nep-fmk New Economics Papers
on Financial Markets
Issue of 2010‒07‒24
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Stock Market Reaction to the Global Financial Crisis: the Role of Corporate Governance and Product Quality Ratings in the Lehman Brothers' Event By Becchettiy, Leonardo; Ceniccola, Claudia; Ciciretti, Rocco
  2. Financial Crisis in Central and Eastern Europe By Ekaterina Sprenger; Volkhart Vincentz
  3. Asymmetric Information and Market Collapse By Paresh Kumar Narayan; Xinwei Zheng
  4. On the Sources of U.S. Stock Market Comovement By Weber, Enzo
  5. Exploring the international transmission of U.S. stock price movements By Berg, Tim Oliver
  6. Linkages between Excess Currency and Stock Market Returns:Granger Causality in Mean and Variance By Eirini Syngelaki;
  7. Predictability of Asset Returns and the Efficient Market Hypothesis By Pesaran, Hashem
  8. Do monetary and technology shocks move euro area stock prices? By Berg, Tim Oliver
  9. Persistence in US Interest Rate Spreads and the Expectations Hypothesis By Strohsal, Till; Weber, Enzo
  10. Risk and Policy Shocks on the US Term Structure By Weber, Enzo; Wolters, Jürgen

  1. By: Becchettiy, Leonardo (Department of Economics, University of Roma Tor Vergata); Ceniccola, Claudia (School of Management, University of Leicester); Ciciretti, Rocco (SEFeMEQ Department, University of Roma Tor Vergata)
    Abstract: We analyse with an event study approach the stock market reaction to one of the most important episodes in the global nancial crisis (Lehman Brothers ling for chapter 11). Our inquiry on abnormal returns of about 2,700 stocks around the event date documents that the shock induces investors to incorporate insights from (or re-adjust the pre-event expected impact of) corporate social responsibility (CSR) ratings in stock evaluation in a sort of "flight to CSR quality". The main CSR domains with signi cant effects on abnormal returns (corporate governance and product quality) are exactly those in which the defaulted company presented weaknesses according to its ex-ante CSR ratings. We also document that the reaction to the Lehman event extends beyond the event date and that investors rationally attribute more value to the direct information on strengths and weaknesses in each CSR rating domain than to aliation/non aliation to the CSR stock market index (FTSE KLD 400 Social Index). A more general result of our paper is that investors seem to discover, after the event, that CSR ratings provide original information which is not captured by traditional - nancial rating indicators.
    Keywords: Global Financial Crisis; Event Study; Corporate Governance; Product Quality; Ratings.
    Date: 2010–07–08
  2. By: Ekaterina Sprenger (Osteuropa-Institut, Regensburg (Institut for East European Studies)); Volkhart Vincentz
    Abstract: Central and Eastern European Countries have been severely affected by the 2008 financial crisis. Several ways of contagion of the financial turmoil worked at different strengths in the different coun-tries. Although the disparities of the effects of the financial crisis are rather large, there are a number of common explanatory features. Mechanisms of transmission of the global financial crisis to the CEECs and its effects on these countries are discussed in this paper.
    Date: 2010–06
  3. By: Paresh Kumar Narayan; Xinwei Zheng
    Abstract: In this paper, using data for the period January 1995 to May 2009 for the Shanghai stock exchange (SHSE), we show that aggregate illiquidity is a priced risk factor. We develop the relationship between the illiquidity factor, asymmetric information, and market collapse. Our empirical results show that while the illiquidity factor is a source of asymmetric information on the SHSE, asymmetric information does not trigger a market collapse.
    Keywords: Illiquidity Factor; Asymmetric Information; Market Collapse.
    Date: 2010–07–16
  4. By: Weber, Enzo
    Abstract: This paper disentangles direct spillovers and common factors as sources of correlations in simultaneous heteroscedastic systems. While these different components are not identifiable by standard means without restrictions, it is shown that they can be pinned down by specifying the variances of the latent idiosyncratic and common shocks as ARCH-type processes. Applying an adapted Kalman filter estimation method to Dow and Nasdaq stock returns, predominant spillovers from the Dow and substantial rising factor exposure are found. While the latter is shown to prevail in the recent global financial crisis, volatility in the dot-com bubble period was driven by Nasdaq shocks.
