nep-fmk New Economics Papers
on Financial Markets
Issue of 2010‒03‒28
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Hedging under arbitrage By Johannes Ruf
  2. Statistical identification with hidden Markov models of large order splitting strategies in an equity market By Gabriella Vaglica; Fabrizio Lillo; Rosario N. Mantegna
  3. FX Swaps: Implications for Financial and Economic Stability By Li L. Ong; Bergljot Barkbu
  4. Football Championships and Jersey Sponsors' Stock Prices: An Empirical Investigation By Michael Hanke; Michael Kirchler
  5. The spread of international financial shocks to Asean countries By Céline Gimet

  1. By: Johannes Ruf
    Abstract: It is shown that delta hedging provides the optimal trading strategy in terms of minimal required initial capital to replicate a given terminal payoff in a continuous-time Markovian context. This holds true in market models where no equivalent local martingale measure exists but only a square-integrable market price of risk. A new probability measure is constructed, which takes the place of an equivalent local martingale measure. In order to ensure the existence of the delta hedge, sufficient conditions are derived for the necessary differentiability of expectations indexed over the initial market configuration. The recently often discussed phenomenon of "bubbles" is a special case of the setting in this paper. Several examples at the end illustrate the techniques described in this work.
    Date: 2010–03
  2. By: Gabriella Vaglica; Fabrizio Lillo; Rosario N. Mantegna
    Abstract: Large trades in a financial market are usually split into smaller parts and traded incrementally over extended periods of time. We address these large trades as hidden orders. In order to identify and characterize hidden orders we fit hidden Markov models to the time series of the sign of the tick by tick inventory variation of market members of the Spanish Stock Exchange. Our methodology probabilistically detects trading sequences, which are characterized by a net majority of buy or sell transactions. We interpret these patches of sequential buying or selling transactions as proxies of the traded hidden orders. We find that the time, volume and number of transactions size distributions of these patches are fat tailed. Long patches are characterized by a high fraction of market orders and a low participation rate, while short patches have a large fraction of limit orders and a high participation rate. We observe the existence of a buy-sell asymmetry in the number, average length, average fraction of market orders and average participation rate of the detected patches. The detected asymmetry is clearly depending on the local market trend. We also compare the hidden Markov models patches with those obtained with the segmentation method used in Vaglica {\it et al.} (2008) and we conclude that the former ones can be interpreted as a partition of the latter ones.
    Date: 2010–03
  3. By: Li L. Ong; Bergljot Barkbu
    Abstract: The proliferation of foreign exchange (FX) swaps as a source of funding and as a hedging tool has focused attention on the role of the FX swap market in the recent crisis. The turbulence in international money markets spilled over into the FX swap market in the second-half of 2007 and into 2008, giving rise to concerns over the ability of banks to roll over their funding requirements and manage their liquidity risk. The turmoil also raised questions about banks' ability to continue their supply of credit to the local economy, as well as the external financing gap it could create. In this paper, we examine the channels through which FX swap transactions could affect a country's financial and economic stability, and highlight the strategies central banks can employ to mitigate market pressures. While not offering any judgment on the instrument itself, we show that the use of FX swaps for funding and hedging purposes is not infallible, especially during periods of market stress.
    Keywords: Balance of payments , Banks , Capital , Central bank role , Credit demand , Credit risk , Currency swaps , Economic stabilization , Exchange rates , Financial institutions , Financial stability , Liquidity management , Reserves , Stabilization measures ,
    Date: 2010–03–08
  4. By: Michael Hanke; Michael Kirchler
    Abstract: Corporate sports sponsorship is an important part of many companies’ corporate communication strategy. We take the example of major football tournaments to show that sponsorship indeed affects the sponsor’s (stock) market value. We find a statistically significant impact of football results (at an individual game level) of the seven most important football nations at European and World Championships on the stock prices of jersey sponsors. In general, the more important a match and the less expected its result, the higher its impact. In addition, we find a form of “mere exposure”-effect which contradicts the efficient markets hypothesis.
    Keywords: Sports sponsorship, Advertising, Stock market efficiency
    JEL: G14
    Date: 2010–03
  5. By: Céline Gimet (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: This article focuses on the reaction of Asean economies to international financial shocks. The crises in emerging markets at the end of the last century underlined the vulnerability of emerging Asean economies to international financial fluctuations and a lack of sustainability in their exchange rate regime. A Structural VAR model is used to analyze the efficiency of the measures adopted by these countries, after this crisis episode, to protect their economies against speculative attacks. The results reveal that the impact of the current subprime crisis on emerging Asean countries is less significant than that observed in industrialized ones.
    Keywords: Asean countries, international financial fluctuations, macroeconomic impact, regional integration, SVAR Model
    Date: 2009

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