nep-fmk New Economics Papers
on Financial Markets
Issue of 2013‒10‒11
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Equity returns in the banking sector in the wake of the great recession and the European sovereign debt crisis By Chan-Lau, Jorge A.; Liu, Estelle X.; Schmittmann, Jochen M.
  2. Fractal Markets Hypothesis and the Global Financial Crisis: Wavelet Power Evidence By Ladislav Kristoufek
  3. Financial market regulation in the shadow of the sovereign debt crisis By Mayntz, Renate
  4. Continuous-time Modeling of Bid-Ask Spread and Price Dynamics in Limit Order Books By Jose Blanchet; Xinyun Chen
  5. Limited attention and news arrival in limit order markets. By Dugast, J.
  6. Credit and Liquidity in Interbank Rates: a Quadratic Approach. By Dubecq, S.; Monfort, A.; Renne, J-P.; Roussellet, G.
  7. Cascades in real interbank markets By Fariba Karimi; Matthias Raddant

  1. By: Chan-Lau, Jorge A.; Liu, Estelle X.; Schmittmann, Jochen M.
    Abstract: This study finds that equity returns in the banking sector in the wake of the Great Recession and the European sovereign debt crisis have been driven mainly by weak growth prospects and heightened sovereign risk and to a lesser extent, by deteriorating funding conditions and investor sentiment. While the equity return performance in the banking sector has been dismal in general, better capitalized and less leveraged banks have outperformed their peers, a finding that supports policymakers' efforts to strengthen bank capitalization. --
    Keywords: banks,equity returns,financial crisis,sovereign risk,sovereign debt crisis,economic growth,regulatory capital,panel data econometrics
    JEL: G01 G14 G21
    Date: 2013
  2. By: Ladislav Kristoufek
    Abstract: We analyze whether the prediction of the fractal markets hypothesis about a dominance of specific investment horizons during turbulent times holds. To do so, we utilize the continuous wavelet transform analysis and obtained wavelet power spectra which give the crucial information about the variance distribution across scales and its evolution in time. We show that the most turbulent times of the Global Financial Crisis can be very well characterized by the dominance of short investment horizons which is in hand with the assertions of the fractal markets hypothesis.
    Date: 2013–10
  3. By: Mayntz, Renate
    Abstract: The financial market crisis of 2008/2009 triggered efforts at re-regulation at all political levels, national, European, and international. Reform demands had been radical and comprehensive but effective regulatory change was halting, and then in summer 2011 the related connected sovereign debt and euro crises came to preoccupy political attention. Regulatory financial market reform nevertheless continued. This paper traces both the shift in political attention and the continuing regulatory activities of different bodies between the summer of 2011 and the summer of 2013. The analysis highlights the time profile, the specific selectivity, the recursive nature, and the stepwise concretization of reforms. Finally, the issue is raised whether the reform process will eventually lead to increasing regulatory harmonization, or increasing international diversity of financial market regulation. -- Die Finanzmarktkrise von 2008/2009 hat auf allen politischen Ebenen - der nationalen, europäischen und internationalen - Versuche einer Regulierungsreform ausgelöst. Die anfänglichen Reformziele waren radikal und umfassend, aber der tatsächliche Reformprozess kam bis zum Sommer 2011 nur zögernd voran. Zu diesem Zeitpunkt drängte die Staatsschuldenkrise und die mit ihr verbundene Euro-Krise das Thema Finanzmarktregulierung in den Hintergrund. Das Discussion Paper verfolgt sowohl den Wandel politischer Aufmerksamkeit wie die dennoch weiter laufenden Aktivitäten wichtiger, speziell internationaler Institutionen in Sachen Regulierungsreform in der Zeit zwischen Mitte 2011 und Mitte 2013. Es wird gezeigt, dass der Reformprozess eine charakteristische Zeitstruktur, eine spezifische Selektivität und Rekursivität besitzt und durch eine schrittweise Konkretisierung gekennzeichnet ist. Am Ende stellt sich die Frage, ob der Reformprozess zu wachsender internationaler Harmonisierung oder umgekehrt zu wachsender Diversität von Finanzmarktregulierung führen wird.
    Date: 2013
  4. By: Jose Blanchet; Xinyun Chen
    Abstract: We derive a continuous time model for the joint evolution of the mid price and the bid-ask spread from a multiscale analysis of the whole limit order book (LOB) dynamics. We model the LOB as a multiclass queueing system and perform our asymptotic analysis using stylized features observed empirically. We argue that in the asymptotic regime supported by empirical observations the mid price and bid-ask-spread can be described using only certain parameters of the book (not the whole book itself). Our limit process is characterized by reflecting behavior and state-dependent jumps. Our analysis allows to explain certain characteristics observed in practice such as: the connection between power-law decaying tails in the volumes of the order book and the returns, as well as statistical properties of the long-run spread distribution.
    Date: 2013–10
  5. By: Dugast, J.
    Abstract: I model the speed of price adjustments to news arrival in limit order markets when investors have limited attention. Because of limited attention, investors imperfectly monitor news arrival. Consequently, in equilibrium, prices reflect news with delay. This delay shrinks when investors' attention capacity increases. The price adjustment delay also decreases when the frequency of news arrival increases. When news arrival frequency is higher, the picking-off risk increases for limit orders. The limit order book becomes thinner and there are fewer stale limit orders to execute or cancel after news arrival. Thus, it reduces the time it takes for market prices to reflect news content.
    Keywords: financial market, limit order market, news, limited attention, imperfect market monitoring.
    JEL: G14 D82 D83
    Date: 2013
  6. By: Dubecq, S.; Monfort, A.; Renne, J-P.; Roussellet, G.
    Abstract: We propose a quadratic term-structure model of the EURIBOR-OIS spreads. Contrary to OIS, EURIBOR rates incorporate credit and liquidity risks resulting in compensations for (a) facing default risk of debtors, and (b) possible unexpected funding needs on the lender’s side. Our approach allows us to decompose the whole term structure of spreads into credit- and liquidity-related parts and into an expectation part and risk premiums. Our results shed new light on the effects of unconventional monetary policy carried out in the Eurosystem. In particular, our findings suggest that most of the recent easing in the euro interbank market is liquidity-related.
    Keywords: Quadratic term-structure model, liquidity risk, credit risk, interbank market, unconventional monetary policy.
    JEL: E43 E44 G12 G21
    Date: 2013
  7. By: Fariba Karimi; Matthias Raddant
    Abstract: We analyze cascades of defaults in an interbank loan market. The novel feature of this study is that the network structure and the size distribution of banks are derived from empirical data. We find that the ability of a defaulted institution to start a cascade depends on an interplay of shock size and connectivity. Further results indicate that the ability to limit default risk by spreading the lending to many counterparts decreased with the financial crisis. To evaluate the influence of the network structure on market stability, we compare the simulated cascades from the empirical network with results from different randomized network models. The results show that the empirical network has non-random features, which cannot be captured by rewired networks. The analysis also reveals that simulations assuming homogeneity for size of banks and loan contracts dramatically overestimates the fragility of the interbank market.
    Date: 2013–10

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