http://hdl.handle.net/10197/1119 Tue, 21 May 2013 23:44:07 GMT 2013-05-21T23:44:07Z http://hdl.handle.net/10197/2599 Time varying risk aversion : an application to energy hedging Cotter, John; Hanly, Jim Risk aversion is a key element of utility maximizing hedge strategies; however, it has typically been assigned an arbitrary value in the literature. This paper instead applies a GARCH-in-Mean (GARCH-M) model to estimate a time-varying measure of risk aversion that is based on the observed risk preferences of energy hedging market participants. The resulting estimates are applied to derive explicit risk aversion based optimal hedge strategies for both short and long hedgers. Out-of-sample results are also presented based on a unique approach that allows us to forecast risk aversion, thereby estimating hedge strategies that address the potential future needs of energy hedgers. We find that the risk aversion based hedges differ significantly from simpler OLS hedges. When implemented in-sample, risk aversion hedges for short hedgers outperform the OLS hedge ratio in a utility based comparison. Sat, 01 Aug 2009 00:00:00 GMT http://hdl.handle.net/10197/2599 2009-08-01T00:00:00Z http://hdl.handle.net/10197/2598 Oil volatility and the option value of waiting : an analysis of the G-7 Bredin, Donal; Elder, John; Fountas, Stilianos There has recently been considerable interest in the potential adverse effects associated with excessive uncertainty in energy futures markets. Theoretical models of investment under uncertainty predict that increased uncertainty will tend to induce firms to delay investment. These models are widely utilized in capital budgeting decisions, particularly in the energy sector. There is relatively little empirical evidence, however, on whether such channels have industry-wide effects. Using a sample of G7 countries we examine whether uncertainty about a prominent commodity – oil – affects the time series variation in manufacturing activity. Our primary result is consistent with the predictions of real options theory – uncertainty about oil prices has had a negative and significant effect on manufacturing activity in Canada, France, UK and US. Sat, 01 Aug 2009 00:00:00 GMT http://hdl.handle.net/10197/2598 2009-08-01T00:00:00Z http://hdl.handle.net/10197/2597 Hedging : scaling and the investor horizon Cotter, John; Hanly, Jim This paper examines the volatility and covariance dynamics of cash and futures contracts that underlie the Optimal Hedge Ratio (OHR) across different hedging time horizons. We examine whether hedge ratios calculated over a short term hedging horizon can be scaled and successfully applied to longer term horizons. We also test the equivalence of scaled hedge ratios with those calculated directly from lower frequency data and compare them in terms of hedging effectiveness. Our findings show that the volatility and covariance dynamics may differ considerably depending on the hedging horizon and this gives rise to significant differences between short term and longer term hedges. Despite this, scaling provides good hedging outcomes in terms of risk reduction which are comparable to those based on direct estimation. Sat, 01 Aug 2009 00:00:00 GMT http://hdl.handle.net/10197/2597 2009-08-01T00:00:00Z http://hdl.handle.net/10197/2596 Investigating sources of unanticipated exposure in industry stock returns Bredin, Donal; Hyde, Stuart This paper investigates the degree of both foreign exchange rate and interest rate exposure of industry level portfolios in the G7. Our paper draws on the efficient market hypothesis and examines the extent of unexpected foreign exchange (and interest rate) exposure rather than the standard approach of focusing purely on the change in foreign exchange (and interest rate) exposure. The results from our baseline regressions are consistent with those previously found in the literature that there is little evidence of exchange rate exposure in most markets - this is the exchange rate exposure puzzle. The second critical element of our analysis is that we investigate the sources of the exposure and examine the existence of indirect levels of both foreign exchange and interest rate exposure. The findings of exposure to foreign exchange rates and interest rates are extensive for industry sectors in the G7 economies when we take account of the possible channels of influence. Results indicate key differences between countries in terms of the relative importance of these cash flow and discount rate channels. Thu, 01 Jan 2009 00:00:00 GMT http://hdl.handle.net/10197/2596 2009-01-01T00:00:00Z http://hdl.handle.net/10197/2595 Scaling conditional tail probability and quantile estimators Cotter, John Sun, 01 Mar 2009 00:00:00 GMT http://hdl.handle.net/10197/2595 2009-03-01T00:00:00Z http://hdl.handle.net/10197/2568 An analysis of the EU Emission Trading Scheme Bredin, Donal; Muckley, Cal The European Union's Emissions Trading Scheme (ETS) is the key policy instrument of the European Commission's Climate Change Program aimed at reducing greenhouse gas emissions to eight percent below 1990 levels by 2012. A critically important element of the EU ETS is the establishment of a market determined price for EU allowances. This article examines the extent to which several theoretically founded factors including, economic growth, energy prices and weather conditions determine the expected prices of the European Union CO2 allowances during the 2005 through to the 2009 period. The novel aspect of our study is that we examine the heavily traded futures instruments that have an expiry date in Phase 2 of the EU ETS. Our study adopts both static and recursive versions of the Johansen multivariate cointegration likelihood ratio test as well as a variation on this test with a view to controlling for time varying volatility effects. Our results are indicative of a new pricing regime emerging in Phase 2 of the market and point to a maturing market driven by the fundamentals. These results are valuable both for traders of EU allowances and for those policy makers seeking to improve the design of the European Union ETS. Thu, 01 Jan 2009 00:00:00 GMT http://hdl.handle.net/10197/2568 2009-01-01T00:00:00Z http://hdl.handle.net/10197/2567 Assessing co-ordinated Asian exchange rate regimes Aggarwal, Raj; Muckley, Cal This study assesses prospective Asian exchange rate regimes and finds short- and longrun currency dynamics more conducive to the introduction of a common peg based on a basket of the European