New Economics Papers
on Financial Markets
Issue of 2010‒10‒02
five papers chosen by

  1. A quantum model for stock market By Chao Zhang; Lu Huang
  2. The Reaction of Stock Returns to News about Fundamentals By Tolga Cenesizoglu
  3. The Ups & Downs of the Stock Market: Is This Time Different? By Stacey Schreft; Adam Bold
  4. Corporate Debt Maturity Choice in Emerging Financial Markets By Neslihan Ozkan; Oleksandr Talavera; Anna Zalewska
  5. Basel III and responding to the recent Financial Crisis: progress made by the Basel Committee in relation to the need for increased bank capital and increased quality of loss absorbing capital By Ojo, Marianne

  1. By: Chao Zhang; Lu Huang
    Abstract: Beginning with several basic hypotheses of quantum mechanics, we give a new quantum model in econophysics. In this model, we define the wave function and the operator of the stock market to establish the Schr\"odinger equation for the stock price. Based on this theoretical framework, an example of a driven infinite quantum well is considered, in which we use a cosine distribution to simulate the state of stock price in equilibrium. After adding an external field into the Hamiltonian to analytically calculate the wave function, the distribution and the average value of the rate of return are shown.
    Date: 2010–09
  2. By: Tolga Cenesizoglu
    Abstract: This paper analyzes the reaction of stock returns to news about the state of the economy. We develop a general equilibrium asset pricing model where the investor learns about the growth rate of the economy through two sources of information, dividend realizations and regularly scheduled announcements about the state of the economy. We distinguish between dividend news and the unexpected part of the external signal and characterize the reaction of stock returns to news from these two sources of information. We show that the reaction to these news variables can be quite different under different assumptions about their precisions in different states. Our model is able to account for several empirical facts about the reaction of stock returns to news, such as time-varying and state-dependent reaction, asymmetric reaction to extreme news and stronger reaction to more precise signals.
    Keywords: Regime Switching, Asymmetric Reaction, Dividend News, Public Announcements
    JEL: G12 G14
    Date: 2010
  3. By: Stacey Schreft (The Mutual Fund Research Center®); Adam Bold (The Mutual Fund Store®)
    Abstract: The stock market is widely viewed as being more volatile these days. This paper examines that perception using data from the past 40 years. It finds surprising consistency across years in the number of days the market closes up and down. In an average year the market closes down 47% of all trading days, and there is little variation across years. Consecutive up and down days are not common. The biggest change identified is that in recent decades the number of days with large one-day moves (moves up or down more than 1% or 2%) has risen, but days with large one-day up moves exceed days with large one-day down moves. The market’s performance in a year has little relation to the exact mix of up and down days.
    Keywords: Stock market, Volatility
    JEL: G10 G11 G19
    Date: 2010–09
  4. By: Neslihan Ozkan (University of Bristol); Oleksandr Talavera (School of Economics, University of East Anglia); Anna Zalewska (University of Bath)
    Abstract: The empirical literature on the effect of dispersion of executive remuneration (i.e., the intensity of a tournament structure) on the comparative performance of companies is mixed. Studies on US data tend to find strong positive effects but non-US studies tend to fail to find an effect. This suggests that tournaments are likely to be more effective in some situations than others. Using UK data we are able to exploit differences between companies as they become more ‘Americanised’ to provide some insight into this question. In the UK there has been a change towards the use of the US terminology CEO and away from the more tradition UK nomenclature of MD. A minority of UK companies retain the terminology MD. Also in some UK companies the top executive is a US citizen. Both these may tell us something about the culture of the company. We test whether tournaments are more likely to be effective if the company calls it top executive CEO and also if there is a US CEO. We find that increasing the dispersion of remuneration is no more effective for companies with CEOs than for MDs. However, we find that the situation is different when we look at companies with US CEOs relative to the rest of the sample. Here we find that increasing the dispersion is associated with better company performance.
    Keywords: Executive compensation, incentive pay, firm performance
    JEL: G35 J33 L29
    Date: 2010–09–22
  5. By: Ojo, Marianne
    Abstract: Developments since the introduction of the 1988 Basel Capital Accord have resulted in growing realisation that new forms of risks have emerged and that previously existing and managed forms require further redress. The revised Capital Accord, Basel II, evolved to a form of meta regulation – a type of regulation which involves the risk management of internal risks within firms. The 1988 Basel Accord was adopted as a means of achieving two primary objectives: Firstly, “…to help strengthen the soundness and stability of the international banking system – this being facilitated where international banking organisations were encouraged to supplement their capital positions; and secondly, to mitigate competitive inequalities.” As well as briefly outlining various efforts and measures which have been undertaken and adopted by several bodies in response to the recent Financial Crisis, this paper considers why efforts aimed at developing a new framework, namely, Basel III, have been undertaken and global developments which have promulgated the need for such a framework. Further, it attempts to evaluate the strengths and flaws inherent in the present and future regulatory frameworks by drawing a comparison between Basel II and the enhanced framework which will eventually be referred to as Basel III.
    Keywords: capital; cyclicality; buffers; risk; regulation; internal controls; equity; liquidity; losses; forward looking provisions; silent participations; Basel III
    JEL: E0 K2 E32 E58 E44
    Date: 2010–09–22

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