a generalized schwartz model for energy spot prices estimation using a particle mcmc method we propose an energy spot price model featuring a two factor price process and a two component stochastic volatility process the first factor in the price process captures the normal variations the second accounts for spikes the two component volatility allows for a flexible autocorrelation structure instead of using various filtering techniques for splitting the two factors as often found in the literature we estimate the model in one step using an adaptive mcmc method with a rao blackwellized particle filter we fit the model to uk natural gas spot prices and investigate the importance of spikes and stochastic volatility we find that the inclusion of stochastic volatility is crucial and that it strongly impacts the jump intensity in the spike process furthermore our estimation method enables us to consider both continuous and purely jump driven volatility processes and thereby assess if the volatility specification also influences the spike process and the overall model fit

relative trading volume risk measures and other firm characteristics during the market crash abstract the crash of 1987 led to significant increases in the trading volume in the n y s e the paper uses individual data of 473 s p 500 firms to analyze the relation between said increases in trading volume and firm and security characteristics

after hours stock prices and post crash hangovers after hours pricing in foreign equity markets of multiple listed u s securities appeared to be efficient in predicting new york prices in the weeks immediately following the october 1987 crash but relatively uninformative in succeeding months by contrast daily changes in new york prices appear to be efficiently incorporated in after hours trading on both the tokyo and london exchanges throughout the sample period this paper suggests that the asymmetry and temporal variations in cross market correlations are consistent with rational investor behavior in equity markets with nonzero transaction costs and time varying share price volatility in the wake of the october 1987 crash a number of studies have provided evidence of significant international linkages among national equity markets where high frequency movements in the share price indices of national exchanges appear to induce sympathetic price movements in subsequent trading on other national exchanges however the cross market correlations are generally much larger in periods of extreme volatility and appear to subside to modest or even negligible associations during periods of more normal trading activity since the constituent stocks of national exchange indices are not identical it may be that the episodic increases in correlated movements of the indices are due to changes in the actual or perceived relative importance of common factors in periods of unusual volatility the thrust of this paper is to remove the issue of the disparate composition of the price indices of national exchanges by examining the prices of a set of

forward exchange bias hedging and the gains from international diversification of investment portfolios abstract the gains to the us investor from international diversification of investment portfolios are examined for portfolio strategies that hedge and strategies that do not hedge exchange rate risk via the interbank forward market using the sharpe performance index and stochastic dominance as performance measures almost all the unhedged strategies outperformed the hedged strategies for 1985 1988 the opposite held for 1981 1984 the results are explained by the biasedness of forward rates in predicting future spot rates jel f30

comovements in national stock market returns evidence of predictability but not cointegration abstract this paper is a response to the literature that tests for cointegration between national stock market indices it argues that apparent findings of cointegration in other studies may often be due to the use of asymptotic rather than small sample critical values in fact economic theory suggests that cointegration is unlikely to be observed in efficient markets however this paper finds evidence for the predictability of relative returns and the existence of a winner loser effect across 16 national equity markets a conclusion is that national stock market indices include a common world component and two country specific components one permanent and one transitory

measuring the subprime crisis contagion evidence of change point analysis of copula functions in this paper we first determine the existence of structural changes in the dependence between time series of equity index returns of two markets using the change point testing method the method is based on archimedean copula functions which are able to comprehensively describe dependence characteristics of random variables the degree of financial contagion between markets is subsequently estimated using the tail dependence coefficient of copula functions before and after the change point we empirically test our method by investigating financial contagion during the subprime crisis between the us s p 500 index and five asian markets namely china japan korea hong kong and taiwan our results show that a statistically significant change point exists in the dependence between the us market and all asian stock markets except taiwan the upper tail dependence is larger after the time of change implying the existence of contagion during the banking crisis between the us and the asian economies the degree of financial contagion is also estimated and found to be consistent with market events and media reports during that period

jump processes in natural gas markets abstract many analysts believe that natural gas will have an increasingly important role in the next few decades accordingly understanding the underpinnings of natural gas prices is likely to be critical both to policy analysts and to market participants at present it is common to assume that these prices follow a geometric brownian motion i e that log returns the inter temporal differences in the natural log of prices are normally distributed possibly allowing for some form of mean reversion increasingly however it has been recognized that the arrival of new information can lead to unexpectedly rapid changes or jumps in spot prices the implication is that the presumption of normally distributed log returns may be suspect in particular the prospect for abnormally fat tails becomes important this article investigates the potential presence of jumps in two key natural gas prices the spot price at the henry hub in the u s and the spot price for natural gas at the national balancing point in the u k we found compelling empirical evidence for the importance of jumps in both markets though jumps appear to be more important in the u k

