nep-fmk New Economics Papers
on Financial Markets
Issue of 2007‒04‒21
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Price Formation and Liquidity Provision in Short-Term Fixed Income Markets By Chris D'Souza; Ingrid Lo; Stephen Sapp
  2. Copula-based measures of dependence structure in assets returns By Viviana Fernandez
  3. US Corporate Default Swap Valuation: The Market Liquidity Hypothesis and Autonomous Credit Risk By Kwamie Dunbar
  4. Evidence Of Chaotic Behavior In American Stock Markets By Espinosa Méndez, Christian
  5. Portfolio Value-at-Risk with Time-Varying Copula: Evidence from the Americas By Ozun, Alper; Cifter, Atilla
  6. "Do U.S. Paintings Follow the CAPM? Findings Disaggregated by Subject, Artist, and Value of the Work" By Richard J. Agnello
  7. Financial markets in Iceland By Peter Tulip

  1. By: Chris D'Souza; Ingrid Lo; Stephen Sapp
    Abstract: Differences in market structures may affect the manner in which fundamental information is incorporated into prices. High levels of quote and trade transparency plus substantial quoting obligations in European government securities markets ensure that prices are informationally efficient. The relationship between price changes, order flow, relative depth and spreads across European and Canadian short-term government bond markets is examined via a reduced-form vector autoregression model. In European markets, dealers are able to quickly absorb private information elsewhere in the market. Consequently, spreads and the relative depth on the bid and offer sides of the market are found to be only slightly informative. Similarly, order flow, which reflects inventory management practices in addition to private information, explains a smaller proportion of the variation in asset returns in European markets than in Canadian interdealer brokered markets where no quoting obligations exist.
    Keywords: Market structure and pricing; Financial markets; Interest rates
    JEL: G12 G14 G15
    Date: 2007
  2. By: Viviana Fernandez
    Abstract: Copula modeling has become an increasingly popular tool in finance to model assets returns dependency. In essence, copulas enable us to extract the dependence structure from the joint distribution function of a set of random variables and, at the same time, to separate the dependence structure from the univariate marginal behavior. In this study, based on U.S. stock data, we illustrate how tail-dependency tests may be misleading as a tool to select a copula that closely mimics the dependency structure of the data. This problem becomes more severe when the data is scaled by conditional volatility and/or filtered out for serial correlation. The discussion is complemented, under more general settings, with Monte Carlo simulations.
    Date: 2006
  3. By: Kwamie Dunbar (University of Connecticut, Stamford, and Sacred Heart University)
    Abstract: This paper develops a reduced form three-factor model which includes a liquidity proxy of market conditions which is then used to provide implicit prices. The model prices are then compared with observed market prices of credit default swaps to determine if swap rates adequately reflect market risks. The findings of the analysis illustrate the importance of liquidity in the valuation process. Moreover, market liquidity, a measure of investors. willingness to commit resources in the credit default swap (CDS) market, was also found to improve the valuation of investors. autonomous credit risk. Thus a failure to include a liquidity proxy could underestimate the implied autonomous credit risk. Autonomous credit risk is defined as the fractional credit risk which does not vary with changes in market risk and liquidity conditions.
    Keywords: Credit Default Swaps; Market Liquidity; Bid-Ask Spreads; Autonomous Credit Risk, Risk Premium
    Date: 2007–01
  4. By: Espinosa Méndez, Christian
    Abstract: This article validates the chaotic behavior in the Argentinean, Brazilian, Canadian, Chilean, American, Peruvian and Mexican Stock Markets using the MERVAL, BOVESPA, S&P TSX COMPOSITE, IPSA, IGPA, S&P 500, DOW JONES INDUSTRIALS, NASDAQ, IGBVL and IPC Stock Indexes respectively. The results of different techniques and methods like: Graphic Analysis, Recurrence Analysis, Temporal Space Entropy, Hurst Coefficient, Lyapunov Exponential and Correlation Dimension support the hypothesis that the stock markets behave in a chaotic way and rejected the hypothesis of randomness. Our conclusion validates the use of prediction techniques in those stock markets. It’s remarkable the result of the Hurst Coefficient Technique, that in average was of 0,75 for the indexes of this study which would justify the use of ARFIMA models among others for the prediction of such series.
    Keywords: Chaos Theory; Recurrence Analysis; Temporal Space Entropy; Hurst Coefficient; Lyapunov Exponential; Correlation Dimension; BDS Test.
    JEL: G10 C14 G14 G15 C12
    Date: 2005–10–20
  5. By: Ozun, Alper; Cifter, Atilla
    Abstract: Model risk in the estimation of value-at-risk is a challenging threat for the success of any financial investments. The degree of the model risk increases when the estimation process is constructed with a portfolio in the emerging markets. The proper model should both provide flexible joint distributions by splitting the marginality from the dependencies among the financial assets within the portfolio and also capture the non-linear behaviours and extremes in the returns arising from the special features of the emerging markets. In this paper, we use time-varying copula to estimate the value-at-risk of the portfolio comprised of the Bovespa and the IPC Mexico in equal and constant weights. The performance comparison of the copula model to the EWMA portfolio model made by the Christoffersen back-test shows that the copula model captures the extremes most successfully. The copula model, by estimating the portfolio value-at-risk with the least violation number in the back-tests, provides the investors to allocate the minimum regulatory capital requirement in accordance with the Basel II Accord.
    Keywords: Time-varying Copula; portfolio value-at-risk; Latin American equity markets; portfolio GARCH
    JEL: C14 G1 C51
    Date: 2007–04–10
  6. By: Richard J. Agnello (Department of Economics,University of Delaware)
    Abstract: This paper investigates to what extent paintings by U.S. artists born before WWII can be treated like capital assets, and whether the findings are specific to artist, subject matter, and value of the work.  The capital asset pricing model (CAPM) in its standard static form is applied to painting returns from 1971 to 1996. Price indices and returns for various groupings of paintings derived from large sample hedonic regressions are used to test alternative forms of the standard CAPM. In the first stage time series estimation, betas for various data groupings are computed to test the degree to which the CAPM explains returns. In general the CAPM signals no factors other than market risk which might explain painting returns. Betas generaly are found to be below one with high priced works having betas close to zero and sometimes negative. U. S. paintings appear to have little systematic risk, and thus may provide useful diversification. In a second stage test of the CAPM the computed betas are treated as a long run characteristic accounting for excess returns of the asset. In this cross sectional re-estimation, little support is found for the consistency of the CAPM although high priced paintings show some support. U. S. paintings appear to follow the CAPM to a degree similar to that of traditional capital assets, and thus behave like capital assets regardless of investment desirability. For high value works the CAPM conformity is strongest and diversification value the highest.
    JEL: G11 G12 Z11
    Date: 2006
  7. By: Peter Tulip
    Abstract: This paper discusses recent developments and policy issues relating to financial markets in Iceland. Overall, the sector is thriving, both relative to history and to conditions in other countries. This bodes well not only for those directly involved in the industry but for the country as a whole, as financial development is an important source of economic growth. Recently concerns have been expressed about the stability of the financial system; however the guarded assessment... <P>La libéralisation financière en Islande <BR>Ce document examine l’évolution récente et les questions de fond concernant les marchés financiers islandais. Globalement, ce secteur est florissant, tant au regard du passé que par rapport à d’autres pays. Cela est de bon augure non seulement pour les acteurs directement impliqués dans le secteur, mais aussi pour le pays dans son ensemble, car le développement financier est une source...
    Keywords: financial markets, marchés financiers, libéralisation, liberalisation, Iceland, Islande
    JEL: G20 G28
    Date: 2007–04–02

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