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Estimating the country risk premium in emerging markets: the case
Estimating the country risk premium in emerging markets: the case

... considered to be free from the risk of default. The beta of a security measures the sensitivity of the returns on the security to changes in systematic factors. The market risk premium is the excess return of the market as a whole, over the riskfree rate. As Watson and Head (2007) note, in the CAPM ...
Corporate Bond Portfolios - European Financial Management
Corporate Bond Portfolios - European Financial Management

a PDF of the full article
a PDF of the full article

... bankruptcy of a sovereign state or crash in an industrial sector). This type of scenario requires the creation of a dashboard of all changed risk factors, a correlation matrix and a choice of financial behaviour model. • Probable scenarios based on implied volatility. • Fund strategy-specific scenar ...
Funding Liquidity, Market Liquidity and the Cross-Section
Funding Liquidity, Market Liquidity and the Cross-Section

... significant when funding risk is combined with other liquidity proxies (these proxies typically become insignificant). This is not due to the correlation between shocks in the time series—these correlations are very low—but to the correlation between the risk exposures. The β estimates are correlate ...
risk appetite renaissance - RBC Global Asset Management
risk appetite renaissance - RBC Global Asset Management

... risk throughout their lives despite the repercussion of inferior returns. ...
Black-Scholes Limitations - by Jan Röman
Black-Scholes Limitations - by Jan Röman

... successful model for pricing financial options. They introduced the Black-Scholes formula to aid in pricing stock options. Over the ensuing 24 years, the financial community gradually accepted the BlackScholes model and incorporated it into brokerage side of the financial business. In 1997, after ye ...
Model Uncertainty, Limited Market Participation, and Asset Prices
Model Uncertainty, Limited Market Participation, and Asset Prices

... of stockholders’ observations is used, the standard asset-pricing models such as Lucas (1978) can match the observed equity premium using a much lower risk aversion coefficient than the one used in Mehra and Prescott (1985). Basak and Cuoco (1998) show theoretically that equity premium increases as ...
Option Pricing - AUEB e
Option Pricing - AUEB e

... the underlying, while that of the call is higher than the current price of the underlying. Again, a long straddle yields a profit when there is a substantial move in the stock index in either direction. The index must move farther in a strangle than in a straddle for the strategy to yield a profit. ...
Commonality In The Determinants Of Expected Stock Returns
Commonality In The Determinants Of Expected Stock Returns

... systematically surprise investors. They believe that investors over react to the past records of success and failure by firms. Proponents of over-reactive markets believe that the forces of competition in a line of business tend to quickly drive profits to normal levels. By projecting prolonged rapi ...
Household Heterogeneity and Incomplete Financial Markets: Asset Return Implications in a
Household Heterogeneity and Incomplete Financial Markets: Asset Return Implications in a

NBER WORKING PAPER SERIES LEVERAGE CONSTRAINTS AND THE INTERNATIONAL TRANSMISSION OF SHOCKS
NBER WORKING PAPER SERIES LEVERAGE CONSTRAINTS AND THE INTERNATIONAL TRANSMISSION OF SHOCKS

... The paper’s main contribution is to compare how macro shocks are transmitted under different financial market structures. We do not attempt to provide an integrated explanation of the recent crisis, or a full quantitative calibration, but instead highlight how the joint process of balance sheet con ...
download
download

... the January 1993 December 1997 subperiod. In this subperiod, we get the evidence of the statistically significant one-day lagged effect of large cap portfolio returns on small cap portfolio returns. There is also an effect of one-day lagged small cap portfolio returns on large cap portfolio returns ...
Concentration risk in credit portfolios - June 2006
Concentration risk in credit portfolios - June 2006

2 hundred million +2 hundred million
2 hundred million +2 hundred million

... market have a Normal probability distribution, meaning there is a 1% (significant level) chance that losses will be greater than 2.32 standard deviations.  Assuming a Normal distribution, 99% (confidence interval) VaR can be defined as follows: standard deviation of the portfolio's value The subscr ...
Labor income risk and asset returns
Labor income risk and asset returns

... Ferson, Sarkissian, and Simin (2002) argue, with a simulation exercise, that if both expected returns and the predictive variable are highly persistent the in-sample regression results may be spurious, and both R2 and statistical signi…cance of the regressor are biased upward.6 The autocorrelation o ...
Optimal strategies of hedging portfolio of unit
Optimal strategies of hedging portfolio of unit

