New Economics Papers
on Financial Markets
Issue of 2010‒11‒20
eleven papers chosen by

  1. The Weekly Structure of US Stock Prices By Guglielmo Maria Caporale; Luis A. Gil-Alana
  2. Pinning in the S&P 500 Futures By Benjamin Golez; Jens Carsten Jackwerth
  3. Cross-correlations between volume change and price change By Boris Podobnik; Davor Horvatic; Alexander M. Petersen; H. Eugene Stanley
  4. New methodology for event studies in Bonds By Bell, Peter N
  5. Hedge Fund Excess Returns Under Time-Varying Beta By Ron Bird; Harry Liem; Susan Thorp
  6. On the Existence and Prevention of Asset Price Bubbles By Hendrik Hakenes; Zeno Enders
  7. Essays on financial crises in emerging markets By Komulainen, Tuomas
  8. The Financial Bubble Experiment: Advanced Diagnostics and Forecasts of Bubble Terminations, Volume III By Ryan Woodard; Didier Sornette; Maxim Fedorovsky
  9. Dubai financial crisis: causes, bailout and after - a case study By Hasan, Zubair
  10. Economic implications of corporate financial reporting in brazilian and european financial markets By C. Benetti
  11. Foreign shareholding: A decomposition analysis. By Shah, Ajay; Patnaik, Ila

