Manual Financial Econometrics Modeling: Market Microstructure, Factor Models and Financial Risk Measures

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The data is composed of financial data in addition to commodities. Another related topic is discussed in the chapter, i.

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Key results include that the PCA—DCC technique is easily reproducible and efficient to construct a tracker of the targeted index at the least cost for the financial advisor e. The issue of shadow banking system became a global phenomenon originating from the USA due to financial crisis. It is believed by many researchers that interest rates were kept too low for too long by the Federal Reserve Bank in the early year This, of course, has caused credit boom in the economy.

Thereby, this situation led to the post financial and economic crisis. However, low interest rates during boom period of early s were not the only reason for the financial crisis. In fact, many academicians and policymakers raised an argument that the crisis was result of the interaction of micro- and macrofactors.

It is true that shadow banking system bears the same risk as banks. As stated by Financial Stability Board , shadow banking system raises concern about systemic risk and concerns about regulatory arbitrage. After FSB , , and reports, FSB published final policy documents on Strengthening Oversight and Regulation of Shadow Banking in August to mitigate potential systemic risks associated with shadow banking. Therefore, the aim of this research is to search for alternative approach to risk mitigation to address potential systemic risk associated with shadow banking.

Methods of estimating and analysing the impact of news sentiment on the behaviour of prices of financial instruments are proposed, based on the block maxima approach. The methods assume that news sentiment affects the maximum and minimum returns of an instrument through their generalised extreme value distributions. The empirical results suggest that news sentiment has the potential of enhancing the predictive ability of our methods. This chapter examines the casual links between financial instability and commodity prices for the US economy.

Financial Econometrics Modeling: Market Microstructure, Factor Models And Financial Risk Measures

The monthly data of six commodity indices and US financial instability is used from January to September Using the bootstrap full-sample Granger causality test, the results show that causality runs from commodities to financial instability; however, the short-run parameters are unstable. To overcome the limitations of the full sample tests and to accommodate possible regime shifts, we apply dynamic Granger causality using bootstrap and rolling window techniques. Analogous to the parameter stability test results, the results show varying levels of the causal nexuses between commodity prices and financial instability.

Over most of the sample period, increase in commodity prices cause financial instability. However, a reinforcing effect is observed during the turmoil market conditions of the global financial crisis in — This chapter examines the impact the European sovereign debt market crisis had on liquidity and volatility dynamics and their interdependencies in the eurozone government bond market. In particular, we examine the impact across different countries and across different maturity buckets within individual countries. We analyze important trends in these measures over both tranquil and crisis periods.

Additionally, we study time-varying correlations as well as the intertemporal interactions of liquidity proxies with volatility and returns. Our findings provide useful insights to regulators and policymakers on the relative strengths and weaknesses of domestic and global financial systems. This chapter examines the dividend policy of European banks.

The empirical evidence presented here suggests that financial institutions in the Eurozone react to stress in international financial markets by reducing or omitting dividend payouts to strengthen their capital position. Additionally, a negative reaction of dividend payouts of European banks to an increase of the yield differential between German and Spanish bonds seems to exist.

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However, this response of dividends to sovereign credit risk in the Eurozone is not statistically significant. The financial crisis starting in does not seem to materially change the relationships among the variables examined here.


Therefore, we develop an original theoretical model to understand the formation of longterm sovereign rates in the euro zone. More specifically, it is a two-country international bond portfolio choice model that generalizes the traditional results of the term structure interest rates theory.

Using CDS as a variable to control for default risks, we test the model empirically for the period January to September However, the results of a Forbes and Rigobon test do not show that the QE programme has led to a significant increase in the conditional correlations between bond markets. In a supplementary empirical test, we show that QE has significantly reduced the sensitivities of bond yield spreads to the premiums paid on sovereign CDS. This chapter investigates the European repo market and its role as an amplifier of tensions in the sovereign debt markets. We focus on the centrally cleared segment, representing the majority of European repos.

A novel data set on repo and margin haircuts applied to sovereign bonds by central clearing counterparties CCPs is gathered, allowing us to assess the haircut methodologies used by the major European CCPs.

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We document that following increases in sovereign risk, haircuts set by major CCPs on peripheral sovereign bonds increased significantly. The procyclicality of haircuts and the concentration of bilateral repos raise concerns about the CCP-intermediated repo market as a source of systemic risk in the euro area.

