nep-fmk New Economics Papers
on Financial Markets
Issue of 2013‒02‒16
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Common non-linearities in multiple series of stock market volatility By Heather M. Anderson; Farshid Vahid
  2. Stock prices, news, and economic fluctuations: comment By André Kurmann; Elmar Mertens
  3. Efficient Markets, Behavioral Finance and a Statistical Evidence of the Validity of Technical Analysis By Marco Antonio Penteado
  4. Estimating the impacts of U.S. LSAPs on emerging market economies’ local currency bond markets By Jeffrey Moore; Sunwoo Nam; Myeongguk Suh; Alexander Tepper
  5. How did the financial crisis alter the correlations of U.S. yield spreads? By Silvio Contessi; Pierangelo De Pace; Massimo Guidolin
  6. CDS spreads and systemic risk: A spatial econometric approach By Keiler, Sebastian; Eder, Armin
  7. Impact of Financial Regulation and Innovation on Bubbles and Crashes due to Limited Arbitrage: Awareness Heterogeneity By Hitoshi Matsushima

  1. By: Heather M. Anderson; Farshid Vahid
    Abstract: Decreases in stock market returns often lead to higher increases in volatility than increases in returns of the same magnitude, and it is common to incorporate these so-called leverage effects in GARCH and stochastic volatility models. Recent research has also found it useful to account for leverage in models of realized volatility, as well as in models of the continuous and jump components of realized volatility. This paper explores the use of smooth transition autoregressive (STAR) models for capturing leverage effects in multiple series of the continuous components of realized volatility. We find that the leverage effect is well captured by a common nonlinear factor driven by returns, even though the persistence in each country’s volatility is country specific. A three country model that incorporates both country specific persistence and a common leverage effect offers slight forecast improvements for mid-range horizons, relative to other models that do not allow for the common nonlinearity.
    Keywords: Realized Volatility, Bipower Variation, Common Factors, Fore-casting, Leverage, Smooth Transition Models.
    Date: 2013
  2. By: André Kurmann; Elmar Mertens
    Abstract: Beaudry and Portier (American Economoc Review, 2006) propose an identification scheme to study the effects of news shocks about future productivity in Vector Error Correction Models (VECM). This comment shows that their methodology does not have a unique solution, when applied to their VECMs with more than two variables. The problem arises from the interplay of cointegration assumptions and long-run restrictions imposed by Beaudry and Portier (2006).
    Date: 2013
  3. By: Marco Antonio Penteado
    Abstract: This work tried to detect the existence of a relationship between the graphic signals - or patterns - observed day by day in the Brazilian stock market and the trends which happen after these signals, within a period of 8 years, for a number of securities. The results obtained from this study show evidence of the existence of such a relationship, suggesting the validity of the Technical Analysis as an instrument to predict the trend of security prices in the Brazilian stock market within that period.
    Date: 2013–02
  4. By: Jeffrey Moore; Sunwoo Nam; Myeongguk Suh; Alexander Tepper
    Abstract: This paper examines whether large-scale asset purchases (LSAPs) by the Federal Reserve influenced capital flows out of the United States and into emerging market economies (EMEs) and also analyzes the degree of pass-through from long-term U.S. government bond yields to long-term EME bond yields. Using panel data from a broad array of EMEs, our empirical estimates suggest that a 10-basis-point reduction in long-term U.S. Treasury yields results in a 0.4-percentage-point increase in the foreign ownership share of emerging market debt. This, in turn, is estimated to reduce government bond yields in EMEs by approximately 1.7 basis points. Federal Reserve LSAPs, which most previous studies have found reduced ten-year U.S. Treasury yields between 60 and 110 basis points during our sample period, therefore likely contributed to U.S. outflows into EMEs and marginal reductions in longer-term EME government bond yields. These effects are qualitatively similar to conventional U.S. monetary policy easing. To assess the robustness of these estimates, we also employ event study and vector autoregression methodologies, finding broadly similar results using these methods. While these results hold in the aggregate, marginal effects vary notably across emerging market countries.
    Keywords: Flow of funds ; Open market operations ; Emerging markets ; Treasury bonds ; Rate of return ; Debts, External ; Government securities
    Date: 2013
  5. By: Silvio Contessi; Pierangelo De Pace; Massimo Guidolin
    Abstract: We investigate the pairwise correlations of 11 U.S. fixed income yield spreads over a sample that includes the Great Financial Crisis of 2007-2009. Using cross-sectional methods and non- parametric bootstrap breakpoint tests, we characterize the crisis as a period in which pairwise correlations between yield spreads were systematically and significantly altered in the sense that spreads comoved with one another much more than in normal times. We find evidence that, for almost half of the 55 pairs under investigation, the crisis has left spreads much more correlated than they were previously. This evidence is particularly strong for liquidity- and default-risk- related spreads, long-term spreads, and the spreads that were most likely directly affected by policy interventions.
    Keywords: Financial crises ; Credit ; Liquidity (Economics)
    Date: 2013
  6. By: Keiler, Sebastian; Eder, Armin
    Abstract: This study applies a novel way of measuring, quantifying and modelling the systemic risk within the financial system. The magnitude of risk spill over effects is gauged by introducing a specific weighting scheme. This approach originally stems from spatial econometrics. The methodology allows for a decomposition of the credit spread into a systemic, systematic and idiosyncratic risk premium. We identify considerable risk spill overs due to the interconnectedness of the financial institutes in the sample. In stress tests, up to one fifth of the CDS spread changes are owing to financial contagion. These results also give an alternative explanation for the nonlinear relationship between a debtor's theoretical probability of default and the observed credit spreads - known as the credit spread puzzle. --
    Keywords: systemic risk,financial contagion,spatial econometrics,CDS spreads,government policy and regulation
    JEL: C21 G12 G18 G21
    Date: 2013
  7. By: Hitoshi Matsushima (The University of Tokyo)
    Abstract: We examine the impact of financial regulation and innovation on bubbles and crashes due to limited arbitrage by modeling timing games among strategic arbitrageurs whose rationality is not commonly known. An unproductive company raises funds by issuing shares, and for purchasing shares, arbitrageurs borrow money from positive feedback traders. The key concept is awareness heterogeneity: positive feedback traders are unaware of euphoria, but arbitrageurs are aware of it. We show the impact of high leverage ratio depends on whether naked CDS is available, and the impact of naked CDS depends on growth balance between positive feedback traders’ capital and loan.
    Date: 2013–02

This nep-fmk issue is ©2013 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.