nep-fmk New Economics Papers
on Financial Markets
Issue of 2011‒08‒29
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Co-movements of Shanghai and New York Stock prices by time-varying regressions By Chow, Gregory C; Liu, Changjiang; Niu, Linlin
  2. Repo runs: evidence from the tri-party repo market By Adam Copeland; Antoine Martin; Michael Walker
  3. Tranching, CDS and Asset Prices: How Financial Innovation Can Cause Bubbles and Crashes By Ana Fostel; John Geanakoplos
  4. Working Paper 10-11 - Estimation of inter-industry domestic and international R&D stocks for Belgium By Bernadette Biatour
  5. Pricing Nikkei 225 Options Using Realized Volatility By Masato Ubukata; Toshiaki Watanabe
  6. Macroeconomic Impact of Basel III By Patrick Slovik; Boris Cournède

  1. By: Chow, Gregory C (BOFIT); Liu, Changjiang (BOFIT); Niu, Linlin (BOFIT)
    Abstract: We estimate a time-varying regression model to study the relationship between returns in the Shanghai and New York stock markets, with possible inclusion of lagged returns. The parameters of the regressions reveal that the effect of the current stock return for New York on that for Shanghai steadily increases after the 1997 Asian financial crisis and turns significantly and persistently positive after 2002, when China entered WTO. The effect of the current return for Shanghai on New York also becomes significantly positive and increasing after 2002. The upward trend has been interrupted during the recent global financial crisis, but reaches the level of about 0.4 to 0.5 in 2010 for both markets. Our results show that China’s stock market has become more and more integrated into the world market in the past twenty years, with interruptions occurring during the recent global economic downturn.
    Keywords: China; globalization; rate of return; stock markets; time-varying parameter regression
    JEL: C29 C50 G14 P43
    Date: 2011–08–22
  2. By: Adam Copeland; Antoine Martin; Michael Walker
    Abstract: This paper provides a quantitative account of the tri-party repo market during the recent financial crisis. Using data from July 2008 to January 2010, we show that the level of haircuts and the amount of funding were surprisingly stable in this market. The stability of the haircuts contrasts with evidence from the bilateral repo market, where, as shown by Gorton and Metrick (2011), haircuts increased sharply. During the crisis, adjustments in the volume of funding to dealers were not gradual; instead, the amount of funding in the tri-party repo market can decrease precipitously. Our findings suggest that runs in the tri-party repo market resemble traditional bank runs.
    Keywords: Repurchase agreements ; Liquidity (Economics) ; Financial crises
    Date: 2011
  3. By: Ana Fostel (Dept. of Economics, George Washington University); John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: We show how the timing of financial innovation might have contributed to the mortgage bubble and then to the crash of 2007-2009. We show why tranching and leverage first raised asset prices and why CDS lowered them afterwards. This may seem puzzling, since it implies that creating a derivative tranche in the securitization whose payoffs are identical to the CDS will raise the underlying asset price while the CDS outside the securitization lowers it. The resolution of the puzzle is that the CDS lowers the value of the underlying asset since it is equivalent to tranching cash.
    Keywords: Financial innovation, Endogenous leverage, Collateral equilibrium, CDS, Tranching and asset prices
    JEL: D52 D53 E44 G10 G12
    Date: 2011–08
  4. By: Bernadette Biatour
    Abstract: This Working Paper deals with the estimation of direct, inter-industry domestic and international R&D stocks for 25 Belgian industries over the period 1995-2007. Two categories of stocks are constructed to estimate potential rent spillovers and knowledge spillovers. Domestic inter-industry and foreign R&D stocks are weighted with Supply and Use tables and bilateral trade data to estimate rent spillovers (through intermediate consumption) and with international patent citations matrices to estimate knowledge spillovers.
