Roesch, D & Scheule, H 2008, 'Integrating stress-testing frameworks' in Roesch, D & Scheule, H (eds), Stress testing for financial institutions: Applications, regulations and techniques, Risk Books, London, UK, pp. 3-15.
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Bank regulators (compare Basel Committee on Banking Supervision 2006) expect financial institutions to provide sufficient Tier I and Tier II capital to cover future worst-case credit portfolio losses. These worst-case losses are based on conservative assumptions for a set of parameters such as the probability of default (PD), asset correlation, loss given default (LGD) or exposure at default (EAD) Stress of PD: probability of default is based on a one factor, non-linear model where the factor equals the 99.9th percentile of a systematic standard normally distributed variable and the sensitivity is based on the so-called asset correlation . Stress of EAD and LGD: EAD and LGD are modelled based on economic downturn conditions.
Iannotta, G & Navone, M 2008, 'Which Factors Affect Bond Underwriting Fees? The Role of Banking Relationships', EUROPEAN FINANCIAL MANAGEMENT, vol. 14, no. 5, pp. 944-961.
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The question of which factors are relevant in determining bond underwriting fees is empirically investigated by analysing 2,202 bond issues completed by European firms during the 1993 - 2003 period. Four major results emerge from the analysis. First, the introduction of the single currency in 1999 has generated an increase in competition among banks, and, as a result, a reduction in underwriting fees. Second, a strong relationship with the issuer's main bank reduces the level of underwriting fees. Third, new issuers are charged with lower underwriter fees relative to firms that have completed issues without building any strong relationship with a bank. Fourth, higher reputation banks charge lower underwriting fees. The implications of these findings are also discussed. © 2008 Blackwell Publishing Ltd.
Pettway, RH, Thosar, S & Walker, S 2008, 'Auctions versus book-built IPOs in Japan: A comparison of aftermarket volatility', Pacific-Basin Finance Journal, vol. 16, no. 3, pp. 224-235.
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In a recent theoretical paper, Sherman [Sherman, A.E., 2005, Global trends in IPO methods: Book building versus auctions with endogenous entry, Journal of Financial Economics 78, 615649.] proposes that: If book building leads to greater expected underpricing relative to uniform price or discriminatory auctions, then it should also lead to less volatility in aftermarket trading. In this paper, we study a Japanese sample and find that book-built IPOs exhibit greater underpricing and higher aftermarket volatility compared to price-discriminatory auctions. Aftermarket volatility wanes with seasoning in both sub-samples, but the book-built volatility levels are persistently higher than those for auctions for as long as one year after the IPO issue date.
Rhee, SG & Wang, J-X 2008, 'Foreign Institutional Ownership and Stock Market Liquidity: Evidence from Indonesia', Journal of Banking and Finance, vol. 33, no. 7, pp. 1312-1324.
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From January 2002 to August 2007, foreign institutions held almost 70% of the free-float value of the Indonesian equity market, or 41% of the total market capitalization. Over the same period, liquidity on the Jakarta Stock Exchange improved substantially with the average bidask spread more than halved and the average depth more than doubled. In this study we examine the Granger causality between foreign institutional ownership and liquidity, while controlling for persistence in foreign ownership and liquidity measures. We find that foreign holdings have a negative impact on future liquidity: a 10% increase in foreign institutional ownership in the current month is associated with approximately 2% increase in the bidask spread, 3% decrease in depth, and 4% rise in price sensitivity in the next month, challenging the view that foreign institutions enhance liquidity in small emerging markets. Our findings are consistent with the negative liquidity impact of institutional investor ownership in developed markets.
Rösch, D & Scheule, H 2008, 'Downturn LGD for Hong Kong mortgage loan portfolios', The Journal of Risk Model Validation, vol. 2, no. 4, pp. 3-11.
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Recent studies find a positive correlation between default and loss given default (LGD) rates for credit portfolios. In response, financial regulators require financial institutions to base their capital on the downturn loss rate given default, which is also known as downturn LGD. This paper compares alternative concepts for the downturn LGD of Hong Kong mortgage loan portfolios.
van de Venter, G & Michayluk, D 2008, 'An Insight into Overconfidence in the Forecasting Abilities of Financial Advisors', Australian Journal of Management, vol. 32, no. 3, pp. 545-557.
