John, Sylvain and colleagues, I find both your remarks very interesting and to contain some truth, I have included a working paper from Angela, ea (2003). Where they use a time varying two factor model to test for contagion. They find that in the Asian Crisis the correlations are indeed increased however no strong evidence is found for contagion in the Mexican crisis. Now my question is do you think that the use of time-varying models or stochastic models (such as a Markov VAR) can reduce risk in a crisis by switching to safer portfolios and by switching to high risk (and hopefully high yielding) portfolios in better times? I'm very interested to hear your opinions, Davy Cielen dcielen at vub.ac.be Student Business Engineering, International Master in Management Science, Solvay Business School Angela, Bekeart and Campbell, 2003, Market Integration and contagion, working paper, available from http://www.nber.org/papers/w9510
making sense of 100's of funds
3 messages · Davy, Krishna Kumar, Sylvain BARTHELEMY
Davy wrote:
John, Sylvain and colleagues, I find both your remarks very interesting and to contain some truth, I have included a working paper from Angela, ea (2003). Where they use a time varying two factor model to test for contagion. They find that in the Asian Crisis the correlations are indeed increased however no strong evidence is found for contagion in the Mexican crisis. Now my question is do you think that the use of time-varying models or stochastic models (such as a Markov VAR) can reduce risk in a crisis by switching to safer portfolios and by switching to high risk (and hopefully high yielding) portfolios in better times? I'm very interested to hear your opinions,
I broadly agree with what John and others have said on this but here is
my two centavos and this is related to the other thread on Copula
functions. We repeatedly see that the marginal distributions are
non-normal and there is asymmetry in the returns. e.g. Markets tank
together but go up in a de-correlated fashion that is not quite captured
in a correlation estimate. {Also recall Correlation(Pearson's) is a
linear measure of dependence}
So perhaps this is the sort of thing that is best modeled using Copula
functions with non-Gaussian marginals. Someone with a little spare time
could perhaps back-test the performance of risk models that use other
measure of dependence besides correlation and see how they measure up.
Dear Davy, Thank you the reference article.
evidence is found for contagion in the Mexican crisis. Now my question is do you think that the use of time-varying models or stochastic models (such as a Markov VAR) can reduce risk in a crisis by switching to safer portfolios and by switching to high risk (and hopefully high yielding) portfolios in better times?
I have many doubts that it would be helpful, especially on emerging markets, where the quality and availability of data is low and markets are not liquid. But I know that there are a lot of research on that and some of my collegues/practitioners are trying to use this kind of time varying models and/or extended Kalman filters to do that. I think that if these models are very helpful to understand a stochastic process and regimes ex-post, they are very difficult to use to elaborate scenarios ex-ante, especially in case of switching regime (during crises and large events). --- Sylvain Barth?l?my Research Director, TAC www.tac-financial.com | www.sylbarth.com -----Message d'origine----- De?: r-sig-finance-bounces at stat.math.ethz.ch [mailto:r-sig-finance-bounces at stat.math.ethz.ch] De la part de Davy Envoy??: mardi 21 ao?t 2007 19:58 ??: 'R-sig-finance' Objet?: Re: [R-SIG-Finance] making sense of 100's of funds John, Sylvain and colleagues, I find both your remarks very interesting and to contain some truth, I have included a working paper from Angela, ea (2003). Where they use a time varying two factor model to test for contagion. They find that in the Asian Crisis the correlations are indeed increased however no strong evidence is found for contagion in the Mexican crisis. Now my question is do you think that the use of time-varying models or stochastic models (such as a Markov VAR) can reduce risk in a crisis by switching to safer portfolios and by switching to high risk (and hopefully high yielding) portfolios in better times? I'm very interested to hear your opinions, Davy Cielen dcielen at vub.ac.be Student Business Engineering, International Master in Management Science, Solvay Business School Angela, Bekeart and Campbell, 2003, Market Integration and contagion, working paper, available from http://www.nber.org/papers/w9510 _______________________________________________ R-SIG-Finance at stat.math.ethz.ch mailing list https://stat.ethz.ch/mailman/listinfo/r-sig-finance -- Subscriber-posting only. -- If you want to post, subscribe first.