a stylized model of home buyers and bankers behaviours during the 2007 2009 us subprime mortgage crisis a predatory perspective abstractwe examine the behaviour of market agents during the years leading to the 2008 us subprime mortgage crisis using a stylized capital asset pricing model model in our study an average investor eager to make money by flipping houses meets a banker who offers him subprime mortgage deals we refer to recent research that shows the mechanics of the psychological and behavioural components of these two market agents in particular much in line with the famous stanford experiment it is assumed that investors adopt a predator or a prey position our analysis shows that given a historical tendency towards financial predatory acts on the part of market agents including buyers government regulations should be adapted and strengthened to face this dooming reality

models of stock returns a comparison in this paper a discrete mixture of normal distributions is proposed to explain the observed significant kurtosis fat tails and significant positive skewness in the distribution of daily rates of returns for a sample of common stocks and indexes stationarity tests on the parameter estimates of this discrete mixture of normal distributions model revealed significant differences in the mean estimates that can explain the observed skewness and significant differences in the variance estimates that can explain the observed kurtosis an alternative explanation for the observed fat tails is the symmetric student model the result of a comparison between the models is that the discrete mixture of normal distributions model has substantially more descriptive validity than the student model for many years both financial economists and statisticians have been concerned with the description of stock market returns the form of the distribution of stock returns is a crucial assumption for mean variance portfolio theory theoretical models of capital asset prices and the prices of contingent claims for example understanding the behavior of the variance is essential to option pricing models empirical tests of asset pricing models and the efficient markets hypothesis draw statistical inferences that are also conditional on distributional assumptions the most convenient assumption for financial theory and empirical methods is that the distribution of security rates of return be multivariate normal with parameters that are stationary over time since the normal distribution is stable under addition any arbitrary portfolio of stocks will also be normally distributed with the additional assumption of risk aversion mean variance theory follows furthermore the assumptions of normality and parameter stationarity are required for most of the econometric techniques typically used in empirical research tests of the normality hypothesis on the daily returns of the dow jones industrial stocks by fama 121 revealed more kurtosis fatter tails than that predicted from a sample of independent and identically distributed normal variates fama concluded from this evidence that the distribution of price changes conforms better to the stable paretian distribution with characteristic exponent

on the risk spillover across the oil market stock market and the oil related cds sectors a volatility impulse response approach abstract compared to credit default swap cds literature this study focuses on the magnitude of volatility transmission and the risk spillover mechanism across the oil market financial market risks and the oil related cds sectors our dataset includes futures prices of west texas intermediate wti and seven different measures of markets and credit risks four of the vast risk measures are the oil related cdss for auto chemicals natural gas and utility sectors in addition three measures of the financial market risk the one month expected equity volatility measured by vix move and smove are included the daily dataset covers the period from 6 january 2004 to 2 february 2016 the volatility transmission mechanism across the oil and financial markets and cds sectors is examined using the volatility impulse response model we evaluate the risk transmission due to several recent crisis shocks around the world and the results show complicated transmission mechanisms that spread over long periods among these events the lehman brothers bankruptcy has destabilizing effects on all oil related sectors findings also show that all oil market related shocks have significant risk transmission effects

asset prices and institutional investors empirical evidence indicates that trades by institutional investors have sizable effects on asset prices generating phenomena such as index effects asset class effects and others it is difficult to explain such phenomena within standard representative agent asset pricing models in this paper we consider an economy populated by institutional investors alongside standard retail investors institutions care about their performance relative to a certain index our framework is tractable admitting exact closed form expressions and produces the following analytical results we find that institutions optimally tilt their portfolios towards stocks that comprise their benchmark index the resulting price pressure boosts index stocks while leaving nonindex stocks unaffected by demanding a higher fraction of risky stocks than retail investors institutions amplify the index stock volatilities and aggregate stock market volatility and give rise to countercyclical sharpe ratios trades by institutions induce excess correlations among stocks that belong to their benchmark index generating an asset class effect institutions finance their additional purchases of index stocks by taking on leverage a policy prescription that calls for a reduction in leverage while reducing the riskiness of institutional portfolios would also reduce the ability of institutions to tilt their portfolios towards index stocks depressing the index level

stochastic dominance and mean variance measures of profit and loss for business planning and investment in this paper we first extend the stochastic dominance sd theory by introducing the first three orders of both ascending sd asd and descending sd dsd to decisions in business planning and investment to risk averse and risk loving decision makers so that they can compare both return and loss we provide investors with more tools for empirical analysis with which they can identify the first order asd and dsd prospects and discern arbitrage opportunities that could increase his her utility as well as wealth and set up a zero dollar portfolio to make huge profit our tools also enable investors and business planners to identify the third order asd and dsd prospects and make better choices to complement the stochastic dominance approach we also introduce an improved mean variance criterion to decisions in business planning or investment on both return and loss for risk averse and riskloving investors we then illustrate the superiority of the present approaches with well known examples in the literature and discuss the relationship between the improved stochastic dominance and mean variance criteria

pricing default swaps empirical evidence in this paper we compare market prices of credit default swaps with model prices we show that a simple reduced form model outperforms directly comparing bonds credit spreads to default swap premiums we find that the model yields unbiased premium estimates for default swaps on investment grade issuers but only if we use swap or repo rates as proxy for default free interest rates this indicates that the government curve is no longer seen as the reference default free curve we also show that the model is relatively insensitive to the value of the assumed recovery rate

index investment and financialization of commodities the authors found that concurrent with the rapidly growing index investment in commodity markets since the early 2000s prices of non energy commodity futures in the united states have become incr

