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on Financial Markets |
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Issue of 2013‒09‒06
six papers chosen by |
| By: | Peter C. B. Phillips (Yale University, University of Auckland, University of Southampton & Singapore Management University); Shu-Ping Shi (The Australian National University); Jun Yu (Singapore Management University) |
| Abstract: | Recent work on econometric detection mechanisms has shown the effectiveness of recursive procedures in identifying and dating financial bubbles. These procedures are useful as warning alerts in surveillance strategies conducted by central banks and fiscal regulators with real time data. Use of these methods over long historical periods presents a more serious econometric challenge due to the complexity of the nonlinear structure and break mechanisms that are inherent in multiple bubble phenomena within the same sample period. To meet this challenge the present paper develops a new recursive flexible window method that is better suited for practical implementation with long historical time series. The method is a generalized version of the sup ADF test of Phillips, Wu and Yu (2011, PWY) and delivers a consistent date-stamping strategy for the origination and termination of multiple bubbles. Simulations show that the test significantly improves discriminatory power and leads to distinct power gains when multiple bubbles occur. An empirical application of the methodology is conducted on S&P 500 stock market data over a long historical period from January 1871 to December 2010. The new approach successfully identi.es the well-known historical episodes of exuberance and collapse over this period, whereas the strategy of PWY and a related CUSUM dating procedure locate far fewer episodes in the same sample range. |
| Keywords: | Date-stamping strategy; Flexible window; Generalized sup ADF test; Multiple bubbles, Rational bubble; Periodically collapsing bubbles; Sup ADF test; |
| JEL: | C15 C22 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:04-2013&r=fmk |
| By: | Bethke, Sebastian; Kempf, Alexander; Trapp, Monika |
| Abstract: | Diversification benefits depend on the correlation between assets. Unfortunately, asset correlation increases when it is most needed. We examine bond correlation using a broad sample of US corporate bonds. We find bond correlation to be higher during the financial crisis in 2008. Increased bond correlation results from higher correlation between corporate bond risk factors. Risk factor correlation increases when investor sentiment worsens. This suggests that corporate bond investors change their perception of risk factors, which results in higher risk factor correlation and finally higher bond correlation. -- |
| Keywords: | bond correlation,credit risk,liquidity,risk factor correlation,investor sentiment |
| JEL: | G11 G12 G32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1306&r=fmk |
| By: | Pei Kuang (University of Birmingham) |
| Abstract: | I develop an equilibrium model with collateral constraints in which rational agents are uncertain and learn about the equilibrium mapping between fundamentals and collateral prices. Bayesian updating of beliefs by agents can endogenously generate booms and busts in collateral prices and largely strengthen the role of collateral constraints as an amplification mechanism through the interaction of agents?' beliefs, collateral prices and credit limits. Over-optimism or pessimism is fueled when a surprise in price expectations is interpreted partially by the agents as a permanent change in the parameters governing the collateral price process and is validated by subsequently realized prices. I show that the model can quantitatively account for the recent US boom-bust cycle in house prices, household debt and aggregate consumption dynamics during 2001-2008. I also demonstrate that the leveraged economy with a higher steady state leverage ratio is more prone to self-reinforcing learning dynamics. |
| Keywords: | Booms and Busts, Collateral Constraints, Learning, Leverage, Housing |
| JEL: | D83 D84 E32 E44 |
| Date: | 2013–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1303&r=fmk |
| By: | Agarwal, Vikas; Gay, Gerald D.; Ling, Leng |
| Abstract: | We provide a rationale for window dressing where investors respond to conflicting signals of managerial ability inferred from a fund's performance and its disclosed portfolio holdings. We contend that window dressers take a risky bet on their performance during a reporting delay period, which affects investors' interpretation of the two conflicting signals and hence their capital allocations. Conditional on good (bad) performance, window dressers benefit from higher (lower) investor flows as compared to non-window dressers. We find that window dressers have poor past performance, possess little skill, and engage in excessive portfolio churning. These characteristics, in turn, result in worse short- and long-term future performance. -- |
| Keywords: | Mutual funds,Window dressing,Portfolio disclosure,Fund flows |
| JEL: | G11 G20 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1107r2&r=fmk |
| By: | Peter Spencer |
| Abstract: | This paper addresses questions about the structure of the economy and financial markets raised by recent research on the term structure. The work of Duffee (2012) and Joslin, Preibsch and Singleton (2012) suggests that macroeconomic variables affect risk premia rather than bond yields, which are driven by just three factors as in the traditional model. This is consistent with the observation that the real world macro-dynamics appear to be much richer than the risk neutral dynamics underpinning the term structure. On the other hand, Cochrane and Piazzesi (2005) and (2010) suggest that premia are much simpler, depending upon a single return forecasting factor but not macro variables. This paper suggests that the traditional model is too restrictive, performing poorly at the long end. A model with two return-forecasting factors works remarkably well. |
| Keywords: | Macro-finance, Kalman augmented VAR, term structure, interest rate expectations, risk premia |
| JEL: | C13 C58 E43 E44 E52 G12 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:13/22&r=fmk |
| By: | Didier, Tatiana; Schmukler, Sergio L. |
| Abstract: | The paper documents the major trends in financial development in Latin America and the Caribbean since the early 1990s. The paper compares trends in Latin America and the Caribbean with those in Asia, Eastern Europe, and advanced countries and compares countries within Latin America and the Caribbean. The findings show that financial systems in the Latin America and the Caribbean region have become more diversified and more complex. In particular, domestic financial systems have become less bank-based, with bond and stock markets playing a larger role; institutional investors have gained some space in channeling domestic savings, thus increasing the availability of funds for investment in capital markets; and several economies in the region have started to reduce currency and maturity mismatches. Nonetheless, a few large companies continue to capture most of the domestic savings. And because these trends have unfolded more slowly than pro-market reformers had envisioned, broad, market-based financial systems with dispersed ownership have yet to materialize fully in the region. As a result, convergence is still largely failing to happen and the region's financial systems remain less developed than those of the advanced economies and several other emerging economies, most notably those in Asia. |
| Keywords: | Debt Markets,Emerging Markets,Banks&Banking Reform,Access to Finance,Mutual Funds |
| Date: | 2013–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6582&r=fmk |