New Economics Papers
on Financial Markets
Issue of 2013‒04‒13
ten papers chosen by

  1. The Great Financial Crisis: setting priorities for new statistics By Claudio Borio
  2. The private value of too-big-to-fail guarantees By Michiel Bijlsma; Remco Mocking
  3. Financial Development in 205 Economies, 1960 to 2010 By Martin Čihák; Asli Demirgüč-Kunt; Erik Feyen; Ross Levine
  4. Stock Market Linkages in Emerging Asia-Pacific Markets By P., Srinivasan; M., Kalaivani
  5. The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World By Farmer, Roger E A; Nourry, Carine; Venditti, Alain
  6. Do Stock Returns Rebound After Bear Markets? An Empirical Analysis From Five OECD Countries By Frédérique BEC; Songlin ZENG
  7. Asymmetry in Government Bond Returns By Ippei Fuijwara; Lena Mareen Korber; Daisuke Nagakura
  8. The Market for OTC Derivatives By Atkeson, Andrew; Eisfeldt, Andrea L.; Weill, Pierre-Olivier
  9. Why is hedge fund activism procyclical? By Burkart, Mike; Dasgupta, Amil
  10. Asymmetric information and the death of ABS CDOs By Daniel O. Beltran; Larry Cordell; Charles P. Thomas

