Decomposing European bond and equity volatility

The paper investigates volatility spillover from US and aggregate European asset markets into European national asset markets. A main contribution is that bond and equity volatilities are analyzed simultaneously. A new model belonging to the 'volatilityspillover' family is suggested: The conditional variance of e.g. the unexpected German stock return is divided into separate effects from the contemporaneous idiosyncratic variance of US bonds, US stocks, European bonds, European stocks, German bonds, and German stocks. Significant volatility-spillover effects are found. The national bond (stock) volatilities are mainly influenced by bond (stock) effects. Global, regional, and local volatility effects are all important. The introduction of the euro is associated with a structural break.European Asset Markets; GARCH; International Finance; Volatility Spillover

Extreme Coexceedances in New EU Member States' Stock Markets

We analyze the financial integration of the new European Union (EU) member states' stock markets using the negative (positive) coexceedance variable that counts the number of large negative (large positive) returns on a given day across the countries. We use a multinomial logit model to investigate how persistence, asset classes, and volatility are related to the coexceedance variables. We find that the effects differ (a) between negative and positive coexceedance variables (b) between old and new EU member states, and (c) before and after the EU enlargement in 2004 suggesting a closer connection of new EU stock markets to those in Western Europe.Financial market integration, Comovement, Emerging markets, EU enlargement, EU Member States, Extreme returns, New EU Member States, Stock Markets

Realized Bond-Stock Correlation: Macroeconomic Announcement Effects

We investigate the effects of macroeconomic announcements on the realized correlation between bond and stock returns. Our results deliver insights into the dominating drivers of bond-stock comovements. We find that it is not so much the surprise component of the announcement, but the mere fact that an announcement occurs that influences the realized bond-stock correlation. The impact of macroeconomic announcements varies across the business cycle. Announcement effects are highly dependent on the sign of the realized bond-stock correlation which has recently gone from positive to negative. Macroeconomic announcement effects on realized bond and stock volatilities are also investigatedBond-stock correlation; Macroeconomic announcements; Realized correlation; Realized volatility

Realized Bond-Stock Correlation: Macroeconomic Announcement Effects

We investigate the effects of macroeconomic announcements on the realized correlation between bond and stock returns. Our results deliver insights into the dominating drivers of bond-stock comovements. We find that it is not so much the surprise component of the announcement, but the mere fact that an announcement occurs that influences the realized bond-stock correlation. The impact of macroeconomic announcements varies across the business cycle. Announcement effects are highly dependent on the sign of the realized bond-stock correlation which has recently gone from positive to negative. Macroeconomic announcement effects on realized bond and stock volatilities are also investigated.Bond-stock correlation, Macroeconomic announcements, Realized correlation, Realized volatility

The Educational Asset Market: A Finance Perspective on Human Capital Investment

Like the stock market, the human capital market consists of a wide range of assets, i.e. educations. Each young individual chooses the educational asset that matches his preferred combination of risk and return in terms of future income. A unique register-based data set with exact information on type and level of education enables us to focus on the shared features between human capital and stock investments. An innovative finance-labor approach is applied to study the educational asset market. A risk-return trade-off is revealed which is not directly related to the length of education.Efficient Frontier; Human Capital Investment; Mean-Variance; Performance Measures.

The Time-Varying Systematic Risk of Carry Trade Strategies

We explain the currency carry trade performance using an asset pricing model in which factor loadings are regime-dependent rather than constant. Empirical results show that a typical carry trade strategy has much higher exposure to the stock market and is mean-reverting in regimes of high FX volatility. The findings are robust to various extensions, including more currencies, longer samples, transaction costs, international stock indices, and other proxies for volatility and liquidity. Our regime-dependent pricing model provides significantly smaller pricing errors than a traditional model. Thus, the carry trade performance is better explained by its time-varying systematic risk that magnifies in volatile markets-suggesting a partial explanation for the Uncovered Interest Rate Parity puzzle.carry trade, factor model, FX volatility, liquidity, smooth transition regression, time-varying betas

The Time-Varying Systematic Risk of Carry Trade Strategies

This paper suggests a factor model for carry trade strategies where the regression coefficients are allowed to depend on market volatility and liquidity. Empirical results on daily data from 1995 to 2008 show that a typical carry trade strategy has much higher exposure to the stock market and also more mean reversion in volatile periods - and that FX market volatility is a priced risk factor. The findings are robust to various extensions, including using more currencies and other proxies for volatility and liquidity (VIX, TED and a bid-ask spread).carry trade, factor model, smooth transition regression, time-varying betas

Level-ARCH Short Rate Models with Regime Switching: Bivariate Modeling of US and European Short Rates.

This paper introduces regime switching volatility into level- ARCH models for the short rates of the US, the UK, and Germany. Once regime switching and level effects are included there are no gains from including ARCH effects. It is of secondary importance exactly how the regime switching is specified. The estimated level parameters are very different across countries. The corresponding new bivariate models for the US and UK short rates show that the states of the US and UK short rate volatilities are not independent nor identical. Equivalently, the US and German volatility states are neither independent nor identicalBivariate short-rate model; International short rates; Level-ARCH model; Regime switching

Do More Economists Hold Stocks?

A unique data set enables us to test the hypothesis that more economists than otherwise identical investors hold stocks due to informational advantages. We confirm that economists have a significantly higher probability of participating in the stock market than investors with any other education, even when controlling for several background characteristics. We make use of a large register-based panel data set containing detailed information on the educational attainments and various financial and socioeconomic variables. We model the stock market participation decision by the probit model. The results are shown to be highly robust to various assumptions, including unobserved individual heterogeneityInvestor education; Portfolio choice; Stock market participation

Extreme coexceedances in new EU member states' stock markets

We analyze the financial integration of the new European Union (EU) member states' stock markets using the negative (positive) coexceedance variable that counts the number of large negative (large positive) returns on a given day across the countries. A similar analysis is performed for the old EU countries. We use a multinomial logit model to investigate how persistence, asset classes, and volatility are related to the coexceedance variables. We find that the effects differ (a) between negative and positive coexceedance variables (b) between old and new EU member states, and (c) before and after the EU enlargement in 2004, suggesting a closer connection of new EU stock markets to those in Western Europe