New Economics Papers
on Financial Markets
Issue of 2012‒10‒06
eight papers chosen by

  1. Benchmarking financial systems around the world By Cihak, Martin; Demirguc-Kunt, Asli; Feyen, Erik; Levine, Ross
  2. Qualitative Easing: How it Works and Why it Matters By Roger E.A. Farmer
  3. The Cross-Section of Stock Returns in Frontier Emerging Markets By Groot, W. de; Pang, J.; Swinkels, L.A.P.
  4. Stock Market Comovements in Central Europe: Evidence from Asymmetric DCC Model By Dritan Gjika; Roman Horváth
  5. How firms use domestic and international corporate bond markets By Gozzi, Juan Carlos; Levine, Ross; Peria, Maria Soledad Martinez; Schmukler, Sergio L.
  6. Speculation, Risk Premia and Expectation in the Yield Curve By Francisco Barillas; Kristoffer Nimark
  7. Efficiency and Bargaining Power in the Interbank Loan Market By Jason Allen; James Chapman; Federico Echenique; Matthew Shum
  8. The Microstructure of Currency Markets By Carol Osler; Xuhang Wang

  1. By: Cihak, Martin; Demirguc-Kunt, Asli; Feyen, Erik; Levine, Ross
    Abstract: This paper introduces the Global Financial Development Database, an extensive dataset of financial system characteristics for 205 economies from 1960 to 2010. The database includes measures of (a) size of financial institutions and markets (financial depth), (b) degree to which individuals can and do use financial services (access), (c) efficiency of financial intermediaries and markets in intermediating resources and facilitating financial transactions (efficiency), and (d) stability of financial institutions and markets (stability). The authors document cross-country differences and time series trends.
    Keywords: Debt Markets,Emerging Markets,Access to Finance,Banks&Banking Reform,Economic Theory&Research
    Date: 2012–08–01
  2. By: Roger E.A. Farmer
    Abstract: This paper is about the effectiveness of qualitative easing; a government policy that is designed to mitigate risk through central bank purchases of privately held risky assets and their replacement by government debt, with a return that is guaranteed by the taxpayer. Policies of this kind have recently been carried out by national central banks, backed by implicit guarantees from national treasuries. I construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where agents are unable to participate in financial markets that open before they are born. I show that a change in the asset composition of the central bank’s balance sheet will change equilibrium asset prices. Further, I prove that a policy in which the central bank stabilizes fluctuations in the stock market is Pareto improving and is costless to implement.
    JEL: E0 E5 E52 E62
    Date: 2012–09
  3. By: Groot, W. de; Pang, J.; Swinkels, L.A.P.
    Abstract: We are the first to investigate the cross-section of stock returns in the new emerging equity markets, the so-called frontier emerging markets. Our unique survivorship-bias free data set consists of more than 1,400 stocks over the period 1997 to 2008 and covers 24 of the most liquid frontier emerging markets. The major benefit of using individual stock characteristics is that it allows us to investigate whether return factors that have been documented in developed countries also exist in these markets. We document the presence of economically and statistically significant value and momentum effects, and a local size effect. Our results indicate that the value and momentum effects still exist when incorporating conservative assumptions of transaction costs. Additionally, we show that value, momentum, and local size returns in frontier markets cannot be explained by global risk factors.
    Keywords: emerging markets;behavioral finance;alpha;value effect;size effect;frontier markets;momentum effects
    Date: 2012–08–01
  4. By: Dritan Gjika (Institute of Economic Studies, Charles University, Prague); Roman Horváth
    Abstract: We examine time-varying stock market comovements in Central Europe employing the asymmetric dynamic conditional correlation multivariate GARCH model. Using daily data from 2001 to 2011, we find that the correlations among stock markets in Central Europe and between Central Europe vis–à–vis the euro area are strong. They increased over time, especially after the EU entry and remained largely at these levels during financial crisis. The stock markets exhibit asymmetry in the conditional variances and in the conditional correlations, to a certain extent, too, pointing to an importance of applying sufficiently flexible econometric framework. The conditional variances and correlations are positively related suggesting that the diversification benefits decrease disproportionally during volatile periods.
    Date: 2012–09
  5. By: Gozzi, Juan Carlos; Levine, Ross; Peria, Maria Soledad Martinez; Schmukler, Sergio L.
    Abstract: This paper provides the first comprehensive documentation of how firms use domestic and international corporate bond markets. Debt issues in domestic and international markets have different characteristics, not explained by differences across firms or countries. International issues tend to be larger, of shorter maturity, denominated in foreign currency, include more fixed rate contracts, and entail lower yields. These patterns remain when analyzing issues by firms from countries with more developed domestic markets and higher financial integration, and even when comparing issues conducted by the same firm in different markets. These findings are consistent with the views that (1) frictions limit the ability of investors and firms to enter into certain contracts in certain markets, (2) domestic and international markets provide distinct financial services and firms use them as complements, and (3) firms with access to domestic and international markets enjoy advantages relative to those that rely solely on domestic markets.
    Keywords: Debt Markets,Emerging Markets,Markets and Market Access,Microfinance,Currencies and Exchange Rates
    Date: 2012–09–01
  6. By: Francisco Barillas; Kristoffer Nimark
    Abstract: An affine asset pricing model in which traders have rational but heterogeneous expectations about future asset prices is developed. We use the framework to analyze the term structure of interest rates and to perform a novel three-way decomposition of bond yields into (i) average expectations about short rates (ii) common risk premia and (iii) a speculative component due to heterogeneous expectations about the resale value of a bond. The speculative term is orthogonal to public information in real time and therefore statistically distinct from common risk premia. Empirically we find that the speculative component is quantitatively important accounting for up to a percentage point of yields, even in the low yield environment of the last decade. Furthermore, allowing for a speculative component in bond yields results in estimates of historical risk premia that are more volatile than suggested by standard Affine Gaussian term structure models which our framework nests.
    Keywords: speculation, risk premia, yield curve
    JEL: G12
    Date: 2012–09
  7. By: Jason Allen; James Chapman; Federico Echenique; Matthew Shum
    Abstract: Using detailed loan transactions-level data we examine the efficiency of an overnight interbank lending market, and the bargaining power of its participants. Our analysis relies on the equilibrium concept of the core, which imposes a set of no-arbitrage conditions on trades in the market. For Canada we show that while the market is fairly efficient, some degree of inefficiency persists throughout our sample. The level of inefficiency matches distinct phases of both the Bank of Canada’s operations as well as phases of the 2007- 2008 financial crisis, where more liquidity intervention implies more inefficiency. We find that bargaining power tilted sharply towards borrowers as the financial crisis progressed, and towards riskier borrowers. This supports a nuanced version of the Too- Big-To-Fail story, whereby participants continued to lend to riskier banks at favorable rates, not because of explicit support to the riskier banks provided by governmental authorities, but rather due to the collective self-interest of these banks.
    Keywords: Financial Institutions; Payment; clearing; and settlement systems
    JEL: C71 G21 G28 E58
    Date: 2012
  8. By: Carol Osler (International Business School, Brandeis University); Xuhang Wang (Graduate student, Brandeis University)
    Abstract: This paper describes the structure and microeconomics of the foreign exchange market. It begins by outlining the major participants and the instruments they trade, highlighting the vast institutional changes that accompanied the emergence of electronic trading since the 1990s. It then discusses how and why order flow drives exchange rates; the economics of liquidity provision; the price discovery process; and volatility.
    Date: 2012–09

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