International Journal of Financial Engineering and Risk Management (8 papers in press)
An Equity-Credit Hybrid Model for Asset Correlations
by Fabio Dias
Abstract: Single factor Gaussian copula models are widely used to manage credit risk of loan portfolios, even driving how many large financial institutions are capitalised under Basel II / III. Under this formulation, the default correlation between two separate firms is directly explained by their asset correlation to a systematic factor, which can be estimated using either equity correlations or observed default rates, with the portfolio losses usually being simulated under a Gaussian copula model. Though it is widely accepted that the use of observed default rates or even equity returns to calibrate a single factor Gaussian copula model is likely to understate the tail risk, this paper proposes a Bayesian approach for a single factor Gaussian copula where the asset correlations are modelled using an inverse Wishart prior with the scale parameter calibrated to observed default rates and the degrees of freedom chosen using the in-sample continuous ranked probability score whilst the equity correlations are used to obtain the posterior distribution. The proposed hybrid model is shown to produce probabilistic forecasts of defaults with better out-of-sample performance than the standard single factor Gaussian copula even though it maintained low complexity and ease of implementation.
Keywords: asset correlations; credit risk management; structural model of credit risk; factor copula models.
Financial markets, energy stock prices and energy political decisions: The case of Cyprus
by Augustinos Dimitras
Abstract: The impact of energy deals announcements on the stock markets is a topic that concerns not only academics but investors and funds too. This study examines the linkages between financial markets and energy firms' stock price returns after the decision of the Cypriot government to exploit its oil and natural gas deposits within its exclusive economic zone. This decision has several geopolitical aspects which affect a large number of interested parties. We employ a dynamic conditional correlation model to measure the effect on financial markets as well as energy firms' stock returns. Results provide evidence that there is no significant impact on either financial markets or energy firms stock prices. Moreover, we highlight the importance of similar political decisions and the reactions of Cyprus' neighbouring countries.
Keywords: energy; financial markets; dynamic conditional correlation; geopolitics of energy.
Special Issue on: FEBS 2017 Advances in Banking and Finance in the Post-Crisis Era
An empirical investigation of Covered Interest rate Parity: The case of the GBP/USD and SEK/USD exchange rates
by Stephanos Papadamou, Evangelia Theodosiou
Abstract: The paper examines empirically a well-established relationship between Forward premi-um and Interest rate differential in International Finance, Covered Interest Rate Parity (CIP). More specifically, a cointegration-based approach is employed to test CIP in two different exchange rates against USD, namely GBP/USD and SEK/USD, by using monthly data and Euro rates for a period of almost fifteen years. Findings suggest the validity of CIP in the case of GBP/USD for both 3-month and 6-month maturities. On the contrary, the empirical analysis of SEK/USD doesnt provide any evidence for ac-cepting the theoretical framework. An important point is that research presents the exist-ence of systematic, small-scale deviations from parity, a finding that can be attributed to the modeling of transaction costs.
Keywords: covered interest rate parity; GBP/USD; SEK/USD; Johansen’s co-integration approach.
Bitcoin as an alternative digital currency. Exploring the publics perception vs experts.
by Spyros Papathanasiou, Nikolaos Papamatthaiou, Dimitrios Balios
Abstract: Νumerous attempts have been made to explain and classify Bitcoin. The different opinions of eminent economists on the subject have raised a series of questions: What is the publics notion of the digital currency? Would a general use of a digital currency be acceptable and if so, what kind of use would that be? Does the view of the experts on the subject conform with that of the layman individual? Our goal is to find out if the view of the public coincides with the opinion of the experts on the subject and to determine if is information can be implemented in order to establish a use of Bitcoin in our everyday lives, apart from the specialized use it has to date.
During the first stage of this research, methods and rules of analysis such as descriptive statistics and tables and charts were used. Firstly, a questionnaire was used and secondly, the answers were gathered, classified and added up according to the participants choices. During the second stage the data was collected with the use of random sampling, while various techniques, such as simple and multiple regressions were utilized for analyzing the results. The conclusion which has been obtained is that the public perceives Bitcoin differently than the experts do. Individuals believe that Bitcoin is mainly a means of transactions/payments, contrary to the experts opinion, which is that it is foremost an investment asset. Additionally, we may perceive a convergence between the view of public and that of the experts on the adoption of Bitcoin technology by existing trading systems.
