Essays on pricing of risk and international linkage of Russian stock market

Last two decades have seen a rapid change in the global economic and financial situation; the economic conditions in many small and large underdeveloped countries started to improve and they became recognized as emerging markets. This led to growth in the amounts of global investments in these countries, partly spurred by expectations of higher returns, favorable risk-return opportunities, and better diversification alternatives to global investors. This process, however, has not been without problems and it has emphasized the need for more information on these markets. In particular, the liberalization of financial markets around the world, globalization of trade and companies, recent formation of economic and regional blocks, and the rapid development of underdeveloped countries during the last two decades have brought a major challenge to the financial world and researchers alike. This doctoral dissertation studies one of the largest emerging markets, namely Russia. The motivation why the Russian equity market is worth investigating includes, among other factors, its sheer size, rapid and robust economic growth since the turn of the millennium, future prospect for international investors, and a number of important major financial reforms implemented since the early 1990s. Another interesting feature of the Russian economy, which gives motivation to study Russian market, is Russia’s 1998 financial crisis, considered as one of the worst crisis in recent times, affecting both developed and developing economies. Therefore, special attention has been paid to Russia’s 1998 financial crisis throughout this dissertation. This thesis covers the period from the birth of the modern Russian financial markets to the present day, Special attention is given to the international linkage and the 1998 financial crisis. This study first identifies the risks associated with Russian market and then deals with their pricing issues. Finally some insights about portfolio construction within Russian market are presented. The first research paper of this dissertation considers the linkage of the Russian equity market to the world equity market by examining the international transmission of the Russia’s 1998 financial crisis utilizing the GARCH-BEKK model proposed by Engle and Kroner. Empirical results shows evidence of direct linkage between the Russian equity market and the world market both in regards of returns and volatility. However, the weakness of the linkage suggests that the Russian equity market was only partially integrated into the world market, even though the contagion can be clearly seen during the time of the crisis period. The second and the third paper, co-authored with Mika Vaihekoski, investigate whether global, local and currency risks are priced in the Russian stock market from a US investors’ point of view. Furthermore, the dynamics of these sources of risk are studied, i.e., whether the prices of the global and local risk factors are constant or time-varying over time. We utilize the multivariate GARCH-M framework of De Santis and Gérard (1998). Similar to them we find price of global market risk to be time-varying. Currency risk also found to be priced and highly time varying in the Russian market. Moreover, our results suggest that the Russian market is partially segmented and local risk is also priced in the market. The model also implies that the biggest impact on the US market risk premium is coming from the world risk component whereas the Russian risk premium is on average caused mostly by the local and currency components. The purpose of the fourth paper is to look at the relationship between the stock and the bond market of Russia. The objective is to examine whether the correlations between two classes of assets are time varying by using multivariate conditional volatility models. The Constant Conditional Correlation model by Bollerslev (1990), the Dynamic Conditional Correlation model by Engle (2002), and an asymmetric version of the Dynamic Conditional Correlation model by Cappiello et al. (2006) are used in the analysis. The empirical results do not support the assumption of constant conditional correlation and there was clear evidence of time varying correlations between the Russian stocks and bond market and both asset markets exhibit positive asymmetries. The implications of the results in this dissertation are useful for both companies and international investors who are interested in investing in Russia. Our results give useful insights to those involved in minimising or managing financial risk exposures, such as, portfolio managers, international investors, risk analysts and financial researchers. When portfolio managers aim to optimize the risk-return relationship, the results indicate that at least in the case of Russia, one should account for the local market as well as currency risk when calculating the key inputs for the optimization. In addition, the pricing of exchange rate risk implies that exchange rate exposure is partly non-diversifiable and investors are compensated for bearing the risk. Likewise, international transmission of stock market volatility can profoundly influence corporate capital budgeting decisions, investors’ investment decisions, and other business cycle variables. Finally, the weak integration of the Russian market and low correlations between Russian stock and bond market offers good opportunities to the international investors to diversify their portfolios.

