New Economics Papers
on Financial Markets
Issue of 2008‒04‒15
ten papers chosen by

  1. Stock Market Event Studies and Competition Commission Inquiries By Lucy Beverley
  2. Calendar anomalies in Athens Exchange Stock Market By Giovanis, Eleftherios
  3. Impact of Political News on the Baltic State Stock Markets By Soultanaeva, Albina
  4. Gambling in the New Year? The January Idiosyncratic Volatility Puzzle By Doran, James; Jiang, Danling; Peterson, David
  5. A multi-horizon scale for volatility. By Alexander Subbotin
  6. Pricing bivariate option under GARCH processes with time-varying copula. By Jing Zhang; Dominique Guegan
  7. Risky Swaps By Gikhman, Ilya
  8. "Financial Markets Meltdown: What Can We Learn from Minsky" By L. Randall Wray
  9. Financial integration in emerging market economies By Pasricha, Gurnain
  10. Corporate Debt Maturity Choice in Transition Financial Markets By Stephan, Andreas; Talavera, Oleksandr; Tsapin, Andriy

  1. By: Lucy Beverley (Competition Commission and Centre for Competition Policy, University of East Anglia)
    Abstract: Event study analysis is a branch of econometrics which attempts to measure the effects of economic events on the value of firms by examining stock market data. Providing that share prices reflect the underlying economic values of assets, changes in equity values will properly capture expected changes in the economic profitability of the firm. This paper considers the effect on stock prices of announcements relevant to Competition Commission references, using established event study methodology.
    Keywords: event studies, shares, share prices, Competition Commission, stock market
    JEL: G14
    Date: 2008–03
  2. By: Giovanis, Eleftherios
    Abstract: The purpose of this paper is to examine if there are calendar anomalies in the Greek Stock market and to confirm the findings of other researches . Specifically two models are presented, one for the day of the week effect test and other for the month of the year effect.
    Keywords: day of the week effect, month effect, January and Monday effect, rolling regression, ARCH, GARCH
    JEL: C10 G12
    Date: 2008–01–18
  3. By: Soultanaeva, Albina (Department of Economics, Umeå University)
    Abstract: This paper studies the link between political news releases, and the returns and volatilities in the stock markets of Riga, Tallinn and Vilnius. Political news releases are viewed as proxies for political risk. The results indicate that political news events regarding domestic and foreign, excluding Russia, political issues led, on average, to lower uncertainty in the stock markets of Riga and Tallinn in 2001-2003. At the same time, political risk from Russia increased the volatility of the stock market in Tallinn. We found that there is only a weak relationship between political risks of different origins and the stock market volatility in the Baltic states in 2004-2007. In addition, we found a significant Monday effect, consistent with the trading behavior of institutional investors.
    Keywords: Public information arrival; political risk; volatility; multivariate GARCH
    JEL: C32 G10 G14 G15
    Date: 2008–03–27
  4. By: Doran, James; Jiang, Danling; Peterson, David
    Abstract: In January high idiosyncratic volatility stocks on average outperform low volatility stocks regardless of firm size, book-to-market equity, past returns, and institutional trading, while in other months they underperform. This positive January relation is concentrated among low-price stocks that also exhibit negative mean, but highly skewed, returns for the remaining months of the year. We suggest these findings are driven by investor preference for stocks with lottery features at the start of the New Year. Similarly, gambling activities in Las Vegas exhibit January seasonality. Also, Chinese stock markets as a whole and highly volatile Chinese stocks in particular outperform at the turn of the Chinese New Year, but not in January.
    Keywords: Idiosyncratic Volatility, January Effect, Mental Accounting, Preference for Skewness, Gambling
    JEL: G14 G11 G12
    Date: 2008–04–08
  5. By: Alexander Subbotin (Centre d'Economie de la Sorbonne et Higher School of Economics (Moscow))
    Abstract: We decompose volatility of a stock market index both in time and scale using wavelet filters and design a probabilistic indicator for valatilities, analogous to the Richter scale in geophysics. The peak-over-threshold method is used to fit the generalized Pareto probability distribution for the extreme values in the realized variances of wavelet coefficients. The indicator is computed for the daily Dow Jones Industrial Averages index data from 1986 to 2007 and for the intraday CAC 40 data from 1995 to 2006. The results are used for comparison and structural multi-resolution analysis of extreme events on the stock market and for the detection of financial crises.
    Keywords: Stock market, volatility, wavelets, multi-resolution analysis, financial crisis.
    JEL: G10 G14
    Date: 2008–03
  6. By: Jing Zhang (Centre d'Economie de la Sorbonne et East China Normal University); Dominique Guegan (Centre d'Economie de la Sorbonne et Paris School of Economics)
