New Economics Papers
on Financial Markets
Issue of 2013‒09‒28
six papers chosen by

  1. Does the Greenspan era provide evidence on leadership in the FOMC? By El-Shagi, Makram; Jung, Alexander
  2. Stock Prices and Stock Return Volatilities Implied by the Credit Market By Byström, Hans
  3. Credit Contagion in Financial Markets: A Network-Based Approach By Steinbacher, Matjaz; Steinbacher, Mitja; Steinbacher, Matej
  4. Intraday analysis of the limit order bias at the ex-dividend day of U.S. common stocks By Efthymiou, Vassilis A.; Leledakis, George N.
  5. Basel III, BIS and Global Financial Governance By Khan, Haider
  6. Survey of Literature on Portfolio Theory By Cantillo , Andres

  1. By: El-Shagi, Makram; Jung, Alexander
    Abstract: The aim of this paper is to examine whether Chairman Greenspan influenced the Reserve Bank Presidents. This question is interesting, because it has been argued that their preferences would be more persistent compared to those of the Governors. We estimate individual Taylor-type reaction functions for the Federal Reserve Districts using their voiced interest rate preferences during the policy go-around as well as real-time economic information on the inflation and unemployment gap. A bootstrap analysis exploits information contained in these reaction functions and constructs counterfactual distributions of disagreement among the Federal Reserve Districts, assuming the absence of factors that could have enforced consensus. We compare these simulated distributions with the observed disagreement during the committee deliberations and find empirical evidence in favour of coordination. This detected coordination helped to bring the preferences of the Federal Reserve Districts more in line with Chairman Greenspan’s views. JEL Classification: C15, C53, D72, E58
    Keywords: bootstrap, federal Reserve Districts, greenspan era, individual reaction functions, real-time data
    Date: 2013–08
  2. By: Byström, Hans (Department of Economics, Lund University)
    Abstract: In this paper we compare equity- and credit investors’ opinions on the price formation in the equity market. More exactly, we invert the CreditGrades model in order to back out credit-implied stock prices and stock return volatilities from credit default swap spreads for the firms in the DJIA index. The credit-implied stock prices often deviate significantly from actual stock prices over the longer term. Meanwhile, their day-to-day movements are significantly correlated with actual stock returns for most firms in the DJIA index. In an attempt to demonstrate potential applications of credit-implied stock prices we construct simple “capital structure arbitrage” trading strategies based on past credit-implied prices. Our strategies only require the buying and selling of stocks and differ from traditional cross-capital structure strategies by being suitable for retail investors and other investors without access to the credit derivatives market. The credit-implied volatilities, in turn, behave rather similarly to observed stock market volatilities but without any ghost effects. We demonstrate how an alternative credit-based “fear gauge”, comparable to the VIX index but emanating from the credit market, can be constructed using the credit-implied volatilities. We call this implied volatility index the Credit-Implied Volatility Index (CIVIX) index. Finally, a plot of the entire term-structure of implied volatilities demonstrates a distinct maturity volatility skew.
    Keywords: credit default swaps; implied volatility; implied stock prices; CreditGrades; VIX
    JEL: G10
    Date: 2013–08–14
  3. By: Steinbacher, Matjaz; Steinbacher, Mitja; Steinbacher, Matej
    Abstract: We propose a network-based model of credit contagion and examine the e�ects of idiosyncratic and systemic shocks to individual banks and the banking system. The banking system is built as a network in which banks are connected to each other through the interbank market. The microstructure captures the relation between debtors and creditors, and the macroeconomic events capture the sensitivity of the banks' �nancial strenght to macroeconomic events, such as housing. We have demonstrated that while idiosyncratic shocks do not have a potential to substantially disturb the banking system, macroeconomic events of higher magnitudes could be highly harmful, especially if they also spur contagion. In a concerted default of more banks, the stability of a banking system tends to decrease disproportionately. In addition, credit risk analysis is highly sensitive to the network topology and exhibits a nonlinear characteristic. Capital ratio and recovery rates are two additional factors that contribute to the stability of the �nancial system.
    Keywords: credit contagion; network models; credit risk; structural models; fi�nancial stability; alpha-criticality index
    JEL: C63 G01
    Date: 2013
  4. By: Efthymiou, Vassilis A.; Leledakis, George N.
    Abstract: This study places Dubofsky’s (1992) “limit order adjustment hypothesis” under the microscope of an intraday analysis, which employs a minute-by-minute trade and quote data recorded during the ex-dividend days of common stocks listed on NYSE, AMEX and NASDAQ. Dufosky’s (1992) model concluded that the asymmetric adjustment of open limit orders for cash dividend payments under the NYSE and AMEX rules is sufficient to create abnormal returns on the ex-dividend day. Empirical evidence shows that the limit order bias incurred due to the asymmetric adjustment of open limit orders seems to dominate the overnight ex-day returns but at the same time, it is significantly corrected via active trading up until the close of the ex- dividend day. As a result, the significant association of the ex-day price drop discrepancy with the opening limit order bias eventually disappears before the ex-dividend day close. Finally, it is found that the reversal of the limit order bias is in fact quicker in stocks which are more liquid or listed on NASDAQ where strong competition among dealers is envisaged to drive stale quotes closer to the fair adjustment of the dividend.
    Keywords: Ex-dividend day; intraday price drop ratio; order flow bias
    JEL: G14 G35 G39
    Date: 2013–09–12
  5. By: Khan, Haider
    Abstract: This paper analyzes the following aspects of global financial governance: • Proposed BASEL III reforms for more stringent capital requirements and their implications for the developing world in particular. • BIS proposals for better regulation of financial derivatives, including commodities futures, by moving away from OTC transactions towards organized exchanges. The Basel reforms and the BIS proposals for regulating the derivatives markets have many positive features. However, they have not been designed with the needs of DCs and LDCs in mind. The consequences of Basel I and II and proposed Basel III are analyzed from the perspective of the developing countries. It turns out that specific concerns of developing countries have not received adequate attention within the Basel Reform Initiatives and more can be and needs to be done.
    Keywords: dynamic complex adaptive economic systems; finance for development; financial architectures; financial crises; regional cooperation; BASEL III reforms; the BIS proposals
    JEL: F3 O1 P1
    Date: 2013–08
  6. By: Cantillo , Andres
    Abstract: The logical derivation of the two-factors model (The CAPM) is not empirically testable. This has paved the way for new treatments of asset pricing. However, the deterministic approach taken by most economists has prevented them to create a more useful treatment to the problems of asset pricing and diversification. Hence, the new approach contained in the post Keynesian literature has an opportunity in the formulation of a solution to both problems based on the notion of fundamental uncertainty
    Keywords: Finance, Diversification, Investment Decisions, Portfolio, Asset Price
    JEL: G11 G12
    Date: 2013–08–18

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