Suhejla Hoti

Structure and Asymptotic Theory for Multivariate Asymmetric Conditional Volatility

Various univariate and multivariate models of volatility have been used to evaluate market risk, asymmetric shocks, thresholds, leverage effects, and Value-at-Risk in economics and finance. This article is concerned with market risk, and develops a constant conditional correlation vector ARMA–asymmetric GARCH (VARMA–AGARCH) model, as an extension of the widely used univariate asymmetric (or threshold) GJR model of Glosten et al. (1992), and establishes its underlying structure, including the unique, strictly stationary, and ergodic solution of the model, its causal expansion, and convenient sufficient conditions for the existence of moments. Alternative empirically verifiable sufficient conditions for the consistency and asymptotic normality of the quasi-maximum likelihood estimator are established under non-normality of the standardized shocks.

GENERALIZED AUTOREGRESSIVE CONDITIONAL CORRELATION

This paper develops a generalized autoregressive conditional correlation (GARCC) model when the standardized residuals follow a random coefficient vector autoregressive process. As a multivariate generalization of the Tsay (1987, Journal of the American Statistical Association 82, 590–604) random coefficient autoregressive (RCA) model, the GARCC model provides a motivation for the conditional correlations to be time varying. GARCC is also more general than the Engle (2002, Journal of Business & Economic Statistics 20, 339–350) dynamic conditional correlation (DCC) and the Tse and Tsui (2002, Journal of Business & Economic Statistics 20, 351–362) varying conditional correlation (VCC) models and does not impose unduly restrictive conditions on the parameters of the DCC model. The structural properties of the GARCC model, specifically, the analytical forms of the regularity conditions, are derived, and the asymptotic theory is established. The Baba, Engle, Kraft, and Kroner (BEKK) model of Engle and Kroner (1995, Econometric Theory 11, 122–150) is demonstrated to be a special case of a multivariate RCA process. A likelihood ratio test is proposed for several special cases of GARCC. The empirical usefulness of GARCC and the practicality of the likelihood ratio test are demonstrated for the daily returns of the Standard and Poors 500, Nikkei, and Hang Seng indexes.

Modelling country risk and uncertainty in small island tourism economies

Small island tourism economies (SITEs) differ significantly from each other in many respects, such as their size, location, political systems, historical experience, economic prospects, ecological fragility, and vulnerability to ethnic conflicts, crime and the threat of global terrorism. Given these differences, a careful analysis of country risk (or uncertainty) and its components for SITEs is of substantial interest to private tourism operators and foreign direct investors in the tourism and hospitality industry, tourism commissions and governments. This paper provides a comparison of country risk ratings, risk returns and their associated volatilities (or uncertainty) for six SITEs for which monthly data compiled by the International Country Risk Guide are available. Monthly economic, financial, political and composite country risk returns are used to estimate univariate symmetric and asymmetric models of uncertainty. The empirical results provide a comparative assessment of the country risk returns and uncertainty for the six SITEs.

Modelling environmental risk

As environmental issues have become increasingly important in economic research and policy for sustainable development, firms in the private sector have introduced environmental and social issues in conducting their business activities. Such behaviour is tracked by the Dow Jones Sustainable Indexes (DJSI) through financial market indexes that are derived from the Dow Jones Global Indexes. The sustainability activities of firms are assessed using criteria in three areas, namely economic, environmental and social. Risk (or uncertainty) is analysed empirically through the use of conditional volatility models of investment in sustainability-driven firms that are selected through the DJSI. The empirical analysis is based on financial econometric models to determine the underlying conditional volatility, with the estimates showing that there is strong evidence of volatility clustering, short and long run persistence of shocks to the index returns, and asymmetric leverage between positive and negative shocks to returns.

Intellectual Property Litigation Activity in the USA

Brand names or trademarks carry incredible economic power and prestige. There is increasing recognition by world bodies that intellectual property (IP), whether manifested in patents, trademarks, copyrights or trade secrets, is highly valuable and must be protected through robust IP enforcement. The USA is an interesting natural laboratory as patent, trademark and copyright litigation battles have been raging domestically for some time. The paper discusses the four main forms of IP assets, the legal remedies that are available to enforce the property rights inherent in each type of IP asset, the basic damages theory relating to each form of IP, and how damages may be calculated when each type of asset is presumed to be infringed. The increased recognition of the value of IP has led to stronger enforcement of IP protection, an increase in IP litigation, and growing policy actions that are focused on how that protection should be manifested. An empirical analysis of how the IP litigation activity in the USA has changed over time is also presented. Copyright 2006 The Authors Journal compilation

Small island tourism economies and country risk ratings

During the last two decades, there has been a growing fascination with the livelihood of islands with small populations and territories which overwhelmingly rely on tourism as a source of exports. The small island tourism economies (SITEs) analyzed in this paper were colonised, and had depended heavily on financial aid from their former colonists for infrastructure development that has declined dramatically since the collapse of the Soviet Union. These economies are developing countries which need a consistent inflow of foreign direct investment to maintain economic growth. They have limited resources, are perceived to suffer from frequent natural disasters, and the international financial community considers them to be risky entities. For this reason, the paper provides a comparison of monthly country risk ratings compiled by the ICRG for six SITEs from 1984 to 2001 and analyses the relationship between country risk and economic growth for these six SITEs using annual data from 1985 to 2000. The economic growth rate is positively correlated with risk ratings in only 13 of the 24 cases. This is a surprising result as the country risk literature asserts that increases in risk ratings are noticeably influenced by higher economic growth rates, and vice versa.