  1. By: Guglielmo Maria Caporale; Luis A. Gil-Alana
    Abstract: In this paper we use fractional integration techniques to examine the degree of integration of four US stock market indices, namely the Standard and Poor, Dow Jones, Nasdaq and NYSE, at a daily frequency from January 2005 till December 2009. We analyse the weekly structure of the series and investigate their characteristics depending on the specific day of the week. The results indicate that the four series are highly persistent; a small degree of mean reversion (i.e., orders of integration strictly smaller than 1) is found in some cases for S&P and the Dow Jones indices. The most interesting findings are the differences in the degree of dependence for different days of the week. Specifically, lower orders of integration are systematically observed for Mondays and Fridays, consistently with the "day of the week" effect frequently found in financial data
    Keywords: Fractional Integration, Weekly Structure, Stock Prices
    JEL: C22 G12
    Date: 2010
  2. By: Benjamin Golez (Universitat Pompeu Fabra, Barcelona, Spain); Jens Carsten Jackwerth (Department of Economics, University of Konstanz, Germany)
    Abstract: We document that S&P 500 futures finish in the proximity of the closest strike price more often on days when serial options on S&P 500 futures expire than on other days. The effect is driven by the interplay of market makers' rebalancing of delta hedges due to the time-decay of the hedges as well as in response to reselling (and early exercise) of in-the-money options by individual investors. Consistent with limits to arbitrage, we find that the effect is asymmetric and stronger above the strike price. In line with increased options activity, pinning becomes more pronounced in recent years.
    Keywords: Pinning, Futures, Options, Option Expiration, Hedging
    JEL: G12 G13
    Date: 2010–08–23
  3. By: Boris Podobnik; Davor Horvatic; Alexander M. Petersen; H. Eugene Stanley
    Abstract: In finance, one usually deals not with prices but with growth rates $R$, defined as the difference in logarithm between two consecutive prices. Here we consider not the trading volume, but rather the volume growth rate $\tilde R$, the difference in logarithm between two consecutive values of trading volume. To this end, we use several methods to analyze the properties of volume changes $|\tilde R|$, and their relationship to price changes $|R|$. We analyze $14,981$ daily recordings of the S\&P 500 index over the 59-year period 1950--2009, and find power-law {\it cross-correlations\/} between $|R|$ and $|\tilde R|$ using detrended cross-correlation analysis (DCCA). We introduce a joint stochastic process that models these cross-correlations. Motivated by the relationship between $| R|$ and $|\tilde R|$, we estimate the tail exponent ${\tilde\alpha}$ of the probability density function $P(|\tilde R|) \sim |\tilde R|^{-1 -\tilde\alpha}$ for both the S\&P 500 index as well as the collection of 1819 constituents of the New York Stock Exchange Composite index on 17 July 2009. As a new method to estimate $\tilde\alpha$, we calculate the time intervals $\tau_q$ between events where $\tilde R>q$. We demonstrate that $\bar\tau_q$, the average of $\tau_q$, obeys $\bar \tau_q \sim q^{\tilde\alpha}$. We find $\tilde \alpha \approx 3$. Furthermore, by aggregating all $\tau_q$ values of 28 global financial indices, we also observe an approximate inverse cubic law.
    Date: 2010–11
  4. By: Bell, Peter N
    Abstract: The new methodology to study the impact of corporate events on bonds is comprised of a sampling technique and regression model. The method is different from standard approaches, motivated by the belief that event impact should be reflected in levels of yield premium. The regression tests for a change in average bond price after an event, statistical inference is made by estimates of a dummy variable. A new sampling method is described to accommodate the irregular spacing of bond trades in time.
    Keywords: Event Study; Bonds; TRACE; ANOVA
    JEL: G14 G3
    Date: 2010–11–15
  5. By: Ron Bird (School of Finance and Economics, University of Technology, Sydney); Harry Liem (School of Finance and Economics, University of Technology, Sydney); Susan Thorp (School of Finance and Economics, University of Technology, Sydney)
    Abstract: We construct a time-varying factor model of hedge fund returns that accounts for market risk, leverage, illiquidity and tail events. We also adjust for database biases arising from voluntary self-reporting. Using a constant beta model, we find no evidence of excess returns for the average hedge fund manager between 1994 and 2009. Furthermore, we find no evidence of market timing skill. These conclusions are unchanged when we allow for time-varying beta, volatility clustering and leverage effects. In fact, allowing for dynamics in conditional mean and variance equations further erodes evidence of excess returns.
    Keywords: hedge funds; time-varying beta; GARCH
    JEL: G12 G14
    Date: 2010–09–01
  6. By: Hendrik Hakenes (University of Hannover, MPI Bonn); Zeno Enders (University of Bonn)
    Abstract: We develop a model of rational bubbles based on the assumptions of unknown market liquidity and limited liability of traders. In a bubble, the price of an asset rises dynamically above its steady-state value, justified by rational expectations about future price developments. The larger the expected future price increase, the more likely it is that the bubble will burst because market liquidity becomes exhausted. Depending on the interactions between uncertainty about market liquidity, fundamental riskiness of the asset, the compensation scheme of the fund manager, and the risk-free interest rate, we give a condition for whether rational bubbles are possible. Based on this analysis, we discuss several widely-discussed policy measures with respect to their effectiveness in preventing bubbles. A reduction of manager bonuses or a Tobin tax can create or eliminate the possibility of bubbles, depending on their implementation. Monetary policy and long-term compensation schemes can prevent bubbles.
    Keywords: Bubbles, Rational Expectations, Bonuses, Compensation Schemes, Financial Crises, Financial Policy
    JEL: G12 E44 E1
    Date: 2010–10
  7. By: Komulainen, Tuomas (Bank of Finland Research)
    Abstract: The financial crises in emerging markets in 1997-1999 were preceded by financial liberalisation, rapid surges in capital inflows, increased levels of indebtedness, and then sudden capital outflows. The study contains four essays that extend the different generations of crisis literature and analyse the role of capital movements and borrowing in the recent crises. Essay 1 extends the first generation models of currency crises. It analyses bond financing of fiscal deficits in domestic and foreign currency, and compares the timing and magnitude of attack with the basic case where deficits are monetised. The essay finds that bond financing may not delay the crisis. But if the country’s indebtedness is low, the crisis is delayed by bond financing, especially if the borrowing is carried out with bonds denominated in foreign currency. Essay 2 extends the second generation model of currency crises by adding capital flows. If these depend negatively on crisis probability, there will be multiple equilibria. The range of country fundamentals for which self-fulfilling crises are possible is wider when capital flows are included, and thus more countries may end up in crisis. An application of the model shows that in 1996 in many emerging economies the fundamentals were inside the range of multiple equilibria and hence self-fulfilling crises were possible. Essay 3 studies financial contagion and develops a model of the international financial system. It uses a basic model of financial intermediation, but adds several local banks and an international bank. These banks are able to use outside borrowing, the amount of which is determined by the value of their collateral. The essay finds that the use of leverage by local and global banks and the fall in collateral prices comprise an important channel and reason for contagion. Essay 4 analyses the causes of financial crises in 31 emerging market countries in 1980–2001. A probit model is estimated using 23 macroeconomic and financial sector indicators. The essay finds that traditional variables (eg unemployment and inflation) and several indicators of indebtedness (eg private sector liabilities and banks' foreign liabilities) explain currency crises. When the sample was divided into pre- and post-liberalisation periods, the indicators of indebtedness became more important in predicting crisis in the postliberalisation period.
    Keywords: currency crises; banking crises; emerging markets; borrowing; collateral; contagion; liberalisation
    JEL: E50 E60 F00 N20 O10 O40
    Date: 2010–11–11
  8. By: Ryan Woodard; Didier Sornette; Maxim Fedorovsky
    Abstract: This is the third installment of the Financial Bubble Experiment. Here we provide the digital fingerprint of an electronic document in which we identify 27 bubbles in 27 different global assets; for 25 of these assets, we present windows of dates of the most likely ending time of each bubble. We will provide that document of the original analysis on 2 May 2011.
    Date: 2010–11
  9. By: Hasan, Zubair
    Abstract: This paper explains the circumstances that led Dubai to the current financial crisis that still lingers. It analyses the steps taken at various stages by the city state to ameliorate the situation including the bailout help the UAE Government eventually granted. It spotlights the role international rating agencies played in aggravating the situation and demands that their activities be brought under regulatory nets now being strengthened across the world in the context of ongoing global meltdown. Finally, it warns of challenges Dubai may be facing in years ahead and what could be done to pre-empt them. The argument is cast with a backdrop of the economic position of UAE in the Middle-East and happenings at the global level in the arena of finance – mainstream and Islamic.
    Keywords: Islamic finance; Global meltdown; Dubai crisis; Rating agencies; financial architecture.
    JEL: J38 G10 G21
    Date: 2010–07
  10. By: C. Benetti (CERAG - Centre d'études et de recherches appliquées à la gestion - CNRS : UMR5820 - Université Pierre Mendès-France - Grenoble II)
    Abstract: The main objective of this study is to determine how the people involved in the accounting process consider the role of accounting information in an economic environment where capital markets play a major role. The study is also aimed at determining whether International Financial Reporting Standards (IFRS) will help fulfill this role. To this end, we compare the perceptions of financial officers, financial analysts and auditors, using Europe as a proxy for a highly developed capital market environment and Brazil as a proxy for a less developed capital market environment
    Keywords: Economic implications ; corporate financial reporting ; brazil ; europe ; financial markets
    Date: 2010
  11. By: Shah, Ajay (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy)
    Abstract: Stulz (2005) has emphasised that for home bias to decline, insiders have to reduce ownership so as to make purchase of shares by foreigners possible. We offer a decomposition in the ownership of shares by foreigners into three parts: the change in insider shareholding, the change in market capitalisation and the change in the fraction of outside shareholding that is held by foreigners. As an example, this decomposition is applied to help understand the sharp change in foreign ownership of Indian firms after 2001.
    Keywords: Home bias, Foreign investors
    JEL: G1 G15
    Date: 2010–10

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