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on Financial Markets |
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Issue of 2009‒07‒11
six papers chosen by |
| By: | Carlos Carvalho; Nicholas Klagge; Emanuel Moench |
| Abstract: | In September 2008, a six-year-old article about the 2002 bankruptcy of United Airlines' parent company resurfaced on the Internet and was mistakenly believed to be reporting a new bankruptcy filing by the company. This episode caused the parent company's stock price to drop by as much as 76 percent in just a few minutes, before NASDAQ halted trading. After the "news" had been identified as false, the stock price rebounded, but still ended the day 11.2 percent below the previous close. We use this natural experiment and a simple asset-pricing model to study the aftermath of this false news shock. We find that, after three trading sessions, the company's stock was still trading below the two-standard-deviation confidence band implied by the model and that it returned to within one standard deviation only during the sixth trading session. On the seventh day after the episode, the stock was trading at exactly the level predicted by the asset-pricing model. We also document that the false news shock had a persistent effect on the stock prices of other major airline companies. |
| Keywords: | Information theory ; Stock - Prices |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:374&r=fmk |
| By: | Bent Jesper Christensen (University of Aarhus and CREATES); Morten Ørregaard Nielsen (Queen's University and CREATES); Jie Zhu (University of Aarhus and CREATES) |
| Abstract: | We extend the fractionally integrated exponential GARCH (FIEGARCH) model for daily stock return data with long memory in return volatility of Bollerslev and Mikkelsen (1996) by introducing a possible volatility-in-mean effect. To avoid that the long memory property of volatility carries over to returns, we consider a filtered FIEGARCH-in-mean (FIEGARCH-M) effect in the return equation. The filtering of the volatility-in-mean component thus allows the co-existence of long memory in volatility and short memory in returns. We present an application to the daily CRSP value-weighted cum-dividend stock index return series from 1926 through 2006 which documents the empirical relevance of our model. The volatility-in-mean effect is significant, and the FIEGARCH-M model outperforms the original FIEGARCH model and alternative GARCH-type specifications according to standard criteria. |
| Keywords: | FIEGARCH, financial leverage, GARCH, long memory, risk-return tradeoff, stock returns, volatility feedback |
| JEL: | C22 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1207&r=fmk |
| By: | Jean Helwege; Samuel Maurer; Asani Sarkar; Yuan Wang |
| Abstract: | The rapid growth of the credit default swap (CDS) market and the increased number of defaults in recent years have led to major changes in the way CDS contracts are settled when default occurs. Auctions are increasingly the mechanism used to settle these contracts, replacing physical transfers of defaulted bonds between CDS sellers and buyers. Indeed, auctions will become a standard feature of all recent CDS contracts from now on. In this paper, we examine all of the CDS auctions conducted to date and evaluate their efficacy by comparing the auction outcomes to prices of the underlying bonds in the secondary market. The auctions appear to have served their purpose, as we find no evidence of inefficiency in the process: Participation is high, open interest is low, and the auction prices are close to the prices observed in the bond market before and after each auction has occurred. We qualify our conclusions by noting that relatively few auctions have taken place thus far. |
| Keywords: | Swaps (Finance) ; Auctions ; Contracts |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:372&r=fmk |
| By: | Schäfer, Dorothea; Zimmermann, Klaus F. |
| Abstract: | With banking sectors worldwide still suffering from the effects of the financial crisis, public discussion of plans to place toxic assets in one or more bad banks has gained steam in recent weeks. The following paper presents a plan how governments can efficiently relieve ailing banks from toxic assets by transferring these assets into a publicly sponsored work-out unit, a so-called bad bank. The key element of the plan is the valuation of troubled assets at their current market value - assets with no market would thus be valued at zero. The current shareholders will cover the losses arising from the depreciation reserve in the amount of the difference of the toxic assets’ current book value and their market value. Under the plan, the government would bear responsibility for the management and future resale of toxic assets at its own cost and recapitalize the good bank by taking an equity stake in it. In extreme cases, this would mean a takeover of the bank by the government. The risk to taxpayers from this investment would be acceptable, however, once the banks are freed from toxic assets. A clear emphasis that the government stake is temporary would also be necessary. The government would cover the bad bank’s losses, while profits would be distributed to the distressed bank’s current shareholders. The plan is viable independent of whether the government decides to have one centralized bad bank or to establish a separate bad bank for each systemically relevant banking institute. Under the terms of the plan, bad banks and nationalization are not alternatives but rather two sides of the same coin. This plan effectively addresses three key challenges. It provides for the transparent removal of toxic assets and gives the banks a fresh start. At the same time, it offers the chance to keep the cost to taxpayers low. In addition, the risk of moral hazard is curtailed. The comparison of the proposed design with the bad bank plan of the German government reveals some shortcomings of the latter plan that may threaten the achievement of these key issues. |
| Keywords: | Bad Bank; Financial crisis; Financial Regulation; Toxic Assets |
| JEL: | G20 G24 G28 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7349&r=fmk |
| By: | Nicola Cetorelli; Pietro F. Peretto |
| Abstract: | This paper shows that bank competition has an intrinsically ambiguous effect on capital accumulation and economic growth. We further demonstrate that banking market structure can be responsible for the emergence of development traps in economies that would otherwise be characterized by unique steady-state equilibria. These predictions explain the conflicting evidence gathered from recent empirical studies of how bank competition affects the real economy. Our results were obtained by developing a dynamic general-equilibrium model of capital accumulation in which banks operate in a Cournot oligopoly. The presence of more banks leads to a higher quantity of credit available to entrepreneurs, but also to diminished incentives to screen loan applicants and thus to poorer capital allocation. We also show that conditioning on economic parameters describing the quality of the entrepreneurial population resolves the theoretical ambiguity. In economies where the average prospective entrepreneur is of low credit quality and where screening would therefore be especially beneficial, less competition leads to higher capital accumulation. The opposite is true when entrepreneurs are innately of higher credit quality. |
| Keywords: | Bank competition ; Banking structure |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:375&r=fmk |
| By: | Laurence Fung (Research Department, Hong Kong Monetary Authority); Ip-wing Yu (Research Department, Hong Kong Monetary Authority) |
| Abstract: | The recent tension in the interbank markets following the global financial crisis has raised concerns about the turbulence in interbank markets. This paper utilises two widely used indicators for measuring interbank stress (the interbank rate less the Overnight Index Swap rate and the interbank rate less the yield of government securities) to examine the transmission of interbank tension from the US dollar to nine interbank markets in the EMEAP economies. Using a vector autoregression model, we show that during the credit crisis of 2007 - 2008, the distress in the US dollar money market had a material impact with durations of seven to 13 days on the interbank markets for the Hong Kong dollar, Japanese yen, Australian dollar and New Zealand dollar. Moreover, based on a bivariate regime switching ARCH model, we also find evidence of volatility co-movement between the interbank stress indicator of the US dollar and that of the Hong Kong dollar, Japanese yen, Australian dollar, New Zealand dollar, Korean won and Singapore dollar during the crisis. The expected duration when two money markets are both in a high-volatility state is estimated to be as long as seven days. The short-lived impact on the EMEAP economies from a shock in the US dollar money market can be attributed to the policy actions taken by central banks and monetary authorities in the region and the coordinated efforts by policy makers worldwide to contain the credit crisis. |
| Keywords: | Interbank stress; Vector autoregression; Regime-switching ARCH |
| JEL: | E50 E58 G15 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0909&r=fmk |