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A
GARCH with Time-Changed Lévy Innovation Model and
Its Applications from an Economic Perspective -- Yang-Che
Wu, Szu-Lang Liao, David Shyu,Shyh-Weir Tzang and Chih-Hsing
Hung
The
paper constructs a GARCH process with time-changed Lévy
innovations from the economic perspective which assumes
that the arrival of new information causes the asset return
to be stochastic and volatility clustering. The GARCH (1,1)
process with generalized hyperbolic innovation is introduced
as a general form for the volatility process. The paper
uses a special case of the process to discuss the economic
meaning behind alternative dynamic behaviors, and then applies
it in pricing a European option under the hypothesis that
every investor selects the canonic martingale measure.
©
2008 The Icfai University Press. All Rights Reserved.
Corporate
Financial Risk Management: Governance and Disclosure Post
IFRS 7 --
Cesare Conti ,Arnaldo Mauri
So
far, the new regulatory and accounting context of Corporate
Financial Risk Management (CFRM) has deeply influenced the
operations of corporates. New protagonists of the CFRM process
have emerged rapidly. Accounting managers have been obliged
to thoroughly understand the economics of derivatives, while
the Board, the auditors and external financial analysts
have become more deeply involved in the process of CFRM.
Unfortunately, this revolution has not been accompanied
by an adequate change in the language of CFRM, which is
actually very complex and inadequate for both the Board
and the analysts. Only the language of value creation can
help in overcoming these problems, as it would allow the
Board to improve the governance of the process of CFRM,
and consequently, to communicate what analysts really need,
through proper risk disclosure. From January 2007, IFRS
7 has introduced a new approach to risk disclosure. This
is a good opportunity to design a reporting system, which
exploits the language of value creation. This paper describes
the main aspects of the new regulatory context of CFRM and
explores some revolutionary improvements brought about by
IFRS 7. It also gives some guidelines to the creation of
a language that is apt for the governance and the disclosure
of CFRM.
©
2008 The Icfai University Press. All Rights Reserved.
Empirical
Analysis of Credit Risk Regime Switching and Temporal Conditional
Default Correlation in Credit Default Swap Valuation: The
Market Liquidity Effect --
Kwamie Dunbar , A J Edwards
This
paper extends the debate concerning Credit Default Swap
(CDS) valuation to include time-varying correlation and
covariances. Traditional multivariate techniques treat the
correlations between covariates as constant over time; however,
this view is not supported by the data. Since financial
data does not follow a normal distribution because of its
heavy tails, modeling the data using a Generalized Linear
Model (GLM) incorporating copulas emerge as a more robust
technique over traditional approaches. This paper also includes
an empirical analysis of the regime switching dynamics of
credit risk in the presence of liquidity, following the
general practice of assuming that credit and market risk
follow a Markov process. The study is based on CDS data
obtained from Bloomberg that spans over the period from
January 1, 2004 to August 8, 2006. The empirical examination
of the regime switching tendencies provides quantitative
support to the anecdotal view that liquidity decreases as
credit quality deteriorates. The analysis also examines
the joint probability distribution of the credit risk determinants
across credit quality, through the use of a copula function
which disaggregates the behavior embedded in the marginal
gamma distributions, so as to isolate the level of dependence
captured in the copula function. The results suggest that
the time-varying joint correlation matrix performs far superior,
compared to the constant correlation matrix; the centerpiece
of linear regression models.
©
2008 The Icfai University Press. All Rights Reserved.
Measuring
Hedge Fund Risks --
Sabrina Khanniche
This
research paper shows that volatility is an incomplete measure
of hedge fund risks, and the Sharpe ratio is also not a
reliable index of risk-adjusted performance. The paper uses
a dataset of monthly hedge fund index returns provided by
TASS, to investigate risk and performance. It demonstrates
that hedge funds are highly attractive according to the
mean-variance approach. However, they lose most of their
attraction when skewness and kurtosis are taken into account.
Jarque-Bera test of the normality of hedge fund returns
rejects the hypothesis of normality for all the hedge fund
categories except Equity Market Neutral and Managed Futures.
Consequently, Sharpe ratios overestimate the performance
of hedge funds. It also reveals that Equity Market Neutral
is the best strategy in term of returns, standard deviation,
Sharpe ratio, skewness and kurtosis.
©
2008 The Icfai University Press. All Rights Reserved.
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