Roland Füss

Spillover Effects among Financial Institutions: A State-Dependent Sensitivity Value-at-Risk Approach

In this paper, we develop a state-dependent sensitivity value-at-risk (SDSVaR) approach that enables us to quantify the direction, size, and duration of risk spillovers among financial institutions as a function of the state of financial markets (tranquil, normal, and volatile). Within a system of quantile regressions for four sets of major financial institutions (commercial banks, investment banks, hedge funds, and insurance companies) we show that while small during normal times, equivalent shocks lead to considerable spillover effects in volatile market periods. Commercial banks and, especially, hedge funds appear to play a major role in the transmission of shocks to other financial institutions. Using daily data, we can trace out the spillover effects over time in a set of impulse response functions and find that they reach their peak after 10 to 15 days.

Spatial Linkages in Returns and Volatilities Among U.S. Regional Housing Markets

This article investigates spatial linkages in returns, idiosyncratic risks and volatilities across 19 U.S. regional housing markets. Using Case & Shiller housing price indices from 1995 through 2009, we find that interconnections across markets can be “wider” and “stronger” than would normally be expected. They are “wider” because, in addition to geographic closeness, economic proximity is also an important source of influence; they are “stronger” because of the significant contagion effects during the 2007–2009 subprime and financial crises. The increased comovement and interdependence, especially among more geographically diverse regions with similar economic conditions, may help explain the failure of geographic portfolio diversification strategies.

Testing the predictability and efficiency of securitized real estate markets

This paper conducts tests of the random walk hypothesis and market efficiency for 14 national public real estate markets. Random walk properties of equity prices influence the return dynamics and determine the trading strategies of investors. To examine the stochastic properties of local real estate index returns and to test the hypothesis that public real estate stock prices follow a random walk, the single variance ratio tests of Lo and MacKinlay (1988) as well as the multiple variance ratio test of Chow and Denning (1993) are employed. Weak-form market efficiency is tested directly using non-parametric runs tests. Empirical evidence shows that weekly stock prices in major securitized real estate markets do not follow a random walk. The empirical findings of return predictability suggest that investors might be able to develop trading strategies allowing them to earn excess returns compared to a buy-and-hold strategy.

Measuring Funds of Hedge Funds Performance Using Quantile Regressions: Do Experience and Size Matter?

This article is the first to use quantile regression to analyze the impact of experience and size of funds of hedge funds (FHFs) on performance. In comparison to OLS regression, quantile regression provides a more detailed picture of the influence of size and experience on FHF return patterns. Hence, it allows one to study the relevance of these factors for various return and risk levels instead of average return and risk, as is the case with OLS regression. Because FHF size and age (as a proxy for experience) are available in a panel setting, one can perform estimations in an unbalanced stacked panel framework. This study analyzes time series and descriptive variables of 649 FHFs drawn from the Lipper TASS Hedge Fund database for the time period January 1996 to August 2007. The empirical results suggest that experience and size have a negative effect on performance, with a positive curvature at the higher quantiles. At the lower quantiles, however, size has a positive effect with a negative curvature. Both factors show no significant effect at the median.

The impact of macroeconomic announcements on implied volatility

While many studies analyse the impact of scheduled macroeconomic announcements on equity market volatility, few focus on the impact on option implied volatilities. In this study, we examine the link between German and US macroeconomic events and the implied volatility indices DAX Volatility Index (VDAX) and Chicago Board Options Exchange, CBOE Volatility Index (VIX). We find that both indices fall on announcement days, with the strongest reactions occurring during the financial crisis from 2008 to 2009. Further, we identify a volatility spillover effect and significant covariance clustering between VDAX and VIX.

Electricity Spot and Derivatives Pricing When Markets are Interconnected

Increasing interconnectivity between electricity wholesale markets requires an efficient allocation scheme in order to provide access to scarce cross-border transmission capacities. In both the US and Europe, existing schemes have primarily induced economically inefficient interconnector use given that flows have to be nominated prior to spot market clearing. By contrast, the market coupling mechanisms recently rolled out in parts of Europe avoid these inefficiencies by implicitly allocating cross-border transmission capacity upon spot market clearance. In this paper, we show that these institutional aspects of market design clearly manifest in the empirical dynamics of both electricity spot and derivatives prices, and hence, do have important implications for pricing and hedging in these markets. Since traditional reduced-form models fail to reproduce such effects of market microstructure, we employ a fundamental multi-market model for electricity pricing in order to analyze how the key stylized facts of electricity prices are impacted by the different allocation schemes.

