Angelo Ranaldo, Francis Breedon, Intraday Pattern in FX Returns and Order Flow, In: Swiss National Bank, No. 4, 2011. (Working Paper)
Using 10 years of high?frequency foreign exchange data, we present evidence of time?of?day effects in
foreign exchange returns through a significant tendency for currencies to depreciate during local trading
hours. We confirm this pattern across a range of currencies and find that, in the case of EUR/USD, it can
form a simple, profitable trading strategy. We also find that this pattern is present in order flow and
suggest that both patterns relate to the tendency of market participants to be net purchasers of foreign
exchange in their own trading hours. Data from alternative sources appear to corroborate that
interpretation. |
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Matteo Bonato, Massimiliano Caporin, Angelo Ranaldo, Forecasting realized (co)variances with a block structure Wishart autoregressive model, In: Swiss National Bank, No. 13, 2009. (Working Paper)
In modelling and forecasting volatility, two main trade-offs emerge: mathematical tractability versus economic interpretation and accuracy versus speed. The authors attempt to reconcile, at least partially, both trade-offs. The former trade-off is crucial for many financial applications, including portfolio and risk management. The speed/accuracy trade-off is becoming more and more relevant in an environment of large portfolios, prolonged periods of high volatility (as in the current financial crisis), and the burgeoning phenomenon of algorithmic trading in which computer-based trading rules are automatically implemented. The increased availability of high-frequency data provides new tools for forecasting variances and covariances between assets. However, there is scant literature on forecasting more than one realised volatility. Following Gourieroux, Jasiak and Sufana (Journal of Econometrics, forthcoming), the authors propose a methodology to model and forecast realised covariances without any restriction on the parameters while maintaining economic interpretability. An empirical application based on variance forecasting and risk evaluation of a portfolio of two US treasury bills and two exchange rates is presented. The authors compare their model with several alternative specifications proposed in the literature. Empirical findings suggest that the model can be efficiently used in large portfolios. |
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Angelo Ranaldo, L Mancini, Jan Wrampelmeyer, Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums, In: Swiss National Bank, No. 3, 2010. (Working Paper)
We use intraday trading and order data to measure liquidity in the foreign exchange (FX) market. FX liquidity exhibits significant cross-sectional and temporal variation during our sample period January 2007--December 2009. We decompose liquidity into an idiosyncratic and a common component. Empirical results show that liquidity comoves strongly across currencies and that systematic FX liquidity decreases dramatically during the financial crisis. Consistent with a theory of liquidity spirals, we document that FX market liquidity is related to funding liquidity and liquidity of equity markets. Finally, we introduce a tradable FX liquidity risk factor, which is shown to account for most of the variation in daily carry trade returns. |
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Angelo Ranaldo, Tommaso Mancini Griffoli, Limits to arbitrage during the crisis: funding liquidity constraints and covered interest parity, In: Swiss National Bank, No. 14, 2010. (Working Paper)
Arbitrage normally ensures that covered interest parity (CIP) holds. Until recently, excess profits, if any, were documented to last merely seconds and reach a few pips. Instead, this paper finds that following the Lehman bankruptcy, these were large, persisted for months and involved strategies short in dollars. Profits are estimated by specifying the arbitrage strategy as a speculator would actually implement it, considering both unsecured and secured funding. Either way, it seems that dollar funding constraints kept traders from arbitraging away excess profits. The claim finds support in an empirical analysis drawing on several novel high frequency datasets of synchronous quotes across securities, including transaction costs. |
