We quantify the capital shortfall that results from a global financial crisis by using a macro-finance dynamic stochastic general equilibrium model that captures the interactions between the financial and real sectors of the economy. We show that a crisis similar to that observed in 2008 generates a capital shortfall (or stressed expected loss, SEL) equal to 2.8% of euro-area GDP, which corresponds to approximately 250 billion euros. We also find that using a cycle-dependent capital ratio that combines concern for both credit growth and SEL has a positive effect on output growth while mitigating the excessive risk taking of the banking system. Finally, our estimates confirm that most of the variability of the macroeconomic and financial variables at business cycle frequencies is due to investment and risk shocks.
{"title":"A General Equilibrium Appraisal of Capital Shortfall","authors":"E. Jondeau, Jean‐Guillaume Sahuc","doi":"10.2139/ssrn.3126905","DOIUrl":"https://doi.org/10.2139/ssrn.3126905","url":null,"abstract":"We quantify the capital shortfall that results from a global financial crisis by using a macro-finance dynamic stochastic general equilibrium model that captures the interactions between the financial and real sectors of the economy. We show that a crisis similar to that observed in 2008 generates a capital shortfall (or stressed expected loss, SEL) equal to 2.8% of euro-area GDP, which corresponds to approximately 250 billion euros. We also find that using a cycle-dependent capital ratio that combines concern for both credit growth and SEL has a positive effect on output growth while mitigating the excessive risk taking of the banking system. Finally, our estimates confirm that most of the variability of the macroeconomic and financial variables at business cycle frequencies is due to investment and risk shocks.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-02-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116850388","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 examine international equity allocations at the fund level and show how excess foreign returns influence portfolio rebalancing, capital flows, and currencies. Our equilibrium model of incomplete foreign exchange (FX) risk trading where exchange rate risk partially segments international equity markets is consistent with the observed dynamics of equity returns, exchange rates, and fund-level capital flows. We document that rebalancing is more intense under higher FX volatility and find heterogeneous rebalancing behavior across different fund characteristics. A granular instrumental variable approach identifies a positive currency supply elasticity.
{"title":"Global Portfolio Rebalancing and Exchange Rates","authors":"Nelson Camanho, H. Hau, Hélène Rey","doi":"10.2139/ssrn.3112543","DOIUrl":"https://doi.org/10.2139/ssrn.3112543","url":null,"abstract":"\u0000 We examine international equity allocations at the fund level and show how excess foreign returns influence portfolio rebalancing, capital flows, and currencies. Our equilibrium model of incomplete foreign exchange (FX) risk trading where exchange rate risk partially segments international equity markets is consistent with the observed dynamics of equity returns, exchange rates, and fund-level capital flows. We document that rebalancing is more intense under higher FX volatility and find heterogeneous rebalancing behavior across different fund characteristics. A granular instrumental variable approach identifies a positive currency supply elasticity.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2018-01-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115923505","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 investigate the channel through which fluctuations in the market liquidity of real-sector repo collateral cause arbitrage crashes and failure of systemically important intermediaries during the global financial crisis. Intermediaries pledge productive capital as repo collateral to fund the margin for their arbitrage positions. A tiny drop in the market liquidity of capital induces higher haircuts and forces arbitrageurs to collectively unwind trading positions, resulting in adverse price movements and losses. This further reduces the collateral value of arbitrage portfolios and triggers more fire-sales in both capital and arbitrage trades. This channel creates stronger amplification effects than in Brunnermeier and Pedersen (2009), and can easily incur a simultaneous repo run and arbitrage crashes, where liquidity in several markets dry up altogether. We also show that "flight-to-liquidity'' effects in intermediaries' collateral choices after the repo run prolong the real-sector recession.
