mean regressions sample country exclusions and endogenous treatment models consistent with the hypothesis that conservatism reduces underpricing by mitigating the impact of information asymmetries we find that higher country level conservatism is associated with lower country level pin values and that the negative relation between conservatism and underpricing is strongest for ipos involving small firms in which information asymmetries are likely to be high lastly we find evidence that legal origin a factor linked to the practice of conservatism influences the relations between underpricing and conservatism

pricing discretely monitored asian options under levy processes we present methodologies to price discretely monitored asian options when the underlying evolves according to a generic levy process for geometric asian options we provide closed form solutions in terms of the fourier transform and we study in particular these formulas in the levy stable case for arithmetic asian options we solve the valuation problem by recursive integration and derive a recursive theoretical formula for the moments to check the accuracy of the results we compare the implementation of our method to monte carlo simulation implemented with control variates and using different parametric levy processes we also discuss model risk issues

continuous cascade models for asset returns abstract in this paper we make a short overview of continuous cascade models recently introduced to model asset return fluctuations we show that these models account in a very parcimonious manner for most of stylized facts of financial time series we review in more details the simplest continuous cascade namely the log normal multifractal random walk mrw it can simply be considered as a stochastic volatility model where the log volatility memory has a peculiar logarithmic shape this model possesses some appealing stability properties with respect to time aggregation we describe how one can estimate it using a gmm method and we present some applications to volatility and var value at risk forecasting

the effect of public sector employment on local labour markets this paper considers the impact of public sector employment on local labour markets using english data at the local authority level for 2003 2007 we find that public sector employment has no identifiable effect on total private sector employment however public sector employment does affect the sectoral composition of the private sector specifically each additional public sector job creates 0 5 jobs in the non tradable sector construction and services while crowding out 0 4 jobs in the tradable sector manufacturing when using data for a longer time period 1999 2007 we find no multiplier effect for non tradables stronger crowding out for tradables and consistent with this crowding out for total private sector employment

forecasting daily supermarket sales using exponentially weighted quantile regression inventory control systems typically require the frequent updating of forecasts for many different products in addition to point predictions interval forecasts are needed to set appropriate levels of safety stock the series considered in this paper are characterised by high volatility and skewness which are both time varying these features motivate the consideration of forecasting methods that are robust with regard to distributional assumptions the widespread use of exponential smoothing for point forecasting in inventory control motivates the development of the approach for interval forecasting in this paper we construct interval forecasts from quantile predictions generated using exponentially weighted quantile regression the approach amounts to exponential smoothing of the cumulative distribution function and can be viewed as an extension of generalised exponential smoothing to quantile forecasting empirical results are encouraging with improvements over traditional methods being particularly apparent when the approach is used as the basis for robust point forecasting

country level institutions and management earnings forecasts using a comprehensive sample hand collected from the original texts of management earnings forecasts from 27 countries we provide descriptive evidence on the country level institutional determinants and economic consequences of forecast characteristics using principal component factors constructed from a number of country level institutional variables we find that forecast disaggregation frequency precision and attribution vary significantly with the business and accounting environment of a country we further document that better quality management forecasts are generally associated with stronger stock market reactions and higher investment efficiency together our findings suggest that country level institutions play a vital role in voluntary disclosure characteristics

forecasting the joint distribution of australian electricity prices using dynamic vine copulae abstract we consider the problem of modelling and forecasting the distribution of a vector of prices from interconnected electricity markets using a flexible class of drawable vine copula models where we allow the dependence parameters of the constituting bivariate copulae to be time varying we undertake in sample and out of sample tests using daily electricity prices and evidence that our model provides accurate forecasts of the underlying distribution and outperforms a set of competing models in their abilities to forecast one day ahead conditional quantiles of a portfolio of electricity prices our study is conducted in the australian national electricity market nem which is the most efficient power auction in the world electricity prices exhibit highly stylised features such as extreme price spikes price dependency between regional markets correlation asymmetry and non linear dependency the developed approach can be used as a risk management tool in the electricity retail industry which plays an integral role in the apparatus of modern energy markets electricity retailers are responsible for the efficient distribution of electricity while being exposed to market risk with extreme magnitudes

