pricing multiasset equity options how relevant is the dependence function abstract in this paper we test how different choices for the dependence function can affect the prices of a set of multiasset equity options we conduct the analysis for various 5 dimensional baskets of uk shares and a wide range of payoffs for the multiasset options consistent with the instruments traded on the market we also test the relevance of the dependence specification over both volatile and quiet market scenarios interestingly we find that in most circumstances the choice of a dependence structure richer than the standard linear correlation does not seem to affect option prices substantially however the dependence function becomes more relevant in particularly volatile market conditions

hedging the black swan conditional heteroskedasticity and tail dependence in s p500 and vix the recent financial crisis has accentuated the fact that extreme outcomes have been overlooked and not dealt with adequately while extreme value theories have existed for a long time the multivariate variant is difficult to handle in the financial markets due to the prevalent heteroskedasticity embedded in most financial time series and the complex extremal dependence that cannot be conveniently captured by a single structure moreover most of the existing approaches are based on a limiting argument in which all variables become large at the same rate in this paper we show how the conditional approach of heffernan and tawn 2004 can be implemented to model extremal dependence between financial time series we use a hedging example based on vix futures to demonstrate the flexibility and superiority of the conditional approach against the conventional ols regression approach

borders and business cycles abstract we document that business cycles of u s census regions are substantially more synchronized than those of european countries data from regions within european countries confirm a european border effect within country correlations are substantially larger than cross country correlations these results continue to hold after controlling for exogenous factors such as distance and size we consider the role of four factors that have received attention in the debate about emu sectoral specialization the level of trade monetary policy and fiscal policy we find that the lower level of trade between european countries explains most of the observed border effect

a new approach to measuring financial contagion this article proposes a new approach to evaluate contagion in financial markets our measure of contagion captures the coincidence of extreme return shocks across countries within a region and across regions we characterize the extent of contagion its economic significance and its determinants using a multinomial logistic regression model applying our approach to daily returns of emerging markets during the 1990s we find that contagion is predictable and depends on regional interest rates exchange rate changes and conditional stock return volatility evidence that contagion is stronger for extreme negative returns than for extreme positive returns is mixed

bank integration and co movements across housing markets this paper investigates whether bank integration measured by cross border bank flows can capture the co movements across housing markets in developed countries by using a spatial dynamic panel model the transmission can occur through a global banking channel in which global banks intermediate wholesale funding to local banks changes in financial conditions are passed across borders through the banks balance sheet exposure to credit currency maturity and funding risks resulting in house price spillovers while controlling for country level and global factors we find significant co movement across housing markets of countries with proportionally high bank integration bank integration can better capture house price co movements than other measures of economic integration once we account for bank exposure other spatial linkages traditionally used to account for return co movements across region such as trade foreign direct investment portfolio investment geographic proximity etc become insignificant moreover we find that the co movement across housing markets decreases for countries with less developed mortgage markets characterized by fixed mortgage rate contracts low limits of loan to value ratios and no mortgage equity withdrawal

explaining international stock correlations with cpi fluctuations and market volatility this paper investigates the dynamic correlations among six international stock market indices and their relationship to inflation fluctuation and market volatility the current research uses a newly developed time series model the double smooth transition conditional correlation with conditional auto regressive range dstcc carr model findings reveal that international stock correlations are significantly time varying and the evolution among them is related to cyclical fluctuations of inflation rates and stock volatility the higher lower correlations emerge between countries when both countries experience a contractionary expansionary phase or higher lower volatilities

measuring sovereign risk spillovers and assessing the role of transmission channels a spatial econometrics approach abstract we contribute to the literature on international risk spillovers by developing a unified framework based on spatial econometrics that enables us to address the following questions i what are the effective transmission channels real linkages and informational channels of international risk spillovers across countries and or regions ii what are the most dominant ones and iii which countries are most at risk for their environment and which are suffering the most from international exposure our analysis based on 41 advanced and emerging economies from 2008q1 to 2012q4 shows that among the considered channels for explaining international spillovers of sovereign bond spreads the informational channel is of utmost importance our results challenge previous findings from the literature in which the empirical strategy did not accommodate altogether important features of country spillovers such as the co existence of multiple transmission channels in the presence of contemporaneous and time lagged interactions ultimately our stress testing analysis reveals important insights on countries prone either to international spillovers international exposure or both at the regional and the worldwide level

