nep-fmk New Economics Papers
on Financial Markets
Issue of 2005‒02‒01
six papers chosen by
Erik Schloegl
School of Mathematical Sciences University of Technology

  2. Stock market integration and the speed of information transmission By Alexandr Cerny
  3. Default Probabilities According to the Bond Market By Byström , Hans; Kwon, Oh Kang
  4. Initial Returns, Long Run Performance and Characteristics of Issuers: Differences in Indian IPOs Following Fixed Price and Book building Processes By Pandey Ajay
  5. Conflicts of Interest in Financial Markets - Evidence from Bond Underwriting in the Nineties. By Dario Focarelli and Alberto Franco Pozzolo.
  6. Practical Volatility and Correlation Modeling for Financial Market Risk Management By Torben G. Andersen; Tim Bollerslev; Peter F. Christoffersen; Francis X. Diebold

  1. By: Kristin Forbes (MIT); Menzie Chinn (University of Wisconsin, Madison)
    Abstract: This paper tests if real and financial linkages between countries can explain why movements in the world's largest markets often have such large effects on other financial markets, and how these cross-market linkages have changed over time. It estimates a factor model in which a country's market returns are determined by: global, sectoral, and cross-country factors (returns in large financial markets), and country-specific effects. Then it uses a new data set on bilateral linkages between the world's 5 largest economies and about 40 other markets to decompose the cross-country factor loadings into: direct trade flows, competition in third markets, bank lending, and foreign direct investment. Estimates suggest that both cross-country and sectoral factors are important determinants of stock and bond returns, and that the U.S. factor has recently gained importance, while the Japanese and U.K. factors have lost importance. From 1996-2000, real and financial linkages became more important determinants of how shocks are transmitted from large economies to other markets. In particular, bilateral trade flows are large and significant determinants of cross-country linkages in both stock and bond markets. Bilateral foreign investment is usually insignificant. Therefore, despite the recent growth in global financial flows, direct trade still appears to be the most important determinant of how movements in the world's largest markets affect financial markets around the globe.
    Keywords: trade linkages, bank lending, factor models, financial integration, interdependence,
    Date: 2003–02–24
  2. By: Alexandr Cerny
    Abstract: Using a unique dataset covering 8 months of high frequency data on the indices from markets in the U.S., London, Frankfurt, Paris, Warsaw, and Prague, I investigate the issue of stock market integration from a novel perspective. Cointegration and Granger causality tests with data of different frequencies (from 5 minutes to 1 day) are performed. The aim is to describe the time structure in which markets react to the information revealed in prices on other markets. Particularly, I want to detect the speed of information transmission between the differentmarkets. The results suggest that markets react very quickly to the information revealed in the prices on other markets. In all cases the reaction occurs as soon as within 1 hour. The U.S. markets seem to be an important source of information for the markets in London and Frankfurt, which react within 30 minutes, with the first reaction occurring already within 5 minutes. Information transmission between the market in London and any of the two continental markets in Paris or Frankfurt appears to be relatively unimportant compared to the information transmission between the two continental markets. The stock market in Paris seems to react to the information revealed at the stock market in Frankfurt with a delay of 40 minutes to 1 hour. Similarly, the two relatively small Eastern European markets in Warsaw and Prague are found to react to the information revealed in the stock market prices in Frankfurt. The reaction of the market in Prague seems to be faster, occurring within 30 minutes, while reaction speed of the market in Warsaw is around 1 hour.
    Keywords: Stock market integration, Market comovement, High-frequency data, Speed of information transmission, Cointegration, Granger causality.
    JEL: G14 G15
    Date: 2004–11
  3. By: Byström , Hans (Department of Economics, Lund University); Kwon, Oh Kang (Discipline of Finance,University of Sydney.)
    Abstract: In this paper we describe a simple way of analytically computing entire ìterm structures of default probabilities using information embedded in the corporate bond market data. This market-based approach of estimating the creditworthiness of firms gives probabilities of default at various maturities, and has the advantage over traditional credit ratings in that it is dynamic and forward looking.
    Keywords: bond market; default probability term structure
    JEL: C20 G33
    Date: 2005–01–26
  4. By: Pandey Ajay
    Abstract: Initial returns (or underpricing) and long run performance of IPOs have been researched extensively across countries. Recent research on IPOs has also been focused on differences in pricing and allocation mechanisms across countries. Indian IPO markets provide a natural setting for comparing the characteristics of issuers, initial returns and long run performance of IPOs coming out with fixed price versus book building route. On a sample of 84 Indian IPOs (20 book-build and 64 fixed-price) from the period 1999 to 2002, we find that the fixed price offerings are used by issuers offering large proportion of their capital by raising a small amount of money. In contrast, book building is opted for by issuers offering small proportion of their stocks and mobilizing larger sums of money. Unlike in the early nineties, the activity in Indian IPO markets is now increasingly following trend of “industry-specific waves” of IPOs as most of the IPOs in our sample are from sectors, which were “hot” during the period. Consistent with the evidence from other countries, initial returns are higher and more uncertain on fixed price offerings. Again in line with evidence elsewhere, all types of Indian IPOs in our sample under performed in the first two years subsequent to listing. We also find some evidence that the IPOs from issuers belonging to industries under the spell of “hot issue” market, under perform more than the rest.
    Date: 2005–01–27
  5. By: Dario Focarelli and Alberto Franco Pozzolo.
    Abstract: This paper presents some new evidence on the conflict of interest that may arise when banks underwrite corporate securities and sell them to their customers. Two alternative views are confronted; a) that commercial banks possess private information on the financial condition of their clients and so perform better screening (the certification hypothesis); and b) that commercial banks might convert loans to firms in financial difficulties into bonds marketed to unsuspecting clients (the ‘naïve investor’ hypothesis). The empirical analysis compares the default rates between 2000 and 2002 of a sample of more than 5,000 securities issued from 1991 to 1999. Our results show that, on average, securities underwritten by investment houses and by commercial banks had the same probability of default. However, investment-grade issues underwritten by commercial banks had a lower probability of default than those underwritten by investment houses, while the reverse was true for noninvestment- grade issues. Based on this latter result, it is not possible to refute the ‘naïve investor’ hypothesis, as instead in Kroszner and Rajan (1994).
    Keywords: Conflicts of interest, Glass-Steagall Act, Securities underwriting, Default performance.
    JEL: G21 G24 N22
    Date: 2005–01–13
  6. By: Torben G. Andersen (Department of Finance, Kellogg School of Management, Northwestern University); Tim Bollerslev (Department of Economics, Duke University); Peter F. Christoffersen (Faculty of Management, McGill University); Francis X. Diebold (Department of Economics, Univerrsity of Pennsylvania)
    Abstract: What do academics have to offer market risk management practitioners in financial institutions? Current industry practice largely follows one of two extremely restrictive approaches: historical simulation or RiskMetrics. In contrast, we favor flexible methods based on recent developments in financial econometrics, which are likely to produce more accurate assessments of market risk. Clearly, the demands of real-world risk management in financial institutions - in particular, real-time risk tracking in very high-dimensional situations - impose strict limits on model complexity. Hence we stress parsimonious models that are easily estimated, and we discuss a variety of practical approaches for high-dimensional covariance matrix modeling, along with what we see as some of the pitfalls and problems in current practice. In so doing we hope to encourage further dialog between the academic and practitioner communities, hopefully stimulating the development of improved market risk management technologies that draw on the best of both worlds.
    JEL: G10
    Date: 2005–01–11

This nep-fmk 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.
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