In our opinion, nowdays it is important that economic policy specialists, who are also professors, should be concerned about bringing macro-financial issues to the attention of the general public (non-specialized). In this regard, Professor Ionel Bostan, known in academia circles of Iasi and Suceava (Romania), frequently publishes micro-studies and essays on financial topics, focusing on the national economic context, in Romanian newspapers and magazines, with particular emphasis on the popularization of some problems in the financial and budgetary sphere. On the other hand, we note that, periodically, the author carries out micro-analyzes and essays on financial themes, referring to the mentioned context - both before and after Romania's accession to the European Union. Starting from this idea, we point out here synthetically the most important aspects found in the works of this author.
{"title":"Studies and Financial Observations on the Romanian Economic Context: Before and After EU Accession","authors":"I. Robu","doi":"10.2139/ssrn.3324912","DOIUrl":"https://doi.org/10.2139/ssrn.3324912","url":null,"abstract":"In our opinion, nowdays it is important that economic policy specialists, who are also professors, should be concerned about bringing macro-financial issues to the attention of the general public (non-specialized). In this regard, Professor Ionel Bostan, known in academia circles of Iasi and Suceava (Romania), frequently publishes micro-studies and essays on financial topics, focusing on the national economic context, in Romanian newspapers and magazines, with particular emphasis on the popularization of some problems in the financial and budgetary sphere. On the other hand, we note that, periodically, the author carries out micro-analyzes and essays on financial themes, referring to the mentioned context - both before and after Romania's accession to the European Union. Starting from this idea, we point out here synthetically the most important aspects found in the works of this author.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-01-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127892501","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This work assesses the impact of monetary policy shocks on the extension of bank credit by local banks and foreign banks in general. We however employ the impulse response functions and the variance decomposition analysis as part of our study in assessing the responses of these types of extension of credit to monetary policy shocks. Our work will enable us reveal whether or not foreign banks react negatively to monetary policy shocks? This is will however enable us to ascertain if indeed foreign banks will not not abandon the domestic market in the face of economic distress or crisis. We will further assess the somewhat different responses in terms of the balance sheet items regarding these banks, the repercussions, more especially on monetary policy employment and the extent to which risk is managed within the banking environment.
{"title":"An Assessment of the Effects of Monetary Policy Shocks in the Face of Local and International Banks in Perspective","authors":"Frederick Anning","doi":"10.2139/ssrn.3323506","DOIUrl":"https://doi.org/10.2139/ssrn.3323506","url":null,"abstract":"This work assesses the impact of monetary policy shocks on the extension of bank credit by local banks and foreign banks in general. We however employ the impulse response functions and the variance decomposition analysis as part of our study in assessing the responses of these types of extension of credit to monetary policy shocks. Our work will enable us reveal whether or not foreign banks react negatively to monetary policy shocks? This is will however enable us to ascertain if indeed foreign banks will not not abandon the domestic market in the face of economic distress or crisis. We will further assess the somewhat different responses in terms of the balance sheet items regarding these banks, the repercussions, more especially on monetary policy employment and the extent to which risk is managed within the banking environment. <br><br>","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-01-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121926734","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Eric Ghysels, Alberto Plazzi, Rossen Valkanov, Antonio Rubia Serrano, Asad Dossani
Multi-period-ahead forecasts of returns’ variance are used in most areas of applied finance where long horizon measures of risk are necessary. Yet, the major focus in the variance forecasting literature has been on one-period-ahead forecasts. In this paper, we compare several approaches of producing multi-period-ahead forecasts within the GARCH and RV families – iterated, direct, and scaled short-horizon forecasts. We also consider the newer class of mixed data sampling (MIDAS) methods. We carry the comparison on 30 assets, comprising of equity, Treasury, currency, and commodity indices. While the underlying data is available at high-frequency (5-minutes), we are interested at forecasting variances 5, 10, 22, 44, and 66 days ahead. The empirical analysis, which is carried in-sample and out-of-sample with data from 2005 to 2018, yields the following results. For GARCH, iterated GARCH dominates the direct GARCH approach. In the case of RV, the direct RV is preferred to the iterated RV. This dichotomy of results emphasizes the need for an approach that uses the richness of high-frequency data and, at the same time produces a direct forecast of the variance at the desired horizon, without iterating. The MIDAS is such an approach and, unsurprisingly, it yields the most precise forecasts of the variance, in and out-of-sample. More broadly, our study dispels the notion that volatility is not forecastable at long horizons and offers an approach that delivers accurate out-of-sample predictions.