gains from diversification on convex combinations a majorization and stochastic dominance approach by incorporating both majorization theory and stochastic dominance theory this paper presents a general theory and a unifying framework for determining the diversification preferences of risk averse investors and conditions under which they would unanimously judge a particular asset to be superior in particular we develop a theory for comparing the preferences of different convex combinations of assets that characterize a portfolio to give higher expected utility by second order stochastic dominance our findings also provide an additional methodology for determining the second order stochastic dominance efficient set

on the optimal hedge of a nontraded cash position in this paper we focus on the optimal demand for futures contracts by an investor with a logarithmic utility function who attempts to hedge a nontraded cash position when the analysis is conducted in the cash commodity price space we show that the value function associated with the bernoulli investor program is not additively separable thus suggesting that this investor hedges against shifts in the opportunity set as represented by the commodity price by establishing the equivalence between the cash formulation of the problem and the wealth formulation we are able to analyze the problem in the wealth commodity price space in this space we show the additive separability of the value function when the futures settlement price process is perfectly locally correlated with the commodity price process the demand for futures in this instance is composed of a a mean variance term and b a minimum variance component that is a classic feature of models with nontraded assets since the first best nonmyopic optimum is attained however the deviation from a mean variance demand should not be interpreted as the expression of a nonmyopic behavior but rather as an attempt to restore a first best optimum on the other hand when the correlation between the futures price and the underlying commodity price is imperfect in general the value function does not separate additively the first best solution cannot be attained and the optimal futures trading strategy involves a hedging term against shifts in the opportunity set in the classic dynamic portfolio problem the investor selects a trading strategy in risky and riskless assets so as to maximize his or her expected lifetime utility in this environment where all assets can be freely traded the logarithmic investor behaves myopically to the extent that he or she ignores shifts in the opportunity set when making current choices samuelson 271 mossin 24 hakansson 16 merton 22 in particular in models with continuous trading it turns out that the value function corresponding to the investor s program is additively separable in wealth and state variables the implication is that his or her behavior will be myopic i e that his or her demand functions for assets will be of the pure meanvariance efficiency type and in particular will not include any dynamic hedging components that are characteristic of financial markets with shifting opportunities in this paper we investigate the structure of the bernoulli investor s demand functions in the situation where one asset cannot be freely traded in the market

should investors include commodities in their portfolios after all new evidence abstract this paper investigates whether an investor is made better off by including commodities in a portfolio that consists of traditional asset classes first we revisit the posed question within an in sample setting by employing mean variance and non mean variance spanning tests then we form optimal portfolios by taking into account the higher order moments of the portfolio returns distribution and evaluate their out of sample performance under the in sample setting we find that commodities are beneficial only to non mean variance investors however these benefits are not preserved out of sample our findings challenge the alleged diversification benefits of commodities and are robust across a number of performance evaluation measures utility functions and datasets the results hold even when transaction costs are considered and across various sub periods not surprisingly the only exception appears over the 2005 2008 unprecedented commodity boom period

a bivariate markov regime switching garch approach to estimate time varying minimum variance hedge ratios this article develops a new bivariate markov regime switching bekk generalized autoregressive conditional heteroscedasticity garch rs bekk garch model the model is a state dependent bivariate bekk garch model and an extension of gray s univariate generalized regime switching grs model to the bivariate case to solve the path dependency problem inherent in the bivariate regime switching bekk garch model we propose a recombining method for the covariance term in the conditional variance covariance matrix the model is applied to estimate time varying minimum variance hedge ratios for corn and nickel spot and futures prices out of sample point estimates of hedging portfolio variance show that compared to the state independent bekk garch model the rs bekk garch model improves out of sample hedging effectiveness for both corn and nickel data we perform white s 2000 data snooping reality check to test for predictive superiority of rs bekk garch over the benchmark model and find that the difference

how regimes affect asset allocation international equity returns are characterized by episodes of high volatility and unusually high correlations coinciding with bear markets this article provides models of asset returns that match these patterns and illustrates their use in asset allocation the presence of regimes with different correlations and expected returns is difficult to exploit within a framework focused on global equities nevertheless for global all equity portfolios the regime switching strategy dominated static strategies in an out of sample test in addition substantial value was added when an investor switched between domestic cash bonds and equity investments in a persistent high volatility market the model told the investor to switch primarily to cash large market timing benefits are possible because high volatility regimes tend to coincide with periods of relatively high interest rates

pricing and risk management of interest rate swaps this paper reformulates the valuation of interest rate swaps swap leg payments and swap risk measures all under stochastic interest rates as a problem of solving a system of linear equations with random perturbations a sequence of uniform approximations which solves this system is developed and allows for fast and accurate computation the proposed method provides a computationally efficient alternative to monte carlo based valuations and risk measurement of swaps this is demonstrated by conducting numerical experiments and so our method provides a potentially important real time application for analysis and calculation in markets

a pseudo bayesian model in financial decision making with implications to market volatility under and overreaction abstract this paper develops a model of weight assignments using a pseudo bayesian approach that reflects investors behavioral biases in this parsimonious model of investor sentiment weights induced by investors conservative and representative heuristics are assigned to observations of the earning shocks of stock prices such weight assignments enable us to provide a quantitative link between some market anomalies and investors behavioral biases the seriousness of an anomaly can be quantitatively assessed by investigating into its dependency on weights new results other than the short run underreaction and long run overreaction can be derived and new hypotheses can be formed