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Financial market participants exercise judgment in decision making and psychological studies have shown that individuals are overconfident about their ability to evaluate financial securities. Range estimation calibration studies indicate that individuals tend to estimate narrow intervals in their estimation of unknown future quantities, suggesting overconfidence. Financial planners have an inherent duty of care and this may lead these individuals to behave differently in their estimation methodology and behaviour. From a survey of Australian financial planners, we find extensive overconfidence in respondents' ability to make judgements under uncertainty as shown by a narrow range of forecasts and a substantial number of inaccurate predictions. The overconfidence is present both when comparing estimates to the ex-post outcome of a predicted quantity and to an interval based on historical return volatility.
Wang, J-X & Yang, M 2008, 'Housewives of Tokyo versus the Gnomes of Zurich: Measuring Price Discovery in Sequential Markets', Journal of Financial Markets, vol. 14, no. 1, pp. 82-108.
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This paper presents two methods to measure market-specific contributions to price discovery in non-overlapping sequential markets: one is a non-parametric approach using high-frequency data and the other is a structural VAR model based on open-to-close returns. The methods complement the existing methodologies for comparing price discovery in parallel markets. Using these methods, we estimate the information shares of four sequential markets for the trading of AUD, JPY, EUR, and GBP against USD over an eight-year period. We find that price discovery in the foreign exchange markets are still dominated by Europe and the United States, particularly the London New York overlapping trading hours. Asia is losing information shares to Europe in the trading of AUD and JPY. The significance of the "housewives of Tokyo" in currency trading may have been overstated.
Bruti Liberati, N, Nikitopoulos Sklibosios, C & Platen, E 1970, 'Monte-Carlo simulations of alternative defaultable term structure models', Bachelier Finance Society 5th World Congress, London, UK.
Casavecchia, L 1970, 'The impact of the interaction of managers and clients on market price', Third International Conference on Mathematics in Finance, Kruger National Park, South Africa.
Casavecchia, L & Scotti, M 1970, 'Strategic pricing of mutual funds and the flow-performance relation', Paul Woolley Centre for Capital Market Dysfunctionality Conference 2008, Sydney, Australia.
Glover, K 1970, 'On the properties of the British option', Quantitative Methods in Finance 2008 Conference, Sydney, Australia.
Hulley, H 1970, 'A Chapman-Kolmogorov algorithm for barrier options with moving barriers', Third International Conference on Mathematics in Finance, Kruger National Park, South Africa.
Hulley, H 1970, 'Conditions for Martingales, with Applications in Finance', Quantitative Methods in Finance 2008 Conference, Sydney, Australia.
Hulley, H & Platen, E 1970, 'Laplace transform identities for diffusions, with applications to rebates and barrier options', Banach Centre Publications: Advances in Mathematics of Finance, General AMaMeF Conference and Banach Centre Conference, Polska Akademia Nauk, Bedlewo, Poland, pp. 139-157.
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Using a simple integral identity, we derive general expressions for the Laplace transform of the transition density of the process, if killing or reflecting boundaries are specified. We also obtain a number of useful expressions for the Laplace transforms of some functions of first-passage times for the diffusion. These results are applied to the special case of squared Bessel processes with killing or reflecting boundaries. In particular, we demonstrate how the above-mentioned integral identity enables us to derive the transition density of a squared Bessel process killed at the origin, without the need to invert a Laplace transform. Finally, as an application, we consider the problem of pricing barrier options on an index described by the minimal market model.
Nikitopoulos Sklibosios, C, Bruti Liberati, N, Platen, E & Schlogl, E 1970, 'Real-world pricing for defaultable term structure models', Bachelier Finance Society 5th World Congress, London, UK.
Van de Venter, G & Michayluk, D 1970, 'An empirical examination of factors related to risk tolerance', The 47th Annual Southwestern Finance Association Meeting, Houston, USA.
Zhao, L 1970, 'TSX Index Revisions and Corporate Performance'.
