Center for Financial Friction (FRIC) Udgivelsesår
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Effects on Capitalization and Lending Decisions of BanksKragh, Jonas; Rangvid, Jesper (Frederiksberg, 2016)[Flere oplysninger][Færre oplysninger]
Resume: Unique and confidential Danish data allow us to identify how changes in disclosure requirements and bankspecific timevarying capital requirements affect banks'lending and capital accumu lation decisions. We find that banks increase their capital ratios after capital requirements are increased, implying that resilience in the banking system is also increased. The increase in capital ratios is partly due to a modest reduction in lending. Using a policy changes, we show that banks react stronger to changes in capital requirements when these are public. Our results further suggest that the impact of capital requirements di¤er for small and large banks. Large banks raise their capital ratios more, reduce lending less, and accumulate more new capital compared to small banks. URI: http://hdl.handle.net/10398/9314 Filer i denne post: 1
Kragh_Rangvid_May 2016.pdf (284.6Kb) 
Christensen, Peter Ove; Flor, Christian Riis; Lando, David; Miltersen, Kristian R. (, 2014)[Flere oplysninger][Færre oplysninger]
Resume: We consider a dynamic tradeoff model of a firm’s capital structure with debt renegotiation. Debt holders only accept restructuring offers from equity holders backed by threats which are in the equity holders’ own interest to execute. Our model shows that in a complete information model in which taxes and bankruptcy costs are the only frictions, violations of the absolute priority rule (APR) are typically optimal. The size of the bankruptcy costs and the equity holders’ bargaining power affect the size of APR violations, but they have only a minor impact on the choice of capital structure. URI: http://hdl.handle.net/10398/9101 Filer i denne post: 1

Klingler, Sven; Kim, Young Shin; Rachev, Svetlozar T.; Fabozzi, Frank J. (, 2013)[Flere oplysninger][Færre oplysninger]
Resume: In this paper, we introduce two new sixparameter processes based on timechanging tempered stable distributions and develop an option pricing model based on these processes. This model provides a good t to observed option prices. To demonstrate the advantages of the new processes, we conduct two empirical studies to compare their performance to other processes that have been used in the literature. URI: http://hdl.handle.net/10398/9104 Filer i denne post: 1
sven_klingler_option_pricing.pdf (279.7Kb) 
[Flere oplysninger][Færre oplysninger]
Resume: We price vulnerable derivatives  i.e. derivatives where the counter party may default. These are basically the derivatives traded on the OTC markets. Default is modeled in a structural framework. The technique employed for pricing is Good Deal Bounds. The method imposes a new restriction in the arbitrage free model by setting upper bounds on the Sharpe ratios of the assets. The potential prices which are eliminated represent unreasonably good deals. The constraint on the Sharpe ratio translates into a constraint on the stochastic discount factor. Thus, tight pricing bounds can be obtained. We provide a link between the objec tive probability measure and the range of potential risk neutral measures which has an intuitive economic meaning. We also provide tight pricing bounds for European calls and show how to extend the call formula to pricing other nancial products in a consistent way. Finally, we numeri cally analyze the behavior of the good deal pricing bounds. URI: http://hdl.handle.net/10398/8899 Filer i denne post: 1