on optimal portfolio choice under stochastic interest rates abstract in an economy where interest rates and stock price changes follow fairly general stochastic processes we analyze the portfolio problem of an investor endowed with a non traded cash bond position he can trade on stocks the riskless asset and a futures contract written on the bond so as to maximize the expected utility of his terminal wealth when the investment opportunity set is driven by an arbitrary number of state variables the optimal portfolio strategy is known to contain a pure preference free hedge component a speculative element and merton breeden hedging terms against the fluctuations of each and every state variable while the first two components are well identified and easy to work out the implementation of the last ones is problematic as the investor must identify all the relevant state variables and estimate their distribution characteristics using the martingale approach we show that the optimal strategy can be simplified to include in addition to the pure hedge and speculative components only two merton breeden type hedging elements however large is the number of state variables the first one is associated with interest rate risk and the second one with the risk brought about by the co movements of the spot interest rate and the market prices of risk the implementation of the optimal strategy is thus much easier as it involves estimating the characteristics of the yield curve and the market prices of risk only rather than those of numerous a priori unknown state variables moreover the investor s horizon is shown explicitly to play a crucial role in the optimal strategy design in sharp contrast with the traditional decomposition finally the role of interest rate risk in actual portfolio risk management is emphasized

predicting carbon market risk using information from macroeconomic fundamentals abstract economic theories suggest that carbon price movements are closely related to economic fundamentals this paper develops an economic state dependent sd approach to evaluate carbon market value at risk var that incorporates information from macroeconomic fundamentals into carbon return var modeling and forecasting this method implements an economic sd sampling scheme that utilizes historical carbon return observations from the relevant economic states to predict future carbon market var applying this sd method to the european union eu carbon market we confirm that the eu fundamental economy has two distinct states that correspond to expansion and recession periods and that the carbon returns have different distributions in the two states we find that the sd method outperforms the traditional non sd methods in out of sample var forecasts and this is particularly evident when the carbon market experiences large scale economy driven structural breaks

wti crude oil futures in portfolio diversification the time to maturity effect the aim of the paper is to analyze the diversification effect brought by crude oil futures contracts the most liquid commodity futures into a portfolio of stocks the studies that have documented the very low and essentially negative correlations between commodities and equities typically rely on normally distributed returns which is not the case for crude oil futures and stocks indexes moreover the particular time to maturity chosen for the future contract used as an investment vehicle is an important matter that needs to be addressed in presence of forward curves switching between backwardation and contango shapes our goal in this paper is twofold a we introduce copula functions to have a better representation of the dependence structure of oil futures with equity indexes b using this copula representation we are able to analyze in a precise manner the maturity effect in the choice of crude oil future contract with respect to its diversification benefits our finding is that in the case of distant maturities futures e g 18 months the negative correlation effect is more pronounced whether stock prices increase or decrease this property has the merit to avoid the hurdles of a frequent roll over while being quite desirable in the current trendless equity markets empirical evidence is exhibited on a database comprising the nymex wti crude oil futures and s p 500 index over a 15 year time period

is the forward bias economically small evidence from european rates abstract for the purpose of testing uncovered interest parity uip rates of european currencies against the mark offer a distinct advantage the admissible band of the exchange rate mechanism erm induces statistically significant mean reversion in weekly rates thus unlike for freely floating rates there is an expectation signal that has non trivial variation and is sufficiently traceable for research purposes when running the standard regression tests of the unbiased expectations hypothesis at the one week horizon we nevertheless obtain essentially zero coefficients for intra ems exchange rates and the familiar negative coefficients for extra ems rates even more puzzlingly lagged exchange rate changes remain significant when added to the regression a feature that seems hard to explain as a missing variable effect the deviation from uip is significant not just statistically but also economically trading rule tests reveal that for sufficiently large filters the average profit per trade exceeds transaction costs and that cumulative gains can be quite impressive the size of the profits and the patterns from buy versus sell decisions also allow us to reject the hypotheses of either a risk premium or peso issues about realignments as sufficient explanations

mean variance portfolio and contribution selection in stochastic pension funding abstract in this paper we study the problem of simultaneous minimization of risks and maximization of the terminal value of expected funds assets in a stochastic defined benefit aggregated pension plan the risks considered are the solvency risk measured as the variance of the terminal fund s level and the contribution risk in the form of a running cost associated to deviations from the evolution of the stochastic normal cost the problem is formulated as a bi objective stochastic problem of mean variance and it is solved with dynamic programming techniques we find the efficient frontier and we show that the optimal portfolio depends linearly on the supplementary cost of the fund plus an additional term due to the random evolution of benefits

optimizing bounds on security prices in incomplete markets does stochastic volatility specification matter we extend and generalize some results on bounding security prices under two stochastic volatility models that provide closed form expressions for option prices in detail we compute analytical expressions for benchmark and standard good deal bounds for both models our findings show that our benchmark results generate much tighter bounds a deep analysis of the properties of option prices and bounds involving a sensitivity analysis and analytical derivation of greeks for both option prices and bounds is also presented these results provide strong practical applications taking into account the relevance of pricing and hedging strategies for traders financial institutions and risk managers

occupational segregation and wage differentials between natives and immigrants evidence from hong kong abstract this paper attempts to provide the first set of evidence on the intra and inter occupational earnings differentials between immigrants and the native by studying hong kong 1996 census data we found that the intra occupational earnings differential is slightly more important than the inter occupational earnings differential comparing with the literature on gender wage differentials immigrants seem to face more barriers to entry into good occupations than females in a relative sense moreover most of the intra occupational differential is unexplained occupational segregation gets smaller as the duration of residence rises and does not exist for immigrants who came to hong kong at young ages

