New Economics Papers
on Financial Markets
Issue of 2013‒06‒24
three papers chosen by

  1. Hedging and Leveraging: Principal Portfolios of the Capital Asset Pricing Model By M. Hossein Partovi
  2. Profiteering from the Dot-com Bubble, Sub-Prime Crisis and Asian Financial Crisis By Michael McAleer; John Suen; Wing Keung Wong
  3. The price impact of CDS trading By Gündüz, Yalin; Nasev, Julia; Trapp, Monika

  1. By: M. Hossein Partovi
    Abstract: The principal portfolios of the standard Capital Asset Pricing Model (CAPM) are analyzed and found to have remarkable hedging and leveraging properties. Principal portfolios implement a recasting of any correlated asset set of N risky securities into an equivalent but uncorrelated set when short sales are allowed. While a determination of principal portfolios in general requires a detailed knowledge of the covariance matrix for the asset set, the rather simple structure of CAPM permits an accurate solution for any reasonably large asset set that reveals interesting universal properties. Thus for an asset set of size N, we find a market-aligned portfolio, corresponding to the market portfolio of CAPM, as well as N-1 market-orthogonal portfolios which are market neutral and strongly leveraged. These results provide new insight into the return-volatility structure of CAPM, and demonstrate the effect of unbridled leveraging on volatility.
    Date: 2013–06
  2. By: Michael McAleer (Econometric Institute Erasmus School of Economics Erasmus University Rotterdam and Tinbergen Institute The Netherlands and Department of Quantitative Economics Complutense University of Madrid Spain and Institute of Economic Research Kyoto University Japan); John Suen (Department of Statistics Chinese University of Hong Kong); Wing Keung Wong (Department of Economics Hong Kong Baptist University)
    Abstract: This paper explores the characteristics associated with the formation of bubbles that occurred in the Hong Kong stock market in 1997 and 2007, as well as the 2000 dot-com bubble of Nasdaq. It examines the profitability of Technical Analysis (TA) strategies generating buy and sell signals with knowing and without trading rules. The empirical results show that by applying long and short strategies during the bubble formation and short strategies after the bubble burst, it not only produces returns that are significantly greater than buy and hold strategies, but also produces greater wealth compared with TA strategies without trading rules. We conclude these bubble detection signals help investors generate greater wealth from applying appropriate long and short Moving Average (MA) strategies.
    Keywords: Technical analysis, moving average, buy-and-hold strategy, dot-com bubble, Asian financial crisis, sub-prime crisis, moving linear regression, volatility.
    JEL: G1 C0
    Date: 2013–06
  3. 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 traders adjust the premium more for transactions with higher inventory risk. Third, trading with buy-side investors who presumably have less market power increases this effect. 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

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