nep-fmk New Economics Papers
on Financial Markets
Issue of 2012‒12‒06
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Stock Return and Cash Flow Predictability: The Role of Volatility Risk By Tim Bollerslev; Lai Xu; Hao Zhou
  2. Financial versus Demand shocks in stock price returns of US non-financial firms in the crisis of 2007 By Varvara Isyuk
  3. The Dodd-Frank Act and Basel III : Intentions, Unintended Consequences, and Lessons for Emerging Markets By Viral V. Acharya
  4. Persistence and Cycles in the US Federal Funds Rate By Guglielmo Maria Caporale; Luis A. Gil-Alana
  5. The Federal Reserve, Emerging Markets, and Capital Controls: A High Frequency Empirical Investigation By Sebastian Edwards
  6. Testing the weak-form efficiency of the WTI crude oil futures market By Zhi-Qiang Jiang; Wen-Jie Xie; Wei-Xing Zhou
  7. On the Risk Management with Application of Econophysics Analysis in Central Banks and Financial Institutions By Dimitri O. Ledenyov; Viktor O. Ledenyov
  8. GARCH Option Valuation: Theory and Evidence By Peter Christoffersen; Kris Jacobs; Chayawat Ornthanalai
  9. Optimal hedging in discrete time By Bruno R\'emillard; Sylvain Rubenthaler
  10. Repo and Securities Lending By Tobias Adrian; Brian Begalle; Adam Copeland; Antoine Martin

  1. By: Tim Bollerslev (Duke University, NBER and CREATES); Lai Xu (Duke University); Hao Zhou (Federal Reserve Board)
    Abstract: We examine the joint predictability of return and cash flow within a present value framework, by imposing the implications from a long-run risk model that allow for both time-varying volatility and volatility uncertainty. We provide new evidence that the expected return variation and the variance risk premium positively forecast both short-horizon returns and dividend growth rates. We also confirm that dividend yield positively forecasts long-horizon returns, but that it cannot forecast dividend growth rates. Our equilibrium-based “structural” factor GARCH model permits much more accurate inference than the reduced form VAR and univariate regression procedures traditionally employed in the literature. The model also allows for the direct estimation of the underlying economic mechanisms, including a new volatility leverage effect, the persistence of the latent long-run growth component and the two latent volatility factors, as well as the contemporaneous impacts of the underlying “structural” shocks.
    Keywords: Return and dividend growth predictability, variance risk premium, expected variation, long-run risk, equilibrium pricing, stochastic volatility and uncertainty, reduced form VAR, “structural” factor GARCH
    JEL: G12 G13 C12 C13
    Date: 2012–11–16
    URL: http://d.repec.org/n?u=RePEc:aah:create:2012-51&r=fmk
  2. By: Varvara Isyuk (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne)
    Abstract: In the aftermath of the recent bank-centered financial crisis it is still unclear how much of the decline in non-financial firms' stock prices was due to liquidity shortage, and how much of this decline was due to lower expected consumer demand. The stock returns are examined over nine periods between July 31, 2007 and March 31, 2010. The near-collapse of Bear Stearns and the failure of Lehman Brothers can be both characterised as liquidity shocks that had a greater impact on financially fragile non-financial firms. It was mostly improvement in demand expectations that positively affected the performance of US non-financial firms in the first months of recovery. In the later periods, however, neither amelioration in demand expectations nor improvement of financial conditions can explain the performance of US non-financial firms.
    Keywords: Stock price returns; financial constraints; liquidity shortage; shock on demand expectations.
    Date: 2012–05
    URL: http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00755562&r=fmk
  3. By: Viral V. Acharya (Asian Development Bank Institute (ADBI))
    Abstract: This paper is an attempt to explain the changes to finance sector reforms under the Dodd-Frank Act in the United States and Basel III requirements globally; their unintended consequences; and lessons for currently fast-growing emerging markets concerning finance sector reforms, government involvement in the finance sector, possible macroprudential safeguards against spillover risks from the global economy, and, finally, management of government debt and fiscal conditions. The paper starts with a summary of reforms under the Dodd-Frank Act and highlights four of its primary shortcomings. It then focuses on the new capital and liquidity requirements under Basel III reforms, arguing that, like its predecessors, Basel III is fundamentally flawed as a way of designing macroprudential regulation of the finance sector. In contrast, the Dodd-Frank Act has several redeeming features, including requirements of stress-test-based macroprudential regulation and explicit investigation of systemic risk in designating some financial firms as systemically important. It argues that India should resist the call for blind adherence to Basel III and persist with its (Reserve Bank of India) asset-level leverage restrictions and dynamic sector risk-weight adjustment approach. It concludes with some important lessons for regulation of the finance sector in emerging markets based on the global financial crisis and proposed reforms that have followed in the aftermath.
    Keywords: The Dodd-Frank Act, Basel III, Emerging Markets, spillover risks, Macroprudential regulation, global financial crisis
    JEL: G2 G21 G28
    Date: 2012–10
    URL: http://d.repec.org/n?u=RePEc:eab:govern:23352&r=fmk
  4. By: Guglielmo Maria Caporale; Luis A. Gil-Alana
    Abstract: This paper uses long-range dependence techniques to analyse two important features of the US Federal Funds effective rate, namely its persistence and cyclical behaviour. It examines annual, monthly, bi-weekly and weekly data, from 1954 until 2010. Two models are considered. One is based on an I(d) specification with AR(2) disturbances and the other on two fractional differencing structures, one at the zero and the other at a cyclical frequency. Thus, the two approaches differ in the way the cyclical component of the process is modelled. In both cases we obtain evidence of long memory and fractional integration. The in-sample goodness-of-fit analysis supports the second specification in the majority of cases. An out-of-sample forecasting experiment also suggests that the long-memory model with two fractional differencing parameters is the most adequate one, especially over long horizons.
