Common Economic Factors Research Articles

Extreme Conditional Quantiles for Panel Data Model with Individual Effects and Heteroscedastic Extremes

Panel quantile regression models play an important role in real applications of finance, econometrics, insurance and risk management. However, direct estimates of the extreme conditional quantiles may lead unstable results due to data sparsity on the tail regions. Moreover, the presence of individual effects complicates the inference for extreme quantiles and a study on their theoretical properties is necessary. This paper proposes a two-stage method to estimate/predict the extreme conditional quantiles where an intermediate quantile is first estimated according to panel regression models and the extrapolation of the intermediate quantile to an extreme quantile is carried out in the second stage. Under a set of second-order regular variation conditions of heteroscedastic extremes, we establish the asymptotic theories for the two-stage prediction while its finite sample performance is demonstrated and compared to the direct prediction by simulations. Finally, we apply the two-stage method to the macroeconomic and housing price data, and find strong evidence of housing bubbles and common economic factors as well as the cross country heterogeneity.

SOCIO-ECONOMIC DYNAMICS OF SOCIAL INSURANCE IN OMAN: A MODEL APPROACH

The paper examines the socio-economic dynamics and challenges to the social insurance scheme in Oman, during the period 2002-2016, using secondary sources. The study adopts a confirmatory factor analysis (CFA), and develops a model to identify the determinants of social insurance coverage for active insured and elderly beneficiaries. The study finds evidence that social insurance coverage in Oman is low, amounting to 12.1 and 6.6% for the active insured and the elderly beneficiaries respectively. Results also show that the common economic factors that have an influence on social coverage for both groups include per capita GDP, the fixed capital formation and inflation, while globalization has an influence on the active insured only., Omanization is a common, non-economic factor for both groups, in addition to fertility rate for the active insured, and life expectancy for elderly beneficiaries. Economic factors were found to be more important than non-economic factors for social insurance coverage in Oman.

A Tale of Two Surplus Countries: China and Germany

We analyze current account imbalances through the lens of the two largest surplus countries; China and Germany. We observe two striking patterns visible since the 2007/8 Global Financial Crisis. First, while China has been gradually reducing its current account surplus, Germany’s surplus has continued to increase throughout and after the crisis. Second, for these two countries, there is a remarkable reversal in the patterns of exchange rate misalignment: China’s currency has turned from being undervalued to overvalued, Germany’s currency has erased its level of overvaluation and become undervalued. Our empirical analyses show that the current account balances of these two countries are quite well explained by currency misalignment, common economic factors, and country-specific factors. Furthermore, we highlight the global financial crisis effects and, for Germany, the importance of differentiating balances against euro and non-euro countries.

TURFs, collective fishery management, and fishery cooperatives

The present study examines the role of territorial use rights in fisheries (TURFs) in the context of co-management, where the latter is defined as collective management by a group of fishers and termed a fishery cooperative. Here, I argue that underneath sociodemographic characteristics of fisher groups that affect the outcomes of co-management, there is a set of common economic factors that affect the likelihood of successful cooperatives. The theory of clubs is applied as a theoretical foundation, in which the role of TURFs is characterized. Next, I present several case studies, mostly from Japanese coastal fisheries, to illustrate the claims that the incentives of fishers matter, more so than group size and homogeneity of members, for successful collective management.

Risk Measurement for Portfolio Credit Risk Based on a Mixed Poisson Model

Experiences manifest the importance of comovement and communicable characters among the risks of financial assets. Therefore, the portfolio view considering dependence relationship among credit entities is at the heart of risk measurement. This paper introduces a mixed Poisson model assuming default probabilities of obligors depending on a set of common economic factors to construct the dependence structure of obligors. Further, we apply mixed Poisson model into an empirical study with data of four industry portfolios in the financial market of China. In the process of model construction, the classical structural approach and option pricing formula contribute to estimate dynamic default probabilities of single obligor, which helps to obtain the dynamic Poisson intensities under the model assumption. Finally, given the values of coefficients in this model calculated by a nonlinear estimation, Monte Carlo technique simulates the progress of loss occurrence. Relationship between default probability and loss level reflected through the MC simulation has practical features. This study illustrates the practical value and effectiveness of mixed Poisson model in risk measurement for credit portfolio.

Rebalancing Through Expansions in Intra-ASEAN Exports? Insights from Gravity Panel Estimates

This paper examines the impact of common economic factors on intra-ASEAN bilateral exports through estimations of panel data using a gravity model. In particular, the paper compares the determinants of two-way bilateral exports within the pioneer ASEAN member economies from that of the pioneer-newer ASEAN economies, to provide insights on the specific channels and trading relationships relevant for boosting intra-regional exports. The gravity estimates imply the importance of the overall size effects and similarities in size between the pioneer-newer ASEAN partnerships for export expansions, and also for trade in agriculture and manufactures. These channels however do not bolster exports amongst the pioneer ASEAN economies. The empirical findings therefore add weight to the observation that strategic partnerships are necessary within the region to bolster intra-regional exports through the level and relative size effects. We therefore posit that any rebalancing strategy to increase intra-regional exports should move beyond the focus on the pioneer ASEAN members per se, to foment greater trade cooperation between the pioneer and newer ASEAN economies.