    Abstract: This paper develops a method for pricing bivariate contingent claims under General Autoregressive Conditionally Heteroskedastic (GARCH) process. As the association between the underlying assets may vary over time, the dynamic copula with time-varying parameter offers a better alternative to any static model for dependence structure and even to the dynamic copula model determined by dynamic dependence measure. Therefore, the proposed method proves to play an important role in pricing bivariate options. The approach is illustrated with one type of better-of-two-markets claims : call option on the better performer of Shanghai and Shenzhen stock composite indexes. Results show that the option prices obtained by the time-varying copula model differ substantially from the prices implied by the static copula model and even the dynamic copula model derived from the dynamic dependence measure. Moreover, the empirical work displays the advantages of the suggested method.
    Keywords: Call-on-max option, GARCH process, Kendall's tau, Copula, dynamic Copula, time-varying parameter.
    JEL: C02 C32 G13
    Date: 2008–02
  7. By: Gikhman, Ilya
    Abstract: In [10] we presented a reduced form of risky bond pricing. At default date, a bond seller fails to continue fulfilling his obligation and the price of the bond sharply drops. For nodefault scenarios, if the face value of the defaulted bond is $1 then the bond price just after the default is its’ recovery rate (RR). Rating agencies and theoretical models are trying to predict RR for companies or sovereign countries. The main theoretical problem with a risky bond or with the general debt problems is presenting the price, knowing the RR. The problem of a credit default swap (CDS) pricing is somewhat an adjacent problem. Recall that the corporate bond price inversely depends on interest rate. In case of a default, the credit risk on a debt investment is related to the loss. There is a possibility for a risky bond buyer to reduce his credit risk. This can be achieved through buying a protection from a protection seller. The bondholder would pay a fixed premium up to maturity or default, which ever one comes first. If default comes before maturity, the protection buyer will receive the difference between the initial face value of the bond and RR. This difference is called ‘loss given default’. This contract represents CDS. The counterparty that pays a fixed premium is called CDS buyer or protection buyer; the opposite party is the CDS seller. Note, that in contrast to corporate bond, CDS contract does not assume that the buyer of the CDS is the holder of underlying bond. Also note that underlying to the swap can be any asset. It is called a reference asset or a reference entity. Thus, CDS is a credit instrument that separates credit risk from corresponding underlying entity. The formal type of the CDS can be described as follows. The buyer of the credit swap pays fixed rate or coupon until maturity or default in case it occurs before the maturity. If default does occur, protection buyer delivers cash or a default asset in exchange with the face value of the defaulted debt. These are known as cash or physical settlements.
    Keywords: Derivatives; credit derivatives; credit default swap; total return swap; credit linked note; constant maturity default swap; equity default swap; asset swap
    JEL: G13
    Date: 2008–02–04
  8. By: L. Randall Wray
    Abstract: According to this new Public Policy Brief by Senior Scholar L. Randall Wray, the current crisis in financial markets can be traced back to securitization (the "originate and distribute" model), leverage, the demise of relationship-based banking, and the dizzying array of extremely complex instruments that--quite literally--only a handful understand.
    Date: 2008–04
  9. By: Pasricha, Gurnain
    Abstract: This paper analyzes de-facto integration in some Emerging Market Economies based on behavior of deviations from Covered Interest Parity in the last 10 years. A price-based measure of de-facto integration provides crucial information for answering policy questions related to impact of capital openness and of effectiveness of controls. An Asymmetric Self Exciting Threshold Autoregressive model is used to estimate bands of speculative inaction. The estimated bands follow the pattern expected, and reveal a rational market in the sense that deviations from parity are self correcting. The paper uses information from the estimated models to construct a new index of de-facto integration.
    Keywords: Covered Interest Parity, Threshold Autoregression, Financial Integration, Integration Index, Emerging Markets
    JEL: G15 F31 F36
    Date: 2008–04–10
  10. By: Stephan, Andreas (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Talavera, Oleksandr (Aberdeen Business School); Tsapin, Andriy (European University Viadrina)
    Abstract: This paper investigates the determinants of liability maturity choice in transition markets. We formulate a model of ¯rm value maximization that describes managers' choice of optimal debt structure. The theoretical predictions are tested using a unique panel of 4,300 Ukrainian firms during the period 2000-2005. Our estimates confirm the importance of liquidity, signaling, maturity matching, and agency costs for the liability term structure of firm operating in a transition economy. In addition, we find that companies do not react uniformly to determinants of debt maturity. Firms that mainly rely on external funds are sensitive to signaling and they consider the variability of firm value an important determinant of their debt maturity choice. For less constrained companies that rely more on internal funding, asset maturity is an essential determinant of debt structure.
    Keywords: debt maturity; capital structure; transition period; Ukraine
    JEL: D24 G30 G32
    Date: 2008–04–02

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