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.

Rahatalous

Suomen Pankin kirjaston rahatalouden kokoelma on maan kattavin ja monipuolisin rahatalouteen ja rahoitusmarkkinoihin painottunut kokoelma. Kokoelmaan kuuluu merkittävä määrä nimekkeitä, joita ei ole hankittu muihin suomalaisiin kirjastoihin. Rahatalouden kokoelma koostuu monografioista, painetuista kausijulkaisuista ja elektronisista lehtitietokannoista. Kokoelma on painottunut tieteelliseen kirjallisuuteen, joka tukee pankissa tehtävää tutkimusta. Lisäksi aineistossa on huomattava määrä yleistajuista kirjallisuutta rahatalouden eri aihealueilta. Rahatalouden kokoelmaan kuuluu monografioita n. 9000 nimekettä (joulukuu 2010). Kokoelma käsittää nimekkeitä useilta eri aihealueilta, kuten rahapolitiikka ja rahateoria (n. 900), valuutat, valuuttajärjestelmät ja valuuttakurssit (n. 1100), pankkitoiminta ja keskuspankit (n. 1300), rahoitusmarkkinat (n. 1700), yleinen talousteoria ja oppihistoria (n. 1300), talouspolitiikka ja -historia (n. 450), hyöty- ja hintateoriat (n. 300), taloudellinen kasvu ja kansantulo (n. 700), suhdanteet (n. 250), julkinen talous ja verotus (n. 400) ja ekonometria (n. 600). Lehtiä kokoelmaan kuuluu n. 300 nimekettä, joista edelleen tilataan 200 nimekettä. Osa lehdistä löytyy painettuna ja osa on käytettävissä kirjastoon hankittujen elektronisten lehtitietokantojen kautta. Kokoelma karttuu pääosin ostojen kautta ja uutta aineistoa hankitaan jatkuvasti. Kokoelmaa on kartutettu systemaattisesti 1950-luvulta lähtien, minkä vuoksi siihen kuuluu merkittävästi vanhempaa aineistoa. Kokoelmaan kuuluvista kirjoista n. 26 % on julkaistu 2000-luvulla ja n. 21 % 1990-luvulla. Varsin suuri osa kirjoista, n. 29 %, on julkaistu 1970- ja 1980-luvulla. Ennen vuotta 1950 julkaistua aineistoa on n. 10 % kokoelmasta. Aineisto on valtaosin englanninkielistä, mutta kokoelmaan kuuluu myös suomen-, ruotsin- ja saksankielisiä nimekkeitä. Monografiat on luokiteltu Suomen Pankin kirjaston oman luokitusjärjestelmän mukaan. Kokoelmaa säilytetään Suomen Pankin kirjaston tiloissa jaettuna avokokoelmaan ja varastokokoelmaan. Aineiston ensisijaisia käyttäjiä ovat pankin oma henkilökunta, mutta kirjasto on avoinna myös kaikille ulkoisille asiakkaille. Kokoelma on lainattavissa muutamia poikkeuksia lukuun ottamatta.