euro, the United States dollar and the Japanese yen than the alternative of a United States dollar peg exchange rate regime. Exchange rate systems of 3- 4- and 5- Asian currencies are considered and the dynamics in a set of four European currencies prior to the introduction of the Euro provides benchmark evidence. The evidence for an Asian basket peg exchange rate regime is strengthened when, unlike prior studies, estimates of the long-run parameters account for time-varying volatility effects. Fri, 01 Jan 2010 00:00:00 GMT http://hdl.handle.net/10197/2567 2010-01-01T00:00:00Z http://hdl.handle.net/10197/2565 The Variance Gamma Self-Decomposable Process in Actuarial Modelling O'Sullivan, Conall; Moloney, Michael A scaled self-decomposable stochastic process put forward by Carr, Geman, Madan and Yor (2007) is used to model long term equity returns and options prices. This parsimonious model is compared to a number of other one-dimensional continuous time stochastic processes (models) that are commonly used in finance and the actuarial sciences. The comparisons are conducted along three dimensions: the models ability to fit monthly time series data on a number of different equity indices; the models ability to fit the tails of the times series and the models ability to calibrate to index option prices across strike price and maturities. The last criteria is becoming increasingly important given the popularity of capital gauranteed products that contain long term imbedded options that can be (at least partially) hedged by purchasing short term index options and rolling them over or purchasing longer term index options. Thus we test if the models can reproduce a typical implied volatility surface seen in the market. Thu, 10 Jun 2010 00:00:00 GMT http://hdl.handle.net/10197/2565 2010-06-10T00:00:00Z http://hdl.handle.net/10197/2564 Pricing European and American options under Heston's stochastic volatility model with accelerated explicit finite differencing methods O'Sullivan, Conall; O'Sullivan, Stephen We present an acceleration technique, effective for explicit finite difference schemes describing diffusive processes with nearly symmetric operators, called Super-Time- Stepping (STS). The technique is applied to the two-factor problem of option pricing under stochastic volatility. It is shown to significantly reduce the severity of the stability constraint known as the Courant-Friedrichs-Lewy condition whilst retaining the simplicity of the chosen underlying explicit method. For European and American put options under Heston’s stochastic volatility model we demonstrate degrees of acceleration over standard explicit methods sufficient to achieve comparable, or superior, efficiencies to a benchmark implicit scheme. We conclude that STS is a powerful tool for the numerical pricing of options and propose them as the method-of-choice for exotic financial instruments in two and multi-factor models. Tue, 01 Jun 2010 00:00:00 GMT http://hdl.handle.net/10197/2564 2010-06-01T00:00:00Z http://hdl.handle.net/10197/2563 A Comparative Anatomy of REITs and Residential Real Estate Indexes: Returns, Risks and Distributional Characteristics Cotter, John; Roll, Richard Real Estate Investment Trusts (REITs) are the only truly liquid assets related to real estate investments. We study the behavior of U.S. REITs over the past three decades and document their return characteristics. REITs have somewhat less market risk than equity; their betas against a broad market index average about .65. Decomposing their covariances into principal components reveals several strong factors. REIT characteristics differ to some extent from those of the S&P/Case-Shiller (SCS) residential real estate indexes. This is partly attributable to methods of index construction. Our examination of REITs suggests that investment in real estate is far more risky than what might be inferred from the widely-followed SCS series. Wed, 28 Oct 2009 00:00:00 GMT http://hdl.handle.net/10197/2563 2009-10-28T00:00:00Z http://hdl.handle.net/10197/2562 Housing risk and return : evidence from a housing asset-pricing model Case, Karl E.; Cotter, John; Gabriel, Stuart A. This paper investigates the risk-return relationship in determination of housing asset pricing. In so doing, the paper evaluates behavioral hypotheses advanced by Case and Shiller (1988, 2002, 2009) in studies of boom and post-boom housing markets. Assuming investment is restricted to housing, the paper specifies and tests a housing asset pricing model, whereby expected returns of metropolitan-specific housing markets are equated to the market return, as represented by aggregate US house price time-series. We augment the model by examining the impact of additional risk factors including aggregate stock market returns, idiosyncratic risk, momentum, and Metropolitan Statistical Area (MSA) size effects. Further, we test the robustness of the asset pricing results to inclusion of controls for socioeconomic variables commonly represented in the house price literature, including changes in employment, affordability, and foreclosure incidence. We find a sizable and statistically significant influence of the market factor on MSA house price returns. Moreover we show that market betas have varied substantially over time. Also, we find the basic housing model results are robust to the inclusion of other explanatory variables, including standard measures of risk and other housing market fundamentals. Additional tests on the validity of the model using the Fama-MacBeth framework offer further strong support of a positive risk and return relationship in housing. Our findings are supportive of the application of a housing investment risk-return framework in explanation of variation in metro-area cross-section and time-series US house price returns. Further, results strongly corroborate Case-Shiller behavioral research indicating the importance of speculative forces in the determination of U.S. housing returns. Mon, 24 May 2010 00:00:00 GMT http://hdl.handle.net/10197/2562 2010-05-24T00:00:00Z http://hdl.handle.net/10197/1932 European monetary policy surprises : the aggregate and sectoral stock market response Bredin, Donal; Hyde, Stuart; O'Reilly, Gerard In this paper we investigate the stock market response to international monetary policy changes in the UK and Germany. Specifically, we analyse the impact of (un)expected changes in UK and German/euro area policy rates on UK and German aggregate and sectoral stock returns in an event study. The