an analysis of household mobility and tenure choice an empirical study of korea abstract this paper develops a model of households joint mobility tenure decisions which improves upon the sole existing model in two important ways first the probabilistic structure is appropriately framed to capture the simultaneity of the mobility and tenure decisions second the model is based more directly on utility maximization theory an additionally distinguishing characteristic of the model is the fact that all independent variables in the estimation are expressed in flow terms this is done in an effort to more truly reflect their importance in the decision making of the household the model is estimated using microlevel data from korea the coefficients and derived elasticities are consistent with expectations and korean households are found to behave in a manner similar to that in the united states this suggests that the basic motivations underlying households mobility tenure decisions are invariant across countries

does industrial structure explain the benefits of international diversification abstract we examine the influence of industrial structure on the cross sectional volatility and correlation structure of country index returns for 12 european countries between 1978 and 1992 we find that industrial structure explains very little of the cross sectional difference in country return volatility and that the low correlation between country indices is almost completely due to country specific sources of return variation diversification across countries within an industry is a much more effective tool for risk reduction than industry diversification within a country

international diversification an extreme value approach abstract international diversification has costs and benefits depending on the degree of asset dependence we study international diversification with two dependence measures correlations and extreme dependence we discover that dependence has typically increased over time and document mixed evidence on heavy tails in individual countries moreover we uncover three additional findings related to dependence first the timing of downside risk differs depending on the region surprisingly recent latin american returns exhibit little downside risk second latin america exhibits a great deal of correlation complexity third according to the empirical results correlation does not vary with returns but extreme dependence does vary monotonically with regional returns our results are consistent with a tradeoff between international diversification and systemic risk they also suggest international limits to diversification and that international investors demand some compensation for joint downside risk during extreme events

portfolio optimization in the presence of dependent financial returns with long memory a copula based approach abstract in this paper we seek to examine the effect of the presence of long memory on the dependence structure between financial returns and on portfolio optimization first we focus on the dependence structure using copulas to select the best copula in addition to the goodness of fit tests we employ a graphical method based on visual comparison of the fitted copula density and the smoothed copula density estimated by wavelets moreover we check the stability of the copula parameter the empirical results show that the long memory affects the dependence structure second we analyze the impact of this dependence structure on the optimal portfolio we propose a new approach based on minimizing the conditional value at risk and assuming that the dependence structure is modeled by the copula parameter the empirical results show that our approach outperforms the traditional minimizing variance approach where the dependence structure is represented by the linear correlation coefficient

long term global market correlations the correlation structure of the world equity markets varied considerably over the past 150 years and was high during periods of economic integration we decompose diversification benefits into two parts one component due to variation in the average correlation across markets and a another component due to the variation in the investment opportunity set from this we infer that periods of globalization have both benefits and drawbacks for international investors globalization expands the opportunity set but as a result the benefits from diversification rely increasingly on investment in emerging markets

extreme dependence with asymmetric thresholds evidence for the european monetary union abstract existing papers on extreme dependence use symmetrical thresholds to define simultaneous stock market booms or crashes such as the joint occurrence of the upper or lower one percent return quantile in both stock markets we show that the probability of the joint occurrence of extreme stock returns may be higher for asymmetric thresholds than for symmetric thresholds we propose a non parametric measure of extreme dependence which allows capturing extreme events for different thresholds and can be used to compute different types of extreme dependence we find that extreme dependence among the stock markets of ten initial emu member countries the united kingdom and the united states is largely asymmetrical in the pre emu period 1989 1998 and largely symmetrical in the emu period 1999 2010 our findings suggest that ignoring the possibility of asymmetric extreme dependence may lead to an underestimation of the probability of co booms and co crashes

do customers learn from experience evidence from retail banking we study customers adoption and subsequent switching decisions with regard to a menu of three part tariff plans offered by a commercial bank using a rich panel data set covering 70 510 fee based checking accounts over 30 months before and after the introduction of the plans we find that most customers adopt non cost minimizing plans preferring plans with large monthly allowances and high fixed payments furthermore after adoption customers who exceed their allowances and consequently pay overage fees are more likely to switch to plans with larger allowances than customers who do not experience such fees notably after switching these overage paying customers pay higher monthly payments than before in contrast switching customers who did not pay overage payments before switching pay less after switching our findings unlike those of previous research on experience based learning suggest that the behavior of experienced customers does not converge to the predictions of neoclassical models we p

