Asset pricing and systematic liquidity risk: an empirical investigation of the Spanish stock market

Systematic liquidity shocks should affect the optimal behavior of agents in financial markets. Indeed, fluctuations in various measures of liquidity are significantly correlated across common stocks. Accordingly, this paper empirically analyzes whether Spanish average returns vary cross-sectionally with betas estimated relative to two competing liquidity risk factors. The first one, proposed by Pastor and Stambaugh (2002), is associated with the strength of volume-related return reversals. Our marketwide liquidity factor is defined as the difference between returns highly sensitive to changes in the relative bid-ask spread and returns with low sensitivities to those changes. Our empirical results show that neither of these proxies for systematic liquidity risk seems to be priced in the Spanish stock market. Further international evidence is deserved.

Systematic liquidity: commonality and inter-temporal variation in the Portuguese stock market

[EN] The aim of this paper is to study systematic liquidity at the Euronext Lisbon Stock Exchange. The motivation for this research is provided by the growing interest in financial literature about stock liquidity and the implications of commonality in liquidity for asset pricing since it could represent a source of non-diversifiable risk. Namely, it is analysed whether there exist common factors that drive the variation in individual stock liquidity and the causes of the inter-temporal variation of aggregate liquidity. Monthly data for the period between January 1988 and December 2011 is used to compute some of the most used proxies for liquidity: bid-ask spreads, turnover rate, trading volume, proportion of zero returns and the illiquidity ratio. Following Chordia et al. (2000) methodology, some evidence of commonality in liquidity is found in the Portuguese stock market when the proportion of zero returns is used as a measure of liquidity. In relation to the factors that drive the inter-temporal variation of the Portuguese stock market liquidity, the results obtained within a VAR framework suggest that changes in real economy activity, monetary policy (proxied by changes in monetary aggregate M1) and stock market returns play an important role as determinants of commonality in liquidity.

The Impact of Regulation on Pricing Behavior in the Spanish Electricity Market

In this paper we measure the impact of regulatory measures which affected the Spanish electricity wholesale market in the period 2002-2005. Our approach is based on the fact that regulation changes firms' incentives and therefore their market behavior. In the absence of any regulation firms would choose profit- maximizing prices on their residual demands so that the observed gap between optimal and actual prices provides a measure of the effect of regulation. Our results indicate that regulation has decreased wholesale prices considerably, but became less effective at the end of the sample period which explains the change of regulatory regime introduced in 2006.

Smiling under stochastic volatility

This paper studies the behavior of the implied volatility function (smile) when the true distribution of the underlying asset is consistent with the stochastic volatility model proposed by Heston (1993). The main result of the paper is to extend previous results applicable to the smile as a whole to alternative degrees of moneyness. The conditions under which the implied volatility function changes whenever there is a change in the parameters associated with Hestons stochastic volatility model for a given degree of moneyness are given.

An empirical comparison of the performance of alternative option pricing models

Published as an article in: Investigaciones Economicas, 2005, vol. 29, issue 3, pages 483-523.

Los Modelos Implícitos de Valoración de Opciones

[ES] Los modelos implícitos constituyen uno de los enfoques de valoración de opciones alternativos al modelo de Black-Scholes que ha conocido un mayor desarrollo en los últimos años. Dentro de este planteamiento existen diferentes alternativas: los árboles implícitos, los modelos con función de volatilidad determinista y los modelos con función de volatilidad implícita. Todos ellos se construyen a partir de una estimación de la distribución de probabilidades riesgo-neutral del precio futuro del activo subyacente, congruente con los precios de mercado de las opciones negociadas. En consecuencia, los modelos implícitos proporcionan buenos resultados en la valoración de opciones dentro de la muestra. Sin embargo, su comportamiento como instrumento de predicción para opciones fuera de muestra no resulta satisfactorio. En este artículo se analiza la medida en la que este enfoque contribuye a la mejora de la valoración de opciones, tanto desde un punto de vista teórico como práctico.

Model driven product line engineering : core asset and process implications

Reuse is at the heart of major improvements in productivity and quality in Software Engineering. Both Model Driven Engineering (MDE) and Software Product Line Engineering (SPLE) are software development paradigms that promote reuse. Specifically, they promote systematic reuse and a departure from craftsmanship towards an industrialization of the software development process. MDE and SPLE have established their benefits separately. Their combination, here called Model Driven Product Line Engineering (MDPLE), gathers together the advantages of both. Nevertheless, this blending requires MDE to be recasted in SPLE terms. This has implications on both the core assets and the software development process. The challenges are twofold: (i) models become central core assets from which products are obtained and (ii) the software development process needs to cater for the changes that SPLE and MDE introduce. This dissertation proposes a solution to the first challenge following a feature oriented approach, with an emphasis on reuse and early detection of inconsistencies. The second part is dedicated to assembly processes, a clear example of the complexity MDPLE introduces in software development processes. This work advocates for a new discipline inside the general software development process, i.e., the Assembly Plan Management, which raises the abstraction level and increases reuse in such processes. Different case studies illustrate the presented ideas.

Consumer Expertise or Credit Risk? An empirical analysis of mortgage pricing

Loan mortgage interest rates are usually the result of a bank-customer negotiation process. Credit risk, consumer cross-buying potential, bundling, financial market competition and other features affecting the bargaining power of the parties could affect price. We argue that, since mortgage loan is a complex product, consumer expertise could be a relevant factor for mortgage pricing. Using data on mortgage loan prices for a sample of 1055 households for the year 2005 (Bank of Spain Survey of Household Finances, EFF-2005), and including credit risk, costs, potential capacity of the consumer to generate future business and bank competition variables, the regression results indicate that consumer expertise-related metrics are highly significant as predictors of mortgage loan prices. Other factors such as credit risk and consumer cross-buying potential do not have such a significant impact on mortgage prices. Our empirical results are affected by the credit conditions prior to the financial crisis and could shed some light on this issue.

Environmental Concerns in Water Pricing Policy: an Application of Data Envelopment Analysis (DEA)

25 p.

Price Premium for High-Efficiency Refrigerators and Calculation of Price-Elasticities for Close-Substitutes: Combining Hedonic Pricing and Demand Systems

21 p.