New Economics Papers
on Financial Markets
Issue of 2011‒05‒14
five papers chosen by

  1. Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis By Rabah Arezki; Bertrand Candelon; Amadou N. R. Sy
  2. A network analysis of global banking:1978-2009 By Camelia Minoiu; Javier A. Reyes
  3. This Time Is the Same: Using Bank Performance in 1998 to Explain Bank Performance during the Recent Financial Crisis By Fahlenbrach, Rudiger; Prilmeier, Robert; Stulz, Rene M.
  4. A new model-based approach to measuring time-varying financial market integration By T. BERGER; L. POZZI
  5. Volatility in EMU sovereign bond yields: Permanent and transitory components By Simón Sosvilla-Rivero; Amalia Morales-Zumaquero

  1. By: Rabah Arezki; Bertrand Candelon; Amadou N. R. Sy
    Abstract: This paper examines the spillover effects of sovereign rating news on European financial markets during the period 2007-2010. Our main finding is that sovereign rating downgrades have statistically and economically significant spillover effects both across countries and financial markets. The sign and magnitude of the spillover effects depend both on the type of announcements, the source country experiencing the downgrade and the rating agency from which the announcements originates. However, we also find evidence that downgrades to near speculative grade ratings for relatively large economies such as Greece have a systematic spillover effects across Euro zone countries. Rating-based triggers used in banking regulation, CDS contracts, and investment mandates may help explain these results.
    Keywords: Announcements , Bonds , Capital markets , Credit , Cross country analysis , Eastern Europe , Financial crisis , Public information notices , Sovereign debt , Spillovers , Press Releases ,
    Date: 2011–03–29
  2. By: Camelia Minoiu; Javier A. Reyes
    Abstract: In this paper we explore the properties of the global banking network using cross-border bank lending data for 184 countries over 1978-2009. Specifically, we analyze financial interconnectedness using network metrics of centrality, connectivity, and clustering. We document a relatively unstable global banking network, with structural breaks in network indicators identifying several waves of capital flows. Interconnectedness rankings, especially for borrowers, are relatively volatile over the period. Connectivity tends to fall during and after systemic banking crises and sovereign debt crises. The 2008-09 global financial crisis stands out as an unusually large perturbation to the cross-border banking network.
    Keywords: Banking crisis , Capital flows , Cross country analysis , Emerging markets , Financial crisis , International banking , Loans ,
    Date: 2011–04–04
  3. By: Fahlenbrach, Rudiger (Ecole Polytechnique Federale de Lausanne); Prilmeier, Robert (OH State University); Stulz, Rene M. (OH State University)
    Abstract: We investigate whether a bank's performance during the 1998 crisis, which was viewed at the time as the most dramatic crisis since the Great Depression, predicts its performance during the recent financial crisis. One hypothesis is that a bank that has an especially poor experience in a crisis learns and adapts, so that it performs better in the next crisis. Another hypothesis is that a bank's poor experience in a crisis is tied to aspects of its business model that are persistent, so that its past performance during one crisis forecasts poor performance during another crisis. We show that banks that performed worse during the 1998 crisis did so as well during the recent financial crisis. This effect is economically important. In particular, it is economically as important as the leverage of banks before the start of the crisis. The result cannot be attributed to banks having the same chief executive in both crises. Banks that relied more on short-term funding, had more leverage, and grew more are more likely to be banks that performed poorly in both crises.
    JEL: G21
    Date: 2011–05
  4. By: T. BERGER; L. POZZI
    Abstract: We investigate financial market integration by looking at the stock market linkages of five developed countries (France, Germany, Japan, the UK, and the US) over the period 1970:1- 2010:8. We measure the time-varying degree of world stock market integration of each country through the conditional variance of the country-specific premium in equity excess returns. The country-specific premiums are derived theoretically from an international CAPM with market imperfections. They are estimated from the latent factor decomposition implied by the theory through the use of state space methods that allow for GARCH errors. Our empirical results suggest that stock market integration has increased over the period 1970:1-2010:8 in all countries but Japan. And while there is a structural increase in stock market integration in four out of five countries, all countries also exhibit several shorter periods of disintegration (reversals), i.e. periods in which country-specific shocks play a more dominant role. Hence, stock market integration is measured as a dynamic process that is fluctuating in the short run while gradually increasing in the long run.
    Keywords: financial markets, integration, factor model, unobserved component, GARCH
    JEL: G15 C32
    Date: 2011–04
  5. By: Simón Sosvilla-Rivero (Departmento de Economía Cuantitativa, Facultad de Ciencias Económicas y Empresariales, Universidad Complutense de Madrid); Amalia Morales-Zumaquero (Departamento de Teoría e Historia Económica, Facultad de Ciencias Económicas y Empresariales, Universidad de Málaga)
    Abstract: This paper explores the evolving relationship in the volatility of sovereign yields in the European Economic and Monetary Union (EMU). To that end, we examine the behaviour for daily yields for 11 EMU countries (EMU-11), during the 2001-2010 period. In a first step, we decompose volatility in permanent and transitory components using Engel and Lee (1999)´s component-GARCH model. Results suggest that transitory shifts in debt market sentiment tend to be less important determinants of bond-yield volatility than shocks to the underlying fundamentals. In a second step, we develop a correlation and causality analysis that indicates the existence of two different groups of countries closed linked: core EMU countries and peripheral EMU countries. Finally, in a third step, we make a cluster analysis that further support our results regarding the existence of two different groups of countries, with different positions regarding the stability of public finance.
    Keywords: Conditional variance, Component model, Cluster analysis, Sovereign bond yields, Economic and Monetary Union
    JEL: C32 F33 G12 G13
    Date: 2011–04

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