{"title":"Direct Versus Iterated Multi-Period Volatility Forecasts","authors":"Eric Ghysels, Alberto Plazzi, Rossen Valkanov, Antonio Rubia Serrano, Asad Dossani","doi":"10.2139/ssrn.3326606","DOIUrl":"https://doi.org/10.2139/ssrn.3326606","url":null,"abstract":"Multi-period-ahead forecasts of returns’ variance are used in most areas of applied finance where long horizon measures of risk are necessary. Yet, the major focus in the variance forecasting literature has been on one-period-ahead forecasts. In this paper, we compare several approaches of producing multi-period-ahead forecasts within the GARCH and RV families – iterated, direct, and scaled short-horizon forecasts. We also consider the newer class of mixed data sampling (MIDAS) methods. We carry the comparison on 30 assets, comprising of equity, Treasury, currency, and commodity indices. While the underlying data is available at high-frequency (5-minutes), we are interested at forecasting variances 5, 10, 22, 44, and 66 days ahead. The empirical analysis, which is carried in-sample and out-of-sample with data from 2005 to 2018, yields the following results. For GARCH, iterated GARCH dominates the direct GARCH approach. In the case of RV, the direct RV is preferred to the iterated RV. This dichotomy of results emphasizes the need for an approach that uses the richness of high-frequency data and, at the same time produces a direct forecast of the variance at the desired horizon, without iterating. The MIDAS is such an approach and, unsurprisingly, it yields the most precise forecasts of the variance, in and out-of-sample. More broadly, our study dispels the notion that volatility is not forecastable at long horizons and offers an approach that delivers accurate out-of-sample predictions.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-01-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133392113","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Why is the dollar the dominant currency for debt contracts and what are its macroeconomic implications? We develop an international general equilibrium model where firms optimally choose the currency composition of their debt. We show that there always exists a dominant currency debt equilibrium, in which all firms borrow in a single dominant currency. It is the currency of the country that effectively pursues aggressive expansionary monetary policy in global downturns, lowering real debt burdens of firms. We show that the dollar empirically fits this description, despite its short term safe haven properties. We provide further modern and historical empirical support for our mechanism across time and currencies. We use our model to study how the optimal monetary policy differs if the Federal Reserve reacts to global versus domestic conditions.
{"title":"Dominant Currency Debt","authors":"Egemen Eren, S. Malamud","doi":"10.2139/ssrn.3236660","DOIUrl":"https://doi.org/10.2139/ssrn.3236660","url":null,"abstract":"Why is the dollar the dominant currency for debt contracts and what are its macroeconomic implications? We develop an international general equilibrium model where firms optimally choose the currency composition of their debt. We show that there always exists a dominant currency debt equilibrium, in which all firms borrow in a single dominant currency. It is the currency of the country that effectively pursues aggressive expansionary monetary policy in global downturns, lowering real debt burdens of firms. We show that the dollar empirically fits this description, despite its short term safe haven properties. We provide further modern and historical empirical support for our mechanism across time and currencies. We use our model to study how the optimal monetary policy differs if the Federal Reserve reacts to global versus domestic conditions.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-11-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115437587","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
For a large financial market (which is a sequence of usual, “small” financial markets), we introduce and study a concept of no asymptotic arbitrage (of the first kind), which is invariant under dis...
{"title":"Large Financial Markets, Discounting, and No Asymptotic Arbitrage","authors":"D. Bálint, M. Schweizer","doi":"10.2139/ssrn.3280855","DOIUrl":"https://doi.org/10.2139/ssrn.3280855","url":null,"abstract":"For a large financial market (which is a sequence of usual, “small” financial markets), we introduce and study a concept of no asymptotic arbitrage (of the first kind), which is invariant under dis...","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-11-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131339712","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Most regulators grant contingent convertible bonds (CoCos) the status of equity. The theory, however, suggests that these securities can distort incentives via inducing debt overhang and risk shifting. In this paper, we therefore theoretically model how the degree of this distortion varies with bank risk. Our model predicts that riskier banks face higher debt overhang from CoCos. Next, analyzing a comprehensive database of CoCo issuance in Europe, we empirically test the predictions of our model. We find that banks with lower risk are more likely to issue CoCos than their riskier counterparts. Since in the current regulatory framework of Basel III banks are expected to raise equity prior to CoCo conversion, future debt overhang makes CoCos an expensive source of capital. Thus, riskier banks will opt for equity issuance over CoCos.
