Anders Wilhelmsson

Value at Risk with time varying variance, skewness and kurtosis-the NIG-ACD model

A new model for financial returns with time varying variance, skewness and kurtosis based on the Normal Inverse Gaussian (NIG) distribution is proposed. The new model and two previously suggested NIG models are evaluated by their Value at Risk (VaR) forecasts on a long series of daily Standard and Poors 500 returns. All three models perform very well compared with extant models and clearly outperform a Gaussian GARCH model. Moreover, the results show that only the new model cannot be rejected as providing correct conditional VaR forecasts.

Is the VIX Futures Market Able to Predict the VIX Index? A Test of the Expectation Hypothesis

This article tests the expectation hypothesis by using the volatility index VIX and futures contracts written on that index. Because the VIX index is negatively correlated with the S&P 500 index returns the VIX futures price should contain a negative risk premium, which is confirmed in this study. When the futures price is not adjusted with the risk premium, the expectation hypothesis is rejected at the 5% significance level for 20 of 21 forecast horizons. However when the futures price is adjusted with the risk premium, obtained from a stochastic volatility model, the expectation hypothesis cannot be rejected. Further, the results show that the risk premium adjusted futures price forecasts the direction of the VIX index well. The one day ahead forecast predicts the direction correctly 73% of the time.

Volatility Risk Premium, Risk Aversion and the Cross-Section of Stock Returns

We test if innovations in investor risk aversion are a priced factor in the stock market. Using 25 portfolios sorted on book-to-market and size as test assets, our new factor together with the market factor explains 64% of the variation in average returns compared to 60% for the Fama-French model. The new factor is generally significant with an estimated risk premium close to its time series mean also when industry portfolios and portfolios sorted on previous returns are augmented to the test assets.

Enterprise Risk Management and Default Risk: Evidence from the Banking Industry

Enterprise risk management (ERM) has emerged as a framework for more holistic and integrated risk management with an emphasis on enhanced governance of the risk management system. ERM should theoretically reduce the volatility of cash flows, agency risk, and information risk—ultimately reducing a firms default risk. We empirically investigate the relationship between the degree of ERM implementation and default risk in a panel data set covering 78 of the worlds largest banks. We create a novel measure of the degree of ERM implementation. We find that a higher degree of ERM implementation is negatively related to the credit default swap (CDS) spread of a bank. When a rich set of control variables and fixed effects are included, a one-standard-deviation increase in the degree of ERM implementation decreases CDS spreads by 21 basis points. The degree of ERM implementation is, however, not a significant determinant of credit ratings when controls for corporate governance are included.

Tax Planning in Partner-owned Close Corporations

Over thepast years, the scholarly discussionon tax lawhas focused largely on aggressive tax planning (Dourado 2015; Panayi 2015). “Aggressive tax planning” is not a legal term; it refers primarily to transactions whereby companies take advantage of discrepancies—arbitrage—between tax laws of different countries, thereby achieving a more favorable taxation than the comparable taxpayers who have no access to such tax-planning opportunities. Aggressive tax planning, then, is not a matter of evading the law, but of exploiting, for purposes of personal gain, the limitations and shortcomings of the lawwith regard to certain transactions. Or, asMurphy (2005) defines it: “Aggressive taxplanning by its very nature involves findingways to accomplish compliance with the letter of the law while totally undermining the policy intent or spirit behind the legislation” (p. 563). Tax planning, whereby tax arbitrages are exploited for personal gain, is not merely an issue within international taxation, however, it can also occur in domestic transactions. Differences in tax rates for different types of income

Predicting Default – Merton vs. Leland

This paper is the first to compare the ability of the two structural credit risk models of Merton (1974) and Leland (1994a, b) to predict bankruptcy. We investigate different implementations of the Merton and Leland models on the whole CRSP/Compustat universe of firms from 1980 to 2015. Although the Leland model has several theoretical advantages, such as an endogenously defined default barrier and flexible maturity of debt, we find the out-of-sample predictive accuracy of the standard Merton model to be far superior.

Loan Pricing over the Business Cycle

Based on a screening model, we hypothesize that borrower risk will be over- (under-)priced in recessions (booms), and the loan spreads’ sensitivity to default risk as a function of economic growth will be inverse U-shaped. We test this prediction using a sample of 5,300 U.S. commercial loans contracted between 1987 and 2012, and find that the data support the prediction. The result is particularly strong at business cycle peaks: in the main results, moving from zero real GDP growth to the 99th percentile of economic growth, the responsiveness of the spread to borrower risk (the “price of risk”) is more than halved. The results are robust to a variety of alternative specifications and competing explanations.

The Investor-Base Hypothesis of Stock Return Volatility: Empirical Evidence

A conjecture in the literature holds that a large and diversified investor base leads to lower volatility by improving the quality of the price signal. In this paper this hypothesis is examined using unique Swedish ownership data. The data does not support the conjecture. Instead, volatility increases in the number of investors and in the size of the firm’s micro-float (the fraction of shares held by investors with stakes below 0.1%). In separate regressions we show that trading volume increases in the size of the investor base, suggesting a trading channel explanation. We also show that proxies for the portfolio concentration of the largest owners are important. We conclude that ownership structure has major implications for stock return volatility.

Non-Parametric Future Looking Value-at-Risk

This paper proposes a new model for computing Value-at-Risk forecasts. The model is fully non-parametric and easy to implement. Further, it incorporates information about the markets perceived uncertainty about the future. The future looking information is obtained from the option market via CBOEs implied volatility index VIX. Using SP500 data from 1990-2010 we …nd that the new model compares favorably to extant models in terms of its forecast performance.