time series analysis for financial market meltdowns abstract there appears to be a consensus that the recent instability in global financial markets may be attributable in part to the failure of financial modeling more specifically it is alleged that current risk models have failed to properly assess the risks associated with large adverse stock price behavior in this paper we first discuss the limitations of classical time series models for forecasting financial market meltdowns then we set forth a framework capable of forecasting both extreme events and highly volatile markets based on the empirical evidence presented in this paper our framework offers an improvement over prevailing models for evaluating stock market risk exposure during distressed market periods

continuous time models realized volatilities and testable distributional implications for daily stock returns we provide an empirical framework for assessing the distributional properties of daily speculative returns within the context of the continuous time jump diffusion models traditionally used in asset pricing finance our approach builds directly on recently developed realized variation measures and non parametric jump detection statistics constructed from high frequency intra day data a sequence of simple to implement moment based tests involving various transformations of the daily returns speak directly to the importance of different distributional features and may serve as useful diagnostic tools in the specification of empirically more realistic continuous time asset pricing models on applying the tests to the 30 individual stocks in the dow jones industrial average index we find that it is important to allow for both time varying diffusive volatility jumps and leverage effects to satisfactorily describe the daily stock price dynamics copyright 2009 john wiley sons ltd

ownership concentration in privatized firms the role of disclosure standards auditor choice and auditing infrastructure we rely on a unique data set to estimate the impact of disclosure standards and auditor related characteristics on ownership concentration in 190 privatized firms from 31 countries accounting transparency can help alleviate the agency conflict between minority investors and controlling shareholders which is evident in the extent of ownership concentration since the expropriation of corporate resources by insiders hinges on these private benefits remaining hidden after controlling for other country level and firm level determinants we find weak no evidence that extensive disclosure standards auditor choice reduce ownership concentration in contrast we provide strong robust evidence that ownership concentration is lower in countries with securities laws that specify a lower burden of proof in civil and criminal litigation against auditors consistent with ball s 2001 predictions collectively our research implies that minority investors worldwide value legal institutions that discipline auditors in the event of financial reporting failure over both the presence of a big five auditor and better disclosure standards

value at risk estimations of energy commodities via long memory asymmetry and fat tailed garch models abstract in this paper we evaluate the value at risk var and the expected shortfalls for some major crude oil and gas commodities for both short and long trading positions classical var estimations as well as riskmetrics and other extensions to cases considering for long range memory asymmetry and fat tail in energy markets volatility were conducted we computed the var for three arch garch type models including figarch fiaparch and hygarch these models were estimated in the presence of three alternative innovation s distributions normal student and skewed student our results show that considering for long range memory fat tails and asymmetry performs better in predicting a one day ahead var for both short and long trading positions moreover the fiaparch model outperforms the other models in the var s prediction these results present several potential implications for energy markets risk quantifications and hedging strategies

modelling interregional links in electricity price spikes abnormally high price spikes in spot electricity markets represent a significant risk to market participants as such a literature has developed that focuses on forecasting the probability of such spike events moving beyond simply forecasting the level of price many univariate time series models have been proposed to dealwith spikes within an individual market region this paper is the first to develop a multivariate self exciting point process model for dealing with price spikes across connected regions in the australian national electricity market the importance of the physical infrastructure connecting the regions on the transmission of spikes is examined it is found that spikes are transmitted between the regions and the size of spikes is influenced by the available transmission capacity it is also found that improved risk estimates are obtained when inter regional linkages are taken into account

the fine structure of asset returns an empirical investigation we investigate the importance of diffusion and jumps in a new model for asset returns in contrast to standard models we allow for jump components displaying finite or infinite activity and variation empirical investigations of time series indicate that index dynamics are devoid of a diffusion component which may be present in the dynamics of individual stocks this leads to the conjecture confirmed on options data that the risk neutral process should be free of a diffusion component we conclude that the statistical and risk neutral processes for equity prices are pure jump processes of infinite activity and finite variation

