New Economics Papers
on Financial Markets
Issue of 2005‒01‒02
ten papers chosen by
Erik Schloegl

  1. Shareholder lockup agreements in the European new markets By Goergen,M.; Renneboog,L.D.R.; Khurshed,A.
  2. Mandelbrot's extremism By Beirlant,J.; Schoutens,W.; Segers,J.J.J.
  3. Excess Sensitivity and Volatility of Long Interest Rates: The Role of Limited Information in Bond Markets By Beechey, Meredith
  4. Spillovers across High Yield Markets By Julius Moschitz
  5. Pension reform, savings behavior and capital market performance By Axel H. Börsch-Supan, F. Jens Köke and Joachim K. Winter
  6. Market Power, Survival and Accuracy of Predictions in Financial Markets By Patrick Leoni
  7. Realized Beta: Persistence and Predictability By Torben G. Andersen; Tim Bollerslev; Francis X. Diebold; Jin Wu
  8. Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets By Torben G. Andersen; Tim Bollerslev; Francis X. Diebold; Clara Vega
  9. What One Can Learn From the Initial Public Offering of Google? A Twenty-Year Excursion to the Venture Capital Industry By Emanuel Shachmurove; Yochanan Shachmurove
  10. Does the compass rose pattern matter for testing normality? By Annaert J.; Claes A.; De Ceuster M.J.K.