directional predictability from oil market uncertainty to sovereign credit spreads of oil exporting countries evidence from rolling windows and crossquantilogram analysis abstract given the recent collapse of oil prices this study investigates the directional predictability from the oil market uncertainty to the sovereign credit default swap cds spreads of four oil exporting gcc countries bahrain qatar saudi arabia and united arab emirates and five other oil exporting countries brazil mexico norway russia and venezuela using the modified bootstrap rolling window approach the empirical results reveal a significant directional predictability from oil uncertainty to the cds spreads of most of those oil exporting countries during the subperiods 2010 2011 and 2014 2015 that is during the periods when oil volatility follows a rising trend the most significant directional predictability is found for qatar bahrain saudi arabia and norway particularly during the 2014 2015 oil price collapse subperiod whereas there is no directional predictability found in the case of brazil for mexico the oil market uncertainty predicts cds spreads mostly during 2014 and for venezuela the directional predictability flows are highly impactful and concentrated during 2011 13 to check the robustness of our estimations we use a novel quantile dependence measure called the cross quantilogram that was developed by han et al 2016 the estimation results of this approach confirm our main findings and indicate that the surge in oil volatility predicts the cds spreads in different quantiles overall the findings highlight that the sovereign credit risk of the gcc and the other oil exporting countries is at least partially driven or directionally predicted by the oil volatility shocks this has important implications for investment and policy decisions

volatility spillovers and the effect of news announcements we examine the effect of us and european news announcements on the spillover of volatility across us and european stock markets using synchronously observed international implied volatility indices at a daily frequency we find significant spillovers of implied volatility between us and european markets as well as within european markets we observe a stark contrast in the effect of scheduled versus unscheduled news releases scheduled unscheduled news releases resolve create information uncertainty leading to a decrease increase in implied volatility nevertheless news announcements do not fully explain the volatility spillovers although they do affect the magnitude of volatility spillovers our results are robust to extreme market events such as the recent financial crisis and provide evidence of volatility contagion across markets

determinants of urban migration evidence from chinese cities this study seeks the causes of variation in the amount of migration to chinese cities over the period of 1995 99 we use a city fixed effect model with lagged values of pull factors for each city

elasticity of risk aversion and international trade abstract this paper analyzes export production in the presence of exchange rate uncertainty under mean variance preferences we present the elasticity of risk aversion since this elasticity concept permits a distinct investigation of risk and expectation effects on exports counterintutitive results are possible e g although the home currency is revaluating devaluating exports by the firm increase decrease this fact may contribute to the explanation of disturbing empirical results

futures markets and commodity options hedging and optimality in incomplete markets abstract this paper examines the allocational roles of futures markets and commodity options in multi good and multi period economies in a continuous time model with time additive utilities and homogeneous beliefs trading in unconditional futures contracts the market portfolio and a riskless asset gives any pareto optimal allocation individuals optimal holdings of futures contracts in the continuous time model are related to their consumption bundles and to their risk tolerances it is shown that both hedging and reverse hedging behavior are possible in the general model with discrete trading options on portfolios of commodity options are shown to permit any unconstrained pareto optimal allocation

portfolio optimization when asset returns have the gaussian mixture distribution abstract in this paper we consider a portfolio optimization problem where the underlying asset returns are distributed as a mixture of two multivariate gaussians these two gaussians may be associated with distressed and tranquil market regimes in this context the sharpe ratio needs to be replaced by other non linear objective functions which in the case of many underlying assets lead to optimization problems which cannot be easily solved with standard techniques we obtain a geometric characterization of efficient portfolios which reduces the complexity of the portfolio optimization problem

dynamic asset allocation for varied financial markets under regime switching framework asset allocation among diverse financial markets is essential for investors especially under situations such as the financial crisis of 2008 portfolio optimization is the most developed method to examine the optimal decision for asset allocation we employ the hidden markov model to identify regimes in varied financial markets a regime switching model gives multiple distributions and this information can convert the static mean variance model into an optimization problem under uncertainty which is the case for unobservable market regimes we construct a stochastic program to optimize portfolios under the regime switching framework and use scenario generation to mathematically formulate the optimization problem in addition we build a simple example for a pension fund and examine the behavior of the optimal solution over time by using a rolling horizon simulation we conclude that the regime information helps portfolios avoid risk during left tail events

returns policy new model introduction and consumer welfare abstract this paper investigates how economic outcomes differ for new model introduction between two extreme contracts outright sales contract and returns policy contract with full credit under the outright sales contract we show that the retailer s incentive to introduce a new model can lead to a reduction of consumer welfare when the retailer is moderately risk averse the primary conclusion from this study is that the returns policy contract resolves this conflict between firms and consumers and that the supply chain introduces the new model only when consumer surplus from the new model is higher than that from the old model

evaluation of firm s loss due to incomplete information in real investment decision abstract we investigate the effect of incomplete information in a model where a start up with a unique idea and technology pioneers a new market but will eventually be expelled from the market by a large firm s subsequent entry we evaluate the start up s loss due to incomplete information about the large firm s behavior we clarify conditions under which the start up needs more information about the large firm the proposed method of evaluating the loss due to incomplete information could also be applied to other real options models involving incomplete information

