nep-fmk New Economics Papers
on Financial Markets
Issue of 2011‒07‒13
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Can We Learn to Beat the Best Stock By A. Borodin; R. El-Yaniv; V. Gogan
  2. Agglomeration Economies and Local Comovement of Stock Returns By Fu, Shihe; Shan, Liwei
  3. Booms and Busts in Asset Prices By Klaus Adam; Albert Marcet
  4. Revisiting the merger and acquisition performance of European banks By Athanasoglou, Panayiotis P.; Asimakopoulos, Ioannis
  5. Do banking relationships improve credit conditions for Spanish SMEs?. By Cardone Riportella, Clara; Casasola, María José; Samartín Sáenz, Margarita
  6. What drives bank securitisation? The Spanish experience. By Cardone Riportella, Clara; Samaniego Medina, Reyes; Trujillo Ponce, Antonio

  1. By: A. Borodin; R. El-Yaniv; V. Gogan
    Abstract: A novel algorithm for actively trading stocks is presented. While traditional expert advice and "universal" algorithms (as well as standard technical trading heuristics) attempt to predict winners or trends, our approach relies on predictable statistical relations between all pairs of stocks in the market. Our empirical results on historical markets provide strong evidence that this type of technical trading can "beat the market" and moreover, can beat the best stock in the market. In doing so we utilize a new idea for smoothing critical parameters in the context of expert learning.
    Date: 2011–06
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1107.0036&r=fmk
  2. By: Fu, Shihe; Shan, Liwei
    Abstract: Existing studies in finance have documented the comovement of stock returns of companies headquartered in the same location. The interpretation is that local investors have a “local bias” due to an information advantage on local companies. This paper argues that localized agglomeration economies affect the fundamentals of local companies, resulting in the local comovement of stock returns. Using the data for China A-share listed companies from 1997-2007, we confirm the local comovement of stock returns of companies headquartered in the same city; moreover, the stock returns of a company headquartered in a city with stronger agglomeration economies are also correlated more highly with stock returns of other companies headquartered in the same city. The local comovement of earnings among companies headquartered in the same city is also found, and the local comovement of stock returns is correlated with the local comovement of earnings. We conclude that correlated local fundamentals due to localized agglomeration economies can explain the local comovement of stock returns.
    Keywords: Stock returns; Local bias; Agglomeration economies
    JEL: G1 R1 R3
    Date: 2011–06–24
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:31887&r=fmk
  3. By: Klaus Adam; Albert Marcet
    Abstract: We show how low-frequency boom and bust cycles in asset prices can emerge from Bayesian learning by investors. Investors rationally maximize infinite horizon utility but hold subjective priors about the asset return process that we allow to differ infinitesimally from the rational expectations prior. Bayesian updating of return beliefs then gives rise to selfreinforcing return optimism that results in an asset price boom. The boom endogenously comes to an end because return optimism causes investors to make optimistic plans about future consumption. The latter reduces the demand for assets that allow to intertemporally transfer resources. Once returns fall short of expectations, investors revise return expectations downward and set in motion a self-reinforcing price bust. In line with available survey data, the learning model predicts return optimism to comove positively with market valuation. In addition, the learning model replicates the low frequency behavior of the U.S. price dividend ratio over the period 1926-2006.
    Keywords: asset price fluctuations, boom and bust cycles
    JEL: G12 D84
    Date: 2011–07
    URL: http://d.repec.org/n?u=RePEc:cep:cepdps:dp1059&r=fmk
  4. By: Athanasoglou, Panayiotis P.; Asimakopoulos, Ioannis
    Abstract: The study examines the value creation of Merger and Acquisition (M&A) deals in European Banking from 1990-2004. This is performed, first, by examining the stock price reaction of banks to the announcement of M&A deals and, second, by analysing the determinants of this reaction. The findings provide evidence of value creation in European banks as the shareholders of the targets have benefited from positive and (statistically) significant abnormal returns while those of the acquirers earn small negative but non-significant abnormal returns. In the case of the shareholders of the acquirers, domestic M&As and especially those between banks with shares listed on the stock market, seem to be more beneficial compared to cross-border ones or those when the target is unlisted. Shareholders of the targets earn in all cases positive abnormal returns. Finally, although the link between abnormal returns and fundamental characteristics of the banks is rather weak, it appears that the acquisition of smaller, less efficient banks generating more diversified income are more value creating, while acquisition of less efficient, liquid and characterised by higher credit risk banks is not a value creating option.
    Keywords: Bank mergers; mergers and acquisitions; abnormal returns;
    JEL: G1 G14 G2 G34 G3 G0 G21
    Date: 2009–08
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:31994&r=fmk
  5. By: Cardone Riportella, Clara; Casasola, María José; Samartín Sáenz, Margarita
    Abstract: Small and medium-sized companies are extremely important for the Spanish economy. However, they face difficulties when trying to obtain financing (credit rationing). As a result, and given their limited possibilities to obtain finance in the capital market, they turn to the credit market, which is the main provider of funds for such companies. The main aim of this study is to provide an insight into the banking relationships that are developed in this market and their impact on credit rationing. Previous literature has studied this situation by focusing on price rationing and quantity rationing. This study furthers research into banking relationships by examining the effects that these relationships may have on compensation demanded for debt and the relationship with long-term credit rationing. After studying 386 SMEs listed in the Spanish Guide of Exporting Companies, the main conclusions drawn were as follows: i) SMEs working with larger numbers of financial entities and with longer relationships with these entities enjoy better access to credit; ii) SMEs that develop banking relationships by contracting financial products manage to reduce their credit costs; iii) SMEs that have longer banking relationships with banking entities benefit from better long-term credit conditions; and iv) the maintenance of banking relationships through the rendering of services reduces bank requirements in terms of guarantees in credit applications.
    URL: http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/142&r=fmk
  6. By: Cardone Riportella, Clara; Samaniego Medina, Reyes; Trujillo Ponce, Antonio
    Abstract: This paper analyses the reasons why Spanish banks securitised in the period 2000–2007 on such a large scale that Spain has become the European country with the second-largest issuance volume after the UK. The results obtained by applying a logistic regression model to a sample of 408 observations indicate that liquidity and the search for improved performance are the decisive factors in securitisation. We find no evidence to support hypotheses regarding credit risk transfer and regulatory capital arbitrage. Our study also presents a more detailed analysis that differentiates between asset and liability securitisation programmes.
    Keywords: Securitisation; ABS; CDO; Credit risk transfer; Regulatory capital arbitrage;
    JEL: G21 G28
    URL: http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/11312&r=fmk

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