{"title":"Arbitrage Run and Collateral Run","authors":"A. Zhang, Runjie Geng","doi":"10.2139/ssrn.3034291","DOIUrl":"https://doi.org/10.2139/ssrn.3034291","url":null,"abstract":"We investigate the channel through which fluctuations in the market liquidity of real-sector repo collateral cause arbitrage crashes and failure of systemically important intermediaries during the global financial crisis. Intermediaries pledge productive capital as repo collateral to fund the margin for their arbitrage positions. A tiny drop in the market liquidity of capital induces higher haircuts and forces arbitrageurs to collectively unwind trading positions, resulting in adverse price movements and losses. This further reduces the collateral value of arbitrage portfolios and triggers more fire-sales in both capital and arbitrage trades. This channel creates stronger amplification effects than in Brunnermeier and Pedersen (2009), and can easily incur a simultaneous repo run and arbitrage crashes, where liquidity in several markets dry up altogether. We also show that \"flight-to-liquidity'' effects in intermediaries' collateral choices after the repo run prolong the real-sector recession.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2017-11-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115265864","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 analyse an extended version of the dynamical mean-field Ising model. Instead of classical physical representation of spins and external magnetic field, the model describes traders’ opinion dynamics. The external field is endogenised to represent a smoothed moving average of the past state variable. This model captures in a simple set-up the interplay between instantaneous social imitation and past trends in social coordinations. We show the existence of a rich set of bifurcations as a function of the two parameters quantifying the relative importance of instantaneous versus past social opinions on the formation of the next value of the state variable. Moreover, we present thorough analysis of chaotic behaviour, which is exhibited in certain parameter regimes. Finally, we examine several transitions through bifurcation curves and study how they could be understood as specific market scenarios. We find that the amplitude of the corrections needed to recover from a crisis and to push the system back to “normal” is often significantly larger than the strength of the causes that led to the crisis itself.
{"title":"A Generalized 2D-Dynamical Mean-Field Ising Model with a Rich Set of Bifurcations (Inspired and Applied to Financial Crises)","authors":"D. Smug, D. Sornette, P. Ashwin","doi":"10.2139/ssrn.3064673","DOIUrl":"https://doi.org/10.2139/ssrn.3064673","url":null,"abstract":"We analyse an extended version of the dynamical mean-field Ising model. Instead of classical physical representation of spins and external magnetic field, the model describes traders’ opinion dynamics. The external field is endogenised to represent a smoothed moving average of the past state variable. This model captures in a simple set-up the interplay between instantaneous social imitation and past trends in social coordinations. We show the existence of a rich set of bifurcations as a function of the two parameters quantifying the relative importance of instantaneous versus past social opinions on the formation of the next value of the state variable. Moreover, we present thorough analysis of chaotic behaviour, which is exhibited in certain parameter regimes. Finally, we examine several transitions through bifurcation curves and study how they could be understood as specific market scenarios. We find that the amplitude of the corrections needed to recover from a crisis and to push the system back to “normal” is often significantly larger than the strength of the causes that led to the crisis itself.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2017-10-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123768474","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 paper examines the effect of the foreign investors fund flow into the domestic stock market. We investigated whether foreign investors are only herders or if they have also the ability to push the market up and down. To answer this question, we include investors’ types as an independent factor in Markov-Switching Model used by Hamilton (1989) to examine the asymmetric effect of the foreign investors during the bull and bear states. Empirical results from Qatar Stock Market suggested that foreign institutional traders are only herding in the market and they cannot play the role of the market maker. We have also found that neither foreign investors nor domestic investors have the ability to switch the regime of the market. The time-varying relationship between the various investors’ types has been investigated. We reported that, although the correlation matrixes of the investors’ categories with the market are time-varying, the foreign institutional trader is still the leader of the market during the bull (bear) states of the market. Finally, we proposed some procedures to minimize the harmful of the foreign investors bad trading.