the structure and degree of dependence a quantile regression approach abstract the copula function defines the degree of dependence and the structure of dependence this paper proposes an alternative framework to decompose the dependence using quantile regression we demonstrate that the methodology provides a detailed picture of dependence including asymmetric and non linear relationships in addition changes in the degree or structure of dependence can be modeled and tested for each quantile of the distribution the empirical part applies the framework to three different sets of financial time series and demonstrates substantial differences in dependence patterns among asset classes and through time the analysis of 54 global equity markets shows that detailed information about the structure of dependence is crucial to adequately assess the benefits of diversification in normal times and crisis times

estimating the correlation structure of international share prices recently the case for international portfolio diversification has been convincingly argued in the framework of mean variance portfolio analysis by a number of researchers however virtually no empirical documentation exists concerning the best method for estimating the correlation structure of international share prices in this paper 12 models for estimating the international correlation matrix are presented and empirically tested relative to full historical extrapolation the major evaluation criteria are the mean squared error and stochastic dominance based on the frequency distribution of the squared forecast errors the results indicate that the national mean model strictly dominates all the others in terms of forecasting accuracy in the last fifteen years or so a number of researchers have convincingly argued the case for international portfolio diversification as opposed to purely domestic diversification in the framework of mean variance portfolio analysis see e g grubel 4 levy and sarnat 8 solnik 12 mcdonald 10 lessard 6 and subrahmanyam 15 1 in spite of the emerging consensus in the academic and investment communities that investors can benefit from international diversification in terms of a more efficient risk return tradeoff virtually no empirical documentation exists concerning the best method for estimating the correlation structure of international share prices since estimating this correlation structure is a necessary precondition for being able to apply modern portfolio theory to international investments empirical examination is of major importance moreover only through empirical examination of the correlation structure will the effort to devise a simple algorithm that can be used to solve for the optimal international portfolio be facilitated in order to trace out the set of ex ante efficient international porffolios using the tenets of modern portfolio theory the investor must obtain accurate estimates of the expected return and the variance of return for each domestic and foreign security and he must also obtain accurate estimates of the correlation coefficients of the returns between each pair of securities stated in terms of his numeraire

international stock market linkages evidence from the pre and post october 1987 period abstract this paper uses recent developments in the theory of cointegration to provide new methods of testing the linkage and dynamic interactions among stock market movements our findings are in sharp contrast with previous research which discovered strong interdependence among national stock markets prior to october 1987 for the post october 1987 period however our results show that the degree of international co movements among stock price indices has increased substantially with the nikkei index the only exception furthermore the us stock market is found to have a considerable impact on the french german and uk markets in the post crash period we also find the response of the french german and uk markets to us stock market innovations to be consistent with the view of cross border informationally efficient stock markets finally we find the japanese equity market performance to have no links with both the us stock market and the stock markets in france germany and uk during the pre and post october crash period

the behavior of stock prices on ldc markets abstract the paper investigates the behavior of stock prices for a group of well established and newly emerging ldc securities markets the results suggest the probability distributions to be consistent with a lognormal distribution with some securities exhibiting non stationary variance ldc markets even though not as efficient as major dc markets are quite comparable to the smaller european markets and the behavior of security prices as reported in this study appears to be generalizable for the heavily traded segments of ldc markets

international diversification of investment portfolios u s and japanese perspectives in this paper we analyze the gains from international diversification of investment portfolios from the japanese as well as the u s perspectives the major findings of this paper include first the potential gains from international as opposed to purely domestic diversification are much greater for u s investors than for japanese investors for u s investors the gains accrue not so much in terms of lower risk as in terms of higher return and the opposite holds for japanese investors second using various ex ante international investment strategies designed to control parameter uncertainty u s investors can realize substantial gains from international diversification in out of sample periods japanese investors however can gain relatively little third hedging exchange risk generally allows the u s but not japanese investors to benefit more from international diversification for u s investors the international bond diversification with exchange risk hedging offers a superior risk return trade off than the international stock diversification with or without hedging

