nep-fmk New Economics Papers
on Financial Markets
Issue of 2009‒10‒31
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Four Myths and a Financial Crisis By Vranceanu, Radu
  2. BANKS RISK RACE: A SIGNALING EXPLANATION By Damien Besancenot; Radu Vranceanu
  3. High Watermarks of Market Risks By Bertrand Maillet; Jean-Philippe Médecin; Thierry Michel
  4. Wavelet Analysis of Central European Stock Market Behaviour During the Crisis By Jozef Barunik; Lukas Vacha
  5. A new value-weighted total return index for the Finnish stock market By Nyberg , Peter; Vaihekoski, Mika

  1. By: Vranceanu, Radu (ESSEC Business School)
    Abstract: The main driving force of the financial crisis of 2007-2009 was a rapid deterioration of the trust of private agents in the quality of financial institutions. In turn, this loss of confidence entailed the collapse of several key asset markets and a sharp decline in the other asset prices. This paper surveys the critical moments of the crisis, puts forward some of the shock amplifying mechanisms and comments on the effectiveness of various policy measures. The conclusion opens the debate on what structural changes in the existing financial architecture are required to contain such crises in the future.
    Keywords: Banking Sector; Economic Myths; Economic Policy; Financial Crisis; Trust
    JEL: E65 G20
    Date: 2009–09
  2. By: Damien Besancenot (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Radu Vranceanu (Department of Economics - ESSEC)
    Abstract: Many observers argue that the abnormal accumulation of risk by banks has been one of the major causes of the 2007-2009 …nancial turmoil. But what could have pushed banks to engage in such a risk race? The answer brought by this paper builds on the classical signaling model by Spence. If banks' returns can be observed while risk cannot, less efficient banks can hide their type by taking more risks and paying the same returns as the efficient banks. The latter can signal themselves by taking even higher risks and delivering bigger returns. The game presents several equilibria that are all characterized by excessive risk taking as compared to the perfect information case.
    Keywords: Banking sector, Risk strategy, Risk/return tradeoff, Signaling, Imperfect information.
    Date: 2009–10–14
  3. By: Bertrand Maillet (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, A.A.Advisors-QCG - ABN AMRO, EIF - Europlace Institute of Finance); Jean-Philippe Médecin (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Thierry Michel (LODH - Banque)
    Abstract: We present several estimates of measures of risk amongst the most well-known, using both high and low frequency data. The aim of the article is to show which lower frequency measures can be an acceptable substitute to the high precision measures, when transaction data is unavailable for a long history. We also study the distribution of the volatility, focusing more precisely on the slopee of the tail of the various risk measure distributions, in order to define the high watermarks of market risks. Based on estimates of the tail index of a Generalized Extreme Value density backed-out from the high frequency CAC 40 series in the period 1997-2006, using both Maximum Likelihood and L-moment Methods, we, finally find no evidence for the need of a specification with heavier tails than in the case of the traditional log-normal hypothesis.
    Keywords: Financial crisis, volatility estimators distributions, range-based volatility, extreme value, high frequency data.
    Date: 2009–08
  4. By: Jozef Barunik (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Prague); Lukas Vacha (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Prague)
    Abstract: In the paper we test for the different reactions of stock markets to the current financial crisis. We focus on Central European stock markets, namely the Czech, Polish and Hungarian ones, and compare them to the German and U.S. benchmark stock markets. Using wavelet analysis, we decompose a time series into frequency components called scales and measure their energy contribution. The energy of a scale is proportional to its wavelet variance. The decompositions of the tested stock markets show changes in the energies on the scales during the current financial crisis. The results indicate that each of the tested stock markets reacted differently to the current financial crisis. More important, Central European stock markets seem to have strongly different behaviour during the crisis.
    Keywords: ewavelet analysis, multiresolution analysis, Central European stock markets, financial crisis
    JEL: C14 C22 G15
    Date: 2009–10
  5. By: Nyberg , Peter (Hanken School of Economics, Department of Finance and Statistics); Vaihekoski, Mika (Turku School of Economics (TSE) and Lappeenranta University of Technology (LUT), School of Business)
    Abstract: This paper presents a new monthly value-weighted, all-share total return index for the Finnish stock market. The index covers the period from the establishment of the Helsinki Stock Exchange in October 1912 to the beginning of 1970, after which the WI index by Berglund et al (1983) and later in December 1990, the Exchange’s own HEX index are available. When combined, these can be used to study the development of the Finnish equity market without a break from the beginning of the stock market until the present day. We also provide a detailed description of the construction methodology and a comparison between our index and those available earlier. The new index replaces the Unitas price index, which has been the only index available for long-term studies from 1928 onwards. The new index also provides an alternative to the book equity weighted Poutvaara (1996) price index for the period 1912–1929.
    Keywords: stock market index; Finland; Helsinki Stock Exchange; Nasdaq OMX; OMXH; Unitas
    JEL: G10 N24
    Date: 2009–09–08

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