From Rising Stars and Falling Angels: On the Relationship Between the Performance and Ratings of German Mutual Funds

The aim of this article is to analyze the relationship between a fund’s Morningstar rating and 1) its subsequent performance and 2) its rating and subsequent inflows or outflows of funds. The authors distinguish between actual and expected predictability as perceived by investors. This study is the first to analyze a prolonged investment period on the German market after Morningstar implemented essential changes in its rating methodology in 2002. The empirical findings suggest that the Morningstar rating has a limited ability to predict future fund quality for the German fund market and that the Sharpe ratio may be a better forecasting tool than the Morningstar rating, although neither is ultimately reliable. Furthermore, the fund flow performance relationship strongly depends on overall market movements. Highly rated funds suffered much greater outflows than lower-rated funds, especially during bear markets. An event study reveals, however, that investors do perceive rating changes as new information. German investors seem to react later than American investors, suggesting they are less influenced by Morningstar ratings in their allocation decisions.

How “Informative” Is the Information Ratio for Evaluating Mutual Fund Managers?

This article aims to determine whether the information ratio (IR) is a useful and reliable performance measure to evaluate mutual fund managers. The authors use a dataset of nearly 10,000 mutual funds for the January 1998 to December 2008 period. The empirical results show that the IR varies over time and across different fund categories. The article finds that representing the true volatility in the return-generating process within a calendar year requires data with a higher frequency than monthly. This reference index or basket needs to capture a large proportion of the investment universe of the respective fund. Because the IR induces managers to hug the benchmark, it should be supplemented with, for example, the Active Share measure to control for the activity level in the portfolio. Finally, in order to separate lucky managers from skilled ones, the long-term track record is an important measure, because luck is generally not persistent over time.

Long‐Term Interdependence between Hedge Fund Strategy and Stock Market Indices

This study presents an investigation of the long and short‐term co‐movements between different hedge fund strategy indices and the stock markets of France, Germany, Japan, North America and the UK. To analyse relationships among these price indices, the EngleGranger methodology, based on bivariate testing for cointegration, and correlation analysis are conducted. The question of long‐term dependence instead of short‐term consideration is of particular interest, because portfolio optimization is based upon the cointegration of prices, rather than the correlation of returns. However, as is generally known, there is an information loss when returns are used instead of prices. Results indicate that there exists no station ary, long‐term relationship between the two as set groups. The overall suggestion is that opportunities exist to diversify an international portfolio by taking hedge funds into account. Moreover, this applies not only in terms of a limited time period, but also in the long‐run. Besides this main result, the augmented Dickey‐Fuller test statistics for cointegration residuals show quite different behaviour in comparison to the correlation co efficients. The values of the test statistics show that there seems to be a weaker tendency towards long‐term interrelation between hedge fund strategies and the US stock market. This applies even though average correlation co efficients among these assets exceed those of other combinations between stock and hedge fund indices.

A Regime‐Switching Approach to Modeling Rental Prices of U.K. Real Estate Sectors

This paper uses regime-switching models of the threshold type to analyze the adjustment process of rental prices for three UK commercial real estate sectors over the period 1974 to 2008. The non-linear models outperform their linear counterparts in in-sample fit. Their out-of-sample forecasting ability is better whenever the corresponding linear models contain a significant amount of neglected non-linearity, which is the case in this study for the industrial sector. Switches into other regimes are triggered by past growth rates of rental prices exceeding a threshold level. For both the industrial and retail sectors, this occurs when the growth rates of rental prices push significantly above 2 or 5 percent per quarter, that is, in situations of strong excess demand. For the office sector, the switch occurs when rental rates are falling rapidly, that is, when the sector suffers from strong excess supply.