[show abstract][hide abstract] ABSTRACT: Using credit default swap data, we propose a novel empirical framework to identify the structure of credit risk networks across international major financial institutions around the recent global credit crisis. Specifically, we identify three groups of players including prime senders, exchange centers and prime receivers of credit risk information. Leverage ratios and particularly the short-term debt ratio appear to be significant determinants of the roles of financial institutions in credit risk transfer, while corporate governance indexes, size, credit risk and liquidity premiums as well as asset write-downs are not significant. Our findings carry important implications for new regulatory standard on capital sub-charge and liquidity coverage ratio.
[show abstract][hide abstract] ABSTRACT: We apply a multivariate asymmetric generalized dynamic conditional correlation GARCH model to daily index returns of S&P500,
US corporate bonds, and their real estate counterparts (REITs and CMBS) from 1999 to 2008. We document, for the first time,
evidence for asymmetric volatilities and correlations in CMBS and REITs. Due to their high levels of leverage, REIT returns
exhibit stronger asymmetric volatilities. Also, both REIT and stock returns show strong evidence of asymmetries in their conditional
correlation, suggesting reduced hedging potential of REITs against the stock market downturn during the sample period. There
is also evidence that corporate bonds and CMBS may provide diversification benefits for stocks and REITs. Furthermore, we
demonstrate that default spread and stock market volatility play a significant role in driving dynamics of these conditional
correlations and that there is a significant structural break in the correlations caused by the recent financial crisis.
KeywordsCMBS-REITs-Dynamic conditional correlation-Macroeconomic variables
The Journal of Real Estate Finance and Economics 04/2012; · 0.88 Impact Factor
[show abstract][hide abstract] ABSTRACT: Using a semiparametric estimation technique, we show that the risk-return tradeoff and the Sharpe ratio of the stock market increases monotonically with the consumption wealth ratio (CAY) across time. While early studies have commonly interpreted such a finding as evidence of the countercyclical variation in aggregate relative risk aversion (RRA), we argue that it mainly reflects changes in investment opportunities for two reasons. First, we fail to reject the null hypothesis of constant RRA after controlling for CAY as a proxy for the hedge against changes in the investment opportunity set. Second, by contrast with habit formation models but consistent with ICAPM, we find that loadings on the conditional stock market variance scaled by CAY are negatively priced in the cross-sectional regressions. For illustration, we replicate the countercyclical stock market risk-return tradeoff using simulated data from Guo's (2004) limited stock market participation model, in which RRA is constant and CAY is a proxy for shareholders' liquidity conditions.
[show abstract][hide abstract] ABSTRACT: We extend Campbell, Medeiros and Viceira (2010) and examine higher moment (beyond the second moment) risk management implications of various currencies for equity investors. We find that the safe haven currencies: US dollar, Swiss franc and Japanese Yen have positive co-skewnenss with equity market while other currencies have negative coskewnesses. This implies that these currencies are good hedge in the volatile market, as they appreciate when the equity volatility increases. Moreover, their cokurtosis with the world equity market are either negative or lower than other currency counterparts, suggesting even higher hedging effectiveness for these currencies during extreme stock market downturns. We find that currency coskewness and cokurtosis with stock markets are priced in the currency market, by providing time series evidence that currency conditional coskewness and cokurtosis (with the equity market) command significant ex ante risk premiums, with the expected negative sign for the price of coskewness and the expected positive sign for the price of cokurtosis. Consistent with some theoretical arguments, we also find a significant negative relation between expected idiosyncratic skewness and average ex ante currency risk premiums.
[show abstract][hide abstract] ABSTRACT: Using high-frequency data, this study investigates intraday price discovery and volatility transmission between the Chinese stock index and the newly established stock index futures markets in China. Although the Chinese stock index started a drastic falling immediately after the stock index futures were introduced, we find that the cash market plays a more dominant role in the price discovery process. The new stock index futures market does not function well in its price discovery performance at its infancy stage, apparently due to high barriers to entry into this emerging futures market. Based on a newly proposed theoretically-consistent asymmetric GARCH model, the results uncover strong bidirectional dependence in the intraday volatility of both markets.
[show abstract][hide abstract] ABSTRACT: In the context of a three-moment Intertemporal Capital Asset Pricing Model specification, we characterize conditional co-skewness between stock and bond excess returns using a bivariate regime-switching model. We find that both conditional U.S. stock co-skewness (the relation between stock return and bond volatility) and bond co-skewness (the relation between bond return and stock volatility) command statistically and economically significant negative ex ante risk premiums. The impacts of the US stock and bond co-skewness on the conditional stock and bond premium on average is as large as the average of corresponding unconditional premium on these markets. The basic findings are quite robust in another country (U.K.) and in the recent post-WWII period.
[show abstract][hide abstract] ABSTRACT: Using monthly stock and bond return data in the past 150 years (1855–2001) for both the US and the UK, this study documents time-varying stock–bond correlation over macroeconomic conditions (the business cycle, the inflation environment and monetary policy stance). There are different patterns of time variation in stock–bond correlations over the business cycle between US and UK, which implies that bonds may be a better hedge against stock market risk and offer more diversification benefits to stock investors in the US than in the UK. Further, there is a general pattern across both the US and the UK during the post-1923 subperiod and during the whole sample period: higher stock–bond correlations tend to follow higher short rates and (to a lesser extent) higher inflation rates.
Journal of Banking & Finance. 04/2009; 33(4):670–680.
[show abstract][hide abstract] ABSTRACT: Using a semiparametric approach, we show that the stock market risk-return tradeoff moves closely with stock return predictors, e.g., the consumption-wealth ratio (CAY). While the finding might suggest countercyclical relative risk aversion (RRA), it mainly reflects variation in investment opportunities for three reasons. First, we cannot reject constant RRA after controlling for CAY as a proxy for investment opportunities. Second, loadings on the conditional market variance scaled by CAY are negatively priced in the cross-section of stock returns. Lastly, our main findings can be explained by a limited participation model, in which RRA is constant and CAY measures shareholders' liquidity conditions.
[show abstract][hide abstract] ABSTRACT: We investigate the international transmission of inflation among G-7 countries using data-determined vector autoregression analysis, as advocated by Swanson and Granger [Swanson, N., Granger, C., 1997. Impulse response functions based on a causal approach to residual orthogonalization in vector autoregressions. Journal of the American Statistical Association 92, 357–367]. Over the period 1973–2003, we find that unexpected changes in US inflation have large effects on inflation in other countries, although they are not always the dominant international factor. Similarly, shocks to some other countries also have a statistically and economically significant influence on US inflation. Moreover, our evidence indicates that US inflation has become less vulnerable to foreign shocks since the early 1990s, mainly because of the diminished influence from Germany and France.
Journal of Banking & Finance. 10/2006; 30(10):2681–2700.
[show abstract][hide abstract] ABSTRACT: With an international dataset of credit default spreads as a credit risk measure, we propose a novel empirical framework to identify the structure of credit risk network across major financial institutions around the recent 2007-2008 global credit crisis. The findings directly shed light on credit risk transmission in a financial network and indirectly help find systemically important financial institutions from the perspective of interconnectedness. Specifically, we are able to identify three groups of players including primary senders, exchange centers and prime receivers of credit risk information on the credit market. Further analysis shows that leverage ratios and certain aspect of corporate governance (i.e., CEO duality) may be significant determinants of identified different roles of financial institutions in credit risk transfer, while no such evidence is found for other factors including size, liquidity and asset write-downs.