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Angelo Ranaldo, Matteo Bonato, Massimiliano Caporin, A Forecast Based Comparison of Restricted Realized Covariance Models, In: SSRN, No. 1557343, 2010. (Working Paper)
Models for realized covariance matrices may suffer for the curse of dimensionality as more traditional multivariate volatility models(such as GARCH and stochastic volatility). Within the class of realized covariance models we focus on the Wishart specification introduced by Gourieroux et al. (2009) and analyze here the forecasting performances of the parametric restrictions discussed in Bonato et al. (2009) which are motivated by asset features such as their economic sector, book-to-market or price-earnings ratios, among others. Our purpose is to verify if restricted model forecasts are statistically equivalent to full model specification, a result that would support the use of restrictions when the problem cross sectional dimension is large. |
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Jürg Syz, Bernard Dumas, Safeguarding Pensions, In: Worldwide Mastering Series, Financial Times, No. 6, 2006. (Working Paper)
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Maria Olivares, Heike Wetzel, Competing in the Higher Education Market: Empirical Evidence for Economies of Scale and Scope in German Higher Education Institutions, In: Leading House Working Paper, No. 70, 2011. (Working Paper)
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Kremena Bachmann, Thorsten Hens, Risikowahrnehmung bei finanziellen Entscheidungen in der Schweiz, In: Department of Banking and Finance, No. 3489, 2011. (Working Paper)
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Gabriel Neukomm, Structured finance, acquisitions and debt agency, In: Swiss Finance Institute Research Paper Series, No. 11-55, 2011. (Working Paper)
Modern corporations use complex debt instruments and pursue acquisitions. In orderto analyze the properties of some of these contracts in the event of an acquisition, thispaper considers a company that has an incumbent capital structure, comprising one of five practically important structured debt contracts. An opportunity for an acquisition comes along that was not ex-ante contractible. The equityholder decides on the financing of this expansion by trading off tax advantages of debt against costs of bankruptcy. The modelyields a number of insights for structured debt and acquisitions, four of which are as follows: First, a seniority clause offers the bondholder protection from agency, but it also decreases the equityholder’s incentives to finance the acquisition. Second, embedded call options are valuable even if interest rates are constant, because they allow the equityholder to issue a new bond at fair value. Third, bankruptcy remoteness is valuable, if assets are very risky. Fourth, convertible bonds are vulnerable to agency and the conversion option bears the same incentive problem as a seniority clause. These properties explains, for example, the otherwise puzzling practice of companies buying out convertible bond holders prior to anacquisition. |
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Hans-Jürg Büttler, Classifying Corporate Bonds: A Simple Approach, In: Economic and Financial Computing, No. 17 (2), 2007. (Working Paper)
This paper introduces a simple approach to classify corporate bonds. It relies entirely on
the quoted price as well as on the quoted bid and ask price of corporate bonds. If current bond prices reflect all the relevant corporate information, then this approach is sufficient for a credit rating which is also up-to-date. We apply the approach outlined in the paper to the group of coupon-bearing bonds issued by banks as well as to other groups of corporate bonds including industrial companies and federal states. Our five-year experience shows that our algorithm works well, even for illiquid markets. |
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Hans-Jürg Büttler, An Orthogonal Polynomial Approach to Estimate the Term Structure of Interest Rates, In: Schweizerische Nationalbank (SNB), No. 14 (2), 2007. (Working Paper)
In this paper, we introduce a new algorithm to estimate the term structure of interest
rates. It is obtained from a constrained optimization, where the objective is to minimize the
integral of squared first derivatives of the instantaneous forward interest rate subject to the
condition that the estimated bond prices lie within the range of observed bid and ask prices.