    Keywords: Federal Funds rate, persistence, cyclical behaviour, fractional integration
    JEL: C32 E43
    Date: 2012
    URL: http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1255&r=fmk
  5. By: Sebastian Edwards
    Abstract: In this paper I use weekly data from seven emerging nations – four in Latin America and three in Asia – to investigate the extent to which changes in Fed policy interest rates have been transmitted into domestic short term interest rates during the 2000s. The results suggest that there is indeed an interest rates “pass through” from the Fed to emerging markets. However, the extent of transmission of interest rate shocks is different – in terms of impact, steady state effect, and dynamics – in Latin America and Asia. The results also indicate that capital controls are not an effective tool for isolating emerging countries from global interest rate disturbances. Changes in the slope of the U.S. yield curve, including changes generated by a “twist” policy, affect domestic interest rates in emerging countries. I also provide a detailed case study for Chile.
    JEL: F30 F32
    Date: 2012–11
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:18557&r=fmk
  6. By: Zhi-Qiang Jiang (ECUST); Wen-Jie Xie (ECUST); Wei-Xing Zhou (ECUST)
    Abstract: We perform detrending moving average analysis (DMA) and detrended fluctuation analysis (DFA) of the WTI crude oil futures prices (1983-2012) to investigate its efficiency. We further put forward a strict statistical test in the spirit of bootstrapping to verify the weak-form market efficiency hypothesis by employing the DMA (or DFA) exponent as the statistic. We verify the weak-form efficiency of the crude oil futures market when the whole period is considered. When we break the whole series into three sub-series separated by the outbreaks of the Gulf War and the Iraq War, our statistical tests uncover that only the Gulf War has the impact of reducing the efficiency of the crude oil market. If we split the whole time series into two sub-series based on the signing date of the North American Free Trade Agreement, we find that the market is inefficient in the sub-periods during which the Gulf War broke out. We also perform the same analysis on short time series in moving windows and find that the market is inefficient only when some turbulent events occur, such as the oil price crash in 1985, the Gulf war, and the oil price crash in 2008. Our analysis may offer a new understanding of the efficiency of the crude oil futures market and shed new lights on the investigation of the efficiency in other financial markets.
    Date: 2012–11
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1211.4686&r=fmk
  7. By: Dimitri O. Ledenyov; Viktor O. Ledenyov
    Abstract: The purpose of this research article is to discover how the econophysics analysis can complement the econometrics models in application to the risk management in the central banks and financial institutions, operating within the nonlinear dynamical financial system. We consider the modern risk management models and show the appropriate techniques to calculate the various existing risks in the finances. We make a few comments on the possible limitations in the models of statistical modeling of volatility such as the Autoregressive Conditional Heteroskedasticity (GARCH) model, because of the nonlinearities appearance in the nonlinear dynamical financial systems. We propose that the various types of nonlinearities, which can originate in the financial and economical systems, have to be taken to the detailed consideration during the Cost of Capital calculation in the finances and economics. We propose the new theory of nonlinear dynamic volatilities and the new nonlinear dynamic chaos (NDC) volatility model for the statistical modeling of financial volatility with the aim to determine the Value at Risk.
    Date: 2012–11
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1211.4108&r=fmk
  8. By: Peter Christoffersen (University of Toronto - Rotman School of Management and CREATES); Kris Jacobs (University of Houston and Tilburg University); Chayawat Ornthanalai (Georgia Institute of Technology)
    Abstract: We survey the theory and empirical evidence on GARCH option valuation models. Our treatment includes the range of functional forms available for the volatility dynamic, multifactor models, nonnormal shock distributions as well as style of pricing kernels typically used. Various strategies for empirical implementation are laid out and we also discuss the links between GARCH and stochastic volatility models. In the appendix we provide Matlab computer code for option pricing via Monte Carlo simulation for nonaffine models as well as Fourier inversion for affine models.
    Keywords: GARCH, option valuation.
    JEL: G13
    Date: 2012–05–08
    URL: http://d.repec.org/n?u=RePEc:aah:create:2012-50&r=fmk
  9. By: Bruno R\'emillard (GERAD); Sylvain Rubenthaler (JAD)
    Abstract: Building on the work of Schweizer (1995) and Cern and Kallseny (2007), we present discrete time formulas minimizing the mean square hedging error for multidimensional assets. In particular, we give explicit formulas when a regime-switching random walk or a GARCH-type process is utilized to model the returns. Monte Carlo simulations are used to compare the optimal and delta hedging methods.
    Date: 2012–11
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1211.5035&r=fmk
  10. By: Tobias Adrian; Brian Begalle; Adam Copeland; Antoine Martin
    Abstract: We provide an overview of the data required to monitor repo and securities lending markets for the purposes of informing policymakers and researchers about firm-level and systemic risk. We start by explaining the functioning of these markets and argue that it is crucial to understand the institutional arrangements. Data collection is currently incomplete. A comprehensive collection would include, at a minimum, six characteristics of repo and securities lending trades at the firm level: principal amount, interest rate, collateral type, haircut, tenor, and counterparty.
    JEL: G18 G23 G28 G38
    Date: 2012–11
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:18549&r=fmk

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