Extreme Correlation of International Equity Markets

Testing the hypothesis that international equity market correlation increases in volatile times is a difficult exercise and misleading results have often been reported in the past because of a spurious relationship between correlation and volatility. Using "extreme value theory" to model the multivariate distribution tails, we derive the distribution of extreme correlation for a wide class of return distributions. Empirically, we reject the null hypothesis of multivariate normality for the negative tail, but not for the positive tail. We also find that correlation is not related to market volatility per se but to the market trend. Correlation increases in bear markets, but not in bull markets.     

Weather Derivative Risk Measures for Extreme Events

We consider pricing weather derivatives for use as protection against weather extremes by using max-stable processes to estimate risk measures. These derivatives are not currently traded on any open markets, but their use could help some institutions manage weather risks from extreme events. The central challenge is to model the dependence of payments, which increases the risk of holding multiple weather derivatives. The method described utilizes results from spatial statistics and extreme value theory to first model extremes in the weather as a max-stable process, and then simulate payments for a general collection of weather derivatives. As the joint likelihood function for max-stable processes is unavailable, we use two approaches: The first is based on the composite likelihood, and the second is based on approximate Bayesian computing (ABC). Both capture the spatial dependence of payments. To incorporate parameter uncertainty into the pricing model, we use bootstrapping with the composite likelihood approach, while the ABC method naturally incorporates parameter uncertainty. We show that the additional risk from the spatial dependence of payments can be quite substantial, and that the methods discussed can compute standard actuarial risk measures in both a frequentist and Bayesian setting.     

International Capital Markets and Foreign Exchange Risk

Relations between foreign exchange risk premia, exchange ratevolatility, and the volatilities of the pricing kernels forthe underlying currencies, are derived under the assumptionof integrated capital markets. As predicted, the volatilityof exchange rates is significantly associated with the estimatedvolatility of the relevant pricing kernels, and foreign exchangerisk premia are significantly related to both the estimatedvolatility of the pricing kernels and the volatility of exchangerates. The estimated foreign exchange risk premia mostly satisfyFama’s (1984) necessary conditions for explaining theforward premium puzzle, but the puzzle remains in several caseseven after taking account of the pricing kernel volatilities.     

Extreme Correlation of Stock and Bond Futures Markets: International Evidence

This study explores time‐varying extreme correlation of stock–bond futures markets in three major developed countries. In the United States and the United Kingdom, there is evidence of positive extreme stock–bond correlation when both futures markets are extremely bullish or bearish. In Germany, stock–bond futures extreme correlation is negative, suggesting the most diversification potentials of bond futures when German stock index futures market plunges. Macroeconomic news, the business cycle, and the stock market uncertainty all significantly affect the median stock–bond futures correlation. However, only the stock market uncertainty still significantly affects the extreme stock–bond futures correlation when the stock market is extremely bearish.     

Idiosyncratic Risk and REIT Returns

The volatility of a stock returns can be decomposed into market and firm-specific volatility, with the former commonly known as systematic risk and the later as idiosyncratic risk. This study examines the relevance of idiosyncratic risk in explaining the monthly cross-sectional returns of REIT stocks. Contrary to the CAPM theory, a significant positive relationship is found between idiosyncratic volatility and the cross-sectional returns. This suggests that firm-specific risk matters in REIT pricing. The regression results further show that once idiosyncratic risk is controlled for in the asset-pricing model, the size and book-to-market equity ratio factors ceased to be significant. The explanatory power of the momentum effect remains robust in the presence of idiosyncratic risk.

REIT Risk Premium Sensitivity and Interest Rates

This analysis investigates several aspects of the relationship between daily REIT stock risk premiums and various interest rates. Consistent with prior research, the general findings indicate that interest rates do impact REIT returns. This study specifically finds that stock returns are more sensitive to maturity rate spread between short- and long-term treasuries than the credit rate spread between commercial bonds and treasuries. In addition, the analyses document a structural model shift during the nineties that has made REITs more sensitive to credit risk. In additional to change in investor clientele, an analysis of declining REIT credit-worthiness points to a root cause for this shift.     

典型事实、极值理论与金融市场动态风险测度研究

本文在金融市场典型事实约束下,运用ARFIMA模型对金融市场条件收益率建模,运用GARCH、GJR、FIGARCH、APARCH、FIAPARCH等5种模型对金融波动率进行建模,进而运用极值理论(EVT)对标准收益的极端尾部风险建模来测度各股市的动态风险,并用返回测试(Back-testing)方法检验模型的适应性。实证结果表明,总的来说,FIAPARCH-EVT模型对各个市场具有较强的适应性,风险测度能力较为优越。进一步,本文在ARFIMA-FIAPARCH模型下,假定标准收益分别服从正态分布(N)、学生t分布(st)、有偏学生t分布(skst)、广义误差分布(GED)共4种分布,对各股市的动态风险测度的准确性进行检验,并和EVT方法的测度结果进行对比分析。结果表明,EVT方法风险测度能力优于其他方法,有偏学生t分布假设下的风险测度模型虽然略逊于EVT方法,但也不失为一种较好的方法;ARFIMA-FI-APARCH-EVT不仅在中国大陆沪深股市表现最为可靠,而且在其他市场也表现出同样的可靠性。     

Weather Risk Hedging in the European Markets and International Investment Diversification

This article analyses weather risk hedging efficiency in three European countries using weather derivatives traded at Chicago Mercantile Exchange (CME) and explores the potential of weather derivatives as a new investment asset to further diversify investors’ portfolios. The results document that the CME European weather contracts are generally effective in hedging the temperature risk in the three European countries. However, for a specific country, weather risk hedging using other countries’ weather indexes is generally not effective. Zero or little correlation among international weather indexes and stock market indexes indicates that weather derivatives should be an efficient investment diversifier. This research provides important insights to both weather risk hedgers and investors.     