capturing deep tail risk via sequential learning of quantile dynamics abstract this paper develops a conditional quantile model that can learn long term and short term memories of sequential data it builds on sequential neural networks and yet outputs interpretable dynamics we apply the model to asset return time series across eleven asset classes using historical data from the 1960s to 2018 our results reveal that it extracts not only the serial dependence structure in conditional volatility but also the memories buried deep in the tails of historical prices we further evaluate its value at risk forecasts against a wide range of prevailing models our model outperforms the garch family as well as models using filtered historical simulation conditional extreme value theory and dynamic quantile regression these studies indicate that conditional quantiles of asset return have persistent sources of risk that are not coming from those responsible for volatility clustering these findings could have important implications for risk management in general and tail risk forecasts in particular

recent advances in electricity price forecasting a review of probabilistic forecasting abstract since the inception of competitive power markets two decades ago electricity price forecasting epf has gradually become a fundamental process for energy companies decision making mechanisms over the years the bulk of research has concerned point predictions however the recent introduction of smart grids and renewable integration requirements has had the effect of increasing the uncertainty of future supply demand and prices academics and practitioners alike have come to understand that probabilistic electricity price and load forecasting is now more important for energy systems planning and operations than ever before with this paper we offer a tutorial review of probabilistic epf and present much needed guidelines for the rigorous use of methods measures and tests in line with the paradigm of maximizing sharpness subject to reliability the paper can be treated as an update and a further extension of the otherwise comprehensive epf review of weron 1 or as a standalone treatment of a fascinating and underdeveloped topic that has a much broader reach than epf itself

managers compensation and misreporting a costly state verification approach i introduction the use of stock options in compensation packages as a way of providing the firm management with the right incentives has been quite popular in the 1990s the favor encountered by options started however to decrease in the past few years the decline in the use of option grants in top executives compensation packages occurred mainly as a reaction to the recent accounting scandals which has prompted the design of alternative stock based compensation schemes e g restricted stock grants or indexed options as reported by hall and murphy 2003 the grant date value of options assigned to all employees of an average standard poor s 500 firm measured in millions of 2002 constant us increased from 22 in 1992 to 238 in 2000 and subsequently decreased to 141 in 2002 although percentages varied from year to year the ceos share of the total grant has fallen from about 7 in the mid 1990s to less than 5 in 2000 2002 1 the decline in the use of options for top management is widely confirmed according to a pearl meyer partners study for the new york times stock option grants that accounted for 52 of the pay of the average ceo of a major company in 2002 were down to an estimated 35 in 2003 a recent watson wyatt report states that the value of new stock option awards granted to ceos at large companies fell by nearly 60 between 2001 and 2003 with the average value of new stock option grants declining from us 10 2 million in 2001 to us 4 2 million in 2003 the decline in options has been softened by the sharp increase in restricted stock grants and other long term incentive award values 2 in this paper we aim to reevaluate the role of stock options as an ingredient of top management compensation packages able to align the interests of managers and shareholders avoiding misreporting of the firm value at the same time 3 in a costly state verification csv model with moral hazard we show that incentive compatible contracts inducing both incentive alignment and truthful revelation of the firm value must entail a strictly convex compensation schedule that is a fixed payment wage when the firm value is sufficiently low and a state contingent claim increasing in the firm value otherwise a simple and commonly observed way to achieve a convex compensation scheme is to design a remuneration including a fixed wage and a call option on the firm equity as we will show such remuneration allows on the one hand to preserve top management incentives providing for a compensation increasing in equity value and on the other hand to reduce the verification costs that must be incurred to avoid misreporting as verification is not needed in the region where the remuneration is fixed 4 options are by no means the only way to achieve a convex compensation however many other schemes having otherwise desirable properties over options do not have the convex shape discussed above for instance combining a fixed wage with restricted stock grants defines a compensation linearly increasing in the firm s equity value which does not allow to reduce misreporting verification costs that always have to be sustained in this case using an incentive compatible compensation scheme fixed wage plus call options we characterize the contract offered by the firm under the assumption of a deterministic and perfect audit technology showing that for any given value of the option package the manager should receive the largest possible number of options at the highest strike price allowing shareholders to reduce the expected verification cost furthermore the strike price of the option turns out to be determined by incentive compatibility i e the option value must be such that the manager is induced to exert the desired level of effort while the magnitude of the fixed wage is defined by individual rationality there are three main policy implications of our analysis