the interrelationships between u s and foreign equity market yields tests of granger causality this study examines the interrelationships between yields on the u s and several foreign market portfolios over the 1980 89 period tests of granger causality are used to investigate the effects of uni directional causality bi directional causality and contemporaneous adjustment in the determination of market rates of return the results indicate that international equity market returns are largely contemporaneously determined and the significance of contemporaneous effects varied over time uni directional and bi directional causality were found to be relatively weak

returns synchronization and daily correlation dynamics between international stock markets the use of close to close returns underestimates returns correlation because international stock markets have different trading hours with the availability of 16 00 london time stock market series we find dynamics of daily correlation and covariance estimated using two non synchroneity adjustment procedures to be substantially different from their synchronous counterparts conditional correlation may have different signs depending on the model and data type used other findings include volatility spillover from the us to the uk and france and a reverse spillover which is not documented before also unlike previous findings we found the increase in daily correlation is prominent only under extremely adverse conditions when a large negative return has been registered

bayes stein estimation for portfolio analysis in portfolio analysis uncertainty about parameter values leads to suboptimal portfolio choices the resulting loss in the investor s utility is a function of the particular estimator chosen for expected returns so this is a problem of simultaneous estimation of normal means under a well specified loss function in this situation as stein has shown the clas sical sample mean is inadmissible this paper presents a simple empirical bayes estimator that should outperform the sample mean in the context of a portfolio simulation analysis shows that these bayes stein estimators provide significant gains in portfolio selection problems

unit root hypothesis new classical and keynesian models abstract following perron econometrica 1989 57 1361 1401 the variables in the new classical and keynesian output equations are shown to be trend stationary therefore these models are evaluated for the united states with the standard non nested hypothesis tests the majority of these tests have rejected the new classical in favour of the keynesian approach

the contagion channels of july august 2011 stock market crash a dag copula based approach abstract the objective of this paper is to empirically investigate whether there is a contagion phenomenon between the stock markets during the july august 2011 stock market crash when there is a market contagion we will identify the propagation channel through which the crash is transmitted hence after checking if there is financial contagion between the stock markets we will see if the transmission mechanism constraints of wealth outweighs that of the portfolio rebalancing an additional test covering the interdependence between the stock and bond markets during the crash helps us verify whether the transmission is due either to the cross market rebalancing channel or to the flight to quality phenomenon on the basis of the combination of the copula theory and the directed acyclic graph to study the structure of causal dependence between the stock market during the period that lies between 01 02 2010 and 28 11 2012 we show that the links between countries are different between the pre crash period and that of the crash more specifically the links that do not exist during normal times seem to have a major role during the crash period we interpret this result as an evidence of the existence of pure contagion on the one hand the tests show that the channel of the portfolio rebalancing was the major mechanism for the spread of the crash on the other hand the phenomenon of the cross market rebalancing existed only in germany whereas that of the flight to quality was in all the other studied stock markets

computing the market price of volatility risk in the energy commodity markets abstract in this paper we demonstrate the need for a negative market price of volatility risk to recover the difference between black scholes black f scholes m 1973 the pricing of options and corporate liabilities journal of political economy 81 637 654 black black f 1976 studies of stock price volatility changes in proceedings of the 1976 meetings of the business and economics statistics section american statistical association pp 177 181 implied volatility and realized term volatility initially using quasi monte carlo simulation we demonstrate numerically that a negative market price of volatility risk is the key risk premium in explaining the disparity between risk neutral and statistical volatility in both equity and commodity energy markets this is robust to multiple specifications that also incorporate jumps next using futures and options data from natural gas heating oil and crude oil contracts over a 10 year period we estimate the volatility risk premium and demonstrate that the premium is negative and significant for all three commodities additionally there appear distinct seasonality patterns for natural gas and heating oil where winter withdrawal months have higher volatility risk premiums computing such a negative market price of volatility risk highlights the importance of volatility risk in understanding priced volatility in these financial markets