Bird, R, Casavecchia, L & Woolley, PK 2008, 'Insights into the market impact of different investment styles', Working Paper Series, The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney.
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Working Paper Number: 1
Abstract: Modern day equity markets are populated by investors pursuing a number of investment styles. In this paper we simulate the behaviour of investors pursuing various types of these styles in order to examine whether their interaction is a major contributing factor to inefficiencies within markets and particularly to the anomalous pricing behaviour identified in the literature. We found that small market fractions constituted by momentum and growth investors are very disruptive to markets, significantly increasing their volatility and causing mispricing for extended periods of time. They also induce an increase in both the risk and trading volume experienced by the other types of investors. We conclude that momentum and growth investing may be a source of the many market anomalies and serious thought should be given to policy, economic and social implications of equity pricing consistently not reflecting fundamental value.
Hulley, H & Platen, E 2008, 'A Visual Classification of Local Martingales'.
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This paper considers the problem of when a local martingale is a martingale or a universally integrable martingale, for the case of time-homogeneous scalar diffusions. Necessary and sufficient conditions of a geometric nature are obtained for answering this question. These results are widely applicable to problems in stochastic finance. For example, in order to apply risk-neutral pricing, one must first check that the chosen density process for an equivalent change of probability measure is in fact a martingale. If not, risk-neutral pricing is infeasible. Furthermore, even if the density process is a martingale, the possibility remains that the discounted price of some security could be a strict local martingale under the equivalent risk-neutral probability measure. In this case, well-known identities for option prices, such as put-call parity, may fail. Using our results, we examine a number of basic asset price models, and identify those that suffer from the above-mentioned difficulties.
Hutcheson, TJ 2008, 'Improving Student Skills in Essay Writing and Oral Presentations', Working Paper Series.
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In most subjects that students complete as part of a Business or Commerce degree they are typically assessed by way of submitting a written essay and sitting for an exam. A student should be able to show in their written essay that they understand topics covered in the subject and have gained knowledge whilst writing the essay. Unfortunately, lecturers have found that the standard of a large number of written essays submitted by both undergraduate and postgraduate students can be fairly poor and display varying degrees of plagiarism. When marking an essay it is often difficult to know whether a student actually understands what they have written in their essay. This occurs in essays written by local students as well as essays written by overseas students whose first language is not English. Students are often informed in their subject guides and lectures about the University assistance provided on essay writing and plagiarism; however it appears that they do not necessarily take up this assistance. This paper evaluates the impact in a business postgraduate subject of replacing the written essay component of assessment with a shorter written essay and requiring students do an oral presentation of their answer to the class. The students are provided with resources on assignment writing that provide assistance with essay writing and referencing as well as preparation and giving of an oral presentation. A quantitative analysis is undertaken to see whether the use of the assignment writing resources by students had an impact on their assignment mark and also if had an impact on the level of plagiarism found in the written assignments.
Platen, E & Hulley, H 2008, 'Hedging for the Long Run'.
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In the years following the publication of Black and Scholes [7], numerous alternative models have been proposed for pricing and hedging equity derivatives. Prominent examples include stochastic volatility models, jump diffusion models, and models based on Levy processes. These all have their own shortcomings, and evidence suggests that none is up to the task of satisfactorily pricing and hedging extremely long-dated claims. Since they all fall within the ambit of risk-neutral pricing, it is thus natural to speculate that their deficiencies are (at least in part) attributable to the modelling constraints imposed by the risk-neutral approach itself. To investigate this idea, we present a simple two-parameter model for a diversifed equity accumulation index. Although our model does not admit an equivalent risk-neutral probability measure, it nevertheless fulfils a minimal no-arbitrage condition for an economically viable financial market. Furthermore, we demonstrate that contingent claims can be priced and hedged, without the need for an equivalent change of probability measure. Convenient formulae for the prices and hedge ratios of a number of standard European claims are derived, and a series of hedge experiments for extremely long-dated claims on the S&P 500 total return index are conducted. Our model serves also as a convenient medium for illustrating and clarifying several points on asset price bubbles and the economics of arbitrage.