decomposition of the (un)expected changes in policy rates are based on futures markets. Overall, our results suggest that, UK monetary policy surprises have a significant negative influence on both aggregate and industry level stock returns in both the UK and Germany. The in uence of German/Euro area monetary policy shocks appears insignificant for both countries. Thu, 01 Dec 2005 00:00:00 GMT http://hdl.handle.net/10197/1932 2005-12-01T00:00:00Z http://hdl.handle.net/10197/1690 Extreme measures of agricultural financial risk Cotter, John; Dowd, Kevin; Morgan, Wyn Risk is an inherent feature of agricultural production and marketing and accurate measurement of it helps inform more efficient use of resources. This paper examines three tail quantile-based risk measures applied to the estimation of extreme agricultural financial risk for corn and soybean production in the US: Value at Risk (VaR), Expected Shortfall (ES) and Spectral Risk Measures (SRMs). We use Extreme Value Theory (EVT) to model the tail returns and present results for these three different risk measures using agricultural futures market data. We compare the estimated risk measures in terms of their size and precision, and find that they are all considerably higher than normal estimates; they are also quite uncertain, and become more uncertain as the risks involved become more extreme. Mon, 06 Oct 2008 00:00:00 GMT http://hdl.handle.net/10197/1690 2008-10-06T00:00:00Z http://hdl.handle.net/10197/1239 Uncovering volatility dynamics in daily REIT returns Cotter, John; Stevenson, Simon Using a time-varying approach, this paper examines the dynamics of volatility in the REIT sector. The results highlight the attractiveness and suitability of using GARCH based approaches in the modeling of daily REIT volatility. The paper examines the influencing factors on REIT volatility, documenting the return and volatility linkages between REIT sub-sectors and also examines the influence of other US equity series. The results contrast with previous studies of monthly REIT volatility. Linkages within the REIT sector and with related sectors such as value stocks are diminished, while the general influence of market sentiment, coming through the large cap indices is enhanced. This would indicate that on a daily basis general market sentiment plays a more fundamental role than more intuitive relationships within the capital markets. Thu, 01 Jan 2004 00:00:00 GMT http://hdl.handle.net/10197/1239 2004-01-01T00:00:00Z http://hdl.handle.net/10197/1197 Multivariate modeling of daily REIT volatility Cotter, John; Stevenson, Simon This paper examines volatility in REITs using a multivariate GARCH based model. The Multivariate VAR-GARCH technique documents the return and volatility linkages between REIT sub-sectors and also examines the influence of other US equity series. The motivation is for investors to incorporate time-varyng volatility and correlations in their portfolio selection. The results illustrate the differences in results when higher frequency daily data is tested in comparison to the monthly data that has been commonly used in the existing literature. The linkages both within the REIT sector and between REITs and related sectors such as value stocks are weaker than commonly found in monthly studies. The broad market would appear to be more influential in the daily case. Mon, 25 Apr 2005 00:00:00 GMT http://hdl.handle.net/10197/1197 2005-04-25T00:00:00Z http://hdl.handle.net/10197/1196 Modelling catastrophic risk in international equity markets : an extreme value approach Cotter, John This letter uses the Block Maxima Extreme Value approach to quantify catastrophic risk in international equity markets. Risk measures are generated from a set threshold of the distribution of returns that avoids the pitfall of using absolute returns for markets exhibiting diverging levels of risk. From an application to leading markets, the letter finds that the Nikkei is more prone to catastrophic risk than the FTSE and Dow Jones Indexes. Wed, 06 Apr 2005 00:00:00 GMT http://hdl.handle.net/10197/1196 2005-04-06T00:00:00Z http://hdl.handle.net/10197/1195 Exponential spectral risk measures Dowd, Kevin; Cotter, John Spectral risk measures are attractive risk measures as they allow the user to obtain risk measures that reflect their subjective risk-aversion. This paper examines spectral risk measures based on an exponential utility function, and finds that these risk measures have nice intuitive properties. It also discusses how they can be estimated using numerical quadrature methods, and how confidence intervals for them can be estimated using a parametric bootstrap. Illustrative results suggest that estimated exponential spectral risk measures obtained using such methods are quite precise in the presence of normally distributed losses. Tue, 20 Mar 2007 00:00:00 GMT http://hdl.handle.net/10197/1195 2007-03-20T00:00:00Z http://hdl.handle.net/10197/1194 Monetary policy & real estate investment trusts Bredin, Donal; O'Reilly, Gerard; Stevenson, Simon This paper assesses the response of Real Estate Investment Trusts (REIT's) to unexpected changes in US monetary policy. A critical element in this study is the use of futures markets to isolate unexpected changes in the policy rate. We find a significant negative response of REIT returns to a surprise change in the policy rate. The paper then examines the potential sources behind such an observed response. We find important differences between the REIT market and the broader equity market. Intuitively the impact of monetary policy on dividend news appears to be more pronounced in the REIT case. However, the decomposition of the response to monetary shocks is largely driven by revision in expectations regarding future excess returns and these results are largely consistent with the findings for the overall stock market as reported in Bernanke & Kuttner (2005). Mon, 01 Jan 2007 00:00:00 GMT http://hdl.handle.net/10197/1194 2007-01-01T00:00:00Z http://hdl.handle.net/10197/1193 Parameter uncertainty in Kalman filter estimation of the CIR term structure model O'Sullivan, Conall The Cox, Ingersoll and Ross (1985) term structure model describes the stochastic evolution of government bond yield curves over time using a square root Orstein-Uhlenbeck diffusion process, whilst imposing cross-sectional no-arbitrage restrictions between yields of different maturities. A Kalman filter approach can be used to estimate the parameters of the CIR model from panel data