Dolores Furió

Extreme value theory versus traditional GARCH approaches applied to financial data: a comparative evaluation

Although stock prices fluctuate, the variations are relatively small and are frequently assumed to be normally distributed on a large time scale. But sometimes these fluctuations can become determinant, especially when unforeseen large drops in asset prices are observed that could result in huge losses or even in market crashes. The evidence shows that these events happen far more often than would be expected under the generalised assumption of normally distributed financial returns. Thus it is crucial to model distribution tails properly so as to be able to predict the frequency and magnitude of extreme stock price returns. In this paper we follow the approach suggested by McNeil and Frey in 2000 and combine GARCH-type models with the extreme value theory to estimate the tails of three financial index returns – S&P 500, FTSE 100 and NIKKEI 225 – representing three important financial areas in the world. Our results indicate that EVT-based conditional quantile estimates are more accurate than those from conventional GARCH models assuming normal or Students t distribution innovations when doing not only in-sample but also out-of-sample estimation. Moreover, these results are robust to alternative GARCH model specifications. The findings of this paper should be useful to investors in general, since their goal is to be able to forecast unforeseen price movements and take advantage of them by positioning themselves in the market according to these predictions.

Market efficiency and price discovery relationships between spot, futures and forward prices: the case of the Iberian Electricity Market (MIBEL)

ABSTRACT This paper analyses the relationships between prices from three different markets within the Spanish zone of the Iberian Electricity Market (MIBEL), namely futures, spot and over the counter (OTC) forward markets. The study focuses on three items: (i) contrasting the Weak-form efficiency hypothesis of the markets involved in the study, (ii) analysing the Semi-strong-form efficient market hypothesis (EMH) of the MIBEL futures market and (iii) examining the price discovery relationships between the series of prices of the considered markets. The empirical results confirm that 1-month-, 1-quarter-, 1-year-ahead futures and spot markets satisfy, generally, the Weak-form efficiency hypothesis and that MIBEL futures market does not contradict the EMH in its Semi-strong-form. In addition, price discovery relationships have also been found. In particular, there is unidirectional causality from the futures market to the forward market and from the futures market to the spot market for 1-month- and 1-quarter-ahead maturities. This result may be indicative of the agents to use the price of the futures market as a valuable reference.

Partisan Politics Theory and Stock Market Performance: Evidence for Spain

ABSTRACT This paper examines the influence of Spanish major political events on stock market performance by testing the empirical implications of the existing theories focused on the connection between politics and stock exchanges. On the one hand, our findings give support to the partisan politics theory, since stock returns behave differently depending on the political orientation of the government, not only on the day of the national election but also during their tenure of office. On the other hand, the analytical results demonstrate that there are no abnormal positive returns during the second half of the governments term, which contradicts the opportunistic political business cycle theory. Finally, according to Brown et al.s (1988) Uncertain Information Hypothesis, volatility of stock returns is shown to increase following the arrival of unexpected information.