New Economics Papers
on Financial Markets
Issue of 2012‒11‒03
seven papers chosen by

  1. The Volatility-Return Relationship: Insights from Linear and Non-Linear Quantile Regressions By D.E. Allen; Abhay K Singh; R. Powell; Michael McAleer; James Taylor; Lyn Thomas
  2. Can we evaluate the predictability of financial markets?. By Ruiz, Esther; Crato, Nuria
  3. High Frequency Market Making By Rene Carmona; Kevin Webster
  4. Using Shapley’s asymmetric power index to measure banks’ contributions to systemic risk By Garratt, Rodney; Webber, Lewis; Willison, Matthew
  5. Private Equity Portfolio Company Performance During The Global Recession By M. WRIGHT; D. S. SIEGEL; L. SCHOLES
  6. Tax-Subsidized Underpricing: Issuers and Underwriters in the Market for Build America Bonds By Cestau, Dario; Green, Richard; Schürhoff, Norman
  7. Taking firms to the stock market: IPOs and the importance of large banks in Imperial Germany 1896 - 1913 By Lehmann, Sibylle H.

  1. By: D.E. Allen (School of Accounting Finance and Economics Edith Cowan University Joondalup Drive Joondalup Western Australia 6027); Abhay K Singh (School of Accouting Finance & Economics, Edith Cowan University, Australia); R. Powell (School of Accounting Finance and Economics Edith Cowan University Joondalup Drive Joondalup Western Australia 6027); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam.); James Taylor (Said Business School, University of Oxford, Oxford); Lyn Thomas (Southampton Management School, University of Southampton, Southampton)
    Abstract: This paper examines the asymmetric relationship between price and implied volatility and the associated extreme quantile dependence using a linear and non- linear quantile regression approach. Our goal is to demonstrate that the relationship between the volatility and market return, as quantied by Ordinary Least Square (OLS) regression, is not uniform across the distribution of the volatility-price re- turn pairs using quantile regressions. We examine the bivariate relationships of six volatility-return pairs, namely: CBOE VIX and S&P 500, FTSE 100 Volatility and FTSE 100, NASDAQ 100 Volatility (VXN) and NASDAQ, DAX Volatility (VDAX) and DAX 30, CAC Volatility (VCAC) and CAC 40, and STOXX Volatility (VS- TOXX) and STOXX. The assumption of a normal distribution in the return series is not appropriate when the distribution is skewed, and hence OLS may not capture a complete picture of the relationship. Quantile regression, on the other hand, can be set up with various loss functions, both parametric and non-parametric (linear case) and can be evaluated with skewed marginal-based copulas (for the non-linear case), which is helpful in evaluating the non-normal and non-linear nature of the relationship between price and volatility. In the empirical analysis we compare the results from linear quantile regression (LQR) and copula based non-linear quantile regression known as copula quantile regression (CQR). The discussion of the properties of the volatility series and empirical ndings in this paper have signicance for portfolio optimization, hedging strategies, trading strategies and risk management, in general.
    Keywords: Return Volatility relationship, quantile regression, copula, copula quantile regression, volatility index, tail dependence.
    JEL: C14 C58 G11
    Date: 2012–10
  2. By: Ruiz, Esther; Crato, Nuria
    Abstract: In the summer of 2007, the International Institute of Forecasters (IIF) asked us to organize a workshop on ‘‘Predictability of Financial Markets’’, which took place on the 16th and 17th of January, 2009, in the beautiful, historical building of the Institute of Economics and Management (ISEG) in Lisbon. Nine outstanding invited speakers presented papers in the area of time series analysis of financial data, which were then discussed by nine other experts. This special issue provides peerreviewed, corrected and updated versions of seven of these papers, with additional comments by the discussants. Sadly, the paper by the Nobel Laureate Sir Clive Granger could not be finished, as he passed away in May 2009. We will always have the memories of his talk, which has been commented on here by Antonio García-Ferrer. In addition, the paper by Stephen Taylor entitled ‘‘A multi-horizon comparison on density forecasts for the S&P 500 index returns and option prices’’ was unfortunately not made available for this special issue.
    Keywords: Financial markets;
    Date: 2012
  3. By: Rene Carmona; Kevin Webster
    Abstract: Since they were authorized by the U.S. Security and Exchange Commission in 1998, electronic exchanges have boomed, and by 2010 high frequency trading accounted for over 70% of equity trades in the US. Such markets are thought to increase liquidity because of the presence of market makers, who are willing to trade as counterparties at any time, in exchange for a fee, the bid-ask spread. In this paper, we propose an equilibrium model showing how such market makers provide liquidity. The model relies on a codebook for client trades, the implied alpha. After solving the individual clients optimization problems and identifying their implied alphas, we frame the market maker stochastic optimization problem as a stochastic control problem with an infinite dimensional control variable. Assuming either identical time horizons for all the clients, or a stochastic partial differential equation model for their beliefs, we solve the market maker problem and derive tractable formulas for the optimal strategy and the resulting limit-order book dynamics.