consisting of a time series of bonds of different maturities. The parameters are estimated by optimising a quasi log-likelihood function that results from the prediction error decomposition of the Kalman filter. The quasi log-likelihood function is usually optimised with a deterministic gradient based optimisation technique such as a quadratic hill climbing optimiser. This paper uses an evolutionary optimiser known as differential evolution (DE) to optimise over the parameter space. The DE optimiser is more likely to find the global maximum than a deterministic optimiser in the presence of a non-convex objective function which may be the case in multifactor term structure models with non-negativity constraints and parameter constraints. The method is applied to estimate parameters from a one and two-factor Cox, Ingersoll and Ross (1985) model. It is shown that in the two factor model the problem of local maxima arises whereby a number of different parameter vectors perform equally well in the estimation procedure. Fixed income derivative prices are particular sensitive to term structure parameters such as the volatility, the rate of mean reversion, and the market price of risk of each factor. The effect of different optimal parameter vectors on fixed income derivatives is examined and is found to be significant. Mon, 01 Jan 2007 00:00:00 GMT http://hdl.handle.net/10197/1193 2007-01-01T00:00:00Z http://hdl.handle.net/10197/1192 Path dependent option pricing under Lévy processes applied to Bermudan options O'Sullivan, Conall A model is developed that can price path dependent options when the underlying process is an exponential Lévy process with closed form conditional characteristic function. The model is an extension of a recent quadrature option pricing model so that it can be applied with the use of Fourier and Fast Fourier transforms. Thus the model possesses nice features of both Fourier and quadrature option pricing techniques since it can be applied for a very general set of underlying Lévy processes and can handle exotic path dependent features. The model is applied to European and Bermudan options for geometric Brownian motion, a jump-diffusion process, a variance gamma process and a normal inverse Gaussian process. However it must be noted that the model can also price other path dependent exotic options such as lookback and Asian options. Wed, 01 Dec 2004 00:00:00 GMT http://hdl.handle.net/10197/1192 2004-12-01T00:00:00Z http://hdl.handle.net/10197/1191 Evaluating the precision of estimators of quantile-based risk measures Dowd, Kevin; Cotter, John This paper examines the precision of estimators of Quantile-Based Risk Measures (Value at Risk, Expected Shortfall, Spectral Risk Measures). It first addresses the question of how to estimate the precision of these estimators, and proposes a Monte Carlo method that is free of some of the limitations of existing approaches. It then investigates the distribution of risk estimators, and presents simulation results suggesting that the common practice of relying on asymptotic normality results might be unreliable with the sample sizes commonly available to them. Finally, it investigates the relationship between the precision of different risk estimators and the distribution of underlying losses (or returns), and yields a number of useful conclusions. Tue, 01 May 2007 00:00:00 GMT http://hdl.handle.net/10197/1191 2007-05-01T00:00:00Z http://hdl.handle.net/10197/1190 Spectral risk measures : properties and limitations Dowd, Kevin; Cotter, John; Sorwar, Ghulam Spectral risk measures (SRMs) are risk measures that take account of user risk aversion, but to date there has been little guidance on the choice of utility function underlying them. This paper addresses this issue by examining alternative approaches based on exponential and power utility functions. A number of problems are identified with both types of spectral risk measure. The general lesson is that users of spectral risk measures must be careful to select utility functions that fit the features of the particular problems they are dealing with, and should be especially careful when using power SRMs. Fri, 18 Apr 2008 00:00:00 GMT http://hdl.handle.net/10197/1190 2008-04-18T00:00:00Z http://hdl.handle.net/10197/1189 Spectral risk measures with an application to futures clearinghouse variation margin requirements Cotter, John; Dowd, Kevin This paper applies an AR(1)-GARCH (1, 1) process to detail the conditional distributions of the return distributions for the S&P500, FT100, DAX, Hang Seng, and Nikkei225 futures contracts. It then uses the conditional distribution for these contracts to estimate spectral risk measures, which are coherent risk measures that reflect a user’s risk-aversion function. It compares these to more familiar VaR and Expected Shortfall (ES) measures of risk, and also compares the precision and discusses the relative usefulness of each of these risk measures in setting variation margins that incorporate time-varying market conditions. The goodness of fit of the model is confirmed by a variety of backtests. Tue, 31 Oct 2006 00:00:00 GMT http://hdl.handle.net/10197/1189 2006-10-31T00:00:00Z http://hdl.handle.net/10197/1188 Spectral risk measures and the choice of risk aversion functior Dowd, Kevin; Cotter, John Spectral risk measures are attractive risk measures as they allow the user to obtain risk measures that reflect their risk-aversion functions. To date there has been very little guidance on the choice of risk-aversion functions underlying spectral risk measures. This paper addresses this issue by examining two popular risk aversion functions, based on exponential and power utility functions respectively. We find that the former yields spectral risk measures with nice intuitiveproperties, but the latter yields spectral risk measures that can have perverse properties. More work therefore needs to be done before we can be sure that arbitrary but respectable utility functions will always yield ‘well-behaved’ spectral risk measures. Sun, 11 Mar 2007 00:00:00 GMT http://hdl.handle.net/10197/1188 2007-03-11T00:00:00Z http://hdl.handle.net/10197/1187 Monetary shocks and REIT returns Bredin, Donal; O'Reilly, Gerard; Stevenson, Simon We investigate the influence of unanticipated changes in US monetary policy on Equity Real Estate Investment Trusts (REIT’s). Although a number of studies have investigated the issue of interest rate changes, the effect of unanticipated changes has not previously been addressed