a closed form garch option valuation model this paper develops a closed form option valuation formula for a spot asset whose variance follows a garch p q process that can be correlated with the returns of the spot asset it provides the first readily computed option formula for a random volatility model that can be estimated and implemented solely on the basis of observables the single lag version of this model contains heston s 1993 stochastic volatility model as a continuous time limit empirical analysis on s p500 index options shows that the out of sample valuation errors from the single lag version of the garch model are substantially lower than the ad hoc black scholes model of dumas fleming and whaley 1998 that uses a separate implied volatility for each option to fit to the smirk smile in implied volatilities the garch model remains superior even though the parameters of the garch model are held constant and volatility is filtered from the history of asset prices while the ad hoc black scholes model is updated every period the improvement is largely due to the ability of the garch model to simultaneously capture the correlation of volatility with spot returns and the path dependence in volatility article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

dynamic link between oil prices and exchange rates a non linear approach abstract we explore the non linear relationship between crude oil prices and exchange rates of major currencies from quantitative and structural perspectives by utilizing bivariate normal mixture model the correlation coefficients between oil prices and exchange rates demonstrate that their dependences typically start from 2004 then dynamically change over time then we investigate whether business cycle and oil price shocks as two possible exogenous factors affect the dependence structure of oil fx linkage we find significant structural heterogeneity during economic expansion while little evidence of heterogeneity in recession this finding provides alternative interpretations for the enhanced dependence between oil prices and exchange rates and generates implications of financialization in commodity market in terms of oil price shocks kilian 2009 the normal mixture model captures significant heterogeneity implying that unstable oil fx dependence structure is frequently associated with oil aggregate demand shocks and oil specific demand shocks with an emphasis on the dynamic weights of two underlying states we interestingly find that structural heterogeneities coincide with a variety of geopolitical and economic events the application of normal mixture not only provide us knowledge of non linear relationship between oil prices and exchange rates but also guidance for investors in risk management and portfolio diversification complementary to the traditional portfolio theory based on normal distribution

social capital and finding a job do contacts matter does social capital affect labor market outcomes the prevalent use of job contacts to find work suggests that who you know is an important means of getting a good job network theories of social capital argue that well connected workers benefit because of the job information and influence they receive through their social ties although a number of studies have found a positive relationship between measures of social capital and wages and or occupational prestige little is known about the causal effect of social networks on labor market outcomes four data sets are used to reassess findings on the role of social capital in the labor market a test of causality is proposed based on the argument that if social capital variables do have a causal effect on job outcomes then workers with high levels of social capital should be more likely to use contacts to find work all else being equal results suggest that much of the effect of social capital in the existing literature reflects the tendency for similar people to become friends rather than a causal effect of friends characteristics on labor market outcomes

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

the impact of economic freedom on the black white income gap abstract using state level data from 1980 2010 we examine whether economic freedom as measured by the economic freedom of north america index has had any impact in increasing or decreasing the ratio of median income for black households to the median income of white households to our knowledge there has been no research on racial income disparities and the role that economic freedom might have in alleviating or exacerbating the problem we find evidence that economic freedom is associated with an increase in the racial income gap

performance replication of the spot energy index with optimal equity portfolio selection evidence from the uk us and brazilian markets abstract this paper reproduces the performance of a geometric average spot energy index by investing only in a subset of stocks from the dow jones composite average the ftse 100 and bovespa composite indexes and in two pools that include only energy sector stocks from the us and the uk respectively daily data are used and the index tracking problem for passive investment is addressed with two evolutionary algorithms the differential evolution algorithm and the genetic algorithm the performance of the suggested investment strategy is tested under three different scenarios buy and hold quarterly and monthly rebalancing accounting for transaction costs where necessary

a markov regime switching approach for hedging energy commodities abstract this paper estimates constant and dynamic hedge ratios in the new york mercantile exchange oil futures markets and examines their hedging performance we also introduce a markov regime switching vector error correction model with garch error structure this specification links the concept of disequilibrium with that of uncertainty as measured by the conditional second moments across high and low volatility regimes overall in and out of sample tests indicate that state dependent hedge ratios are able to provide significant reduction in portfolio risk

is mean variance analysis applicable to hedge funds abstract this paper shows that the mean variance analysis of hedge funds approximately preserves the ranking of preferences in standard utility functions this extends the results of levy and markowitz 1979 levy h markowitz h m 1979 approximating expected utility by a function of mean and variance american economic review 69 308 317 and hlawitschka 1994 hlawitschka w 1994 the empirical nature of taylor series approximations to expected utility american economic review 84 713 719 for individual stocks and portfolios of stocks

heteroscedasticity of deviations in market bubble moments how the goods and bads lead to the ugly abstractwe conjecture that market bubbles may be the results of the interplay of goods and bads toxic products which develop through three interlocking moments herding swarming and stampeding with deviations marked by heteroscedasticity we use our stylized model of financial predation the consolidated model of financial predation and data we have accumulated through in the field eight year research and the study of 30 years of u s market history in order to explore the foundations of market crises we find that blind trust or the positivity bias and of the fear to miss out on an opportunity to enter exit a market impacts the investors decisions to invest or retract we show how markets are driven towards a make or break predatory dynamic that creates winners and losers due in part to weak regulations and identify a constant k that permeates market behaviours

empirical age earnings profiles the human capital earnings function in which earnings are expressed as a quadratic in potential experience is probably the most widely accepted empirical specification in economics in spite of its widespread acceptance the human capital earnings function provides a very poor approximation of the true empirical relationship between earnings and experience the standard formulation understates early career earnings growth by about 30 50 and overstates midcareer growth by 20 50 however simple alternative specifications that fit the data are available

