New Economics Papers
on Financial Markets
Issue of 2010‒11‒27
nine papers chosen by

  1. The Financial Crisis 2007-08 and Causality: A Hicksian Perspective By Fernandez-Pol, Eduardo
  2. Banking Efficiency in Emerging Market Economies By Matthews, Kent
  3. The rise and fall of the ABS market By Mario Cerrato
  4. Stock Market Development in Africa: do all macroeconomic financial intermediary determinants matter? By Asongu , Anutechia Simplice
  5. An economic model of contagion in interbank lending markets By Dan Ladley
  6. Price Discovery in Currency Markets By Carol Osler; Alexander Mende; Lukas Menkhoff
  7. The Spanish term structure of interest rates revisited: cointegration with multiple structural breaks, 1974-2010 By Vicente Esteve; Manuel Navarro-Ibáñez; María A. Prats
  8. An Empirical Analysis of International Stock Market Volatility Transmission By Indika Karunanayake; Valadkhani, Abbas; O'Brien, Martin
  9. Projected earnings accuracy and the profitability of stock recommendations By Hess, Dieter; Kreutzmann, Daniel; Pucker, Oliver

  1. By: Fernandez-Pol, Eduardo (University of Wollongong)
    Abstract: Almost everyone agrees on two general features displayed by the recent banking crisis, namely: the crisis was stupefyingly complex and the financial system was devoured by its own creations. Beyond these points of agreement, there are many questions that will be debated by academics and policymakers for decades. One of the outstanding questions is what caused the financial crisis 2007-08. To shed light on this question, the paper compiles a list of the tentative causes of the recent financial crisis, discusses their separability and attempts an appraisal of the separable causes using the Hicksian methodology for causality analysis. Specifically, this paper identifies three major separable causes of the recent banking crisis and brings into sharp focus the far-from-trivial requirements that are necessary in order to demonstrate that a particular set of events can indeed be the preponderant causes of the severe banking crisis 2007-08.
    Keywords: Financial crisis 2007-08, causality analysis, Hicksian methodology, separable causes
    JEL: B41 G10
    Date: 2010
  2. By: Matthews, Kent (Cardiff Business School)
    Abstract: This paper reviews the different ways to measure bank efficiency and highlight the results of research on bank efficiency in Asian emerging economies. In particular it will outline the extent of research thus far conducted on the efficiency of banks in Pakistan and comment on how to build and improve upon them.
    Keywords: bank efficiency; bootstrap; Pakistan
    JEL: G20 G21
    Date: 2010–11
  3. By: Mario Cerrato
    Abstract: The financial crisis has raised some concern about the quality of information available on some traded assets on the securities markets to market participants and regulators. Asset-backed securitization in general got partial blame for the paucity of liquidity on bank balance sheets and the consequent credit crunch. After the Asset-Backed Security (ABS) market fell to near inactivity in 2009, the US federal government's Term Asset-Backed Securities Loan Facility (TALF) provided backing and a boost to the issuance of asset-backed securitization. In this market condition, given the nature of ABS, it is difficult for them not to be relatively illiquid, and this has resulted in unacceptable levels of market risk for most investors. Their liquidity before the crisis was driven by a market in continuous expansion, fed by Special Purpose Vehicle (SPV), Conduits, and other low capitalized term-transformation vehicles. Nowadays, the industry is concerned with the ongoing ABS reforms and how these will be implemented. This article reviews the ABS market in the last decade and the possible consequences of the recent regulatory proposals. It proposes a retention policy and the institution of a new financial body to supervise the quality of the security in an ABS pool, its liquidity, and the model risk implied by the issuer's valuation mode
    Keywords: Asset Backed Security; Government Policy and Regulation
    JEL: G39 G18
    Date: 2010–11
  4. By: Asongu , Anutechia Simplice
    Abstract: This study brings light to some financial intermediary development factors that could negate stock market development, as well as those that could improve it. Using a panel of eight countries, from 1989 to 2008, we derive indexes via Principal Component Analysis; based on which panel fixed effect regressions are performed. The principal edge of this work is that, in policy making, not all aspects of financial intermediary development should be prioritized for stock market development.
    Keywords: Financial intermediary development; Stock market development; Africa
    JEL: G1 G2 G0
    Date: 2010–11–22
  5. By: Dan Ladley