in terms of possible effects on both REIT’s returns and volatility. The results show a strong response in both the first and second moments of REIT returns to unexpected policy rate changes. The results for the impact of the shock on both mean and volatility of returns is consistent with results from studies addressing broader equity markets. However, we find evidence both against behavioral changes in volatility coincident to US monetary policy decisions and asymmetric responses to the monetary policy shock. Mon, 01 Jan 2007 00:00:00 GMT http://hdl.handle.net/10197/1187 2007-01-01T00:00:00Z http://hdl.handle.net/10197/1186 Hedging effectiveness under conditions of asymmetry Cotter, John; Hanly, Jim We examine whether hedging effectiveness is affected by asymmetry in the return distribution by applying tail specific metrics to compare the hedging effectiveness of short and long hedgers using crude oil futures contracts. The metrics used include Lower Partial Moments (LPM), Value at Risk (VaR) and Conditional Value at Risk (CVAR). Comparisons are applied to a number of hedging strategies including OLS and both Symmetric and Asymmetric GARCH models. Our findings show that asymmetry reduces in-sample hedging performance and that there are significant differences in hedging performance between short and long hedgers. Thus, tail specific performance metrics should be applied in evaluating hedging effectiveness. We also find that the Ordinary Least Squares (OLS) model provides consistently good performance across different measures of hedging effectiveness and estimation methods irrespective of the characteristics of the underlying distribution. Mon, 01 Jan 2007 00:00:00 GMT http://hdl.handle.net/10197/1186 2007-01-01T00:00:00Z http://hdl.handle.net/10197/1185 Financial risks and the Pension Protection Fund : can it survive them? Blake, David; Cotter, John; Dowd, Kevin This paper discusses the financial risks faced by the UK Pension Protection Fund (PPF) and what, if anything, it can do about them. It draws lessons from the regulatory regimes under which other financial institutions, such as banks and insurance companies, operate and asks why pension funds are treated differently. It also reviews the experience with other government-sponsored insurance schemes, such as the US Pension Benefit Guaranty Corporation, upon which the PPF is modelled. We conclude that the PPF will live under the permanent risk of insolvency as a consequence of the moral hazard, adverse selection, and, especially, systemic risks that it faces. Wed, 01 Nov 2006 00:00:00 GMT http://hdl.handle.net/10197/1185 2006-11-01T00:00:00Z http://hdl.handle.net/10197/1184 Macroeconomic uncertainty and performance in the European Union and implications for the objectives of monetary policy Bredin, Donal; Fountas, Stilianos We use a very general bivariate GARCH-M model and EU monthly data covering the 1962-2003 period to test for the impact of real (output growth) and nominal (inflation) macroeconomic uncertainty on inflation and output growth. Our evidence supports a number of important conclusions. First, in the majority of countries uncertainty regarding the output growth rate is related to the average growth rate and the effect in most countries is negative. Second, contrary to expectations,inflation uncertainty in most cases improves the output growth performance of an economy. Third, inflation and output uncertainty have a mixed effect on inflation. These results imply that macroeconomic uncertainty may even improve macroeconomic performance. The first two results also imply that the ECB should focus its monetary policy strategy on stabilising output growth rather than inflation. Sat, 01 Jan 2005 00:00:00 GMT http://hdl.handle.net/10197/1184 2005-01-01T00:00:00Z http://hdl.handle.net/10197/1183 Risk aversion and the efficiency of the New York independent system operator’s market for transmission congestion contracts Siddiqui, Afzal S.; Bartholomew, Emily S.; Marnay, Chris; Oren, Shmuel S. The deregulation of electricity industries has generally separated the provision of generation from its subsequent transmission. However, the physical nature of electricity generation and delivery creates special problems for the design of efficient markets, notably the need to manage delivery in real time and the resulting volatile congestion costs. In theory, two broad approaches exist for implementing transmission congestion management: (i) a centralised point-to-point (PTP) structure, in which derivative transmission congestion contracts (TCCs) are traded, and (ii) a decentralised approach, in which trading rights exist only on the heavily congested links of the network. Since the latter mechanism focuses on the bottlenecks of the grid, which are fixed by the underlying network topology, it defines a small number of tradable rights, thereby enabling market participants to hedge transmission congestion risk more efficiently. By contrast, while the TCC-based approach, as implemented in New York, provides market participants with a potentially effective hedge against volatile congestion rents, it, nevertheless, results in prices paid for TCCs that are systematically divergent from the resulting congestion rents for distant locations and at high prices. Such inefficiency can be explained in part by the low liquidity of TCC markets and the deviation of TCC feasibility requirements from actual energy flows. It could also be the case that market participants over-pay in this environment out of risk aversion. Analysis of data from the New York TCC markets from 2000 to 2001 indicates that, on aggregate, market participants were only slightly risk averse (or even risk seeking, depending on the utility function employed). As a result, the very design of these markets, rather than the behaviour of market participants, leads to the observed discrepancy between forward and spot prices. Thu, 01 Jan 2004 00:00:00 GMT http://hdl.handle.net/10197/1183 2004-01-01T00:00:00Z http://hdl.handle.net/10197/1182 Foreign shocks and the volatility of the ISEQ Bredin, Donal; Gavin, Caroline; O'Reilly, Gerard We investigate the influence of foreign monetary policy decisions on the volatility of the Irish stock market. Specifically, we examine the influence of US monetary policy announcements on the ISEQ. We find evidence of the so called calm before the storm i.e. there appears to be a decline in volatility on the day prior to an FOMC meeting and a subsequent increase in volatility after the results