nep-fmk New Economics Papers
on Financial Markets
Issue of 2007‒06‒23
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Examining the Nelson-Siegel Class of Term Structure Models By Michiel De Pooter
  2. Affiliated mutual funds and analyst optimism By Simona Mola; Massimo Guidolin
  3. Who Leads Financial Markets? By Weber, Enzo
  4. Systematic Mispricing in European Equity Prices? By Marian Berneburg

  1. By: Michiel De Pooter (Erasmus Universiteit Rotterdam)
    Abstract: In this paper I examine various extensions of the Nelson and Siegel (1987) model with the purpose of fitting and forecasting the term structure of interest rates. As expected, I find that using more flexible models leads to a better in-sample fit of the term structure. However, I show that the out-of-sample predictability improves as well. The four-factor model, which adds a second slope factor to the three-factor Nelson-Siegel model, forecasts particularly well. Especially with a one-step state-space estimation approach the four-factor model produces accurate forecasts and outperforms competitor models across maturities and forecast horizons. Subsample analysis shows that this outperformance is also consistent over time.
    Keywords: Term structure of interest rates; Nelson-Siegel; Svensson; Forecasting; State-space model
    JEL: E4 C5 C32
    Date: 2007–06–11
    URL: http://d.repec.org/n?u=RePEc:dgr:uvatin:20070043&r=fmk
  2. By: Simona Mola; Massimo Guidolin
    Abstract: Prior studies have shown that investment banking affiliations place pressure on analysts to produce optimistic recommendations on the investment bank’s stock-clients. Our analysis of a large sample of recommendations issued from 1995 through 2003 indicates that a mutual fund affiliation also affects analysts’ research. That is, analysts are likely to look favorably at stocks held by the affiliated mutual funds. Controlling for a variety of factors including the investment banking affiliation, we find that the greater the portfolio weight of a stock for the affiliated mutual funds, the more optimistic the analyst rating becomes when compared to the consensus. Reputation partly restrains the optimism of analyst recommendations. In fact, the presence of other institutional investors as shareholders of the recommended stocks curbs analyst optimism. Nevertheless, from 1999 through 2001, star analysts report the most optimism when they recommend stocks in the portfolios of affiliated mutual funds.
    Keywords: Mutual funds ; Investment banking
    Date: 2007
    URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-017&r=fmk
  3. By: Weber, Enzo
    Abstract: The present paper embarks on an analysis of interactions between the US and Euroland in the capital, foreign exchange, money and stock markets from 1994 until 2006. Estimating multivariate EGARCH processes for the structural financial innovations determines causality-in-variance effects and provides a solution to the simultaneity problem of identifying the contemporaneous impacts between the daily variables. Structural mean equations can therefore give answers to the question of financial markets leadership: Generally speaking, the US effects on Europe still dominate, but the special econometric methodology is able to uncover otherwise neglected spillovers in the reverse direction.
    Keywords: Structural EGARCH; Financial Markets; United States; Euro Zone
    JEL: G15 C32
    Date: 2007–04
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:3633&r=fmk
  4. By: Marian Berneburg
    Abstract: One empirical argument that has been around for some time and that clearly contra- dicts equity market efficiency is that market prices seem too volatile to be optimal estimates of the present value of future discounted cash flows. Based on this, it is deduced that systematic pricing errors occur in equity markets which hence can not be efficient in the Effcient Market Hypothesis sense. The paper tries to show that this so-called excess volatility is to a large extend the result of the underlying assumptions, which are being employed to estimate the present value of cash flows. Using monthly data for three investment style indices from an integrated European Equity market, all usual assumptions are dropped. This is achieved by employing the Gordon Growth Model and using an estimation process for the dividend growth rate that was suggested by Barsky and De Long. In extension to Barsky and De Long, the discount rate is not assumed at some arbitrary level, but it is estimated from the data. In this manner, the empirical results do not rely on the prerequisites of sta- tionary dividends, constant dividend growth rates as well as non-variable discount rates. It is shown that indeed volatility declines considerably, but is not eliminated. Furthermore, it can be seen that the resulting discount factors for the three in- vestment style indices can not be considered equal, which, on a risk-adjusted basis, indicates performance differences in the investment strategies and hence stands in contradiction to an efficient market. Finally, the estimated discount rates under- went a plausibility check, by comparing their general movement to a market based interest rate. Besides the most recent data, the estimated discount rates match the movements of market interest rates fairly well.
    Keywords: Equity Market Efficiency; Discounted Cashflow; Excess Volatility; Variance Bound Test, Rational Expectations
    JEL: G12 G14
    Date: 2007–06
    URL: http://d.repec.org/n?u=RePEc:iwh:dispap:6-07&r=fmk

This nep-fmk issue is ©2007 by Kwang Soo Cheong. 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.
General information on the NEP project can be found at http://nep.repec.org. For comments please write to the director of NEP, Marco Novarese at <director@nep.repec.org>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.