nep-fmk New Economics Papers
on Financial Markets
Issue of 2005‒03‒20
seven papers chosen by
Erik Schloegl
School of Mathematical Sciences University of Technology

  1. How trade splits up information sets and dealers carry out their brokerage of asymmetric information By Rodolfo Apreda
  2. Linkages in international stock markets: Evidence from a classification procedure By Simon Sosvilla-Rivero; Pedro N. Rodríguez
  3. Credit Default Swaps and Equity Prices: The Itraxx CDS Index Market By Byström, Hans N. E.
  4. The Determinants of Credit Default Swap Premia By Ericsson, Jan; Jacobs, Kris; Oviedo-Helfenberger, Rodolfo
  5. Attributing Returns and Optimising United States Swaps Portfolios Using an Intertemporally-Consistent and Arbitrage-Free Model of the Yield Curve By Leo Krippner
  6. Impact of Cross-listing on Local Stock Returns: Case of Russian ADRs By Elena Smirnova
  7. The Unanticipated Effects of Insider Trading Regulation By Art Durnev; Amrita S. Nain

  1. By: Rodolfo Apreda
    Abstract: n this paper we set forth a new perspective from which to understand and measure the brokerage of asymmetric information that intermediaries usually carry out. Firstly, we deal with partitions of a given set so as to lay grounds to our line of research. Secondly, we argue that trade splits up imperfect information sets, over which traders try to negotiate and profit, but also hide their opportunistic behavior from their counterparts. Next, the brokerage of asymmetric information is framed so as to stress the fact that any exchange is dual, entailing not only bargaining property rights but also information value. Lastly, we bring to light the linkage between differential rates, residual information sets and trading environments, which seems to be a functional toolkit for assessing how much asymmetric information is brokered eventually.
    Keywords: asymmetric information, brokerage, differential rates, residual information sets, financial intermediaries
    JEL: G14 D82 D80 C78
    Date: 2005–03
  2. By: Simon Sosvilla-Rivero; Pedro N. Rodríguez
    Abstract: In this paper we propose a new approach to evaluate the predictable components in stock indices using a boosting-based classification technique, and we use this method to examine causality among the three main stock market indices in the world during periods of large positive price changes. The empirical evidence seems to indicate that the Standard & Poors 500 index contains incremental information that is not present in either the FTSE 100 index or the Nikkei 225 index, and that could be used to enhance the predictability of the large positive returns in the three main stock market indices in the world. This in turn would suggest a causality relationship running from the Standard & Poors 500 index to both the FTSE 100 and the Nikkei 225 indices.
  3. By: Byström, Hans N. E. (Department of Economics, Lund University)
    Abstract: In this paper we provide some early evidence of a link between the iTraxx credit default swap (CDS) index market and the stock market. To our knowledge this is the first paper studying this relationship. Knowledge about the link between stock returns, stock return volatilities and CDS spreads is important not only for risk managers using credit default swaps for hedging purposes, but also to anyone trying to profit from arbitrage possibilities in the CDS market. For a sample of European sectoral iTraxx CDS indexes, correlations reveal a tendency for iTraxx CDS spreads to narrow when stock prices rise and vice versa. Furthermore, OLS regressions suggest that firm-specific information is embedded into stock prices before it is embedded into CDS spreads. Stock price volatility is also found to be significantly correlated with CDS spreads and the spreads are found to increase (decrease) with increasing (decreasing) stock price volatilities. Finally, we find significant autocorrelation in the iTraxx market.
    Keywords: credit default swap index; stock market index
    JEL: C20 G33
    Date: 2005–03–11
  4. By: Ericsson, Jan (McGill University); Jacobs, Kris (McGill University); Oviedo-Helfenberger, Rodolfo (McGill University)
    Abstract: Using a new dataset of bid and offer quotes for credit default swaps, we investigate the relationship between theoretical determinants of default risk and actual market premia using linear regression. These theoretical determinants are firm leverage, volatility and the riskless interest rate. We find that estimated coefficients for these variables are consistent with theory and that the estimates are highly significant both statistically and economically. The explanatory power of the theoretical variables for levels of default swap premia is approximately 60%. The explanatory power for the differences in the premia is approximately 23%. Volatility and leverage by themselves also have substantial explanatory power for credit default swap premia. A principal component analysis of the residuals and the premia shows that there is only weak evidence for a residual common factor and also suggests that the theoretical variables explain a significant amount of the variation in the data. We therefore conclude that leverage, volatility and the riskfree rate are important determinants of credit default swap premia, as predicted by theory.
    Keywords: Credit default swap; Credit risk; Structural model; Leverage; Volatility
    JEL: G12
    Date: 2004–09–15
  5. By: Leo Krippner (AMP Capital Investors)
    Abstract: This paper uses the volatility-adjusted orthonormalised Laguerre polynomial model of the yield curve (the VAO model) from Krippner (2005), an intertemporally-consistent and arbitrage-free version of the popular Nelson and Siegel (1987) model, to develop a multi-dimensional yield-curve-based risk framework for fixed interest portfolios. The VAO model is also used to identify relative value (i.e. potential excess returns) from the universe of securities that define the yield curve. In combination, these risk and return elements provide an intuitive framework for attributing portfolio returns ex-post, and for optimising portfolios ex-ante. The empirical applications are to six years of daily United States interest rate swap data. The first application shows that the main sources of fixed interest portfolio risk (i.e. unanticipated variability in ex-post returns) are first-order (‘duration’) effects from stochastic shifts in the level and shape of the yield curve; second-order (‘convexity’) effects and other contributions are immaterial. The second application shows that fixed interest portfolios optimised ex-ante using the VAO model risk/relative framework significantly outperform a naive evenly-weighted benchmark over time.
    Keywords: yield curve; term structure; fixed interest securities; portfolio optimisation; interest rate swaps
    JEL: E43 G11 G12
    Date: 2005–03–11
  6. By: Elena Smirnova
    Abstract: The paper examines the impact of American Depositary Receipt (ADR) listings on the return of the underlying Russian stocks. The contribution of this paper is twofold. First, it looks at a new sample of ADRs issued by Russian companies. Second, the technique used to estimate the market model is different from the previous studies. The returns are modeled to follow GARCH process, as opposed to the regular OLS procedure, which assumes homoscedasticity in residual returns. Average abnormal returns and cumulative average abnormal returns are calculated for the [-25, +25] event window, with the ADR listing date being the event date. The results indicate a significant negative abnormal local market return on an ADR listing day. The return volatilities after the listing are compared to those before the listing. Eleven out of sixteen companies experienced increased volatility of local returns after the cross-listing.
    Keywords: finance, Russia, international cross-listings, ADRs
    Date: 2004–05–01
  7. By: Art Durnev; Amrita S. Nain
    Abstract: Using a sample of 2,827 firms from 21 countries we examine whether insider trading laws achieve the primary objective for which they are introduced – protecting uninformed investors from private information-based trading. We find that when control is concentrated in the hands of a large shareholder, insider trading regulation is less effective in reducing private information-based trading if investor protection is poor. We suggest that controlling shareholders who are banned from trading may resort to covert expropriation of firm resources, creating more information asymmetry and thereby encouraging private information trading by informed outsiders. Consistent with this, we find evidence that when the rights of controlling shareholders are high, insider trading restrictions are associated with greater earnings opacity.
    Keywords: Insider Trading Regulation, Ownership, Private Information Trading, Earnings Opacity
    JEL: G15 G14 G38
    Date: 2004–05–01

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