local gaussian correlations in financial and commodity markets abstract we investigate the increased correlations between commodity and u s financial markets as well as among commodity markets from 1992 to 2017 under a non linear framework we study how far the phenomenon of financialization is sustainable given the several significant events that shaped the 2000s we use a new measure of asymmetric dependence namely the local gaussian correlation tjostheim and hufthammer 2013 which distinguishes between positive and negative local dependence to detect whether the dependence between commodities and securities and with each other has become stronger by examining the local gaussian correlation before and after the break dates we can apply the contagion test with a bootstrap procedure several robustness checks have been performed the contagion tests give consistent results with the local gauss correlation estimates our findings confirm the existence of the financialization phenomenon between stock markets and commodity markets particularly after the 08 2008 break date a remarkable exception to financialization remains the gold market

short rate nonlinearities and regime switches abstract using non parametric estimation methods various authors have shown distinct non linearities in the drift and volatility function of the us short rate which are inconsistent with standard affine term structure models we document how a regime switching model with state dependent transition probabilities between regimes can replicate the patterns found by the non parametric studies to do so we use data from the uk and germany in addition to us data and include term spreads in some of our models we also examine the drift and volatility function of the term spread

risk spillovers in oil related cds stock and credit markets abstract this paper examines risk transmission and migration among six us measures of credit and market risk during the full period 2004 2011 period and the 2009 2011 recovery subperiod with a focus on four sectors related to the highly volatile oil price there are more long run equilibrium risk relationships and short run causal relationships among the four oil related credit default swaps cds indexes the expected equity volatility vix index and the swaption expected volatility smove index for the full period than for the recovery subperiod the auto sector cds spread is the most error correcting in the long run and also leads in the risk discovery process in the short run on the other hand the cds spread of the highly regulated natural monopoly utility sector does not error correct the four oil related cds spread indexes are responsive to vix in the short and long run while no index is sensitive to smove which in turn unilaterally assembles risk migration from vix the 2007 2008 great recession seems to have led to localization and less migration of credit and market risk in the oil related sectors

regime shifts implications for dynamic strategies corrected regime shifts present significant challenges for investors because they cause performance to depart significantly from the ranges implied by long term averages of means and covariances but regime shifts also present opportunities for gain the authors show how to apply markov switching models to forecast regimes in market turbulence inflation and economic growth they found that a dynamic process outperformed static asset allocation in backtests especially for investors who seek to avoid large losses

option pricing under a normal mixture distribution derived from the markov tree model abstract we examine a markov tree mt model for option pricing in which the dynamics of the underlying asset are modeled by a non iid process we show that the discrete probability mass function of log returns generated by the tree is closely approximated by a continuous mixture of two normal distributions using this normal mixture distribution and risk neutral pricing we derive a closed form expression for european call option prices we also suggest a regression tree based method for estimating three volatility parameters and required to apply the mt model we apply the mt model to price call options on 89 non dividend paying stocks from the s p 500 index for each stock symbol on a given day we use the same parameters to price options across all strikes and expires comparing against the black scholes model we find that the mt model s prices are closer to market prices

dynamic speculation and hedging in commodity futures markets with a stochastic convenience yield the main objective of this paper is to address in an a continuous time framework the issue of using storable commodity futures as vehicles for hedging purposes when in particular the convenience yield as well as the market prices of risk evolve randomly over time following the martingale route and by operating a suitable constant relative risk aversion utility function crra specific change of numeraire we solve the investor s dynamic optimization program to obtain quasi analytical solutions for optimal demands which can be expressed in terms of two discount bonds traded and synthetic contrary to the existing literature we explicitly derive the individual optimal proportions invested in the spot commodity in a discount bond and in the futures contracts which can be computed in a simple recursive way we suggest various decompositions allowing an investor to assess the sensitivity of the optimal demands to the state variables and to specify the role played by each risky asset empirical evidence shows that the convenience yield has a strong impact on the speculation and hedging positions and the interaction among time varying risk premia determines the magnitude and the sign of these positions

modelling the dependence structures of australian itraxx cds index in contrast to market expectations the correlation between credit default swap cds spreads and their respective stock prices in australia was found to be positive the global financial crisis gfc affected the nonlinear association between the two asset classes with firms experiencing financial distress and stock prices plummeting cdss issuers reacted to such exogenous shocks by increasing their risk premiums on their spreads reflecting the increased inherent risk by splitting the data into pre and post gfc contexts and by employing the use of archimedean copulas we observe a negative co movement in the post gfc period this finding is robust to several equity indices overall such result is critical for investors engaging in arbitrageur activities

creditgrades and the itraxx cds index market in the study reported the creditgrades model was used to calculate credit default swap spreads and the spreads were compared with empirically observed cds spreads for eight itraxx indices covering europe theoretical and empirical spread changes were found to be significantly correlated also lagged theoretical spread changes were correlated with current itraxx spread changes the correlations indicate a close relationship between the stock market and the cds market and also indicate some predictive ability of the creditgrades model simple trading strategies based on the autocorrelation and predictive ability of the model produced positive profits before trading costs when trading was within the bid ask spread

dynamics of cds spread indexes of us financial sectors this article examines the credit default swap cds spread index for three sectors banking financial services and insurance in the short and long run in the long run the results show that the index of the insurance sector which sells the long term cds contracts has the highest adjustment while the banking sector is not error correcting in the short run although the insurance sector cds spread index has general predictive power of all sector cds spreads the evidence suggests that the banking sector particularly leads the financial services and this in turn leads the insurance sector implying a leading sector cds pricing role for the banking spreads in the short run the short run sensitivity generalized impulse response function girf and generalized variance decomposition gvdc analyses also demonstrate that the sectors credit risk responds more to credit events in the banking sector than in the other two sectors other than their own over a 50 day horizon however the lowest cross sector cds

