New Economics Papers
on Financial Markets
Issue of 2009‒08‒08
seven papers chosen by

  1. Long Memory and Tail dependence in Trading Volume and Volatility By Eduardo Rossi; Paolo Santucci de Magistris
  2. Revisiting the Merger and Acquisition Performance of European Banks By Ioannis Asimakopoulos; Panayiotis Athanasoglou,
  3. Measuring Stock Market Contagion with an Application to the Sub-prime Crisis By Mark Mink; Jochen Mierau
  4. Regulatory Competition and Bank Risk Taking By Itai Agur
  5. Liquidity risk premia in unsecured interbank money markets. By Jens Eisenschmidt; Jens Tapking
  6. The term structure of equity premia in an affine arbitrage-free model of bond and stock market dynamics. By Wolfgang Lemke; Thomas Werner
  7. Bank Loan Announcements and Borrower Stock Returns: Does Bank Origin Matter? By Steven Ongena; Viorel Roscovan

  1. By: Eduardo Rossi (Dipartimento di economia politica e metodi quantitativi, University of Pavia, Italy.); Paolo Santucci de Magistris (Dipartimento di economia politica e metodi quantitativi, University of Pavia, Italy)
    Abstract: This paper investigates long-run dependencies of volatility and volume, supposing that are driven by the same informative process. Log-realized volatility and log-volume are characterized by upper and lower tail dependence, where the positive tail dependence is mainly due to the jump component. The possibility that volume and volatility are driven by a common fractionally integrated stochastic trend, as the Mixture Distribution Hypothesis prescribes, is rejected. We model the two series with a bivariate Fractionally Integrated VAR specification. The joint density is parameterized by means of with different copula functions, which provide flexibility in modeling the dependence in the extremes and are computationally convenient. Finally, we present a simulation exercise to validate the model.
    Keywords: Realized Volatility, Trading Volume, Fractional Cointegration, Tail dependence, Copula Modeling
    JEL: C32 G12
    Date: 2009–07–13
  2. By: Ioannis Asimakopoulos (Bank of Greece); Panayiotis Athanasoglou, (Bank of Greece)
    Abstract: The study examines the value creation of Merger and Acquisition (M&A) deals in European Banking from 1990-2004. This is performed, first, by examining the stock price reaction of banks to the announcement of M&A deals and, second, by analysing the determinants of this reaction. The findings provide evidence of value creation in European banks as the shareholders of the targets have benefited from positive and (statistically) significant abnormal returns while those of the acquirers earn small negative but non-significant abnormal returns. In the case of the shareholders of the acquirers, domestic M&As and especially those between banks with shares listed on the stock market, seem to be more beneficial compared to cross-border ones or those when the target is unlisted. Shareholders of the targets earn in all cases positive abnormal returns. Finally, although the link between abnormal returns and fundamental characteristics of the banks is rather weak, it appears that the acquisition of smaller, less efficient banks generating more diversified income are more value creating, while acquisition of less efficient, liquid and characterised by higher credit risk banks is not a value creating option.
    Keywords: Bank mergers; mergers and acquisitions; abnormal returns
    JEL: G14 G21 G34
    Date: 2009–08
  3. By: Mark Mink; Jochen Mierau
    Abstract: We present a new method to examine financial contagion, defined as a sudden strengthening of shock transmission between financial markets. In particular, we develop a correlation-like measure of synchronicity between markets that is straightforward to implement while being insensitive to heteroskedasticity of market returns. In fact, synchronicity would perfectly coincide with the dynamic conditional correlation (DCC) coefficient if the latter could be calculated using the `true' models for the variance and covariance of the market returns. When analysing the 1997 East Asian crisis and the current sub-prime mortgage crisis, we find no evidence that stock market returns are more contagious during periods of turmoil than during tranquil times.
    Keywords: Contagion; Heteroskedasticity; Dynamic Conditional Correlation; Sub-prime Crisis; East Asian Crisis.
    JEL: C14 F36 G15
    Date: 2009–07
  4. By: Itai Agur
    Abstract: How damaging is competition between bank regulators? This paper develops a model in which both banks' risk profile and their access to wholesale funding are endogenous. Regulators weigh not only welfare, but also the number of banks under their supervision. Simulations indicate that the gains from consolidating US regulation are moderate, roughly 0.5-1% of GDP. But retaining multiple regulators implies a choice for a financial system that is both more profitable and more fragile. The paper also shows how complex balance sheet items give rise to a gradual rise in bank risk, followed by a sudden interbank crisis.
    Keywords: regulatory competition; arbitrage; bank risk; liquidity risk; interbank market.
    JEL: G21 G28
    Date: 2009–07
  5. By: Jens Eisenschmidt (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Jens Tapking (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Unsecured interbank money market rates such as the Euribor increased strongly with the start of the financial market turbulences in August 2007. There is clear evidence that these rates reached levels that cannot be explained alone by higher credit risk. This article presents this evidence and provides a theoretical explanation which refers to the funding liquidity risk of lenders in unsecured term money markets. JEL Classification: G01, G10, G21.
    Keywords: Liquidity premium, interbank money markets, unsecured lending, 2007/2008 financial market turmoil.
    Date: 2009–03
  6. By: Wolfgang Lemke (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Thomas Werner (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We estimate time-varying expected excess returns on the US stock market from 1983 to 2008 using a model that jointly captures the arbitrage-free dynamics of stock returns and nominal bond yields. The model nests the class of affine term structure (of interest rates) models. Stock returns and bond yields as well as risk premia are affine functions of the state variables: the dividend yield, two factors driving the one-period real interest rate and the rate of inflation. The model provides for each month the `term structure of equity premia', i.e. expected excess stock returns over various investment horizons. Model-implied equity premia decrease during the `dot-com' boom period, show an upward correction thereafter, and reach highest levels during the financial turmoil that started with the 2007 subprime crisis. Equity premia for longer-term investment horizons are less volatile than their short-term counterparts. JEL Classification: E43, G12.
    Keywords: Equity premium, affine term structure models, asset pricing.
    Date: 2009–04
  7. By: Steven Ongena (CentER – Tilburg University and CEPR, Department of Finance PO Box 90153, NL -5000 LE Tilburg, The Netherlands.); Viorel Roscovan (RSM – Erasmus University, Department of Finance, PO Box 1738, NL 3062 PA Rotterdam, The Netherlands.)
    Abstract: Banks play a special role as providers of informative signals about the quality and value of their borrowers. Such signals, however, may have a quality of their own as the banks’ selection and monitoring abilities may differ. Using an event study methodology, we study the importance of the geographical origin and organization of the banks for the investors’ assessments of firms’ credit quality and economic worth following loan announcements. Our sample comprises 986 announcements of bank loans to U.S. firms over the period of 1980-2003. We find that investors react positively to such announcements if the loans are made by foreign or local banks, but not if the loans are made by banks that are located outside the firm’s headquarters state. Investor reaction is, in fact, the largest when the bank is foreign. Our evidence suggest that investors value relationships with more competitive and skilled banks rather than banks that have easier access to private information about the firms. These results are applicable also to the European markets where regulatory and economic borders do not coincide and bank identities and reputation seem to matter a great deal. JEL Classification: G21, G32, H11, D80.
    Keywords: relationship banking, bank organization, bank origin, loan announcement return.
    Date: 2009–03

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