ultimate ownership income management and legal and extra legal institutions this study provides evidence of the role of both legal and extra legal institutions in limiting the income management induced by the detachment of control rights from the cash flow rights of ultimate owners the tests use a unique comprehensive data set for firm level control and ownership structures from 9 east asian and 13 western european countries univariate regressions show that income management that is induced by the wedge between control rights and cash flow rights is significantly limited in countries with high statutory protection of minority rights proxied by legal tradition minority rights protection the efficiency of the judicial system or disclosure standards and effective extra legal institutions proxied by the effectiveness of competition laws diffusion of the press and tax compliance furthermore multiple regression results show that a common law tradition and an efficient judicial system subsume the effects of the other legal institutions and that a high rate of tax compliance subsumes the effects of the other extra legal institutions in curbing insider income management it is surprising that a high rate of tax compliance ultimately has a greater effect than legal tradition and the efficiency of the judicial system although this finding is unexpected given prior evidence on the dominant roles of legal institutions in macroeconomic issues and corporate policies it is consistent with the recent argument that effective tax enforcement is like a public good in that it can reduce insiders private control benefits an implication of this finding is that closer attention to extra legal institutions has the potential to enhance our understanding of the institutional reforms needed to limit insider private control benefits

local multipliers and human capital in the united states and sweden we show that every time a local economy generates a new job by attracting a new business in the traded sector a significant number of additional jobs are created in the non traded sector this multiplier effect is particularly large for jobs with high levels of human capital and for high technology industries these findings are important for local development policies as they suggest that to increase local employment levels municipalities should target high technology employers with high levels of human capital

comovement information production and the business cycle abstract recent theoretical research suggests that information production is a positive externality of aggregate economic activity veldkamp 2005 both the quantity and quality of information increase during periods of economic expansion and decrease during periods of contraction based on this insight we hypothesize and confirm that time varying information production drives the comovement patterns observed in stock returns we examine stock return comovement in 36 countries from 1980 to 2007 and show that consistent with the theory comovement patterns are countercyclical that is when information production is high low comovement is low high we also find that the relation between comovement and the business cycle is stronger in countries that experience large intertemporal swings in information production finally we show that the relation between business cycle and comovement is stronger in poor countries countries with less developed financial markets and countries with weaker accounting and transparency standards these results suggest that financial development and transparency are conducive to a steady flow of financial information over the business cycle

the determinants and welfare implications of us workers diverging location choices by skill 1980 2000 abstract from 1980 to 2000 the rise in the us college high school graduate wage gap coincided with increased geographic sorting as college graduates concentrated in high wage high rent cities this paper estimates a structural spatial equilibrium model to determine causes and welfare consequences of this increased skill sorting while local labor demand changes fundamentally caused the increased skill sorting it was further fueled by endogenous increases in amenities within higher skill cities changes in cities wages rents and endogenous amenities increased inequality between high school and college graduates by more than suggested by the increase in the college wage gap alone jel d31 i26 j24 j31 j61 r23

the interruption of income convergence and income growth in large cities in the 1980s recent studies have documented the divergence of per capita personal income among regions of the us in the 1980s following many decades of income convergence this paper establishes the same patter

is there evidence of pessimism and doubt in subjective distributions implications for the equity premium puzzle abel 2002 shows that pessimism and doubt in the subjective distribution of the growth rate of consumption reduce the equity premium puzzle we quantify the amount of pessimism and doubt in survey data on us consumption and income individual forecasters are in fact pessimistic but show marked overconfidence rather than doubt however the implications for abel s model depend on how the empirically heterogeneous beliefs are mapped into beliefs of a representative agent we use an arrow debreu economy to show that disagreement increases the equity premium when incorporating this in our estimation we find little empirical evidence of either overconfidence or doubt

the association between financial accounting measures and real economic activity a multinational study abstract we investigate how cross country differences in financial accounting standards affect the relation between financial accounting earnings and real economic value relevant events that underlie those earnings based on previous research and economic theory we hypothesize that because of differences in legal systems and the demand for accounting information differences in legal protection for external shareholders and differences in the degree of tax conformity in our sample countries accounting earnings in the uk and the us will be more closely related to underlying economic activity than will accounting earnings in france and germany empirical results are generally consistent with our hypothesis

