New Economics Papers
on Financial Markets
Issue of 2011‒11‒21
thirteen papers chosen by

  1. Privileged information exacerbates market volatility By Gabriel Desgranges; Stéphane Gauthier
  2. Published stock recommendations as institutional investor sentiment in the near-term stock market By Nico Singer; Frank Dreher; Saskia Laser
  3. On the Predictability of Stock Prices: a Case for High and Low Prices By Massimiliano Caporin; Angelo Ranaldo
  4. Stock return predictability and variance risk premia: statistical inference and international evidence By Tim Bollerslev; James Marrone; Lai Xu; Hao Zhou
  5. Tracing the temporal evolution of clusters in a financial stock market By Argimiro Arratia; Alejandra Caba\~na
  6. Stock Market Reactions due to Announcements of Consumer Price Index and the Investigation of Endogeneity By Subhani, Dr. Muhammad Imtiaz; Osman, Ms. Amber
  7. Insider Trading with Different Market Structures By Wassim Daher; Fida Karam; Leonard J. Mirman
  8. A simplified Capital Asset Pricing Model By Vladimir Vovk
  9. Are the Major South Asian Equity Markets Co-Integrated? By Subhani, Dr. Muhammad Imtiaz; Hasan, Dr. Syed Akif; Mehar, Dr. Ayub; Osman, Ms. Amber
  11. The reform of European securities settlement systems : Towards an integrated financial market By Marie-Noëlle Calès; Dominique Chabert; Walid Hichri; Nadège Marchand
  12. The financial stress index: identification of systemic risk conditions By Mikhail V. Oet; Ryan Eiben; Timothy Bianco; Dieter Gramlich; Stephen J. Ong
  13. Operational risk : A Basel II++ step before Basel III By Dominique Guegan; Bertrand Hassani

  1. By: Gabriel Desgranges (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise); Stéphane Gauthier (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We study how asymmetric information affects market volatility in a linear setup where the outcome is determined by forecasts about this same outcome. The unique rational expectations equilibrium will be stable when it is the only rationalizable solution. It has been established in the literature that stability is obtained when the sensitivity of the outcome to agents' forecasts is less than 1, provided that this sensitivity is common knowledge. Relaxing this common knowledge assumption, instability is obtained when the proportion of agents who a priori know the sensitivity is large, and the uninformed agents believe it is possible that the sensitivity is greater than 1.
    Keywords: Asymmetric information, common knowledge, eductive learning, rational expectations, rationalizability, volatility.
    Date: 2011–10
  2. By: Nico Singer (University of Rostock); Frank Dreher (Goethe University Frankfurt); Saskia Laser (University of Rostock)
    Abstract: This paper investigates the role of published stock recommendations as institutional investor sentiment in the near-term German stock market using stock recommendations published in both print and online media. In line with extant literature for other countries, vector autoregressive analysis reveals that past stock returns drive today's sentiment, but not the other way around. We further document substantial empirical evidence that sentiment based on stock recommendations published online drives its print media counterpart, which is due to the delay financial news are printed and distributed in newspapers.
    Keywords: analysts forecast, institutional sentiment, stock market, VAR analysis
    Date: 2011
  3. By: Massimiliano Caporin; Angelo Ranaldo
    Abstract: Contrary to the common wisdom that asset prices are hardly possible to forecast, we show that high and low prices of equity shares are largely predictable. We propose to model them using a simple implementation of a fractional vector autoregressive model with error correction (FVECM). This model captures two fundamental patterns of high and low prices: their cointegrating relationship and the long memory of their difference (i.e. the range), which is a measure of realized volatility. Investment strategies based on FVECM predictions of high/low US equity prices as exit/entry signals deliver a superior performance even on a risk-adjusted basis.
