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Empirical Aspects of Financial Stability

Riedle, Thorsten (2018) Empirical Aspects of Financial Stability. Doctor of Philosophy (PhD) thesis, University of Kent,. (Access to this publication is currently restricted. You may be able to access a copy if URLs are provided) (KAR id:66808)

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This thesis discusses the empirical aspects of financial stability and presents evidence that suggests that stock market bubbles and volatility are related, and that financial crises are also triggered by events related to non-financial sectors. Financial crises are predominantly related to boom episodes and asset price bubbles, which can seriously impact the financial system when they burst. This thesis draws upon the findings of previous papers and argues that the risk of financial instability (systemic risk) is formed during the boom phase and materialises on the eruption of crisis. In so doing, this study considers stock market bubbles as a potential source of risk for financial stability.

Chapter 2 examines whether longer periods of low volatility influence the formation of bubbles, which are defined as the difference between current prices and an adaptive moving average of an alternate history of asset prices, and whether stock market bubbles increase the likelihood of stock market crashes. The regression analysis employed confirms that longer episodes of low realised volatility exerts a significant influence on the formation of stock market bubbles, which, in turn, significantly increase the likelihood of stock market crises. This relationship is referred to as volatility paradox. Furthermore, the bubble is incorporated to inflate Value at Risk, in order to generate a countercyclical capital buffer for extreme events. It is shown that the inflated VaR covers the majority of the extreme negative returns. This leads to the conclusion that the information content of bubbles should be taken into account while measuring risk in stock markets.

Chapter 4 compares the realised volatility levels between international stock markets. Although the volatility patterns are fairly similar, the pairwise t-test reveals a significant difference between the volatility levels of national stock markets. A two component GARCH-MIDAS model is applied to decompose conditional volatility into a short-run and a long-run volatility component and to link macroeconomic variables directly with stock market volatility. The outcomes of the GARCH-MIDAS model indicate that stock market volatility is associated with macroeconomic variables, and that stock market volatility depends upon different variables in different countries. Realised volatility is found to explain a considerable proportion of conditional volatility. The Granger causality test reveals no significant causal relationship of volatility with illiquidity or with sentiment.

Item Type: Thesis (Doctor of Philosophy (PhD))
Thesis advisor: Tunaru, Radu
Thesis advisor: Panopoulou, Ekaterini
Uncontrolled keywords: Financial stability, stock market bubbles, Bubble-Value-at-Risk, boom-bust cycle, low volatility, systemic risk, volatility decomposition
Divisions: Divisions > Kent Business School - Division > Kent Business School (do not use)
SWORD Depositor: System Moodle
Depositing User: System Moodle
Date Deposited: 23 Apr 2018 09:12 UTC
Last Modified: 16 Feb 2021 13:54 UTC
Resource URI: (The current URI for this page, for reference purposes)
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