New Economics Papers
on Financial Markets
Issue of 2012‒12‒22
four papers chosen by

  1. Securitization By Gary Gorton; Andrew Metrick
  2. The Puzzle of Index Option Returns By George M. Constantinides; Jens Carsten Jackwerth; Alexi Savov
  3. Oil price density forecasts: Exploring the linkages with stock markets By Francesco Ravazzolo; Marco J. Lombardi
  4. Liquidity shocks, dollar funding costs, and the bank lending channel during the European sovereign crisis By Ricardo Correa; Horacio Sapriza; Andrei Zlate

  1. By: Gary Gorton; Andrew Metrick
    Abstract: We survey the literature on securitization and lay out a research program for its open questions. Securitization is the process by which loans, previously held to maturity on the balance sheets of financial intermediaries, are sold in capital markets. Securitization has grown from a small amount in 1990 to a pre-crisis issuance amount that makes it one of the largest capital markets. In 2005 the amount of non-mortgage asset-backed securities issued in U.S. capital markets exceeded the amount of U.S. corporate debt issued, and these securitized bonds – even those unrelated to subprime mortgages -- were at center of the recent financial crisis. Nevertheless, despite the transformative effect of securitization on financial intermediation, the literature is still relatively small and many fundamental questions remain open.
    JEL: E0 G0 G2
    Date: 2012–12
  2. By: George M. Constantinides (University of Chicago and NBER, USA); Jens Carsten Jackwerth (Department of Economics, University of Konstanz, Germany); Alexi Savov (New York University, USA)
    Abstract: We construct a panel of S&P 500 index call and put option portfolios, daily adjusted to maintain targeted maturity, moneyness, and unit market beta, and test multi-factor pricing models. The standard linear factor methodology is applicable because the monthly portfolio returns have low skewness and are close to normal. We hypothesize that any one of crisis-related factors incorporating price jumps, volatility jumps, and liquidity (along with the market) explains the cross sectional variation in returns. Our hypothesis is not rejected, even when the factor premia are constrained to equal the corresponding premia in the cross-section of equities. The alphas of short maturity out-of-the-money puts become economically and statistically insignificant.
    Keywords: index option mispricing, linear factor pricing, price jumps, volatility jumps, volatility, liquidity, delevered returns
    JEL: G11 G13 G14
    Date: 2012–09–07
  3. By: Francesco Ravazzolo; Marco J. Lombardi
    Abstract: In the recent years several commentators hinted at an increase of the correlation between equity and commodity prices, and blamed investment in commodity-related products for this. First, this paper investigates such claims by looking at various measures of correlation. Next, we assess to what extent correlations between oil and equity prices can be exploited for asset allocation. We develop a time-varying Bayesian Dynamic Conditional Correlation model for volatilities and correlations and find that joint modelling of oil and equity prices produces more accurate point and density forecasts for oil which lead to substantial benefits in portfolio wealth.
    Keywords: Oil price, stock price, density forecasting, correlation, Bayesian DCC
    JEL: C11 C15 C53 E17 G17
    Date: 2012–12
  4. By: Ricardo Correa; Horacio Sapriza; Andrei Zlate
    Abstract: This paper documents a new type of cross-border bank lending channel. The deepening of the European sovereign debt crisis in 2011 restrained the financial intermediation of European banks in the United States. In this period, some of the U.S. branches of European banks faced a dollar liquidity shock—due to their perceived risk reflecting the sovereign risk of their countries of origin—which in turn affected the branches’ lending to U.S. entities. We use a novel dataset to analyze the operations of branches of foreign banks in the United States. Our results show that: (1) The U.S. branches of European banks experienced a run on their deposits, mainly from U.S. money market funds. (2) The branches with curtailed access to large time deposits relied more on funding from their own parent institutions, thus shifting from being net suppliers to being net receivers of dollar funding from their related offices. (3) Since the additional funding received from parent institutions was not enough to offset the decreased access to U.S. funding, such branches reduced their lending to U.S. entities.
    Date: 2012

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