OPUS 4 | CFS working paper series

2003, 18

"Do credit rating agencies add to the dynamics of emerging market crises?" (2003)

Roman Kräussl

The experience in the period during and after the Asian crisis of 1997-98 has provoked an extensive debate about the credit rating agencies' evaluation of sovereign risk in emerging markets lending. This study analyzes the role of credit rating agencies in international finan-cial markets, particularly whether sovereign credit ratings have an impact on the financial stability in emerging market economies. The event study and panel regression results indicate that credit rating agencies have substantial influence on the size and volatility of emerging markets lending. The empirical results are significantly stronger in the case of government's downgrades and negative imminent sovereign credit rating actions such as credit watches and rating outlooks than positive adjustments by the credit rating agencies while by the market participants' anticipated sovereign credit rating changes have a smaller impact on financial markets in emerging economies. Klassifikation: E44, E47, G15. This version August 2003.

2000, 13

(Partial) privatization social security : the Chilean model - a lesson to follow? (2000)

Roland Eisen

This paper examines thoroughly the Chilean Pension Reform, giving first an overview of the mandatory saving plan, the relevant institutions, and the rules for transition from the old to the new system. The main part of the paper contains a critical evaluation of the reform, in particular the macroeconomic performance with respect to capital formation and growth, and the effects on the savings rate as well as on the rates of return and labor market are discussed. Furthermore, the development of capital markets is reviewed. A short critique is presented with respect to intergenerational distribution and risk sharing as well as with respect to the social consequences. This paper is the result of a CFS sponsored research project. A preliminary version was presented at the meeting of the committee of Social Policy of the Verein fuer Socialpolitik, May 1999 and at the 55th Congress of IIPF, 23-26 August 1999, in Moskow. Klassifikation: H 55

2009, 20

A blocking and regularization approach to high dimensional realized covariance estimation (2009)

Nikolaus Hautsch Lada M. Kyj Roel C. A. Oomen

We introduce a regularization and blocking estimator for well-conditioned high-dimensional daily covariances using high-frequency data. Using the Barndorff-Nielsen, Hansen, Lunde, and Shephard (2008a) kernel estimator, we estimate the covariance matrix block-wise and regularize it. A data-driven grouping of assets of similar trading frequency ensures the reduction of data loss due to refresh time sampling. In an extensive simulation study mimicking the empirical features of the S&P 1500 universe we show that the ’RnB’ estimator yields efficiency gains and outperforms competing kernel estimators for varying liquidity settings, noise-to-signal ratios, and dimensions. An empirical application of forecasting daily covariances of the S&P 500 index confirms the simulation results. JEL-Classifications: C14, C22 Keywords: Covariance Estimation, Blocking, Realized Kernel, Regularization, Microstructure, Asynchronous Trading

2010, 03

A call on art investments (2010)

Roman Kraeussl Christian Wiehenkamp

The art market has seen boom and bust during the last years and, despite the downturn, has received more attention from investors given the low interest environment following the financial crisis. However, participation has been reserved for a few investors and the hedging of exposures remains dificult. This paper proposes to overcome these problems by introducing a call option on an art index, derived from one of the most comprehensive data sets of art market transactions. The option allows investors to optimize their exposure to art. For pricing purposes, non-tradability of the art index is acknowledged and option prices are derived in an equilibrium setting as well as by replication arguments. In the former, option prices depend on the attractiveness of gaining exposure to a previously non-traded risk. This setting further overcomes the problem of art market exposures being dificult to hedge. Results in the replication case are primarily driven by the ability to reduce residual hedging risk. Even if this is not entirely possible, the replication approach serves as pricing benchmark for investors who are significantly exposed to art and try to hedge their art exposure by selling a derivative. JEL Classification: G11, G13, Z11 Keywords: Art Market, Art Index, Alternative Investments, Option Pricing.

2003, 23

A critique on the proposed use of external sovereign credit ratings in Basel II (2003)

Roman Kräussl

This paper deals with the proposed use of sovereign credit ratings in the "Basel Accord on Capital Adequacy" (Basel II) and considers its potential effect on emerging markets financing. It investigates in a first attempt the consequences of the planned revisions on the two central aspects of international bank credit flows: the impact on capital costs and the volatility of credit supply across the risk spectrum of borrowers. The empirical findings cast doubt on the usefulness of credit ratings in determining commercial banks' capital adequacy ratios since the standardized approach to credit risk would lead to more divergence rather than convergence between investment-grade and speculative-grade borrowers. This conclusion is based on the lateness and cyclical determination of credit rating agencies' sovereign risk assessments and the continuing incentives for short-term rather than long-term interbank lending ingrained in the proposed Basel II framework. Klassifikation: E44, E47, G15. This version August 2003.

