nep-fmk New Economics Papers
on Financial Markets
Issue of 2012‒09‒30
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Financial Globalization and the Rise of IPOs outside the U.S. By Doidge, Craig; Karolyi, George Andrew; Stulz, Rene M.
  2. Federal Reserve liquidity provision during the financial crisis of 2007-2009 By Michael J. Fleming
  3. Does the IMF´s official support affect sovereign bond maturities? By Aitor Erce
  4. An Intertemporal CAPM with Stochastic Volatility By John Y. Campbell; Stefano Giglio; Christopher Polk; Robert Turley
  5. Stock Price Dynamics and Option Valuations under Volatility Feedback Effect By Juho Kanniainen; Robert Pich\'e
  6. Hierarchical structure of stock price fluctuations in financial markets By Ya-Chun Gao; Shi-Min Cai; Bing-Hong Wang
  7. Intraday Liquidity Patterns in Indian Stock Market By R. Krishnan; Vinod Mishra

  1. By: Doidge, Craig (University of Toronto); Karolyi, George Andrew (Cornell University); Stulz, Rene M. (OH State University and European Corporate Governance Institute)
    Abstract: During the past two decades, the fraction of the world's initial public offerings (IPOs) accounted for by U.S. firms has fallen sharply. This decrease is attributed to higher IPO activity outside the U.S. and lower IPO activity in the U.S. We show that financial globalization has played a major role in the growth of IPOs outside the U.S. Historically, a country's IPO activity was strongly related to the quality of its institutions and better institutions helped explain the higher IPO activity in the U.S. compared to other countries. However, greater financial globalization has been associated with a reduction in the importance of institutions as determinants of a country's IPO activity. A large part of the increase in IPO activity outside the U.S. occurred through global IPOs, IPOs in which some of the proceeds are raised outside the firm's home country. Financial globalization has enabled firms from countries with poorer institutions to make use of global IPOs and they have done so more than firms from other countries. The evidence is consistent with the view that access to global markets and, more generally, financial globalization helps firms overcome the obstacles of poor institutions.
    JEL: F30 G30
    Date: 2012–07
  2. By: Michael J. Fleming
    Abstract: This paper examines the Federal Reserve's unprecedented liquidity provision during the financial crisis of 2007-2009. It first reviews how the Fed provides liquidity in normal times. It then explains how the Fed's new and expanded liquidity facilities were intended to enable the central bank to fulfill its traditional lender-of-last-resort role during the crisis while mitigating stigma, broadening the set of institutions with access to liquidity, and increasing the flexibility with which institutions could tap such liquidity. The paper then assesses the growing empirical literature on the effectiveness of the facilities and provides insights as to where further research is warranted.
    Keywords: Financial crises ; Bank liquidity ; Troubled Asset Relief Program ; Liquidity (Economics) ; Lenders of last resort
    Date: 2012
  3. By: Aitor Erce (Banco de España)
    Abstract: This paper looks at whether the tendency of some governments to borrow short term is reinforced by financial support from the International Monetary Fund. I first present a model of sovereign debt issuance at various maturities featuring endogenous liquidity crises and maturity mismatches due to financial underdevelopment. I use the model to analyse the impact of IMF lending during debt crises on the sovereign’s optimal maturity structure. Within the model, although IMF assistance is able to catalyse private flows, this provides incentives for government to issue larger amounts of short-term debt, making the roll-over problem larger. I take the model to the data and find support for the hypothesis that IMF lending leads countries to increase their short-term borrowing. Additionally, I do not find any positive effect of IMF lending on countries’ ability to tap international capital markets. These results helps explain why a catalytic effect of IMF lending has proved empirically elusive
    Keywords: Sovereign debt, maturity, IMF, offi cial support
    JEL: F33 F34 C33
    Date: 2012–09
  4. By: John Y. Campbell; Stefano Giglio; Christopher Polk; Robert Turley
    Abstract: This paper extends the approximate closed-form intertemporal capital asset pricing model of Campbell (1993) to allow for stochastic volatility. The return on the aggregate stock market is modeled as one element of a vector autoregressive (VAR) system, and the volatility of all shocks to the VAR is another element of the system. Our estimates of this VAR reveal novel low-frequency movements in market volatility tied to the default spread. We show that growth stocks underperform value stocks because they hedge two types of deterioration in investment opportunities: declining expected stock returns, and increasing volatility. Volatility hedging is also relevant for pricing risk-sorted portfolios and non-equity assets such as equity index options and corporate bonds.
    JEL: G12 N22
    Date: 2012–09
  5. By: Juho Kanniainen; Robert Pich\'e
    Abstract: According to the volatility feedback effect, an unexpected increase in squared volatility leads to an immediate decline in the price-dividend ratio. In this paper, we consider the properties of stock price dynamics and option valuations under the volatility feedback effect by modeling the joint dynamics of stock price, dividends, and volatility in continuous time. Most importantly, our model predicts the negative effect of an increase in squared return volatility on the value of deep-in-the-money call options and, furthermore, attempts to explain the volatility puzzle. We theoretically demonstrate a mechanism by which the market price of diffusion return risk, or an equity risk-premium, affects option prices and empirically illustrate how to identify that mechanism using forward-looking information on option contracts. Our theoretical and empirical results support the relevance of the volatility feedback effect. Overall, the results indicate that the prevailing practice of ignoring the time-varying dividend yield in option pricing can lead to oversimplification of the stock market dynamics.
    Date: 2012–09
  6. By: Ya-Chun Gao; Shi-Min Cai; Bing-Hong Wang
    Abstract: The financial market and turbulence have been broadly compared on account of the same quantitative methods and several common stylized facts they shared. In this paper, the She-Leveque (SL) hierarchy, proposed to explain the anomalous scaling exponents deviated from Kolmogorov monofractal scaling of the velocity fluctuation in fluid turbulence, is applied to study and quantify the hierarchical structure of stock price fluctuations in financial markets. We therefore observed certain interesting results: (i) The hierarchical structure related to multifractal scaling generally presents in all the stock price fluctuations we investigated. (ii) The quantitatively statistical parameters that describes SL hierarchy are different between developed financial markets and emerging ones, distinctively. (iii) For the high-frequency stock price fluctuation, the hierarchical structure varies with different time period. All these results provide a novelty analogy in turbulence and financial market dynamics and a insight to deeply understand the multifractality in financial markets.
    Date: 2012–09
  7. By: R. Krishnan; Vinod Mishra
    Abstract: This paper attempts to study the liquidity patterns and to detect any commonality across liquidity measures, using one year intraday data from India's National Stock Exchange (NSE). Using the data on 20 stocks from NSE's NIFTY Index, we found that most of the volume and spread related liquidity measures exhibit an intra-day U-shaped pattern, similar to those found for a market consisting of market makers. However, we also note that the presence of U-shaped pattern in both the volume related and spread related measures,implying a concurrent high trading volume and wide spreads. While such a phenomena has been reported previously for a market with a specialist liquidity provider and can be explained using the Brock and Kleidon (1992) model [Journal of Economic Dynamics and Control, 16, 451-489 ], it is for the first time we observe such a behaviour in Indian stock market; an order driven market where there is no market maker. Besides, we find only a weak evidence of co-movement or commonality in liquidity measures. This suggests that market wide factors may not play a significant role in affecting the liquidity of individual stocks, hinting that such factors need not be a part of the asset pricing process.
    Keywords: Liquidity, Intraday data, Commonality, NSE, India
    JEL: G15
    Date: 2012–09

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