New Economics Papers
on Financial Markets
Issue of 2012‒08‒23
ten papers chosen by

  1. Legislating Stock Prices By Lauren Cohen; Karl B. Diether; Christopher Malloy
  2. Stock Market Cycles and Future Trend Estimation By Angyal (Apolzan), Carmen-Maria; Aniş, Cecilia–Nicoleta
  3. Returns Correlation Structure and Volatility Spillovers Among the Major African Stock Markets By Tinashe Harry Dumile Kambadza; Zivanemoyo Chinzara
  4. Spillover Effects in the Volatility of Financial Markets By Edoardo Otranto
  5. The Volatility of Long-term Bond Returns: Persistent Interest Shocks and Time-varying Risk Premiums By Daniela Osterrieder; Peter C. Schotman
  6. Bond Yields in Emerging Economies: It Matters What State You Are In By Laura Jaramillo; Anke Weber
  7. Government Bonds and Their Investors: What Are the Facts and Do They Matter? By Jochen R. Andritzky
  8. On the Necessity of Five Risk Measures By Dominique Guegan; Wayne Tarrant
  9. Viewing Risk Measures as information By Dominique Guegan; Wayne Tarrant
  10. On the role of the estimation error in prediction of expected shortfall By Lönnbark, Carl

  1. By: Lauren Cohen; Karl B. Diether; Christopher Malloy
    Abstract: In this paper we demonstrate that legislation has a simple, yet previously undetected impact on firm stock prices. While it is understood that the government and firms have an important relationship, it remains difficult to determine which firms any given piece of legislation will affect, and how it will affect them. By observing the actions of legislators whose constituents are the affected firms, we can gather insights into the likely impact of government legislation on firms. Specifically, focusing attention on “interested” legislators’ behavior captures important information seemingly ignored by the market. A long-short portfolio based on these legislators’ views earns abnormal returns of over 90 basis points per month following the passage of legislation. Further, the more complex the legislation, the more difficulty the market has in assessing the impact of these bills. Consistent with the legislator incentive mechanism, the more concentrated the legislator’s interest in the industry, the more informative are her votes for future returns.
    JEL: G12 G14
    Date: 2012–08
  2. By: Angyal (Apolzan), Carmen-Maria; Aniş, Cecilia–Nicoleta
    Abstract: Contemporary period was an unprecedented growth of stock markets in both developed economies and in emerging ones. The process of financial development has led to substantial changes in the behavior of the stock markets. Recent articles have been oriented to determine the relationship between financial liberalization and stock market cycles (Edwards et al. 2003; Kaminsky and Schmukler 2003). These articles have analyzed the stock exchanges in different countries focusing on the market movements in growth phases (bull) and downward (bear). This study uses the ARIMA methodology, that consists in estimating Minimum Mean Square Error (MMSE - minimum mean square error or ”signal extraction”) of hidden and unobserved components existing in a time series as it is developed in the work of Cleveland and Tiao (1976), Burman (1980), Hillmer and Tiao (1982), Bell and Hillmer (1984) and Maravall and Pierce (1987). The study uses data representing quarterly closing prices for the period 01.03.1998 – 01.06.2011 (52 observations) of a number of 5 european indices: AEX (Netherlands), ATX (Austria), CAC40 (France), DAX (Germany), FTSE (UK) and a US stock index – Dow Jones Industrial Average. Chosen indices characterize the evolution of mature stock markets. The data used are taken from Thompson Reuters database. The study allows identification, for the mature stock markets, the three distinct cycles in the period 1998–2011, cycle I – 1998–2002, cycle II – 2003–2008, cycle III – 2009–present. The moments of instability triggered by the actual crisis and the crisis significantly influenced all stock markets, the effects of the latter influence and their future trend. Thus, we identify a medium-term downward trend for European indices CAC40 and AEX and short-term index ATX. The estimation for European indices DAX, FTSE and Dow Jones Industrial Average US shows a medium-term growth trend.
    Keywords: stock market; cycle stock; stock index; ARIMA model
    JEL: G15 G01
    Date: 2012
  3. By: Tinashe Harry Dumile Kambadza; Zivanemoyo Chinzara
    Abstract: The paper analyses the structure of returns comovements and the volatility spillovers among the African stock markets using daily data for the period 2000-2010. We particularly focus on two issues: whether the stock markets of countries with close trading and financial links are more sychronised, and whether the financial crises influences volatility spillovers. Econometric models used include the Factor Analysis (FA), the Vector Autoregressive (VAR) and the GARCH. Our findings suggest that linkages among the African stock markets only exist along regional blocs. South Africa is found to be both the most dominant and most endogenous stock market. Most of the markets exhibit evidence of asymmetry and persistence in volatility. The results also show that it is important to account for structural change in volatility during financial crises when modelling volatility. We outline the investment and policy implications of the findings.
    Keywords: Returns and volatility linkages, Factor Analysis (FA), Vector Autoregressive (VAR), Financial Stability, asymmetric GARCH.
    JEL: G15 F36
    Date: 2012
  4. By: Edoardo Otranto
    Abstract: Recent econometric and statistical models for the analysis of volatility in financial markets serve the purpose of incorporating the effect of other markets in their structure, in order to study the spillover or the contagion phenomena. Extending the Multiplicative Error Model we are able to capture these characteristics, under the assumption that the conditional mean of the volatility can be decomposed into the sum of one component representing the proper volatility of the time series analyzed, and other components, each representing the volatility transmitted from one other market. Each component follows a proper dynamics with elements that can be usefully interpreted. This particular decomposition allows to establish, each time, the contribution brought by each individual market to the global volatility of the market object of the analysis. We experiment this model with four stock indices.
