New Economics Papers
on Financial Markets
Issue of 2005‒01‒23
eight papers chosen by
Erik Schloegl

  1. Asset Float and Speculative Bubbles By Harrison Hong; Jose Scheinkman; Wei Xiong
  2. Speculative Trading and Stock Prices: An Analysis of Chinese A-B Share Premia By Jianping Mei; Jose Scheinkman; Wei Xiong
  3. On the Microstructure of Price Determination and Information Aggregation with Sequential and Asymmetric Information Arrival in an Experimental Asset Market By Martin Barner, Francesco Feri, Charles Plott
  4. Can we insure against political uncertainty? Evidence from the U.S. Stock Market By Mattozzi, Andrea
  5. Exchange Rate Fundamentals and Order Flow (July 2004) By Martin D. D. Evans(Georgetown University and NBER) and Richard K. Lyons(U.C. Berkeley and NBER, Haas School of Business)
  6. What are the Origins of Foreign Exchange Movements? By Martin D. D. Evans(Georgetown University and NBER)
  8. Do Currency Markets Absorb News Quickly? By Martin D.D. Evans; Richard K. Lyons

  1. By: Harrison Hong; Jose Scheinkman; Wei Xiong
    Date: 2005–01–17
  2. By: Jianping Mei; Jose Scheinkman; Wei Xiong
    Date: 2005–01–17
  3. By: Martin Barner, Francesco Feri, Charles Plott
    Abstract: Experiments were conducted on an asset with the structure of an option. The information of any individual is limited, as if only the direction of movement of the option value known for a single period without information of the value from when movement was initiated. However, if all information of all insiders were pooled, the value of the option would be known with certainty. The results are the following: (1) Information becomes aggregated in the prices as if fully informative rational expectations operated; and (2) The mechanism through which information gets into the market is captured by a path dependent process that we term "The Fundamental Coordination Principle of Information Transfer in Competitive Markets". The early contracts tend to be initiated by insiders who tender limit orders. The emergence of bubbles and mirages in the markets are coincident with failures and circumstances that prevent the operation of the "Fundamental Principle."
    Keywords: Microstructure, Information, Rational Expectations experiments, Information Aggregation, Belief Formation, Bubbles, Cascades, Mirages
    Date: 2004–08
  4. By: Mattozzi, Andrea
    Abstract: We show that existing stocks that are currently traded in the U.S. stock market can be used to hedge political uncertainty. Focusing on the 2000 U.S. Presidential election, we construct two "presidential portfolios" composed of selected stocks anticipated to fare differently under a Bush versus a Gore presidency. To construct these portfolios we use data on campaign contributions by publicly traded corporations and identify the major contributors on each side. Using daily observations for the six months before the election took place, we show that the excess returns of these portfolios with respect to overall market movements are significantly related to changes in electoral polls.
    Keywords: political uncertainty, financial markets
    Date: 2004–10
  5. By: Martin D. D. Evans(Georgetown University and NBER) and Richard K. Lyons(U.C. Berkeley and NBER, Haas School of Business) (Department of Economics, Georgetown University)
    Abstract: This paper addresses the striking ability of transaction flows to explain exchange rate movements. Specifically, we examine whether this arises because transaction flows convey incremental information about fundamentals. If so, then these flows should affect price upon their realization and observation by price setters (marketmakers). Our model is a simple general equilibrium model of information aggregation that provides---in a setting of incomplete markets---a utility-based present-value representation for exchange rates. The model produces testable implications for the relationships between realized transaction flows, current and future exchange rate returns, and future fundamentals (e.g., money supplies). We then bring these implications to the data, making use of a new dataset covering over six years of transactions (which permits estimation at the monthly frequency). We find strong contemporanous effects of transaction flows on exchange rates, corroborating past findings. More importantly, we present four key findings that are both new to the literature and supportive of our model: (1) transaction flows forecast (Granger cause) future macroeconomic variables such as money growth, output growth, and inflation, (2) transaction flows forecast future exchange rates changes, and do so more effectively than forward discounts, (3) the future exchange rate components that current flows forecast are primarily the future non-flow-driven components, and (4) though flows convey new information about future fundamentals, much of this information is still not impounded in the exchange rate 9 months later. The slow pace of learning implies that abstracting from information aggregation---as is standard in exchange rate economics---is not innocuous. Classification-JEL Codes:F3, F4, G1
    Keywords: Exchange Rate Dynamics, Microstructure, Order Flow.
  6. By: Martin D. D. Evans(Georgetown University and NBER) (Department of Economics, Georgetown University)
    Abstract: This paper uses a new transactions data set on the inter bank foreign exchange market to examine the origins of spot exchange rate movements. The data provide a comprehensive picture of trading activity and allow me to examine the contribution of public news to spot rate dynamics over hours, days, and weeks. Contrary the presumption of macroeconomic exchange rates models, I find that public news only accounts for a fraction of exchange rate volatility over the whole frequency spectrum. In particular, I estimate that less that 50\% of the variance of spot rate changes at very high frequencies is attributable to public news. At daily and weekly frequencies, changes in the spot rate understate the effects of public news by 20 to 40 percent because the cumulative effects of independent public and private news exert offsetting effects. These findings suggest one reason for the poor performance of macroeconomic exchange rate models; namely their exclusive focus on public Classification-JEL Codes:
  7. By: Somnath Chatterjee
    Abstract: This paper examines the causal relationship between euro and sterling swap spreads during the period January, 1999 to March, 2003. The absence of any correlation between changes in the two swap spreads would indicate that credit risk factors are country-specific. But euro swap spreads showed some correlation with the interest rate differentials between the two markets. Both spreads follow a GARCH process but sterling swap spreads reacted more intensely to market movements and were more volatile than their euro counterparts. There was evidence of mild volatility transmission from the sterling swap spreads to the euro swap spreads but the causality was one sided.
  8. By: Martin D.D. Evans; Richard K. Lyons
    Abstract: This paper addresses whether macro news arrivals affect currency markets over time. The null from macro exchange-rate theory is that they do not: macro news is impounded in ex-change rates instantaneously. We test this by examining the effects of news on subsequent trades by end-user participants (such as hedge funds, mutual funds, and non-financial corporations). News arrivals induce subsequent changes in trading in all of the major end-user segments. These induced changes remain significant for days. Induced trades also have persistent effects on prices. Currency markets are not responding to news instantaneously.
    JEL: F3 F4 G1
    Date: 2005–01

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