We use a finite series of ordinary Laguerre polynomials to approximate the unknown function
of the instantaneous forward interest rate. The objective function can be written explicitly as a
quadratic form of the Laguerre constants and the nonlinear constraints can be obtained from a
recurrence relationship. The estimation error is less than one basis point, given a sufficient
number of bonds. |
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Michel Habib, Ulrich Hege, Pierre Mella-Barral, Entrepreneurial Spawning and Firm Characteristics, In: Working Paper ISB, No. 000, 2011. (Working Paper)
We analyze the implications of entrepreneurial spawning for a variety of firm characteristics such as size, focus, profitability, and innovativeness. We examine the dynamics of spawning over time. Our model accounts for much of the empirical evidence relating to the relation between spawning and firm characteristics. Firms that have higher patent quality spawn more, as do firms that have higher knowhow. Older firms spawn less, they are more diversified and less profitable. Spawning frequency, focus, and profitability are positively related where spawning is driven by the value of organizational fit; they are negatively related with firm size. |
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Maria Olivares, Heike Wetzel, How to compete in the higher education market? - Empirical evidence for economies of scale and scope of German higher education institutions, In: Swiss Leading House "Economics of Education" Working Paper, No. 70, 2011. (Working Paper)
Since the late 1990s, the European higher education system has had to face deep structural changes. With the public authorities seeking to create an environment of quasi-markets in the higher education sector, the increased competition induced by recent reforms has pushed all publicly financed higher education institutions to use their resources more efficiently. Higher education institutions increasingly now aim at differentiating themselves from their competitors in terms of the range of outputs they produce. Assuming that different market positioning strategies will have different effects on the performance of higher education institutions, this paper explores the existence of economies of scale and scope in the German higher education sector. Using an input-oriented distance function approach, we estimate the economies of scale and scope and the technical efficiency for 154 German higher education institutions from 2001 through 2007. Our results suggest that comprehensive universities should indeed orientate their activities to the concept of a full-university that combines teaching and research activities across a broad range of subjects. In contrast, praxis-oriented small and medium-sized universities of applied sciences should specialise in the teaching and research activities they conduct. |
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Urs Schweri, Is the pricing kernel u-shaped?, In: NCCR Finrisk Working Paper, No. 732, 2011. (Working Paper)
There is strong empirical evidence that the pricing kernel is U-shaped, which provides a way to explain the substantial coskewness premium. Existing studies typically use a polynomial approximation of the pricing kernel. Problematically, these polynomials have, in most cases, increasing parts by construction. Therefore, it is not clear whether the increasing parts are an artifact of the chosen functional form. Taking this concept into consideration, this paper shows that pricing kernels, as estimated by the generalized method of moments on equity data, are still U-shaped and that the increasing part is not a statistical artifact. This conclusion derives from the fact that the functional form of kernels, which allows for strictly decreasing kernels as well as for kernels with increasing parts, is still U-shaped. These results arise from checking for higher order polynomials, various time horizons, and different functional forms of the kernel. |
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Rina Rosenblatt-Wisch, Klaus Reiner Schenk-Hoppé, Reto Foellmi, Consumption Paths under Prospect Utility in an Optimal Growth Model , In: Swiss Finance Institute Research Paper, No. 10-38, 2010. (Working Paper)
This paper studies the Cass-Koopmans-Ramsey model of optimal economic growth in the presence of loss aversion and habit formation. The representative agent's preferences for consumption can be gradually varied between the standard constant intertemporal elasticity of substitution (CIES) case and Kahneman and Tversky's prospect utility. We nd that the transitional dynamics of optimal consumption paths differ distinctly from the standard model, in particular consumption smoothing is more pronounced. We also show that prospect utility can cause the economy to remain in a steady state with low consumption and low capital.
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Bruno Biais, Jean-Charles Rochet, Paul Woolley, Innovations, rents and risk, In: The Paul Woolley Centre Working Paper Series 13, No. 659, 2010. (Working Paper)
We offer a rational expectations model of the dynamics of innovative industries. The fundamentalvalue of innovations is uncertain and one must learn whether they are solid or fragile. Also, when theindustry is new, it is difficult to monitor managers and make sure they exert the effort necessary toreduce default risk. This gives rise to moral hazard. In this context, initial successes spur optimismand growth. But increasingly confident managers end up requesting large rents. If these becometoo high, investors give up on incentives, and default risk rises. Thus, moral hazard gives rise toendogenous crises and fat tails in the distribution of aggregate default risk. We calibrate our modelto fit the stylized facts of the MBS industry’s boom and bust cycle.2 |
