nep-fmk New Economics Papers
on Financial Markets
Issue of 2012‒09‒09
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Rethinking stock market integration: Globalization, valuation and convergence By Pui Sun Tam; Pui I Tam; ;
  2. The Financial Market Impact of UK Quantitative Easing By Francis Breedon; Jagjit S. Chadha; Alex Water
  3. A non-parametric and entropy based analysis of the relationship between the VIX and S&P500 By D.E. Allen; A. Kramadibrata; Michael McAleer; R. Powell; A. K. Singh
  4. A model of the euro-area yield curve with discrete policy rates. By Renne, J-P.
  5. Pricing of Variance Swaps under a Credit-Equity Modeling Framework By Matthew Lorig; Rafael Mendoza-Arriaga

  1. By: Pui Sun Tam; Pui I Tam; ;
    Abstract: This paper aims to study the extent of integration among developed and emerg- ing stock markets in the onset of globalization through the formulation of a uni…ed conceptual framework that synthesizes the stock valuation model and the convergence hypothesis. Market integration manifests in the convergence of stock valuation ratios of markets in the long run, where valuation ratios are reflective of stock fundamentals driven by common global factors across markets. The spectrum of transition dynamics of markets towards integration is explored with variants of valuation ratios and di¤er- ent notions of convergence. Results reveal the time-varying nature of the global stock market integration process that is characterized by heterogeneous transition experience of markets at both the total market and disaggregated industrial sector levels.
    Keywords: Convergence, Stock market integration, Valuation ratio
    JEL: F36 G12 G15
    Date: 2012–08
  2. By: Francis Breedon (Queen Mary, University of London); Jagjit S. Chadha (University of Kent and University of Cambridge); Alex Water (University of Kent)
    Abstract: After outlining some of the monetary developments associated with Quantitative Easing (QE), we measure the impact of the UK's initial 2009-10 QE Programme on bonds and other assets. First, we use a macro-finance yield curve both to create a counterfactual path for bond yields and to estimate the impact of QE directly. Second, we analyse the impact of individual QE operations on a range of asset prices. We find that QE significantly lowered government bond yields through the portfolio balance channel - by around 50 or so basis points. We also uncover significant effects of individual operations but limited pass through to other assets.
    Keywords: Term structure of interest rates, Monetary policy, Quantitative Easing
    JEL: E43 E44 E47 E58
    Date: 2012–08
  3. By: D.E. Allen (School of Accounting Finance and Economics Edith Cowan University Joondalup Drive Joondalup Western Australia 6027); A. Kramadibrata (School of Accounting Finance and Economics Edith Cowan University Joondalup Drive Joondalup Western Australia 6027); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam.); R. Powell (School of Accounting Finance and Economics Edith Cowan University Joondalup Drive Joondalup Western Australia 6027); A. K. Singh (School of Accounting Finance and Economics Edith Cowan University Joondalup Drive Joondalup Western Australia 6027)
    Abstract: This paper features an analysis of the relationship between the S&P500 Index and the VIX using daily data obtained from both the CBOE website and SIRCA (The Securities Industry Research Centre of the Asia Pacic). We explore the relationship between the S&P500 daily continuously compounded return series and a similar series for the VIX in terms of a long sample drawn from the CBOE running from 1990 to mid 2011 and a set of returns from SIRCA's TRTH datasets running from March 2005 to-date. We divide this shorter sample, which captures the behaviour of the new VIX, introduced in 2003, into four roughly equivalent sub-samples which permit the exploration of the impact of the Global Financial Crisis. We apply to our data sets a series of non-parametric based tests utilising entropy based metrics. These suggest that the PDFs and CDFs of these two return distributions change shape in various subsample periods. The entropy and MI statistics suggest that the degree of uncertainty attached to these distributions changes through time and using the S&P500 return as the dependent variable, that the amount of information obtained from the VIX also changes with time and reaches a relative maximum in the most recent period from 2011 to 2012. The entropy based non-parametric tests of the equivalence of the two distributions and their symmetry all strongly reject their respective nulls. The results suggest that parametric techniques do not adequately capture the complexities displayed in the behaviour of these series. This has practical implications for hedging utilising derivatives written on the VIX, which will be the focus of a subsequent study.
    Keywords: S&P500, VIX, Entropy, Non-Parametric Estimation, Quantile Regressions.
    Date: 2012–05
  4. By: Renne, J-P.
    Abstract: This paper presents a no-arbitrage model of the yield curve that explicitly incorporates the central-bank policy rate. After having estimated the model using daily euro-area data, I explore the behaviour of risk premia at the short end of the yield curve. These risk premia are neglected by the widely-used practice that consists in backing out market forecasts of future policy-rate moves from money-market forward rates. The results suggest that this practice is valid in terms of sign of the expected target moves, but that it tends to overestimate their size. As an additional contribution, the model is exploited to simulate forward-guidance measures. A credible commitment of the central bank to keep its policy rate unchanged for a given period of time can result in substantial declines in yields. For instance, a central-bank commitment to keep the policy rate at 1% over the next 2 years would imply a decline in the 5-year rate of about 25 basis points.
    Keywords: affine term-structure models; zero lower bound; regime switching; forward policy guidance.
    JEL: E43 E44 E47 E52 G12
    Date: 2012
  5. By: Matthew Lorig; Rafael Mendoza-Arriaga
    Abstract: We compute the value of a variance swap when the underlying is modeled as a Markov process time changed by a L\'{e}vy subordinator. In this framework, the underlying may exhibit jumps with a state-dependent L\'{e}vy measure, local stochastic volatility and have a local stochastic default intensity. Moreover, the L\'{e}vy subordinator that drives the underlying can be obtained directly by observing European call/put prices. To illustrate our general framework, we provide an explicit formula for the value of a variance swap when the diffusion is modeled as (i) a L\'evy subordinated geometric Brownian motion with default and (ii) a L\'evy subordinated Jump-to-default CEV process (see \citet{carr-linetsky-1}). Our results extend the results of \cite{mendoza-carr-linetsky-1}, by allowing for joint valuation of credit and equity derivatives as well as variance swaps.
    Date: 2012–09

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