    Keywords: Simultaneous System; Latent Factor; Identification; Spillover; EGARCH
    Date: 2010–03–16
  5. By: Berg, Tim Oliver
    Abstract: I investigate the transmission of U.S. stock price shocks to real activity and prices in G-7 countries using a multicountry vector autoregressive (VAR) model. I achieve identification by imposing a small number of sign restrictions on impulse responses, while controlling for monetary policy, business cycle and government spending shocks. The results suggest that (a) stock price movements are important for fluctuations in G-7 real activity and prices but do not qualify as demand side business cycle shocks and (b) the transmission is similar across G-7 countries.
    Keywords: international transmission; stock prices; G-7 countries; multicountry VAR; identification with sign restrictions
    JEL: F30 E44 C33
    Date: 2010–05–19
  6. By: Eirini Syngelaki (Economics,Finance and Accounting, National University of Ireland, Maynooth);
    Abstract: This paper investigates the causal linkages between monetary and equity market integration of the new member states (NMS) as well as of the non economic monetary union (Non- EMU) member states with the euro zone, after the official launch of the euro. Granger causality in mean and in variance tests are utilized. Our results reveal a number of interesting facts that can be summarized as follows. Firstly, there is little evidence of causality in mean effects for all countries. Secondly, there are significant spill over effects for the NMS. Thirdly, the excess currency return is the chief variable which leads the excess stock market return volatility of the NMS. Our findings have obvious implications for both investors and policy makers.
    Keywords: monetary market integration, equity market integration, Granger causality in-mean and in-variance, AR, Univariate GARCH
    JEL: F36 C22 G15
    Date: 2010
  7. By: Pesaran, Hashem (University of Cambridge)
    Abstract: This paper is concerned with empirical and theoretical basis of the Efficient Market Hypothesis (EMH). The paper begins with an overview of the statistical properties of asset returns at different frequencies (daily, weekly and monthly), and considers the evidence on return predictability, risk aversion and market efficiency. The paper then focuses on the theoretical foundation of the EMH, and show that market efficiency could co-exit with heterogeneous beliefs and individual irrationality so long as individual errors are cross sectionally weakly dependent in the sense defined by Chudik, Pesaran, and Tosetti (2010). But at times of market euphoria or gloom these individual errors are likely to become cross sectionally strongly dependent and the collective outcome could display significant departures from market efficiency. Market efficiency could be the norm, but it is likely to be punctuated with episodes of bubbles and crashes. The paper also considers if market inefficiencies (assuming that they exist) can be exploited for profit.
    Keywords: market efficiency, predictability, heterogeneity of expectations, forecast averaging, equity premium puzzle
    JEL: G12 G14
    Date: 2010–06
  8. By: Berg, Tim Oliver
    Abstract: I use a Bayesian vector autoregressive (VAR) model to investigate the impact of monetary and technology shocks on the euro area stock market in 1987-2005. I find an important role for technology shocks, but not monetary shocks, in explaining variations in real stock prices. The identification method is flexible enough to study the effects of technology news shocks. The responses are consistent with the idea that news on technology improvements have an immediate impact on stock prices. These findings are robust to several modelling choices, including the productivity measure, omitted variables, and the identifying restrictions.
    Keywords: monetary policy; technology shocks; news; stock prices; Bayesian VAR
    JEL: G1 E52 E44 O33
    Date: 2010–05–19
  9. By: Strohsal, Till; Weber, Enzo
    Abstract: The present work provides an economic explanation of a well-known (seeming) violation of the expectations hypothesis of the term structure (EHT) - the frequent finding of unit roots in interest rate spreads. We derive from EHT that the nonstationarity stems from the holding premium, which is hence cointegrated with the spread. We model the premium as being proportional to the IGARCH variance of excess returns and further propose a cointegration test. Simulating the distribution of the test statistic we actually find cointegration relations between premia and spreads in US data. The EHT appears to perform much better than previously thought.
    Keywords: Expectations Hypothesis; Holding Premium; GARCH; Persistence; Cointegration
    JEL: E43 C32
    Date: 2010–05–31
  10. By: Weber, Enzo; Wolters, Jürgen
    Abstract: We document two stylised facts of US short- and long-term interest rate data incompatible with the pure expectations hypothesis: Relatively slow adjustment to long-run relations and low contemporaneous correlation. We construct a small structural model which features three types of randomness: While a persistent monetary policy shock implies immediate identical reactions through the term structure, both a transitory policy shock and an autocorrelated risk premium allow for the sustained decoupling observed in the data. Indeed, we find important impacts and persistence of risk premia and a decomposition of policy shocks judging a larger part as transitory the longer the investment horizon.
    Keywords: Expectations Hypothesis; Risk Premium; Policy Reaction Function; Persistence; Transitory Shocks
    JEL: E43 C32
    Date: 2010–03–16

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