the wider impacts of high technology employment evidence from u s cities abstract innovative high technology industries are commonly described as drivers of regional development tech workers earn high wages but they are also said to generate knock on effects throughout the local economies that host them spurring growth in jobs and wages in nontradable activities at the same time in iconic high tech agglomerations like the san francisco bay area the home of silicon valley the success of the tech industry creates tensions in part as living costs rise beyond the reach of many non tech workers across a large sample of u s cities this paper explores these issues systematically combining annual data on wages employment and prices from the quarterly census of employment and wages the department of housing and urban development and the consumer price index it estimates how growth in tradable tech employment affects the real living cost deflated wages of local workers in nontradable sectors results indicate that high technology employment has significant positive but modest effects on the real wages of workers in nontradable sectors these effects appear to be spread consistently across different kinds of nontradable activities in terms of substantive wider impacts tech appears benign though fairly ineffectual

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

early warning signals using avars of infinitely divisible garch models evidence from stock index markets classical time series models have failed to properly assess the risks that are associated with large adverse stock price behaviour this article contributes to autoregressive moving average model garch arma garch models with standard infinitely divisible innovations and assesses the performance of these models by comparing them with other time series models that have normal innovation we discuss the limitations of value at risk var and aim to develop early warning signal models using average value at risk avars based on the arma garch model with standard infinitely divisible innovations empirical results for the daily dow jones industrial average index the england financial times stock exchange 100 index and the japan nikkei 225 index reveal that estimating avars for the arma garch model with standard infinitely divisible innovations offers an improvement over prevailing models for evaluating stock market risk exposure during periods of distress in financial markets and provides a suitable early

backtesting trading risk of commercial banks using expected shortfall this paper uses saddlepoint technique to backtest the trading risk of commercial banks using expected shortfall it is found that four out of six us commercial banks have excessive trading risks monte carlo simulation studies show that the proposed backtest is very accurate and powerful even for small test samples more importantly risk managers can carry out the proposed backtest based on any number of exceptions so that incorrect risk models can be promptly detected before any further huge losses are realized

estimating value at risk under a heath jarrow morton framework with jump this article proposes a new methodology for measuring value at risk hereafter var using a model that incorporates both volatility and jumps heath jarrow morton hjm model has been used for the valuation of interest rate derivatives this study extends the use of hjm model to the estimation var this article specifically uses a two factor hjm jump diffusion model for the computation the study models the eurodollar futures prices using its derivatives in addition this article uses a new volatility specification of ze to 2002 to construct the hjm dynamics the result indicates that the var model using hjm jump diffusion framework performs well in capturing the nonnormality and in providing accurate var forecasts in the in sample and out sample tests

is specialization good for regional economic development kemeny t and storper m is specialization good for regional economic development regional studies debates about urban growth and change often centre on specialization however arguments linking specialization to metropolitan economic development contain diverse and sometimes conflicting claims is it better to be highly specialized or diversified does specialization refer to the absolute or relative scale of an activity in a region does specialization have static or evolutionary effects this paper investigates these questions in theoretical and empirical terms by analysing local agglomerations over time it is found that growing absolute specialization is positively linked to wages while changes in relative concentration are not significantly associated with wage dynamics

intra urban wage variation employment location and commuting times abstract theory predicts that within a metropolitan area employers located where there is difficult commuting will have to compensate their workers with appropriately higher wages this should hold whether one is comparing central city work locations with those at the fringe or simply differences between suburban edge cities in the longer run if employers are concerned primarily with labor costs firm mobility should equalize wages or else agglomeration economies must exist to sustain the differences using microdata from the 1990 census for 2 large metropolitan areas in the u s wage equations are estimated for urban workers allowing for different wage levels depending on zone of employment the results show that observationally equivalent workers have wages that vary substantially across employment zones within a metro area and that this variation is strongly and significantly correlated with the average commute time of the workers employed in that zone these results hold across several different econometric specifications wages and average travel times also are found to be highly correlated with the aggregate number of workers in each zone but are not affected by zone employment specialization thus there is inconclusive evidence as to whether wage commuting cost differences result from equilibrium agglomeration effects or from a disequilibrium distribution of employment