contagion and trade why are currency crises regional abstract currency crises tend to be regional they affect countries in geographic proximity this suggests that patterns of international trade are important in understanding how currency crises spread above and beyond any macroeconomic phenomena we provide empirical support for this hypothesis using data for five different currency crises in 1971 1973 1992 1994 and 1997 we show that currency crises affect clusters of countries tied together by international trade by way of contrast macroeconomic and financial influences are not closely associated with the cross country incidence of speculative attacks

do market capitalization and stocks traded converge new global evidence abstract in this paper we examine convergence of stock markets our empirical exercise is based on 11 different panels which together consist of 120 countries the richness of the dataset allows us to disaggregate countries into panels such as high income middle income low income oecd csi and developing country panels in addition we construct regional panels such as those representing the arab states east asia and the pacific south asia latin america and the caribbean and sub saharan africa our main finding is that based on the conditional convergence model convergence of stock market capitalization and stocks traded is found for four panels namely the high and low income panels the oecd panel and the sub saharan african panel the speed of convergence is high in most cases between 20 and 30

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

international diversification a copula approach abstract the viability of international diversification involves balancing benefits and costs this balance hinges on the degree of asset dependence in light of theoretical research linking diversification and dependence we examine international diversification using two measures of dependence correlations and copulas we document several findings first dependence has increased over time second we find evidence of asymmetric dependence or downside risk in latin america but less in the g5 the results indicate very little downside risk in east asia third east asian and latin american returns exhibit some correlation complexity interestingly the regions with maximal dependence or worst diversification do not command large returns our results suggest international limits to diversification they are also consistent with a possible tradeoff between international diversification and systemic risk

the euro and european financial market dependence a time varying copula model is used to investigate the impact of the introduction of the euro on the dependence between 17 european stock markets during the period 1994 2003 the model is implemented with a gjr garch ma t model for the marginal distributions and the gaussian copula for the joint distribution which allows capturing time varying non linear relationships the results show that within the euro area market dependence increased after the introduction of the common currency only for large equity markets such as in france germany italy the netherlands and spain structural break tests indicate that the increase in financial market dependence started around the beginning of 1998 when euro membership was determined and the relevant information was announced the uk and sweden but not other european countries outside the euro area are found to exhibit an increase in equity market co movement which is consistent with the interpretation that these countries may be expected to join the euro in the future

the dark side of global integration increasing tail dependence abstract we measure stock market coexceedances using the methodology of cappiello gerard and manganelli 2005 ecb working paper 501 this method enables us to measure comovement at each point of the return distribution first we construct annual coexceedance probabilities for both lower and upper tail return quantiles using daily data from 1974 2006 next we explain these probabilities in a panel gravity model framework results show that macroeconomic variables asymmetrically impact stock market comovement across the return distribution financial liberalization significantly increases left tail comovement whereas trade integration significantly increases comovement across all quantiles decreasing exchange rate volatility results in increasing lower tail comovement the introduction of the euro increases comovement across the entire return distribution thereby significantly reducing the benefits of portfolio diversification within the euro area

asset market linkages in crisis periods we characterize asset return linkages during periods of stress by an extremal dependence measure contrary to correlation analysis this nonparametric measure is not predisposed toward the normal distribution and can allow for nonlinear relationships our estimates for the g 5 countries suggest that simultaneous crashes between stock markets are much more likely than between bond markets however for the assessment of financial system stability the widely disregarded cross asset perspective is particularly important for example our data show that stock bond contagion is approximately as frequent as flight to quality from stocks into bonds extreme cross border linkages are surprisingly similar to national linkages illustrating a potential downside to international financial integration

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

international diversification during the financial crisis a blessing for equity investors abstract this paper empirically investigates international equity investors foreign portfolios before and during the financial crisis by estimating a gravity model for 22 source and 42 destination countries during 2001 2009 the results show a significant negative relationship between foreign equity holdings and stock market correlations during the financial crisis while there is no relationship before the crisis when distinguishing between active and passive rebalancing the results clearly indicate a significantly negative relationship between active rebalancing and correlations during the crisis these findings hold as well at the individual country level when allowing for source country specific coefficients an analysis from the perspective of each source country s representative investor who optimizes mean variance utility shows that active rebalancing provides sizeable utility gains during the crisis finally there is even a significantly negative relationship between future correlations and active rebalancing since 2007 suggesting that prior to the crisis investors already repositioned their country weights to markets with lower correlation during 2008 2009