    Keywords: high and low prices, predictability of asset prices, range, fractional cointegration, exit/entry trading signals, chart/technical analysis
    JEL: G11 C53
    Date: 2011
  4. By: Tim Bollerslev; James Marrone; Lai Xu; Hao Zhou
    Abstract: Recent empirical evidence suggests that the variance risk premium, or the difference between risk-neutral and statistical expectations of the future return variation, predicts aggregate stock market returns, with the predictability especially strong at the 2-4 month horizons. We provide extensive Monte Carlo simulation evidence that statistical finite sample biases in the overlapping return regressions underlying these findings can not ``explain" this apparent predictability. Further corroborating the existing empirical evidence, we show that the patterns in the predictability across different return horizons estimated from country specific regressions for France, Germany, Japan, Switzerland and the U.K. are remarkably similar to the pattern previously documented for the U.S. Defining a ``global" variance risk premium, we uncover even stronger predictability and almost identical cross-country patterns through the use of panel regressions that effectively restrict the compensation for world-wide variance risk to be the same across countries. Our findings are broadly consistent with the implications from a stylized two-country general equilibrium model explicitly incorporating the effects of world-wide time-varying economic uncertainty.
    Date: 2011
  5. By: Argimiro Arratia; Alejandra Caba\~na
    Abstract: We propose a methodology for clustering financial time series of stocks' returns, and a graphical set-up to quantify and visualise the evolution of these clusters through time. The proposed graphical representation allows for the application of well known algorithms for solving classical combinatorial graph problems, which can be interpreted as problems relevant to portfolio design and investment strategies. We illustrate this graph representation of the evolution of clusters in time and its use on real data from the Madrid Stock Exchange market.
    Date: 2011–11
  6. By: Subhani, Dr. Muhammad Imtiaz; Osman, Ms. Amber
    Abstract: In the financial market the very peculiar and key focus is about the trading volume response to Consumer price index (CPI). Therefore, taking CPI as one of the important economic variables, the Karachi Stock Exchange-100 index trading volume was investigated in connection with the CPI. The outcomes of this study suggested that CPI has a major association with the KSE-100 index trading volume. The statistical test further elaborated this significance and has revealed a negative relationship between CPI “Consumer price index” and “KSE-100 index trading volume”. Another interesting key feature to this research was the presence of endogeneity in the data used for the research.
    Keywords: Consumer price index (CPI) announcements; Trading Volume; Endogeneity
    JEL: O16
    Date: 2011
  7. By: Wassim Daher (Gulf University for Science and Technology (GUST) - Department of Mathematics and Natural Sciences, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Fida Karam (Gulf University for Science and Technology (GUST) - Department of Economics and Finance); Leonard J. Mirman (University of Virginia - Department of Economics)
    Abstract: We study an extension of Jain and Mirman (1999) with two insiders under three different market structures : (i) Cournot competition among the insiders, (ii) Stackelberg game between the insiders and (iii) monopoly in the real market and Stackelberg in the financial market. We show how the equilibrium outcomes are affected by each of the market structure. Finally we perform a comparative statics analysis between the models.
    Keywords: Insider trading, Cournot, Stackelberg, correlated signals, Kyle model.
    Date: 2011–08
  8. By: Vladimir Vovk
    Abstract: We consider a Black-Scholes market in which a number of stocks and an index are traded. The simplified Capital Asset Pricing Model is the conjunction of the usual Capital Asset Pricing Model, or CAPM, and the statement that the appreciation rate of the index is equal to its squared volatility plus the interest rate. (The mathematical statement of the conjunction is simpler than that of the usual CAPM.) Our main result is that either we can outperform the index or the simplified CAPM holds.
    Date: 2011–11
  9. By: Subhani, Dr. Muhammad Imtiaz; Hasan, Dr. Syed Akif; Mehar, Dr. Ayub; Osman, Ms. Amber
    Abstract: Seemingly unrelated variables are quite often having relations with each other and this peculiar relation has always won the intentional and unintentional attention of many scientists and researchers. This paper is an attempt to investigate and interrogate the co-movements or the relations among the seemingly unrelated stock markets of South Asian countries, which includes Karachi Stock Exchange (Pakistan), Bombay Stock Exchange (India), Dhaka Stock Exchange (Bangladesh) and Nepal Stock Exchange (Nepal). The daily co-movement of the four well-known Indices comprising of KSE-100, BSE Sensex, DSE Composite Index, and NSE Index is examined by using the Johansen co-integration analysis for the period of May-1995 to May-2011. We found the linkage of stock prices of Karachi Stock Exchange with the stock prices of Dhaka stock exchange, while KSE is not co-integrated with the rest of outlined equity markets in terms of stock price indices.
