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on Financial Markets |
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Issue of 2010‒02‒13
six papers chosen by |
| By: | Kaizoji, Taisei (kaizoji@icu.ac.jp) |
| Abstract: | The aim of this paper is to provide one potential theoretical explanation for questions how asset bubbles come about, why it persists, and what caused it to burst. We propose a new model of bubbles and crashes. We divide the risky assets into two classes, the bubble asset and the non-bubble asset, and the risk-free asset. Investors are divided into two groups, the rational investors and the noise traders. The rational investors maximize their expected utility of their wealth in the next period. Noise traders maximize their random utility of binary choice: holding the bubble asset and holding the risk-free asst. We demonstrate that noise-traders’ herd behavior, which follows the behavior getting a majority, occurs when the number of noise-traders increases, and their herd behavior gives cause to a bubble, and their momentum trading prolongs bubble. However, rising stock price slows down as the noise-trader’s behavior approaches to a stationary state, so that the price momentum begins to decrease in the second half of bubble. We demonstrate that decreasing the price momentum lead to market crash. |
| Keywords: | Bubble; chrash; noise traders; rational investors |
| Date: | 2010–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:20352&r=fmk |
| By: | Jie-Jun Tseng; Sai-Ping Li |
| Abstract: | An analysis of the stylized facts in financial time series is carried out. We find that, instead of the heavy tails in asset return distributions, the slow decay behaviour in autocorrelation functions of absolute returns is actually directly related to the degree of clustering of large fluctuations within the financial time series. We also introduce an index to quantitatively measure the clustering behaviour of fluctuations in these time series and show that big losses in financial markets usually lump more severely than big gains. We further give examples to demonstrate that comparing to conventional methods, our index enables one to extract more information from the financial time series. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1002.0284&r=fmk |
| By: | Michael C. M\"unnix; Rudi Sch\"afer; Thomas Guhr |
| Abstract: | We demonstrate that the lowest possible price change (tick-size) has a large impact on the structure of financial return distributions. It induces a microstructure as well as it can alter the tail behavior. On small return intervals, the tick-size can distort the calculation of correlations. This especially occurs on small return intervals and thus contributes to the decay of the correlation coefficient towards smaller return intervals (Epps effect). We study this behavior within a model and identify the effect in market data. Furthermore, we present a method to compensate this purely statistical error. |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1001.5124&r=fmk |
| By: | Ishikawa, Ryuichiro; Kudoh, Noritaka |
| Abstract: | In this paper, we study a dynamic Gaussian financial market model in which the traders form higher-order expectations about the fundamental value of a single risky asset. Rational uninformed traders are introduced into an otherwise standard differential information economy to investigate the impact of asymmetric information. In a two-period economy, there is a unique linear equilibrium; beauty contests under asymmetric information do not introduce excess volatility driven by self-fulfilling multiple equilibria. Under certain conditions, there is a nonmonotonic relationship between price volatility and the proportion of uninformed traders. |
| Keywords: | higher-order expectations, asset prices, asymmetric information, |
| JEL: | D82 D84 G12 G14 |
| Date: | 2010–01–24 |
| URL: | http://d.repec.org/n?u=RePEc:hok:dpaper:218&r=fmk |
| By: | Jenkinson, Tim; Jones, Howard |
| Abstract: | Despite the central importance of investors to all initial public offering (IPO) theories, relatively little is known about their role in practice. This article is based on a survey of how institutional investors assess IPOs, what information they provide to the investment banking syndicate, and the factors they believe influence allocations. We find that investor characteristics, in particular brokerage relationships with the bookrunner, are perceived to be the most important factors influencing allocations, which supports the view that IPO allocations are part of implicit quid pro quo deals with investment banks. The survey raises doubts as to the extent of information production or revelation. |
| JEL: | G24 G23 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ner:oxford:http://economics.ouls.ox.ac.uk/14296/&r=fmk |
| By: | Jenkinson, Tim; Jones, Howard |
| Abstract: | Competition between investment banks for lead underwriter mandates in IPOs is fierce, but having committed to a particular bank, the power of the issuer is greatly reduced. Although information revelation theories justify giving the underwriters influence over pricing and allocation, this creates the potential for conflicts of interest. In this clinical paper we analyse an interesting innovation that has been used in recent European IPOs whereby issuers separate the preparation and distribution roles of investment banks, and keep competitive pressure on the banks throughout the issue process. These ‘competitive IPOs’ allow the issuer greater control and facilitate more contingent fee structures that help to mitigate against ‘bait and switch’. But unlike more radical departures from traditional bookbuilding - such as auctions - the competitive IPO is an incremental market-based response to potential conflicts of interest that retains many of the advantages of investment banks’ active involvement in issues. |
| JEL: | G3 G24 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:ner:oxford:http://economics.ouls.ox.ac.uk/14297/&r=fmk |