New Economics Papers
on Financial Markets
Issue of 2010‒02‒27
seven papers chosen by

  1. Audit the Federal Reserve? By William Barnett; ;
  2. Regulation Simulation By Philip Maymin
  3. Financialization, Crisis and Commodity Correlation Dynamics By Annastiina Silvennoinen; Susan Thorp
  4. The Political Economy of the Yield Curve By Di Maggio, Marco
  5. Dynamics of Moving Average Rules in a Continuous-time Financial Market Model By Xue-Zhong He; Min Zheng
  6. Profitability Shocks and the Size EFfect in the Cross-Section of Expected Stock Return By Hou, Kewei; van Dijk, Mathijs A.
  7. Incentive systems for stock portfolio managers in Sweden By Hedesström, Martin

  1. By: William Barnett (Department of Economics, The University of Kansas); ;
    Abstract: An independent institute for monetary statistics is needed in the United States, says William Barnett in paper to appear in the journal, Central Banking. Expanded Congressional audit would be a second best alternative, but would not fully address the needs and would carry risks.
    Keywords: Central banking, Federal Reserve, data institute, monetary aggregation, monetary policy, audit, GAO.
    JEL: C82 E01 E41 E50
    Date: 2010–01
  2. By: Philip Maymin
    Abstract: A deterministic trading strategy by a representative investor on a single market asset, which generates complex and realistic returns with its first four moments similar to the empirical values of European stock indices, is used to simulate the effects of financial regulation that either pricks bubbles, props up crashes, or both. The results suggest that regulation makes the market process appear more Gaussian and less complex, with the difference more pronounced for more frequent intervention, though particular periods can be worse than the non-regulated version, and that pricking bubbles and propping up crashes are not symmetrical.
    Date: 2010–02
  3. By: Annastiina Silvennoinen (Queensland University of Technology); Susan Thorp (School of Finance and Economics, University of Technology, Sydney)
    Abstract: We study bi-variate conditional volatility and correlation dynamics for individual commodity futures and financial assets from May 1990-July 2009 using DSTCC-GARCH (Silvennoinen and Terasvirta 2009). These models allow correlation to vary smoothly between extreme states via transition functions driven by indicators of market conditions. Expected stock volatility and money manager open interest in futures markets are relevant transition variables. Results point to increasing integration between commodities and financial markets. Higher commodity returns volatility is predicted by lower interest rates and corporate bond spreads, US dollar depreciations, higher expected stock volatility and financial traders open positions. We observe higher and more variable correlations between commodity futures and financial asset returns, particularly from mid-sample, often predicted by higher expected stock volatility. For many pairings, we observe a structural break in the conditional correlation processes from the late 1990s.
    Keywords: commodity futures; double smooth transition; conditional correlation; financialization
    JEL: G11 C22
    Date: 2010–01–01
  4. By: Di Maggio, Marco
    Abstract: This paper proposes a novel method to recover the market's beliefs about the Fed's monetary policy by using the responses of interest rates to economic news. We investigate the differential impact of news over time showing that the impact of this information is time varying, and that the importance of the housing and labor markets has sharply increased after the crisis. We follow a difference-in-difference estimation procedure to test for the presence of political constraints in the U.S., employing as control group the response of the European swap rates to macroeconomic announcements. We provide strong evidence that after the crisis of 2007, the Federal Reserve has been subject to the political pressure exerted by the Congress.
    Keywords: Fed; Financial Crisis; Political Pressure; Yield Curve; Political Constraints
    JEL: E43 G14 E58 G18
    Date: 2010–01–31
  5. By: Xue-Zhong He (School of Finance and Economics, University of Technology, Sydney); Min Zheng (School of Finance and Economics, University of Technology, Sydney)
    Abstract: Within a continuous-time framework, this paper proposes a stochastic heterogeneous agent model (HAM) of financial markets with time delays to unify various moving average rules used indiscrete-time HAMs. The time delay represents a memory length of a moving average rule indiscrete-time HAMs.Intuitive conditions for the stability of the fundamental price of the deterministic model in terms of agents' behavior parameters and memory length are obtained. It is found that an increase in memory length not only can destabilize the market price, resulting in oscillatory market price characterized by a Hopf bifurcation, but also can stabilize another wise unstable market price, leading to stability switching as the memory length increases. Numerical simulations show that the stochastic model is able to characterize long deviations of the market price from its fundamental price and excess volatility and generate most of the stylized factso bserved in financial markets.
    Keywords: asset price; financial market behavior; heterogeneous beliefs; stochastic delay differential equations; stability; bifurcations; stylized facts
    Date: 2010–01–01
  6. By: Hou, Kewei (Ohio State University); van Dijk, Mathijs A. (Erasmus University Rotterdam)
    Abstract: Recent studies report that the size effect in the cross-section of U.S. stock returns has disappeared after the early 1980s. We examine whether the disappearance of the size effect in realized returns can be attributed to unexpected shocks to the profitability of small and big firms. We show that small firms experience large negative profitability shocks after the early 1980s, while big firms experience large positive shocks. As a result, realized returns of small and big firms over this period differ substantially from expected returns. After adjusting for the price impact of profitability shocks, we find that there still is a robust size effect in expected returns. Our results suggest that in-sample cash flow shocks can significantly affect inferences about predictability in the cross-section of stock returns.
    Date: 2010–01
  7. By: Hedesström, Martin (Department of Psychology, University of Gothenburg, Gothenburg, Sweden)
    Abstract: Interviews with Swedish investment professionals show that incentivising stock portfolio managers on the basis of short term returns performance is a widespread practice across several types of fund management. Among retail funds, state pension funds, and hedge funds, bonuses are predominantly based on one-year intervals. Longer-term bonus components, if offered, are generally of insignificant size. Small fund companies may offer longer-term bonuses, but then as incentive not only to produce good results but also – if results are good – to stay at the company for a longer time. Pension insurance companies also apply longer-term bonuses, possibly because they do not risk money being withdrawn by investors due to poor performance. Experimental studies are needed in order to disentangle the effects of longer term bonuses on sustainable investments.
    Keywords: incentive system; compensation scheme; bonus; stock portfolio manager; shorttermism
    Date: 2009–12–20

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