2007, 29

A direct test of the buffer-stock model of saving (2007)

Tullio Jappelli Mario Padula Luigi Pistaferri

Recent models with liquidity constraints and impatience emphasize that consumers use savings to buffer income fluctuations. When wealth is below an optimal target, consumers try to increase their buffer stock of wealth by saving more. When it is above target, they increase consumption. This important implication of the buffer stock model of saving has not been subject to direct empirical testing. We derive from the model an appropriate theoretical restriction and test it using data on working-age individuals drawn from the 2002 and 2004 Italian Surveys of Household Income and Wealth. One of the most appealing features of the survey is that it has data on the amount of wealth held for precautionary purposes, which we interpret as target wealth in a buffer stock model. The test results do not support buffer stock behavior, even among population groups that are more likely, a priori, to display such behavior. The saving behavior of young households is instead consistent with models in which impatience, relative to prudence, is not as high as in buffer stock models. JEL Classification: D91

2008, 46

A dynamic limit order market with diversity in trading horizons (2008)

Mark Van Achter

This paper considers a trading game in which sequentially arriving liquidity traders either opt for a market order or for a limit order. One class of traders is considered to have an extended trading horizon, implying their impatience is linked to their trading orientation. More specifically, sellers are considered to have a trading horizon of two periods, whereas buyers only have a single-period trading scope (the extended buyer-horizon case is completely symmetric). Clearly, as the life span of their submitted limit orders is longer, this setting implies sellers are granted a natural advantage in supplying liquidity. This benefit is hampered, however, by the direct competition arising between consecutively arriving sellers. Closed-form characterizations for the order submission strategies are obtained when solving for the equilibrium of this dynamic game. These allow to examine how these forces affect traders´ order placement decisions. Further, the analysis yields insight into the dynamic process of price formation and into the market clearing process of a non-intermediated, order driven market. JEL Classification: G10, G20.

2012, 07

A dynamic programming approach to constrained portfolios (2012)

Holger Kraft Mogens Steffensen

This paper studies constrained portfolio problems that may involve constraints on the probability or the expected size of a shortfall of wealth or consumption. Our first contribution is that we solve the problems by dynamic programming, which is in contrast to the existing literature that applies the martingale method. More precisely, we construct the non-separable value function by formalizing the optimal constrained terminal wealth to be a (conjectured) contingent claim on the optimal non-constrained terminal wealth. This is relevant by itself, but also opens up the opportunity to derive new solutions to constrained problems. As a second contribution, we thus derive new results for non-strict constraints on the shortfall of inter¬mediate wealth and/or consumption.

2005, 04

A framework for exploring the macroeconomic determinants of systematic risk (2005)

Torben G. Andersen Tim Bollerslev Francis X. Diebold Ginger Wu

We selectively survey, unify and extend the literature on realized volatility of financial asset returns. Rather than focusing exclusively on characterizing the properties of realized volatility, we progress by examining economically interesting functions of realized volatility, namely realized betas for equity portfolios, relating them both to their underlying realized variance and covariance parts and to underlying macroeconomic fundamentals. Klassifikation: G12. January 2005.

2012, 03

A new comparative approach to macroeconomic modeling and policy analysis (2012)

Volker Wieland Tobias J. Cwik Gernot J. Müller Sebastian Schmidt Maik Hendrik Wolters

In the aftermath of the global financial crisis, the state of macroeconomic modeling and the use of macroeconomic models in policy analysis has come under heavy criticism. Macroeconomists in academia and policy institutions have been blamed for relying too much on a particular class of macroeconomic models. This paper proposes a comparative approach to macroeconomic policy analysis that is open to competing modeling paradigms. Macroeconomic model comparison projects have helped produce some very influential insights such as the Taylor rule. However, they have been infrequent and costly, because they require the input of many teams of researchers and multiple meetings to obtain a limited set of comparative findings. This paper provides a new approach that enables individual researchers to conduct model comparisons easily, frequently, at low cost and on a large scale. Using this approach a model archive is built that includes many well-known empirically estimated models that may be used for quantitative analysis of monetary and fiscal stabilization policies. A computational platform is created that allows straightforward comparisons of models’ implications. Its application is illustrated by comparing different monetary and fiscal policies across selected models. Researchers can easily include new models in the data base and compare the effects of novel extensions to established benchmarks thereby fostering a comparative instead of insular approach to model development.

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