of such meetings are made known. We also find evidence to suggest that ISEQ volatility is influenced by surprise changes in US monetary policy. Moreover, US monetary surprises appear to affect Irish stock return volatility asymmetrically. In particular, higher than expected US federal funds, tend to increase Irish stock return volatility. This paper represents an important step in addressing the issues of spillover identification between the US and the Irish stock market. Sun, 30 May 2004 00:00:00 GMT http://hdl.handle.net/10197/1182 2004-05-30T00:00:00Z http://hdl.handle.net/10197/1181 Modelling financial crises of global equity markets Cotter, John Extreme asset price movements have major consequences for an economy’s financial stability and monetary policies. The recent equity price movements associated with financial crises appear to be more pronounced and policy makers need to make accurate predictions of the frequency and severity of these events. This paper investigates the extreme behaviour of equity market returns and quantifies the possible losses associated with financial crises. Extreme value theory that models tail realisations only is applied to equity indices representing American, Asian and European markets. The paper finds that the tail realisations are adequately modelled with the fat-tailed Fréchet distribution. Furthermore tail realisations associated with the downside of a distribution are greater than the upside. Thu, 01 Jan 2004 00:00:00 GMT http://hdl.handle.net/10197/1181 2004-01-01T00:00:00Z http://hdl.handle.net/10197/1180 Assessing co-ordinated Asian exchange rate regimes Aggarwal, Raj; Muckley, Cal This study assesses alternative Asian exchange rate regimes and finds short- and long-run currency dynamics more conducive to the possibility of introducing a common peg based on a basket of the European euro, the United States dollar and the Japanese yen than the alternative of re-introducing a United States dollar peg exchange rate regime. Exchange rate systems of 3- 4- and 5- Asian currencies are examined and the dynamics in a set of 4 European currencies prior to the introduction of the Euro provides benchmark evidence. The evidence for an Asian basket peg regime is strengthened when, unlike in prior studies, the long-run parameters are estimated while accounting for generalised autoregressive conditional heteroscedasticity effects. Wed, 01 Aug 2007 00:00:00 GMT http://hdl.handle.net/10197/1180 2007-08-01T00:00:00Z http://hdl.handle.net/10197/1179 The performance and diversification benefits of funds of hedge funds Denvir, Emily; Hutson, Elaine We examine the performance and diversification potential of 332 funds of hedge funds (FOHFs) for the period from January 1990 to May 2003. Consistent with prior studies, we find that FOHFs appear to underperform the hedge fund index on a risk-adjusted basis. However, FOHFs have characteristics that offset their apparent underperformance. Their returns do not suffer from negative skewness that is a feature of many hedge fund strategies. In addition, we find that FOHFs have lower correlations (than the hedge fund index) with stock indices in both bull and bear markets, making them a better diversification tool in equity portfolios. For bond portfolios, however, FOHFs have no diversification advantage over hedge fund indexing. Thu, 01 Jan 2004 00:00:00 GMT http://hdl.handle.net/10197/1179 2004-01-01T00:00:00Z http://hdl.handle.net/10197/1178 Is macroeconomic uncertainty bad for macroeconomic performance? Evidence from five Asian countries Bredin, Donal; Fountas, Stilianos We use a very general bivariate GARCH-M model and quarterly data for five Asian countries to test for the impact of real and nominal macroeconomic uncertainty on inflation and output growth. Our evidence supports a number of important conclusions. First, in the majority of countries uncertainty regarding the output growth rate is related negatively to the average growth rate. Second, contrary to expectations, inflation uncertainty in most cases does not harm the output growth performance of an economy. Third, inflation and output uncertainty have a mixed effect on inflation. These results imply that macroeconomic uncertainty may even improve macroeconomic performance, i.e., raise output growth and reduce inflation. Thu, 01 Mar 2007 00:00:00 GMT http://hdl.handle.net/10197/1178 2007-03-01T00:00:00Z http://hdl.handle.net/10197/1177 Real & nominal foreign exchange volatility effects on exports – the importance of timing Bredin, Donal; Cotter, John This paper compares real and nominal foreign exchange volatility effects on exports. Using a flexible lag version of the Goldstein-Khan two-country imperfect substitutes model for bilateral trade, we identify the overall effect into both a timing as well as a size impact. We find that the size impact of forecasted foreign exchange volatility does not vary according to the measure used in terms of magnitude and direction. However, there are very different timing effects, when we compare real and nominal foreign exchange rate volatility. Sun, 01 Jan 2006 00:00:00 GMT http://hdl.handle.net/10197/1177 2006-01-01T00:00:00Z http://hdl.handle.net/10197/1176 Conundrum or complication : a study of yield curve dynamics under unusual economic conditions and monetary policies Cripwell, Peter; Edelman, David The definition of the decline of long term yields in the light of increasing short term yields as a conundrum by Chairman Greenspan in February 2005 has generated a significant amount of research. This paper presents a study of yield curve dynamics over this period using economic surprise data as the diagnostic tool. Results are presented for both US and Japanese data which indicate a non-linear response of the yield curve to economic data and monetary policy over the period in question. Further, a limited model is presented that is consistent with the observations. This can lead to an explanation of the conundrum in terms of a non-linear yield response to expected long term inflation and a variable expected long term real rate. Tue, 04 Mar 2008 00:00:00 GMT http://hdl.handle.net/10197/1176 2008-03-04T00:00:00Z http://hdl.handle.net/10197/1175 How unlucky is 25-Sigma? Dowd, Kevin; Cotter, John; Humphrey, Christopher; Woods, Margaret Mon, 24 Mar 2008 00:00:00 GMT http://hdl.handle.net/10197/1175 2008-03-24T00:00:00Z http://hdl.handle.net/10197/1174 A simple recursive numerical method for Bermudan option pricing under Lévy processes O'Sullivan, Conall A numerical