51,210 research outputs found

    What Does the Risk-Appetite Index Measure?

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    Explanations of changes in asset prices as being due to exogenous changes in risk appetite, although arguably controversial, have been popular in the financial community and have also received some attention in attempts to account for recent financial crises. Operational versions of these explanations are based on the assumption that changes in asset prices can be decomposed into a part that can be attributed to changes in riskiness and a part attributable to changes in risk aversion, and that some quantitative measure can capture these effects in isolation. One such measure, the risk-appetite index (RAI)-- used in the financial community as well as in assessments of financial stability in emerging markets -- is based on the rank correlation between assets' riskiness and excess returns. The author seeks to provide a theoretical foundation for this measure. He summarizes the arguments behind the index in two propositions and attempts to derive these propositions within a class of well-specified asset-pricing models. His results indicate that, whereas the exclusive attribution of the rank effect to changes in risk aversion is problematic in general, a specific set of circumstances can be identified in which this attribution is permissible. The key assumption is identified, and its empirical implications are examined. In cases where this assumption is shown to be empirically valid, the model provides a theoretical foundation for the RAI.Economic models; Financial markets

    Productivity, Preferences and UIP deviations in an Open Economy Business Cycle Model

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    We show that a flex-price two-sector open economy DSGE model can explain the poor degree of international risk sharing and exchange rate disconnect. We use a suite of model evaluation measures and examine the role of (i) traded and non-traded sectors; (ii) financial market incompleteness; (iii) preference shocks; (iv) deviations from UIP condition for the exchange rates; and (v) creditor status in net foreign assets. We find that there is a good case for both traded and non-traded productivity shocks as well as UIP deviations in explaining the puzzles

    Are benefits from oil - stocks diversification gone? New evidence from a dynamic copula and high frequency data

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    Oil is perceived as a good diversification tool for stock markets. To fully understand this potential, we propose a new empirical methodology that combines generalized autoregressive score copula functions with high frequency data and allows us to capture and forecast the conditional time-varying joint distribution of the oil -- stocks pair accurately. Our realized GARCH with time-varying copula yields statistically better forecasts of the dependence and quantiles of the distribution relative to competing models. Employing a recently proposed conditional diversification benefits measure that considers higher-order moments and nonlinear dependence from tail events, we document decreasing benefits from diversification over the past ten years. The diversification benefits implied by our empirical model are, moreover, strongly varied over time. These findings have important implications for asset allocation, as the benefits of including oil in stock portfolios may not be as large as perceived

    Relating Developers’ Concepts and Artefact Vocabulary in a Financial Software Module

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    Developers working on unfamiliar systems are challenged to accurately identify where and how high-level concepts are implemented in the source code. Without additional help, concept location can become a tedious, time-consuming and error-prone task. In this paper we study an industrial financial application for which we had access to the user guide, the source code, and some change requests. We compared the relative importance of the domain concepts, as understood by developers, in the user manual and in the source code. We also searched the code for the concepts occurring in change requests, to see if they could point developers to code to be modified. We varied the searches (using exact and stem matching, discarding stop-words, etc.) and present the precision and recall. We discuss the implication of our results for maintenance
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