nep-fmk New Economics Papers
on Financial Markets
Issue of 2011‒10‒22
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The instability of the correlation structure of the S&P 500 By Lyócsa, Štefan; Výrost, Tomáš; Baumöhl, Eduard
  2. Time Scales in Futures Markets and Applications By Laurent Schoeffel
  3. Is recent bank stress really driven by the sovereign debt crisis? By Guntram B. Wolff

  1. By: Lyócsa, Štefan; Výrost, Tomáš; Baumöhl, Eduard
    Abstract: Using weekly returns of S&P 500 constituents, we study the time-varying correlation structure during the period of 2006 to mid-2011. Contrary to most of the previous correlation studies of many assets, we do not use rolling correlations but the DCC MV-GARCH model with the MacGyver strategy proposed by Engle (2009). We find empirical evidence that the correlation structure tends to change significantly during the periods of high volatility and market downturns.
    Keywords: correlation structure; dynamic conditional correlations; range-based volatility; conditional volatility; MacGyver strategy
    JEL: C32 G1
    Date: 2011–10–17
  2. By: Laurent Schoeffel (CEA Saclay)
    Abstract: The probability distribution of log-returns for financial time series, sampled at high frequency, is the basis for any further developments in quantitative finance. In this letter, we present experimental results based on a large set of time series on futures. We show that the t-distribution with $\nu \simeq 3$ gives a nice description of almost all data series considered for a time scale $\Delta t$ below 1 hour. For $\Delta t \ge 8$ hours, the Gaussian regime is reached. A particular focus has been put on the DAX and Euro futures. This appears to be a quite general result that stays robust on a large set of futures, but not on any data sets. In this sense, this is not universal. A technique using factorial moments defined on a sequence of returns is described and similar results for time scales are obtained. Let us note that from a fundamental point of view, there is no clear reason why DAX and Euro futures should present similar behavior with respect to their return distributions. Both are complex markets where many internal and external factors interact at each instant to determine the transaction price. These factors are certainly different for an index on a change parity (Euro) and an index on stocks (DAX). Thus, this is striking that we can identify universal statistical features in price fluctuations of these markets. This is really the advantage of micro-structure analysis to prompt unified approaches of different kinds of markets. Finally, we examine the relation of power law distribution of returns with another scaling behavior of the data encoded into the Hurst exponent. We have obtained $H=0.54 \pm 0.04$ for DAX and $H=0.51 \pm 0.03$ for Euro futures.
    Date: 2011–10
  3. By: Guntram B. Wolff
    Abstract: Ahead of the European Council meeting on 23 October, the author outlines how EU Heads of States should focus on restoring confidence in euro-area policymakersâ?? ability and determination to put the euro area on a sound footing and restore market credibility. Stress in the interbank market has increased dramatically since July and bank stock market valuation has fallen by 22 percent on average for 60 of the most important banks tested in the EBA stress tests. I find evidence that bank stock valuation is significantly and economically meaningfully affected by the bankâ??s exposure to Greek debt. Greek banks are particularly affected. Holdings of debt of the other four periphery countries does not however appear to be a strong determinant of stock price movements. Policy announcements of 21 July of no haircut on any sovereign but Greece appear to be perceived as credible. The exposure to Greece cannot explain the general and large decline in euro area banksâ?? market cap. Instead, a general confidence crisis of the euro area banking system, or more deeply the euro area construction, might be driving the fall in stock prices. The summit of 23 October should focus on restoring confidence in euro-area policymakersâ?? ability and determination to put the euro area on a sound footing. Recapitalisation of banks can only be only one aspect. A credible solution to Greece and a way forward for the larger institutional set-up, including a federal fiscal back-stop of the banking system, are of at least equal importance.
    Date: 2011–10

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