Expectativas y volatilidad condicionada: los tipos de interés en el mercado interbancario

En este trabajo examinamos si la teoría de expectativas con primas de liquidez constantes puede explicar la estructura temporal de los tipos de interés de pequeños vencimientos en el mercado interbancario de depósitos español, para datos mensuales desde 1977 hasta 1995. Utilizamos el contraste de Campbell y Shiller (1987) basado en un modelo VAR cointegrado. A partir de las estimaciones consistentes de dicho modelo obtenemos la magnitud y persistencia de los shocks a través de la simulación de la respuesta al impulso, y estimaciones eficientes de los parámetros modelizando la varianza condicional que es variable en el tiempo. En este sentido, se proponen varios esquemas de volatilidad que permiten plantear distintas aproximaciones de laincertidumbre en un entorno multiecuacional GARCH y que están basadas en el modelo de expectativas propuesto. La evidencia empírica muestra que se incumple la teoría de las expectativas, que existe una dinámica conjunta a corto plazo para los tipos de interés y el diferencial que está definida por un modelo VAR(4)-GARCH( 1,1)-BEKK (que está próximo a la integrabilidad en varianza), y que existen distintos factores de riesgo que afectan a las primas en los plazos estudiados

Regime Switching Models for Electricity Time Series that Capture Fat Tailed Distributions

In the power market, electricity prices play an important role at the economic level. The behavior of a price trend usually known as a structural break may change over time in terms of its mean value, its volatility, or it may change for a period of time before reverting back to its original behavior or switching to another style of behavior, and the latter is typically termed a regime shift or regime switch. Our task in this thesis is to develop an electricity price time series model that captures fat tailed distributions which can explain this behavior and analyze it for better understanding. For NordPool data used, the obtained Markov Regime-Switching model operates on two regimes: regular and non-regular. Three criteria have been considered price difference criterion, capacity/flow difference criterion and spikes in Finland criterion. The suitability of GARCH modeling to simulate multi-regime modeling is also studied.

Testing Futures Market Efficiency and Optimal Hedge Ratio Estimation: Evidence from Futures and Options on RTS

This study investigates futures market efficiency and optimal hedge ratio estimation. First, cointegration between spot and futures prices is studied using Johansen method, with two different model specifications. If prices are found cointegrated, restrictions on cointegrating vector and adjustment coefficients are imposed, to account for unbiasedness, weak exogeneity and prediction hypothesis. Second, optimal hedge ratios are estimated using static OLS, and time-varying DVEC and CCC models. In-sample and out-of-sample results for one, two and five period ahead are reported. The futures used in thesis are RTS index, EUR/RUB exchange rate and Brent oil, traded in Futures and options on RTS.(FORTS) For in-sample period, data points were acquired from start of trading of each futures contract, RTS index from August 2005, EUR/RUB exchange rate March 2009 and Brent oil October 2008, lasting till end of May 2011. Out-of-sample period covers start of June 2011, till end of December 2011. Our results indicate that all three asset pairs, spot and futures, are cointegrated. We found RTS index futures to be unbiased predictor of spot price, mixed evidence for exchange rate, and for Brent oil futures unbiasedness was not supported. Weak exogeneity results for all pairs indicated spot price to lead in price discovery process. Prediction hypothesis, unbiasedness and weak exogeneity of futures, was rejected for all asset pairs. Variance reduction results varied between assets, in-sample in range of 40-85 percent and out-of sample in range of 40-96 percent. Differences between models were found small, except for Brent oil in which OLS clearly dominated. Out-of-sample results indicated exceptionally high variance reduction for RTS index, approximately 95 percent.

