Emerging markets and financial crises: Regional, global or isolated shocks?
Kenourgios, D., Padhi, P. (2012) Emerging markets and financial crises: Regional, global or isolated shocks?, Journal of Multinational Financial Management, Vol. 22(1-2), pp. 24-38.
This paper investigates financial contagion of three emerging market crises of the late 1990s, as well as the subprime... more This paper investigates financial contagion of three emerging market crises of the late 1990s, as well as the subprime crisis of 2007, focusing on financial markets of emerging economies, USA and 2 global indices. Conventional cointegration and vector error correction analysis show long and short run dynamics only among emerging stock markets during the Russian and the Asian crises, for both stock and bond markets during the subprime crisis, while the Argentine turmoil has no impact on any of the examined markets. Further analysis into a multivariate time-varying asymmetric framework provides evidence on the global impact of the Russian default, the contagion effects of the subprime crisis, the regional aspect of the Asian crisis and the isolated nature of the Argentine turmoil. Moreover, stock markets seem to constitute a stronger transmission mechanism during the three contagious crises. Our findings have crucial implications for international investors, policy makers and multi-lateral organizations.
The Implications of International Political Disputes on Business Interests: An Event Study
Drivas K. “The Implications of International Political Disputes on Business Interests: An Event Study.” Ekonomia 13, 1(2010).
This paper examines, via an event study approach, the effect of Greece’s veto against FYROM’s bid forNATO accession on... more This paper examines, via an event study approach, the effect of Greece’s veto against FYROM’s bid forNATO accession on the stocks of Greek firms conducting business in FYROM. The results show a negative effect on the stocks of these Greek firms while the veto “news” was taken into account at an earlier date rather than the actual veto announcement. This date is identified as the date when negotiations over a bilateral resolution appeared to collapse.
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Download (.pdf) Measuring the Impact of Monetary Policy on Asset Prices in Turkey
by Murat Duran
Co-authored with Gülserim Özcan from Bilkent University, Pinar Özlü and Deren Ünalmış from Central Bank of Turkey. Published in "Economics Letters"
Little is known about the impact of monetary policy on asset prices in emerging markets. This study applies the... more Little is known about the impact of monetary policy on asset prices in emerging markets. This study applies the heteroscedasticity-based GMM for financial markets in Turkey. The results suggest that event study estimates are biased for some asset returns.
Forecasting Time-Varying Correlation Using the DCC Model
Co-authored with Niño Joseph I. Paz and Miguel Antonio C. Mindanao
Hedging strategies have become more and more complicated as assets being traded have become more interrelated to each... more Hedging strategies have become more and more complicated as assets being traded have become more interrelated to each other. Thus, the estimation of risks for optimal hedging does not involve only the quantification of individual volatilities but also include their pairwise correlations. Therefore a model to capture the dynamic relationships is necessary to estimate and forecast correlations of returns through time. Engle’s dynamic conditional correlation (DCC) model is compared with other models of correlation. Performance of the correlation models are evaluated in this paper using only the daily log returns of the closing prices from January, 2000 to February, 2010 of the Peso-Dollar Exchange Rate and Philippine Stock Exchange index.Ultimately, Engle’s DCC model is adopted because of its consistency with expectations. Though generally negative, correlation between these two returns is not really constant as the results indicated. The forecast evaluation of the models was divided into in-sample and out-of-sample forecast performance with short-term (i.e., 22-day, 60-day, and 125-day) and medium-term (250-day and 500-day) rolling window correlations, or realized correlations, as proxies for the actual correlation. Based on the root mean squared error and mean absolute error, the integrated DCC model showed optimal forecast performance for the in-sample correlation patterns while the mean-reverting DCC model had the most desirable forecast properties for dynamic long-run forecasts. Also, the Diebold-Mariano tests showed that the integrated DCC has greater predictive accuracy in terms of the 3-month realized correlations than the rest of the models.
