New Economics Papers
on Financial Markets
Issue of 2013‒07‒28
six papers chosen by

  1. Fragmentation in European Financial Markets. Measures, Determinants, and Policy Solutions By Maria Abascal; Tatiana Alonso; Sergio Mayordomo
  2. Strategic Interaction in A Stock Trading Chat Room By Jie Lu; Bruce Mizrach
  3. Is Stock Market Sensitive to Foreign Capital Inflows and Economic Growth? Evidence from Pakistan By Raza, Syed Ali; Jawaid, Syed Tehseen; Afshan, Sahar
  4. Sovereign bond spread drivers in the EU market in the aftermath of the global financial crisis By Iuliana Matei; Angela Cheptea
  5. Flight Patterns and Yields of European Government Bonds By Gregor von Schweinitz
  6. An Alternative Model to Basel Regulation By Sofiane Aboura; Emmanuel Lépinette

  1. By: Maria Abascal; Tatiana Alonso; Sergio Mayordomo
    Abstract: This paper measures fragmentation in four European financial markets (interbank, sovereign debt, equity, and the CDS market for financial institutions) and develops a new measure of global fragmentation using these markets as inputs. We find that, during the recent crisis, fragmentation in the interbank market has been, on average, higher in the peripheral countries than in the core ones and it has increased particularly during periods of financial stress. Among the most significant factors that contributed to the high fragmentation levels observed are counterparty risk and financing costs (overall factors), and country-specific factors such as banking sector openness, the debt–to-GDP and the relative size of the financial sector. We also study the short-run effect of the ECB programmes and announcements and find a significant decrease in the daily levels of fragmentation immediately after the mplementation of the SMP, 3Y-LTROs and the second CBPP of the ECB as well as key announcements relative to banking union and the OMT. These helped restore investors’ confidence in the euro and confirmed the ECB’s support for tackling the challenges of the European sovereign debt crisis. Nevertheless, additional measures seem to be necessary to guarantee a new process of re-integration and thus a more stable European banking sector.
    Keywords: Eurozone, financial fragmentation, Interbank market, Banking Union
    JEL: G15 G18 F36
    Date: 2013–07
  2. By: Jie Lu (Rutgers University); Bruce Mizrach (Rutgers University)
    Abstract: We consider a model of an internet chat room with free entry but secure identity. Traders exchange messages in real time of both a fundamental and non-fundamental nature. We explore conditions under which traders post truthful information and make trading decisions. We also establish a symmetric Bayesian Nash equilibrium in which momentum traders profit from their exposure to informed traders in the chat room. The model generates a number of empirical predictions: (1) the non-skillful traders follow the skillful traders; (2) the more skillful traders are more frequently followed by others; (3) the non-skillful traders benefit from following. We test and confirm all three predictions using a data set of chat room logs from the Activetrader Financial Chat Room.
    Keywords: chat room, strategic information, individual traders, behavioral finance
    JEL: G14
    Date: 2013–07–16
  3. By: Raza, Syed Ali; Jawaid, Syed Tehseen; Afshan, Sahar
    Abstract: This study investigates the impact of foreign capital inflows and economic growth on stock market capitalization in Pakistan by using the annual time series data from the period of 1976 to 2011. The ARDL bound testing cointegration approach confirms the valid long run relationship between considered variables. Results indicate that foreign direct investment, workers’ remittances and economic growth have significant positive relationship with the stock market capitalization in long run as well as in short run. Results of dynamic ordinary least square (DOLS) and fully modified ordinary least square (FMOLS) suggest that the initial results of long run coefficients are robust. Results of variance decomposition test show the bidirectional causal relationship of foreign direct investment and economic growth with stock market capitalization. However, unidirectional causal relationship is found in between workers’ remittances and stock market capitalization. It is suggested that in Pakistan, investor can make their investment decisions through keep an eye on the direction of the considered foreign capital inflows and economic growth.
    Keywords: Remittances, Foreign Direct Investment, Economic Growth, Market Capitalization
    JEL: F21 F24 F43 G20
    Date: 2013–04–05
  4. By: Iuliana Matei (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Angela Cheptea (SMART - Structures et Marché Agricoles, Ressources et Territoires - Agrocampus Ouest - Institut national de la recherche agronomique (INRA) : UMR1302)
    Abstract: Dans cet article, nous étudions empiriquement les déterminants des spreads des obligations souveraines des pays de l'UE vis-à-vis de l'Allemagne entre 2003-2010. Nous abordons deux questions principales. Tout d'abord, nous examinons quelle proportion de la variation des spreads s'explique par des changements dans les fondamentaux, les risques de liquidité et de crédit. Deuxièmement, nous distinguons entre les pays membres et non-membres de l'UEM pour voir si les déterminants des spreads affectent les membres de l'UE uniformément. À cet effet, nous employons des techniques de panel dans un modèle où les spreads par rapport à l'Allemagne (exempte de risque de défaut) sont expliqués par un ensemble de variables traditionnelles et institutionnelles. Les résultats révèlent que les déficits budgétaires élevés, la dette publique ainsi que les risques politiques et dans une moindre mesure la liquidité exercent des pressions considérables sur les spreads pour de nombreux pays de l'UE.
    Keywords: Debt; Euro zone crisis; financial contagion; panel models
    Date: 2012–12–21
  5. By: Gregor von Schweinitz
    Abstract: The current European Debt Crisis has led to a reinforced effort to identify the sources of risk and their influence on yields of European Government Bonds. Until now, the potentially nonlinear influence and the theoretical need for interactions reflecting flight-to-quality and flight-to-liquidity has been widely disregarded. I estimate government bond yields of the Euro-12 countries without Luxembourg from May 2003 until December 2011. Using penalized spline regression, I find that the effect of most explanatory variables is highly nonlinear. These nonlinearities, together with flight patterns of flight-to-quality and flight-to-liquidity, can explain the co-movement of bond yields until September 2008 and the huge amount of differentiation during the financial and the European debt crisis without the unnecessary assumption of a structural break. The main effects are credit risk and flight-to-liquidity, while the evidence for the existence of flight-to-quality and liquidity risk (the latter measured by the bid-ask spread and total turnover of bonds) is comparably weak.
    Keywords: sovereign bonds, sovereign risk premiums, sovereign debt crisis, semipara-metric regression
    JEL: C14 G01 G12
    Date: 2013–07
  6. By: Sofiane Aboura (CEREG - Centre de Recherche sur la gestion et la Finance - DRM UMR 7088 - Université Paris IX - Paris Dauphine); Emmanuel Lépinette (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine)
    Abstract: The post-crisis financial reforms address the need for systemic regulation, focused not only on individual banks but also on the whole financial system. The regulator principal objective is to set banks' capital requirements equal to international minimum standards in order to mimimise systemic risk. Indeed, Basel agreement is designed to guide a judgement about minimum universal levels of capital and remains mainly microprudential in its focus rather than being macroprudential. An alternative model to Basel framework is derived where systemic risk is taken into account in each bank's dynamic. This might be a new departure for prudential policy. It allows for the regulator to compute capital and risk requirements for controlling systemic risk. Moreover, bank regulation is considered in a two-scale level, either at the bank level or at the system-wide level. We test the adequacy of the model on a data set containing 19 banks of 5 major countries from 2005 to 2012. We compute the capital ratio threshold per year for each bank and each country and we rank them according to their level of fragility. Our results suggest to consider an alternative measure of systemic risk that requires minimal capital ratios that are bank-specific and time-varying.
    Keywords: Systemic risk; Bank Regulation; Basel Accords
    Date: 2013–07–19

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.