nep-fmk New Economics Papers
on Financial Markets
Issue of 2012‒07‒14
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Volatility Transmission across Currency, Commodity and Equity Markets under Multi-Chain Regime Switching: Implications for Hedging and Portfolio Allocation By A. Khalifa; S. Hammoudeh; Edoardo Otranto; S. Ramchander
  2. Sovereign risk, European crisis resolution policies and bond yields By Kilponen , Juha; Laakkonen, Helinä; Vilmunen, Jouko
  3. A decision-theoretic model of asset-price underreaction and overreaction to dividend news By Alexander Ludwig; Alexander Zimper

  1. By: A. Khalifa; S. Hammoudeh; Edoardo Otranto; S. Ramchander
    Abstract: This paper uses the multi-chain Markov Switching model to examine the nature of the volatility transmission across currency, commodity and stock markets, and provide implications for hedging and asset allocation. Results generally indicate the dominant presence of interdependency, as opposed to spillover and comovement relationships, highlighting the mutual reciprocity of individual market shocks across assets. Furthermore, there is evidence that optimal hedge ratios and portfolio weights are regime dependent. For instance, we find that it is more expensive to hedge when the market is in turmoil than when it is tranquil, and portfolio weights are larger for assets that are in the low volatility state.
    Keywords: volatility; interdependence; spillover; comovement; hedging; portfolio allocation
    JEL: F37 G13 G15
    Date: 2012
  2. By: Kilponen , Juha (Bank of Finland Research); Laakkonen, Helinä (Bank of Finland Research); Vilmunen, Jouko (Bank of Finland Research)
    Abstract: We study the effects of the ECB monetary policy and the European crisis resolution policies on the 10 year sovereign bond yields of seven European countries. We find that some of the decisions have had significant impact on sovereign bond yields and have succeeded in reducing stress in the financial markets. However, the impact of the same policy decision might have been positive for some countries while negative for others, suggesting that contagion effects may be important. The economically most significant effects on the bond yields have been due to the announcement of ECB's Securities Market Programme.
    Keywords: bond markets; policy effects; liquidity; European sovereign debt crisis; monetary policy
    JEL: E42 F34 G15
    Date: 2012–06–15
  3. By: Alexander Ludwig (CMR, University of Cologne; Albertus-Magnus-Platz; 50923 Koln; Germany); Alexander Zimper (Department of Economics, University of Pretoria)
    Abstract: We combine new developments in decision theory with a standard consumption-based asset-pricing framework. In our model the efficient market hypothesis is violated if and only if agents' beliefs express ambiguity about the stochastic process driving economic fundamentals. Asset price fluctuations result because agents with ambiguous beliefs are prone to a confirmatory bias in the interpretation of new information. We demonstrate that our approach gives rise to price-patterns of "underreaction" and "overreaction" to news about dividend payments. Although these empirical phenomena have received significant attention in the behavioral finance literature, we argue that our decision-theoretic underpinning of psychological attitudes has a less ad hoc flavor than existing approaches.
    Keywords: Choquet Expected Utility Theory, Portfolio Choice, Asset Pricing Puzzles
    Date: 2012–06

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