
on Financial Markets 
Issue of 2011‒08‒22
five papers chosen by 
By:  Laurent Schoeffel (CEA Saclay) 
Abstract:  In a previous publication, we have discussed the common belief that for the pedestrian observer, financial markets look completely random with erratic and uncontrollable behavior. To a large extend, this is correct. However, it has been shown on one example, the Euro future contract, that the difference between real financial time series and random walks, as small as it is, is detectable using modern statistical multivariate analysis. This has been achieved using several triggers encoded in a multivariate trading system. Then a nonrandom content of the financial series can be inferred. Of course, this is not a general proof, as we focus on one particular example and the generality of the process can not be claimed. In this letter, we produce a second example on a completely different markets, largely uncorrelated to the Euro future, namely the DAX and Cacao future contracts. The same procedure is followed using a trading system, based on exactly the same ingredients. We show that similar results can be obtained and we conclude that this is an evidence that some invariants, as encoded in our system, have been identified. They provide a kind of quantification of the nonrandom content of the financial markets explored over a 10 years period of time. 
Date:  2011–08 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1108.3155&r=fmk 
By:  Aloud, Monira; Tsang, Edward; Olsen, Richard; Dupuis, Alexandre 
Abstract:  Financial markets witness high levels of activity at certain times, but remain calm at others. This makes the flow of physical time discontinuous. Therefore using physical time scales for studying financial time series, runs the risk of missing important activities. An alternative approach is the use of an eventbased time that captures periodic activities in the market. In this paper, we use a special type of event, called a directionalchange event, and show its usefulness in capturing periodic market activities. Our study confirms that the length of the price curve coastline as defined by directionalchange events, turns out to be a long one.  
Keywords:  Directionalchange event,intrinsic time,highfrequency finance,foreign exchange market,timeseries analysis 
JEL:  G10 
Date:  2011 
URL:  http://d.repec.org/n?u=RePEc:zbw:ifwedp:201128&r=fmk 
By:  Larry Cordell; Yilin Huang; Meredith Williams 
Abstract:  This paper conducts an indepth analysis of structured finance assetbacked securities collateralized debt obligations (SF ABS CDOs), the subset of CDOs that traded on the ABS CDO desks at the major investment banks and were a major contributor to the global financial panic of August 2007. Despite their importance, we have yet to determine the exact size and composition of the SF ABS CDO market or get a good sense of the writedowns these CDOs will generate. In this paper the authors identify these SF ABS CDOs with data from Intex©, the source data and valuation software for the universe of publicly traded ABS/MBS securities and SF ABS CDOs. They estimate that 727 publicly traded SF ABS CDOs were issued between 1999 and 2007, totaling $641 billion. Once identified, they describe how and why multisector structured finance CDOs became subprime CDOs, and show why they were so susceptible to catastrophic losses. The authors then track the flows of subprime bonds into CDOs to document the enormous crossreferencing of subprime securities into CDOs. They calculate that $201 billion of the underlying collateral of these CDOs was referenced by synthetic credit default swaps (CDSs) and show how some 5,500 BBBrated subprime bonds were placed or referenced into these CDOs some 37,000 times, transforming $64 billion of BBB subprime bonds into $140 billion of CDO assets. For the valuation exercise, the authors estimate that total writedowns on SF ABS CDOs will be $420 billion, 65 percent of original issuance balance, with over 70 percent of these losses having already been incurred. They then extend the work of BarnettHart (2009) to analyze the determinants of expected losses on the deals and AAA bonds and examine the performance of the dealers, collateral managers, and rating agencies. Finally, the authors discuss the implications of their findings for the “subprime CDO crisis” and discuss the many areas for future work. 
Keywords:  Debt ; Securities ; Assetbacked financing ; Banks and banking 
Date:  2011 
URL:  http://d.repec.org/n?u=RePEc:fip:fedpwp:1130&r=fmk 
By:  Gregorio Impavido; Ahmed I AlDarwish; Michael Hafeman; Malcolm Kemp; Padraic O'Malley 
Abstract:  In todayâ€™s financial system, complex financial institutions are connected through an opaque network of financial exposures. These connections contribute to financial deepening and greater savings allocation efficiency, but are also unstable channels of contagion. Basel III and Solvency II should improve the stability of these connections, but could have unintended consequences for cost of capital, funding patterns, interconnectedness, and risk migration. 
Date:  2011–08–05 
URL:  http://d.repec.org/n?u=RePEc:imf:imfwpa:11/187&r=fmk 
By:  Syed ali, Raza; Syed tehseen, jawaid; Imtiaz, arif; Fahim, qazi 
Abstract:  This study investigates the validity of Capital Asset Pricing (CAP) Model in Karachi stock exchange (KSE). The data of 387 companies of 30 different sectors on monthly, quarterly and semiannual basis are used. The Paired sample t test is applied to find the difference between actual and expected returns. Results show that capital asset pricing model (CAPM) predict more accurately the expected return on a short term investment as compare to long term investment. It is recommended that the investors should more focus on CAPM results for short term as compare to long term investments in KSE. 
Keywords:  Portfolio choice; Investment Decisions; Capital Assets Pricing Model; Risk 
JEL:  G12 G11 G32 
Date:  2011–06–10 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:32737&r=fmk 