nep-fmk New Economics Papers
on Financial Markets
Issue of 2007‒12‒08
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Exact prediction of S&P 500 returns By Kitov, Ivan; Kitov, Oleg
  2. Legal Origin, Shareholder Protection and the Stock Market: New Challenges from Time Series Analysis By Sonja Fagernas; Prabirjit Sarkar; Ajit Singh
  3. An empirical analysis of asset-backed securitization By Vink, Dennis; Thibeault, André E.
  4. The term structure of euro area break-even inflation rates - the impact of seasonality By Jacob Ejsing; Juan Angel García; Thomas Werner
  5. Hierarchical Markov normal mixture models with applications to financial asset returns By John Geweke; Gianni Amisano

  1. By: Kitov, Ivan; Kitov, Oleg
    Abstract: A linear link between S&P 500 return and the change rate of the number of nine-year-olds in the USA has been found. The return is represented by a sum of monthly returns during previous twelve months. The change rate of the specific age population is represented by moving averages. The period between January 1990 and December 2003 is described by monthly population intercensal estimates as provided by the US Census Bureau. Four years before 1990 are described using the estimates of the number of 17 year-olds shifted 8 years back. The prediction of S&P 500 returns for the months after 2003, including those beyond 2007, are obtained using the number of 3 year-olds between 1990 and 2003 shifted by 6 years ahead and quarterly estimates of real GDP per capita. A prediction is available for the period beyond 2007. There are two sharp drops in the predicted returns - in 2007 and 2009, and one strong rally in 2008. Equivalently, S&P 500 index should drop in 2007 and 2009 to the level observed one year before. Potential link between S&P 500 returns and 9-year-old population is tested for cointegration. The Engle-Granger and Johansen tests demonstrate the presence of a long-term equilibrium (cointegrating) relation between these variables. This makes valid standard statistical estimates. Correlation between the predicted and observed indices, including RMS difference, linear regression, and VAR demonstrate good prediction accuracy at two-year horizon, when the prediction uses 7-year-olds instead of 9-year-olds. The RMS difference between the observed and predicted returns for the period between 1992 and 2003 is only 0.09 with standard deviation of the observed series for the same period of 0.12 and the naïve (random walk) RMS deference of 0.18.
    Keywords: S&P 500; returns; prediction; population; economic growth
    JEL: D53 G11 F47
    Date: 2007–12–02
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:6056&r=fmk
  2. By: Sonja Fagernas (University of Cambridge); Prabirjit Sarkar (Jadavpur University & University of Cambridge); Ajit Singh (University of Cambridge)
    Abstract: This paper uses a new time series dataset of shareholder protection consisting of 60 annual legal indicators for the period 1970-2005 for France, Germany, the UK and the US. On the basis of these data it examines developments in shareholder protection and reassesses the claims that common-law countries have better shareholder protection than civil law countries. Furthermore it examines the relationship between legal changes and stock market development. It casts serious doubt on the claim that common-law countries have better shareholder protection which in turn leads to more stock market development.
    Keywords: Stock Market, Corporate Governance, Financial Development, Leximetrics
    JEL: F02 F36 E44 G11 O16 K22
    Date: 2007–06
    URL: http://d.repec.org/n?u=RePEc:wef:wpaper:0023&r=fmk
  3. By: Vink, Dennis; Thibeault, André E. (Nyenrode Business Universiteit)
    Abstract: In this study we provide empirical evidence demonstrating a relationship between the nature of the assets and the primary market spread. The model also provides predictions on how other pricing characteristics affect spread, since little is known about how and why spreads of asset-backed securities are influenced by loan tranche characteristics. We find that default and recovery risk characteristics represent the most important group in explaining loan spread variability. Within this group, the credit rating dummies are the most important variables to determine loan spread at issue. Nonetheless, credit rating is not a sufficient statistic for the determination of spreads. We find that the nature of the assets has a substantial impact on the spread across all samples, indicating that primary market spread with backing assets that cannot easily be replaced is significantly higher relative to issues with assets that can easily be obtained. Of the remaining characteristics, only marketability explains a significant portion of the spreads’ variability. In addition, variations of the specifications were estimated in order to asses the robustness of the conclusions concerning the determinants of loan spreads.
    Keywords: asset securitization, asset-backed securitisation, bank lending, default risk, risk management, everaged financing
    Date: 2007
    URL: http://d.repec.org/n?u=RePEc:dgr:nijrep:2007-06&r=fmk
  4. By: Jacob Ejsing (Capital markets and financial structure division, DG-E, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Juan Angel García (Capital markets and financial structure division, DG-E, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Thomas Werner (Corresponding author: Capital markets and financial structure division, DG-E, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper provides a toolkit for extracting accurate information about inflation expectations using inflation-linked bonds. First, we show how to estimate term structures of zero-coupon real rates and break-even inflation rates (BEIRs) in the euro area. This improves the analysis of developments in inflation expectations by providing constant maturity measures. Second, we show that seasonality in consumer prices introduces misleading and quantitatively important time-varying distortions in the calculated BEIRs. We explain how to correct for this in the estimation of the term structure, and thus provide a unified framework for extracting constant maturity BEIRs corrected for seasonality. JEL Classification: E31, E43, G12.
    Keywords: Term structure, break-even inflation rates, inflation-linked bonds, inflation seasonality.
    Date: 2007–11
    URL: http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070830&r=fmk
  5. By: John Geweke (Corresponding author: Department of Economics , University of Iowa, Iowa City IA 52242, USA.); Gianni Amisano (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: With the aim of constructing predictive distributions for daily returns, we introduce a new Markov normal mixture model in which the components are themselves normal mixtures. We derive the restrictions on the autocovariances and linear representation of integer powers of the time series in terms of the number of components in the mixture and the roots of the Markov process. We use the model prior predictive distribution to study its implications for some interesting functions of returns. We apply the model to construct predictive distributions of daily S&P500 returns, dollar-pound returns, and one- and ten-year bonds. We compare the performance of the model with ARCH and stochastic volatility models using predictive likelihoods. The model's performance is about the same as its competitors for the bond returns, better than its competitors for the S&P 500 returns, and much better for the dollar-pound returns. Validation exercises identify some potential improvements. JEL Classification: C53, G12, C11, C14.
    Keywords: Asset returns, Bayesian, forecasting, MCMC, mixture models.
    Date: 2007–11
    URL: http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070831&r=fmk

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