New Economics Papers
on Financial Markets
Issue of 2007‒03‒10
nine papers chosen by

  1. Price Dynamics on a Stock Market with Asymmetric Information By Bernard De Meyer
  2. An Asset Pricing Model for Mean-Variance-Downside-Risk Averse Investors By José Olmo
  3. The Use of Derivatives in the Spanish Mutual Fund Industry By José M. Marín; Thomas A. Rangel
  4. Bonds futures and their options: more than the cheapest-to-deliver; quality option and marginning By Henrard, Marc
  5. Term Structure Forecasting: No-arbitrage Restrictions vs. Large Information Set By Carlo A. Favero, Linlin Niu and Luca Sala
  6. Optimization in a Simulation Setting: Use of Function Approximation in Debt Strategy Analysis By David Jamieson Bolder; Tiago Rubin
  7. Bank behaviour with access to credit risk transfer markets By Goderis, Benedikt; Marsh, Ian; Vall Castello , Judit; Wagner, Wolf
  8. The economic impact of central bank transparency: a survey By Carin van der Cruijsen; Sylvester Eijffinger
  9. On Volatility Spillovers and Dominant Effects in East Asian: Before and After the 911 By Chan, Tze-Haw; Hooy, Chee Wooi

  1. By: Bernard De Meyer
    Date: 2007–03–07
  2. By: José Olmo (Department of Economics, City University, London)
    Abstract: We introduce a family of utility functions that describe the preferences of mean-variance-downside-risk (mvdr) averse investors. The risk premium on a risky asset in an economy with these individuals is given by a weighted sum of CAPM systematic risk and a systematic risk given by the level of comovements between the asset and the market in distress episodes. Hence investors require a higher reward than predicted by CAPM for holding assets correlated with the market in distress episodes, and a lower reward for holding assets with negative correlation in market downturns. The application of this pricing theory to financial sectors in FTSE-100 is illuminating. The empirical failure of standard CAPM is explained by the extra reward required by investors from market downturns. While Chemicals and Mining sectors exhibit positive comovements with FTSE downturns; Banking and Oil and Gas sectors are robust to them and Telecommunications Services exhibit negative comovements serving as refugee of investors fleeing from domestic market distress episodes.
    Keywords: Asset Pricing, CAPM, Downside-risk, Mean-variance
    JEL: G11 G12 G13
    Date: 2007–01
  3. By: José M. Marín; Thomas A. Rangel
    Abstract: We study the use of derivatives in the Spanish mutual fund industry. The picture that emerges from our analysis is rather negative. In general, the use of derivatives does not improve the performance of the funds. In only one out of eight categories we find some (very weak and not robust) evidence of superior performance. In most of the cases users significantly underperform non users. Furthermore, users do not seem to exhibit superior timing or selectivity skills either, but rather the contrary. This bad performance is only partially explained by the larger fees funds using derivatives charge. Moreover, we do not find evidence of derivatives being used for hedging purposes. We do find evidence of derivatives being used for speculation. But users in only one category exhibit skills as speculators. Finally, we find evidence of derivatives being used to manage the funds’ cash inflows and outflows more efficiently.
    Keywords: Mutual Funds, Derivative use, Risk Management
    JEL: G11 G2
    Date: 2006–11
  4. By: Henrard, Marc
    Abstract: Even if the name futures indicates a simple instrument, bond futures are complex. Several special features are embedded in the instrument. In particular the future is not written on one specific bond but on a basket of bonds, from which the short side can deliver the cheapest. This paper focuses on that feature, present in the main futures market, and its impact on the futures risk. A formula for the delivery option and the convexity adjustment due to the daily margining is proposed in the Gaussian HJM model. The approach is numerically very efficient and easy to implement. Based on this result a futures option formula is derived. The approach is similar to the one used for Canary swaptions.
    Keywords: Bond future; option on bond futures; delivery option; marginning; Gaussian HJM model; explicit formula; numerical integration.
    JEL: G13 E43
    Date: 2006–05
  5. By: Carlo A. Favero, Linlin Niu and Luca Sala
    Abstract: This paper addresses the issue of forecasting the term structure. We provide a unified state-space modelling framework that encompasses different existing discrete-time yield curve models. within such framework we analyze the impact on forecasting performance of two crucial modelling choices, i.e. the imposition of no-arbitrage restrictions and the size of the information set used to extract factors. Using US yield curve data, we find that: a. macro factors are very useful in forecasting at medium/long forecasting horizon; b. financial factors are useful in short run forecasting; c. no-arbitrage models are effective in shrinking the dimensionality of the parameter space and, when supplemented with additional macro information, are very effective in forecasting; d. within no-arbitrage models, assuming time-varying risk price is more favorable than assuming constant risk price for medium horizon-maturity forecast when yield factors dominate the information set, and for short horizon and long maturity forecast when macro factors dominate the information set; e. however, given the complexity and the highly non-linear parameterization of no-arbitrage models, it is very difficult to exploit within this type of models the additional information offered by large macroeconomic datasets.
