New Economics Papers
on Financial Markets
Issue of 2012‒09‒16
five papers chosen by

  1. Stock market reaction to fed funds rate surprises: state dependence and the financial crisis By Alexandros Kontonikas; Ronald MacDonald; Aman Saggu
  2. Financial markets and international risk sharing in emerging market economics By Martin Schmitz
  3. Bank Risk during the Financial Crisis: Do business models matter? By Yener Altunbas; Simone Manganelli; David Marques-Ibanez
  4. Emerging Market Sovereign Bond Spreads: Estimation and Back-testing By Fabio Comelli
  5. New Thinking on Corporate Bond Market in India. By Banerji, Sanjay; Gangopadhyay, Krishna; Patnaik, Ila; Shah, Ajay

  1. By: Alexandros Kontonikas; Ronald MacDonald; Aman Saggu
    Abstract: Traditionally, it is assumed that the population size of cities in a country follows a Pareto distribution. This paper examines the impact of Federal Funds rate (FFR) surprises on stock returns in the United States over the period 1989-2009, focusing on the impact of the recent financial crisis. We find that prior to the crisis, stock prices increased as a response to unexpected FFR cuts. State dependence is also identified with stocks exhibiting larger increases when interest rate easing coincided with recessions, bear stock markets, and tightening credit market conditions. However, an important structural shift took place during the financial crisis, which changed the stock market response to FFR shocks, as well as the nature of state dependence. Specifically, during the crisis period stock market participants did not react positively to unexpected FFR cuts. Our results highlight the severity of the recent financial turmoil episode and the ineffectiveness of conventional monetary policy close to the zero lower bound for nominal interest rates.
    Keywords: Monetary Policy; Stock Market; State Dependence; Financial Crisis
    JEL: C32 E44 E52 G01 G14
    Date: 2012–09
  2. By: Martin Schmitz (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany)
    Abstract: In light of rapidly increasing foreign equity liability positions of emerging market economies, we test for a necessary condition of international risk sharing, namely for systematic patterns between idiosyncratic output fluctuations and financial market developments. Panel analysis of 22 emerging market economies shows strong evidence for pro-cyclicality of capital gains on domestic stock markets both over short and medium term horizons. This implies that domestic output fluctuations can be hedged through cross-border ownership of financial markets. JEL Classification: F21, F30, G15
    Keywords: International risk sharing, capital gains, cross-border investment, financial globalisation, emerging market economies
    Date: 2012–07
  3. By: Yener Altunbas (Bangor Business School); Simone Manganelli (European Central Bank); David Marques-Ibanez (European Central Bank)
    Abstract: We exploit the 2007-2009 financial crisis to analyze how risk relates to bank business models. Institutions with higher risk exposure had less capital, larger size, greater reliance on short-term market funding, and aggressive credit growth. Business models related to significantly reduced bank risk were characterized by a strong deposit base and greater income diversification. The effect of business models is non-linear: it has a different impact on riskier banks. Finally, it is difficult to establish in real time whether greater stock market capitalization involves real value creation or the accumulation of latent risk.
    Keywords: bank risk, business models, bank regulation, financial crisis, Basle III
    JEL: G21 G15 E58 G32
    Date: 2012–02
  4. By: Fabio Comelli
    Abstract: We estimate sovereign bond spreads of 28 emerging economies over the period January 1998-December 2011 and test the ability of the model in generating accurate in-sample predictions for emerging economies bond spreads. The impact and significance of country-specific and global explanatory variables on bond spreads varies across regions, as well as economic periods. During crisis times, good macroeconomic fundamentals are helpful in containing bond spreads, but less than in non-crisis times, possibly reflecting the impact of extra-economic forces on bond spreads when a financial crisis occurs. For some emerging economies, in-sample predictions of the monthly changes in bond spreads obtained with rolling regression routines are significantly more accurate than forecasts obtained with a random walk. Rolling regression-based bond spread predictions appear to convey more information than those obtained with a linear prediction method. By contrast, bond spreads forecasts obtained with a linear prediction method are less accurate than those obtained with random guessing.
    Date: 2012–08–28
  5. By: Banerji, Sanjay; Gangopadhyay, Krishna; Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy)
    Date: 2012–09

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