nep-fmk New Economics Papers
on Financial Markets
Issue of 2009‒06‒17
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Explosive Behavior in the 1990s Nasdaq: When Did Exuberance Escalate Asset Values? By Peter C.B. Phillips; Yangru Wu; Jun Yu
  2. Infinite Density at the Median and the Typical Shape of Stock Return Distributions By Chirok Han; Jin Seo Cho; Peter C.B. Phillips
  3. Was the stock exchange crisis of 2007 predictable? By POPESCU, Ion; STOICA, Victor; MERUTA, Alexandrina
  4. Predicting Stock Returns in a Cross-Section : Do Individual Firm Characteristics Matter ?. By Kateryna Shapovalova; Alexander Subbotin
  5. Time-Varying Incentives in the Mutual Fund Industry By Anthony Tay; Jacques Olivier
  6. A Risk Management Approach for Portfolio Insurance Strategies. By Benjamin Hamidi; Bertrand Maillet; Jean-Luc Prigent
  7. Leverage Bubbles. By Fares Triki
  8. Yield Curve Predictability, Regimes, and Macroeconomic Information: A Data-Driven Approach By Francesco Audrino; Kameliya Filipova

  1. By: Peter C.B. Phillips (Cowles Foundation, Yale University); Yangru Wu (Rutgers Business School - Newarks and New Brunswick, Rutgers University); Jun Yu (School of Economics, Singapore Management University)
    Abstract: A recursive test procedure is suggested that provides a mechanism for testing explosive behavior, date-stamping the origination and collapse of economic exuberance, and providing valid confidence intervals for explosive growth rates. The method involves the recursive implementation of a right-side unit root test and a sup test, both of which are easy to use in practical applications, and some new limit theory for mildly explosive processes. The test procedure is shown to have discriminatory power in detecting periodically collapsing bubbles, thereby overcoming a weakness in earlier applications of unit root tests for economic bubbles. An empirical application to Nasdaq stock price index in the 1990s provides confirmation of explosiveness and date-stamps the origination of financial exuberance to mid -1995, prior to the famous remark in December 1996 by Alan Greenspan about irrational exuberance in financial markets, thereby giving the remark empirical content.
    Keywords: Explosive root, Irrational exuberance, Mildly explosive process, Nasdaq bubble, Periodically collapsing bubble, Sup test, Unit root test
    JEL: G10 C22
    Date: 2009–06
  2. By: Chirok Han (Dept. of Economics, Korea University); Jin Seo Cho (Dept. of Economics, Korea University); Peter C.B. Phillips (Cowles Foundation, Yale University)
    Abstract: Statistics are developed to test for the presence of an asymptotic discontinuity (or infinite density or peakedness) in a probability density at the median. The approach makes use of work by Knight (1998) on L_1 estimation asymptotics in conjunction with non-parametric kernel density estimation methods. The size and power of the tests are assessed, and conditions under which the tests have good performance are explored in simulations. The new methods are applied to stock returns of leading companies across major U.S. industry groups. The results confirm the presence of infinite density at the median as a new significant empirical evidence for stock return distributions.
    Keywords: Asymptotic leptokurtosis, Infinite density at the median, Least absolute deviations, Kernel density estimation, Stock returns, Stylized facts
    JEL: C12 G11
    Date: 2009–06
  3. By: POPESCU, Ion (Universitatea Spiru Haret, Facultatea de Finante si Banci); STOICA, Victor (Universitatea Spiru Haret, Facultatea de Finante si Banci); MERUTA, Alexandrina (Universitatea Spiru Haret, Facultatea de Finante si Banci)
    Abstract: The aim is to try to solve the dilemma if could be predictable exchange crisis from 2007 in the conditions of market globalization, including stock exchange, under the risk of system. In such circumstances, the value judgments based on those three major developments (The Big Three) recorded in three representative locations: New York Stock Exchange (NYSE), London Stock Exchange (LSE) and Tokyo Stock Exchange (TSE). The analysis led to a technique conslusion, namely the level of support is a time of stability in the case of the fall, but this may be reduced through investor-buyers intervention, who estimated that the level of the lowest possible has been achieved: creating a sliding side of the course, forming the support level; ceiling being exceeded arose danger that the phenomenon of decline to continue. How the three stock exchanges: NYSE, LSE and TSE hold together more than 50% of total mondial capitalization was natural that the downfall stock exchange triggered in the United States to spread almost instantaneously throughout the world. An example is even the german index the Frankfurt DAX. Bucharest Stock Exchange has made no exceptional leadership leading the Romanian Banking Association (ARB) and National Bank of Romania (NBR) to discuss the technical level of a system with fluidity of internal markets, respectively those monetary and foreign exchange in times of turbulence.
