New Economics Papers
on Financial Markets
Issue of 2010‒01‒23
six papers chosen by

  1. Organizational Diseconomies in the Mutual Fund Industry By Fabian Garavito
  2. Financial Markets in East Asia and Europe during the Global Financial Crisis By Johansson, Anders C.
  3. Financial Volatility and Economic Activity By Antonio Mele
  4. How to regulate a financial market? The impact of the 1893-1898 regulatory reforms on the Paris Bourse By Pierre-Cyrille Hautcoeur; Amir Rezaee; Angelo Riva
  5. The Irish Credit Bubble By Morgan Kelly
  6. Pricing Fixed-Income Securities in an Information-Based Framework By Lane P. Hughston; Andrea Macrina

  1. By: Fabian Garavito
    Abstract: I document how the organizational form of a mutual fund affects its investment strategies. I show that centralized funds tilt their portfolios to hard information companies whereas decentralized funds tilt their portfolios to soft information companies. I also show that the investments of decentralized (centralized) mutual funds in soft (hard) information companies outperform those of centralized (decentralized) funds. Moreover, decentralized funds show ability to forecast soft information companies' future returns and a disability at forecasting hard information companies' future returns. On the other hand, centralized funds do not seem to be able to forecast the returns of hard information companies, but they show disability at forecasting hard information companies' future returns. The results corroborate the main predictions of Stein (2002). The results also shed light on the increase in demand for large stocks and the positive relationship between performance of portfolio concentration documented in the literature.
    Date: 2009–08
  2. By: Johansson, Anders C. (China Economic Research Center)
    Abstract: This paper analyzes equity market movements in East Asia and Europe during the global financial crisis. Extending the methodology in Chakrabarti and Roll (2002), we study regional as well as country-regional volatility, covariance and correlation. We also analyze regional and country-regional tail dependence in the two regions. The results show that volatility and covariance patterns in East Asia and Europe were relatively stable until the second half of 2008. Correlations were higher in Europe, but relatively high in East Asia as well. Both regions thus exhibit an overall increase in comovements compared to the time of the Asian financial crisis. There was a sharp decline in regional correlation during the third quarter of 2008 in both East Asia and Europe, which was then followed by a strong increase. The spread of the crisis affected Europe more, with resulting higher regional comovements. Moreover, average tail dependence stayed relatively stable in both regions throughout the pre-crisis and crisis periods with a notably higher level of tail dependence in Europe. Surprisingly, countries in East Asia such as China that are usually seen as insulated from the rest of the region show signs of increasing market integration with the rest of the region. The increasing level of financial market integration and the high level of comovements during times of international financial turmoil demonstrate the limited benefit of diversification in regional portfolios.
    Keywords: East Asia; Europe; Financial crisis; Financial integration; Correlation; Copula; Tail dependence
    JEL: F36 F41 G15
    Date: 2010–01–01
  3. By: Antonio Mele
    Abstract: Does capital markets uncertainty affect the business cycle? We find that financial volatility predicts 30% of post-war economic activity in the United States, and that during the Great Moderation, aggregate stock market volatility explains, alone, up to 55% of real growth. In out-of-sample tests, we find that stock volatility helps predict turning points over and above traditional financial variables such as credit or term spreads, and other leading indicators. Combining stock volatility and the term spread leads to a proxy for (i) aggregate risk, (ii) risk-premiums and (iii) monetary policy, which is found to track, and anticipate, the business cycle. At the heart of our analysis is a notion of volatility based on a slowly changing measure of return variability. This volatility is designed to capture long-run uncertainty in capital markets, and is particularly successful at explaining trends in the economic activity at horizons of six months and one year.
    Date: 2009–11
  4. By: Pierre-Cyrille Hautcoeur; Amir Rezaee; Angelo Riva
    Abstract: Theoretical and historical experience suggests a financial centre may either include a single, consolidated and loosely regulated stock exchange attracting all intermediaries and actors, or a variety of exchanges going from strictly regulated to completely unregulated and adapted to the needs of different categories of intermediaries, investors and issuers. Choosing between these two solutions is uneasy because few substantial changes occur at this "meta-regulatory" level. The history of the Paris exchanges provides a good example, since two legal changes in opposite directions occurred in the late 19th century, when Paris was the second financial centre in the world. In 1893, a law threatened the existing two-exchanges equilibrium by diminishing the advantages of the more regulated exchange; in 1898, another law brought them back. We analyse the impact of these two changes on the competition between the exchanges in terms of securities listed, traded volumes and spreads. We conclude competition among exchanges is a delicate matter and efficiency is not always where one would think.
    Date: 2010
  5. By: Morgan Kelly (University College Dublin)
    Date: 2009–12–08
  6. By: Lane P. Hughston (Department of Mathematics, Imperial College); Andrea Macrina (Department of Mathematics, King's College London, Institute of Economic Research, Kyoto University)
    Abstract: In this paper we introduce a class of information-based models for the pricing of fixed-income securities. We consider a set of continuous- time information processes that describe the flow of information about market factors in a monetary economy. The nominal pricing kernel is at any given time assumed to be given by a function of the values of information processes at that time. By use of a change-of-measure technique we derive explicit expressions for the price processes of nom- inal discount bonds, and deduce the associated dynamics of the short rate of interest and the market price of risk. The interest rate positiv- ity condition is expressed as a differential inequality. We proceed to the modelling of the price-level, which at any given time is also taken to be a function of the values of the information processes at that time. A simple model for a stochastic monetary economy is introduced in which the prices of nominal discount bonds and inflation-linked notes can be expressed in terms of aggregate consumption and the liquidity benefit generated by the money supply.
    Keywords: Fixed-income securities, interest rate theory, inflation, inflation-linked securities, non-linear filtering, incomplete information
    Date: 2010–01

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.