Dynamic Hedging with Credit Default Swaps: Empirical Evidence from the European Monetary Union

This thesis investigates the effectiveness of time-varying hedging during the financial crisis of 2007 and the European Debt Crisis of 2010. In addition, the seven test economies are part of the European Monetary Union and these countries are in different economical states. Time-varying hedge ratio was constructed using conditional variances and correlations, which were created by using multivariate GARCH models. Here we have used three different underlying portfolios: national equity markets, government bond markets and the combination of these two. These underlying portfolios were hedged by using credit default swaps. Empirical part includes the in-sample and out-of-sample analysis, which are constructed by using constant and dynamic models. Moreover, almost in every case dynamic models outperform the constant ones in the determination of the hedge ratio. We could not find any statistically significant evidence to support the use of asymmetric dynamic conditional correlation model. In addition, our findings are in line with prior literature and support the use of time-varying hedge ratio. Finally, we found that in some cases credit default swaps are not suitable instruments for hedging and they act more as a speculative instrument.

Prevalência dos Sintomas da Síndrome Pré-Menstrual

Objetivos: analisar os sintomas pré-menstruais relatados pelas mulheres com quadros graves de síndrome pré-menstrual (SPM), sua duração e época de aparecimento e patogênese. Métodos: estudo de corte transversal por meio de questionário aplicado a 254 mulheres com idade entre 20 e 44 anos, sem doenças ginecológicas ou clínicas que comprometessem o estado geral ou bem-estar físico. Foram excluídas as que estavam em amenorréia há mais de seis meses, a histerectomizadas e as grávidas. Resultados: 110 mulheres (43,3%) relataram pelo menos um sintoma intenso na fase pré-menstrual causando danos à sua vida, sendo consideradas portadoras de SPM. A irritabilidade foi relatada por 86,4%, cansaço por 70,9%, depressão por 61,8%, cefaléia por 61,8%, mastalgia por 59,1% e dor abdominal por 54,5%. Quase todas (94,5%) tinham mais de uma queixa, 89,1% apresentaram sintomas psíquicos e mais de três quartos das pacientes (76,4%) associavam queixas físicas e psíquicas. A maioria declarou duração de três a quatro dias (32,4%) ou de cinco a sete dias (31,4%). Conclusões: o quadro clínico da SPM, apesar de multivariado, em geral é composto por irritabilidade e/ou depressão, associados a cansaço e dores de cabeça ou nas mamas, coexistindo sintomas físicos e psíquicos, por três a sete dias, sendo difícil atribuí-lo a uma etiologia única, à luz dos conhecimentos atuais.

Modelo Preditivo para Cesariana com Uso de Fatores de Risco

Objetivos: Identificar fatores anteparto relacionados à ocorrência de cesariana. Construir modelo preditivo de cesariana. Pacientes e Métodos: Foram estudados todos os 843 partos assistidos em unidade obstétrica de nível III, no período de junho de 1993 a novembro de 1994.O delineamento do estudo foi de coorte do tipo retrospectivo. O critério de inclusão foi de recém-nascido vivo pesando 1.000 g ou mais. A variável dependente foi cesariana, dicotomizada como presente ou ausente. As variáveis independentes foram os fatores anteparto relacionados à cesariana. Para a construção do modelo foi utilizada a regressão logística. Resultados: O modelo multivariado mostrou risco de cesariana de acordo com as seguintes variáveis independentes: adolescência (idade inferior a 20 anos), odds ratio (OR) = 0,396; idade materna igual ou superior a 28 anos, OR = 2,133; antecedente de parto normal, OR = 0,626; antecedente de cesariana OR = 4,576; assistência pré-natal, OR=2,346; apresentação pélvica, OR = 4,174; gemelaridade OR = 14,065; hemorragia da segunda metade da prenhez, OR = 28,189; pré-eclampsia leve, OR = 2,180; pré-eclampsia grave, OR = 16,738; hipertensão arterial crônica, OR = 4,927, e outras intercorrências maternas, OR = 2,012. O modelo matemático mostrou concordância entre a probabilidade prevista e a resposta observada em 82,3%, o que indica sua eficiência. Conclusões: Foram identificados 12 fatores anteparto relacionados à ocorrência de cesariana. Foi possível construir modelo preditivo de cesariana utilizando os fatores de risco anteparto identificados no presente estudo.

