Séminaires de recherche

Money Market Integration and Sovereign CDS Spreads Dynamics in the New EU States

Mardi | 2011-02-08

Petar Chobanov – Amine LAHIANI – Nikolay NENOVSKY

Summary: When the first phase of the crisis focused primarily on the interbank market volatility, thesecond phase spread on the instability of public finance. Although the overall stance of public financesof the new members is better than the old member countries, the differences within the new group aresignificant (from the performer Estonia to the laggard Hungary). Sovereign CDS spreads have becomemajor variables focused on risks and expectations about the fiscal situation of different countries. Inthe paper we investigate, first, whether there is a link in the new member states (NMS) between theexpectations about the condition of their public finances and the dynamics of money markets,including integration of national money markets with the euro area. In others word we contribute toclarify the relationship between fiscal and liquidity risks as major components of systemic risk.Second, we look on the particularities of this relationship through the different phases of the crisis andacross the different countries using different monetary regimes. This concerns mostly two oppositeextreme monetary regimes, namely, currency boards (and quasi-fixed exchange rate) – Bulgaria,Estonia, Latvia, Lithuania, or inflation targeting – Poland, Czech Republic, Hungary and Romania.The results obtained form the high frequency panel data models support the theoretical hypotheses andpolicy intuition that exists strong relationship between the liquidity risk (measured by the short termmoney markets) and fiscal risk (measured by CDS) and that this link is extremely unstable and insome sense nonlinear during the financial crisis. Our study confirm that the strong link betweenmonetary and public finance risk as apart of total systemic risk increase during the crisis especially forcurrency boards regimes, when the link becomes stronger and pronounced. For the inflation targetingcountries the link became weaker and less pronounced.

Modelling Volatility and Correlations with a Hidden Markov Decision Tree

Mardi | 2011-02-01

Philippe CHARLOT – libre

The goal of the present paper is to present a new multivariate GARCH model with time varying conditional correlation. Since the seminal work of Bollerslev (1990), conditional correlation models have become a attractive field in economics. Different specifications have been developed to study both empirical findings and practical use like asymmetry, change in regime but also estimation of large correlation matrix (see, e.g. Silvennoinen and Teräsvirta (2009) for a survey of recent advances). Among this field of research, our work focus on change in regime specification based on tree structure. Indeed, tree-structured dynamic correlation models has been developed to analyse volatility and covolatility asymmetries (see Dellaportas and Vrontos (2007)) or linking the dynamics of the individual volatilities with the dynamics of the correlations (see Audrino and Trojani (2006)). The common approach of these models is to partitioning the space of time series recursively using binary decisions. This can be interpreted as a deterministic decision tree. At the opposite, the approach that we adopt for this paper is developed around the idea of hierarchical architecture with a Markov temporal structure. Our model is based on an extension of Hidden Markov Model (HMM) introduced by Jordan, Ghahramani, and Saul (1997). It is a factorial and coupled HMM. Hence, our model is based is a stochastic decision tree liking the dynamics of univariate volatility with the dynamics of the correlations. It can be view as a HMM which is both factorial and dependent coupled. The factorial decomposition provides a factorized state space. This state space decomposition is done using state dependent and time-varying transition probabilities given an input variable. The top level of the tree can be seen as a master process and the following levels as slave processes. The constraint of a level on the following is done via a coupling transition matrix which produce the ordered hierarchy of the structure. As the links between decision states are driven with Markovian dynamics andthe switch from one level to the following is done via a coupling transition matrix, this architecture gives a fully probabilistic decision tree. Estimation is done in one step using maximum likelihood. We also perform an empirical analysis of our model using real financial time series. Results show that our hidden tree-structured model can be an interesting alternative to deterministic decision tree.

Environmental Tax and the Distribution of Income among Heterogeneous Workers

Mardi | 2011-01-25


This paper analyzes the environmental tax policy issues when labor is heterogeneous. The objec-tive is to assess whether an environmental tax policy could be Pareto improving, when the revenueof the pollution tax is recycled by a change in the labor tax properties. We show that, dependingon the heterogeneity characteristics of labor and on the initial structure of the tax system, a policymix could be designed in order to leave each class of worker unharmed. It consists of an increase inprogressivity together with a decrease in the ‡at rate component of the wage tax.

Time-Varying Risk Premium in Large Cross-Sectional Equity Datasets (preliminary draft)

Mardi | 2011-01-18


AbstractWe develop an econometric methodology to infer the path of risk premia from large unbalancedpanel of individual stock returns. We estimate the time-varying risk premia implied by conditional linearasset pricing models through simple two-pass cross-sectional regressions, and show consistency andasymptotic normality under increasing cross-sectional and time series dimensions. We address consistentestimation of the asymptotic variance, and testing for asset pricing restrictions. Our approach alsodelivers inference for a time-varying cost of equity. The empirical illustration on over 12,500 US stockreturns from January 1960 to December 2009 shows that conditional risk premia and cost of equitiesare large and volatile in crisis periods. They exhibit large positive and negative strays from standardunconditional estimates and follow the macroeconomic cycles. The asset pricing restrictions are rejectedfor the usual unconditional four-factor model capturing market, size, value and momentum effects butnot for its conditional version using scaled factors.aUniversity of Lugano and Swiss Finance Institute, bUniversity of Lugano, cUniversity of Genï¿oeve andSwiss Finance Institute.*Acknowledgements: We gratefully acknowledge the financial support of the Swiss National ScienceFoundation (Prodoc project PDFM11-114533).1

Co-movement of business cycles in the Maghreb : does the trade matter?

Mercredi | 2011-01-12

Aram BELHADJ – Comlanvi Jude EGGOH

Over the past two decades, the Maghreb Countries have initiated a liberalization process characterized by increasing trade flows and they have strengthened economic and financial linkages between their economies.In this paper, we demonstrate how co-movements of outputs would respond to this integration process. The nature of this relation seems to be important for these countries because the decision to join an economic and monetary union would depend on how the union affects trade and co-movements.To this end, we estimate a panel model describing the relationship between trade intensity and business cycles correlation during the period 1980-2005. We use three estimation techniques: pooled OLS, fixed vs. random effects as well as 2SLS estimations. Thereafter, we add to this relationship intra-industry trade as a variable describing the similarity of trade structure.Our results suggest that trade intensity may help to harmonize business cycles in these countries while intra-industry trade causes a reverse effect. Many lessons are thereby learned.