Moskowitz, Tobias J.; Ooi, Yao Hua; Heje Pedersen, Lasse (Amsterdam, 2012)[Flere oplysninger][Færre oplysninger]
Resume: We document significant ‘‘time series momentum’’ in equity index, currency, commodity, and bond futures for each of the 58 liquid instruments we consider. We find persistence in returns for one to 12 months that partially reverses over longer horizons, consistent with sentiment theories of initial underreaction and delayed overreaction. A diversified portfolio of time series momentum strategies across all asset classes delivers substantial abnormal returns with little exposure to standard asset pricing factors and performs best during extreme markets. Examining the trading activities of speculators and hedgers, we find that speculators profit from time series momentum at the expense of hedgers. URI: http://hdl.handle.net/10398/8862 Filer i denne post: 1
time_series_momentum_lasse_heje.pdf (997.5Kb) 
Lando, David; Medhat, Mandouh; Stenbo Nielsen, Mads; Feodor Nielsen, Søren (, 2012)[Flere oplysninger][Færre oplysninger]
Resume: We consider additive intensity (Aalen) models as an alternative to the multiplicative intensity (Cox) models for analyzing the default risk of a sample of rated, non nancial U.S. rms. The setting allows for estimating and testing the signi cance of timevarying e ects. We use a variety of model checking techniques to identify misspeci cations. In our nal model we nd evidence of timevariation in the e ects of distancetodefault and shorttolong term debt, we identify interactions between distancetodefault and other covariates, and the quick ratio covariate is signi cant. None of our macroeconomic covariates are signi cant. URI: http://hdl.handle.net/10398/9100 Filer i denne post: 1
david_lando_additive_intensity.pdf (5.373Mb) 
Wagner, Christian (, 2012)[Flere oplysninger][Færre oplysninger]
Resume: In this paper, we derive the dynamics and assess the economic value of currency speculation by formalizing the concept of a trader inaction range. We show that exchange rate returns comprise a timevarying riskpremium and that uncovered interest parity (UIP) holds in a speculative sense. The oftencited `forward bias puzzle' originates from the omission of the riskpremium in standard UIP tests. Consistent with its popularity among market professionals, the carrytrade strategy can be rationalized as it systematically collects riskpremia and generates economic value when applied in multicurrency portfolios. URI: http://hdl.handle.net/10398/9099 Filer i denne post: 1

DickNielsen, Jens; Feldhütter, Peter; Lando, David (Amsterdam, 2012)[Flere oplysninger][Færre oplysninger]
Resume: We analyze liquidity components of corporate bond spreads during 2005–2009 using a new robust illiquidity measure. The spread contribution from illiquidity increases dramatically with the onset of the subprime crisis. The increase is slow and persistent for investment grade bonds while the effect is stronger but more shortlived for speculative grade bonds. Bonds become less liquid when financial distress hits a lead underwriter and the liquidity of bonds issued by financial firms dries up under crises. During the subprime crisis, flighttoquality is confined to AAArated bonds. URI: http://hdl.handle.net/10398/8864 Filer i denne post: 1
corporate_bon_liquidity_david_lando.pdf (623.7Kb) 
Krishnamurthy, Arvind; VissingJørgensen, Annette (Chicago, 2012)[Flere oplysninger][Færre oplysninger]
Resume: Investors value the liquidity and safety of US Treasuries. We document this by showing that changes in Treasury supply have large effects on a variety of yield spreads. As a result, Treasury yields are reduced by 73 basis points, on average, from 1926 to 2008. Both the liquidity and safety attributes of Treasuries are driving this phenomenon. We document this by analyzing the spread between assets with different liquidity (but similar safety) and those with different safety (but similar liquidity). The low yield on Treasuries due to their extreme safety and liquidity suggests that Treasuries in important respects are similar to money. URI: http://hdl.handle.net/10398/8882 Filer i denne post: 1
aggregate_demand_annette_vissing (2).pdf (1.802Mb) 
Feldhütter, Peter; Stenbo Nielsen, Mads (, 2012)[Flere oplysninger][Færre oplysninger]
Resume: We present a new estimation approach that allows us to extract from spreads in synthetic credit markets the contribution of systematic and idiosyncratic default risk to total default risk. Using an extensive data set of 90,600 CDS and CDO tranche spreads on the North American Investment Grade CDX index we conduct an empirical analysis of an intensitybased model for correlated defaults. Our results show that systematic default risk is an explosive process with low volatility, while idiosyncratic default risk is more volatile but less explosive. Also, we nd that the model is able to capture both the level and time series dynamics of CDO tranche spreads. URI: http://hdl.handle.net/10398/9102 Filer i denne post: 1

Fatum, Rasmus; Pedersen, Jesper; Norman Sørensen, Peter (, 2012)[Flere oplysninger][Færre oplysninger]
Resume: We investigate the intraday effects of intramarginal intervention in a horizontal band on the exchange rate spread. Official intraday data on Danish intervention transactions in the ERM II, the Exchange Rate Mechanism of the European Union, facilitates our analysis. We show that intervention purchases and sales both exert a significant influence on the exchange rate spread, but in opposite directions. Intervention purchases of the small currency, on average, narrow the spread while intervention sales of the small currency, on average, widen the spread. This is a novel finding that differs from those of existing studies that find intervention always widens the exchange rate spread and increases market uncertainty. URI: http://hdl.handle.net/10398/9103 Filer i denne post: 1