    Date: 2012–10
  4. By: Garratt, Rodney (University of California, Santa Barbara); Webber, Lewis (Bank of England); Willison, Matthew (Bank of England)
    Abstract: An individual bank can put the whole banking system at risk if its losses in response to shocks push losses for the system as a whole above a critical threshold. We determine the contribution of banks to this systemic risk using a generalisation of the Shapley value; a concept originating in co-operative game theory. An important feature of this approach is that the order in which banks fail in response to a shock depends on the composition of the banks’ asset portfolios and capital buffers. We show how these factors affect banks’ contributions to systemic risk, and the extent to which these contributions depend on the level of the critical threshold.
    Keywords: Shapley value; systemic risk; bank regulation
    JEL: C71 G01 G21 G28
    Date: 2012–10–26
    Abstract: We assess the recent economic and financial performance of U.K. private equity (PE) backed buyouts. Our empirical evidence, which is based on thousands of transactions, reveals that PE-backed buyouts achieved superior economic and financial performance in the period before and during the recent global recession, relative to comparable firms that did not experience such transactions. Our regression results imply positive differentials of 5-15% in productivity and approximately 3-5% in profitability for buyout firms, relative to non-buyout firms. Another key finding is that revenue and employment growth for PE- backed firms were positive during the sample period.
    Keywords: management buyouts; private equity; total factor productivity; employment; financial performance
    JEL: G34 G32
    Date: 2012–06
  6. By: Cestau, Dario; Green, Richard; Schürhoff, Norman
    Abstract: Build America Bonds (BABs) were issued by states and municipalities for twenty months as an alternative to tax-exempt bonds. The program was part of the 2009 fiscal stimulus package. The bonds are taxable to the holder, but the federal Treasury rebates 35% of the coupon payment to the issuer. The stated purpose of the program was to provide municipal issuers with access to a more liquid market by making them attractive to foreign, tax-exempt, and tax-deferred investors. We evaluate one aspect of the liquidity of the bonds---the underpricing when the bonds are issued. We show that the structure of the rebate creates additional incentives to underprice the bonds when they are issued, and that the underpricing is larger for BABs than for traditional municipals, controlling for characteristics such as size of the issue or the trade. This suggests that the bonds are not more liquid, contrary to the stated purpose of the program, or that issuers and underwriters are strategically underpricing the bonds to increase the tax subsidy, or both. Several findings point to strategic underpricing. There is a negative correlation between the underwriter's spread and the underpricing. The underpricing for BABs is quite evident for institutional and interdealer trades, while that for tax-exempts is primarily for smaller sales to customers. Counterfactuals for our estimated structural model also suggest strategic underpricing.
    Keywords: Build America bonds; financial intermediation; incentive conflicts; municipal finance; underpricing
    JEL: E44 E63 G23 H74
    Date: 2012–10
  7. By: Lehmann, Sibylle H.
    Abstract: Large universal banks played a major role for Germany's industrialisation because they provided loans to the industry and thereby helped firms to overcome liquidity constraints. Previous research has also argued that they were equally important on the German stock market. The present paper provides quantitative and qualitative evidence that although the market for underwriters was dominated by a small oligopoly of six large banks, there was still perceptible competition, which kept fees and short run profits low. Another interesting finding of the paper is the absence of a signalling effect to investors. Neither underpricing nor the one year performance was different for the IPOs issued by one of the Big Six. Thus, although the German IPO business was in the hands of a small oligopoly, investors did not benefit from the lack of competition. One explanation is that the quality of IPOs on the German stock market of the time was very good in general caused by the competition between underwriters, but also by the tight regulation of underwriting, which ensured the quality of all firms on the German stock market. --
    Keywords: Financial History,Universal Banks,IPOs
    JEL: G21 G24 N23
    Date: 2012

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