Euroalueen ja muiden ulkomaisten keskuspankkien julkaisut

Kokoelma sisältää euroalueen keskuspankkien ja muiden ulkomaisten keskuspankkien julkaisemia tilastojulkaisuja, vuosikertomuksia ja lehtiä rahapolitiikasta, rahoitusmarkkinoista, finanssivalvonnasta, rahahuollosta ja pankkitoiminnasta. Julkaisuissa on tilastotietoa kyseisistä maista ja katsauksia taloudelliseen tilanteeseen ja rahapoliittisiin toimenpiteisiin. Tilastot ovat yleensä maan omassa valuutassa. Julkaisuja on n. 3890 nimekettä 1800 -luvulta lähtien. Kokoelman julkaisut ovat enimmäkseen englanninkielisiä, mutta julkaisuja on myös kansallisilla kielillä. Keskuspankkikokoelma kasvaa painetuilla vuosikertomuksilla, tilastoilla ja raporteilla. Osa tilastojulkaisuista sekä lehdistä on verkkojulkaisuina keskuspankkien sivuilla. Kokoelman vanhin aineisto on Ruotsin ja Englannin keskuspankkien lainsäädäntöä 1800-luvun puolivälistä. Euroalueelta kokoelmassa on Alankomaiden, Belgian, Espanjan, Irlannin, Italian, Itävallan, Kreikan, Kyproksen, Luxemburgin, Maltan, Portugalin, Ranskan, Saksan, Slovakian, Slovenian, ja Viron keskuspankkien julkaisuja. Suomen Pankin julkaisut on käsitelty omana alueenaan. Kokoelmassa on myös Argentiinan, Australian, Brasilian, Bulgarian, Intian, Islannin, Ison-Britannian, Israelin, Japanin, entisen Jugoslavian, Kanadan, Kiinan, Latvian, Liettuan, Puolan, Romanian, Ruotsin, Sveitsin, Tanskan, Tsekin, entisen Tsekkoslovakian, Turkin, Ukrainan, Unkarin, Uuden Seelannin, Venäjän ja Yhdysvaltojen keskuspankkien julkaisuja. Painettua kokoelmaa säilytetään varastokokoelmassa, ja se on saatavana pyynnöstä käyttöön ja kopioitavaksi.

The Impact of European Macroeconomic News Announcements on CIVETS Stock Markets

The purpose of this research is to investigate how CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) stock markets are integrated with Europe as measured by the impact of euro area (EA) scheduled macroeconomic news announcements, which are related to macroeconomic indicators that are commonly used to indicate the direction of the economy. Macroeconomic announcements used in this study can be divided into four categories; (1) prices, (2) real economy, (3) money supply and (4) business climate and consumer confidence. The data set consists of daily market data from CIVETS and scheduled macroeconomic announcements from the EA for the years 2007-2012. The econometric model used in this research is Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH). Empirical results show diverse impacts of macroeconomic news releases and surprises for different categories of news supporting the perception of heterogeneity among CIVETS. The analyses revealed that in general EA macroeconomic news releases and surprises affect stock market volatility in CIVETS and only in some cases asset pricing. In conclusion, all CIVETS stock markets reacted to the incoming EA macroeconomic news suggesting market integration to some extent. Thus, EA should be considered as a possible risk factor when investing in CIVETS.

The Forecast Performance of Model-Free Implied Volatility: Evidence from DAX Index Options

Volatility has a central role in various theoretical and practical applications in financial markets. These include the applications related to portfolio theory, derivatives pricing and financial risk management. Both theoretical and practical applications require good estimates and forecasts for the asset return volatility. The goal of this study is to examine the forecast performance of one of the more recent volatility measures, model-free implied volatility. Model-free implied volatility is extracted from the prices in the option markets, and it aims to provide an unbiased estimate for the market’s expectation on the future level of volatility. Since it is extracted from the option prices, model-free implied volatility should contain all the relevant information that the market participants have. Moreover, model-free implied volatility requires less restrictive assumptions than the commonly used Black-Scholes implied volatility, which means that it should be less biased estimate for the market’s expectations. Therefore, it should also be a better forecast for the future volatility. The forecast performance of model-free implied volatility is evaluated by comparing it to the forecast performance of Black-Scholes implied volatility and GARCH(1,1) forecast. Weekly forecasts for six years period were calculated for the forecasted variable, German stock market index DAX. The data consisted of price observations for DAX index options. The forecast performance was measured using econometric methods, which aimed to capture the biasedness, accuracy and the information content of the forecasts. The results of the study suggest that the forecast performance of model-free implied volatility is superior to forecast performance of GARCH(1,1) forecast. However, the results also suggest that the forecast performance of model-free implied volatility is not as good as the forecast performance of Black-Scholes implied volatility, which is against the hypotheses based on theory. The results of this study are consistent with the majority of prior research on the subject.