    Keywords: trend; history of maximum (minimum); point of resistance; upward tunnel (downward); peak; DJIA; FTSE; Nikkei 225
    JEL: G15
    Date: 2009–06–01
  4. By: Kateryna Shapovalova (Centre d'Economie de la Sorbonne); Alexander Subbotin (Centre d'Economie de la Sorbonne et Higher School of Economics)
    Abstract: It is a common wisdom that individual stocks' returns are difficult to predict, though in many situations it is important to have such estimates at our disposal. In particular, they are needed to determine the cost of capital. Market equilibrium models posit that expected returns are proportional to the sensitivities to systematic risk factors. Fama and French (1993) three-factor model explains the stock returns premium as a sum of three components due to different risk factors : the traditional CAPM market beta, and the betas to the returns on two portfolios, "Small Minus Big" (the differential in the stock returns for small and big companies) and "High Minus Low" (the differential in the stock returns for the companies with high and low book-to-price ratio). The authors argue that this model is sufficient to capture the impact on returns of companies' accounting fundamentals, such as earnings-to-price, cash flow-to-price, past sales growth, long term and short-term past earnings. Using a panel of stock returns and accounting data from 1979 to 2008 for the companies listed on NYSE, we show that this is not the case, at least at individual stocks' level. According to our findings, fundamental characteristics of companies' performance are of higher importance to predict future expected returns than sensitivities to the Fama and French risk factors. We explain this finding within the rational pricing paradigm : contemporaneous accounting fundamentals may be better proxies for the future sensitivity to risk factors, than the historical covariance estimates.
    Keywords: Accounting fundamentals, equity performance, style analysis, value and growth, cost of capital.
    JEL: E44 G11 E32
    Date: 2009–05
  5. By: Anthony Tay (School of Economics, Singapore Management University); Jacques Olivier (HEC Paris and CEPR)
    Abstract: This paper re-examines the incentives of mutual fund managers arising from investor flows. We provide evidence that the convexity of the flow-performance relationship varies with economic activity. We show that the effect is economically large and is not driven by abnormal years. We test two possible channels through which this pattern may arise. We investigate implications of the time-varying convexity for the incentives of managers to alter strategically the risk of their portfolios. We provide evidence that poor mid-year performers increase the risk of the portfolio only when economic activity is strong. Finally, we briefly discuss some methodological implications.
    Keywords: Mutual funds, Incentives, Flow-Performance Relationship, Convexity, Business Cycles
    JEL: G11 G23
    Date: 2008–03
  6. By: Benjamin Hamidi (Centre d'Economie de la Sorbonne et A.A.Advisors-QCG (ABN AMRO)Variances); Bertrand Maillet (Centre d'Economie de la Sorbonne, A.A.Advisors-QCG (ABN AMRO)Variances et IEF); Jean-Luc Prigent (THEMA - Université de Cergy)
    Abstract: Controlling and managing potential losses is one of the main objectives of the Risk Management. Following Ben Ameur and Prigent (2007) and Chen et al. (2008), and extending the first results by Hamidi et al. (2009) when adopting a risk management approach for defining insurance portfolio strategies, we analyze and illustrate a specific dynamic portfolio insurance strategy depending on the Value-at-Risk level of the covered portfolio on the French stock market. This dynamic approach is derived from the traditional and popular portfolio insurance strategy (Cf. Black and Jones, 1987 ; Black and Perold, 1992) : the so-called "Constant Proportion Portfolio Insurance" (CPPI). However, financial results produced by this strategy crucially depend upon the leverage - called the multiple - likely guaranteeing a predetermined floor value whatever the plausible market evolutions. In other words, the unconditional multiple is defined once and for all in the traditional setting. The aim of this article is to further examine an alternative to the standard CPPI method, based on the determination of a conditional multiple. In this time-varying framework, the multiple is conditionally determined in order to remain the risk exposure constant, even if it also depends upon market conditions. Furthermore, we propose to define the multiple as a function of an extended Dynamic AutoRegressive Quantile model of the Value-at-Risk (DARQ-VaR). Using a French daily stock database (CAC 40) and individual stocks in the period 1998-2008), we present the main performance and risk results of the proposed Dynamic Proportion Portfolio Insurance strategy, first on real market data and secondly on artificial bootstrapped and surrogate data. Our main conclusion strengthens the previous ones : the conditional Dynamic Strategy with Constant-risk exposure dominates most of the time the traditional Constant-asset exposure unconditional strategies.
    Keywords: CPPI, portfolio insurance, VaR, CAViaR, quantile regression, dynamic quantile model.
    JEL: G11 C13 C14 C22 C32
    Date: 2009–05
  7. By: Fares Triki (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: This paper investigates the relation between liquidity and asset prices. It shows that, when banks balance sheets are marked to market and banks are targeting a financial leverage level - a situation similar to current environment - formation of Leverage Bubble phenomenon and suggests a new regulation rule based on a Dynamic Leverage Ratio (DLR) rule.
    Keywords: Financial crises, rational bubbles, dynamic leverage ratio, mark to market accounting, asset pricing, macroprudential regulation, market liquidity.
    JEL: G14 G18 G20 G28
    Date: 2009–05
  8. By: Francesco Audrino; Kameliya Filipova
    Abstract: We propose an empirical approach to determine the various economic sources driving the US yield curve. We allow the conditional dynamics of the yield at different maturities to change in reaction to past information coming from several relevant predictor variables. We consider both endogenous, yield curve factors and exogenous, macroeconomic factors as predictors in our model, letting the data themselves choose the most important variables. We find clear, different economic patterns in the local dynamics and regime specification of the yields depending on the maturity. Moreover, we present strong empirical evidence for the accuracy of the model in fitting in-sample and predicting out-of-sample the yield curve in comparison to several alternative approaches.
    Keywords: Yield curve modeling and forecasting; Macroeconomic variables; Tree-structured models; Threshold regimes; GARCH; Bagging
    JEL: C22 C51 C53 E43 E44
    Date: 2009–05

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