nep-fmk New Economics Papers
on Financial Markets
Issue of 2011‒09‒16
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Global asset pricing By Karen K. Lewis
  2. News Reaction in Financial Markets within a Behavioral Finance Model with Heterogeneous Agents By Fischer, Thomas
  3. Collective behavior in financial market By Thomas Kau\^e Dal'Maso Peron; Francisco Aparecido Rodrigues
  4. Overconfidence and Bubbles in Experimental Asset Markets By Julija Michailova; Ulrich Schmidt
  5. Who Should Supervise? The Structure of Bank Supervision and the Performance of the Financial System By Barry Eichengreen; Nergiz Dincer
  6. Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking By Nicolo, G. De; Gamba, A.; Lucchetta, M.
  7. The string prediction models as application to financial forex market By Marian Repasan; Richard Pincak
  8. Bank Competition in the EU: How Has It Evolved? By Laurent Weill
  9. Indexed debt contracts and the financial accelerator By Charles T Carlstrom; Timothy S Fuerst; Matthias Paustian
  10. Debt overhang in emerging Europe ? By Brown, Martin; Lane, Philip R.

  1. By: Karen K. Lewis
    Abstract: Financial markets have become increasingly global in recent decades, yet the pricing of internationally traded assets continues to depend strongly upon local risk factors, leading to several observations that are difficult to explain with standard frameworks. Equity returns depend upon both domestic and global risk factors. Further, local investors tend to overweight their asset portfolios in local equity. The stock prices of firms that begin to trade across borders increase in response to this information.> ; Foreign exchange markets also display anomalous relationships. The forward rate predicts the wrong sign of future movements in the exchange rate, implying that traders can make profits by borrowing in lower interest rate currencies and investing in higher interest rate currencies. Furthermore, the sign of the foreign exchange premium changes over time, a fact difficult to reconcile with consumption variability. In this review, I describe the implications of the current body of research for addressing these and other global asset pricing challenges.
    Keywords: Asset pricing ; Financial markets
    Date: 2011
  2. By: Fischer, Thomas
    Abstract: This paper presents a Heterogeneous Agent Model of a financial market with chartist and fundamentalist traders that exhibit bounded rationality and short-term thinking to explain the effect of under and overreaction to news. The existence of the Market Maker's finite price adjustment speed leads to the fact that prices do not adjust instantaneously to new information. Chartists use moving average rules to make their investment decisions. Chartist can transform an underreaction-only scenario into a market with overreaction. The use of long moving average rules might even make the market unstable. Furthermore, noise in financial markets can lead to long time decoupling from fundamental value. Higher market efficiency (low deviations from fundamental value), on the other hand, is achieved if high rationality and long-term thinking for the agents is assumed.
    Keywords: Heterogeneous Agent Model - stock market - under and overreaction to news - moving average rules - financial stability
    Date: 2011–09
  3. By: Thomas Kau\^e Dal'Maso Peron; Francisco Aparecido Rodrigues
    Abstract: Financial market is an example of complex system, which is characterized by a highly intricate organization and the emergence of collective behavior. In this paper, we quantify this emergent dynamics in the financial market by using concepts of network synchronization. We consider networks constructed by the correlation matrix of asset returns and study the time evolution of the phase coherence among stock prices. It is verified that during financial crisis a synchronous state emerges in the system, defining the market's direction. Furthermore, the paper proposes a statistical regression model able to identify the topological features that mostly influence such an emergence. The coefficients of the proposed model indicate that the average shortest path length is the measurement most related to network synchronization. Therefore, during economic crisis, the stock prices present a similar evolution, which tends to shorten the distances between stocks, indication a collective dynamics.
    Date: 2011–09
  4. By: Julija Michailova; Ulrich Schmidt
    Abstract: This paper investigates the relationship between market overconfidence and occurrence of stock-price bubbles. Sixty participants traded stocks in ten experimental asset markets. Markets were constructed on the basis of subjects’ overconfidence, measured in pre-experimental sessions. The most overconfident subjects form “overconfident markets”, and the least overconfident subjects “rational markets”. Prices in rational markets tend to track the fundamental asset value more accurately than prices in overconfident markets and are significantly lower and less volatile. Additionally we observe significantly higher bubble measures and trading volume on overconfident markets. Altogether, our data provide evidence that overconfidence has strong effects on prices and trading behavior in experimental asset markets
    Keywords: overconfidence, price bubbles, experimental asset market
    JEL: C92 G12
    Date: 2011–09
  5. By: Barry Eichengreen; Nergiz Dincer
    Abstract: We assemble data on the structure of bank supervision, distinguishing supervision by the central bank from supervision by a nonbank governmental agency and independent from dependent governmental supervisors. Using observations for 140 countries from 1998 through 2010, we find that supervisory responsibility tends to be assigned to the central bank in low-income countries where that institution is one of few public-sector agencies with the requisite administrative capacity. It is more likely to be undertaken by a non-independent agency of the government in countries ranked high in terms of government efficiency and regulatory quality. We show that the choice of institutional arrangement makes a difference for outcomes. Countries with independent supervisors other than the central bank have fewer nonperforming loans as a share of GDP even after controlling for inflation, per capita income, and country and/or year fixed effects. Their banks are required to hold less capital against assets, presumably because they have less need to protect against loan losses. Savers in such countries enjoy higher deposit rates. There is some evidence, albeit more tentative, that countries with these arrangements are less prone to systemic banking crises.