Uma avaliação das contribuições de Stiglitz à teoria dos mercados financeiros

The objective and originality of this paper lie in identifying Stiglitz's main theoretical contributions to Financial Economics and in briefly portraying the contemporary economic thought out of which these contributions emerged as well as in suggesting their connections with the subsequent economic thought. Grounded on a detailed analysis of Stiglitz's works on finance, his most important theoretical findings are singled out and gathered into four issues: (1) the conditions under which the Modigliani-Miller theorem is valid; (2) the inconsistency inherent to the efficient market hypothesis; (3) the microeconomic effects of asymmetrical information in financial markets; and (4) its real macroeconomic effects. In all of these topics, the focal point of Stiglitz's theoretical research is the unrealistic underpinnings on which the Arrow-Debreu competitive equilibrium model relies. It is also emphasised that this same perspective he coherently followed to construct a fully-fledged theoretical framework would be preserved in his empirical investigations, notably about developing countries, on which he has concentrated effort since the beginnings of the nineties.

Décentralisation financière et pays en dévelopement: concepts, mesure et évaluation

Ce texte présente ce qu’est la décentralisation fiscale, fait ressortir ses forces et ses faiblesses et identifie les raisons de son succès, le tout dans le contexte de huit pays en développement en faisant appel à de l’information sur l’Argentine, la Chine, la Colombie, l’Inde, l’Indonésie, le Maroc, le Pakistan et la Tunisie. Le texte est divisé en trois parties. La première expose les concepts pertinents, la seconde présente un certain nombre d’indicateurs quantitatifs et la troisième évalue les conditions de succès de la décentralisation.

In Search of Advice for Physicians in Entry-Level Medical Markets

We consider entry-level medical markets for physicians in the United Kingdom. These markets experienced failures which led to the adoption of centralized market mechanisms in the 1960's. However, different regions introduced different centralized mechanisms. We advise physicians who do not have detailed information about the rank-order lists submitted by the other participants. We demonstrate that in each of these markets in a low information environment it is not beneficial to reverse the true ranking of any two acceptable hospital positions. We further show that (i) in the Edinburgh 1967 market, ranking unacceptable matches as acceptable is not profitable for any participant and (ii) in any other British entry-level medical market, it is possible that only strategies which rank unacceptable positions as acceptable are optimal for a physician.

Methods to Estimate Dynamic Stochastic General Equilibrium Models

This paper employs the one-sector Real Business Cycle model as a testing ground for four different procedures to estimate Dynamic Stochastic General Equilibrium (DSGE) models. The procedures are: 1 ) Maximum Likelihood, with and without measurement errors and incorporating Bayesian priors, 2) Generalized Method of Moments, 3) Simulated Method of Moments, and 4) Indirect Inference. Monte Carlo analysis indicates that all procedures deliver reasonably good estimates under the null hypothesis. However, there are substantial differences in statistical and computational efficiency in the small samples currently available to estimate DSGE models. GMM and SMM appear to be more robust to misspecification than the alternative procedures. The implications of the stochastic singularity of DSGE models for each estimation method are fully discussed.

Economic Development under Alternative Trade Regimes

How does openness affect economic development? This question is answered in the context of a dynamic general equilibrium model of the world economy, where countries have technological differences that are both sector-neutral and specific to the investment goods sector. Relative to a benchmark case of trade in credit markets only, consider (i) a complete restriction of trade, and (ii) a full liberalization of trade. The first change decreases the cross-sectional dispersion of incomes only slightly, and produces a relatively small welfare loss. The second change, instead, decreases dispersion by a significant amount, and produces a very large welfare gain.

