Introduction (Władysław Milo, Piotr Wdowińskt) .................. 7
Part One. Volatility in Financial Markets: Modeling
and Forecasting
1 Forecasting the Polish Stock Market Volatility with Markov
Switching GARCH Models (Ryszard Doman) ...................... 13
1.1 Introduction ........................................... 13
1.2 Markov Switching Models ................................ 14
1.3 Model Specification .................................... 15
1.4 Model Estimation ....................................... 16
1.5 Forecasts .............................................. 18
1.6 The Data ............................................... 18
1.7 Estimation Results .................................... 19
1.8 Forecast Evaluation .................................... 23
1.9 Conclusions ............................................ 26
2 Forecasting the Volatility of the Polish Stock Index -
WIG20 (Piotr Fiszeder) ...................................... 29
2.1 Introduction ........................................... 29
2.2 Competing Models ....................................... 30
2.3 Evaluation Measures .................................... 32
2.4 Data and Forecast Results .............................. 33
2.5 Conclusions ............................................ 41
3 The Application of Error Correction Model in Forecasting
Market Volatility on Emerging Currency Options Markets
(Piotr Mielus) .............................................. 43
3.1 Introduction ........................................... 43
3.2 Currency Basket Estimation ............................. 44
3.3 The Error Correction Model ............................. 45
3.4 Results for Market Volatility .......................... 46
3.5 Forecast Results Estimation ............................ 49
3.6 Conclusions ............................................ 50
3.7 Appendix ............................................... 52
4 The Determinants of Stock Return Volatility on the
Ukrainian Emerging Financial Market: a GARCH Approach
(Jerzy Stelmach) ............................................ 57
4.1 Introduction ........................................... 57
4.2 Determinants of Stock Market Return Volatility ......... 58
4.3 Data, Methodology and Specification .................... 62
4.4 Empirical Results ...................................... 64
4.5 Conclusions ............................................ 69
5 How Well Do Models of Stock Market Volatility Forecast at
Longer Horizons? (Burkhard Raunig) .......................... 71
5.1 Introduction ........................................... 71
5.2 Data, Models and the Forecasting Experiment ............ 72
5.3 Forecast Evaluation .................................... 74
5.3.1 Measures of Ex-Post Volatility .................. 74
5.3.2 Statistical Loss Functions ...................... 75
5.3.3 Regression Approach ............................ 75
5.3.4 Value-at-Risk ................................... 76
5.4 Empirical Results ...................................... 77
5.4.1 Results from Statistical Loss Functions ......... 77
5.4.2 Results from Regression Analysis ................ 78
5.4.3 Value-at-Risk Evaluation ....................... 80
5.5 Conclusions ............................................ 83
Part Two. Portfolio Selection and Optimization
6 An Attempt to Assess the Effectiveness of the Fundamental
Securities Portfolio Constructed on the Basis of
Forecasts (Waldemar Tarczyński, Małgorzata Łuniewska) ....... 87
6.1 Introduction ........................................... 87
6.2 Description of the Method .............................. 89
6.3 An Empirical Example ................................... 90
7 How to Immunize a Defaultable Bond Portfolio? (Alina
Kondratiuk-Janyska, Marek Kałuszka) ......................... 97
7.1 Introduction ........................................... 97
7.2 Preliminary Notations ................................ 98
7.3 Main Result ........................................... 100
7.4 Appendix .............................................. 103
8 The Portfolio of Risky Investments Based on the AHP
(Wojciech Zatoń) ........................................... 107
8.1 Introduction .......................................... 107
8.2 Methodology ........................................... 108
8.3 Example ............................................... 109
8.3.1 Company's Growth Forecast (GROWTH) ............. 110
8.3.2 Management and the Structure of the
Shareholders (MANAGEMENT) ...................... 111
8.3.3 Signals from Technical Analysis (ТА) ........... 112
8.3.4 Price/Book Value (P/BV) Ratio .................. 113
8.4 Conclusions ........................................... 116
Part Three. Stock Market Modeling in Emerging Markets
9 The Slovenian Stock Market Index (SBI20 - Slovenski
Borzni Index) from the Aspect of Frequency Domain
(Aleša Lotrič Dolinar) ..................................... 119
9.1 Time Series Analysis ................................. 119
9.2 About SBI20 ........................................... 120
9.3 ARCH Analysis of Return on SBI20 ...................... 123
9.4 Spectral Analysis in General .......................... 124
9.5 Spectral Analysis of Return on SBI20 .................. 128
9.6 Another Application of the Spectral Method ............ 130
9.7 Comparison of the Two Methods and Concluding
Remarks ............................................... 132
10 Modeling and Forecasting the VolatiUty of Thin Emerging
Stock Markets: The Case of Bulgaria (Plamen Patev,
Nigokhos Kanaryan) ......................................... 135
10.1 Introduction .......................................... 135
10.2 Literature Review ..................................... 136
10.3 Methodology ........................................... 137
10.4 Empirical Results ..................................... 140
10.5 Conclusions ........................................... 143
Part Four. Econometric and Statistical Theory and
Applications in Financial Markets
11 Maximum Likelihood Estimation of Stochastic Unit Root
Models with GARCH Disturbances (Jacek Kwiatkowski) ......... 149
11.1 Introduction .......................................... 149
11.2 Stochastic Unit Root Model ............................ 150
11.3 Kalman Filter with GARCH Effects ...................... 152
11.4 Applications to Zloty Exchange Rates .................. 154
11.5 Conclusions ........................................... 157
12 An Application of Neural Networks to Find Risky Credit
Positions and For ecasting Consumer Loans Default
Situation (Przemysiaw Garsztka, Maciej Kokorniak) .......... 159
12.1 Introduction .......................................... 159
12.2 The Methods Overview .................................. 160
12.3 Description of Variables Characterizing Revolving
Credits ............................................... 162
12.4 Experiment Conditions ................................. 164
12.5 Experiment Results .................................... 167
12.6 Conclusions ........................................... 174
13 The Generalization of Net Present Value Calculations
(Jacek Białek) ............................................. 177
13.1 Introduction .......................................... 177
13.2 The Model ............................................ 178
13.2.1 The Black-Karasinsky Model (1991) ............. 180
13.2.2 The Cox-Ingersoll-Ross Model (1985) ............ 180
13.3 The Generalized Definition of Net Present Value ....... 181
13.4 The Criterion for Rejecting Investment Projects ....... 181
13.5 An Average Net Present Value in a Special Case ........ 183
13.6 Conclusions ........................................... 189
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