New Economics Papers
on Financial Markets
Issue of 2011‒02‒26
seven papers chosen by

  1. Robust Global Stock Market Interdependencies By Brian M Lucey; Cal Muckley
  2. Non - Randomness Stock Market Price Model By Aleksey Kharevsky
  3. Cream Skimming in Financial Markets By Patrick Bolton; Tano Santos; Jose A. Scheinkman
  4. Market Reaction to Second-Hand News: Attention Grabbing or Information Dissemination By Enrico Maria Cervellati; Riccardo Ferretti; Pierpaolo Pattitoni
  5. Optimal Central Bank Lending By Andreas Schabert
  6. Private Information Flow and Price Discovery in the U.S. Treasury Market By George J. Jiang; Ingrid Lo
  7. The promise and performance of the Federal Reserve as Lender of Last Resort 1914-1933 By Michael D. Bordo; David C. Wheelock

  1. By: Brian M Lucey (Institute for International Integration Studies, Trinity College Dublin); Cal Muckley (Smurfirt Business School, University College Dublin, Dublin 4, Ireland)
    Abstract: In this paper, we examine the scope for international stock portfolio diversification, from the viewpoint of a United States representative investor, in regard to both the Asian and theEuropean stock markets. Our findings indicate that despite correlation style evidence to thecontrary, the European stock markets provide a superior long-term diversification opportunity relative to that provided by the Asian stock markets. Hence, a short-term measurement of interdependence appears to be uninformative with respect to the diversification opportunities of investors with longer term investment horizons. In terms of methodology, we adopt common stochastic trend tests, including a common stochastic trend test which accounts for generalised autoregressive conditional heteroskedasticity effects in conjunction with the recursive estimation of these tests to estimate the development of longterm stock market interdependence linkages. Recursively estimated robust correlations between the international stock markets are utilised to reveal the nature of short-term stock market interdependence linkages.
    Keywords: Stock Market Linkages, Portfolio Diversification, Correlation, Cointegration
    JEL: F3 G1
    Date: 2011–02
  2. By: Aleksey Kharevsky
    Abstract: A new model for the stock market price analysis is proposed. It is suggested to look at price as an everywhere discontinuous function of time of bounded variation.
    Date: 2011–02
  3. By: Patrick Bolton; Tano Santos; Jose A. Scheinkman
    Abstract: We propose an equilibrium occupational choice model, where agents can choose to work in the real sector (become entrepreneurs) or to become informed dealers in financial markets. Agents incur costs to become informed dealers and develop skills for valuing assets up for trade. The financial sector comprises a transparent competitive exchange, where uninformed agents trade and an opaque over-the-counter (OTC) market, where informed dealers offer attractive terms for the most valuable assets entrepreneurs put up for sale. Thanks to their information advantage and valuation skills, dealers are able to provide incentives to entrepreneurs to originate good assets. However, the opaqueness of the OTC market allows dealers to extract informational rents from entrepreneurs. Trade in the OTC market imposes a negative externality on the organized exchange, where only the less valuable assets end up for trade. We show that in equilibrium the dealers' informational rents in the OTC market are too large and attract too much talent to the financial industry.
    JEL: G1 G14 G18 G2 G24 G28
    Date: 2011–02
  4. By: Enrico Maria Cervellati; Riccardo Ferretti; Pierpaolo Pattitoni
    Abstract: This paper deals with a long-standing issue in finance: whether the market reaction to second-hand information is caused by price pressure or by dissemination. We use the perspective of attention grabbing as a particular form of price pressure to analyze the market reaction to the dissemination of analysts’ recommendations through the press. This perspective allows the prediction of an asymmetric market reaction to “buy” and “sell” advice, which has previously been detected in a few other empirical studies but is otherwise difficult to rationalize within the standard price pressure hypothesis. In particular, we analyze the content of a weekly column in the most important Italian financial newspaper that presents past information and analysts’ recommendations on listed companies. In doing so, we find an asymmetric price and volume reaction. Contrary to previous evidence, we document a positive relation between the number of analysts quoted in the column and the price (volume) increase associated with positive recommendations. Because the weekly columns simply attract the attention of investors with no additional new information, it is natural to observe a greater reaction for the most “glamorous” stocks (i.e., the stocks most commonly followed by analysts).
    Keywords: attention grabbing; analysts’ recommendations; anomalous market reaction; individual investors; event study
    JEL: G14 D82
    Date: 2011–02
  5. By: Andreas Schabert (Dortmund University, and University of Amsterdam)
    Abstract: We analyze optimal monetary policy in a sticky price
    Keywords: Optimal monetary policy; central bank instruments; collateralized lending; liquidity premium; inflation
    JEL: E4 E5 E32
    Date: 2010–06–21
  6. By: George J. Jiang; Ingrid Lo
    Abstract: Existing studies show that U.S. Treasury bond price changes are mainly driven by public information shocks, as manifested in macroeconomic news announcements and events. The literature also shows that heterogeneous private information contributes significantly to price discovery for U.S. Treasury securities. In this paper, we use high frequency transaction data for 2-, 5-, and 10-year Treasury notes and employ a Markov switching model to identify intraday private information flow in the U.S. Treasury market. We show that the probability of private information flow (PPIF) identified in our model effectively captures permanent price effects in U.S. Treasury securities. In addition, our results show that public information shocks and heterogeneous private information are the main factors of bond price discovery on announcement days, whereas private information and liquidity shocks play more important roles in bond price variation on non-announcement days. Most interestingly, our results show that the role of heterogeneous private information is more prominent when public information shocks are either high or low. Furthermore, we show that heterogeneous private information flow is followed by low trading volume, low total market depth and hidden depth. The pattern is more pronounced on non-announcement days.
    Keywords: Financial markets; Market structure and pricing
    JEL: G12 G14
    Date: 2011
  7. By: Michael D. Bordo (Rutgers University and NBER); David C. Wheelock (Federal Reserve Bank of St. Louis)
    Abstract: This paper examines the origins and early performance of the Federal Reserve as lender of last resort. The Fed was established to overcome the problems of the National Banking era, in particular an “inelastic” currency and the absence of an effective lender of last resort. As conceived by Paul Warburg and Nelson Aldrich at Jekyll Island in 1910, the Fed’s discount window and bankers acceptance-purchase facilities were expected to solve the problems that had caused banking panics in the National Banking era. Banking panics returned with a vengeance in the 1930s, however, and we examine why the Fed failed to live up to the promise of its founders. Although many factors contributed to the Fed’s failures, we argue that the failure of the Federal Reserve Act to faithfully recreate the conditions that had enabled European central banks to perform effectively as lenders of last resort, or to reform the inherently unstable U.S. banking system, were crucial. The Fed’s failures led to numerous reforms in the mid-1930s, including expansion of the Fed’s lending authority and changes in the System’s structure, as well as changes that made the U.S. banking system less prone to banking panics. Finally, we consider lessons about the design of lender of last resort policies that might be drawn from the Fed’s early history.
    Keywords: Federal Reserve Act, lender of last resort, discount window, banking panics, Great Depression
    JEL: E58 G28 N21 N22
    Date: 2011–02–15

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