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on Financial Markets |
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Issue of 2010‒12‒11
eight papers chosen by |
| By: | Jan Novotny |
| Abstract: | This paper empirically analysis the price jump behavior of heavily traded US stocks during the recent financial crisis. Namely, I test the hypothesis that the recent financial turmoil caused no change in the price jump behavior. To accomplish this, I employ data on realized trades for 16 stocks and one ETF from the NYSE database. These data are at a 1-minute frequency and span the period from January 2008 to the end of July 2009, where the recent financial crisis is generally understood to start with the plunge of Lehman Brothers shares on September 9, 2008. I employ five model-independent and three model-dependent price jump indicators to robustly assess the price jump behavior. The results confirm an increase in overall volatility during the recent financial crisis; however, the results cannot reject the hypothesis that there was no change in price jump behavior in the data during the financial crisis. This implies that the uncertainty during the crisis was scaled up but the structure of the uncertainty seems to be the same. |
| Keywords: | financial markets; price jumps; extreme price movements; financial crisis |
| JEL: | P59 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp416&r=fmk |
| By: | Noss, Joseph (Bank of England) |
| Abstract: | Structured credit instruments offer an insight into markets’ perceptions of the extent of future credit defaults. Claims of different seniorities incur losses only if defaults reach different magnitudes, so their relative value offers an insight into the likelihood of losses being of different severities. This paper matches the traded values of structured credit products by modelling the defaults of the underlying credits and their interdependence. It offers an improvement on the industry-standard ‘Gaussian copula’ model in its ability to capture the ‘tail event’ of multiple firms defaulting together. This allows policymakers to draw better inference as to the likely scale of defaults implied by structured credit prices. It offers an indication of the extent to which defaults are driven by systemic shocks to firms’ balance sheets. It may also be of use to those who trade structured credit products and may offer an improvement in risk management. |
| Keywords: | Structured credit instruments; systemic risk; asset prices |
| JEL: | G12 |
| Date: | 2010–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0407&r=fmk |
| By: | Vahagn Galstyan (Institute for International Integration Studies, Trinity College Dublin); Philip Lane (Institute for International Integration Studies, Trinity College Dublin) |
| Abstract: | In this paper we examine shifts in the bilateral patterns in international portfolio holdings in emerging Europe during the 2001-2008 period. In relation to the 2001-2007 pre-crisis period, we find some evidence that shifts in the geographical composition of portfolio debt liabilities reflect shifts in bilateral trade patterns. In addition, we find that the new member states disproportionately attracted portfolio equity investment from other members of the European Union after 2004. During the crisis period, we find that the bilateral composition of the shift in portfolio positions is affected by the scale of pre-crisis holdings and the geographical proximity of creditors. We also find that countries in the euro area are more likely to maintain portfolio positions in emerging Europe than were investors from other regions. |
| Keywords: | Portfolio holdings, crises, emerging Europe |
| JEL: | F30 F32 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp346&r=fmk |
| By: | Vladimir Borgy (Banque de France - Banque de France); Julien Idier (Banque de france - Banque de France); Gaëlle Le Fol (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX) |
| Abstract: | Even though the FX market is one of the most liquid financial market, it would be an error to consider that it is immune against any liquidity problem. This paper analyzes on a long sample (2000-2009), the all set of quotes and transactions in three main currency pairs (EURJPY, EURUSD, USDJPY) on the EBS platform. To characterize the FX market liquidity, we consider the spread, the traded volume, the number of transactions and the Amihud (2002) statistic for illiquidity. We also propose the computation of a new liquidity indicator, BIL, that solely relies on price series availability. The main benefit of such measure is to be easily calculated on almost any financial market as well as to have a clear interpretation in terms of liquidity costs. Using all these advanced liquidity analyses, we finally test the accuracy of these measures to detect liquidity problems in the FX market. Our analysis, based on a signaling approach, shows that liquidity problems have arisen during specific episodes in the early 2000's and more generally during the recent financial turmoil. |
| Keywords: | FX market; Liquidity; financial crisis |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00539985_v1&r=fmk |
| By: | Landier, Augustin; Sraer, David; Thesmar, David |
