nep-fmk New Economics Papers
on Financial Markets
Issue of 2011‒11‒01
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Role Reversal in Global Finance By Prasad, Eswar
  2. A Quantum-like Approach to the Stock Market By Diederik Aerts; Bart D'Hooghe; Sandro Sozzo
  3. Identifying supply and demand in the Hungarian corporate loan market By Sándor Sóvágó

  1. By: Prasad, Eswar (Cornell University)
    Abstract: I document that emerging markets have cast off their "original sin" – their external liabilities are no longer dominated by foreign-currency debt and have instead shifted sharply towards direct investment and portfolio equity. Their external assets are increasingly concentrated in foreign exchange reserves held in advanced economy government bonds. Given the enormous and rising public debt burdens of reserve currency economies, this means that the long-term risk on emerging markets' external balance sheets is shifting to the asset side. However, emerging markets continue to look for more insurance against balance of payments crises, even as self-insurance through reserve accumulation itself becomes riskier. I propose a mechanism for global liquidity insurance that would meet emerging markets' demand for insurance with fewer domestic policy distortions while facilitating a quicker adjustment of global imbalances. I also argue that emerging markets have become less dependent on foreign finance and more resilient to capital flow volatility. The main risk that increasing financial openness poses for these economies is that capital flows exacerbate vulnerabilities arising from weak domestic policies and institutions.
    Keywords: emerging markets, international investment positions, structure of external assets and liabilities, foreign exchange reserves, global liquidity insurance
    JEL: F3 F4
    Date: 2011–10
    URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp6032&r=fmk
  2. By: Diederik Aerts; Bart D'Hooghe; Sandro Sozzo
    Abstract: Modern approaches to stock pricing in quantitative finance are typically founded on the 'Black-Scholes model' and the underlying 'random walk hypothesis'. Empirical data indicate that this hypothesis works well in stable situations but, in abrupt transitions such as during an economical crisis, the random walk model fails and alternative descriptions are needed. For this reason, several proposals have been recently forwarded which are based on the formalism of quantum mechanics. In this paper we apply the 'SCoP formalism', elaborated to provide an operational foundation of quantum mechanics, to the stock market. We argue that a stock market is an intrinsically contextual system where agents' decisions globally influence the market system and stocks prices, determining a nonclassical behavior. More specifically, we maintain that a given stock does not generally have a definite value, e.g., a price, but its value is actualized as a consequence of the contextual interactions in the trading process. This contextual influence is responsible of the non-Kolmogorovian quantum-like behavior of the market at a statistical level. Then, we propose a 'sphere model' within our 'hidden measurement formalism' that describes a buying/selling process of a stock and shows that it is intuitively reasonable to assume that the stock has not a definite price until it is traded. This result is relevant in our opinion since it provides a theoretical support to the use of quantum models in finance.
    Date: 2011–10
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1110.5350&r=fmk
  3. By: Sándor Sóvágó (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: During the recent crisis bank lending to the non-financial corporate sector declined substantially in Hungary and this slump proceeds in the aftermath of the recession as well. However it is not evident whether it is a result of the slow recovery of the real economy (the lack of credit demand), or it is caused by the balance sheet adjustment of financial intermediaries, that is tight credit supply is prevalent. In this paper we identify supply and demand in the corporate loan market in Hungary and decompose the developments of lending to supply and demand factors. Doing this a simultaneous econometric model is estimated on a panel dataset, which covers the major banks in the industry. The model takes into account the results of the Bank Lending Survey of MNB, which provides some information about lending standards and banks’ willingness to lend. Our results suggest that tight supply conditions have played an important role in the decline of lending, especially after the outbreak of the crisis. At the same time, demand has been contracted as well during the recession, although it has started to recover in 2010. At the end of 2010 we may conclude that the decline in supply and demand accounted for the drop in corporate lending in a ratio of around 2/3-1/3, respectively.
    Keywords: corporate lending, credit supply, bank lending survey
    JEL: E44
    Date: 2011
    URL: http://d.repec.org/n?u=RePEc:mnb:opaper:2011/94&r=fmk

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