New Economics Papers
on Financial Markets
Issue of 2009‒07‒17
five papers chosen by

  1. Financial crises and bank failures: a review of prediction methods By Yuliya Demyanyk; Iftekhar Hasan
  2. The Banking Crisis - A Rational Interpretation By Minford, Patrick
  3. Examining Feedback, Momentum and Overreaction in National Equity Markets By Sarantis Tsiaplias
  4. CDOs and Systematic Risk: Why bond ratings are inadequate By Jan Pieter Krahnen; Christian Wilde
  5. Deposit market competition, costs of funding and bank risk By Ben R Craig; Valeriya Dinger

  1. By: Yuliya Demyanyk; Iftekhar Hasan
    Abstract: In this article we analyze financial and economic circumstances associated with the U.S. subprime mortgage crisis and the global financial turmoil that has led to severe crises in many countries. We suggest that the level of cross-border holdings of long-term securities between the United States and the rest of the world may indicate a direct link between the turmoil in the securitized market originated in the United States and that in other countries. We provide a summary of empirical results obtained in several Economics and Operations Research papers that attempt to explain, predict, or suggest remedies for financial crises or banking defaults; we also extensively outline the methodologies used in them. The intent of this article is to promote future empirical research for preventing financial crises.
    Keywords: Subprime mortgage ; Financial crises
    Date: 2009
  2. By: Minford, Patrick (Cardiff Business School)
    Abstract: Modern macroeconomic models have been widely criticised as relying too much on rationality and market efficiency. However, basically their predictions about this crisis are being borne out by events. 'Crashes' are an integral part of an 'efficient market' capitalism and are brought on by swings in the news about productivity growth; this time nearly two decades of strong computer-based productivity growth were brought to a crashing halt by raw material shortages. This presages a slow recovery until innovation in material use frees growth up again as it did in the 1990s after the shortages of the 1970s.
    Keywords: Macroeconomic models; Banking Crisis
    JEL: E0
    Date: 2009–07
  3. By: Sarantis Tsiaplias (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: The matters of asset price feedback, momentum and overreaction are theoretically motivated by a series of papers in the behavioural finance field. These papers propose theoretical conditions and examples pursuant to which traditional pricing rationales are inapplicable and asset prices are influenced by characteristics such as feedback and momentum (Barberis, Shleifer, and Vishny, 1988; De Long et al., 1990a,b; Hong and Stein, 1999). There are few empirical models and results, however, regarding the existence of feedback and reactionary effects, and the manner in which feedback effects are distributed across pricing factors. This paper derives a model entailing both factorspecific feedback and momentum effects, and overreaction. The model is applied to a set of developed equity markets, with results indicating that the majority of the markets exhibit some form of corrective feedback.
    Date: 2009–07
  4. By: Jan Pieter Krahnen (Goethe University Frankfurt, CFS, and CEPR); Christian Wilde (Goethe University Frankfurt)
    Abstract: This paper analyzes the risk properties of typical asset-backed securities (ABS), like CDOs or MBS, relying on a model with both macroeconomic and idiosyncratic components. The examined properties include expected loss, loss given default, and macro factor dependencies. Using a two-dimensional loss decomposition as a new metric, the risk properties of individual ABS tranches can directly be compared to those of corporate bonds, within and across rating classes. By applying Monte Carlo Simulation, we find that the risk properties of ABS differ significantly and systematically from those of straight bonds with the same rating. In particular, loss given default, the sensitivities to macroeconomic risk, and model risk differ greatly between instruments. Our findings have implications for understanding the credit crisis and for policy making. On an economic level, our analysis suggests a new explanation for the observed rating inflation in structured finance markets during the pre-crisis period 2004-2007. On a policy level, our findings call for a termination of the 'one-size-fits-all' approach to the rating methodology for fixed income instruments, requiring an own rating methodology for structured finance instruments.
    Keywords: Credit Risk, Risk Transfer, Systematic Risk
    JEL: G21 G28
    Date: 2009–06–24
  5. By: Ben R Craig; Valeriya Dinger
    Abstract: This paper presents an empirical examination of the effects of both deposit market competition and of wholesale funding on bank risk simultaneously. The traditional view of the relation between competition and risk has focused on the disciplining role of the charter value. In this project we argue that if the structure of bank liabilities and the costs of retail and wholesale funding are jointly determined with bank risk, the omission of wholesale funding in the empirical analysis of the relation between deposit market competition and risk may give rise to a substantial bias in the estimated results. This will be especially the case where wholesale lenders “screen” their borrowers’ risk as argued by the market discipline literature. We propose a new approach to the estimation of the relation between deposit market competition and bank risk which accounts for the opportunity of banks to shift to wholesale funding when deposit market competition is intense. The analysis is based on a unique comprehensive dataset which combines retail deposit rates data with data on bank characteristics and with data on local deposit market features for a sample of 589 US banks. Our results support the notion of a risk-enhancing effect of deposit market competition.
    Keywords: Bank competition ; Bank deposits
    Date: 2009

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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.