nep-fmk New Economics Papers
on Financial Markets
Issue of 2011‒03‒19
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Self-Regulation in Securities Markets By Carson, John
  2. Basel III: Long-term impact on economic performance and fluctuations By Paolo Angelini; Laurent Clerc; Vasco Cúrdia; Leonardo Gambacorta; Andrea Gerali; Alberto Locarno; Roberto Motto; Werner Roeger; Skander Van den Heuvel; Jan Vlcek
  3. Volatility and correlations for stock markets in the emerging economies By David E Allen; Anna Golab; Robert Powell
  4. Analysis of trade packages in Chinese stock market By Fei Ren; Wei-Xing Zhou
  5. CAViaR and the Australian Stock Markets: An Appetiser By David E Allen; Abhay Kumar Singh
  6. Informational Efficiency in Futures Markets for Crude Oil By Andreas Fritz; Christoph Weber
  7. Credit Risk and Real Capital: An Examination of Swiss Banking Sector Default Risk Using CVaR By Robert Powell; David E Allen

  1. By: Carson, John
    Abstract: This paper canvasses the trends in self-regulation and the role of self-regulation in securities markets in different parts of the world. The paper also describes the conditions in which self-regulation might be an effective element of securities markets regulation, particularly in emerging markets. Use of self-regulation and self-regulatory organizations is often recommended in emerging markets as part of a broader strategy aimed at improving the effectiveness of securities regulation and market integrity. According to the International Organization of Securities Commissions, reliance on self-regulation is an optional feature of a regulatory regime. Self-regulatory organizations may support better-regulated and more efficient capital markets, but the value of self-regulation is again being questioned in many countries. Forces such as commercialization of exchanges, development of stronger statutory regulatory authorities, consolidation of financial services industry regulatory bodies, and globalization of capital markets are affecting the scope and effectiveness of self-regulation—and in particular the traditional role of securities exchanges as self-regulatory organizations. The paper reviews different models of self-regulation, including exchange self-regulatory organizations, member (or independent) self-regulatory organizations, and industry or dealers’ associations. It draws on examples of self-regulatory organizations from many markets to illustrate the degree of reliance on self-regulation, as well as the range of functions for which self-regulatory organizations are responsible, in markets around the world. Issues that are important to the effective operation of self-regulatory organizations are discussed, such as corporate governance, managing conflicts of interest, and regulatory oversight by government authorities.
    Date: 2011–01
  2. By: Paolo Angelini (Bank of Italy); Laurent Clerc (Banque de France); Vasco Cúrdia (Federal Reserve Bank of New York); Leonardo Gambacorta (Bank for International Settlements); Andrea Gerali (Bank of Italy); Alberto Locarno (Bank of Italy); Roberto Motto (European Central Bank); Werner Roeger (European Commission); Skander Van den Heuvel (Board of Governors of the Federal Reserve System); Jan Vlcek (International Monetary Fund)
    Abstract: We assess the long-term economic impact of the new regulatory standards (the Basel III reform), answering the following questions. (1) What is the impact of the reform on long-term economic performance? (2) What is the impact of the reform on economic fluctuations? (3) What is the impact of the adoption of countercyclical capital buffers on economic fluctuations? The main results are the following. (1) Each percentage point increase in the capital ratio causes a median 0.09 percent decline in the level of steady state output, relative to the baseline. The impact of the new liquidity regulation is of a similar order of magnitude, at 0.08 percent. This paper does not estimate the benefits of the new regulation in terms of reduced frequency and severity of financial crisis, analysed in Basel Committee on Banking Supervision (BCBS, 2010b). (2) The reform should dampen output volatility; the magnitude of the effect is heterogeneous across models; the median effect is modest. (3) The adoption of countercyclical capital buffers could have a more sizeable dampening effect on output volatility. These conclusions are fully consistent with those of reports by the Long-term Economic Impact group (BCBS, 2010b) and Macro Assessment Group (MAG, 2010b).
    Keywords: Basel III, countercyclical capital buffers, financial (in)stability, procyclicality, macroprudential
    JEL: E44 E61 G21
    Date: 2011–02
  3. By: David E Allen (School of Accounting Finance & Economics, Edith Cowan University); Anna Golab (School of Accounting Finance & Economics, Edith Cowan University); Robert Powell (School of Accounting Finance & Economics, Edith Cowan University)
    Abstract: This paper examines the European investment implications of the recent European Union (EU) expansion to encompass former Eastern bloc economies. What are the risk and return characteristics of these markets pre- and post-EU? What are the implications for investors within the Euro zone? Should investors diversify outside the Central and Eastern Europe (CEE)? The former Eastern bloc economies constitute emerging markets which typically offer attractive risk-adjusted returns for international investors. In this paper, we explore a number of aspects of this important issue and their implications for CEE based investors, culminating in a Markowitz efficient frontier analysis of these markets pre- and post-EU expansion.