{"title":"The Agency of CoCos: Why Contingent Convertible Bonds Aren't for Everyone","authors":"Roman Goncharenko, S. Ongena, Asad Rauf","doi":"10.2139/ssrn.3067909","DOIUrl":"https://doi.org/10.2139/ssrn.3067909","url":null,"abstract":"Most regulators grant contingent convertible bonds (CoCos) the status of equity. The theory, however, suggests that these securities can distort incentives via inducing debt overhang and risk shifting. In this paper, we therefore theoretically model how the degree of this distortion varies with bank risk. Our model predicts that riskier banks face higher debt overhang from CoCos. Next, analyzing a comprehensive database of CoCo issuance in Europe, we empirically test the predictions of our model. We find that banks with lower risk are more likely to issue CoCos than their riskier counterparts. Since in the current regulatory framework of Basel III banks are expected to raise equity prior to CoCo conversion, future debt overhang makes CoCos an expensive source of capital. Thus, riskier banks will opt for equity issuance over CoCos.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126706622","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Following the 2008-9 financial crisis, large banks increasingly issued contingent convertible bonds (CoCo bonds) to increase their capital buffers – a policy supported by national bank regulators. This paper examines whether the issuance of CoCo bonds provides the same reduction in bank default risk as the corresponding issuance of common equity by analyzing the premium reduction in (single name) credit default swaps (CDS) around the corresponding issuance announcement events. We find that the default risk reduction associated with issuance crucially depends on the CoCo bond’s design features: Only CoCo bond designs with permanent write-down features provide a default risk reduction similar to equity. CoCo bonds with equity conversion features come with a lower subsequent volatility of the bank asset value, but are inferior to equity in terms of their default risk reduction.
{"title":"Are CoCo Bonds a Good Substitute for Equity? Evidence from European Banks","authors":"H. Hau, Gabriela Hrasko","doi":"10.2139/ssrn.3270815","DOIUrl":"https://doi.org/10.2139/ssrn.3270815","url":null,"abstract":"Following the 2008-9 financial crisis, large banks increasingly issued contingent convertible bonds (CoCo bonds) to increase their capital buffers – a policy supported by national bank regulators. This paper examines whether the issuance of CoCo bonds provides the same reduction in bank default risk as the corresponding issuance of common equity by analyzing the premium reduction in (single name) credit default swaps (CDS) around the corresponding issuance announcement events. We find that the default risk reduction associated with issuance crucially depends on the CoCo bond’s design features: Only CoCo bond designs with permanent write-down features provide a default risk reduction similar to equity. CoCo bonds with equity conversion features come with a lower subsequent volatility of the bank asset value, but are inferior to equity in terms of their default risk reduction.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-10-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117190279","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Economic and financial theories and practice essentially deal with uncertain future. Humans encounter uncertainty in different kinds of activity, from sensory-motor control to dynamics in financial markets, what has been subject of extensive studies. Representation of uncertainty with normal or lognormal distribution is a common feature of many of those studies. For example, proposed Bayessian integration of Gaussian multisensory input in the brain or log-normal distribution of future asset price in renowned Black-Scholes-Merton (BSM) model for pricing contingent claims.
Standard deviation of log(future asset price) scaled by square root of time in the BSM model is called implied volatility. Actually, log(future asset price) is not normally distributed and traders account for that to avoid losses. Nevertheless the BSM formula derived under the assumption of constant volatility remains a major uniform framework for pricing options in financial markets. I propose that one of the reasons for such a high popularity of the BSM formula could be its ability to translate uncertainty measured with implied volatility into price in a way that is compatible with human intuition for measuring uncertainty.
The present study deals with mathematical relationship between uncertainty and the BSM implied volatility. Examples for a number of common probability distributions are presented. Overall, this work proposes that representation of various probability distributions in terms of the BSM implied volatility profile may be meaningful in both biological and financial worlds. Necessary background from financial mathematics is provided in the text.