  6. By: David Jamieson Bolder; Tiago Rubin
    Abstract: This paper provides an analysis of how a firm’s decision to serve a foreign market by exporting or by engaging in foreign direct investment (FDI) affects firm productivity, when productivity is endogeneous as a function of training. The main result of our paper is that, with endogeneous productivity, exporting results in lower productivity than does FDI, but exporting may result in higher or lower employment and output than does FDI. We also show that FDI has lower employment, higher training, higher wages and higher productivity than does production for the home market. A further interesting and unexpected result of our model is that exporting results in the same level of training and productivity as does production for the home market. However, under the same demand conditions, the exporting firm employs less labour for foreign production than for home production and, consequently, output for the foreign market is lower than output for the home market. In addition, we investigate the firm's decision to serve the foreign market by exporting or by engaging in FDI and determine parameter values for which either regime is chosen.
    Keywords: International topics; Labour markets; Productivity
    JEL: F22 F23
    Date: 2007
  7. By: Goderis, Benedikt (Oxford University); Marsh, Ian (Cass Business School); Vall Castello , Judit (Universitat Autonoma); Wagner, Wolf (Tilburg University and Cambridge Endowment for Research in Finance (CERF))
    Abstract: One of the most important recent innovations in financial markets has been the development of credit derivative products that allow banks to more actively manage their credit portfolios than ever before. We analyse the effect that access to these markets has had on the lending behaviour of a sample of banks, using a sample of banks that have not accessed these markets as a control group. We find that banks that adopt advanced credit risk management techniques (proxied by the issuance of at least one collateralized loan obligation) experience a permanent increase in their target loan levels of around 50%. Partial adjustment to this target, however, means that the impact on actual loan levels is spread over several years. Our findings confirm the general efficiency-enhancing implications of new risk management techniques in a world with frictions suggested in the theoretical literature.
    Keywords: credit derivatives; bank loans; moral hazard
    JEL: G20 G21 G28
    Date: 2007–02–28
  8. By: Carin van der Cruijsen; Sylvester Eijffinger
    Abstract: We provide an up-to-date overview of the literature on the desirability of central bank transparency from an economic viewpoint. Since the move towards more transparency, a lot of research on its e¤ects has been carried out. First, we show how the theoretical literature has evolved, by looking into branches inspired by Cukierman and Meltzer (1986) and by investigating several, more recent, research strands (e.g. coordination and learning). Then, we summarize the empirical literature which has been growing more recently. Last, we discuss whether: - the empirical research resolves all theoretical question marks, -how the endings of the literature match the actual practice of central banks, and - where there is scope for more research.
    Keywords: Central Bank Transparency; Monetary Policy; Surve
    JEL: E31 E52 E58
    Date: 2007–02
  9. By: Chan, Tze-Haw; Hooy, Chee Wooi
    Abstract: The present paper examines the dynamic effects of volatility spillovers and dominant role (the second-moment) of the US, Japan and Hong Kong in the East Asian equity markets. To evaluate the recent September 11 (911) impact, two sub periods – before and after the tragedy, are being considered based on daily market returns. The upshots of our findings are five-fold. First, for all markets the constant risk components, as well as the ARCH and GARCH effects are significantly detected, implying the persistency of volatility in East Asian equity markets. Nevertheless, not all indexes show asymmetrical news effects. Though all indexes show leverage effects, they are significant only for certain countries including the US and Japan, which is consistent with empirical literature. Second, the volatilities of these equity markets are bounded in common stochastic trends, at least in the long run. Third, the Hong Kong long run coefficients are more significant than that of US or Japan before the 911 calamity. Nonetheless, there is sufficient evidence showing that the US spillovers were transmitted via Hong Kong. After the 911, the Hong Kong’s spillovers trim down while Japanese influence enhance as in Malaysia, Philippines, Thailand and Singapore. Taken as a whole (1998-2002), Japanese spillovers are relatively small and nonsignificant in some East Asian equity markets. Fourth, the ECT coefficients are significant but small (except for Hong Kong). The East Asian equity markets are thereby endogenously determined and the volatility adjustments to the long run equilibrium are slow, once being shocked. The ECT coefficients slightly improved after 911. Fifth, volatilities in the East Asian equity markets are attributed mainly to the shocks of local and regional factors rather than the world factor. In a nutshell, the volatility spillovers and the Hong Kong- and US-dominant effects have been confirmed. Hitherto, the 911 impact is relatively small and somewhat inconclusive.
    Keywords: East Asian; Spillover Effect; Dominant Effect; EGARCH-M; ARDL Bounds Testing Approach
    JEL: G15 C13 F36
    Date: 2003

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