nep-fmk New Economics Papers
on Financial Markets
Issue of 2012‒10‒20
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Federal Reserve's balance sheet and overnight interest rates By Jaime Marquez; Ari Morse; Bernd Schlusche
  2. Asymmetry with respect to the memory in stock market volatilities By Lönnbark, Carl
  3. Occurrence of long and short term asymmetry in stock market volatilities By Lönnbark, Carl
  4. Stock returns and implied volatility: A new VAR approach By Lee, Bong Soo; Ryu, Doojin
  5. Equity trading and the allocation of market data revenue By Cecilia Caglio; Stewart Mayhew
  6. Contagion in CDS, Banking and Equity Markets. By Rodrigo César de Castro Miranda; Benjamin Miranda Tabak; Mauricio Medeiros Junior
  7. Market microstructure, bank's behaviour and interbank spreads By Gabbi, G.; Germano, G.; Hatzopoulos, V.; Iori, G.; Politi, M.
  8. Who Ran on Repo? By Gary B. Gorton; Andrew Metrick
  9. Hedge fund dynamic market sensitivity By Jiaqi Chen; Michael L. Tindall

  1. By: Jaime Marquez; Ari Morse; Bernd Schlusche
    Abstract: This paper provides a comprehensive study of the interplay between the Federal Reserve's balance sheet and overnight interest rates. We model both the supply of and the demand for excess reserves, treating assets of the Federal Reserve as policy tools, and estimate the effects of conventional and unconventional monetary policy on overnight funding rates. We find that, in the current environment with quite elevated levels of reserves, the effect of further monetary policy accommodation on overnight interest rates is limited. Further, assuming a path for removing monetary policy accommodation that is consistent with the FOMC's exit principles, we project that the federal funds rate increases to 70 basis points, settling in a corridor bracketed by the discount rate and the interest rate on excess reserves, as excess reserves of depository institutions decline to near zero.
    Date: 2012
  2. By: Lönnbark, Carl (Department of Economics, Umeå University)
    Abstract: The empirically most relevant stylized facts when it comes to modeling time varying financial volatility are the asymmetric response to return shocks and the long memory property. Up till now, these have largely been modeled in isolation though. To more flexibly capture asymmetry also with respect to the memory structure we introduce a new model and apply it to stock market index data. We find that, although the effect on volatility of negative return shocks is higher than for positive ones, the latter are more persistent and relatively quickly dominate negative ones.
    Keywords: Financial econometrics; GARCH; news impact; nonlinear; risk prediction; time series
    JEL: C12 C51 C58 G10 G15
    Date: 2012–10–03
  3. By: Lönnbark, Carl (Department of Economics, Umeå University)
    Abstract: We introduce the notions of short and long term asymmetric effects in volatilities. With short term asymmetry we mean the conventional one, i.e. the asymmetric response of current volatility to the most recent return shocks. However, there may be asymmetries in the way the effect of past return shocks propagate over time as well. We refer to this as long term asymmetry. We propose a model that enables the study of such a feature. In an empirical application using stock market index data we found evidence of the joint presence of short and long term asymmetric effects.
    Keywords: Financial econometrics; GARCH; memory; nonlinear; risk prediction; time series
    JEL: C22 C51 C58 G15 G17
    Date: 2012–10–03
  4. By: Lee, Bong Soo; Ryu, Doojin
    Abstract: This study re-examines the return-volatility relationship and dynamics under a new VAR framework. By analyzing two model-free implied volatility indices - VIX (the U.S.) and VKOSPI (Korea) - and their corresponding stock market indices, we found an asymmetric volatility phenomenon in both developed and emerging markets. However, the VKOSPI, a recently published implied volatility index, shows impulse response dynamics that are clearly distinct from those for the VIX, an implied volatility index for the developed market. --
    Keywords: asymmetric volatility,vector autoregression,VIX,VKOSPI
    JEL: G10 G15
    Date: 2012
  5. By: Cecilia Caglio; Stewart Mayhew
    Abstract: Revenues generated from the sales of consolidated data represent a substantial source of income for U.S. stock exchanges. Until 2007, consolidated data revenue was allocated in proportion to the number of reported trades. This allocation rule encouraged market participants to break up large trades and execute them in multiple pieces. Exchanges devised revenue-sharing and rebate programs that rewarded order-flow providers, and encouraged algorithmic traders to execute strategies involving large numbers of small trades. We provide evidence that data revenue allocation influenced the trading process, by examining trading activity surrounding various events that changed the marginal data revenue per trade.
    Date: 2012
  6. By: Rodrigo César de Castro Miranda; Benjamin Miranda Tabak; Mauricio Medeiros Junior
    Abstract: We developed an endogenous testing strategy for finding contagion within stock markets indices, Credit Default Swaps spreads and banking sector indices. We present evidence of strong contagion in specific cases and markets and show an analysis of contagion to Brazil. Our results are important for the development of macroprudential policies.
    Date: 2012–10
  7. By: Gabbi, G.; Germano, G.; Hatzopoulos, V.; Iori, G.; Politi, M.
    Abstract: We present an empirical analysis of the European electronic interbank market of overnight lending (e-MID) during the years 1999–2009. The main goal of the paper is to explain the observed changes of the cross-sectional dispersion of lending/borrowing conditions before, during and after the 2007–2008 subprime crisis. Unlike previous contributions, that focused on banks’ dependent and macro information as explanatory variables, we address the role of banks’ behaviour and market microstructure as determinants of the credit spreads.
    Keywords: interbank lending; market microstructure; subprime crisis; credit spreads; liquidity management
    Date: 2012
  8. By: Gary B. Gorton; Andrew Metrick
    Abstract: The sale and repurchase (repo) market played a central role in the recent financial crisis. From the second quarter of 2007 to the first quarter of 2009, net repo financing provided to U.S. banks and broker-dealers fell by about $1.3 trillion – more than half of its pre-crisis total. Significant details of this “run on repo” remain shrouded, however, because many of the providers of repo finance are lightly regulated or unregulated cash pools. In this paper we supplement the best available official data sources with a unique market survey to provide an updated picture of the dynamics of the repo run. We provide evidence that the run was predominantly driven by the flight of foreign financial institutions, domestic and offshore hedge funds, and other unregulated cash pools. Our analysis highlights the danger of relying exclusively on data from regulated institutions, which would miss the most important parts of the run.
    JEL: G01 G23
    Date: 2012–10
  9. By: Jiaqi Chen; Michael L. Tindall
    Abstract: Many hedge funds attempt to achieve high returns by employing leverage. However, it is difficult to track the degree of leverage used by hedge funds over time because detailed timely information about their positions in asset markets is generally unavailable. This paper discusses how to combine shrinkage variable selection methods with dynamic regression to compute and track hedge fund leverage on a time-varying basis. We argue that our methodology measures leverage as well as hedge fund sensitivity to markets arising from other sources. Our approach employs the lasso variable selection method to select the independent variables in equations of hedge fund excess returns. With the independent variables selected by the lasso method, a state space model generates the parameter estimates dynamically. The hedge fund market sensitivity indicator is the average of the absolute values of the parameters in the excess return equations. Our indicator peaks at the time of the Long Term Capital Management meltdown in 1998 and again at a critical time in the 2008 financial crisis. In the absence of direct information from hedge fund balance sheets, our approach could serve as an important tool for monitoring market sensitivity and financial distress in the hedge fund industry.
    Date: 2012

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