... Thus, using the logic of fair valuation, purchasing a replicating portfolio is essential in the evaluation of liabilities. Accordingly, in the case of unit-linked life insurance for example, Frantz et al. (2003) showed that fair valuation is only valid if the underlying hedging is actually applied1. ...
Risk Analysis of Collateralized Debt Obligations
Risk Analysis of Collateralized Debt Obligations

... are common in practice. Alternative bottom-up formulations in Das, Duffie, Kapadia & Saita (2007), Delloye, Fermanian & Sbai (2006) and Duffie, Eckner, Horel & Saita (2009) require the specification and estimation of default timing models for the individual portfolio constituent securities. They all ...
Probability of Default for Microfinance Institutions
Probability of Default for Microfinance Institutions

... Modeling probability of default (PD) ...
Life Settlement Pricing
Life Settlement Pricing

... problem has a unique solution, which is: • The parameters can be obtained easily as the dual variables in an unconstrained convex programming problem: ...
RETURN FORECASTS AND OPTIMAL PORTFOLIO CONSTRUCTION
RETURN FORECASTS AND OPTIMAL PORTFOLIO CONSTRUCTION

... Indeed, applying the standard conditional mean estimation strategy to a multifactor model across a diverse range of stocks is a popular approach to ascertain securities’ return appeal. However, by treating different securities as the same, the above approach forces returns of all securities to have ...
02b risk neutral valuation the black-scholes model and monte
02b risk neutral valuation the black-scholes model and monte

... cannot find a formula for the option value • In some cases we can find a formula for the value of an option (e.g., the Black-Scholes formula) • BUT often, though we continue to use the BlackScholes theory (and the Black-Scholes risk-neutral distribution) there is no formula for the option price Exam ...
The Leverage Rotation Strategy
The Leverage Rotation Strategy

... Leverage aversion is also due to innate behavioral biases. The availability heuristic is a mental rule of thumb that argues that individuals will use the first immediate example that comes to mind when evaluating a topic, or making a decision. Often times, the most extreme negative events become the ...
Decision Technology - Parallel Programming Laboratory
Decision Technology - Parallel Programming Laboratory

...  When running a simulation, it is important that all areas of the input distribution get sampled, especially the low probability (high uncertainty) areas. If not, uncertainty will seem less than it actually is. ...
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Innovation, Job Creation
Innovation, Job Creation

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Modern portfolio theory

Modern portfolio theory (MPT) is a theory of finance that attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets. Although MPT is widely used in practice in the financial industry and several of its creators won a Nobel memorial prize for the theory, in recent years the basic assumptions of MPT have been widely challenged by fields such as behavioral economics.MPT is a mathematical formulation of the concept of diversification in investing, with the aim of selecting a collection of investment assets that has lower overall risk than any other combination of assets with the same expected return. This is possible, intuitively speaking, because different types of assets sometimes change in value in opposite directions. For example, to the extent prices in the stock market move differently from prices in the bond market, a combination of both types of assets can in theory generate lower overall risk than either individually. Diversification can lower risk even if assets' returns are positively correlated.More technically, MPT models an asset's return as a normally or elliptically distributed random variable, defines risk as the standard deviation of return, and models a portfolio as a weighted combination of assets, so that the return of a portfolio is the weighted combination of the assets' returns. By combining different assets whose returns are not perfectly positively correlated, MPT seeks to reduce the total variance of the portfolio return. MPT also assumes that investors are rational and markets are efficient.MPT was developed in the 1950s through the early 1970s and was considered an important advance in the mathematical modeling of finance. Since then, some theoretical and practical criticisms have been leveled against it. These include evidence that financial returns do not follow a normal distribution or indeed any symmetric distribution, and that correlations between asset classes are not fixed but can vary depending on external events (especially in crises). Further, there remains evidence that investors are not rational and markets may not be efficient. Finally, the low volatility anomaly conflicts with CAPM's trade-off assumption of higher risk for higher return. It states that a portfolio consisting of low volatility equities (like blue chip stocks) reaps higher risk-adjusted returns than a portfolio with high volatility equities (like illiquid penny stocks). A study conducted by Myron Scholes, Michael Jensen, and Fischer Black in 1972 suggests that the relationship between return and beta might be flat or even negatively correlated.
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