Consumo de cafeína por grávidas usuárias de uma Unidade Básica de Saúde no município do Rio de Janeiro

OBJETIVO: avaliar o consumo de cafeína em gestantes e sua associação com variáveis demográficas, socioeconômicas, reprodutivas e comportamentais e com o estado nutricional materno. MÉTODOS: trata-se de estudo do tipo transversal, realizado entre 2005 e 2007. A presente análise refere-se ao período entre a oitava e a 13ª semana gestacional, sendo realizada com 255 gestantes entre 18 e 40 anos, usuárias de uma Unidade Básica de Saúde no município do Rio de Janeiro, Rio de Janeiro. A variável "desfecho"foi o consumo de cafeína quantificado por meio de questionário de freqüência alimentar semiquantitativo, previamente validado, o qual continha uma lista de alimentos com 81 itens e oito opções de freqüência de consumo. A ingestão de cafeína foi quantificada a partir do consumo de: chocolate em pó/Nescau®, chocolate em barra ou bombom, refrigerante, café e mate. A análise estatística foi realizada por meio de modelo hierarquizado de regressão linear múltipla. RESULTADOS: a mediana e o consumo médio de cafeína foram, respectivamente, de 97,5 e 121,1 mg (desvio padrão, dp=128,4). Já o consumo elevado da substância (>300 mg/dia) foi observado em 8,3% das gestantes. No modelo multivariado, observou-se que mulheres cuja menarca ocorreu mais cedo (β=-0,15), com maior número de pessoas vivendo na casa (β=0,17) e que não faziam uso de medicamentos (β=-0,24) apresentaram maior tendência ao consumo elevado de cafeína e esta foi estatisticamente significativa (p<0,05). CONCLUSÕES: o consumo de cafeína pela maioria das gestantes foi inferior ao limite de 300 mg/dia preconizado em outros estudos. Observou-se tendência ao consumo elevado de cafeína nas gestantes cuja menarca ocorreu mais cedo, com maior número de pessoas vivendo na casa e que não faziam uso de medicamentos.

Ruptura prematura das membranas amnióticas no pré-termo: fatores associados à displasia broncopulmonar

OBJETIVO: identificar os fatores obstétricos e neonatais associados ao desfecho de displasia broncopulmonar em pacientes com amniorrexe prematura no pré-termo. MÉTODOS: foram analisados 213 prontuários do Instituto Fernandes Figueira, entre 1998 e 2002, cujas pacientes evoluíram com quadro de amniorrexe prematura <34 semanas de gestação. Foram excluídas gestações múltiplas. As variáveis de natureza clínico-obstétricas e neonatais foram cotejadas com o desfecho de displasia broncopulmonar. Os dados foram submetidos à análise bivariada, sendo os valores que exibiam significância estatística (p<0,05) submetidos à regressão logística. RESULTADOS: a prevalência de displasia broncopulmonar foi de 6.10%. A análise univariada dos fatores associados ao desfecho de displasia broncopulmonar exibiu os seguintes resultados: tempo de ventilação mecânica neonatal >10 dias (OR: 54,00 [11,55-278,25] p=0,000); idade gestacional <30 semanas (OR: 6,33 [1,26-43,06] p=0,017) peso <1.000 g (OR: 4,82 [1,34-17,53] p=0,010); peso <1.500 g (OR: 14,09 [1,82-300,50] p=0,003; persistência do canal arterial (OR: 12,33 [3,07-50,10], p=0,000); doença da membrana hialina (OR: 8,46 [2,21-35,00] p=0,000); pneumonia congênita (OR: 7,48 [2,03-27,93] p=0,000); uso de surfactante neonatal (OR: 19,66 [4,54-97,76] p=0,000) e infecção neonatal (OR: 7,67 [0,99-163,79] p=0,049). No modelo multivariado final, somente as variáveis "ventilação mecânica">10 dias (p=0,001) e "uso de surfactante" (p=0,040) permaneceram independentemente associadas ao desfecho. CONCLUSÕES: observou-se que os fatores associados à displasia broncopulmonar são de natureza neonatal, sendo que a ventilação mecânica duradoura e o uso de surfactante neonatal influenciaram no desenvolvimento dessa doença.

