John Hatem

Stochastic modeling of security returns: Evidence from the Helsinki Stock Exchange

Abstract This paper documents the presence of linear and nonlinear dependencies in Finnish stock returns and models these dependencies using autoregressive conditional heteroscedastic methods. Three conditional distributions (normal, Student- t , and the power exponential) are explored. The statistical estimates and the corresponding diagnostic tests indicate that a GARCH (1, 1) model with a power exponential conditional distribution, which is characterized by an autoregressive mean, represents the data better than any of the other models examined.

A causal analysis of black and official exchange rates: The turkish case

ZusammenfassungEine Kausalanalyse von Schwarzmarktkursen und offiziellen Wechselkursen: Der Fall der Türkei. - Diese Arbeit untersucht statistisch den Kausalzusammenhang zwischen Schwarzmarkt- und offiziellen Wechselkursen für das türkische Pfund, und zwar im VerhÄltnis zum US-Dollar und zur D-Mark in der Zwei-Jahres-Periode ab September {dy1985}, wobei Granger-Techniken benutzt werden. TÄgliche Änderungen des Schwarzmarktkurses für die D-Mark gehen den tÄglichen Änderungen des offiziellen Kurses voraus. Bei wöchentlichen und monatlichen Änderungen liegt eher eine Gleichzeitigkeit vor. Die Ergebnisse für den Schwarzmarktkurs und den offiziellen Dollar-Kurs sind Ähnlich, obwohl es Hinweise für einen schwachen Feedback gibt, wenn Tagesdaten benutzt werden. Diese Befunde stützen die These, da\ SchwarzmÄrkte Informationen effizient verwerten.RésuméUne analyse de causalité pour des taux de change noirs et officiels: le cas de la Turquie. - Cet article examine statistiquement la relation causale entre les taux de change noirs et officiels pour la lira turque vis-à-vis le dollar américain et la mark allemande pour une période de deux ans qui commence en septembre 1985. L’auteur applique des techniques de type Granger. Les changements quotidiens sur le marché noir pour la mark allemande précèdent ceux sur le marché officiel. Une relation simultanée existe pour les changements hebdomadaires et mensuels. Les résultats pour le dollar noir et officiel sont similaires bienqu’il y ait quelque évidence pour une répercussion faible si les données quotidiennes sont utilisées. Les résultats supportent la notion que les marchés noirs sont des processeurs efficients des informations.ResumenUn análisis de causalidad de tipos de cambio oficial y paralelo: el caso turco. - En este trabajo se examina estadísticamente la relación causal entre los tipos de cambio paralelo y oficial de la lira turca con respecto al dólar EE.UU. y el marco alemán para un período de dos años, comenzando en setiembre de {dy1985} y utilizando técnicas de tipo Granger. Los movimientos diarios en el mercado paralelo del marco dan lugar a movimientos diarios en el mercado oficial. Existe una relación contemporánea en los movimientos semanales y mensuales. Los resultados para el dólar paralelo y oficial son similares, a pesar de la evidencia de una respuesta débil en el caso de utilizarse datos diarios. Los resultados apoyan la noción de que los mercados paralelos son eficientes procesadores de información.

A comparison of state university defined benefit and defined contribution pension plans: a Monte Carlo simulation

Abstract This paper examines investment risk in comparing defined benefit (DB) and defined contribution (DC) plans by employing a Monte Carlo simulation. Using a bivariate normal distribution, two general types of risk are associated with a DC-plan. The first is that not enough is being earned by an allocation rule to cover DB-plan outflows. Secondly the portfolio may experience runs of losses that can’t be overcome by waiting for a better year because the money runs out. The general result is that higher stock allocations allow the higher earning potential of stocks, even if the losses are occasionally experienced, to accumulate enough wealth to see a DC portfolio match the promised benefits of a DB-plan.

A Pedagogical Note on Risk Framing

This article presents several classroom games that help illustrate the effect of risk framing on choices under uncertainty. These games are presented in the context of Kahneman and Tverskys prospect theory that is an alternative to the traditional expected utility theory. Expected utility theory is a prescriptive model of decision making that explains how people should react to risk, while prospect theory is a descriptive model that explains how people actually do react to risk. These classroom games can be used in introductory risk management courses, insurance courses, and financial risk management courses to help students to understand the effect of context on choices made under uncertainty. Although results from actual classroom experiments are included, these results are not meant to be indicative of normal results but are rather illustrative of the type of results that may arise when alternative framing contexts are used.

Put Option Portfolio Insurance vs. Asset Allocation

The purpose of this study is to develop a model that uses index put options to replace fixed income securities in an individual investors portfolio. Such a portfolio would allow the investor to reduce downside risk, consistent with the rationale for the fixed income allocation, while also allowing the investor to participate to a greater degree, in any potential gains from a market upturn. Results indicate that in order for the model to be superior to a stock/bond portfolio, substantial movement in stock returns is necessary. Implications of results are discussed.

Exchange rates, and fundamental variables: a semi-parametric analysis of binary choice

This study is motivated by the dearth of models that provide good out-of-sample fit for exchange rates. That is, current models of exchange rate behaviour are poor predictors of subsequent currency movements. An attempt is made to determine if the relationship between exchange rates and fundamental variables can help explain the more extreme exchange rate movements (distributional switches). Models are developed that relate fundamental economic variables to the resulting estimates based on the mixture of normal probability distributions. Parametric estimation procedures (Logit and Probit) are compared with a semi-parametric technique, maximum score estimation (MSCORE), which is relatively untested in the field of finance. The fundamental variables of these models include information on trade balances, money supply changes, interest rate changes, real economic growth, relative inflation rates and changes in stock market indexes. Classification results favour MSCORE. Implications of results and improvements in methodology are discussed.