    Keywords: Domestic R&D stocks, International R&D stocks, Spillovers
    JEL: C81 O30
    Date: 2011–07–20
  5. By: Masato Ubukata (Assistant Professor, Department of Economics, Kushiro Public University of Economics (E-mail:; Toshiaki Watanabe (Professor, Institute of Economic Research, Hitotsubashi University (E-mail: Institute for Monetary and Economic Studies, Bank of Japan)
    Abstract: This article analyzes whether daily realized volatility, which is the sum of squared intraday returns over a day, is useful for option pricing. Different realized volatilities are calculated with or without taking account of microstructure noise and with or without using overnight and lunch-time returns. ARFIMA, ARFIMAX, HAR, HARX models are employed to specify the dynamics of realized volatility. ARFIMA and HAR models can capture the long-memory property and ARFIMAX and HARX models can also capture the asymmetry in volatility depending on the sign of previous day's return. Option prices are derived under the assumption of risk-neutrality. For comparison, GARCH, EGARCH and FIEGARCH models are estimated using daily returns, where option prices are derived by assuming the risk-neutrality and by using the Duan (1995) method in which the assumption of risk-neutrality is relaxed. Main results using the Nikkei 225 stock index and its put options prices are: (1) ARFIMAX model with daily realized volatility performs best, (2) the Hansen and Lunde ( 2005a) adjustment without using overnight and lunch-time returns can improve the performance, (3) if the Hansen and Lunde (2005a), which also plays a role to remove the bias caused by the microstructure noise by setting the sample mean of realized volatility equal to the sample variance of daily returns, is used, the other methods for taking account of microstructure noise do not necessarily improve the performance and (4) the Duan (1995) method does not improve the performance compared with assuming the risk neutrality.
    Keywords: microstructure noise, Nikkei 225 stock index, non-trading hours, option pricing, realized volatility
    JEL: C22 C52 G13
    Date: 2011–08
  6. By: Patrick Slovik; Boris Cournède
    Abstract: The estimated medium-term impact of Basel III implementation on GDP growth is in the range of -0.05 to -0.15 percentage point per annum. Economic output is mainly affected by an increase in bank lending spreads as banks pass a rise in bank funding costs, due to higher capital requirements, to their customers. To meet the capital requirements effective in 2015 (4.5% for the common equity ratio, 6% for the Tier 1 capital ratio), banks are estimated to increase their lending spreads on average by about 15 basis points. The capital requirements effective as of 2019 (7% for the common equity ratio, 8.5% for the Tier 1 capital ratio) could increase bank lending spreads by about 50 basis points. The estimated effects on GDP growth assume no active response from monetary policy. To the extent that monetary policy will no longer be constrained by the zero lower bound, the Basel III impact on economic output could be offset by a reduction (or delayed increase) in monetary policy rates by about 30 to 80 basis points.<P>Impact macro-économique de Bâle III<BR>L'impact estimé à moyen terme de la mise en conformité avec les règles de Bâle III sur la croissance du PIB est de l'ordre de -0,05 à -0,15 point de pourcentage par an. L’effet sur l’activité économique provient principalement de ce que les banques augmentent leurs marges de crédit afin de compenser la hausse de leurs coûts de financement provoquée par le durcissement des exigences de capital. Pour répondre aux exigences de fonds propres en 2015 (4,5% pour le ratio d'actions ordinaires, 6% pour le ratio de fonds propres de base), les banques devraient augmenter leurs marges de crédit d'environ 15 points de base en moyenne. Les exigences de capital en vigueur à compter de 2019 (7% pour le ratio d'actions ordinaires, 8,5% pour le ratio de fonds propres de base) pourraient augmenter les marges de crédit d’environ 50 points de base. Les effets estimés sur la croissance du PIB n’incorporent aucune réponse de la politique monétaire. Pour autant que la politique monétaire ne se heurte plus au plancher zéro des taux nominaux, l'impact de Bâle III sur la production économique pourrait être compensé par une réduction (ou un retard avant l’augmentation) des taux de la politique monétaire d'environ 30 à 80 points de base.
    Keywords: monetary policy, bank, financial intermediaries, interest rates, Basel accord, Basel III, bank regulation, bank lending, bank capital requirements, politique monétaire, banque, taux d'intérêt, intermédiaires financiers, Accord de Bâle, Bâle III, Réglementation bancaire, Crédit bancaire, Réglementation des fonds propres bancaires
    JEL: E52 G21 G28
    Date: 2011–02–14

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