New Economics Papers
on Financial Markets
Issue of 2012‒02‒20
six papers chosen by

  1. The Relationship Between Uncertainty and the Market Reaction to Information: How is it Influenced by Market and Stock-Specific Characteristics? By Ron Bird; Krishna Reddy; Danny Yeung
  2. Harmonising Basel III and the Dodd Frank Act through greater collaboration between standard setters and national supervisors By Ojo, Marianne
  3. Performance Implications of Active Management of Institutional Mutual Funds By Ron Bird; Paolo Pellizzari; Danny Yeung
  4. Revisiting Mutual Fund Performance Evaluation By Angelidis , Timotheos; Giamouridis, Daniel; Tessaromatis, Nikolaos
  5. Shocks on the Romanian foreign exchange market before and after the global crisis By Dumitriu, Ramona; Stefanescu, Razvan
  6. The role of financial investments in agricultural commodity derivatives markets By Alessandro Borin; Virginia Di Nino

  1. By: Ron Bird (School of Finance and Economics, University of Technology, Sydney); Krishna Reddy (Waikato Management School, University of Waikato); Danny Yeung (School of Finance and Economics, University of Technology, Sydney)
    Abstract: Numerous empirical studies dating back to Ball and Brown (1968) have investigated how markets react to the receipt of new information. However, it is only recently that authors have focussed on differentiating between, and learning from, how investors react to good and bad news. In this paper we find that investors swing between being optimistic and being pessimistic in their interpretation of the new information driven by not only the prevailing market uncertainty and sentiment but also by a significant number of firm-specific characteristics. Pessimism prevails when uncertainty is high, sentiment is weak and the information is being disseminated by companies that are lowly-valued, have high risk, are thinly traded and/or are small cap stocks. However, investors swing to being optimistic when one reverses some or all of these factors. The conclusion that we draw is that risk, uncertainty and the attitude of investors combine to determine how the markets react to new information and this flows through to asset valuations.
    JEL: G11 G12 G14 D81
    Date: 2011–09–01
  2. By: Ojo, Marianne
    Abstract: Having considered a vital means whereby the Basel III framework and the Dodd Frank Act could achieve a respectable degree of harmonization, in the paper which precedes this, namely, the paper on “Harmonising Basel III and the Dodd Frank Act through International Accounting Standards – Reasons why International Accounting Standards Should Serve as “Thermostats”, this paper considers another important means of effectively achieving the aims and objectives of these important and major regulatory reforms aimed at achieving greater financial stability. In so doing, it will highlight challenges encountered by the Basel III framework, as well as that encountered by the Dodd Frank Act – particularly in the areas of enforcement, coordination and communication. In facilitating better enforcement, the need for high level principles, bright line rules and a more effective mandate will be emphasized. Furthermore, a system whereby greater collaboration between standard setters and national supervisors can be better facilitated requires effective coordination and communication mechanisms aimed at ensuring that vital decisions and information are communicated timely, accurately, effectively and completely.
    Keywords: financial stability; Volcker Rule; Basel III; Dodd Frank; European Systemic Risk Board; supervisors; Basel Committee; coordination; information asymmetry; regulation; high level principles
    JEL: D0 E02 K2 D8 G01
    Date: 2012–01–25
  3. By: Ron Bird (School of Finance and Economics, University of Technology, Sydney); Paolo Pellizzari (Department of Applied Mathematics, Ca' Foscari University of Venice); Danny Yeung (School of Finance and Economics, University of Technology, Sydney)
    Abstract: Although mutual fund performance has been dissected from almost every angle, very little attention has been paid to the connection between the actual active decisions made by management and the subsequent performance outcomes. In this paper we use information on institutional mutual funds to examine the implications of their active decisions made with respect to active positions, style and cash holdings for the fund's realised alpha, tracking error and information ratio. We identify some areas where the funds across the entire sample have success (active positions, and growth and winning stock divergences) and many others where they fall short (e.g. value and loser stock divergences). We identify that there is significant variation in these findings when we extend our analysis to examine the impact of these active decisions on performance for different styles of funds during periods of weak and strong markets. Value funds prove to be by far the best in the active positions that they make but losing across the board with their style divergences. Finally, we highlight the importance in style choice on the overall performance of a fund and identify the superiority of the value style over its competitors.
    JEL: G11 G14
    Date: 2011–09–01
  4. By: Angelidis , Timotheos; Giamouridis, Daniel; Tessaromatis, Nikolaos
    Abstract: Mutual fund manager excess performance should be measured relative to their self-reported benchmark rather than the return of a passive portfolio with the same risk characteristics. Ignoring the self-reported benchmark introduces biases in the measurement of stock selection and timing components of excess performance. We revisit baseline empirical evidence in mutual fund performance evaluation utilizing stock selection and timing measures that address these biases. We introduce a new factor exposure based approach for measuring the – static and dynamic – timing capabilities of mutual fund managers. We overall conclude that current studies are likely to be overstating lack of skill because they ignore the managers’ self-reported benchmark in the performance evaluation process.
    Keywords: Mutual funds; short-term performance; market timing; factor timing
    JEL: G11
    Date: 2012–02–02
  5. By: Dumitriu, Ramona; Stefanescu, Razvan
    Abstract: This paper explores some changes induced on the Romanian foreign exchange market by the global crisis. We study these changes from the perspective of number and intensity of the shocks occurred before and after the global crisis. We found some significant differences, explainable not only by the direct effects of the crisis, but also by the intervention of the National Bank of Romania.
    Keywords: Romanian Foreign Exchange Market; Shocks; Global Crisis; Monetary Policy; National Bank of Romania
    JEL: G14 G15 G01
    Date: 2011–06–03
  6. By: Alessandro Borin (Bank of Italy); Virginia Di Nino (Bank of Italy)
    Abstract: This paper investigates the relationship between futures prices and financial investments in derivatives of the main agricultural commodities. We first provide a broad picture of how these markets function and how they have evolved, showing that traders who deal mostly in commodity index investments (swap dealers) have gained importance since the mid-2000s. However, traditional financial market participants (money managers) still show the stronger (simultaneous) correlation with price movements. Our main empirical analysis aims to gauge the influence of financial investors’ positions on both the level and the volatility of futures prices. The Granger-causality tests suggest that speculative investments usually follow – rather than precede - variations in futures returns. Employing a GARCH model, we find that the activity of money managers tends to be associated with lower volatility of futures returns, while that of swap dealers is sometimes followed by higher price variations.
    Keywords: futures markets, commodities, speculation, GARCH, volatility
    JEL: D84 G12 G13 G14 Q13
    Date: 2012–01

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