Fatores preditores de recorrência do endometrioma ovariano após tratamento laparoscópico

OBJETIVO: Analisar os fatores que possam influenciar na recorrência do endometrioma ovariano após tratamento videolaparoscópico.MÉTODOS: Estudo de coorte retrospectivo. Foram avaliadas 129 pacientes submetidas à videolaparoscopia, entre 2003 e 2012, para tratamento de endometrioma ovariano, com seguimento pós-operatório mínimo de 2 anos. Foi realizada ultrassonografia transvaginal para excluir persistência da lesão e identificação de recidiva. Para comparação de variáveis contínuas foi utilizado o teste t de Student, e para o teste de homogeneidade entre as proporções, o teste do χ2 ou exato de Fisher (para frequências menores do que cinco). Para a obtenção de fatores prognósticos ligados à recidiva foi aplicado o modelo de regressão linear multivariado. O nível de significância utilizado para a análise foi de 5%.RESULTADOS: A taxa de recorrência foi de 18.6%. O tamanho do endometrioma, a modalidade cirúrgica empregada e os dados demográficos como idade, índice de massa corpórea, presença de sintomas, tabagismo e prática de exercícios físicos não se associaram ao aumento da recorrência. Foi observado que a interrupção do tratamento clínico pós-operatório apresentou risco significativo para aumento da recorrência (OR 23,7; IC95% 5,26-107,05; p=0,001).CONCLUSÃO: O uso contínuo de contracepção oral parece reduzir dramaticamente a taxa de recidiva de endometrioma ovariano. Neste estudo, a interrupção do tratamento foi o fator associado com maior taxa de recidiva da lesão após o tratamento videolaparoscópico.

Interdependence of Emerging Eastern European stock markets

One of the main developments in the global economy during the past decades has been the growth of emerging economies. Projections for their long-term growth, changes in the investment climate, corporate transparency and demography point to an increasing role for these emerging economies in the global economy. Today, emerging economies are usually considered as financial markets offering opportunities for high returns, good risk diversification and improved return-to-risk ratios. However, researchers have noted that these advantages may be in decline because of the increasing market integration. Nevertheless, it is likely that certain financial markets and specific sectors will remain partially segmented and somewhat insulated from the global economy for the year to come. This doctoral dissertation investigates several stock markets in Emerging Eastern Europe (EEE), including the ones in Russia, Poland, Hungary, the Czech Republic, Bulgaria and Slovenia. The objective is to analyze the returns and financial risks in these emerging markets from international investor’s point of view. This study also examines the segmentation/integration of these financial markets and the possibilities to diversify and hedge financial risk. The dissertation is divided into two parts. The first includes a review of the theoretical background for the articles and a review of the literature on EEE stock markets. It includes an overview of the methodology and research design applied in the analysis and a summary of articles from the second part of this dissertation and their main findings. The second part consists of four research publications. This work contributes to studies on emerging stock markets in four ways. First, it adds to the body of research on the pricing of risk, providing new empirical evidence about partial stock market segmentation in EEE. The results suggest that the aggregate emerging market risk is a relevant driver for stock market returns and that this market risk can be used to price financial instruments and forecast their performance. Second, it contributes to the empirical research on the integration of stock markets, asset prices and exchange rates by identifying the relationships between these markets through volatility and asset pricing. The results show that certain sectors of stock markets in EEE are not as integrated as others. For example, the Polish consumer goods sector, the Hungarian telecommunications sector, and the Czech financial sector are somewhat isolated from their counterparts elsewhere in Europe. Nevertheless, an analysis of the impact of EU accession in 2004 on stock markets suggests that most of the EEE markets are becoming increasingly integrated with the global markets. Third, this thesis complements the scientific literature in the field of shock and volatility spillovers by examining the mechanism of spillover distribution among the EU and EEE countries. The results illustrate that spillovers in emerging markets are mostly from a foreign exchange to the stock markets. Moreover, the results show that the effects of external shocks on stock markets have increased after the enlargement of the EU in 2004. Finally, this study is unique because it analyzes the effects of foreign macroeconomic news on geographically closely related countries. The results suggest that the effects of macroeconomic announcements on volatility are significant and have effect that varies across markets and their sectors. Moreover, the results show that the foreign macroeconomic news releases, somewhat surprisingly, have a greater effect on the EEE markets than the local macroeconomic news. This dissertation has a number of implications for the industry and for practitioners. It analyses financial risk associated with investing in Emerging Eastern Europe. Investors may use this information to construct and optimize investment portfolios. Moreover, this dissertation provides insights for investors and portfolio managers considering asset allocation to protect value or obtain higher returns. The results have also implications for asset pricing and portfolio selection in light of macroeconomic news releases.

