Journal of Emerging Market Finance current issue

Modified Estimators of the Expected Shortfall

Jadhav, D., Ramanathan, T.V., Naik-Nimbalkar, U.V. — Wed, 07 Oct 2009 03:54:26 PDT

The coherent risk measure Expected Shortfall is popularly considered as an alternative to Value-at-Risk. We briefly review all existing parametric and non-parametric methods to estimate Expected Shortfall. The historical method is considered as the best method of estimation for the Expected Shortfall, though it has a serious disadvantage of over-estimation in the presence of outliers in the return data. In this article, we propose two non-parametric estimators of Expected Shortfall which are robust to outliers. We estimate the Expected Shortfall corresponding to daily returns of some of the selected assets and indices of the Indian (BSE and NSE) and foreign stock markets (NYSE and LSE). The backtesting procedure boasts in confirming that the proposed non-parametric estimators are the best alternatives to the historical method in avoiding over-estimation of Expected Shortfall.

The Dynamics of the Credit Spread and Monetary Policy: Empirical Evidence from the Korean Bond Market

Jang, I., Kim, D. — Wed, 07 Oct 2009 03:54:26 PDT

This paper empirically examines the aggregate determinants of the credit spread and the influence of monetary policy shocks on its dynamics in Korea. Using the innovations accounting technique from an estimated vector autoregression (VAR) model, we provide a set of interesting results on the short run and the medium run determinants of the credit spread and its dynamics. The key findings are that (i) the default risk premium is the major driving force of the credit spread dynamics for low grade bonds, and (ii) monetary policy is a significant driving force of the medium term dynamics of the credit spread.

The Weak-form Efficiency of Chinese Stock Markets: Thin Trading, Nonlinearity and Episodic Serial Dependencies

Lim, K.-P., Habibullah, M. S., Hinich, M. J. — Wed, 07 Oct 2009 03:54:26 PDT

Motivated by the shortcomings of earlier Chinese efficiency studies, the present paper re-examines the weak-form efficiency of Shanghai and Shenzhen Stock Exchanges. Specifically, our adopted methodologies mitigate the confounding effect of thin trading on return autocorrelation, detect both linear and nonlinear serial dependencies in the adjusted returns series, and capture the persistence of dependency structures over time. The result shows that the adjusted returns series from both markets follow a random walk for long periods of time, only to be interspersed with brief periods of strong linear and/or nonlinear dependency structures. This suggests that there are certain time periods when new information is not fully reflected into stock prices. Another interesting finding is that the existence of serial dependencies in both the Shanghai and Shenzhen Stock Exchanges follows one another closely after October 1997. It indicates that both markets respond in a similar way to influences from political, economic, social and institutional changes.

Applicability of Contrarian Strategy in the Bombay Stock Exchange

Locke, S., Gupta, K. — Wed, 07 Oct 2009 03:54:26 PDT

The application of contrarian strategies in the Bombay Stock Exchange (BSE) are examined in this paper, shedding further light on competing explanations underlying this anomaly. Three specific issues are investigated using several models. First, can a trader book a profit by employing a contrarian strategy? The test portfolio earned a contrarian profit of 74.40 per cent above the market return. Second, risk differences between Winner and Loser portfolios are found to be an independent phenomenon. Third, the size of the firm appears to play a vital role in explaining the overreaction hypothesis.

Information Memory and Pricing Efficiency of Futures Contracts: Evidence from the Indian Equity Futures Market

Gupta, K., Singh, B. — Wed, 07 Oct 2009 03:54:26 PDT

The present study investigates the information dissemination efficiency of the Indian equity futures market. Daily log returns of all indices as well as individual stock futures contracts understudy have been found to be non-normal and responding asymmetrically to the information shocks. Volatility clustering in daily log returns of all indices and individual stock futures contracts has been identified, which suggests that Indian equity futures market is not an efficient price-discovery vehicle. In addition, the present study finds an evidence of leverage effect, which implies that traders assign more weightage to bad news, whereas, they cautiously react to positive news. Mean reversion in daily log returns of the Indian equity futures market further suggests that traders (especially retail traders) need to be overcautious while adding equity futures as leverage products in their portfolio because in a highly volatile market, framing a trading rule to earn super normal profit may be an easy task for big/institutional traders but may not be possible for small/uninformed traders.