  1. By: Goergen,M.; Renneboog,L.D.R.; Khurshed,A. (Tilburg University, Center for Economic Research)
    Abstract: We analyse the characteristics of lockup agreements of IPOs on the Neuer Markt and the Nouveau Marche from 1996 to 2000. Even though both markets were part of the same EuroNM network, the characteristics of their lockup agreements are substantially different. Firm characteristics have a major influence on lockup contracts. In addition, shareholder characteristics explain the diversity of contracts within the same firm. Although the French regulator offers two types of minimum lockup contracts, the market perceives a difference between the two contracts as the choice is influenced by the type of the firm and the type of shareholders.
    JEL: G24 G34
    Date: 2004
  2. By: Beirlant,J.; Schoutens,W.; Segers,J.J.J. (Tilburg University, Center for Economic Research)
    Abstract: In the sixties Mandelbrot already showed that extreme price swings are more likely than some of us think or incorporate in our models. A modern toolbox for analyzing such rare events can be found in the field of extreme value theory. At the core of extreme value theory lies the modelling of maxima over large blocks of observations and of excesses over high thresholds. The general validity of these models makes them suitable for out-of-sample extrapolation. By way of illustration we assess the likeliness of the crash of the Dow Jones on October 19, 1987, a loss that was more than twice as large as on any other single day from 1954 until 2004.
    JEL: C13 C14
    Date: 2004
  3. By: Beechey, Meredith (Department of Economics, University of California, Berkeley)
    Abstract: Asymmetric information between the central bank and bond markets creates an inference problem that affects the behaviour of long interest rates. This paper employs a simple macroeconomic model with a time-varying infation target to illustrate the implications of asymmetry for the sensitivity of long rates and volatility of bond returns. When the central bank's infation target is not communicated and macroeconomic shocks are imperfectly observed, bond markets infer the value of the target from noisy signals. This heightens the sensitivity of long-run infation expectations to transitory shocks, thereby raising the measured reaction of long rates to monetary policy and to infation surprises. Calibrated coe±cients from such regressions are more than twice as large when bond markets lack knowledge of the target compared with a full information scenario. Time variation in the infation target is the main source of volatility, but learning adds to the ability of the model to explain the observed volatility of returns along the yield curve.
    Keywords: Term structure of interest rates; yield curve; limited information; learning; excess sensitivity; excess volatility.
    JEL: E43 E52
    Date: 2004–12–01
  4. By: Julius Moschitz
    Abstract: This paper studies the time-variant interactions among US stocks, emerging market bonds and US low-grade corporate bonds. All of these assets are characterized by a similar average return, but returns are far from being perfectly correlated. Therefore, investing in these different assets provides substantial diversification benefits. What is more, most correlations among assets do not increase, rather decrease, during financial crisis.
    Keywords: Asset allocation; Financial crisis; Time-varying correlations; Regime-switching models; Emerging market bonds; Corporate bonds; Stock market.
    JEL: G11 G14 G15
    Date: 2004–12–29
  5. By: Axel H. Börsch-Supan, F. Jens Köke and Joachim K. Winter (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: This paper shows that the capital market effects of population aging and pension reform are particularly strong in continental European economies such as France, Germany, and Italy. Reasons are threefold: these countries have large and ailing pay-as-you-go public pension systems, relatively thin capital markets and less than benchmark capital performance. The aging process will force the younger generations in these countries to provide more retirement income through own private saving. Capital markets will therefore grow in size and active institutional investors will become more important as intermediaries. Aim of this paper is to show that these changes are likely to generate beneficial side effects in terms of improved productivity and aggregate growth.
    Date: 2004–06–25
  6. By: Patrick Leoni
    Abstract: This paper aims to show that the market selection hypothesis in finance is not solely driven by the competitiveness of such markets, as was originally claimed by Alchian [1] and Friedman [4]. Within a standard intertemporal General Equilibrium framework, we allow for an agent to have enough influence on financial markets to strategically affect prices of assets traded. We then show that, as in Sandroni [15], the agent’ long-run consumption will vanish if she makes less accurate predictions than the market, and maintain her market power otherwise. We conclude that the Darwinian justification to this market selection is not the only explanation for the eventual domination of agents making the most accurate predictions. Rather, we claim that the origin of market selection, and in turn of the common prior assumption in asset pricing, is associated with the ability to foresee accurately market uncertainty.
    Keywords: market imperfection, asset pricing, learning
    JEL: G11 G12 D43
  7. By: Torben G. Andersen (Department of Economics, Northwestern University); Tim Bollerslev (Department of Economics, Duke University); Francis X. Diebold (Department of Economics, University of Pennsylvania); Jin Wu (Department of Economics, University of Pennsylvania)
    Abstract: A large literature over several decades reveals both extensive concern with the question of time-varying betas and an emerging consensus that betas are in fact time-varying, leading to the prominence of the conditional CAPM. Set against that background, we assess the dynamics in realized betas, vis-à-vis the dynamics in the underlying realized market variance and individual equity covariances with the market. Working in the recently-popularized framework of realized volatility, we are led to a framework of nonlinear fractional cointegration: although realized variances and covariances are very highly persistent and well approximated as fractionally-integrated, realized betas, which are simple nonlinear functions of those realized variances and covariances, are less persistent and arguably best modeled as stationary I(0) processes. We conclude by drawing implications for asset pricing and portfolio management.
    Keywords: Quadratic variation and covariation, realized volatility, asset pricing, CAPM, equity betas, long memory, nonlinear fractional cointegration, continuous-time methods
    JEL: C1 G1
    Date: 2003–01–03
  8. By: Torben G. Andersen (Department of Economics, Northwestern University); Tim Bollerslev (Department of Economics, Duke University); Francis X. Diebold (Department of Economics, University of Pennsylvania); Clara Vega (Department of Finance, University of Rochester)
    Abstract: We characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. Our analysis is based on a unique data set of high frequency futures returns for each of the markets. We find that news surprises produce conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. The details of the linkages are particularly intriguing as regards equity markets. We show that equity markets react differently to the same news depending on the state of the economy, with bad news having a positive impact during expansions and the traditionally-expected negative impact during recessions. We rationalize this by temporal variation in the competing “cash flow” and “discount rate” effects for equity valuation. This finding helps explain the time-varying correlation between stock and bond returns, and the relatively small equity market news effect when averaged across expansions and recessions. Lastly, relying on the pronounced heteroskedasticity in the high-frequency data, we document important contemporaneous linkages across all markets and countries over-and-above the direct news announcement effects.
    Keywords: Asset Pricing, Macroeconomic News Announcements, Financial Market Linkages, Market Microstructure, High-Frequency Data, Survey Data, Asset Return Volatility, Forecasting
    JEL: F3 F4 G1 C5
    Date: 2003–07–01
  9. By: Emanuel Shachmurove (University of Michigan Law School); Yochanan Shachmurove (The City College of The City University of New York and the University of Pennsylvania)
    Abstract: Over the past two decades the venture capital industry became a major focus for the financial media. With potential for high rates of return, this industry attracts entrepreneurs looking for opportunities to invest. While some investments are successful and highly publicized, many are not. This paper gives insight about the role financing in different stages plays in determining the success of an investment. It compares data on the rates of return of 2,678 venture-backed public companies during multiple stages of financing. Additionally, this paper evaluates how the rates of return of these companies have changed between the 1980s and 1990s.
    Keywords: Annualized returns, Venture Capital, Venture-Backed Public Companies, Stage of Financing, Initial Public Offering, Early-Stage Financing, Seed Financing, Research and Development Financing, Start-up Financing, First-Stage Financing, Expansion Financing, Second-Stage Financing, Third-Stage and Mezzanine Financing, Bridge Financing, Acquisition/Buyout Financing, Acquisition Financing, Management /Leveraged Buyout
    JEL: C12 D81 D92 E22 G12 G24 G3 M13 M21 O16 O3
    Date: 2004–10–25
  10. By: Annaert J.; Claes A.; De Ceuster M.J.K.
    Abstract: Some years ago, Crack and Ledoit (1996) discovered a strikingly geometric structure when plotting US stock returns against themselves. Since this pattern, in which lines radiating from the origin pop up, resembles the navigating tool it was named “Compass Rose”. Although authors differ in opinion when explaining the causes of the phenomenon, discreteness of price jumps is unanimously indicated as driver of the structure. This paper first documents the presence of a Compass Rose Structure within the illiquid Belgian stock market, looking at both individual stocks and stock indices. We then examine whether the presence of a Compass Rose, i.e. the discreteness of prices, affects normality tests. Based on simulated Brownian Motions with rounded price increments, we notice that two commonly used normality tests react differently to discreteness in the underlying data. As the tick size increases, the popular Jarque-Bera test is not able to detect the deviations from normality. The Lilliefors test, however, clearly rejects the normality assumption when the data exhibit tick/volatility ratios in excess of 2.5.
    Date: 2003–06

This issue is ©2005 by Erik Schloegl. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.