the returns to education microeconomics in this paper we focus on education as a private decision to invest in human capital and the estimation of the rate of return to that private investment while the literature is replete with studies that estimate the rate of return using regression methods where the estimated return is obtained as the coefficient on a years of education variable in a log wage equation that contains controls for work experience and other individual characteristics the issue is surrounded with difficulties we outline the theoretical arguments underpinning the empirical developments and show that the evidence on private returns to the individual is compelling despite some of these issues surrounding the estimation of the return to schooling our evidence based on estimates from a variety of datasets and specifications is that there is an unambiguously positive effect on the earnings of an individual from participation in education moreover the size of the effect seems large relative to the returns on other investments

income determination and income discrimination in shenzhen shenzhen is not only one of the fastest growing urban agglomerations in mainland china shenzhen also stands for a unique most rapid and successful transformation into an urban market economy how important are personal characteristics social norms and policy related discriminatory factors for income determination in such an extraordinary city this paper estimates the income effect of non productivity related discriminatory factors like personal characteristics social norms and policies compared with productivity related returns on human capital the design of the shenzhen household survey 2005 enables the inclusion of a large set of discriminating factors in a mincer becker type of income model together with a unique look at the migrant population in this urban centre the results show that the human capital approach holds strong evidence is also found of a significant influence of social norms and policies which is particularly relevant in a developing and transitional economy even in such an

estimating stochastic discount factor models with hidden regimes applications to commodity pricing abstract we develop new likelihood based methods to estimate factor based stochastic discount factors sdf that may accommodate hidden markov dynamics in the factor loadings we use these methods to investigate whether it is possible to find a sdf that jointly prices the cross section of eight u s portfolios of stocks treasuries corporate bonds and commodities in particular we test a range of possible different specification of the sdf including single state and hidden markov models and compare their statistical and pricing performances in addition we assess whether and to which extent a selection of these models replicates the observed moments of the return series and especially correlations we report that regime switching models clearly outperform single state ones both in term of statistical and pricing accuracy however while a four state model is selected by the information criteria a two state three factor full vector autoregression model outperforms the others as far as the pricing accuracy is concerned

stochastic dominance via quantile regression with applications to investigate arbitrage opportunity and market efficiency abstract tests for stochastic dominance constructed by translating the inference problem of stochastic dominance into parameter restrictions in quantile regressions are proposed they are variants of the one sided kolmogorov smirnoff statistic with a limiting distribution of the standard brownian bridge the procedure to obtain the critical values of our proposed test statistics are provided simulation results show their superior size and power they are applied to the nasdaq 100 and s p 500 indices to investigate dominance relationship before and after major turning points results show no arbitrage opportunity between the bear and bull markets our results infer that markets are inefficient and risk averters are better off investing in the bull rather than the bear market

dynamic correlation and equicorrelation analysis of global financial turmoil evidence from emerging east asian stock markets abstractthis study investigates the dynamic conditional correlations dccs between eight emerging east asian stock markets and the us stock market and analyses the dynamic equicorrelation among these nine stock markets we find a significant increase in the conditional correlations and equicorrelation in the first phase of the global financial crisis we refer to this finding as contagion from the us stock market to the emerging east asian markets we also find an additional significant process of increasing correlations and equicorrelation herding in the second phase of the global financial crisis further we employ two new models namely dccx mgarch a dcc multivariate garch model with exogenous variables and decox mgarch a dynamic equicorrelation multivariate garch model with exogenous variables to identify the channels of contagion we find that an increase in the vix index increases the conditional correlations and equicorrelation while increases in ted spreads decrease the conditional corre

the choice of the distribution of asset returns how extreme value theory can help abstract one of the issues of risk management is the choice of the distribution of asset returns academics and practitioners have assumed for a long time for more than three decades that the distribution of asset returns is a gaussian distribution such an assumption has been used in many fields of finance building optimal portfolio pricing and hedging derivatives and managing risks however real financial data tend to exhibit extreme price changes such as stock market crashes that seem incompatible with the assumption of normality this article shows how extreme value theory can be useful to know more precisely the characteristics of the distribution of asset returns and finally help to chose a better model by focusing on the tails of the distribution an empirical analysis using equity data of the us market is provided to illustrate this point

a stochastic volatility model with markov switching this article presents a new way of modeling time varying volatility we generalize the usual stochastic volatility models to encompass regime switching properties the unobserved state variables are governed by a first order markov process bayesian estimators are constructed by gibbs sampling high medium and low volatility states are identified for the standard and poor s 500 weekly return data persistence in volatility is explained by the persistence in the low and the medium volatility states the high volatility regime is able to capture the 1987 crash and overlap considerably with four u s economic recession periods

arbitrage equilibrium with skewed asset returns the quadratic form of the covariance co skewness model by kraus and litzenberger and arbitrage pricing theory are used for an empirical investigation of market equilibrium with skewed seecurity returns empirical tests similar to the ones in black jensen scholes and gibbons are discussed the empirical estimates give some support to the kraus litzenberger hypothesis on skewness preference however there is some evidence that the tested arbitrage equilibrium is not a complete description of security pricing

