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on Financial Markets |
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Issue of 2013‒03‒09
ten papers chosen by |
| By: | Stijn Claessens; M. Ayhan Kose; Luc Laeven; Fabián Valencia |
| Abstract: | The global financial crisis of 2007-09 has led to an intensive research program analyzing a wide range of issues related to financial crises. This paper presents a summary of a forthcoming book, Financial Crises: Causes, Consequences, and Policy Responses, that includes 19 contributions examining these issues and distilling policy lessons. The book covers a wide range of crises, including banking, balance-of-payments, and sovereign debt crises. It reviews the typical patterns prior to crises, considers lessons on their antecedents, and analyzes their evolution and aftermath. It also provides valuable policy lessons on how to prevent, contain and manage financial crises. |
| Keywords: | Global financial crisis, sudden stops, debt crises, banking crises, currency crises, defaults, restructuring, welfare cost, asset price busts, credit busts, prediction of crises |
| JEL: | E32 F44 G01 E5 E6 H12 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-05&r=fmk |
| By: | Roger E.A. Farmer (UCLA Economics); Carine Nourry (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & Institut Universitaire de France); Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC) |
| Abstract: | Existing literature continues to be unable to offer a convincing explanation for the volatility of the stochastic discount factor in real world data. Our work provides such an explanation. We do not rely on frictions, market incompleteness or transactions costs of any kind. Instead, we modify a simple stochastic representative agent model by allowing for birth and death and by allowing for heterogeneity in agents’ discount factors. We show that these two minor and realistic changes to the timeless Arrow-Debreu paradigm are sufficient to invalidate the implication that competitive financial markets efficiently allocate risk. Our work demonstrates that financial markets, by their very nature, cannot be Pareto efficient, except by chance. Although individuals in our model are rational; markets are not. |
| Keywords: | Inefficient markets, heterogeneous agents, overlapping generations, sunspots, extrinsic uncertainty, excess volatility. |
| Date: | 2013–02–26 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1311&r=fmk |
| By: | Belén Martín-Barragán; Sofía B. Ramos; Helena Veiga |
| Abstract: | In a global economy, shocks occurring in one market can spill over to other markets. This paper investigates the impact of oil shocks and stock markets crashes on correlations between stock and oil markets. We test changes in correlations at different scales with non-overlapping confidence intervals based on estimated wavelet correlations. Contrary to other approaches, this method does not need adjustment for heteroskedasticity biases on the correlation coefficients. Our results show that oil shocks affect the correlation between both markets. The evidence on the change of correlation between stock markets after an oil shock is weaker; except in some specific cases during the Kuwait war and the OPEC cutback period. Conversely, we only find weak evidence that stock market crashes change the correlation between oil and stock markets. Overall, the evidence gives support to including oil as an asset class in asset allocation strategies. |
| Keywords: | Correlations, Financial shocks, International Financial Markets, Oil shocks, Stock Market Returns, Wavelets |
| JEL: | C40 E32 G15 F30 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:ws130504&r=fmk |
| By: | Yannick Le Pen (Université Paris-Dauphine); Benoît Sévi (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS) |
| Abstract: | We empirically reinvestigate the issue of excess comovement of commodity prices initially raised in Pindyck and Rotemberg (1990) and show that excess comovement, when it exists, can be related to hedging and speculative pressure in commodity futures markets. Excess comovement appears when commodity prices remain correlated even after adjusting for the impact of common factors. While Pindyck and Rotemberg and following contributions examine this issue using a relevant but arbitrary set of control variables, we use recent developments in large approximate factor models so that a richer information set can be considered and “fundamentals” are likely to be adequately modeled. We consider a set of 8 unrelated commodities along with 187 real and nominal macroeconomic variables from which 9 factors are extracted over the period 1993-2010. Our estimates provide evidence of a time-varying excess comovement which is only occasionally significant, even after controlling for heteroscedasticity. Interestingly, excess comovement is mostly significant in recent years when a large increase in the trading of commodities is observed and also in crisis periods. However, we show that this increase in trading activity alone has no explanatory power for the excess comovement. Conversely, measures of hedging and speculative pressure explain around 60% of the estimated excess comovement thereby showing the strong impact not only of the financialization process, but also the impact of behaviour of some categories of traders on the price of commodities and the fact that supply and demand variables are not the sole factors in determining equilibrium prices. |
| Keywords: | commodity excess comovement hypothesis, factors model, heteroscedasticity-corrected correlation, commodity index, futures trading. |