method is developed that can price options, including exotic options that can be priced recursively such as Bermudan options, when the underlying process is an exponential Lévy process with closed form conditional characteristic function. The numerical method is an extension of a recent quadrature option pricing method so that it can be applied with the use of fast Fourier transforms. Thus the method possesses desirable features of both transform and quadrature option pricing techniques since it can be applied for a very general set of underlying Lévy processes and can handle certain exotic features. To illustrate the method it is applied to European and Bermudan options for a log normal process, a jump diffusion process, a variance gamma process and a normal inverse Gaussian process. Tue, 01 Aug 2006 00:00:00 GMT http://hdl.handle.net/10197/1174 2006-08-01T00:00:00Z http://hdl.handle.net/10197/1173 Reassessing the evidence of an emerging Yen block in North and Southeast Asia Kearney, Colm; Muckley, Cal Using weekly observations on 9 Asian currencies from November 1976 to December 2003, we re-examine the evidence of an emerging yen block in North and Southeast Asia. In contrast to previous research that assumes instantaneous adjustment of exchange rates by the region’s Central Banks to variations in the world’s main global currencies, we use a dynamic general-to-specific Newey-West estimation strategy that allows gradual adjustment and calculation of both short and long run equilibrium responses. We find that there is no de facto yen block, but although the US dollar remains dominant throughout the region, the yen’s influence is rising amongst a subset of the currencies since the early 1990s. Sun, 01 May 2005 00:00:00 GMT http://hdl.handle.net/10197/1173 2005-05-01T00:00:00Z http://hdl.handle.net/10197/1172 Estimating financial risk measures for futures positions : a non-parametric approach Cotter, John; Dowd, Kevin This paper presents non-parametric estimates of spectral risk measures applied to long and short positions in 5 prominent equity futures contracts. It also compares these to estimates of two popular alternative measures, the Value-at-Risk (VaR) and Expected Shortfall (ES). The spectral risk measures are conditioned on the coefficient of absolute risk aversion, and the latter two are conditioned on the confidence level. Our findings indicate that all risk measures increase dramatically and their estimators deteriorate in precision when their respective conditioning parameter increases. Results also suggest that estimates of spectral risk measures and their precision levels are of comparable orders of magnitude as those of more conventional risk measures. Sat, 23 Dec 2006 00:00:00 GMT http://hdl.handle.net/10197/1172 2006-12-23T00:00:00Z http://hdl.handle.net/10197/1171 Modeling long memory in REITs Cotter, John; Stevenson, Simon One stylized feature of financial volatility impacting the modeling process is long memory. This paper examines long memory for alternative risk measures, observed absolute and squared returns for Daily REITs and compares the findings for a non-REIT equity index. The paper utilizes a variety of tests for long memory finding evidence that REIT volatility does display persistence, in contrast to the actual return series. Trading volume is found to be strongly associated with long memory. The results do however suggest differences in the findings with regard to REITs in comparison to the broader equity sector which may be due to relatively thin trading during the sample period. Wed, 01 Nov 2006 00:00:00 GMT http://hdl.handle.net/10197/1171 2006-11-01T00:00:00Z http://hdl.handle.net/10197/1170 Is there a high technology pecking order? An investigation of the capital structure of NTBFs in the Irish software sector Hogan, Teresa; Hutson, Elaine This paper examines the financing of 117 privately held new technology-based firms (NTBFs) in the Irish software product sector. We advance the high-technology pecking order hypothesis (HTPOH) to explain the dominance of external equity over debt in NTBFs. Using founders’ opinions and perceptions on various financing issues, we find evidence consistent with four implications of the HTPOH. Sample firm founders perceive low tax benefits of debt, and very high levels of business risk as reflected in pessimism about their likelihood of survival even with adequate financing. In addition, founders perceive greater information asymmetries in debt than in private equity markets. This finding is consistent with the spirit of Myers’ (1984) and Myers and Majluf’s (1984) pecking order hypothesis in that firms prefer sources of finance associated with the least information asymmetry. A related finding is that founders believe issuing equity sends a positive signal to clients, suppliers and financiers. Wed, 01 Sep 2004 00:00:00 GMT http://hdl.handle.net/10197/1170 2004-09-01T00:00:00Z http://hdl.handle.net/10197/1169 Extreme spectral risk measures : an application to futures clearinghouse margin requirements Cotter, John; Dowd, Kevin This paper applies the Extreme-Value (EV) Generalised Pareto distribution to the extreme tails of the return distributions for the S&P500, FT100, DAX, Hang Seng, and Nikkei225 futures contracts. It then uses tail estimators from these contracts to estimate spectral risk measures, which are coherent risk measures that reflect a user’s risk-aversion function. It compares these to VaR and Expected Shortfall (ES) risk measures, and compares the precision of their estimators. It also discusses the usefulness of these risk measures in the context of clearinghouses setting initial margin requirements, and compares these to the SPAN measures typically used. Wed, 14 Dec 2005 00:00:00 GMT http://hdl.handle.net/10197/1169 2005-12-14T00:00:00Z http://hdl.handle.net/10197/1168 Correlation dynamics between Asia-Pacifc, EU and US stock returns Hyde, Stuart; Bredin, Donal; Nguyen, Nghia This paper investigates the correlation dynamics in the equity markets of 13 Asia-Pacific countries, Europe and the US using the asymmetric dynamic conditional correlation GARCH model (AG-DCC-GARCH) introduced by Cappiello, Engle and Sheppard (2006). We find significant variation in correlation between markets through time. Stocks exhibit asymmetries in conditional correlations in addition to conditional volatility. Yet asymmetry is less appar- ent in less integrated markets. The Asian crisis acts as a structural break, with correlations increasing markedly between crisis