optimal filtering of jump diffusions extracting latent states from asset prices this paper provides an optimal filtering methodology in discretely observed continuoustime jump diffusion models although the filtering problem has received little attention it is useful for estimating latent states forecasting volatility and returns computing model diagnostics such as likelihood ratios and parameter estimation our approach combines time discretization schemes with monte carlo methods it is quite general applying in nonlinear and multivariate jump diffusion models and models with nonanalytic observation equations we provide a detailed analysis of the filter s performance and analyze four applications disentangling jumps from stochastic volatility forecasting volatility comparing models via likelihood ratios and filtering using option prices and returns jel c11 c13 c15 c51 c52 g11 g12 g17 this paper develops a filtering approach for learning about unobserved shocks and states from discretely observed prices generated by continuous time jumpdiffusion models the optimal filtering problem which has received little attention is the natural companion to the parameter estimation problem as filters allow researchers to analyze and use their models for practical applications 1 despite its usefulness there is currently no general method for solving the filtering problem in continuous time models

an empirical comparison of alternate regime switching models for electricity spot prices one of the most profound features of electricity spot prices are the price spikes markov regime switching mrs models seem to be a natural candidate for modeling this spiky behavior however in the studies published so far the goodness of fit of the proposed models has not been a major focus while most of the models were elegant their fit to empirical data has either been not examined thoroughly or the signs of a bad fit ignored with this paper we want to fill the gap we calibrate and test a range of mrs models in an attempt to find parsimonious specifications that not only address the main characteristics of electricity prices but are statistically sound as well we find that the most universal and robust structure is that of an independent spike 3 regime model with heteroscedastic diffusion type base regime dynamics and shifted spike regime distributions

the benefits from international diversification for nordic investors abstract in this paper we investigate the magnitude of the benefits from international diversification from the nordic point of view special attention is paid to whether potentially increased co movement of stock markets together with more volatile nordic currencies have resulted in decreased benefits from international diversification towards the end of the 1980s moreover the paper presents evidence on the benefits from international diversification for a currency which has recently started its free float the finnish markka fim we find significant increases in stock market co movement both unhedged ex ante strategies as well as strategies hedged for exchange rate risk are investigated revealing substantial benefits from international diversification for the nordic countries however we obtain mixed results concerning the question of the optimality of hedging

exchange rate uncertainty forward contracts and international portfolio selection in this paper ex ante efficient portfolio selection strategies are developed to realize potential gains from international diversification under flexible exchange rates it is shown that exchange rate uncertainty is a largely nondiversiflable factor adversely affecting the performance of international portfolios therefore it is essential to effectively control exchange rate volatility for that purpose two methods of exchange risk reduction are simultaneously employed multicurrency diversification and hedging via forward exchange contracts the empirical findings show that international portfolio selection strategies designed to control both estimation and exchange risks almost consistently outperform the u s domestic portfolio in out of sample periods since grubel 11 applied modern portfolio theory mpt to international investment various authors such as levy and sarnat 17 solnik 20 and lessard 16 have examined the gains from international diversification of investment portfolios for the purpose of establishing the gains from international diversification these studies constructed international portfolios using historical risk and return data from a period of fixed or relatively stable exchange rates and showed that internationally diversified portfolios dominated purely domestic portfolios in terms of mean variance efficiency from the standpoint of today s investors however the previous studies fail to offer operational guidance for international diversification for two important reasons first it is now questionable whether the past findings are still relevant under the current flexible exchange rate regime second by being ex post in nature the past studies ignored the issue of estimation risk or parameter uncertainty and therefore may have overstated the realizable portion of the potential gains from international diversification fluctuating exchange rates are likely to mitigate the potential gains from international diversification by making investment in foreign securities more risky as will be shown later a fluctuating exchange rate contributes to the risk of foreign investment not only through its own variance but also through its positive covariances with the local stock market returns during our sample period of 1980 through 1985 for example exchange rate volatility is found to account for about fifty percent of the volatility of dollar returns from investment in the stock markets of such major countries as germany japan and the u k furthermore the exchange rate changes vis a vis the u s dollar are found to be

international listings of stocks the case of canada and the u s the globalization of financial markets has seen ever increasing numbers of firms choosing to list their stocks on foreign exchanges we examine whether the extent of economic and financial market integration or segmentation between a firm s home country and listing country influences stock price reaction by examining the case of two similar countries the u s and canada during the 100 days before the week of interlisting in the u s risk adjusted stock prices of canadian firms rise on average by over 9 4 rise by an additional 2 around the interlisting date but follow with a corresponding drop of 9 7 in the 100 days after interlisting we interpret this evidence to be consistent with the financial market segmentation between canada and the u s however a subsample of canadian resource firms does not exhibit these stock price effects suggesting industry related factors may also be an important determinant of integration we also find average trading volume in interlisted stocks more than doubles in the months following interlisting