    Abstract: This paper considers the stability of a financial system in which heterogenous banks interact through a lending market. We analyse a discrete time model in which households and banks are located on a circular city. Households present banks with risky investment opportunities, which banks fund through deposits and interbank borrowing. In the event of bankruptcy, a bank defaults on its interbank loans potentially resulting in contagion and losses for other banks. Through simulation we examine the vulnerability of the financial system to systemic events, demonstrating the non-linear relationship between market concentration, shock severity and bankruptcies. The role and effect of regulatory actions such as reserve requirements, minimum bank capitalisation and constraints on the size of borrowing relationships, are considered in limiting these effects.
    Keywords: Systemic risk; Interbank lending; Regulation; Network; Heterogeneity
    JEL: G21 C63
    Date: 2010–11
  6. By: Carol Osler (International Business School, Brandeis University); Alexander Mende (Leibniz Universität); Lukas Menkhoff (Leibniz Universität)
    Abstract: This paper examines the price discovery process in currency markets, basing its analysis on the pivotal distinction between the customer (end-user) market and the interdealer market. It first provides evidence that the price discovery process cannot be based on adverse selection between dealers and end users, as postulated in standard equity-market models, because the spreads dealers quote to their customers are not positively related to a trade’s likely information content. The paper then highlights three hypotheses from the literature – fixed operating costs, market power, and strategic dealing – that may explain the cross-sectional variation in customers spreads. The paper finishes by proposing a price discovery process relevant to liquid two-tier markets and providing preliminary evidence that this process applies to currencies.
    Keywords: Bid-ask spreads, foreign exchange, asymmetric information, microstructure, price discovery, interdealer, inventory, market order, limit order
    JEL: F31 G14 G15
    Date: 2010–06
  7. By: Vicente Esteve (Universidad de Valencia and Universidad de La Laguna, Spain); Manuel Navarro-Ibáñez (Universidad de La Laguna, Spain); María A. Prats (Universidad de Murcia, Spain)
    Abstract: In this paper we consider the possibility that a linear cointegrated regression model with multiples structural changes would provide a better empirical description of the term structure model of interest rates. Our methodology is based on instability tests recently proposed in Kejriwal and Perron (2010) as well as the cointegration test in Arai and Kurozumi (2007) and Kejriwal (2008) developed to allow for multiple breaks under the null hypothesis of cointegration.
    Keywords: Term structure of interest rates; Cointegration; Multiple Structural Breaks.
    JEL: C32 E43
    Date: 2010–11
  8. By: Indika Karunanayake (University of Wollongong); Valadkhani, Abbas (University of Wollongong); O'Brien, Martin (University of Wollongong)
    Abstract: This paper examines the interplay between stock market returns and their volatility, focus ingon the Asian and global financial crises of 1997-98 and 2008-09 for Australia, Singapore, the UK, and the US. We use a multivariate generalised autoregressive conditional heteroskedasticity (MGARCH) model and weekly data (January 1992-June 2009). Based on the results obtained from the mean return equations, we could not find any significant impact on returns arising from the Asian crisis and more recent global financial crises across these four markets. However, both crises significantly increased the stock return volatilities across all of the four markets. Not surprisingly, it is also found that the US stock market is the most crucial market impacting on the volatilities of smaller economies such as Australia. Our results provide evidence of own and cross ARCH and GARCH effects among all four markets, suggesting the existence of significant volatility and cross volatility spillovers across all four markets. A high degree of time-varying co-volatility among these markets indicates that it is riskier for investors to diversify their financial portfolio by acquiring stocks withinthese four countries only.
    Keywords: Financial crises, Stock market volatility transmission, Multivariate GARCH model
    JEL: G15
    Date: 2010
  9. By: Hess, Dieter; Kreutzmann, Daniel; Pucker, Oliver
    Abstract: We document that investors can actually profit from the contemporaneous link between earnings accuracy and recommendation profitability (Loh and Mian (2006)). Differentiating between 'able' and 'lucky' analysts we suggest an implementable, i.e. look-ahead bias free, trading strategy that yields annual excess returns of 11.5% before transactions costs during our 1994 - 2007 sample period. Rather than past track records analysts' characteristics indicate their ability to identify undervalued stocks. We find that a reputation effect, i.e. higher recommendation announcement returns, is insignificant. This indicates that the ability is real. Able analysts can distinguish between firms that will over- or underperform. --
    Keywords: analysts,trading strategy,profitability of recommendations
    JEL: G14 G24
    Date: 2010

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