science technology and regional economic development review and prospects abstract this paper reviews the literature on the location and regional effects of science and technology st these pools of mobile workers are most attracted to large urban areas in only some of these areas however does the spin off process result in the generation of new technology based firms the availability of local venture capital appears to be the principal influence on this variation government policy regarding science and technology has impacts on regions by contributing to the agglomeration of r d government policy also often fails to recognize that s t policy and industrial policy have regional effects that may be long term in nature and most detrimental to those regions whose economies are least competitive finally some priorities for future research on innovation in a regional setting are identified

beyond sharpe ratio optimal asset allocation using different performance ratios abstract as the assumption of normality in return distributions is relaxed classic sharpe ratio and its descendants become questionable tools for constructing optimal portfolios in order to overcome the problem asymmetrical parameter dependent performance ratios have been recently proposed in the literature the aim of this note is to develop an integrated decision aid system for asset allocation based on a toolkit of eleven performance ratios a multi period portfolio optimization up covering a fixed horizon is set up at first bootstrapping of asset return distributions is assessed to recover all ratios calculations at second optimal rebalanced weights are achieved at third optimal final wealth is simulated for each ratios eventually we make a robustness test on the best performance ratios empirical simulations confirm the weakness in forecasting of sharpe ratio whereas asymmetrical parameter dependent ratios such as the generalized rachev sortino satchell and farinelli tibiletti ratios show satisfactorily robustness

improving the value at risk forecasts theory and evidence from the financial crisis abstract the recent financial crisis has raised numerous questions about the accuracy of value at risk var as a tool to quantify extreme losses in this paper we develop data driven var approaches that are based on the principle of optimal combination and that provide robust and precise var forecasts for periods when they are needed most such as the recent financial crisis within a comprehensive comparative study we provide the latest piece of empirical evidence on the performance of a wide range of standard var approaches and highlight the overall outperformance of the newly developed methods

point process models for extreme returns harnessing implied volatility forecasting the risk of extreme losses is an important issue in the management of financial risk there has been a great deal of research examining how option implied volatilities iv can be used to forecast asset return volatility however the role of iv in the context of predicting extreme risk has received relatively little attention the potential benefit of iv in forecasting extreme risk is considered within a range of models beginning with the traditional garch based approach along with a number of novel point process models univariate models where iv is included as an exogenous variable are considered along with a novel bivariate approach where extreme movements in iv are treated as another point process it is found that in the context of forecasting value at risk the bivariate models produce the most accurate forecasts across a wide range of scenarios

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

bridging the gap between the distribution of realized ecu volatility and arch modelling of the euro the garch nig model summary this paper bridges the gap between traditional arch modelling and recent advances on realized volatilities based on a ten year sample of five minute returns for the ecu basket currencies versus the us dollar we find that the realized volatilities constructed from the summation of the high frequency intraday squared returns conditional on the lagged squared daily returns are approximately inverse gaussian ig distributed while the distribution of the daily returns standardized by their realized volatilities is approximately normal moreover the implied daily garch model with normal inverse gaussian nig errors estimated for the ecu returns results in very accurate out of sample predictions for the three years of actual daily euro us dollar exchange rates copyright 2002 john wiley sons ltd

multinomial var backtests a simple implicit approach to backtesting expected shortfall under the fundamental review of the trading book frtb capital charges for the trading book are based on the coherent expected shortfall es risk measure which show greater sensitivity to tail risk in this paper it is argued that backtesting of expected shortfall or the trading book model from which it is calculated can be based on a simultaneous multinomial test of value at risk var exceptions at different levels an idea supported by an approximation of es in terms of multiple quantiles of a distribution proposed in emmer et al 2015 by comparing pearson nass and likelihood ratio tests lrts for different numbers of var levels n it is shown in a series of simulation experiments that multinomial tests with n 4 are much more powerful at detecting misspecifications of trading book loss models than standard bi nomial exception tests corresponding to the case n 1 each test has its merits pearson offers simplicity nass is robust in its size properties to the choice of n the lrt is very powerful though slightly over sized in small samples and more computationally burdensome a traffic light system for trading book models based on the multinomial test is proposed and the recommended procedure is applied to a real data example spanning the 2008 financial crisis