nep-fmk New Economics Papers
on Financial Markets
Issue of 2012‒05‒29
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Financial Markets Forecasts Revisited: Are they Rational, Herding or Bold? By Ippei Fujiwara; Hibiki Ichiue; Yoshiyuki Nakazono; Yosuke Shigemi
  2. A Concave Security Market Line By Enrico G. De Giorgi; Thierry Post; Atakan Yalcin
  3. Contagion in financial networks: a threat index By Gabrielle Demange
  4. The Future of Financial Markets and Regulation: What Strategy for Europe? By Jean-Baptiste Gossé; Dominique Plihon
  5. Systematic and liquidity risk in subprime-mortgage backed securities By Mardi Dungey; Gerald P. Dwyer; Thomas Flavin
  6. The "CAPS" Prediction System and Stock Market Returns By Avery, Christopher N.; Chevalier, Judith; Zeckhauser, Richard Jay
  7. Structure in the Italian Overnight Loan Market By Matthias Raddant
  8. Do Japanese Stock Prices Reflect Macro Fundamentals? By Wenjuan Chen; Anton Velinov;

  1. By: Ippei Fujiwara (Associate Professor, Australian National University, CAMA, EABCN, and Globalization and Monetary Policy Institute (FRB Dallas) (E-mail:; Hibiki Ichiue (Director, Monetary Affairs Department, Bank of Japan (E-mail:; Yoshiyuki Nakazono (Waseda University and Research Fellow of the Japan Society for the Promotion of Science (Email:; Yosuke Shigemi (Director, Institute for Monetary and Economic Studies, (currently Information System Services Department), Bank of Japan (E-mail:
    Abstract: We test whether professional forecasters forecast rationally or behaviorally using a unique database, QSS Database, which is the monthly panel of forecasts on Japanese stock prices and bond yields. The estimation results show that (i) professional forecasts are behavioral, namely, significantly influenced by past forecasts, (ii) there exists a stock-bond dissonance: while forecasting behavior in the stock market seems to be herding, that in the bond market seems to be bold in the sense that their current forecasts tend to be negatively related to past forecasts, and (iii) the dissonance is due, at least partially, to the individual forecastersf behavior that is influenced by their own past forecasts rather than othersf. Even in the same country, forecasting behavior is quite different by market.
    Keywords: Anchoring, Bold, Herding, Survey Forecasts
    JEL: D03 G17
    Date: 2012–05
  2. By: Enrico G. De Giorgi (School of Economics and Political Science, University of St. Gallen); Thierry Post (Koc University, Graduate School of Business); Atakan Yalcin (Koc University, Graduate School of Business)
    Abstract: We provide theoretical and empirical arguments in favor of a concave shape for the security market line, or a diminishing marginal premium for market risk. In capital market equilibrium with binding portfolio restrictions, different investors generally hold different sets of risky securities. Despite the differences in composition, the optimal portfolios generally share a joint exposure to systematic risk. Equilibrium in this case can be approximated by a concave relation between expected return and market beta rather than the traditional linear relation. An empirical analysis of U.S. stock market data confirms the existence of a significant and robust, concave cross-sectional relation between average return and estimated past market beta. We estimate that the market-risk premium is at least five to six percent per annum for the average stock, substantially higher than conventional estimates.
    Keywords: capital market equilibrium, asset pricing, investment restrictions, portfolio theory.
    JEL: G12 C21
    Date: 2012–05
  3. By: Gabrielle Demange (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: An intricate web of claims and obligations ties together the balance sheets of a wide variety of financial institutions. Under the occurrence of default, these interbank claims generate externalities across institutions and possibly disseminate defaults and bankruptcy. Building on a simple model for the joint determination of the repayments of interbank claims, this paper introduces a measure of the threat that a bank poses to the system. Such a measure, called threat index, may be helpful to determine how to inject cash into banks so as to increase debt reimbursement, or to assess the contributions of individual institutions to the risk in the system. Although the threat index and the default level of a bank both reflect some form of weakness and are affected by the whole liability network, the two indicators differ. As a result, injecting cash into the banks with the largest default level may not be optimal.
    Keywords: Contagion ; Systemic risk ; Financial linkages ; Bankruptcy
    Date: 2012–01
  4. By: Jean-Baptiste Gossé (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234); Dominique Plihon (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234)
    Abstract: This article provides insight into the future of financial markets and regulation in order to define what would be the best strategy for Europe. To preserve financial stability, Europe has to choose between financial opening and independently determining how to regulate finance. Among the five scenarios we defined, three achieve financial stability both inside and outside Europe. In terms of market efficiency, the multi-polar scenario is the best and the fragmentation scenario is the worst, since gains of integration depend on the size of the new capital market. Regarding sovereignty of regulation, fragmentation is the best scenario and the multi-polar scenario is the worst because it necessitates coordination at the global level which implies moving further away from respective national preferences. However, the more realistic option seems to be the regionalisation scenario: (i) this level of coordination seems much more realistic than the global one; (ii) the market should be of sufficient size to enjoy substantial benefits of integration. Nevertheless, the "European government" might gradually increase the degree of financial integration outside Europe in line with the degree of cooperation with the rest of the world.
    Keywords: Financial Stability, Supervision and Regulation, Financial Integration
    Date: 2011–08–01
  5. By: Mardi Dungey; Gerald P. Dwyer; Thomas Flavin
    Date: 2011
  6. By: Avery, Christopher N.; Chevalier, Judith; Zeckhauser, Richard Jay
    Abstract: We study the predictive power of approximately 2.5 million stock picks submitted by individual users to the “CAPS†website run by the Motley Fool company ( These picks prove to be surprisingly informative about future stock prices. Indeed, a strategy of shorting stocks with a disproportionate number of negative picks on the site and buying stocks with a disproportionate number of positive picks produces a return of over nine percent per annum over the sample period. These results are mostly driven by the fact that negative picks on the site strongly predict future stock price declines; positive picks on the site produce returns that are statistically indistinguishable from the market. A Fama French decomposition suggests that these results are largely due to stock-picking rather than style factors or market timing.
    Date: 2011
  7. By: Matthias Raddant
    Abstract: We analyze the Italian interbank loan market from 1999 until 2010. The analysis of net trade flows shows a high imbalance caused by few large net borrowers in the market. The trading volume shows a significant drop starting in 2007, which accelerates with the Lehman default in late 2008. The network, based on trading relationships, is very dense. Hence, we try to identify strong links by looking for preferential lending relationships expressed by discounts in the loan rate. Furthermore, we estimate the dynamics of credit spreads for each bank and find that economically significant spreads for the overnight market only developed in 2010. The analysis of bilateral loan relationships reveals that in the pre-crisis era large net borrowers used to borrow at a slight discount. In the post-Lehman era borrowers with large net exposures paid more than the average market rate, which shows that the risk evaluation of market participants has changed considerably
    Keywords: interbank markets, overnight loans, preferential lending
    JEL: G15 G21 E44
    Date: 2012–05
  8. By: Wenjuan Chen; Anton Velinov;
    Abstract: This paper investigates to what extent the fundamentals of the real economy are re ected in the stock prices of Japan. A Markov switching VAR model with switching variances is used to test the structural identi cation scheme. Identification of fundamental and nonfundamental shocks is shown to be supported by the data. Based on the appropriate structural restriction, the historical stock prices are decomposed into fundamental components and nonfundamental components. The decomposition shows that the linkage between Japanese stock prices and real activity shocks became strengthened since the bubble collapsed in the beginning of 1990s.
    Keywords: Stock price, real activity, financial crisis, structural restrictions
    JEL: G12 E23
    Date: 2012–05

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