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Johannes Brumm, Collateral constraints, idiosyncratic risk, and aggregate fluctuations, In: CDSE Discussion Paper , No. 109, 2011. (Working Paper)
Theoretically, collateral constraints have the potential to strongly amplify and propagate aggregate shocks. However, the quantitative literature tends to find rather weak and non-robust effects. This paper tries to improve on this by modeling the interaction between idiosyncratic risk and collateral constraints. To this aim, agents' productivities as workers and entrepreneurs are assumed to evolve stochastically. This leads to a perpetual mismatch between wealth and skills, which is the reason for collateralized borrowing. The advantage of this modeling strategy is threefold: First, the evolution of skills can be measured empirically. In contrast, the heterogeneity in patience that the previous literature assumes to excite collateralized borrowing is not even intended as a serious micro-foundation. Second, idiosyncratic risk creates a non-degenerate distribution of wealth. As a consequence, the percentage of constrained agents changes as shocks hit the economy. Among other things, this generates recessions that are much sharper than booms. Last but not least, the impact of collateral constraints turns out to be larger and more robust in the setup with idiosyncratic risk compared to models with heterogeneity in patience. |
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Christian Reichlin, Utility Maximization with a Given Pricing Measure When the Utility Is Not Necessarily Concave, In: NCCR FINRISK Working Paper, No. 517, 2011. (Working Paper)
We study the problem of maximizing expected utility from terminal wealth for a non-concave utility function and for a budget set given by one fixed pricing measure. We prove the existence of a maximizer and show that the concave envelope of the (non-concave) value function (indirect utility) is the value function of the utility maximization problem for the concave envelope of the original utility function. The value functions are shown to coincide if the underlying probability space is atomless. For a converging sequence of models, we prove that the sequence of value functions and a subsequence of optimal allocations converge to the corresponding quantities in the limit model. We illustrate our results by concrete numerical examples. |
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Thorsten Hens, Christian Reichlin, Three Solutions to the Pricing Kernel Puzzle, In: FINRISK Working Paper Series, No. 604, 2010. (Working Paper)
The pricing kernel puzzle is the observation that the pricing kernel might be increasing in some range of the market returns. This paper analyzes the pricing kernel in a financial market equilibrium. If markets are complete and investors are risk-averse and have common and true beliefs, the pricing kernel is a decreasing function of aggregate resources. If at least one of these assumptions is violated, the pricing kernel is not necessarily decreasing. Thus, incomplete markets, risk-seeking behaviour and incorrect beliefs can induce increasing parts in the pricing kernel and can be seen as potential solutions for the pricing kernel puzzle. We construct examples to illustrate the three explanations. We verify the robustness of the explanations under aggregation and compare the phenomena with the findings in the empirical literature. The results are used to reveal strengths and weaknesses of the three solutions. Risk-seeking behaviour is a fragile explanation that can only work in a model with atomic state space. Biased beliefs are robust under aggregation and consistent with the empirical findings. In incomplete markets, it is easy to find a pricing kernel with increasing parts. In order to get situations where all pricing kernels have increasing parts, we need extreme assumptions on the wealth distribution. |
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Rafael Lalive d'Epinay, Analia Schlosser, Josef Zweimüller, Parental leave and mothers’ careers: The relative importance of job protection and cash benefits, In: IZA Discussion Paper, No. 5792, 2011. (Working Paper)
Parental leave regulations in most OECD countries have two key policy instruments: jobprotection and cash benefits. This paper studies how mothers’ return to work behavior andlabor market outcomes are affected by alternative mixes of these key policy parameters.Exploiting a series of major parental leave policy changes in Austria, we find that longer cashbenefits lead to a significant delay in return to work and that the magnitude of this effectdepends on the relative length of job protection and cash benefits. However, despite theirimpact on time on leave, we do not find a significant effect on mothers’ labor marketoutcomes in the medium run, neither of benefit duration nor of job-protection duration. Tounderstand the relative importance (and interaction) of the two policy instruments in shapingmothers’ return to work behavior, we set up a non-stationary job search model in which cashbenefits and job protection determine decisions of when to return to work and whether or notto return to the pre-birth employer. Despite its lean structure, the model does surprisingly wellin matching empirically observed return to work profiles. The simulation of alternativecounterfactual regimes shows that a policy that combines both job protection and benefitspayments succeeds to induce mothers to spend some time with the child after birth withoutjeopardizing their medium run labor market attachment. |
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