Jessen, Cathrine; Poulsen, Rolf (, 2012)[Flere oplysninger][Færre oplysninger]
Resume: In this paper the empirical performance of ve di erent models for barrier op tion valuation is investigated: the BlackScholes model, the constant elasticity of variance model, the Heston stochastic volatility model, the Merton jumpdi usion model, and the in nite activity Variance Gamma model. We use timeseries data from the USD/EUR exchange rate market: standard put and call (plain vanilla) option prices and a unique set of observed market values of barrier options. The models are calibrated to plain vanilla option prices, and prediction errors at dif ferent horizons for plain vanilla and barrier option values are investigated. For plain vanilla options, the Heston and Merton models have similar and superior performance for prediction horizons up to one week. For barrier options, the continuouspath models (BlackScholes, constant elasticity of variance, and Hes ton) do almost equally well, while both models with jumps (Merton and Variance Gamma) perform markedly worse. URI: http://hdl.handle.net/10398/9179 Filer i denne post: 1

Sarno, Lucio; Schneider, Poul; Wagner, Christian (, 2011)[Flere oplysninger][Færre oplysninger]
Resume: We study the properties of foreign exchange risk premiums that can explain the forward bias puzzle, de¯ned as the tendency of highinterest rate currencies to ap preciate rather than depreciate. These risk premiums arise endogenously from the noarbitrage condition relating the term structure of interest rates and exchange rates. Estimating a±ne (multicurrency) term structure models reveals a noticeable tradeo® between matching depreciation rates and accuracy in pricing bonds. Risk premiums implied by our global a±ne model generate unbiased predictions for cur rency excess returns and are closely related to global risk aversion, the business cycle, and traditional exchange rate fundamentals. URI: http://hdl.handle.net/10398/9098 Filer i denne post: 1

Modeling and Risk AnalysisCont, Rama; Jessen, Cathrine (, 2011)[Flere oplysninger][Færre oplysninger]
Resume: Constant Proportion Debt Obligations (CPDOs) are structured credit derivatives which generate high coupon payments by dynamically leveraging a position in an underlying portfolio of investment grade index default swaps. CPDO coupons and principal notes received high initial credit ratings from the major rating agencies, based on complex models for the joint transition of ratings and spreads for all names in the underlying portfolio. We propose a parsimonious model for analyzing the performance of CPDO strategies using a topdown approach which captures the essential risk factors of the CPDO. Our approach allows to compute default probabilities, loss distributions and other tail risk measures for the CPDO strategy and analyze the dependence of these risk measures on various parameters describing the risk factors. We nd that the probability of the CPDO defaulting on its coupon payments is found to be small{and thus the credit rating arbitrarily high{ by increasing leverage, but the ratings obtained strongly depend on assumptions on the credit environment (high spread or low spread). More importantly, CPDO loss distributions are found to be bimodal with a wide range of tail risk measures inside a given rating category, suggesting that credit ratings are insu cient performance indicators for such complex leveraged strategies. A worstcase scenario analysis indicates that CPDO strategies have a high exposure to persistent spreadwidening scenarios CPDO ratings are shown to be quite unstable during the lifetime of the strategy. URI: http://hdl.handle.net/10398/8890 Filer i denne post: 1
constant_proportion_cathrine_jessen.pdf (599.2Kb) 
Björk, Tomas; Murgoci, Agatha; Zhou, Xun Yu (, 2009)[Flere oplysninger][Færre oplysninger]
Resume: The objective of this paper is to study the mean–variance portfolio optimization in continuous time. Since this problem is time inconsistent we attack it by placing the problem within a game theoretic framework and look for subgame perfect Nash equilibrium strategies. This particular problem has already been studied in [2] where the authors assumed a con stant risk aversion parameter. This assumption leads to an equilibrium control where the dollar amount invested in the risky asset is independent of current wealth, and we argue that this result is unrealistic from an eco nomic point of view. In order to have a more realistic model we instead study the case when the risk aversion depends dynamically on current wealth. This is a substantially more complicated problem than the one with constant risk aversion but, using the general theory of time inconsis tent control developed in [4], we provide a fairly detailed analysis on the general case. In particular, when the risk aversion is inversely proportional to wealth, we provide an analytical solution where the equilibrium dollar amount invested in the risky asset is proportional to current wealth. The equilibrium for this model thus appears more reasonable than the one for the model with constant risk aversion. URI: http://hdl.handle.net/10398/9097 Filer i denne post: 1
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