    Keywords: Co-integration; Equity/ Stock Markets; Market Trend; Stock Prices
    JEL: R53 G12 G15 E01 M21
    Date: 2011
  10. By: Masahiro Inoguchi
    Abstract: This paper examines the impact of price fluctuations in foreign stock markets on the stock prices of domestic banks’ stocks to explore if and how external shocks have affected the banking system in Korea, Malaysia, Singapore, and Thailand during the 2000s. Some researchers insist that domestic banks in East Asia were less affected by the 2007–2009 global financial crisis. However, few previous articles have investigated how the banking sector in East Asia has been affected by external shocks. Employing a multinomial logit model, this study estimates how changes in the US and Japanese stock market indices affected the banking sectors in Korea, Malaysia, Singapore, and Thailand before the 1997 crisis and before and during the 2007–2009 crises. This study’s regression employs the number of banks in a given country that experienced a large shock on the same day (“coexceedances”) as shocks to the domestic banking sector. The regression result suggests that fluctuations in foreign stock market indices had a larger impact on prices of East Asian banking stocks during the 2000s than during the 1990s before the Asian financial crisis. Although the shock brought by the deteriorating foreign stock markets was significant before the 2007–2009 global financial crisis, both increases and declines in the foreign stock prices affected the banking sector during the crisis. Increasing foreign capital flows and foreign assets and liabilities may have greatly influenced the domestic banking system of East Asia in the 2000s.
    JEL: F36 G15 O16
    Date: 2011
  11. By: Marie-Noëlle Calès (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon); Dominique Chabert (Université de Lyon - Université de Lyon); Walid Hichri (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon); Nadège Marchand (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon)
    Abstract: The European Central Bank (ECB) will offer to banks in 2013 an european shared platform for securities settlement, named TARGET 2 Securities (T2S), in order to open the national financial markets. The financial crisis did not change the ECB agenda. This paper develops a spatial competition model to understand the impact of this new organisation on european post-trading services. We analyse the incentives of the Central Securities Depositaries (CSD) to move to T2S when they become competitors in the market for settlement services and remain in a monopoly position for depository services. Settlement and depository services are complementary goods, because banks have to pay for these two services to buy or sell a security. We show that such a reform should induce a decrease in the settlement price and more generally in post-trading prices, but that prices depend strongly on market organisation. Under certain conditions, partial adhesion would make prices increase. This configuration appears as a Nash equilibrium. As CSDs are free to adhere to T2S, the ECB might be forced to regulate.
    Keywords: Post-trading organisation; securities settlement; depositary services; compatibility
    Date: 2011
  12. By: Mikhail V. Oet; Ryan Eiben; Timothy Bianco; Dieter Gramlich; Stephen J. Ong
    Abstract: This paper develops a financial stress index for the United States, the Cleveland Financial Stress Index (CFSI), which provides a continuous signal of financial stress and broad coverage of the areas that could indicate it. The index is based on daily public-market data collected from four sectors of the fi nancial markets—the credit, foreign exchange, equity, and interbank markets. A dynamic weighting method is employed to capture changes in the relative importance of these four sectors as they occur. In addition, the design of the index allows the origin of the stress to be identified. We compare the CFSI to alternative indexes, using a detailed benchmarking methodology, and show how the CFSI can be applied to systemic stress monitoring and early warning system design. To that end, we investigate alternative stress-signaling thresholds and frequency regimes and then establish optimal frequencies for filtering out market noise and idiosyncratic episodes. Finally, we quantify a powerful CFSI-based rating system that assigns a probability of systemic stress to ranges of CFSI outcomes.
    Keywords: Systemic risk ; Risk assessment
    Date: 2011
  13. By: Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, BPCE - BPCE)
    Abstract: Following Banking Committee on Banking Supervision, operational risk quantification is based on the Basel matrix which enables sorting incidents. In this paper, we deeply analyze these incidents and propose strategies for carrying out the supervisory guidelines proposed by the regulators. The objectives are numerous. On the first hand, banks need to provide a univariate capital charge for each cell of the Basel matrix. On the other hand, banks need also to provide a global capital charge corresponding to the whole matrix taking into account dependences. We provide a solution to do so. Finally, we draw regulators and managers attention on two crucial points : the granularity and the risk measure.
    Keywords: Basel II, operational risks, EVT, copula.
    Date: 2011–09

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.