Impact of investor’s varying risk aversion on the dynamics of asset price fluctuations

While investors’ responses to price changes and their price forecast have been identified as one of the major factors contributing to large price fluctuations in financial markets, our study shows that investors’ heterogeneous and dynamic risk aversion (DRA) preferences may play a more critical role in understanding the dynamics of asset price fluctuations. We allow an agent specific and time-dependent risk aversion index in a popular power utility function with constant relative risk aversion to construct our DRA model in which we made two key contributions. We developed an approximated closed-form price setting equation, providing a necessary framework for exploring the impact of various agents’ behaviors on the price dynamics. The dynamics of each agent’s risk aversion index is modeled by a bounded random walk with a constant variance, and such dynamics is incorporated in the price formula to form our DRA model. We show numerically that our model reproduces most of the “stylized” facts observed in the real data, suggesting that dynamic risk aversion is an important mechanism for understanding the dynamics of the financial market and the resultant financial time series.     

Forecasting macroeconomic risks

We construct risks around consensus forecasts of real GDP growth, unemployment, and inflation. We find that risks are time-varying, asymmetric, and partly predictable. Tight financial conditions forecast downside growth risk, upside unemployment risk, and increased uncertainty around the inflation forecast. Growth vulnerability arises as the conditional mean and conditional variance of GDP growth are negatively correlated: downside risks are driven by lower mean and higher variance when financial conditions tighten. Similarly, employment vulnerability arises as the conditional mean and conditional variance of unemployment are positively correlated, with tighter financial conditions corresponding to higher forecasted unemployment and higher variance around the consensus forecast.     

Asset price volatility and banks

This paper examines the operation of Diamond–Dybvig banks when depositors have access to the asset market. Previous studies have shown that banks are redundant in this environment since it is impossible to prevent the strategic withdrawals. This paper shows that the strategic withdrawals can be prevented if the market risk, due to asset price volatility, is considered. Banks provide deterministic returns to the depositors since the aggregate withdrawals are predictable, and therefore, banks can choose the portfolio such that no asset liquidation is involved. However, an individual consumer with stochastic liquidity need is vulnerable to the price volatility if he holds the asset directly. Therefore, banks improve the consumers’ welfare by providing the insurance against not only the liquidity shock but also the market risk. Banks are not redundant.     

Asset market response to monetary policy news from SNB press releases

This paper analyses the effects of Swiss National Bank (SNB) communication on asset prices. It distinguishes between different monetary policy news contained in press releases following a monetary policy decision. Employing a latent variable approach and event-study methods, I find that medium- and long-term bond yields respond to changes in the communicated inflation and GDP forecasts as well as to the degree of pessimism expressed in press releases. Exchange rates mainly react to changes in the GDP forecast while stocks do not react to SNB communication on monetary policy announcement days. Additionally, short-term expectations about the future path of the policy rate are driven by the communicated inflation forecast. The results underline the role of qualitative news beyond quantitative forecasts in influencing market expectations and asset prices.     

Decreasing downside risk aversion and background risk

In this paper, we show that risk vulnerability can be associated with the concept of downside risk aversion (DRA) and an assumption about its behavior, namely that it is decreasing in wealth. Specifically, decreasing downside risk aversion in the Arrow–Pratt and Ross senses are respectively necessary and sufficient for a zero-mean background risk to raise the aversion to other independent risks.     

Prices,debt and market structure in an agent-based model of the financial market

We develop an agent-based model in which heterogeneous and boundedly rational agents interact by trading a risky asset at an endogenously set price. Agents are endowed with balance sheets comprising the risky asset as well as cash on the asset side and equity capital as well as debt on the liabilities side. A number of findings emerge when simulating the model: we find that the empirically observable log-normal distribution of bank balance sheet size naturally emerges and that higher levels of leverage lead to a greater inequality among agents. Furthermore, greater leverage increases the frequency of bankruptcies and systemic events. Credit frictions, which we define as the stickiness of debt adjustments, are able to explain a key difference in the relation between leverage and assets observed for different bank types. Lowering credit frictions leads to an increasingly procyclical behavior of leverage, which is typical for investment banks. Nevertheless, the impact of credit frictions on the fragility of the model financial system is complex. Lower frictions do increase the stability of the system most of the time, while systemic events become more probable. In particular, we observe an increasing frequency of severe liquidity crises that can lead to the collapse of the entire model financial system.     