{"title":"Analyzing Foreign Investors Behavior in the Emerging Stock Market: Evidence from Qatar Stock Market","authors":"Elsayed Elsiefy, Moustafa Ahmed AbdElaal","doi":"10.5430/afr.v6n4p197","DOIUrl":"https://doi.org/10.5430/afr.v6n4p197","url":null,"abstract":"This paper examines the effect of the foreign investors fund flow into the domestic stock market. We investigated whether foreign investors are only herders or if they have also the ability to push the market up and down. To answer this question, we include investors’ types as an independent factor in Markov-Switching Model used by Hamilton (1989) to examine the asymmetric effect of the foreign investors during the bull and bear states. Empirical results from Qatar Stock Market suggested that foreign institutional traders are only herding in the market and they cannot play the role of the market maker. We have also found that neither foreign investors nor domestic investors have the ability to switch the regime of the market. The time-varying relationship between the various investors’ types has been investigated. We reported that, although the correlation matrixes of the investors’ categories with the market are time-varying, the foreign institutional trader is still the leader of the market during the bull (bear) states of the market. Finally, we proposed some procedures to minimize the harmful of the foreign investors bad trading.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2017-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117335221","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 solve the problems of mean-variance hedging (MVH) and mean-variance portfolio selection (MVPS) under restricted information. We work in a setting where the underlying price process S is a semimartingale, but not adapted to the filtration G which models the information available for constructing trading strategies. We choose as G = Fdet the zero-information filtration and assume that S is a time-dependent affine transformation of a square-integrable martingale. This class of processes includes in particular arithmetic and exponential Levy models with suitable integrability. We give explicit solutions to the MVH and MVPS problems in this setting, and we show for the Levy case how they can be expressed in terms of the Levy triplet.
{"title":"Dynamic Mean-Variance Optimisation Problems with Deterministic Information","authors":"M. Schweizer, Danijel Zivoi, Mario Sikic","doi":"10.2139/ssrn.3051199","DOIUrl":"https://doi.org/10.2139/ssrn.3051199","url":null,"abstract":"We solve the problems of mean-variance hedging (MVH) and mean-variance portfolio selection (MVPS) under restricted information. We work in a setting where the underlying price process S is a semimartingale, but not adapted to the filtration G which models the information available for constructing trading strategies. We choose as G = Fdet the zero-information filtration and assume that S is a time-dependent affine transformation of a square-integrable martingale. This class of processes includes in particular arithmetic and exponential Levy models with suitable integrability. We give explicit solutions to the MVH and MVPS problems in this setting, and we show for the Levy case how they can be expressed in terms of the Levy triplet.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2017-09-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122411265","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 study the sensitivity of optimal consumption streams with respect to perturbations of the random endowment. At the leading order, the consumption adjustment does not matter: any choice that matches the budget constraint simply shifts the original utility by the marginal value of the perturbation. Nontrivial results obtain at the next-to-leading order. Here, one first solves the problem for a deterministic perturbation, which leads to a "prognosis measure". The desired consumption adjustment for a general endowment perturbation is in turn given by the conditional expectation of the latter, computed under this measure and appropriately weighted with the conditional expectations of the remaining risk-tolerance.
{"title":"Sensitivity of Optimal Consumption Streams","authors":"Martin Herdegen, Johannes Muhle‐Karbe","doi":"10.2139/ssrn.2643322","DOIUrl":"https://doi.org/10.2139/ssrn.2643322","url":null,"abstract":"We study the sensitivity of optimal consumption streams with respect to perturbations of the random endowment. At the leading order, the consumption adjustment does not matter: any choice that matches the budget constraint simply shifts the original utility by the marginal value of the perturbation. Nontrivial results obtain at the next-to-leading order. Here, one first solves the problem for a deterministic perturbation, which leads to a \"prognosis measure\". The desired consumption adjustment for a general endowment perturbation is in turn given by the conditional expectation of the latter, computed under this measure and appropriately weighted with the conditional expectations of the remaining risk-tolerance.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2017-09-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124496240","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}
Safety culture is a concept often used to highlight the fact that there are social processes in organizations that help or hinder behaviors or outcomes regarding of Occupational Health and Safety (OHS). Thus, the part of workplace culture that concerns health and safety, risks and hazards, is called safety culture. Unsafe attitudes and behaviors in an organization have been demonstrated to partly be a result of workplace culture. Workplace norms have been shown to predict unsafe and risky behavior among employees. Behavior is, however, influenced by many different factors, of which safety culture is one. How well safety rules and regulations are adhered to in an organization is considered to be influenced by culture. A poor safety culture for example have been associated with organizational accidents, such as the Chernobyl nuclear disaster and the two NASA space shuttle accidents. This paper is an attempt to position the place of safety culture and Occupational Health and Safety Culture in Manufacturing Companies.