La banque d'investissement et la conglomération du secteur financier : une multiplicité d'intérêts en quête d'équilibre

Jouant un rôle crucial pour l’efficience des marchés, la banque d’investissement contemporaine se caractérise par l’exercice d’une grande diversité d’activités aussi complexes qu’hétérogènes sous un même toit. Agissant tantôt auprès d’une clientèle de particuliers, d’entreprises, d’institutions financières, de fonds d’investissement ou de gouvernements, et tantôt pour son propre compte, elle compose avec une multitude d’intérêts divergents, ce qui soulève un certain questionnement quant à la portée de l’obligation de loyauté dont elle peut être tributaire envers ses clients. Les implications répétées des banques d’affaires dans la vague de récents scandales financiers ont inévitablement affecté la confiance que les épargnants témoignent envers l’intégrité de cette institution et des marchés financiers en général. Elles ont de plus contribué significativement à relancer le débat concernant la pertinence de contrôler, et même d’éliminer les conflits d’intérêts, un phénomène largement répandu au sein de la banque d’investissement. À titre de mécanismes préventifs, les solutions de marchés et l’autodiscipline des intermédiaires financiers sont imparfaits. La réglementation des conflits d’intérêts se justifie alors afin de pallier les défaillances du marché et de l’autorégulation. Pour autant qu’il maintienne sa réglementation dans un rapport efficience-équité acceptable, l’État est appelé à concevoir des normes de contrôle aux objectifs variés, allant de la réforme structurelle du secteur financier à l’élaboration de principes généraux devant servir de balises à la conduite des intermédiaires financiers. Ainsi, dans une industrie caractérisée par une forte conglomération, la réponse des législateurs semble s’articuler autour du traitement adéquat des conflits d’intérêts, traitement qui s’opère par divers mécanismes, dont la muraille Chine, la divulgation et le refus d’agir.

Banque mondiale et développement. Pertinences scientifiques des discours et pratiques de développement de la Banque mondiale dans les PED des années 80 à nos jours.

RÉSUMÉ « De nos jours, notent Samoff et Carrol, la Banque mondiale doit être considérée à la fois comme une banque, une agence de développement et un institut de recherche » (2004, p9). L’institution de Bretton Woods est en effet devenue notamment dans le cadre du développement des PED, à la fois une banque de prêt et une institution de savoir ; « le laboratoire d’idées sur le développement le plus important au monde », précisent Wilks et Lefrançois (2002). Cependant, si elle reste un partenaire idéologique et financier pour le développement de ces pays, la Banque mondiale est aussi en même temps dans le paysage des relations économiques internationales contemporaines une véritable superpuissance, une figure importante de la dominance mondiale d’aujourd’hui. Les programmes de développement qu’elle professe et met en œuvre dans les PED y sont de ce fait également les discours et pratiques de développement dominants. Mais le discours de développement de la Banque mondiale dans les PED, outre qu’il y soit le savoir dominant du développement, se veut aussi par ailleurs un discours d’érudition : un corps de connaissances savant de développement, qui dans sa formulation comme dans son contenu revendique l’appartenance à une certaine rationalité, vise à une certaine « scientificité ». Partant, la question autour de laquelle s’organise la présente thèse et qui est au cœur de sa problématique est la suivante : le programme de développement que la Banque mondiale destine aux PED dans sa dimension discursive en particulier, est-il pour autant rationnel et raisonnable ? En d’autres termes : de quel crédit scientifique et moral peut jouir ce programme; de quelle cohérence, de quel réalisme, et de quelle adéquation sociale, peut se prévaloir un tel système de pensées et d’actions de développement ? Mais interroger les bien-fondés épistémologiques de son programme de développement dans les PED revient aussi au plans politique et social à questionner cette position de dominance qu’occupe la Banque mondiale dans ces pays. Aussi notre questionnement général s’enchaîne-t-il comme suit: ce pouvoir d’autorité de la Banque mondiale dans les PED, tire t-il sa légitimité d’un fondement rationnel convaincant, capable de résister à la critique, ou plutôt, s’enracine t-il dans une confusion idéologique sciemment instaurée et entretenue ou comme dit Rist, dans le « pouvoir de celui qui parvient à l’imposer» ?