Comparative analysis of risk ratings for the East European region

Following the aftermath of the 11 September 2001 events, the risks associated with engaging in international dealings have increased substantially, and become more difficult to analyse and predict for decision makers in the economic, financial and political sectors. The importance of country risk analysis is underscored by the existence of several prominent country risk rating agencies, which combine a wide range of qualitative and quantitative information regarding alternative measures of economic, financial and political risk into associated composite risk ratings. However, the accuracy of any rating agency with regard to any or all of these measures is open to question. For this reason, the paper provides a qualitative comparison of country risk rating systems used by seven leading rating agencies. The paper also provides a novel analysis of four risk ratings using univariate and multivariate volatility models for nine East European countries. These ratings are compiled by the International Country Risk Guide, which is the only risk rating agency to provide consistent monthly data for a large number of countries since 1984. The empirical results enable a comparative assessment of the conditional means and volatilities associated with county risk returns, defined as the rate of change in country risk ratings, across the nine East European countries. Moreover, the estimated constant conditional correlation coefficients provide useful information as to whether the countries are similar in terms of shocks to the four risk returns.

MEASURING RISK IN ENVIRONMENTAL FINANCE

Environmental sustainability indices, such as the Dow Jones Sustainability Indexes and the Ethibel Sustainability Index, quantify the development and promotion of sustainable social, ethical and environmental values in the community. Moreover, such indices provide a benchmark for managing sustainability portfolios, and developing financial products and services that are linked to sustainable economic, environmental, social and ethical criteria. This paper reviews the existing data and risk indices in environmental finance. The main purpose of the paper is to analyse existing sustainability and ethical indices in environmental finance, and evaluate empirical environmental risk by estimating conditional volatility clustering that is inherent in these indices. Financial volatility models are estimated to analyse the underlying conditional volatility or time-varying risk that is inherent in alternative environmental sustainability indices. Volatility clustering is observed for most series, but some extreme observations are also evident. The log- and second-moment conditions suggest that valid inferences can be drawn for purposes of sensible empirical analysis. Copyright 2007 The Authors. Journal compilation

Value-at-Risk for country risk ratings

The country risk literature argues that country risk ratings have a direct impact on the cost of borrowings as they reflect the probability of debt default by a country. An improvement in country risk ratings, or country creditworthiness, will lower a countrys cost of borrowing and debt servicing obligations, and vice versa. In this context, it is useful to analyse country risk ratings data, much like financial data, in terms of the time series patterns, as such an analysis would provide policy makers and the industry stakeholders with a more accurate method of forecasting future changes in the risks and returns of country risk ratings. This paper considered an extension of the Value-at-Risk (VaR) framework where both the upper and lower thresholds are considered. The purpose of the paper was to forecast the conditional variance and Country Risk Bounds (CRBs) for the rate of change of risk ratings for 10 countries. The conditional variance of composite risk returns for the 10 countries were forecasted using the Single Index (SI) and Portfolio Methods (PM) of McAleer and da Veiga [10,11]. The results suggested that the country risk ratings of Switzerland, Japan and Australia are much mode likely to remain close to current levels than the country risk ratings of Argentina, Brazil and Mexico. This type of analysis would be useful to lenders/investors evaluating the attractiveness of lending/investing in alternative countries.

Multivariate volatility in environmental finance

There exist several important benchmark indexes in environmental finance, some computed by well-known financial index providers such as the Dow Jones group and others by independent agencies specializing in environmentally and socially responsible investing in finance. The construction of these sustainability indexes relies on two distinct screening methods, positive and negative, which aim to include or exclude candidate companies according to sustainable economic, environmental, social and ethical criteria. We investigate the presence and the importance of multivariate effects in conditional volatility in two major financial time-series indexes, namely the Dow Jones Sustainability Index (DJSI) World and the Ethibel Sustainability Index (ESI) Global, as a way to analyse their relative inherent risk. We further investigate empirically the existence of risk spillovers across these four indexes as a mean to assess the impact of the different screening criteria. Finally, the trends and volatility of two prominent financial indexes, the DJIA and S&P500, are analysed in the same manner to provide a comparison of the performance of the two types of indexes.