  1. By: Claudio Borio
    Abstract: Every financial crisis brings in its wake demands for more information; the latest one is no exception. Because, in deceptively tranquil times, it is well-nigh impossible to foster the consensus necessary to improve data availability, such a window of opportunity must not be missed. To be sure, the main reason why crises occur is not lack of statistics but the failure to interpret them correctly and to take remedial action. But better statistics can no doubt be a big help. Priorities for new data collections include better property prices and, above all, comprehensive financial information for banks on a consolidated and global basis, covering their balance sheets but also their income statements. This could be usefully complemented with corresponding information on the international geography of these banks' operations and, for crisis management purposes, with much more timely and granular data on their bilateral exposures. The collection of information should be based on sound governance arrangements, flexible and cost-efficient. The BIS can play and is playing a very active role.
    Keywords: financial crisis, systemic risk, banking statistics, property prices
    Date: 2013–04
  2. By: Michiel Bijlsma; Remco Mocking
    Abstract: We estimate the size of the funding advantage for a sample of 151 large European banks for the period 1-1-2008 until 15-6-2012 using rating agencies‟ assessment of banks‟ credit ratings uplift. We find that the size of the funding advantage is large and fluctuates substantially over time. </p><p align="left">It rises from 0.1% of GDP in the first half of 2008 to more than 1% of GDP mid 2011. The latter value is in line with results from other studies. We find that the marginal effect of total assets relative to GDP on the rating uplift is positive and declines with the size of the bank. In addition, a higher sovereign rating of a bank‟s home country corresponds on average to a higher rating uplift for that bank.
    JEL: G01 G21 G24
    Date: 2013–04
  3. By: Martin Čihák; Asli Demirgüč-Kunt; Erik Feyen; Ross Levine
    Abstract: This paper describes our construction of the Global Financial Development Database and uses the data to compare financial systems around the world. The database provides information on financial systems in 205 economies over the period from 1960 to 2010 and includes measures of (1) size of financial institutions and markets (financial depth), (2) degree to which individuals and firms can and do use financial services (access), (3) efficiency of financial intermediaries and markets in intermediating resources and facilitating financial transactions (efficiency), and (4) stability of financial institutions and markets (stability).
    JEL: G00 G01 G10 G20 O16
    Date: 2013–04
  4. By: P., Srinivasan; M., Kalaivani
    Abstract: This study examines the stock market integration among major stock markets of emerging Asia-Pacific economies, viz. India, Malaysia, Hong Kong, Singapore, South Korea, Taiwan, Japan, China and Indonesia. Johansen and Juselius (1990) multivariate cointegration test, Granger causality/Block exogeneity Wald test based on VECM approach and Variance Decomposition Analysis was employed to investigate the dynamic linkages between markets. Cointegration test confirmed a well defined long-run equilibrium relationship among the major stock markets, implying that there exists a common force, such as arbitrage activity, which brings these stock markets together in the long run. The results of Granger causality/Block exogeneity Wald test based on VECM and Variance Decomposition Analysis revealed the stock market interdependencies and dynamic interactions among the selected emerging Asia-Pacific economies. This result implies that investors can gain feasible benefits from international portfolio diversification in the short-run. On the whole, the study results suggest that although long-term diversification benefits from exposure to these markets might be limited, short-run benefits might exist due to substantial transitory fluctuations.
    Keywords: Stock Market Integration, Cointegration, Vector Error Correction Model, Variance Decomposition Analysis
    JEL: C32 F36 G11 G15
    Date: 2013–04–05
  5. By: Farmer, Roger E A; Nourry, Carine; Venditti, Alain
    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: asset pricing; efficient markets; excess volatility
    JEL: E32 E44 G10 G12 G14
    Date: 2013–01
  6. By: Frédérique BEC; Songlin ZENG (THEMA, Universite de Cergy-Pontoise; THEMA, Universite de Cergy-Pontoise)
    Abstract: This paper proposes an empirical study of the shape of recoveries in - nancial markets from a bounce-back augmented Markov Switching model. It relies on models rst applied by Kim, Morley and Piger [2005] to the busi- ness cycle analysis. These models are estimated for monthly stock market returns data of ve developed countries for the post-1970 period. Focus- ing on a potential bounce-back eect in nancial markets, its presence and shape are formally tested. Our results show that i) the bounce-back eect is statistically signicant and large in all countries, but Germany where evi- dence is less clear-cut and ii) the negative permanent impact of bear markets on the stock price index is notably reduced when the rebound is explicitly taken into account.
    Keywords: Stock Market Returns, Markov Switching Models, Shape of Bounce- Back
    JEL: C22 G10
    Date: 2013
  7. By: Ippei Fuijwara (Australia-Japan Research Centre (AJRC)); Lena Mareen Korber; Daisuke Nagakura
    Abstract: Is there asymmetry in the distribution of government bond returns in developed countries? Can asymmetries be predicted using financial and macroeconomic variables? To answer the first question, we provide evidence for asymmetry in government bond returns in particular for short maturities. This finding has important implications for modelling and forecasting government bond returns. For example, widely used models for yield curve analysis such as the affine term structure model assume symmetrically distributed innovations. To answer the second question, we find that liquidity in government bond markets predicts the coefficient of skewness with a positive sign, meaning that the probability of a large and negative excess return is more likely in a less liquid market. In addition, a positive realized return is associated with a negative coefficient of skewness, or a small probability of a large and negative return in the future.
    Keywords: Government bond returns; skewness; conditional symmetry test
    JEL: G10 G12 E43
    Date: 2013–03
  8. By: Atkeson, Andrew; Eisfeldt, Andrea L.; Weill, Pierre-Olivier
    Abstract: We develop a model of equilibrium entry, trade, and price formation in over-the-counter (OTC) markets. Banks trade derivatives to share an aggregate risk subject to two trading frictions: they must pay a fixed entry cost, and they must limit the size of the positions taken by their traders because of risk-management concerns. Although all banks in our model are endowed with access to the same trading technology, some large banks endogenously arise as "dealers,'' trading mainly to provide intermediation services, while medium sized banks endogenously participate as ``customers'' mainly to share risks. We use the model to address positive questions regarding the growth in OTC markets as trading frictions decline, and normative questions of how regulation of entry impacts welfare.
    Keywords: credit default swaps; dealers; OTC markets
    JEL: D83 G00
    Date: 2013–03
  9. By: Burkart, Mike; Dasgupta, Amil
    Abstract: We provide a theoretical model to explain the procyclicality of hedge fund activism. In our model, hedge funds which compete to retain investor flows excessively increase the net leverage of target firms in order to deliver high short-term payouts and signal their ability. Such excessive leverage leads to debt overhang in economic downturns, thereby destroying incentives for activism and engendering procyclicality. Our model thus provides a theoretical explanation that links the procyclicality of hedge fund activism with increases in the leverage or payouts ratios of target firms. In addition, the model generates several new testable implications and reconciles seemingly contradictory evidence on the wealth effects of activism for shareholders and bondholders.
    Keywords: Career concerns; Corporate governance; Hedge funds; Shareholder activism
    JEL: G23 G34
    Date: 2013–03
  10. By: Daniel O. Beltran; Larry Cordell; Charles P. Thomas
    Abstract: A key feature of the 2007 financial crisis is that for some classes of securities trade has practically ceased. And where trade has occurred, it appears that market prices are well below their intrinsic values. This seems especially true for those securities where the payoff streams are particularly complex, for example, structured finance ABS CDOs. One explanation for this is that information about these securities' intrinsic values since the crisis has been asymmetric, with current holders having better information than potential buyers. We first characterize the information asymmetries that were present in the structured finance ABS CDO market. Because many of the CDO dealers had partially or fully integrated the pipeline from mortgage originations through CDO issuance, they had informational advantages over potential buyers that could well have disrupted trading in CDOs as the crisis took hold in August of 2007. Using a "workhorse" model for pricing securities under asymmetric information and a novel dataset for the intrinsic values of ABS CDOs, we show how the resulting adverse selection problem could explain why the bulk of these securities either trade at significant discounts to their intrinsic values or do not trade at all.
    Date: 2013

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