International spillovers in global asset markets

The paper empirically estimates the financial transmission within and across bond and equity markets in the four largest global financial markets – the United States, the Euro area, Japan, and the United Kingdom. We argue that international bond and equity markets are highly interconnected both within and across asset classes in a globalized world, where the complex transmission process across various financial assets is not restricted to just the domestic market. This paper employs identification through generalized forecast error variance decompositions to estimate spillovers across four systemic markets in a Vector Autoregression (VAR) framework. We find that asset prices react most strongly to international shocks within the same asset class, but that there are also substantial international spillovers across asset classes. Rolling estimations analysis provides evidence that global asset markets have become more integrated and that the bilateral relationships change over time. Our results are robust to specifications that take into account the monetary policy stance and include foreign exchange markets.     

Equity market contagion during the global financial crisis: Evidence from the world's eight largest economies

The global financial crisis (2007–2009) saw sharp declines in stock markets around the world, affecting both advanced and emerging markets. In this paper we test for the existence of equity market contagion originating from the US to advanced and emerging markets during the crisis period. Using a latent factor model, we provide strong evidence of contagion effects in both advanced and emerging equity markets. In the aggregate equity market indices, contagion from the US explains a large portion of the variance in stock returns in both advanced and emerging markets. However, in the financial sector indices we find less evidence of contagion than in the aggregate indices, and this is particularly the case for the advanced markets. The results suggest that contagion effects are not strongly related to high levels of global integration.     

基于相对VaR的资产配置和资本资产定价模型

本文在相对Value—at—Risk（VaR）风险度量的基础上重新审视了金融经济学中最为核心的两个问题：资产配置和资产定价。遵循经典的Markowitz—Sharpe理论体系，我们在一般的分布假设下建立了基于相对VaR的均值风险模型和资本资产定价模型，并得出了两基金分离、有效边界、证券市场线等一系列结论。通过研究比较，我们说明了经典的Markowitz—Sharpe理论体系只是本文所构建的资产配置和定价理论体系在正态分布假设下的一个特例。我们还通过实证研究来说明不同分布假设对金融决策的影响。     

Asymmetric risk spillovers between Shanghai and Hong Kong stock markets under China’s capital account liberalization

In this paper, we investigate the asymmetric risk spillovers between Shanghai and Hong Kong stock markets under the backdrop of China’s capital account liberalization by measuring the Conditional Value-at-Risk (CoVaR) based on adjusted realized volatilities and variational mode decomposition based copula model. The empirical results show that, the asymmetric features of risk spillovers between the two markets are significant and manifest different states before and after the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect schemes. More specifically, first, the downside risk spillovers from Hong Kong to Shanghai are significantly larger than its upside risk spillovers, while the risk spillovers from Shanghai to Hong Kong is on the contrary. Second, the short-run risk spillovers are more drastic than the long-run risk spillovers, except the risk spillovers from Shanghai to Hong Kong after the Shenzhen-Hong Kong Stock Connect scheme. Finally, by comparing the risk spillovers from two directions, the importance of Shanghai stock market gradually rises up with the implementations of Stock Connect schemes.     

VaR方法在风险评估中的应用

现代金融市场的金融产品种类繁多,市场不确定因素不断加大,市场风险越来越大,传统的风险评估方法难以满足市场对风险评估的需要。VaR法通过定量计算风险值,以求达到对风险准确评估的目的。