    JEL: C51 C32
    Date: 2012
  5. By: Daniela Osterrieder (Aarhus University and CREATES); Peter C. Schotman (Maastricht University)
    Abstract: We develop a model that can match two stylized facts of the term-structure. The first stylized fact is the predictability of excess returns on long-term bonds. Modeling this requires sufficient volatility and persistence in the price of risk. The second stylized fact is that long-term yields are dominated by a level factor, which requires persistence in the spot interest rate. We find that a fractionally integrated process for the short rate plus a fractionally integrated specification for the price of risk leads to an analytically tractable almost affine term structure model that can explain the stylized facts. In a decomposition of long-term bond returns we find that the expectations component from the level factor is more volatile than the returns themselves. It therefore takes a volatile risk premium that is negatively correlated with innovations in the level factor to explain the volatility of long-term bond returns. The model also implies that excess bond returns do not exhibit mean reversion, consistent with the empirical evidence.
    Keywords: term structure of interest rates, fractional integration, affine models.
    JEL: C58 G12 C32
    Date: 2012–08–03
  6. By: Laura Jaramillo; Anke Weber
    Abstract: While many studies have looked into the determinants of yields on externally issued sovereign bonds of emerging economies, analysis of domestically issued bonds has hitherto been limited, despite their growing relevance. This paper finds that the extent to which fiscal variables affect domestic bond yields in emerging economies depends on the level of global risk aversion. During tranquil times in global markets, fiscal variables do not seem to be a significant determinant of domestic bond yields in emerging economies. However, when market participants are on edge, they pay greater attention to country-specific fiscal fundamentals, revealing greater alertness about default risk.
    Date: 2012–08–02
  7. By: Jochen R. Andritzky
    Abstract: This paper introduces a new dataset on the composition of the investor base for government securities in the G20 advanced economies and the euro area. During the last decades, investors from abroad have increased their presence in government bond markets. The financial crisis broke this trend. Domestic financial institutions allocated a larger share of government securities in their portfolios, as Japan has done since its crisis in the 1990s. Increases in the share held by institutional investors or non-residents by 10 percentage points are associated with a reduction in yields by about 25 or 40 basis points, respectively. The data show a varied lead-lag relationship between bond yields and investor holdings. Portfolio balance estimates suggest that a change in statutory or regulatory holdings of government securities to the tune of 10 percent of the outstanding stock causes expected returns to decline by 7 to 25 basis points.
    Keywords: Bond markets , Developed countries , Euro Area , Group of Twenty , Investment ,
    Date: 2012–06–15
  8. By: Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Wayne Tarrant (Wingate University - Department of Mathematics)
    Abstract: The banking systems that deal with risk management depend on underlying risk measures. Following the recommendation of the Basel II accord, most banks have developed internal models to determine their capital requirement. The Value at Risk measure plays an important role in computing this capital. In this paper we analyze in detail the errors produced by use of this measure. We then discuss other measures, pointing out their strengths and shortcomings. We give detailed examples, showing the need for five risk measures in order to compute a capital in relation to the risk to which the bank is exposed. In the end, we suggest using five different risk measures for computing capital requirements.
    Keywords: Risk measure; Value at Risk; Bank capital; Basel II Accord
    Date: 2012–07–27
  9. By: Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Wayne Tarrant (Wingate University - Department of Mathematics)
    Abstract: Regulation and Risk management in banks depend on underlying risk measures. In general this is the only purpose that is seen for risk measures. In this paper, we suggest that the reporting of risk measures can be used to determine the loss distribution function for a financial entity. We demonstrate that a lack of sufficient information can lead to ambiguous risk situations. We give examples, showing the need for the reporting of multiple risk measures in order to determine a bank's loss distribution. We conclude by suggesting a regulatory requirement of multiple risk measures being reported by banks, giving specific recommendations.
    Keywords: Risk measure; Value at Risk; bank capital; Basel II accord
    Date: 2012–07–27
  10. By: Lönnbark, Carl (Department of Economics, Umeå University)
    Abstract: In the estimation of risk measures such as Value at Risk and Expected shortfall relatively short estimation windows are typically used rendering the estimation error a possibly non-negligible component. In this paper we build upon previous results for the Value at Risk and discuss how the estimation error comes into play for the Expected Shortfall. We identify two important aspects where it may be of importance. On the one hand there is in the evaluation of predictors of the measure. On the other there is in the interpretation and communication of it. We illustrate magnitudes numerically and emphasize the practical importance of the latter aspect in an empirical application with stock market index data.
    Keywords: Backtesting; Delta method; Finance; GARCH; Risk Management
    JEL: C52 C53 C58 G10 G19
    Date: 2012–08–16

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