structure and performance global interdependence of stock markets around the crash of october 1987 using a new data source on share price indices this paper finds no evidence that the substantial variations in the reactions to the crash of october 1987 across countries are related to the structure of markets however trading halts and capital controls on residents may have moderated the speed of declines in some markets the paper also examines one measure of interlinkages between markets the trading of foreign stocks on domestic markets and finds this to be closely related to interdependence between markets

risk2 measuring the risk in value at risk the recent derivatives disasters have focused the attention of the finance industry on the need to control financial risks better this search has led to a uniform measure of risk called value at risk var which is the expected worst loss over a given horizon at a given confidence level var numbers however are themselves affected by sampling variation or estimation risk thus the risk in value at risk itself nevertheless given these limitations var is an indispensable tool to control financial risks this article lays out the statistical methodology for analyzing estimation error in var and shows how to improve the accuracy of var estimates

currency hedging for international portfolios this paper examines the benefits from currency hedging both for speculative and risk minimization motives in international bond and equity portfolios the riskreturn performances of globally diversified portfolios are compared with and without forward contracts over the period 1974 to 1990 inclusion of forward contracts results in statistically significant improvements in the performance of unconditional portfolios containing bonds conditional strategies are also implemented both in sample and out of sample and are shown to both significantly improve the risk return tradeoff of global portfolios and to outperform unconditional hedging strategies whether international portfolios should be hedged against currency risks is the subject of an active debate the theoretical side of the debate has been closely associated with two strands in the academic literature international asset pricing and optimal hedging in the futures markets in the international asset pricing model iapm of solnik 1974 optimal portfolios contain positions in forward contracts or equivalently foreign currency denominated bills these positions which can differ from the positions in foreign stocks have since been termed hedges black 1990 shows that under additional assumptions the hedge ratios should be identical for all investors regardless of their nationality universality and that investors should never fully hedge their foreign currency exposures similarly theoretical models from the futures literature produce demands for hedging instruments that contain both speculative and hedging components the empirical issue unanswered so far is whether adding forward contracts to international portfolios significantly improves the risk return profile of global investments empirical research has barely begun to respond to the challenges of theoretical models there exists little empirical evidence on either the relevance of black s universal hedge ratios or the optimality of hedge ratios less than one instead researchers have concentrated on the benefits of fully hedging exchange risk for example eun and resnick 1988 indicate that stock portfolios perform better when fully hedged but offer no statistical tests

price limit performance evidence from the tokyo stock exchange price limit advocates claim that price limits decrease stock price volatility counter overreaction and do not interfere with trading activity conversely price limit critics claim that price limits cause higher volatility levels on subsequent days volatility spillover hypothesis prevent prices from efficiently reaching their equilibrium level delayed price discovery hypothesis and interfere with trading due to limitations imposed by price limits trading interference hypothesis empirical research does not provide conclusive support for either positions we examine the tokyo stock exchange price limit system to test these hypotheses our evidence supports all three hypotheses suggesting that price limits may be ineffective

common trends and convergence south east asian equity markets 1988 1999 abstract this paper uses two different estimation approaches to demonstrate that equity markets in south east asia have shown signs of converging during the 1990s according to the haldane and hall economic journal 101 436 443 1991 method of measuring convergence a subset of asian markets had converged by mid 1997 this process appears to have been abruptly halted and somewhat reversed by the recent financial crisis we find that in general there are two common trends present in the eight asian equity market indices modeled here and also two trends when the us market is additionally included in a johansen var

uk gas markets the market price of risk and applications to multiple interruptible supply contracts we employ the schwartz and smith schwartz e and j smith 2000 short term variations and long term dynamics in commodity prices management science 46 893 911 model to explore the dynamics of the uk gas markets we discuss in detail the short term and long term market prices of risk borne by the market players and how deviations from expected cyclical storage affect the short term market price of risk finally we illustrate an application of the model by pricing interruptible supply contracts that are currently traded in the uk

multivariate cointegration analysis of the finnish japanese stock markets abstract in this paper evidence on the cointegration between the finnish and japanese financial markets is provided the results obtained by multivariate cointegration analysis indicate that changes in the nikkei financial market have an impact on the error correction mechanism of the finnish stock market