国际原油市场极端风险的测度模型及后验分析

采用可以捕捉收益分布尾部极端风险的ES(Excepted Shortfall)指标,同时基于时变高阶矩波动模型和常规GARCH族模型建立风险测度模型,并在多、空头寸共20个分位数水平下,综合对比了不同模型在国际原油市场风险测度中表现出的精确性差异。研究结果表明:时变高阶矩波动模型可以刻画原油市场收益分布中的时变偏度和时变峰度特征,更好地测度原油市场的极端风险,同时GARCHSK-M模型表现出了相对最高的风险测度精确性,可以作为测度原油市场极端风险相对合理的模型选择。     

Multiscale Analysis of International Linkages of REIT Returns and Volatilities

This paper extends the REIT literature on international market linkages by introducing a time scale dimension. In particular, we apply the maximum overlap discrete wavelet transform (MODWT) to seven major global REIT markets, and investigate their linkages among returns and volatilities at different time scales. Our findings suggest strong scale-dependency of the market linkages. Specifically, the linkage among returns generally increases with time scale, implying that portfolio diversification is most efficient at short time horizons. Moreover, the return linkage is found to be time varying and its dynamics varies across scales. In addition, results on the volatility linkage, which manifests itself through volatility comovements and spillover, show that volatility comovements generally strengthen as scale increases and volatility spillover varies across scales in terms of strength and direction. Our findings cast doubt on the use of the scale-free correlation coefficient as a universal measure of market linkage. Our findings can be utilized by time-scale-conscious investors to improve portfolio selection and risk management.     

REIT Operational Efficiency: Performance,Risk, and Return

The Journal of Real Estate Finance and Economics - Relations between Real Estate Investment Trust (REIT) efficiency and operational performance, risk, and stock return are examined. REIT-level...     

Domestic and International Equity REIT Joint Ventures: Structuring Corporate Options

We examine a sample of 185 Joint Ventures parented by publicly-traded Equity Real Estate Investment Trusts 1994–2001. These transactions are found to be motivated by a wide variety of corporate strategies. Shareholder returns for REIT parents are significantly positive, which is consistent with wealth effects previously reported for joint ventures formed by non-REIT real estate firms. In a subsample of joint ventures formed to structure partial dispositions of property, however, abnormal returns are significantly negative, which is consistent with the free cash flow theory of Jensen. REIT joint venture experience in Asia has been neutral for value, but may improve in the future if early ventures have created options for more efficient partnerships later.     

Idiosyncratic Risk in Emerging Markets

In this study, I examine the properties and portfolio management implications of value‐weighted idiosyncratic volatility in 24 emerging markets. This paper provides evidence against the view that the rise of idiosyncratic risk is a global phenomenon. Furthermore, specific and market risks jointly predict market returns as there is a negative (positive) relation between idiosyncratic (market) risk and subsequent stock returns. Idiosyncratic volatility is the most important component of tracking error volatility, and it does not exhibit either an upward or a downward trend. Thus, investors do not have to increase, on average, the number of stocks they hold to keep the active risk constant.     

Catastrophic Risk and Credit Markets

We provide a model of the effects of catastrophic risk on real estate financing and prices and demonstrate that insurance market imperfections can restrict the supply of credit for catastrophe-susceptible properties. Using unique micro-level data, we find that earthquake risk decreased commercial real estate bank loan provision by 22% in California properties in the 1990s, with more severe effects in African–American neighborhoods. We show that the 1994 Northridge earthquake had only a short-term disruptive effect. Our basic findings are confirmed for hurricane risk, and our model and empirical work have implications for terrorism and political perils.     

Downside Risk in Emerging Markets

This paper investigates the relation between downside risk and expected returns on the aggregate stock market in an international context. Nonparametric and parametric value at risk are used as measures of downside risk to determine the existence of a risk-return trade-off. For emerging markets, fixed effects panel data regressions provide evidence for a significantly positive relationship between monthly expected market returns and downside risk. This result is robust after controlling for aggregate dividend yield and price-to-fundamental ratios. The relationship between expected returns and downside risk is weaker for developed markets and vanishes when control variables are included in the specification.     

Fraud Risk in Emerging Markets

David L. Stulb, joint leader of Ernst ＆ Young＇s global Fraud Investigations ＆ Dispute Servicespractice, said,“Major fraud and corruption scandals attract headlines around the world, dramatically affecting corporate and market values. With the fear of fraud greatest in emerging markets, and with 20% of all companies having been victims of fraud, the consequences for those companies that continue to underestimate the risk could be severe.” at the launch of the 9th Global Fraud Survey, Fraud Risk in Emerging Markets.