    Keywords: Emerging Markets; European Union; Portfolio investment
    Date: 2010–06
  4. By: Fei Ren; Wei-Xing Zhou
    Abstract: This paper conducts an empirically study on the trade package composed of a sequence of consecutive purchases or sales of 23 stocks in Chinese stock market. We investigate the probability distributions of the execution time, the number of trades and the total trading volume of trade packages, and analyze the possible scaling relations between them. Quantitative differences are observed between the institutional and individual investors. The trading profile of trade packages is investigated to reveal the preference of large trades on trading volumes and transaction time of the day, and the different profiles of two types of investors imply that institutions may be more informed than individuals. We further analyze the price impacts of both the entire trade packages and the individual transactions inside trade packages. We find the price impact of trade packages is nonnegligible over the period of the execution time and it may have a power-law relation with the total trading volume. The price impact of the transactions inside trade packages displays a U-shaped profile with respect to the time $t$ of the day, and also shows a power-law dependence on their trading volumes. The trading volumes of the transactions inside trade packages made by institutions have a stronger impact on current returns, but the following price reversals persist over a relatively shorter horizon in comparison with those by individuals.
    Date: 2011–03
  5. By: David E Allen (School of Accounting Finance & Economics, Edith Cowan University); Abhay Kumar Singh (School of Accounting Finance & Economics, Edith Cowan University)
    Abstract: Value-at-Risk (VaR) has become the universally accepted metric adopted internationally under the Basel Accords for banking industry internal control and for regulatory reporting. This has focused attention on methods of measuring, estimating and forecasting lower tail risk. One promising technique is Quantile Regression which holds the promise of efficiently calculating (VAR). To this end, Engle and Manganelli in (2004) developed their CAViaR model (Conditional Autoregressive Value at Risk). In this paper we apply their model to Australian Stock Market indices and a sample of stocks, and test the efficacy of four different specifications of the model in a set of in and out of sample tests. We also contrast the results with those obtained from a GARCH(1,1) model, the RiskMetricsTM model and an APARCH model
    Keywords: VaR; Quantile regressions; Autoregressive; CAViaR
    Date: 2010–09
  6. By: Andreas Fritz; Christoph Weber (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen)
    Abstract: This paper develops a novel methodology to test whether recent developments on world oil markets are in line with the hypothesis of efficient and structurally invariant markets. We treat the joint hypothesis problem as stated by Fama (1970), Fama (1991), that market efficiency can only be assessed in conjunction with a price model of market equilibrium. Data on spot and futures prices for Brent crude oil in the period 2002-2008 are used for analysis. The hypothesis of market efficiency is assessed by comparing the observed developments of crude oil prices to the ex-ante expected distributions using the Rosenblatt transform. For the market for Brent crude oil, the results are in line with the hypothesis of market efficiency in the short-term but during our sample period the hypothesis is refuted when forecast horizons of one year are considered.
    Keywords: Multi factor model, Informational efficiency, Oil market
    JEL: G13 G14 Q40
    Date: 2011–03
  7. By: Robert Powell (School of Accounting Finance & Economics, Edith Cowan University); David E Allen (School of Accounting Finance & Economics, Edith Cowan University)
    Abstract: The global financial crisis (GFC) has placed the creditworthiness of banks under intense scrutiny. In particular, capital adequacy has been called into question. Current capital requirements make no allowance for capital erosion caused by movements in the market value of assets. This paper examines default probabilities of Swiss banks under extreme conditions using structural modeling techniques. Conditional Value at Risk (CVaR) and conditional probability of default (CPD) techniques are used to measure capital erosion. Significant increase in probability of default (PD) is found during the GFC period. The market asset value based approach indicates a much higher PD than external ratings indicate. Capital adequacy recommendations are formulated which distinguish between real and nominal capital based on asset fluctuations.
    Keywords: Real capital; Financial crisis; Conditional value at risk; Credit risk; Banks; Probability of default; Capital adequacy
    Date: 2010–10

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