stock market crashes and the performance of circuit breakers empirical evidence this study examines the behavior of a small stock market with circuit breakers and with a one hour preauction order imbalance disclosure during the october 1987 crash the crash and its aftershocks lasted for a week and selling pressure was concentrated in higher beta larger capitalization and lower leverage firm stocks circuit breakers when implemented reduced the next day opening order imbalance and the initial price loss however they had no effect on the long run response some price overreaction and reversal phenomena also are documented

order imbalance liquidity and market returns traditionally volume has provided the link between trading activity and returns we focus on a hitherto unexplored but intuitive measure of trading activity the aggregate daily order imbalance on the new york stock exchange signed order imbalances increase decrease following market declines rises which reveals that investors are contrarians on aggregate order imbalances in either direction either excess buy or sell orders reduce liquidity market wide returns are strongly affected by contemporaneous and lagged order imbalances market wide returns reverse themselves after high negative imbalance large negative return days the magnitude of this reversal is partially predictable from the level of the imbalance and return even after controlling for aggregate market volume and liquidity market returns are affected by order imbalance

flexible modeling of dependence in volatility processes this article proposes a novel stochastic volatility sv model that draws from the existing literature on autoregressive sv models aggregation of autoregressive processes and bayesian nonparametric modeling to create a sv model that can capture long range dependence the volatility process is assumed to be the aggregate of autoregressive processes where the distribution of the autoregressive coefficients is modeled using a flexible bayesian approach the model provides insight into the dynamic properties of the volatility an efficient algorithm is defined which uses recently proposed adaptive monte carlo methods the proposed model is applied to the daily returns of stocks

correlated arch corrarch modelling the time varying conditional correlation between financial asset returns abstract although the time variation of the conditional correlations of asset returns is a well established stylized fact and of crucial importance for efficient financial decisions there is no explicit general model available for its estimation and forecasting in this paper we propose a bivariate garch covariance structure in which conditional variances can follow any garch type process while conditional correlation is generated by an explicit discrete time stochastic process the corrarch process a high order corrarch can parsimoniously be represented by a corgarch process the model successfully generates the reported stylized facts establishes an autocorrelation structure for correlations and thus provides an explicit framework for out of sample forecasting we provide empirical evidence from the g7 stock market indexes

time varying quantile association regression model with applications to financial contagion and var abstract this paper develops a quantile association regression model which is able to capture the dynamic quantile dependence in the tails of conditional distributions the association measure the quantile specific odds ratio qor captures the tendency of two random variables being simultaneously below specific quantiles it is independent of marginal distributions and invariant to monotonic transformation and enjoys methodological advantages over popular alternatives such as the copula the ability of the qor measure to capture and forecast a range of different dependence structures is first shown via simulations in the financial application we implement the model and compute the qor on a daily basis to assess contagion for 10 stock markets during two recent crises our empirical results show that contagion exists during the us banking crisis between the us and all tested markets and between greece and the tested european markets during the euro crisis hence the model is able to capture the changes in quantile dependence between stock markets and offer a vivid description of market events in addition the model provides an accurate valuation of daily value at risk var

order imbalances and stock price movements on october 19 and 20 1987 on october 19 1987 nyse stocks in the s p index declined seven percentage points more than nyse stocks not in this index in the first hour of trading on october 20 the s p stocks virtually recovered to the level of the non s p stocks there is a strong relation between order imbalances and stock price movements both in analyses of time series and cross sections thus in addition to the breakdown in the linkage between future prices and the spot index on these two days there were also breakdowns in the linkage among nyse stocks