TCMB Faiz Kararlarinin Hisse Senedi Piyasalari Uzerine Etkisi
by Murat Duran
Co-authored with Pinar Özlü and Deren Ünalmış from Central Bank of Turkey. Published in "Central Bank Review".
The transmission of policy decisions to financial markets is an integral part of the monetary transmission mechanism.... more The transmission of policy decisions to financial markets is an integral part of the monetary transmission mechanism. However, one of the major problems in estimating the effect of monetary policy on asset prices is the simultaneous response of policy actions and the asset prices to each other. To overcome this problem, this study applies the heterokedasticity-based generalized method of moments (GMM) technique suggested by Rigobon and Sack (2004) to the Turkish stock market. The results show that an increase in the policy rate leads to a decline in stock prices, especially for the financial sector firms.
Measuring the Impact of Monetary Policy on Asset Prices in Turkey (Turkiye'de Para Politikasinin Finansal Varlik Fiyatlari Uzerine Etkisi)
by Murat Duran
Co-authored with Gülserim Özcan from Bilkent University, Pinar Özlü and Deren Ünalmış from Central Bank of Turkey. Published in Working Paper Series of Central Bank of Turkey.
The transmission of policy decisions to financial markets is an integral part of the monetary transmission mechanism.... more The transmission of policy decisions to financial markets is an integral part of the monetary transmission mechanism. However, one of the major problems in estimating the effect of monetary policy on asset prices is the simultaneous response of policy actions and the asset prices to each other. Rigobon and Sack (2004) suggest a heterokedasticity-based generalized method of moments (GMM) technique to overcome this problem. For emerging markets, there are very few studies using this method. This study applies the heteroskedasticity-based technique to estimate the impact of monetary policy on the Turkish bond, currency and stock markets. This technique also addresses the omitted variables problem. The empirical results verify the findings obtained by event study methods in earlier studies. Firstly, the impact of monetary policy on market interest rates is found to be positive, which diminishes with maturity for maturities longer than 9 months. Secondly, the results suggest that a rise in the policy rate leads to a moderate appreciation of the domestic currency, where the TL/EUR rate is affected more significantly compared to the TL/US dollar rate. Finally, the results show that an increase in the policy rate leads to a decline in stock prices, and monetary policy has the greatest impact on the share prices of the financial sector firms.
TCMB Faiz Kararlarinin Piyasa Faizleri ve Hisse Senedi Piyasalari Üzerine Etkisi
by Murat Duran
Co-authored with Refet Gürkaynak from Bilkent University, Pinar Özlü and Deren Ünalmış from Central Bank of Turkey. Published in Economic Notes Series of Central Bank of Turkey.
The transmission of policy decisions to financial markets is an integral part of the monetary transmission mechanism.... more The transmission of policy decisions to financial markets is an integral part of the monetary transmission mechanism. However, one of the major problems in estimating the effect of monetary policy on asset prices is the simultaneous response of policy actions and the asset prices to each other. This study applies the generalized method of moments (GMM) technique suggested by Rigobon and Sack (2004) to the Turkish stock and bond markets to overcome this simultaneity problem. The results verify the findings obtained by event study methods in earlier studies and show that an increase in the policy rate leads to a decline in stock prices and a rise in longer term interest rates. The impact on longer rates diminshes with maturity.
Estimation of Time Varying APIN and PSOS using High-Frequency Transaction Data
by Daniel Preve
Co-authored with Yiu Kuen Tse (submitted)
Recently Duarte and Young (2009) extended the probability of informed trading (PIN) proposed by Easley et al. (2002)... more Recently Duarte and Young (2009) extended the probability of informed trading (PIN) proposed by Easley et al. (2002) and decomposed it into two components: the adjusted PIN (APIN) as a measure of asymmetric information and the probability of symmetric order-flow shock (PSOS) as a measure of illiquidity. They provided some cross-section estimates of these measures using daily data over annual periods and argued that the APIN is not priced. In this paper we propose a method to estimate daily APIN and PSOS as an extension of Tay et al. (2009) using high-frequency transaction data. Our empirical results indicate that daily APIN is much more stable than daily PIN. In contrast to PIN, daily APIN is not positively correlated with daily variance, while daily PSOS is. Moreover, in comparison with the daily APIN, the daily PSOS exhibits clustering and sporadic bursts over time.