{"title":"The Importance of Occupational Health and Safety Culture in Manufacturing Companies","authors":"Professor Alain Ndedi, L. Kok","doi":"10.2139/ssrn.3026353","DOIUrl":"https://doi.org/10.2139/ssrn.3026353","url":null,"abstract":"Safety culture is a concept often used to highlight the fact that there are social processes in organizations that help or hinder behaviors or outcomes regarding of Occupational Health and Safety (OHS). Thus, the part of workplace culture that concerns health and safety, risks and hazards, is called safety culture. Unsafe attitudes and behaviors in an organization have been demonstrated to partly be a result of workplace culture. Workplace norms have been shown to predict unsafe and risky behavior among employees. Behavior is, however, influenced by many different factors, of which safety culture is one. How well safety rules and regulations are adhered to in an organization is considered to be influenced by culture. A poor safety culture for example have been associated with organizational accidents, such as the Chernobyl nuclear disaster and the two NASA space shuttle accidents. This paper is an attempt to position the place of safety culture and Occupational Health and Safety Culture in Manufacturing Companies.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2017-08-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124350269","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 reconsider the microeconomic foundations of financial economics. Motivated by the importance of Knightian uncertainty in markets, we present a model that does not carry any probabilistic structure ex ante, yet is based on a common order. We derive the fundamental equivalence of economic viability of asset prices and absence of arbitrage. We also obtain a modified version of the fundamental theorem of asset pricing using the notion of sublinear pricing measures. Different versions of the efficient market hypothesis are related to the assumptions one is willing to impose on the common order.
{"title":"Viability and Arbitrage Under Knightian Uncertainty","authors":"Matteo Burzoni, F. Riedel, H. Soner","doi":"10.2139/ssrn.3099057","DOIUrl":"https://doi.org/10.2139/ssrn.3099057","url":null,"abstract":"We reconsider the microeconomic foundations of financial economics. Motivated by the importance of Knightian uncertainty in markets, we present a model that does not carry any probabilistic structure ex ante, yet is based on a common order. We derive the fundamental equivalence of economic viability of asset prices and absence of arbitrage. We also obtain a modified version of the fundamental theorem of asset pricing using the notion of \u0000 sublinear pricing measures. Different versions of the efficient market hypothesis are related to the assumptions one is willing to impose on the common order.\u0000","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2017-07-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124004995","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 introduce the notion of a patience premium, which is based on the concept of ambiguity aversion and is an ambiguity premium. We identify three reasons for the existence of the patience premium: Certainty preferences: perceived confidence in the expected performance; Comparison with peers: desire to outperform the competition drives the focus towards short-term outcomes; Loss aversion: intolerance to negative performance leads to the use of sub-optimal trading strategies. These reasons are driven by the behaviour of market participants and are interconnected. The phenomenon of the patience premium helps explain why the performance of investment strategies may benefit from having longer holding periods.
{"title":"Patience Premium","authors":"Igor Yelnik","doi":"10.2139/ssrn.2979221","DOIUrl":"https://doi.org/10.2139/ssrn.2979221","url":null,"abstract":"We introduce the notion of a patience premium, which is based on the concept of ambiguity aversion and is an ambiguity premium. We identify three reasons for the existence of the patience premium: Certainty preferences: perceived confidence in the expected performance; Comparison with peers: desire to outperform the competition drives the focus towards short-term outcomes; Loss aversion: intolerance to negative performance leads to the use of sub-optimal trading strategies. These reasons are driven by the behaviour of market participants and are interconnected. The phenomenon of the patience premium helps explain why the performance of investment strategies may benefit from having longer holding periods.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2017-06-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116544817","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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