New Economics Papers
on Financial Markets
Issue of 2012‒10‒13
six papers chosen by

  1. Spillover Effects of the U.S. Financial Crisis on Financial Markets in Emerging Asian Countries By Bong-Han Kim; Hyeongwoo Kim; Bong-Soo Lee
  2. Anticipating Long-Term Stock Market Volatility By Conrad, Christian; Loch, Karin
  3. Emerging Stock Premia: Do Industries Matter? By Marcella Lucchetta; Michael Donadelli
  4. Fixed income strategies for trading and for asset management By Tinschert, Jonas; Cremers, Heinz
  5. A note on forecasting emerging market exchange rates: Evidence of anti-herding By Pierdzioch, Christian; Rülke, Jan-Christoph; Stadtmann, Georg
  6. An Evolutionary CAPM Under Heterogeneous Beliefs By Carl Chiarella; Roberto Dieci; Xue-Zhong He; Kai Li

  1. By: Bong-Han Kim; Hyeongwoo Kim; Bong-Soo Lee
    Abstract: We examine spillover effects of the recent U.S. financial crisis on five emerging Asian countries by estimating conditional correlations of financial asset returns across countries using multivariate GARCH models. We propose a novel approach that simultaneously estimates the conditional correlation coefficient and the effects of its determining factors over time, which can be used to identify the channels of spillovers. We find some evidence of financial contagion around the collapse of Lehman Brothers in September 2008. We further find a dominant role of foreign investment for the conditional correlations in international equity markets. The dollar Libor-OIS spread, the sovereign CDS premium, and foreign investment are found to be significant factors affecting foreign exchange markets.
    Keywords: Financial Crisis; Spillover Effects; Contagion; Emerging Asian Countries; Dynamic Conditional Correlation; DCCX-MGARCH
    JEL: C32 F31 G15
    Date: 2012–10
  2. By: Conrad, Christian; Loch, Karin
    Abstract: We investigate the relationship between long-term U.S. stock market risks and the macroeconomic environment using a two component GARCH-MIDAS model. Our results provide strong evidence in favor of counter-cyclical behavior of long-term stock market volatility. Among the various macro variables in our dataset the term spread, housing starts, corporate profits and the unemployment rate have the highest predictive ability for stock market volatility . While the term spread and housing starts are leading variables with respect to stock market volatility, for corporate profits and the unemployment rate expectations data from the Survey of Professional Forecasters regarding the future development are most informative. Our results suggest that macro variables carry information on stock market risk beyond that contained in lagged realized volatilities, in particular when it comes to long-term forecasting.
    Keywords: Volatility Components; MIDAS; Survey Data; Macro Finance Link
    JEL: C53 C58
    Date: 2012–10–05
  3. By: Marcella Lucchetta (Department of Economics, University Of Venice Cà Foscari); Michael Donadelli (Department of Economics and Finance, LUISS Guido Carli)
    Abstract: This paper studies the dynamics of emerging excess returns in a industry-by-industry context. Differently from the recent financial literature, which mainly focuses on “total market indexes”, we perform a standard ex-post empirical analysis aimed at capturing the industries’ contribution to country stock performances. We obtain three key empirical findings. First, at industry level, we confirm the “high performance-high volatile nature” as well as the time-varying component of emerging excess returns. Second, at country level and in a dynamic context, we detect those industries that mainly contribute to the presence of emerging stock premia. Third, we show that some industries are much more exposed to global factors than others. We argue that these results display relevant implications for portfolio diversification and reflect consumption smoothing motive
    Keywords: Industry Excess Returns, Emerging Stock Premia, Time-Varying Performances
    JEL: D82 F36 F44 G11 G15
    Date: 2012
  4. By: Tinschert, Jonas; Cremers, Heinz
    Abstract: Trading and investment strategies play an essential part in better understanding fixed income markets. Over-the-counter markets and thousands of different outstanding bonds increase the difficulties to identify adequate comparison methods. Market participants and their practices differ widely depending on intentions and are often based on non-uniform decision-making figures. This working paper deals with the differing intentions of traders, treasurers and portfolio managers within fixed-income markets. The definition and implementation of exact pricing tools is a crucial undertaking for traders. Even small changes can lead to large differences in present value calculations and therefore cause mispricings. For traders, bonds are hedged against the benchmark, swapped or hold outright in their trading book. Different spread calculations against swap or benchmark are used to calculate an accurate price level. Interpolation is an essential tool to do this. For treasurers, the asset swap spread acts as the major tool to make investment decisions and after the bonds are purchased, an asset swap hedge will protect the position against yield changes. Portfolio managers are mainly seeking for duration that fits into the portfolio and the bonds are often let outright in the investment portfolio. Hedging tools are used to protect the portfolio against losses and to log in the desired key duration. The working paper examines several key points for diverse market actors and will give an overview through the fixed income market. --
    Keywords: Svensson,Nelson / Siegel,cubic spline,yield curve,hermite interpolation,zero curve,credit curve,steepener,flattener,barbell,credit basis,bullet,asset swap spread,Z-Spread,duration,BPV,basis point value,credit risk,convexity,credit trading,carry
    JEL: C52 G12 G13 G15 L9
    Date: 2012
  5. By: Pierdzioch, Christian; Rülke, Jan-Christoph; Stadtmann, Georg
    Abstract: Using survey forecasts of a large number of Asian, European, and South American emerging market exchange rates, we studied empirically whether evidence of herding or antiherding behavior of exchange-rate forecasters can be detected in the cross-section of forecasts. Emerging market exchange-rate forecasts are consistent with herding (anti-herding) if forecasts are biased towards (away from) the consensus forecast. Our empirical findings provide strong evidence of anti-herding of emerging market exchange-rate forecasters. --
    JEL: F31 D84 C33
    Date: 2012
  6. By: Carl Chiarella (Finance Discipline Group, UTS Business School, University of Technology, Sydney); Roberto Dieci (Department of Mathematics, University of Bologna); Xue-Zhong He (Finance Discipline Group, UTS Business School, University of Technology, Sydney); Kai Li (Finance Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: Heterogeneity and evolutionary behaviour of investors are two of the most important characteristics of financial markets. This papers incorporates the adaptive behaviour of agents with heterogeneous beliefs and establishes an evolutionary capital asset pricing model (ECAPM) within the mean-variance framework. We show that the rational behaviour of agents switching to better performing trading strategies can cause large deviations of the market price from the fundamental value of one asset to spill over to other assets. Also, this spill-over effect is associated with high trading volumes and persistent volatility characterized by significantly decaying autocorrelations of, and positive correlation between, price volatility and trading volume.
    Keywords: evolutionary CAPM; heterogeneous beliefs; market stability; spill-over effects; volatility; trading volume
    JEL: D84 G12
    Date: 2012–10–01

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.