Tail-risk Protection Trading Strategies
Natalie Packham, Jochen Papenbrock, Peter Schwendner, Fabian Wöbbeking
Quantitative Finance,
No. 5,
2017
Abstract
Starting from well-known empirical stylized facts of financial time series, we develop dynamic portfolio protection trading strategies based on econometric methods. As a criterion for riskiness, we consider the evolution of the value-at-risk spread from a GARCH model with normal innovations relative to a GARCH model with generalized innovations. These generalized innovations may for example follow a Student t, a generalized hyperbolic, an alpha-stable or a Generalized Pareto distribution (GPD). Our results indicate that the GPD distribution provides the strongest signals for avoiding tail risks. This is not surprising as the GPD distribution arises as a limit of tail behaviour in extreme value theory and therefore is especially suited to deal with tail risks. Out-of-sample backtests on 11 years of DAX futures data, indicate that the dynamic tail-risk protection strategy effectively reduces the tail risk while outperforming traditional portfolio protection strategies. The results are further validated by calculating the statistical significance of the results obtained using bootstrap methods. A number of robustness tests including application to other assets further underline the effectiveness of the strategy. Finally, by empirically testing for second-order stochastic dominance, we find that risk averse investors would be willing to pay a positive premium to move from a static buy-and-hold investment in the DAX future to the tail-risk protection strategy.
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The Risk‐Taking Channel of Monetary Policy in the U.S.: Evidence from Corporate Loan Data
Manthos D. Delis, Iftekhar Hasan, Nikolaos Mylonidis
Journal of Money, Credit and Banking,
No. 1,
2017
Abstract
To study the presence of a risk-taking channel in the U.S., we build a comprehensive data set from the syndicated corporate loan market and measure monetary policy using different measures, most notably Taylor (1993) and Romer and Romer (2004) residuals. We identify a negative relation between monetary policy rates and bank risk-taking, especially in the run up to the 2007 financial crisis. However, this effect is purely supply-side driven only when using Taylor residuals and an ex ante measure of bank risk-taking. Our results highlight the sensitivity of the potency of the risk-taking channel to the measures of monetary policy innovations.
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Crowdfunding and Bank Stress
Daniel Blaseg, Michael Koetter
Banking Beyond Banks and Money: A Guide to Banking Services in the Twenty-First Century,
2016
Abstract
Bank instability may induce borrowers to use crowdfunding as a source of external finance. A range of stress indicators help identify banks with potential credit supply constraints, which then can be linked to a unique, manually constructed sample of 157 new ventures seeking equity crowdfunding, for comparison with 200 ventures that do not use crowdfunding. The sample comprises projects from all major German equity crowdfunding platforms since 2011, augmented with controls for venture, manager, and bank characteristics. Crowdfunding is significantly more likely for new ventures that interact with stressed banks. Innovative funding sources are thus particularly relevant in times of stress among conventional financiers. But crowdfunded ventures are generally also more opaque and risky than new ventures that do not use crowdfunding.
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Friend or Foe? Crowdfunding Versus Credit when Banks are Stressed
Daniel Blaseg, Michael Koetter
IWH Discussion Papers,
No. 8,
2015
Abstract
Does bank instability push borrowers to use crowdfunding as a source of external finance? We identify stressed banks and link them to a unique, manually constructed sample of 157 new ventures seeking equity crowdfunding. The sample comprises projects from all German equity crowdfunding platforms since 2011, which we compare with 200 ventures that do not use crowdfunding. Crowdfunding is significantly more likely for new ventures that interact with stressed banks. Innovative funding is thus particularly relevant when conventional financiers are facing crises. But crowdfunded ventures are generally also more opaque and risky than new ventures that do not use crowdfunding.
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The Dynamics of Bank Spreads and Financial Structure
Reint E. Gropp, Christoffer Kok, J.-D. Lichtenberger
Quarterly Journal of Finance,
No. 4,
2014
Abstract
This paper investigates the effect of within banking sector competition and competition from financial markets on the dynamics of the transmission from monetary policy rates to retail bank interest rates in the euro area. We use a new dataset that permits analysis for disaggregated bank products. Using a difference-in-difference approach, we test whether development of financial markets and financial innovation speed up the pass through. We find that more developed markets for equity and corporate bonds result in a faster pass-through for those retail bank products directly competing with these markets. More developed markets for securitized assets and for interest rate derivatives also speed up the transmission. Further, we find relatively strong effects of competition within the banking sector across two different measures of competition. Overall, the evidence supports the idea that developed financial markets and competitive banking systems increase the effectiveness of monetary policy.
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Pre-announcement and Timing: The Effects of a Government Expenditure Shock
Alexander Kriwoluzky
European Economic Review,
No. 3,
2012
Abstract
An econometric strategy to identify a pre-announced fiscal policy shock is proposed. I show that the reduced form innovations can be recovered by estimating a Vector-moving-average model using the Kalman filter. The structural effects are identified exploiting the shock's pre-announced nature, which leads to potentially different signs of the responses of some endogenous variables during the announcement and after the realization of the shock. I illustrate my strategy by identifying a pre-announced shock to government consumption expenditures. I find that the response of private consumption is significantly negative on impact, rises and becomes significantly positive two quarters after the realization of the policy shock.
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The Technological Role of Inward Foreign Direct Investment in Central East Europe
Johannes Stephan
The Technological Role of Inward Foreign Direct Investment in Central East Europe,
2011
Abstract
Foreign direct investment (FDI) assumed a prominent role in Central East Europe (CEE) early on in the transition process. Foreign investors were assigned the task of restructuring markets, providing capital and knowledge for investment in technologically outdated and financially ailing firms.
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Human Capital Investment, New Firm Creation and Venture Capital
Merih Sevilir
Journal of Financial Intermediation,
No. 4,
2010
Abstract
This paper studies the relation between firm investment in general human capital, new firm creation and financial development for new firm financing, such as the existence of a venture capital industry. On one hand, firm investment in general human capital leads employees to generate new innovative ideas for starting their own firm. Since employees need a venture capitalist to start their new firm, firm investment in general human capital encourages the creation of venture capitalists by increasing the need for their services, such as providing advice and monitoring. On the other hand, as new firm financing becomes available, firms' willingness to invest in general human capital increases, and as a by-product, the creation of employee-founded and venture capital-backed new firms increases in the economy. Hence, our model provides a rational explanation for the emergence of new firms created by employees of established firms, which represents one of the most common type of new firms in many industries.
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Organization and Financing of Innovation, and the Choice between Corporate and Independent Venture Capital
Paolo Fulghieri, Merih Sevilir
Journal of Financial and Quantitative Analysis,
No. 6,
2009
Abstract
This paper examines the impact of competition on the optimal organization and financing structures in innovation-intensive industries. We show that as an optimal response to competition, firms may choose external organization structures established in collaboration with specialized start-ups where they provide start-up financing from their own resources. As the intensity of the competition to innovate increases, firms move from internal to external organization of projects to increase the speed of product innovation and to obtain a competitive advantage with respect to rival firms in their industry. We also show that as the level of competition increases, firms provide a higher level of financing for externally organized projects in the form of corporate venture capital (CVC). Our results help explain the emergence of organization and financing arrangements such as CVC and strategic alliances, where large established firms organize their projects in collaboration with external specialized firms and provide financing for externally organized projects from their own internal resources.
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