nep-fmk New Economics Papers
on Financial Markets
Issue of 2011‒12‒19
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Joint Dynamics of Equity Market Factors By Peter Christoffersen; Hugues Langlois
  2. Illiquidity Premia in the Equity Options Market By Peter Christoffersen; Ruslan Goyenko; Kris Jacobs; Mehdi Karoui
  3. The variance risk premium around the world By Juan M. Londono
  4. Lending relationships and credit rationing: the impact of securitization By Carbo Valverde, S.; Degryse, H.A.; Rodriguez-Fernandez, F.
  5. Did the US macroeconomic conditions affect Asian stock markets? By Seema Narayan; Paresh Kumar Narayan
  6. Is there an accruals or a cash flow anomaly in UK stock returns? By Nuno Soares; Andrew W. Stark

  1. By: Peter Christoffersen (University of Toronto - Rotman School of Management and CREATES); Hugues Langlois (McGill University - Desautels Faculty of Management)
    Abstract: The four equity market factors from Fama and French (1993) and Carhart (1997) are perva- sive in academic empirical asset pricing studies and in applied portfolio allocation. However, the joint distributional dynamics of the factors are rarely studied. For investors basing strate- gies on the factors or using them to model the returns of a wider set of assets, proper risk management requires knowing the joint factor dynamics which we model. We ?nd striking ev- idence of asymmetric tail dependence across the factors. While the linear factor correlations are small and even negative, the extreme correlations are large and positive, so that the linear correlations drastically overstate the bene?ts of diversi?cation across the factors. We model the nonlinear factor dependence and explore its economic importance in a portfolio allocation experiment which shows that signi?cant economic value is earned when acknowledging the nonlinear dependence.
    Keywords: Factors, threshold correlation, copulas, portfolio optimization, asymmetry.
    JEL: C01 G11
    Date: 2011–09–09
  2. By: Peter Christoffersen (University of Toronto - Rotman School of Management and CREATES); Ruslan Goyenko (McGill University - Faculty of Management); Kris Jacobs (University of Houston - C.T. Bauer College of Business); Mehdi Karoui (McGill University)
    Abstract: Illiquidity is well-known to be a signi?cant determinant of stock and bond returns. We report on illiquidity premia in equity option markets. An increase in option illiquidity decreases the current option price and predicts higher expected option returns. This effect is statistically and economically signi?cant. It is robust across different empirical approaches and when including various control variables. The illiquidity of the underlying stock affects the option return negatively, consistent with a hedging argument: When stock market illiquidity increases, the cost of replicating the option goes up, which increases the option price and reduces its expected return.
    Keywords: illiquidity; equity options; cross-section; option returns; option smile.
    JEL: G12
    Date: 2011–04–19
  3. By: Juan M. Londono
    Abstract: This paper investigates the variance risk premium in an international setting. First, I provide new evidence on the basic stylized facts traditionally documented for the US. I show that while the variance premiums in several other countries are, on average, positive and display significant time variation, they do not predict local equity returns. Then, I extend the domestic model in Bollerslev, Tauchen and Zhou (2009) to an international setting. In light of the qualitative implications of my model, I provide empirical evidence that the US variance premium outperforms that of all other countries in predicting local and foreign equity returns.
    Date: 2011
  4. By: Carbo Valverde, S.; Degryse, H.A.; Rodriguez-Fernandez, F. (Tilburg University, Center for Economic Research)
    Abstract: Do lending relationships mitigate credit rationing? Does securitization influence the impact of lending relationships on credit rationing? If so, is its impact differently in normal periods versus crisis periods? This paper combines several unique data sets to address these questions. Employing a disequilibrium model to identify credit rationing, we find that more intense lending relationships, measured through their length and lower number, considerable improve credit supply and reduce the degree of credit rationing. In general, we find that a relationship with a bank that is more involved in securitization activities relaxes credit constraints in normal periods; however, it also increases credit rationing during crisis periods. Finally, we study the impact of different types of securitization – covered bonds and mortgage-backed securities (MBS) – on credit rationing. While both types of securitization reduce credit rationing in normal periods, the issuance of MBS by a firm’s main bank aggravates these firm’s credit rationing in crisis periods.
    Keywords: lending relationships;financial crisis;securitization.
    JEL: G21
    Date: 2011
  5. By: Seema Narayan; Paresh Kumar Narayan
    Abstract: The aim of this paper is to examine the impact of US macroeconomic conditions—namely, exchange rate and short-term interest rate—on the stocks of seven Asian countries (China,India, the Philippines, Malaysia, Singapore, Thailand, and South Korea). Using daily data for the period 2000 to 2010, we divide the sample into pre-crisis period (pre-August 2007) and crisis period (post-August 2007) we find that in the short-run interest rate has a statistically insignificant effect on returns for all countries except the Philippines in the crisis period,while except for China, regardless of the crisis, depreciation had a statistically significant negative effect on returns. When the long-run relationship among the variables is considered,for four of the seven countries (India, Malaysia, Philippines, Singapore, and Thailand) while there was cointegration in the pre-crisis period, in the crisis period there was no such relationship, implying that the financial crisis has actually weakened the link between stock prices and economic fundamentals.
    Keywords: Interest Rate; Exchange Rate; Financial Crisis; Depreciation
    Date: 2011–11–21
  6. By: Nuno Soares (Faculdade de Engenharia, Universidade do Porto, Portugal and CEF.UP, Faculdade de Economia, Universidade do Porto, Portugal); Andrew W. Stark (Manchester Business School, UK)
    Abstract: In this paper, we apply a modified version of the Mishkin (1983) test to companies in the UK stock market in order to investigate the presence of accruals and cash flow effects on UK firms’ annual returns. First, we find that accruals decile rankings have U-shaped, or inverted U-shaped, or no relationships with most of the risk variables. Accruals decile rankings have, however, a negative relationship with the ratio of research and development to market value which is known to have a positive relationship with returns. Second, regarding the relationship between risk controls and returns, we find evidence associated with an RD effect and some evidence in favour of earnings-price and past return effects. We find little evidence of firm size, book to-market, and firm leverage effects, once the other variables are controlled for. Third, for the period 1990-2007, we report little evidence of general accruals mispricing in the UK in which accruals have a negative relationship with future returns, once risk has been accounted for. Additionally, after treatment of extreme observations, evidence of cash flow mispricing is found for the UK stock market. An alternative interpretation of our results is that there is no separate accruals effect, at least in the way predicted by the conventional mispricing stories, once other effects are taken into account, but there is a separate cash flow effect.
    Keywords: Accruals anomaly, accrual based accounting, cash flows, financial statement analysis
    JEL: M41 G11 G14
    Date: 2011–12

This nep-fmk issue is ©2011 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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.