| Abstract: | Using loan level data, we investigate the lending behavior of a large subprime mortgage issuer prior to its bankruptcy in the beginning of 2007. In 2004, this firm suddenly started to massively issue new loans contracts that featured deferred amortization ("interestonly loans") to high income and high FICO households. We document that these loans were not only riskier, but also that their returns were more sensitive to real estate prices than standard contracts. Implicitly, this lender dramatically increased its exposure to its own legacy asset, which is what a standard model of portfolio selection in distress would predict. We provide additional evidence on New Century’s lending behavior, which are consistent with a risk shifting strategy. Finally, we are able to tie this sudden change in behavior to the sharp monetary policy tightening implemented by the Fed in the spring of 2004. Our findings shed new light on the relationship between monetary policy and risk taking by financial institutions. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:23653&r=fmk |
| By: | Francisco Vazquez; Benjamin M. Tabak; Marcos Souto |
| Abstract: | This paper proposes a model to conduct macro stress test of credit risk for the banking system based on scenario analysis. We employ an original bank level data set with disaggregated credit loans for business and consumer loans. The results corroborate the presence of a strong procyclical behavior of credit quality, and show a robust negative relationship between (the logistic transformation of) NPLs and GDP growth, with a lag response up to three quarters. The models also indicate substantial variations in the cyclical behavior of NPLs across credit types. Stress tests suggest that the banking system is well prepared to absorb the credit losses associated with a set of distressed macroeconomic scenarios without threatening financial stability. |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:226&r=fmk |
| By: | Dayanand Arora; Francis Xavier Rathinam (Indian Council for Research on International Economic Relations) |
| Abstract: | The OTC derivatives markets all over the world have shown tremendous growth in recent years. In the wake of the present financial crisis, which is believed to have been exacerbated by OTC derivatives, increasing attention is being paid to analysing the regulatory environment of these markets. In this context, we analyse the regulatory framework of the OTC derivatives market in India. The paper, inter alia, seeks to prove the point that the Indian OTC derivatives markets, unlike many other jurisdictions, are well regulated. Only contracts where one party to the contract is an RBI regulated entity are considered legally valid in India. A good reporting system and a post-trade clearing and settlement system, through a centralised counter party, has ensured good surveillance of the systemic risks in the Indian OTC market. From amongst the various OTC derivatives markets permitted in India, interest rate swaps and foreign currency forwards are the two prominent markets. However, by international standards, the total size of the Indian OTC derivatives markets still remains small because credit default swaps were conspicuously absent in India until now. It appears that Indian OTC derivatives markets will grow fast once again after the present financial crisis is over. This research paper explores those open issues that are important to ensure market stability and development. On the issue of the much discussed competition between exchange-traded and OTC-traded derivatives, we believe that the two markets serve different purposes and would contribute more to risk management and market efficiency, if viewed as complementary. Regarding the introduction of new derivative products for credit risk transfer, the recent announcement by the RBI that it would introduce credit default swaps is a welcome sign. We believe that routing of credit default swaps through a reporting platform and managing its post-trade activities through a centralised counterparty would provide better surveillance of the market. Strengthening the position of the Clearing Corporation of India Ltd. (CCIL) as the only centralised counterparty for Indian OTC derivatives market and better supervision of the off-balance sheet business of financial institutions are two measures that have been proposed to ensure the stability of the market. |
| Keywords: | Derivatives and Over the Counter Market, Financial Institutions and Services and Government Policy and Financial Regulation |
| JEL: | G1 G2 G28 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:2371&r=fmk |
| By: | Peter R. Hansen (Stanford University, Department of Economics and CREATES); Asger Lunde (Aarhus University, School of Economics and Management and CREATES); Valeri Voev (Aarhus University, School of Economics and Management and CREATES) |
| Abstract: | We introduce a multivariate GARCH model that utilizes and models realized measures of volatility and covolatility. The realized measures extract information contained in high-frequency data that is particularly beneficial during periods with variation in volatility and covolatility. Applying the model to market returns in conjunction with an individual asset yields a model for the conditional regression coefficient, known as the beta. We apply the model to a set of highly liquid stocks and find that conditional betas are much more variable than usually observed with rolling-window OLS regressions with dailty data. In the empirical part of the paper we examine the cross-sectional as well as the time variation of the conditional beta series. The model links the conditional and realized second moment measures in a self-contained system of equations, making it amenable to extensions and easy to estimate. A multi-factor extension of the model is briefly discussed. |
| Keywords: | Financial Volatility, Beta, Realized GARCH, High Frequency Data. |
| JEL: | G11 |
| Date: | 2010–11–29 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2010-74&r=fmk |