Market integration, return and volatility dynamics; empirical evidence from African stock markets

Frontier and Emerging economies have implemented policies with the objective of liberalizing their equity markets. Equity market liberalization opens the domestic equity market to foreign investors and as well paves the way for domestic investors to invest in foreign equity securities. Among other things, equity market liberalization results in diversification benefits. Moreover, equity market liberalization leads to low cost of equity capital resulting from the lower rate of return by investors. Additionally, foreign and local investors share any potential risks. Liberalized equity markets also become liquid considering that there are more investors to trade. Equity market liberalization results in financial integration which explains the movement of two markets. In crisis period, increased volatility and co-movement between two markets may result in what is termed contagion effects. In Africa, major moves toward financial liberalization generally started in the late 1980s with South Africa as the pioneer. Over the years, researchers have studied the impact of financial liberalization on Africa’s economic development with diverse results; some being positive, others negative and still others being mixed. The objective of this study is to establish whether African stock-markets are integrated into the United States (US) and World market. Furthermore, the study helps to see if there are international linkages between the Africa, US and the world markets. A Bivariate- VAR- GARCH- BEKK model is employed in the study. In the study, the effect of thin trading is removed through series of econometric data purification. This is because thin trading, also known as non-trading or inconsistency of trading, is a main feature of African markets and may trigger inconsistency and biased results. The study confirmed the widely established results that the South Africa and Egypt stock markets are highly integrated with the US and World market. Interestingly, the study adds to knowledge in this research area by establishing the fact that Kenya is very integrated with the US and World markets and that it receives and exports past innovations as well as shocks to and from the US and World market.

Interdependence of International Stock Markets, European Government Bond Market and Gold Market

This thesis examines the interdependence of international stock markets (the USA, Europe, Japan, emerging markets, and frontier markets), European government bond market, and gold market during the 21st century. Special focus is on the dynamics of the correlations between the markets, as well as on, spillovers in mean returns and volatility. The mean return spillovers are examined on the basis of the bivariate VAR(1) model, whereas the bivariate BEKK-GARCH(1, 1) model is employed for the analysis of the volatility spillovers. In order to analyze the spillover effects in different market conditions, the full sample period from 2000 to 2013 is divided into the pre-crisis period (2000–2006) and the crisis period (2007–2013). The results indicate an increasing interdependence especially within international stock markets during the periods of financial turbulence, and are thus consistent with the existing literature. Hence, bond and gold markets provide the best diversification benefits for equity investors, particularly during the periods of market turmoil.