countries during this period though the bear market in the early 2000s is a more significant event for correlations with developed markets. Our findings also provide further evidence consistent with increasing global market integration. The documented asymmetries and correlation dynamics have important implications for international portfolio diversification and asset allocation. Mon, 01 Jan 2007 00:00:00 GMT http://hdl.handle.net/10197/1168 2007-01-01T00:00:00Z http://hdl.handle.net/10197/1167 UK Stock returns & the impact of domestic monetary policy shocks Bredin, Donal; Hyde, Stuart; O'Reilly, Gerard We investigate the influence of changes in UK monetary policy on UK stock returns and the possible reasons behind such a response. Firstly, we conduct an event study to assess the impact of unexpected changes in monetary policy on aggregate and sectoral stock returns. The decomposition of unexpected changes in the policy rate is based on futures markets data. Secondly, using a variance decomposition in the spirit of Campbell (1991) we attempt to identity the channels behind the response of stock returns to monetary policy surprises. The variance decomposition results indicate that the monetary policy shock leads to a persistent negative response in terms of future excess returns for a number of sectors. Fri, 21 Oct 2005 00:00:00 GMT http://hdl.handle.net/10197/1167 2005-10-21T00:00:00Z http://hdl.handle.net/10197/1166 Capital structure in new technology-based firms : evidence from the Irish software sector Hogan, Teresa; Hutson, Elaine Using a sample of 117 Irish software companies, we examine the capital structure of new technology-based firms. Consistent with the findings on financing for other small businesses, internal funds are the most important source of funding in new technology-based firms. However, in apparent contradiction to the pecking order hypothesis, the use of debt is rare and equity financing is the prime source of external finance. By questioning chief executive officers via survey on their perceptions and opinions on various financing issues, we are able to conclude that in many cases software firm founders prefer outside equity to debt. The dearth of debt in the capital structure of new technology-based firms cannot be wholly explained by financing constraints due to information asymmetries in the banking sector. Thu, 01 Jan 2004 00:00:00 GMT http://hdl.handle.net/10197/1166 2004-01-01T00:00:00Z http://hdl.handle.net/10197/1165 Volatility and Irish exports Bredin, Donal; Cotter, John We analyse the impact of volatility per se on exports for a a small open economy concentrating on Irish trade with the UK and the US. An important element is that we take account of the time lag between the trade decision and the actual trade or payments taking place by using a flexible lag approach. Rather than adopt a single measure of risk we also adopt a spectrum of risk measures and detail varied size characteristics and statistical properties. We find that the ambiguous results found to date may well be due to not taking account of the timing effect which varies substantially depending on which volatility measure is used. However, the foreign exchange volatility effect is consistently positive, indicating the dominance of exporters expectations of possible profitable opportunities from future cash flows. The potential negative aspects of trade, the entry and exit costs, are accounted for by a negative influence of income volatility on trade. Tue, 12 Oct 2004 00:00:00 GMT http://hdl.handle.net/10197/1165 2004-10-12T00:00:00Z http://hdl.handle.net/10197/1164 International influences on Irish stock returns Bredin, Donal; Hyde, Stuart We examine the influence of US and UK macroeconomic and financial variables on Irish stock returns in a nonlinear framework. We allow for time variation via regime switching using a smooth transition regression (STR) model. Importantly we find that both US and UK stock returns are significant determinants of Irish returns. Further,US returns are an important transition variable. Additionally,we show that both the US industrial production growth and changesin short term interest rates play an important role in explaining Irish stock returns. A two transition variable model finds that US short term interest rate changes exert a secondary nonlinear influence on Irish returns. The significance of US variables is reflective of the influence of US investment in the Irish economy. Mon, 01 Mar 2004 00:00:00 GMT http://hdl.handle.net/10197/1164 2004-03-01T00:00:00Z http://hdl.handle.net/10197/1163 International policy rate changes and Dublin interbank offer rates Bredin, Donal; Gavin, Caroline; O'Reilly, Gerard We investigate the influence of international interest rate changes on the Dublin inter bank money market rates (Dibor). Specifically, we analyse the impact of (un)expected changes in German(Euro) area and US policy rates on various Dibor rates between 1991 to 2002 in an event type study. Our decomposition of (un)expected changes of policy rates are based on future markets and is akin to Kuttner (2000). Overall, our results suggest that Dibor rates respond positively and significantly to unanticipated Euro and US policy rate changes while expected changes have an insignificant impact. Thu, 01 Jan 2004 00:00:00 GMT http://hdl.handle.net/10197/1163 2004-01-01T00:00:00Z http://hdl.handle.net/10197/1162 Margin requirements with intraday dynamics Cotter, John; Longin, François Both in practice and in the academic literature, models for setting margin requirements in futures markets use daily closing price changes. However, financial markets have recently shown high intraday volatility, which could bring more risk than expected. Such a phenomenon is well documented in the literature on high-frequency data and has prompted some exchanges to set intraday margin requirements and ask intraday margin calls. This article proposes to set margin requirements by taking into account the intraday dynamics of market prices. Daily margin levels are obtained in two ways: first, by using daily price changes defined with different time-intervals (say from 3 pm to 3 pm on the following trading day instead of traditional closing times); second, by using 5-minute and 1-hour price changes and scaling the results to one day. An application to the FTSE 100 futures contract traded on LIFFE demonstrates the usefulness of this new approach. Mon, 14 Jun 2004 00:00:00 GMT http://hdl.handle.net/10197/1162 2004-06-14T00:00:00Z