risk reduction by diversification in the nordic stock markets empirical examination of the ex post potential gains of risk reduction through international portfolio diversification started with grubel 1968 levy and sarnat 1970 solnik 1974 and lessard 1974 in their survey of international finance adler and dumas 1983 p 938 summed up the results the potential for international diversification to reduce risk seems unquestionable in the wake of increasing liberalization for international portfolio investment more recent contributions include jorion 1985 1989 grauer and hakansson 1987 and levy and lerman 1988 the results of the pioneers have been corroborated by contemporary research and according to jorion 1989 p 54 international diversification extolled by grubel as early as 1968 seems to have delivered on its promises despite the long tradition of studies in international portfolio diversification there has been no such work regarding the nordic markets this paper fills the gap through an analysis of potential gains from international diversification for different nordic investors danish finnish norwegian and swedish if they invest in all the nordic equity markets until the beginning of the 1980s nordic investors particularly in finland and sweden faced legal restrictions on investment abroad see nordiska radet 1987 adler and dumas 1983 have pointed out that such restrictions would lead to partially or fully segmented markets and hietala 1989 has shown the existence of premiums in the finnish stock market in our study we do not make any direct test of whether the nordic equity markets have been segmented or integrated but our results might provide some indirect evidence the nordic countries are generally viewed as fairly homogeneous from a social political and economic point of view while international diversifi

extreme coexceedances in new eu member states stock markets abstract we analyze the financial integration of the new european union eu member states stock markets using the negative positive coexceedance variable that counts the number of large negative large positive returns on a given day across the countries a similar analysis is performed for the old eu countries we use a multinomial logit model to investigate how persistence asset classes and volatility are related to the coexceedance variables we find that the effects differ a between negative and positive coexceedance variables b between old and new eu member states and c before and after the eu enlargement in 2004 suggesting a closer connection of new eu stock markets to those in western europe

regime jumps in electricity prices many countries are liberalizing their energy markets participants in these markets are exposed to market risk due to the characteristics of electricity price dynamics electricity prices are known to be mean reverting very volatile and subject to frequent spikes models that describe the dynamics of electricity prices should incorporate these characteristics in order to capture the price spikes many researchers have introduced stochastic jump processes but we argue and show that this specification might lead to potential problems with specifying the true amount of mean reversion within the process in this paper we propose a regime switching model that models price spikes separated from normal mean reverting prices

international portfolio diversification with estimation risk international portfolio diversification has long been advocated as a way of enhancing average returns while reducing portfolio risk for the investor who considers diversifying into foreign securities this proposition however relies on the assumption that the required inputs to the classical mean variance analysis are known with certainty typically expected returns variances and covariances are simply replaced by their ex post sample values and the optimal portfolio is derived without mentioning the uncertainty inherent in these parameter values but the rational investor should take this uncertainty into account when forming expectations and probably will consider estimators that are less subject to estimation error than the classical sample mean this paper investigates alternative estimators of expected returns and their implications for the alleged gains from diversification an important observation is the crucial influence that errors in estimating expected returns have on portfolio analysis a closer examiprevious studies of international portfolio diversification have relied on ex post meanvariance analysis without considering the problem of estimation risk typically past averages are substituted for expected returns and no allowance is made for the uncertainty inherent in these parameter values first i demonstrate the shortcomings of such an approach and second i investigate another method of estimating expected returns initially proposed by stein by shrinking the sample averages toward a common mean i find that the out of sample performance of the optimal portfolio is substantially increased one of the implications of this method is that the classical conclusions vastly overestimate the possible gains in average returns instead benefits from diversification are more likely to accrue from a reduction in risk this paper draws on part of my dissertation at the university of chicago i am grateful to arnold zellner michael mussa george constantinides and especially john bilson for useful discussions and comments numerous improvements were also suggested by the referee this research received the generous financial support of the college interuniversitaire d etudes doctorales dans les sciences du management

the nature of the adas model based on the islm model the aggregate demand and supply model adas is interpreted as a synthesis of the keynesian and neoclassical models it uses the islm model without explaining its nature to derive aggregate demand ad it is combined with an aggregate supply as curve to explain price inflation and output dynamics this paper argues that neither the ad nor as curve is conceptually the same as its microeconomic counterpart and adas is not a synthesis in fact adasimplies that discretionary policy is necessary and that price changes do not perform their traditional negative feedback function

residual shape risk on natural gas market with mixed jump diffusion price dynamics abstract this paper introduces residual shape risk as a new subclass of energy commodity risk residual shape risk is caused by insufficient liquidity of energy forward market when retail energy supplier has to hedge his short sales by a non flexible standard baseload product available on wholesale market because of this inflexibility energy supplier is left with residual unhedged position which has to be closed at spot market the residual shape risk is defined as the difference between spot and forward prices weighted by residual unhedged position whose size depends on the shape of customers portfolio of a given retail energy supplier we evaluated residual shape risk over the years 2014 2018 with a real portfolio of a leading natural gas retail supplier in the czech republic the size of residual shape risk in our example corresponds approximately to 1 percent of the profit margin of the natural gas retail supplier