| JEL: | C22 C32 G15 E17 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1301&r=fmk |
| By: | Uri Kartoun |
| Abstract: | The paper presents new machine learning methods: signal composition, which classifies time-series regardless of length, type, and quantity; and self-labeling, a supervised-learning enhancement. The paper describes further the implementation of the methods on a financial search engine system to identify behavioral similarities among time-series representing monthly returns of 11,312 hedge funds operated during approximately one decade (2000 - 2010). The presented approach of cross-category and cross-location classification assists the investor to identify alternative investments. |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1303.0073&r=fmk |
| By: | Ghatak, Maitreesh (London School of Economics); de Quidt, Jonathan (London School of Economics); Fetzer, Thiemo (London School of Economics) |
| Abstract: | Motivated by recent controversies surrounding the role of commercial lenders in micro nance, we analyze borrower welfare under different market structures, considering a benevolent non-profit lender, a for-prfi t monopolist, and a competitive credit market. To understand the magnitude of the effects analyzed, we simulate the model with parameters estimated from the MIX Market database. Our results suggest that market power can have severe implications for borrower welfare, while despite possible information frictions competition typically delivers similar borrower welfare to non-pro t lending. In addition, for-profit lenders are less likely to use joint liability than non-profits. |
| Keywords: | micronance; market power; for-profit; social capital |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:cge:warwcg:122&r=fmk |
| By: | Gündüz, Yalin; Nasev, Julia; Trapp, Monika |
| Abstract: | In this paper we show that informational and real frictions in CDS markets strongly affect CDS premia. We derive this main finding using a proprietary set of individual CDS transactions cleared by the Depository Trust & Clearing Corporation. We first show that CDS traders adjust the CDS premium in response to the observed order flow. Buy orders lead to an increase of the premium and sell orders to a decrease, suggesting that the order flow carries information. Second, we show that trader adjusts the premium more for transactions with higher inventory risk. Third, we show that the trader adjusts the premium in the way described only if she trades with buyside investors which presumably have less market power. Overall, our results imply that CDS premia contain a significant non-default related component which CDS traders charge to protect themselves against informational and real frictions. -- |
| Keywords: | CDS,frictions,asymmetric information,inventory risk,market power |
| JEL: | G12 G14 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1212r&r=fmk |
| By: | Hyong-chol O |
| Abstract: | We provided an analytical representation of the price of a barrier option with one type of special moving barrier. We consider the case that risk free rate, dividend rate and stock volatility are time dependent. We get a pricing formula and put call parity for barrier option when the moving barrier has a special relation with risk free rate, dividend rate and stock volatility. |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1303.1296&r=fmk |
| By: | Masato Ubukata; Toshiaki Watanabe |
| Abstract: | This article examines option pricing performance using realized volatilities with or without handling microstructure noise, non-trading hours and large jumps. The dynamics of realized volatility is specified by ARFIMA(X) and HAR(X) models. Main results using put options on the Nikkei 225 index are: (1) ARFIMAX model performs best, (2) the Hansen and Lunde (2005a) adjustment for non-trading hours improves the performance, (3) methods for reducing microstructure noise-induced bias yield better performance, while if the Hansen-Lunde adjustment is used, the other methods are not necessarily needed and (4) the performance is unaffected by removing large jumps from realized volatility. |
| Keywords: | microstructure noise, Nikkei 225 stock index, non-trading hours, option pricing, realized volatility |
| JEL: | C13 C22 C52 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd12-273&r=fmk |
| By: | Slawomir Ireneusz Bukowski |
| Abstract: | The aim of this paper is to outline results of investigations into the degree of the Polish and Slovak equity market integration with the euro area equity market. In investigations was used monthly data from the 1999:01-2011:12 period concerning the yield performance of the following indices: WIG, DJ EUROSTOXX, DOW JONES COMPOSITE AVERAGE and SAX. The model of the “increased impact of the common information component on equity market yields” estimated by means of GARCH (1,1) was used as a measure of the equity market integration. In the period from 1999 to 2009, the Polish equity market was more integrated with the global market than with the euro area equity market. On the other hand, the Slovak equity market was more integrated with the global market in the 1999-2004 period whereas in the years 2005-2011 its higher integration degree with the euro area equity market was noted accompanied by a low integration degree with the global market. |
| Keywords: | stock exchange, degree of equity market integration, yield, price- based measures, news-based measures, ratio of variance |
| JEL: | G10 G15 G19 |
| Date: | 2013–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:pia:wpaper:115/2013&r=fmk |