{"title":"Representation of Probability Distributions With Implied Volatility and Biological Rationale","authors":"F. Polyakov","doi":"10.2139/ssrn.3213650","DOIUrl":"https://doi.org/10.2139/ssrn.3213650","url":null,"abstract":"Economic and financial theories and practice essentially deal with uncertain future. Humans encounter uncertainty in different kinds of activity, from sensory-motor control to dynamics in financial markets, what has been subject of extensive studies. Representation of uncertainty with normal or lognormal distribution is a common feature of many of those studies. For example, proposed Bayessian integration of Gaussian multisensory input in the brain or log-normal distribution of future asset price in renowned Black-Scholes-Merton (BSM) model for pricing contingent claims.<br><br>Standard deviation of log(future asset price) scaled by square root of time in the BSM model is called implied volatility. Actually, log(future asset price) is not normally distributed and traders account for that to avoid losses. Nevertheless the BSM formula derived under the assumption of constant volatility remains a major uniform framework for pricing options in financial markets. I propose that one of the reasons for such a high popularity of the BSM formula could be its ability to translate uncertainty measured with implied volatility into price in a way that is compatible with human intuition for measuring uncertainty.<br><br>The present study deals with mathematical relationship between uncertainty and the BSM implied volatility. Examples for a number of common probability distributions are presented. Overall, this work proposes that representation of various probability distributions in terms of the BSM implied volatility profile may be meaningful in both biological and financial worlds. Necessary background from financial mathematics is provided in the text.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-09-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121797156","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We empirically evaluate the channels through which securitization impacts bank profitability. To this end, we analyze the role played by bank risk, cost of funding, liquidity and regulatory capital in explaining the relationship between securitization and bank profitability. We find that securitization activities tend to boost profitability. We also show that bank risk, cost of funding, liquidity and regulatory capital individually and jointly act as transmission channels in the securitization-profitability relationship. In addition, we break down the securitization effects on bank profitability into direct and indirect effects and identify the contribution of each individual transmission channel in the overall impact on bank profitability. Our findings have several implications for banks, financial markets, and regulators.
{"title":"Disentangling the Impact of Securitization on Bank Profitability","authors":"Mohamed Bakoush, Rabab Abouarab, S. Wolfe","doi":"10.2139/ssrn.3388959","DOIUrl":"https://doi.org/10.2139/ssrn.3388959","url":null,"abstract":"We empirically evaluate the channels through which securitization impacts bank profitability. To this end, we analyze the role played by bank risk, cost of funding, liquidity and regulatory capital in explaining the relationship between securitization and bank profitability. We find that securitization activities tend to boost profitability. We also show that bank risk, cost of funding, liquidity and regulatory capital individually and jointly act as transmission channels in the securitization-profitability relationship. In addition, we break down the securitization effects on bank profitability into direct and indirect effects and identify the contribution of each individual transmission channel in the overall impact on bank profitability. Our findings have several implications for banks, financial markets, and regulators.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-09-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131023451","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The endo-exo problem lies at the heart of statistical identification in many fields of science, and is often plagued by spurious strong-and-long memory due to improper treatment of trends, shocks and shifts in the data. A class of models that has shown to be useful in discerning exogenous and endogenous activity is the Hawkes process. This class of point processes has enjoyed great recent popularity and rapid development within the quantitative finance literature, with particular focus on the study of market microstructure and high frequency price fluctuations. We show that there are important lessons from older fields like time series and econometrics that should also be applied in financial point process modelling. In particular, we emphasize the importance of appropriately treating trends and shocks for the identification of the strength and length of memory in the system. We exploit the powerful Expectation Maximization (EM) algorithm and objective statistical criteria (BIC) to select the flexibility of the deterministic background intensity. With these methods, we strongly reject the hypothesis that the considered financial markets are critical at univariate and bivariate microstructural levels.
{"title":"The Endo-Exo Problem in High Frequency Financial Price Fluctuations and Rejecting Criticality","authors":"Spencer Wheatley, Alexander Wehrli, D. Sornette","doi":"10.2139/ssrn.3239443","DOIUrl":"https://doi.org/10.2139/ssrn.3239443","url":null,"abstract":"The endo-exo problem lies at the heart of statistical identification in many fields of science, and is often plagued by spurious strong-and-long memory due to improper treatment of trends, shocks and shifts in the data. A class of models that has shown to be useful in discerning exogenous and endogenous activity is the Hawkes process. This class of point processes has enjoyed great recent popularity and rapid development within the quantitative finance literature, with particular focus on the study of market microstructure and high frequency price fluctuations. We show that there are important lessons from older fields like time series and econometrics that should also be applied in financial point process modelling. In particular, we emphasize the importance of appropriately treating trends and shocks for the identification of the strength and length of memory in the system. We exploit the powerful Expectation Maximization (EM) algorithm and objective statistical criteria (BIC) to select the flexibility of the deterministic background intensity. With these methods, we strongly reject the hypothesis that the considered financial markets are critical at univariate and bivariate microstructural levels.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-08-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130819841","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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