Keywords: Bitcoin; Cryptocurrencies; publics’ perception; quantitative data collection approach; alternative investments.
Evaluating the effect of IFRS Adoption on Earnings Management in Greece. A logit approach.
by Konstantinos Vergos
Abstract: The study examines if IFRS adoption resulted in the long run to decreasing accounting manipulation. We use the full sample of 231 non-financial firms that were listed on the ASE between 2002 and 2015, to examine our hypothesis. We measure the accounting quality in financial statements of Greece by using five different methods. We provide for the first time evidence based on the long-term period that supports the hypothesis that IFRS adoption has been a significant step towards transparency and lower information costs. The findings of the study endorse the broader and faster adoption of international accounting standards and provide valuable evidence globally that can be useful to regulators and market participants.
Keywords: accounting quality; IFRS; earnings management; earnings manipulation. Logit; Greece; auditing.
Special Issue on: FEBS 2017 Advances in Banking and Finance in the Post-Crisis Era
A study of corporate failure using Data Envelopment Analysis and Quadratic Discriminant Analysis: the case of the Greek construction sector during the period of the economic crisis
by Apostolos Christopoulos, Nikolaos Demiroglou, Ioannis Dokas
Abstract: The aim of the present study is to provide a reliable methodology relative to the use of MDA in the construction process of corporate failure prediction models. In the present study, a two-stage analysis is followed. In the first stage we construct our sample for each sub period: The pre-crisis period 2006-2008 and the crisis period 2009-2011. The distinction of the total sample in two groups (efficient, non-efficient) per sub-period is realized using DEA method. In the second stage we develop the QDA and LDA in order to establish a reliable prediction model per sub period. In more detail we propose an output-oriented DEA model using six financial ratios from the fields of liquidity, activity and profitability. According to the efficiency score of DEA we set two groups of firms for each sub - period. In the second stage emphasis is put on the assumptions of the model used. Firstly, we select financial ratios from the categories of capital structure, profitability and operating ratios. Secondly, the necessary normality tests and transformations are incorporated in the proposed methodology in order to apply the MDA.
Keywords: DEA; Financial Ratios; LDA; QDA; Corporate Failure Prediction; Construction Sector; Business Cycle.
ECBs unconventional monetary policies and the European bank stock returns
by Dimitris Kenourgios, Nancy Kagiana, Athanasios Katevatis
Abstract: This paper examines the impact of the four unconventional monetary policy announcements followed by the European Central Bank on the stock price of European banks, as well as on the STOXX Europe 600 Banks index, from January 2010 to December 2016. The results show that there is a positive relation between the announced programs and the stock returns of the European banks at the same day of the announcement, while the impact is stronger for the long-term sovereign bond purchases (Securities Markets Program). We also find that the banks of the countries which benefit most from the unconventional policies are these from Southern Europe. On the contrary, the announcement of these programs displays a limited effect on the banks of the European core countries and those with solid banking system. Finally, the announcements seem to reduce the volatility of stock prices and especially for the covered bond purchase program (CBPP3).
Keywords: Quantitative easing; European Central Bank; European banks; Stock returns.
Solutions in quadratures to the CEV model
by Evangelos Melas
Abstract: Cox introduced the constant elasticity of variance (CEV) model in 1975, in order to capture this inverse relationship between the stock price and its volatility. An important parameter in the model is the parameter β, the elasticity of volatility. The CEV model subsumes some of the previous option pricing models. For β = 0, β = −1/2, and β = −1 the CEV model reduces respectively to the BSM model, the square−root model of Cox and Ross, and the Bachelier model. Both in the case of the BSM model and in the case of the CEV model it has become traditional to begin a discussion of option pricing by starting with the vanilla European calls and puts. Mathematically, it makes sense to investigate the simpler cases first. We use Kovacics algorithm to derive, for all half−integer values of β, all solutions in quadratures of the CEV ordinary differential equation. These solutions give rise, by separation of variables, to simple solutions to the CEV partial differential equation. In particular, whenrnβ =...,−5/2, −2, −3/2, −1, 1, 3/2, 2, 5/2,... we obtain four classes of of denumerably infinite elementary function solutions, when β=−1/2 and β=1/2 we obtain two classes of of denumerably infinite elementary function solutions, whereas, when β = 0 we find two elementary function solutions.
Keywords: CEV Model; Solutions of ODEs; Kovacic Algorithm.