nep-fmk New Economics Papers
on Financial Markets
Issue of 2013‒04‒27
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Bank-lending constraints and alternative financing during the financial crisis: Evidence from European SMEs By Casey, Eddie; O'Toole, Conor
  2. A Fokker-Planck description for the queue dynamics of large tick stocks By A. Gareche; G. Disdier; J. Kockelkoren; J. -P. Bouchaud
  3. Analysis of Realized Volatility in Two Trading Sessions of the Japanese Stock Market By Tetsuya Takaishi; Ting Ting Chen; Zeyu Zheng
  4. Market Frictions, Investor Sophistication and Persistence in Mutual Fund Performance By Ariadna Dumitrescu; Javier Gil-Bazo
  5. Hedging in bond markets by the Clark-Ocone formula By Nicolas Privault; Timothy Robin Teng
  6. Euro area CDS spreads in the crisis: The role of open market operations and contagion By Gerlach, Petra

  1. By: Casey, Eddie; O'Toole, Conor
    Abstract: The financial crisis has brought to the fore concerns regarding small- and medium-sized enterprises' (SMEs) capacity to access traditional bank lending. Using European firm-level data on SME access to finance since the onset of the financial crisis, we find that bank-lending constrained SMEs are significantly more likely to avail of alternative forms of external finance, controlling for firm-level and country-level characteristics. We then determine the implications that usage of alternative forms of finance can have for certain economically desirable business activities. In particular, we find that using alternative finance substantially reduces the likelihood of business fixed investment. This effect is not evident for business innovation.
    Keywords: data/investment
    Date: 2013–03
  2. By: A. Gareche; G. Disdier; J. Kockelkoren; J. -P. Bouchaud
    Abstract: Motivated by empirical data, we develop a statistical description of the queue dynamics for large tick assets based on a two-dimensional Fokker-Planck (diffusion) equation, that explicitly includes state dependence, i.e. the fact that the drift and diffusion depends on the volume present on both sides of the spread. "Jump" events, corresponding to sudden changes of the best limit price, must also be included as birth-death terms in the Fokker-Planck equation. All quantities involved in the equation can be calibrated using high-frequency data on best quotes. One of our central finding is the the dynamical process is approximately scale invariant, i.e., the only relevant variable is the ratio of the current volume in the queue to its average value. While the latter shows intraday seasonalities and strong variability across stocks and time periods, the dynamics of the rescaled volumes is universal. In terms of rescaled volumes, we found that the drift has a complex two-dimensional structure, which is a sum of a gradient contribution and a rotational contribution, both stable across stocks and time. This drift term is entirely responsible for the dynamical correlations between the ask queue and the bid queue.
    Date: 2013–04
  3. By: Tetsuya Takaishi; Ting Ting Chen; Zeyu Zheng
    Abstract: We analyze realized volatilities constructed using high-frequency stock data on the Tokyo Stock Exchange. In order to avoid non-trading hours issue in volatility calculations we define two realized volatilities calculated separately in the two trading sessions of the Tokyo Stock Exchange, i.e. morning and afternoon sessions. After calculating the realized volatilities at various sampling frequencies we evaluate the bias from the microstructure noise as a function of sampling frequency. Taking into account of the bias to realized volatility we examine returns standardized by realized volatilities and confirm that price returns on the Tokyo Stock Exchange are described approximately by Gaussian time series with time-varying volatility, i.e. consistent with a mixture of distributions hypothesis.
    Date: 2013–04
  4. By: Ariadna Dumitrescu (Group for Research in Economics and Finance (GREF), ESADE Business School); Javier Gil-Bazo (Universitat Pompeu Fabra and Barcelona Graduate School of Economics)
    Abstract: If there are diseconomies of scale in asset management, any predictability in mutual fund performance will be arbitraged away by rational investors seeking funds with the highest expected performance (Berk and Green, 2004). In contrast, the performance of US equity mutual funds persists through time. In this paper, we investigate whether market frictions can reconcile the assumptions of investor rationality and diseconomies of scale with the empirical evidence. More specifically, we extend the model of Berk and Green (2004) to account for financial constraints and heterogeneity in investors' reservation returns reflecting the idea that less financially sophisticated investors face higher search costs. In our model, both negative and positive expected fund performance are possible in equilibrium. Moreover, expected fund performance increases with expected managerial ability, which can explain the evidence on performance persistence. The model also implies that performance persistence increases with fund visibility, as fund visibility increases the proportion of unsophisticated investors in the fund. Consistently with this prediction, we report empirical evidence for the US equity fund market that diferences in performance are significantly less persistent among hard-to-find funds than otherwise similar funds.
    Keywords: mutual fund performance persistence; market frictions; investor sophistication
    JEL: G2 G23
    Date: 2012–05
  5. By: Nicolas Privault; Timothy Robin Teng
    Abstract: Hedging strategies in bond markets are computed by martingale representation and the Clark-Ocone formula under the choice of a suitable of numeraire, in a model driven by the dynamics of bond prices. Applications are given to the hedging of swaptions and other interest rate derivatives, and our approach is compared to delta hedging when the underlying swap rate is modeled by a diffusion process.
    Date: 2013–04
  6. By: Gerlach, Petra
    Abstract: This paper studies euro area CDS spreads during the financial crisis. We examine the impact of the crisis on both commercial banks and sovereigns, and focus on two questions. First, have the ECB's open market operations reduced market stress? It seems that large repo volumes, especially if credited to banks the same day, helped initially, and that the announcement of the Securities Market Programme also calmed markets. Asset purchase volumes do not seem to matter directly. Second, was there contagion among and between banks and sovereigns? We find evidence for both. Interestingly, sovereign CDS spreads appear immune after April 2010. We argue that this might reflect the ECB's efforts to stop contagion during the euro crisis.
    Date: 2013–02

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