mean reversion in equilibrium asset prices evidence from the futures term structure we use the term structure of futures prices to test whether investors anticipate mean reversion in spot asset prices the empirical results indicate mean reversion in each market we examine for agricultural commodities and crude oil the magnitude of the estimated mean reversion is large for example point estimates indicate that 44 percent of a typical spot oil price shock is expected to be reversed over the subsequent eight months for metals the degree of mean reversion is substantially less but still statistically significant we detect only weak evidence of mean reversion in financial asset prices in this study we provide evidence of mean reversion in the prices of several real and financial assets rather than examining evidence of ex post reversion using time series of asset prices we use price data from futures contracts with varying delivery horizons to test whether investors expect asset prices to revert this approach offers two advantages first since futures prices are readily available for many markets our procedure can be implemented for many assets including those for which reliable spot price data is elusive second there is little ambiguity as to the source of any mean reversion detected using our method subject only to the maintained assumption that the no arbitrage cost of carry condition holds our test detects mean reversion that is expected to occur in equilibrium but has no power to detect mean reversion resulting from noise or inefficiencies our methodology focuses on relations between price levels and the slope of the futures term structure defined as the change across delivery dates in the futures prices observed on a given trading date an inverse relation between prices and the futures term slope constitutes evidence that investors expect mean reversion in spot prices to illustrate initially assume there are no

diversifying portfolios of u s stocks with crude oil and natural gas a regime dependent optimization with several risk measures abstract we build a portfolio encompassing u s crude oil natural gas and stocks to study the diversification power of energy commodities such diversification power depends on the joint dependence structure of the three types of assets according to gatfaoui 2016a the dependence structure is time varying because individual asset returns exhibit several variance regimes we identify the corresponding regime specific multivariate copulas and incorporate them to well chosen risk measures specifically we minimize the portfolio s variance semi variance and tail risk in the presence and the absence of constraints on the portfolio s expected return and or stock investment first the return constraint reduces the performance of the optimal portfolio second the regime specific portfolio optimization implements an enhanced active management strategy over the whole sample period finally the tail risk optimal portfolio offers the most interesting risk return tradeoff however variance and semi variance optimal portfolios can also be considered in the absence of a return constraint

does the choice of performance measure influence the evaluation of hedge funds abstract the sharpe ratio is adequate for evaluating investment funds when the returns of those funds are normally distributed and the investor intends to place all his risky assets into just one investment fund hedge fund returns differ significantly from a normal distribution for this reason other performance measures for hedge fund returns have been proposed in both the academic and practice oriented literature in conducting an empirical study based on return data of 2763 hedge funds we compare the sharpe ratio with 12 other performance measures despite significant deviations of hedge fund returns from a normal distribution our comparison of the sharpe ratio to the other performance measures results in virtually identical rank ordering across hedge funds

a general framework for discretely sampled realized variance derivatives in stochastic volatility models with jumps abstract after the recent financial crisis the market for volatility derivatives has expanded rapidly to meet the demand from investors risk managers and speculators seeking diversification of the volatility risk in this paper we develop a novel and efficient transform based method to price swaps and options related to discretely sampled realized variance under a general class of stochastic volatility models with jumps we utilize frame duality and density projection method combined with a novel continuous time markov chain ctmc weak approximation scheme of the underlying variance process contracts considered include discrete variance swaps discrete variance options and discrete volatility options models considered include several popular stochastic volatility models with a general jump size distribution heston scott hull white stein stein hypergeometric 3 2 and 4 2 models our framework encompasses and extends the current literature on discretely sampled volatility derivatives and provides highly efficient and accurate valuation methods numerical experiments confirm our findings

how important is intertemporal risk for asset allocation how important is merton s intertemporal risk for asset allocation decisions to address this question we jointly estimate and test a conditional asset pricing model which includes long term interest rate risk as a potentially priced factor for four broad classes of assets large stocks small stocks long term treasury bonds and corporate bonds we find that the premium for long bond risk is the main component of the risk premiums of treasury bond and corporate bond portfolios while it represents a small fraction of total risk premiums for equities our results suggest that investors perceive stocks and especially small stocks as hedges against variations in the investment opportunity set since these four asset classes represent some of the most important for investors we proceed to use our estimates to compute the optimal asset allocations for investors who optimize with or without taking into account the intertemporal risk we provide a set of measures to investigate the importance of this risk we find that at average market volatility levels investors can earn annual premiums between 3 6 during expansions and 5 8 during recessions for bearing intertemporal risk alone these results underscore the importance of explicitly considering intertemporal risk in asset allocation decisions especially during down markets and business recessions

market efficiency of oil spot and futures a mean variance and stochastic dominance approach this paper examines the market efficiency of oil spot and futures prices by using both mean variance mv and stochastic dominance sd approaches based on the west texas intermediate crude oil data for the sample period 1989 2008 we find no evidence of any mv and sd relationships between oil spot and futures indices this infers that there is no arbitrage opportunity between these two markets spot and futures do not dominate one another investors are indifferent to investing spot or futures and the spot and futures oil markets are efficient and rational the empirical findings are robust to each sub period before and after the crises for different crises and also to portfolio diversification

how do regimes affect asset allocation international equity returns are characterized by episodes of high volatility and unusually high correlations coinciding with bear markets this article provides models of asset returns that match

asset allocation with correlation a composite trade off abstract we assess the ability of minimum variance portfolio allocation strategies accounting for time varying correlation between assets to provide performance benefits relative to an equally weighted portfolio prior to transaction costs correlation based strategies emphatically outperform the equally weighted benchmark this finding is strongest for short horizon correlation forecasts and attributed to dynamic correlation as opposed to variance forecasts thus estimation error is not found to be the primary obstacle to successful portfolio optimization rather frequent rebalancing and associated transaction costs pose a significant challenge limiting portfolio turnover through short selling restrictions and greater rebalancing error tolerance results in regular outperformance of the correlation based strategies even for large transaction costs taken together these findings provide evidence of a trade off between optimal portfolio performance forecasting horizon rebalancing frequency and transaction costs