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on Financial Markets |
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Issue of 2013‒02‒03
four papers chosen by |
| By: | Jacob Boudoukh; Ronen Feldman; Shimon Kogan; Matthew Richardson |
| Abstract: | A basic tenet of financial economics is that asset prices change in response to unexpected fundamental information. Since Roll’s (1988) provocative presidential address that showed little relation between stock prices and news, however, the finance literature has had limited success reversing this finding. This paper revisits this topic in a novel way. Using advancements in the area of textual analysis, we are better able to identify relevant news, both by type and by tone. Once news is correctly identified in this manner, there is considerably more evidence of a strong relationship between stock price changes and information. For example, market model R-squareds are no longer the same on news versus no news days (i.e., Roll’s (1988) infamous result), but now are 16% versus 33%; variance ratios of returns on identified news versus no news days are 120% higher versus only 20% for unidentified news versus no news; and, conditional on extreme moves, stock price reversals occur on no news days, while identified news days show an opposite effect, namely a strong degree of continuation. A number of these results are strengthened further when the tone of the news is taken into account by measuring the positive/negative sentiment of the news story. |
| JEL: | G14 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18725&r=fmk |
| By: | L. BAELE; V. DE BRUYCKERE; O. DE JONGHE; R. VANDER VENNET |
| Abstract: | This paper presents evidence that bank managers adjust key strategic variables following a risk and/or valuation signal from the stock market. Banks receive a risk signal when they exhibit substantially higher volatility compared to the best performing bank(s) with similar business model characteristics, and a valuation signal when they are undervalued relative to the average bank with similar characteristics (using respectively a stochastic frontier and multiplicative heteroscedasticity model). We show that the likelihood that banks receive a risk and/or valuation signal increases with opaqueness, managerial discretion and specialization. Next, we show, using a partial adjustment model, that bank managers adjust the long- term target value of key strategic variables and the speed of adjustment towards those targets following a risk and/or negative valuation signal. We interpret this as evidence of stock market inuencing. Finally, we show that our results are unlikely to be driven by indirect inuencing by regulators, subordinated debtholders, or wholesale depositors. |
| Keywords: | monitoring, inuencing, stochastic frontier, multiplicative heteroscedasticity regression, partial adjustment, opaqueness, earnings forecast dispersion, bank risk |
| JEL: | G21 G28 L25 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:12/827&r=fmk |
| By: | Daniel Fricke; Thomas Lux |
| Abstract: | Previous literature on statistical properties of interbank loans has reported various power-laws, particularly for the degree distribution (i.e. the distribution of credit links between institutions). In this paper, we revisit data for the Italian interbank network based on overnight loans recorded on the e-MID trading platform during the period 1999-2010 using both daily and quarterly aggregates. In con- trast to previous authors, we find no evidence in favor of scale-free networks. Rather, the data are best described by negative Binomial distributions. For quarterly data, Weibull, Gamma, and Exponential distributions tend to provide comparable ts. We find comparable re- sults when investigating the distribution of the number of transactions, even though in this case the tails of the quarterly variables are much fatter. The absence of power-law behavior casts doubts on the claim that interbank data fall into the category of scale-free networks |
| Keywords: | interbank market, network models |
| JEL: | G21 G01 E42 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1819&r=fmk |
| By: | Sebastian Poledna; Stefan Thurner; J. Doyne Farmer; John Geanakoplos |
| Abstract: | We use a simple agent based model of value investors in financial markets to test three credit regulation policies. The first is the unregulated case, which only imposes limits on maximum leverage. The second is Basle II, which also imposes interest rate spreads on loans and haircuts on collateral, and the third is a hypothetical alternative in which banks perfectly hedge all of their leverage-induced risk with options that are paid for by the funds. When compared to the unregulated case both Basle II and the perfect hedge policy reduce the risk of default when leverage is low but increase it when leverage is high. This is because both regulation policies increase the amount of synchronized buying and selling needed to achieve deleveraging, which can destabilize the market. None of these policies are optimal for everyone: Risk neutral investors prefer the unregulated case with a maximum leverage of roughly four, banks prefer the perfect hedge policy, and fund managers prefer the unregulated case with a high maximum leverage. No one prefers Basle II. |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1301.6114&r=fmk |