capital controls and international capital market segmentation the evidence from the japanese and american stock markets the paper focuses on two countries japan and the u s to test the integration of capital markets in japan the enactment of the foreign exchange and foreign trade control law in december of 1980 amounted to a true regime switch that virtually eliminated capital controls using multifactor asset pricing models we show that the price of risk in the u s and japanese stock markets was different before but not after the liberalization this evidence supports the view that governments are the source of international capital market segmentation the notion that world capital markets are perfectly integrated is central to most theoretical developments in both international finance and macroeconomics indeed it also lies behind much of the recent international policy discussion capital markets are integrated if assets with perfectly correlated rates of return have the same price regardless of the location in which they are traded 1 segmentation may arise either because of government impediments to capital movements or because of individuals attitudes or irrationality if the hypothesis that the international capital markets are integrated is rejected there is still an important empirical question left unanswered which is related to the source of segmentation while there is a rich body of theoretical research on international market integration only a few studies have tried to investigate this important question empirically a first group of empirical studies on market integration has generally adopted

explaining co movements between stock markets the case of us and germany abstract we explain co movements between stock markets by explicitly considering the distinction between interdependence and contagion we propose and implement a full information approach on data for us and germany to provide answers to the following questions i is there long term interdependence between us and german stock markets ii is there short term interdependence and contagion between us and german stock markets i e do short term fluctuations of the us share prices spill over to german share prices and is such co movement unstable over high volatility episodes our answers are respectively no to the first question and yes to the second one

stability and forecasting of the comovement measures of international stock market returns abstract the potential benefits to international diversification may be less if the comovement structure of international equity returns is non stationary than if it is this paper examines the intertemporal stability of the correlation and the covariance structure of the returns of ten major stock markets whilst empirical evidence supports the hypothesis that the correlation structure is stable over time the empirical support for the stability of the covariance matrix is much weaker alternative forecasting models of the comovement structure are examined

caviar conditional autoregressive value at risk by regression quantiles value at risk var has become the standard measure of market risk employed by financial institutions for both internal and regulatory purposes var is defined as the value that a portfolio will lose with a given probability over a certain time horizon usually one or ten days despite its conceptual simplicity its measurement is a very challenging statistical problem and none of the methodologies developed so far give satisfactory solutions interpreting the var as the quantile of future portfolio values conditional on current information we propose a new approach to quantile estimation which does not require any of the extreme assumptions invoked by existing methodologies such as normality or i i d returns the conditional autoregressive value at risk or caviar model moves the focus of attention from the distribution of returns directly to the behavior of the quantile we specify the evolution of the quantile over time using a special type of autoregressive process and use the regression quantile framework introduced by koenker and bassett to determine the unknown parameters since the objective function is not differentiable we use a differential evolutionary genetic algorithm for the numerical optimization utilizing the criterion that each period the probability of exceeding the var must be independent of all the past information we introduce a new test of model adequacy the dynamic quantile test applications to simulated and real data provide empirical support to this methodology and illustrate the ability of these algorithms to adapt to new risk environments

gains from international diversification 1968 85 returns on portfolios of stocks and bonds this paper applies the multi period investment model to a universe of international securities on the basis of the simple probability assessment approach our principal findings are 1 the gains from including non u s asset categories in the universe were remarkably large in some cases statistically significant especially for the highly risk averse strategies 2 the gains from removing the no leverage constraint were more substantial than they were in the absence of non u s securities and 3 there is strong evidence of market segmentation in that the optimal levels of investment in u s securities were mostly zero in the presence of the non u s asset categories

contagion around the october 1987 stock market crash abstract this study investigates financial contagion among seven international stock markets around the october 19 1987 crash building on a recent advance in vector autoregression analysis by swanson n granger c w j 1997 impulse response functions based on a causal approach to residual orthogonalization in vector autoregression journal of the american statistical association 92 357 367 data determined historical decompositions are conducted to provide a day by day picture of price fluctuation transmission which is crucial to explore the financial contagion pattern characterized by rich dynamics the results clearly show that the crash originated in the us market and that an upward movement in the japanese market after the crash helped the recovery in the us market which has not yet been empirically documented in the literature