TY - BOOK

T1 - Volatility and Systematic Risks in Financial Markets

AU - Würsig, Christoph Matthias

N1 - Doctoral thesis

PY - 2022

Y1 - 2022

N2 - This thesis investigates different volatility risk measures, interdependencies between the risk measures and macroeconomic determinants, and the connection between systematic risk and market power in financial markets. In Chapter 1, I introduce the overall concept of the thesis and present an overview of the subsequent chapters. In Chapter 2, we comprehensively examine the volatility term structures in commodity markets. We model state-dependent spillovers in principal components (PCs) of the volatility term structures of different commodities, as well as that of the equity market. We detect strong economic links and a substantial interconnectedness of the volatility term structures of commodities. Accounting for intra-commodity-market spillovers significantly improves out-of-sample forecasts of the components of the volatility term structure. Spillovers following macroeconomic news announcements account for a large proportion of this forecast power. There thus seems to be substantial information transmission between different commodity markets. The option-implied variance is calculated based on the entire option surface. Option-implied tail risk represents only a proportion of the left tail (or right tail) of the option surface. As for the calculation of the variance there are a plethora of tail risk measures to choose from, to evaluate the different tail risk measures. We compare them in Chapter 3. It comprehensively investigates the usefulness of the tail risk measures proposed in the literature. We evaluate the tail risk measures on the basis of their statistical and economic validity. Our main conclusion is that the option-implied measure of Bollserslev and Todorov (2011b) outperforms all others. It performs well for all tests and can predict not only the occurrence but also the size of future crash events. In addition, the measure is priced in the market: it predicts returns both in the time-series and in the cross-section. Finally, it also has an impact on real economic activity. Using the tail risk measure found to be best for the equity markets in Chapter 3, we investigate the cross-section of tail risks in commodity markets in Chapter 4. In contrast to findings from equity indices, left and right tail risk implied by option markets are both large. Moreover, we find that, both, left and right tail risk are priced in the cross-section of commodity futures returns. The variance risk premium is the main driver for the left tail and the right tail risk. We find strong links to between the tail risk and the tail risk of equity markets as well as to speculation in commodity markets. In general, commodity-specific variables exert the largest influence on tail risk. There is no evidence of commodity market factors that are linked to tail risk. In Chapter 5, we examine the impact of product market competition on another risk factor, the systematic risk. Using a measure of total product market similarity, we document a strong negative link between market power and market betas. There is a more than threefold increase in the effect during the most recent low-competition period. Announcements of anti-competitive mergers lead to a significant reduction in market betas, underlining the causality of the market power--systematic risk relationship. Firms that face less competition appear to be partly insulated from systematic discount-rate shocks. Lower equity costs therefore mean that market power is in part self-reinforcing. In Chapter 6, I conclude and outline possible future directions for research.

AB - This thesis investigates different volatility risk measures, interdependencies between the risk measures and macroeconomic determinants, and the connection between systematic risk and market power in financial markets. In Chapter 1, I introduce the overall concept of the thesis and present an overview of the subsequent chapters. In Chapter 2, we comprehensively examine the volatility term structures in commodity markets. We model state-dependent spillovers in principal components (PCs) of the volatility term structures of different commodities, as well as that of the equity market. We detect strong economic links and a substantial interconnectedness of the volatility term structures of commodities. Accounting for intra-commodity-market spillovers significantly improves out-of-sample forecasts of the components of the volatility term structure. Spillovers following macroeconomic news announcements account for a large proportion of this forecast power. There thus seems to be substantial information transmission between different commodity markets. The option-implied variance is calculated based on the entire option surface. Option-implied tail risk represents only a proportion of the left tail (or right tail) of the option surface. As for the calculation of the variance there are a plethora of tail risk measures to choose from, to evaluate the different tail risk measures. We compare them in Chapter 3. It comprehensively investigates the usefulness of the tail risk measures proposed in the literature. We evaluate the tail risk measures on the basis of their statistical and economic validity. Our main conclusion is that the option-implied measure of Bollserslev and Todorov (2011b) outperforms all others. It performs well for all tests and can predict not only the occurrence but also the size of future crash events. In addition, the measure is priced in the market: it predicts returns both in the time-series and in the cross-section. Finally, it also has an impact on real economic activity. Using the tail risk measure found to be best for the equity markets in Chapter 3, we investigate the cross-section of tail risks in commodity markets in Chapter 4. In contrast to findings from equity indices, left and right tail risk implied by option markets are both large. Moreover, we find that, both, left and right tail risk are priced in the cross-section of commodity futures returns. The variance risk premium is the main driver for the left tail and the right tail risk. We find strong links to between the tail risk and the tail risk of equity markets as well as to speculation in commodity markets. In general, commodity-specific variables exert the largest influence on tail risk. There is no evidence of commodity market factors that are linked to tail risk. In Chapter 5, we examine the impact of product market competition on another risk factor, the systematic risk. Using a measure of total product market similarity, we document a strong negative link between market power and market betas. There is a more than threefold increase in the effect during the most recent low-competition period. Announcements of anti-competitive mergers lead to a significant reduction in market betas, underlining the causality of the market power--systematic risk relationship. Firms that face less competition appear to be partly insulated from systematic discount-rate shocks. Lower equity costs therefore mean that market power is in part self-reinforcing. In Chapter 6, I conclude and outline possible future directions for research.

KW - Marktmacht

KW - Commodity Market

KW - Volatilität

KW - Volatility

KW - Tail Risk

KW - Market power

KW - Systematisches Risiko

KW - Extrem-Risiko

KW - Vorhersage von Aktienrenditen

KW - Return Predictability

KW - Rohstoffmärkte

KW - systematic risk

U2 - 10.15488/11968

DO - 10.15488/11968

M3 - Doctoral thesis

CY - Hannover

ER -