Jin-Ray Lu

Forecasting volatility in the financial markets: a comparison of alternative distributional assumptions

This article analyses the volatility forecasting performance of the GARCH models based on various distributional assumptions in the context of stock market indices and exchange rate returns. Using rollover methods to construct the out-of-the-sample volatility forecasts, this study shows that the GARCH model combined with the logistic distribution, the scaled students t distribution and the Riskmetrics model are preferable both in stock markets and foreign exchange markets. The exponential power and the mixture of two normal distributions are, however, less recommended. Furthermore, a complex distribution does not always outperform a simpler one, although the exact ranking depends on the application of underlying assets and the performance statistics being used.

Effect of oil price risk on systematic risk from transportation services industry evidence

This paper investigates the effects of oil price risk on systematic risk using the transportation service industries as samples across eight representative nations. The researchers estimate the systematic risk by the use of time-varying models including the Schwert and Seguin model, the Multi-GARCH model and the Kalman filter algorithm as well as the market model. The empirical results show that the Kalman filter algorithm appears to be the superior model for capturing systematic risk in the transportation industry. The betas of the marine industry decrease as it suffers from oil price risk, while the airline industry sees the reverse. Therefore, the influence of oil price risk is more critical for the airline industry.

Dealer spread and portfolio selection under price risks: evidence from the gold service industry

The bid and ask quotes as well as portfolio selection decisions of gold dealers who face a gold price risk are investigated within a continuous-time framework. The research integrates into a systematic analysis the decision of asset allocation in financial economics as well as the decision of a bid–ask spread in a market microstructure. The holding rate of gold is correlated to the intensity and jump size of the Poisson process, which is a hedging demand for gold assets against the risk of extreme events. According to empirical analysis from the gold service industries, the gold spread return is related to the expected return, volatility and jump risks of gold prices.

Dynamic Insurance Leverage and Dividend Decisions for a Property-Liability Insurance Firm

In the context of risk management process, a firm needs to control a variety of operational and financial decisions. Two critical decisions to be made for a property and liability (P/L) insurance firm are the amount of insurance to sell at market and the amount of dividend compensation to be afforded equity owners. In this paper, we consider a P/L insurer whose net worth is modeled by a diffusion process, and its objective is to maximize the expected discounted dividend payouts to the shareholders as well as minimize the expected discounted cost of insolvency: By using the technique of continuous-time stochastic control, we solve the optimal joint decisions of insurance leverage and dividend payout rate. Our analysis is carried out under the assumptions of continuous control, as well as random planning time. With some assumptions, we show their close-form solutions. Finally, the numerical results using Markov chain numerical approximation are also illustrated to relieve impractical presumptions.