The objective of this chapter is to introduce the concept of the financial Kuznets curve FKC as an analogue to the already well-established notion of the environmental Kuznets curve EKC. It is envisaged that the FKC can be introduced on the grounds that too much of a good thing is not good and that countries with large financial sectors are more susceptible to financial crises. The empirical results, based on a variety of econometric techniques, show that the adverse effect of financialization on growth materializes only at high levels of financialization as measured by the ratio of credit to GDP.

This chapter examines the role that China plays in the global economy for the propagation of financial uncertainty and volatility. For this purpose, it seeks to measure the interdependence of real and financial markets for a key set of developed markets — the US, the UK, Germany, and Japan — in relation to China.

We employ vector auto-regressions VARs and make use of generalized impulse responses and variance decompositions to explore the interconnections among these countries. Among other results, we find that the US, Japan, UK, and Germany are highly integrated and form a cluster in terms of financial market volatility and industrial production growth.

Surprisingly, we find that financial market volatility in developed countries is strongly affected by volatility shocks emanating from the Hong Kong Stock Exchange, attesting to the growing importance of Asian financial markets and real activity in the global economy.

By contrast, China has a different story. Chinese financial and production markets are decoupled, and Chinese industrial production growth is mainly determined by its own shocks to domestic conditions. Technological changes have had an impact on every traditional industry, including financial services. Brick and mortar banks are no longer the face of this industry. New technological inventions, such as bitcoin-inspired distributed system, Open Application Program Interface API , and crowd-sourced identity schemes have shaped the industry into something faster, safer, and cost-efficient.

In this chapter, we explore the influence of technology on the financial service industry. We first investigate the impact of technology on existing market elements like retail investors, commercial banking, traditional exchanges, and the emergence of exchange traded funds. We examine high-frequency trading and the link between technology flash crashes. We also investigate how technology has influenced the profession of equity research.

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We then document new inventions like Open APIs and Blockchains and discuss how such innovations have and are likely to change the business landscape in the financial services industry. With the ever-growing importance of stock markets, an overwhelming number of studies have been carried out worldwide to investigate the link which exists between stock market development and economic growth.

However, studies analyzing this link are scant in the African region. As such, this chapter uses a dynamic panel vector error correction model PVECM to analyze the relationship among stock market development, banking development, and economic growth in a unified framework for the period — The results suggest that stock market development plays an important role in generating gains in terms of economic growth both in the short run and in the long-run within the sample of African countries under consideration.

This study endeavors to determine the optimal bank—market mixtures of different countries and their effects on economic activity. We particularly examine emerging markets, following the view that optimal financial structures differ according to different levels of economic development. Our findings show that development in economic activity has a negative impact on financial structure ratio. As economies grow, the financial structure ratio decreases, i. We believe that our findings will have policy implications for developing countries that are seeking to improve their financial systems.

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Financial Econometrics Modeling: Market Microstructure, Factor Models and Financial Risk Measures

Lastly, comments, suggestions for policymakers and ideas for further research are developed. The purpose of this chapter is to explain the impact of global security threats on the performance of family firms. A large body of theoretical and empirical research analyzes the impact of terrorism on governments, but it is also important to understand the effects on other types of actors.

We argue that family businesses tend to be more resilient to terrorist activity due to superior social capital stemming from the strength of their social ties and motivation to persevere. Further, we propose that family firm performance in the aftermath of terrorist activity is positively moderated by institutional quality, which can both mitigate contextual complications and provide stability. A case study analysis of Indian family firms is developed to substantiate these arguments.

The financial crisis of the last decade reopens the question of asset pricing for researchers and practitioners. In this study, we analyze common variation of stock returns during the financial crisis in the French market. We focus on the empirical disparities between the Capital Asset Pricing Model and the Fama-French three-factor model for individual stocks firms. We show that market premium, size and value factors provide a better description of single stock returns in a specific period of high uncertainty. This new finding underlines the usefulness of ad hoc models for asset managers.

Furthermore, small stocks underperform the market and, surprisingly, are less volatile than large capitalizations.

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  6. Conversely, stocks with high book-to-market ratios outperform the market, making the existence of additional risk factors consistent. Nevertheless, both models have difficulty explaining the returns on small stocks. Finally, in line with Roll , the choice of market proxy is essential. In this chapter, we review the literature about the use of third- and fourth-order moments in finance, the main papers on asset pricing theory with higher-order moments, and the definitions of skewness and kurtosis in the statistical literature.

    Contagion, skewness and kurtosis investor preferences, and tail regimes are some of the topics discussed in this chapter. We derive theoretical results about the higher-order moments of the bivariate truncated normal distribution, and analyze the implications of the results for previous empirical tests.