New Economics Papers
on Financial Markets
Issue of 2010‒06‒04
four papers chosen by

  1. The Credit Crisis around the Globe: Why Did Some Banks Perform Better? By Beltratti, Andrea; Stulz, Rene M.
  2. The functioning of the European interbank market during the 2007-08 financial crisis By Silvia Gabrieli
  3. Time-Varying Beta: A Boundedly Rational Equilibrium Approach By Carl Chiarella; Roberto Dieci; Xue-Zhong He
  4. A Survey of Non-linear Methods for No-arbitrage Bond Pricing By Carl Chiarella; Chih-Ying Hsiao; Ming Xi Huang

  1. By: Beltratti, Andrea (Bocconi University); Stulz, Rene M. (Ohio State University and ECGI)
    Abstract: Though overall bank performance from July 2007 to December 2008 was the worst since the Great Depression, there is significant variation in the cross-section of stock returns of large banks across the world during that period. We use this variation to evaluate the importance of factors that have been put forth as having contributed to the poor performance of banks during the credit crisis. Our evidence is inconsistent with the argument that poor governance of banks made the crisis worse, but it is supportive of theories that emphasize the fragility of banks financed with short-run capital market funding. Strikingly, differences in banking regulations across countries are generally uncorrelated with the performance of banks during the crisis, except that banks in countries with more restrictions on banking activities performed better, and are uncorrelated with observable risk measures of banks before the crisis. The better-performing banks had less leverage and lower returns in 2006 than the worst-performing banks.
    Date: 2010–03
  2. By: Silvia Gabrieli (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper analyses the functioning of the overnight unsecured euro money market during the ongoing crisis in terms of i) operational efficiency of monetary policy implementation, ii) efficient reallocation of banking system’s reserves, iii) developments in the pricing of interbank loans. The results suggest that monetary policy implementation has been hampered by the crisis, particularly after the end of September 2008. A heightened awareness of counterparty credit risk seems to be one key factor behind the downward pressure on unsecured rates, as well as behind the notable increase in their cross-section dispersion. Starting from September 2008, and even more in October 2008, banks perceived as relatively “riskier” pre-turmoil paid significantly higher interest rates to borrow overnight funds. In November, a non-uniform softening of the strains occurred: only the most active (roughly the largest) borrowers experienced a notable price improvement. This is possibly a reflection of the bailouts of “too-big-to-fail” institutions. Heterogeneous developments in banks’ funding costs also suggest a move against the integration of the euro interbank market.
    Keywords: Interbank market; Financial crisis; Monetary policy operational efficiency; Moral hazard; European financial integration
    JEL: E58 G21
    Date: 2010–05–28
  3. By: Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Roberto Dieci (Department of Mathematics for Economics and Social Sciences, University of Bologna); Xue-Zhong He (School of Finance and Economics, University of Technology, Sydney)
    Abstract: By taking into account conditional expectations and the dependence of the systematic risk of asset returns on micro- and macro-economic factors, the conditional CAPM with time-varying betas displays superiority in explaining the cross-section of returns and anomalies in a number of empirical studies. Most of the literature on time-varying beta is motivated by econometric estimation rather than explicit modelling of the stochastic behaviour of betas through agents’ behaviour. Within the mean-variance framework of repeated one-period optimisation, we set up a boundedly rational dynamic equilibrium model of a ï¬nancial market with heterogeneous agents and obtain an explicit dynamic CAPM relation between the expectede quilibrium returns and time-varying betas. By incorporating the three most popular types of investors, fundamentalists, chartists and noise traders, into the model, we show that, independent of the fundamentals, there is a systematic change in the market portfolio, risk-return relationships, and time varying betas when investors change their behaviour, such as the chartists acting as momentum traders. In particular, we demonstrate the stochastic nature of time-varying betas and show that the commonly used rolling window estimates of time-varying betas may not be consistent with the ex-ante betas implied by the equilibrium model. The results provide a number of insights into an understanding o ftime-varying beta.
    Keywords: equilibrium asset prices; CAPM; time-varying betas, heterogeneous expectations
    JEL: G12 D84
    Date: 2010–05–01
  4. By: Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Chih-Ying Hsiao (School of Finance and Economics, University of Technology, Sydney); Ming Xi Huang (School of Finance and Economics, University of Technology, Sydney)
    Date: 2010–05–01

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