    JEL: G0 H1
    Date: 2011–09
  6. By: Nicolo, G. De; Gamba, A.; Lucchetta, M. (Tilburg University, Center for Economic Research)
    Abstract: This paper formulates a dynamic model of a bank exposed to both credit and liquidity risk, which can resolve financial distress in three costly forms: fire sales, bond issuance and equity issuance. We use the model to analyze the impact of capital regulation, liquidity requirements and taxation on banks' optimal policies and metrics of efficiency of intermediation and social value. We obtain three main results. First, mild capital requirements increase bank lending, bank efficiency and social value relative to an unregulated bank, but these benefits turn into costs if capital requirements are too stringent. Second, liquidity requirements reduce bank lending, efficiency and social value significantly, they nullify the benifits of mild capital requirements, and their private and social costs increase monotonically with their stringency. Third, increases in corporate income and bank liabilities taxes reduce bank lending, bank effciency and social value, with tax receipts increasing with the former but decreasing with the latter. Moreover, the effects of an increase in both forms of taxation are dampened if they are jointly implemented with increases in capital and liquidity requirements.
    Keywords: Capital requirements;liquidity requirements;taxation of liabilities. JEL Classifications
    Date: 2011
  7. By: Marian Repasan; Richard Pincak
    Abstract: In this paper we apply a new approach of the string theory to the real financial market. The strings are defined here by the boundary conditions, characteristic length, real values and the method of redistribution of information. The map represents the detrending and data standardization procedure. We used 1-end-point, 2-end-point open string and partially compactified strings that satisfy the Dirichlet and Neumann boundary conditions. We established two different models to predict the behavior of financial forex market. The first model is based on the correlation function as invariant and the second one is an application based on the deviations from the closed string/pattern form. We found the difference between these two approaches. The first model cannot predict the behavior of the forex market with good efficiency in comparison with the second one which is, in addition, able to make relevant profit per year.
    Date: 2011–09
  8. By: Laurent Weill (LaRGE Research Center, Université de Strasbourg)
    Abstract: Economic integration on the EU banking markets is expected to favor competition, which should provide economic gains. However, even if there is a commonly accepted view in favor of enhanced bank competition during the last decade, no study has been performed in the 2000s showing this trend. In this paper, we aim to fill this gap by measuring the evolution of bank competition in all EU countries during the 2000s. We estimate the Lerner index and the H-statistic for a sample of banks from all EU countries. We provide evidence of a general improvement in bank competition in the EU, even if cross-country differences are observed in the pattern of the evolution of bank competition. We check whether convergence in bank competition has taken place on the EU banking markets, by applying ? and ? convergence tests for panel data. We show convergence in bank competition. These findings are also observed with standard competition measures (Herfindahl index, profitability indicators). We thus support the view th at bank integration has taken place in the European Union.
    Keywords: banking, competition, European integration
    JEL: G21 F36 L16
    Date: 2011
  9. By: Charles T Carlstrom; Timothy S Fuerst; Matthias Paustian
    Abstract: This paper addresses the positive and normative implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principal conclusions are that the optimal degree of indexation is significant, and that the business cycle properties of the model are altered under this level of indexation.
    Keywords: Indexation (Economics) ; Financial markets
    Date: 2011
  10. By: Brown, Martin; Lane, Philip R.
    Abstract: This paper assesses the extent to which debt overhang poses a constraint to economic activity in Emerging Europe, as the region emerges from the recent financial and economic crisis. At the macroeconomic level, it finds that the external imbalance problem for Emerging Europe has been in most cases more one of flows (high current account deficits in the pre-crisis years) rather than large stocks of external debt. A high reliance on equity funding means that net external debt is far lower than net external liabilities. Domestic balance sheets have expanded quite rapidly but sector liabilities remain relatively low compared with advanced economies. With the important exception of Hungary, public debt levels also remain relatively low in Emerging Europe. At the microeconomic level, the potential for debt overhang in the corporate sector is limited to a few countries: Latvia, Lithuania, Estonia, and Slovenia. Due to the low incidence of household debt, hardly any country, except Estonia, seems to face a threat of debt overhang in the household sector. The strong increase in non-performing loans compared with pre-crisis bank profitability suggests that debt overhang in the banking sector is a threat in Ukraine, Latvia, Lithuania, Hungary, Georgia, and Albania. Financial integration of Emerging Europe seems to have contributed to the transmission of the crisis to the region. At the same time, this integration is helping the region in managing the crisis by concerted actions of the major players.
    Keywords: Debt Markets,Access to Finance,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform,Emerging Markets
    Date: 2011–08–01

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