An approximation for credit portfolio losses

Mixture models play an important role in the modeling of portfolio losses. In these models the risk of default of individual obligors (indexed by i ∈ {1, . . . , m}) depends on an underlying set of common economic factors, denoted Ψ. Given these factors, the losses due to default li of individual obligors are assumed to be stochastically independent. Dependence between different obligors stems only from dependence of the individual default probabilities on the set of factors. These models are used for both risk management of credit portfolios and valuation of multi-name credit derivatives. The current article investigates both issues. The numerical evaluation of the portfolio loss distribution is usually based on the two-stage structure of mixture models. For instance, in order to sample from the loss distribution by standard Monte Carlo, one generates first a realization of the systematic factor variable Ψ. In a second step one generates a sequence of independent variates li, 1 ≤ i ≤ m, according to the conditional distribution of (li)1≤i≤m given Ψ. Standard Monte Carlo can be quite slow, and so various numerical techniques for estimating the distribution of the total loss of a portfolio in mixture models have been developed. In this paper we focus on the the second stage, i.e. the conditional loss distribution given the underlying factors, and propose an alternative way for evaluating the conditional distribution of the total loss L = ∑m i=1 li. Our approximation is based on a central limit theorem; error bounds can be derived from the Berry-Esseen-inequality. We compare the numerical performance of our method relative to the standard Vasicek-approximation and the true loss distribution obtained by standard Monte Carlo methods. It turns out that our suggested approximation technique often provides more accurate results than the Vasicek-approximation while being computationally less expensive

Deterministic factors of stock networks based on cross-correlation in financial market

The stock market has been known to form homogeneous stock groups with a higher correlation among different stocks according to common economic factors that influence individual stocks. We investigate the role of common economic factors in the market in the formation of stock networks, using the arbitrage pricing model reflecting essential properties of common economic factors. We find that the degree of consistency between real and model stock networks increases as additional common economic factors are incorporated into our model. Furthermore, we find that individual stocks with a large number of links to other stocks in a network are more highly correlated with common economic factors than those with a small number of links. This suggests that common economic factors in the stock market can be understood in terms of deterministic factors.

What Determines Fiscal Policy? Evidence from German States

This paper explores the factors behind the time path of real spending and revenue in the West German states from 1975 to 2004. The empirical approach stresses robustness and takes into account a large set of economic and political variables. Our results suggest that common economic factors and, to a smaller degree, state-specific economic developments are important determinants of state fiscal performance. In comparison, the influence of political factors is limited both in statistical and quantitative terms. Finally, there is evidence that addressing governance problems and ensuring flexibility in terms of fiscal strategy are important ingredients for any policy aimed at improving fiscal outcomes at the state level.

Cyclical correlations, credit contagion, and portfolio losses

We model aggregate credit losses on large portfolios of financial positions contracted with firms subject to both cyclical default correlation and direct default contagion processes. Cyclical correlation is due to the dependence of firms on common economic factors. Contagion is associated with the local interaction of firms with their business partners. We provide an explicit normal approximation of the distribution of portfolio losses. We quantify the relation between the variability of global economic fundamentals, strength of local firm interaction, and the fluctuation of losses. We find that cyclical oscillations in fundamentals dominate average losses, while local interaction causes additional fluctuations of losses around their average. The strength of the contagion-induced loss variability depends on the complexity of the business partner network.

Cyclical Correlations, Credit Contagion, and Portfolio Losses

We model aggregate credit losses on large portfolios of financial positions contracted with firms subject to both cyclical default correlation and direct default contagion processes. Cyclical correlation is due to the dependence of firms on common economic factors. Credit contagion phenomena are associated with the local interaction of firms with their business partners. We provide an explicit normal approximation of the distribution of total portfolio losses. We quantify the relation between the variability of global economic fundamentals, strength of local firm interaction, and the fluctuation of losses. We find that cyclical oscillations in fundamentals dominate average portfolio losses, while local interaction cause additional fluctuations of losses around their average. The strength of the contagion-induced loss variability and hence the degree of extreme loss risk depends on the complexity of the business partner network, a relation that was recently confirmed by empirical studies.

The Impact of Debt Financing on Entry and Exit in a Duopoly

This article investigates the interaction between market entry, company foreclosure, and capital structure in a duopoly. We find that the order in which firms foreclose is determined not only by differences in firm-specific factors, but also by common economic factors, such as the interest rate and the market profit volatility. We extend the exit model by allowing financially distressed firms to renegotiate their debt contracts through a one-off debt exchange offer. We find that firms with high bankruptcy costs or with prospects of profit improvement can get bigger reductions on their debt repayments. Investigating market entry, we find that financial vulnerability of the incumbent induces earlier entry. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

The intersection of market and credit risk

Economic theory tells us that market and credit risks are intrinsically related to each other and not separable. We describe the two main approaches to pricing credit risky instruments: the structural approach and the reduced form approach. It is argued that the standard approaches to credit risk management – CreditMetrics, CreditRisk+ and KMV – are of limited value when applied to portfolios of interest rate sensitive instruments and in measuring market and credit risk. Empirically returns on high yield bonds have a higher correlation with equity index returns and a lower correlation with Treasury bond index returns than do low yield bonds. Also, macro economic variables appear to influence the aggregate rate of business failures. The CreditMetrics, CreditRisk+ and KMV methodologies cannot reproduce these empirical observations given their constant interest rate assumption. However, we can incorporate these empirical observations into the reduced form of Jarrow and Turnbull (1995b). Drawing the analogy. Risk 5, 63–70 model. Here default probabilities are correlated due to their dependence on common economic factors. Default risk and recovery rate uncertainty may not be the sole determinants of the credit spread. We show how to incorporate a convenience yield as one of the determinants of the credit spread. For credit risk management, the time horizon is typically one year or longer. This has two important implications, since the standard approximations do not apply over a one year horizon. First, we must use pricing models for risk management. Some practitioners have taken a different approach than academics in the pricing of credit risky bonds. In the event of default, a bond holder is legally entitled to accrued interest plus principal. We discuss the implications of this fact for pricing. Second, it is necessary to keep track of two probability measures: the martingale probability for pricing and the natural probability for value-at-risk. We discuss the benefits of keeping track of these two measures.