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Evaluating currency crisis: A multivariate Markov regime switching approach
K. Mouratidis, D. Kenourgios, A. Samitas and D. Vougas, “Evaluating Currency Crises: A Multivariate Markov Regime Switching Approach”, The Manchester School Journal, forthcoming.
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Financial crises and stock market contagion in a multivariate time-varying asymmetric framework
Kenourgios, D., A. Samitas and N. Paltalidis (2011) “Financial crises and stock market contagion in a multivariate time-varying asymmetric framework”, Journal of International Financial Markets, Institutions & Money, 21 (1), pp. 92-106.
Modelling return and volatility in emerging stock markets: A Markov switching approach
D. Kenourgios and A. Samitas (2009) “Modelling return and volatility in emerging stock markets: A Markov switching approach”, International Journal of Economic Research, Vol. 6, No. 1, pp. 61-72.
Financial crises and stock market dependence
A. Samitas, D. Kenourgios and N. Paltalidis (2007) “Financial crises and stock market dependence”, European Financial Management Association 16th Annual Meeting (EFMA), Vienna, 27-30 June 2007, and 14th Annual Conference of Multinational Finance Society, Thessaloniki 1-3 July 2007.
Uncovered Interest Parity, the Forward Discount Puzzle, & Efficiency in the Market for Foreign Exchange
A common finding in the literature on international financial economics is that, contrary to theoretical predictions,... more A common finding in the literature on international financial economics is that, contrary to theoretical predictions, countries with high nominal interest rates tend to experience currency appreciation. This “forward discount puzzle” has been shown to be pervasive across all markets and maturities, and affects not just the spot market, but also the forward market through the interest rate differential. Our article aims to uncover recent trends in strict interest parity and the changing nature of forward market efficiency, and investigate the changing strength with which these complementary hypotheses hold. We use pre and post-financial crisis data to examine the possibility of a structural break in 2007, and to examine whether exchange market efficiency has declined in the wake of the crash. As Milton Friedman once said,“The only relevant test of the validity of a hypothesis is comparison of prediction with experience.”
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Evaluation of contagion or interdependence in the financial crises of Asia and Latin America, considering the macroeconomic fundamentals
with Pedro L. Valls Pereira, Digenes Manoel Leiva Martin and, Wilson Toshiro Nakamura
This article investigates the existence of contagion between countries on the basis of an analysis of returns for... more This article investigates the existence of contagion between countries on the basis of an analysis of returns for stock indices over the period 1994 to 2003. The econometrics methodology used is that of multivariate Generalized Autoregressive Conditional Heteroscedasticity (GARCH) family volatility models, particularly the Dynamic Conditional Correlation (DCC) models in the form proposed by Engle and Sheppard (2001). The returns were duly corrected for a series of country-specific fundamentals. The relevance of this procedure is highlighted in the literature by the work of Pesaran and Pick (2003). The results obtained in this article provide evidence favourable for the hypothesis of regional contagion in both Latin America and Asia. As a rule, contagion spread from the Asian crisis to Latin America, but not in the opposite direction.
Latent Fundamentals Arbitrage with a Mixed Effects Factor Model
Co-authored with Robert Iquiapaza and Aureliano Bressan
We propose a single factor mixed effects panel data model to compose an arbitrage portfolio identifying differences in... more We propose a single factor mixed effects panel data model to compose an arbitrage portfolio identifying differences in firm-level latent fundamentals. Furthermore, we show that even though the characteristics that affect returns are unknown variables, it is possible to identify the strength of the combination of these fundamentals for each stock by following a simple approach using historical data. As a result, a trading strategy that buys the stocks with the best fundamentals (strong fundamentals portfolio) and sells the stocks with the worst ones (weak fundamentals portfolio) realized significant risk-adjusted returns for the period between July 1986 and June 2008. In this case, this arbitrage portfolio generated a significant monthly risk-adjusted return of 2.42% considering the Carhart (1997) 4-factor model and presented a market sensibility (CAPM Beta) of 0.14. For robustness we performed sub period and seasonal analyses as well as an adjustment by trading costs. Finally, we find further empirical evidence to profit from the usage of a simple investment rule identifying fundamentals from structure of pass returns.
