nep-fmk New Economics Papers
on Financial Markets
Issue of 2009‒10‒10
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Beyond the Third Pillar of Basel Two: Taking Bond Market Signals Seriously By Adrian Pop
  2. Options introduction and volatility in the EU ETS By Julien Chevallier; Yannick Le Pen; Benoît Sévi
  3. Return and Volatility Spillovers among the East Asian Equity Markets By Kamil Yilmaz
  4. Dynamics of Biofuel Stock Prices: A Bayesian Approach By Du, Xiaodong (Sheldon); Hayes, Dermot J.; Yu, Cindy
  5. Financial Spillovers to Emerging Markets during the Global Financial Crisis By Heiko Hesse; Nathaniel Frank

  1. By: Adrian Pop (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: The logic behind the indirect channel of market discipline presumes that the pricing of bank debt in the secondary market, if accurate, conveys to supervisor and other market participants a reliable signal of bank's financial conditions and default risk. By collecting a unique dataset of spreads, ratings, and accounting measures of bank risk for a sample of large European banking organizations during the 1995—2002 period, we empirically test whether secondary market prices accurately reflect financial conditions of bank issuers. Our results complement the findings obtained by Sironi [Testing for market discipline in the European banking industry: Evidence from subordinated debt issues. Journal of Money, Credit, and Banking 35 (2003) 443-472] on the primary market of bank subordinated debt
    Date: 2009–09–23
    URL: http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00419241_v1&r=fmk
  2. By: Julien Chevallier (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre); Yannick Le Pen (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Benoît Sévi (GRANEM - Department of Law, Economics, and Management - Université d'Angers)
    Abstract: To improve risk management in the European Union Emissions Trading Scheme (EU ETS), the European Climate Exchange (ECX) has introduced option instruments in October 2006 after regulatory authorization. The central question we address is: can we identify a potential destabilizing effect of the introduction of options on the underlying market (EU ETS futures)? Indeed, the literature on commodities futures suggest that the introduction of derivatives may either decrease (due to more market depth) or increase (due to more speculation) volatility. As the identification of these effects ultimately remains an empirical question, we use daily data from April 2005 to April 2008 to document volatility behavior in the EU ETS. By instrumenting various GARCH models, endogenous break tests, and rolling window estimations, our results overall suggest that the introduction of the option market had no effect on the volatility in the EU ETS. These finding are robust to other likely influences linked to energy and commodity markets.
    Date: 2009–09–23
    URL: http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00419339_v1&r=fmk
  3. By: Kamil Yilmaz (Koc University)
    Abstract: This article examines the extent of contagion and interdependence across the East Asian equity markets since early 1990s and compares the ongoing crisis with earlier episodes. Using the forecast error variance decomposition from a vector autoregression, we derive return and volatility spillover indices over the rolling sub-sample windows. We show that there is substantial difference between the behavior of the East Asian return and volatility spillover indices over time. While the return spillover index reveals increased integration among the East Asian equity markets, the volatility spillover index experiences significant bursts during major market crises, including the East Asian crisis. The fact that both return and volatility spillover indices reached their respective peaks during the current global financial crisis attests to the severity of the current episode.
    Keywords: Stock returns, Volatility, Spillovers, Vector autoregression, Variance decomposition
    JEL: G1 F3
    Date: 2009–09
    URL: http://d.repec.org/n?u=RePEc:koc:wpaper:0907&r=fmk
  4. By: Du, Xiaodong (Sheldon); Hayes, Dermot J.; Yu, Cindy
    Abstract: We use Bayesian Markov Chain Monte Carlo methods to investigate the linkage between the volatility of ethanol security prices and the uncertainty surrounding the profitability of ethanol production and the price variations of non-ethanol energy securities. The joint evolution of return and volatility is modeled as a stochastic process that incorporates jumps in both return and volatility. While a strong and significant correlation is found between the volatility of ethanol securities and profit uncertainty from June 2005 to July 2008, the dynamic pattern of ethanol stock volatility is strikingly similar to that of the S&P 500 energy sector index in the more recent period. Our evidence lends support to the findings in the literature on rational learning from uncertainty in determining the equity price and volatility during the adoption and development of a technological innovation.
    Keywords: jumps, rational learning, stochastic volatility, technological innovation.
    Date: 2009–09–28
    URL: http://d.repec.org/n?u=RePEc:isu:genres:13113&r=fmk
  5. By: Heiko Hesse; Nathaniel Frank
    Abstract: In this paper potential financial linkages between liquidity and bank solvency measures in advanced economies and emerging market (EM) bond and stock markets are analyzedduring the latest crisis. A multivariate GARCH model is estimated in order to gauge the extent of co-movements of these financial variables across markets. The findings indicate that the notion of possible de-coupling (in the financial markets) had been misplaced. While EM stock markets reached their peak in the last quarter of 2007, interlinkages between funding stress and equity markets in advanced economies and EM financial indicators were highly correlated and have seen sharp increases during specific crisis moments.
    Keywords: Banking sector , Bond markets , Capital markets , Cross country analysis , Developed countries , Developing countries , Economic models , Emerging markets , Financial crisis , Liquidity , Spillovers , Stock markets ,
    Date: 2009–05–20
    URL: http://d.repec.org/n?u=RePEc:imf:imfwpa:09/104&r=fmk

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