Ming-Chih Lee

Estimation of Value-at-Risk under jump dynamics and asymmetric information

This paper employs three Value-at-Risk (VaR) models (GARJI, ARJI and asymmetric GARCH) to compare the performance of 1-day-ahead VaR estimates. The influences of price jumps and asymmetric information on the performance of VaR are investigated. Two stock indices (Dow Jones and S&P 500) and one exchange rate (Japanese yen) are illustrated for estimating the model-based VaR. The results suggest for asset returns which exhibit time-variant jumps and information asymmetry, the VaR estimates generated by the GARJI and ARJI models provide reliable accuracy for low and high confidence levels. Moreover, as MRSB indicated, the GARJI model is more efficient than alternative models.

Hedging with zero-value at risk hedge ratio

In this paper we derive a new mean-risk hedge ratio based on the concept of Value at Risk (VaR). The proposed zero-VaR hedge ratio has an analytical solution and it converges to the MV hedge ratio under a pure martingale process or normality. A bivariate constant correlation GARCH(1,1) model with an error correction term is employed to estimate expected returns and time-varying volatilities of the spot and futures in S&P 500 index. The empirical results indicates that the joint normality and martingale process do not hold for S&P 500 futures and the conventional minimum variance hedge is inappropriate for a hedger who only cares about downside risk. Eventually, this article provides an alternative hedging method for a practitioner to use the concept of Value-at-Risk to reflect the risk-averse level.

Hedging for multi-period downside risk in the presence of jump dynamics and conditional heteroskedasticity

This study extends the one period zero-VaR (Value-at-Risk) hedge ratio proposed by Hung et al . (2005) to the multi-period case and incorporates the hedging horizon into the objective function under VaR framework. The multi-period zero-VaR hedge ratio has several advantages. First, compared to existing hedge ratios based on downside risk, it has an analytical solution and is simple to calculate. Second, compared to the traditional Minimum Variance (MV) hedge ratio, it considers expected return and remains optimal while the Martingale process is invalid. Thirdly, hedgers may elect an adequate hedging horizon and confidence level to reflect their level of risk aversion using the concept of VaR. Pondering the occurrence of volatility clustering and price jumps, this study utilizes the ARJI model to compute time-varying hedge ratios. Finally, both in-sample and out-of-sample hedging effectiveness between one-period hedge ratio and multi-period hedge ratio are evaluated for four hedging horizons and various levels of risk aversion. The empirical results indicate that hedgers wishing to hedge downside risk over long horizons should use the multi-period zero-VaR hedge ratios.

Correlated jumps in crude oil and gasoline during the Gulf War

This article employs a bivariate poisson jump model to investigate the relationship between the volatility of crude oil and gasoline especially during the period of the Gulf War. We find that greater jumps occurring in crude oil returns will appear in gasoline returns at the same time, but the magnitude of the co-movements in volatility falls. The covariance is relatively smaller in the Second Gulf War vs. the first conflict. The volatility of crude oil is of significantly high levels during periods of the war, yet the volatility of gasoline is not as sensitive as crude oil, particularly in the second conflict. Furthermore, the jump that occurred by the war did not lead both spot prices to a high persistent level for a long period, which fits the feature of the jump models. All these findings are important to market traders and hedging strategies.

A VaR study of required margin for securities margin trading

Abstract Functioning as a guide for the developing countries that are in a quandary period, this study examines the appropriateness of the 120% minimum required margin on securities margin trading in Taiwan. That is, whether the 120% cash position was good enough to cover the default risk for a financial holding company. In order to get a better risk management ability, Switching Regime Beta Model (SRBM) has been chosen. In analyzing the average VaR, there are three kinds of industries had been considered, that include electronics industry, finance industry and plastic industry. Different from the existing literatures, we transfer estimated VaR to a critical value in terms of the required margin; the results suggest that 120% cash position holding cannot cover the default risk for a financial holding company. The required margin should be raised.

Variation of interest-rate parity and its asymmetry on stock return in a jump-diffusion process

Two-stage methodology is developed to verify how the unanticipated asymmetry variations affect the stock returns. A GARCH model is investigated on residuals from a CIP identification followed by an ARJI model examination of the stock return. Consequently, a negative exogenous change can result of a more downward impact on stock return. Although this exogenous change is environmental, it could be implicated in macro-data. Because of the similarity in politics and economics, Korea and Taiwan were considered. Based upon the derivation of CIP, stock returns are found to be asymmetrically sensitive to the environment. The conditional jumps are larger than those where the news is of no substance. The findings demonstrate the importance of the stability.

Do foreign trading patterns cause abnormal information from Taiwanese stock markets

This study investigates whether foreign investors cause abnormal information by jump process in the Taiwanese stock market during before and after relaxation of the restrictions on QFII investors on 2 October 2003 (pre- and post-QFII). By conducting further analysis, this study conducts detailed analysis and explores how abnormal information and QFII behaviour are related by performing correlation and Granger causality analyses. This study concludes that the release of restrictions on QFII has been extremely helpful in improving the domestic investment environment and stabilizing the Taiwanese stock market.