Estacionariedade de Índices Financeiros no Brasil no Período 1988-2003
Apresentado no ENANPAD, 2004
Autoria: Robert Aldo Iquiapaza , Aureliano Angel Bressan, Francisco Vidal Barbosa
Neste trabalho, avaliam-se as propriedades de séries temporais para alguns índices financeiros de empresas brasileiras... more
Neste trabalho, avaliam-se as propriedades de séries temporais para alguns índices financeiros de empresas brasileiras selecionadas, antes e após a implantação do Plano Real. Para tal, são utilizadas técnicas recentes, tais como a abordagem de Ioannidis et. al. (2003) a qual utiliza a aproximação cúbica do modelo ESTAR aplicado à análise univariada de estacionariedade, além de testes de raiz unitária para dados em painel, nos quais se reconhece a possibilidade de dependência entre indicadores analisados em um mesmo período e ao longo do tempo. Os dados referem-se aos demonstrativos financeiros de empresas negociadas na Bovespa, no período de dezembro de 1988 a setembro de 2003. Os resultados indicam a rejeição da hipótese de raiz unitária para os indicadores de liquidez corrente e seca, refletindo que estes índices financeiros se comportam como globalmente estacionários, tanto no período 1988/2003 quanto no período pós Real. Já os índices de liquidez geral e de endividamento, apresentaram um comportamento não-estacionário, e o índice de financiamento de estoques se comporta como não-estacionário em todo o período e estacionário no período pós Real. Tais resultados ressaltam a importância da verificação dos índices financeiros utilizados como regressores nas estimações econométricas lineares.
Credit Spread Interdependencies of European States and Banks during the Financial Crisis
by Adrian Alter
Co-authored with Y. Stephan Schueler
We investigate the interdependence of the default risk of several Eurozone countries (France, Germany, Italy, Ireland,... more We investigate the interdependence of the default risk of several Eurozone countries (France, Germany, Italy, Ireland, Netherlands, Portugal, Spain) and their domestic banks during the period June 2007 - May 2010, using daily credit default swaps (CDS). Bank bailout programs changed the composition of both banks’ and sovereign balance sheets and, moreover, affected the linkage between the default risk of governments and their local banks. Our main findings suggest that in the period before bank bailouts the contagion disperses from bank credit spreads into the sovereign CDS market. After bailouts, a financial sector shock affects more strongly sovereign CDS spreads in the short-run, however, the impact becomes insignificant at a long horizon. Furthermore, government CDS spreads become an important determinant of banks’ CDS series. The interdependence of government and bank credit risk is heterogeneous across countries, but homogeneous within the same country.
Forward Rate Unbiasedness Hypothesis in the Tunisian Foreign Exchange Market
DRAFT Working Paper . Comments Invited. Co-authored with Dhekra Azouzi & Chaker Aloui
Based on a linear framework, this paper aims to examine the relationship between future spot rates and forward... more
Based on a linear framework, this paper aims to examine the relationship between future spot rates and forward exchange rates using USD-TND data, thanks to traditional regressions and to the Vector Error Correction Model (VECM) in order to check if the Unbiasedness Forward Exchange Rate (UFER) hypothesis is satisfied and if the forward premiums contain valuable information useful to forecast the subsequent path that will be taken by spot exchange rates. The empirical analysis reveals that the UFER hypothesis is rejected and that the forward premium is a crucial tool, particularly at short term, to detect the future movements of spot exchange rates. A potential enrichment of such a paper will rely on a non linear framework.
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This paper has been submitted for publication. A pre-submission copy is available at SSRN
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