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on Financial Markets |
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Issue of 2013‒10‒18
seven papers chosen by |
| By: | Antoine Martin; James McAndrews; Ali Palida; David Skeie |
| Abstract: | Monetary policy measures taken by the Federal Reserve as a response to the 2007-09 financial crisis and subsequent economic conditions led to a large increase in the level of outstanding reserves. The Federal Open Market Committee (FOMC) has a range of tools to control short-term market rates in this situation. We study several of these tools, namely, interest on excess reserves (IOER), reverse repurchase agreements (RRPs), and the term deposit facility (TDF). We find that overnight RRPs (ON RRPs) may provide a better floor on rates than term RRPs because they are available to absorb daily liquidity shocks. Whether the TDF or RRPs best support equilibrium rates depends on the intensity of interbank monitoring costs versus balance sheet costs, respectively, that banks face. In our model, using the RRP and TDF concurrently may most effectively stabilize short-term rates close to the IOER rate when such costs are rapidly increasing. |
| Keywords: | Federal Open Market Committee ; Monetary policy ; Bank reserves ; Bank liquidity ; Interest rates ; Repurchase agreements |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:642&r=fmk |
| By: | Maria Th. Kasselaki (Bank of Greece); Athanasios O. Tagkalakis (Bank of Greece) |
| Abstract: | This paper studies the links between of financial soundness indicators and financial crisis episodes controlling for several macroeconomic and fiscal variables in 20 OECD. We focus our attention on aggregate capital adequacy, asset quality and bank profitability indicators compiled by the IMF. Our key findings suggest that in times of severe financial crisis regulatory capital to risk weighted assets is increased (by about 0.5-0.6 percentage points –p.p.) to abide by regulatory and supervisory demands, non performing loans (NPL) to total loans increase dramatically (by about 0.5-0.6 p.p.), but loan loss provisions lag behind NPLs (they fall by about 12.3-18.8 p.p.) and profitability deteriorates dramatically (returns on assets (equity) fall by about 0.3-0.4 (5.0-7.0) p.p.). |
| Keywords: | Bank profitability; capital adequacy; asset quality; financial crisis. |
| JEL: | E44 E58 G21 G28 E61 E62 H61 H62 E32 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:158&r=fmk |
| By: | Tsangyao Chang (Department of Finance, Feng Chia University, Taichung, Taiwan); Wen-Yi Chen (Center of Health Research and Development, National Taichung University of Science and Technology, Taichung, Taiwan); Rangan Gupta (Department of Economics, University of Pretoria); Duc Khuong Nguyen (IPAG Lab, IPAG Business School, France.) |
| Abstract: | This study applies bootstrap panel causality, proposed by Kónya (2006), to investigate causal link be-tween political uncertainty and stock price for seven OECD countries over the monthly period of 2001.01 to 2013.04. This modeling approach allows us to examine both the cross-sectional depen-dency and the country-specific heterogeneity. Our empirical results indicate that not all the countries are alike and that the theoretical prediction that stock prices fall at the announcement of a policy change is not always supported. Specifically, we find evidence of the stock price leading hypothesis for Italy and Spain, while the political uncertainty leading hypothesis cannot be rejected for the United Kingdom and the United States. In addition, the neutrality hypothesis was supported in the remaining three countries (Canada, France, and Germany), while the feedback hypothesis, however, is never found. |
| Keywords: | Stock Price; Political Uncertainty Index; Bootstrap Panel Causality Test |
| JEL: | C23 G12 G18 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201360&r=fmk |
| By: | Van Heerden , Dorathea; Rodrigues, Jose; Hockly, Dale; Lambert, Bongani; Taljard, Tjaart; Phiri, Andrew |
| Abstract: | This study deviates from the conventional use of a linear approach in testing for the efficiency market hypothesis (EMH) for the Johannesburg Stock Exchange (JSE) between the periods 2001:01 to 2013:07. By making use of a threshold autoregressive (TAR) model and corresponding asymmetric unit root tests, our study demonstrates how the stock market indexes evolve as highly persistent, nonlinear process and yet for a majority of the time series under observation, the formal unit root tests reject the hypothesis of stationarity among the variables. These results bridge two opposing contentions obtained from previous studies by concluding that while a number of stock prices under the JSE stock market may not evolve as pure unit root processes, the time series are, however, highly persistent to an extent of being able to be deemed as weak-form efficient. |
| Keywords: | Keywords: Efficient Market Hypothesis (EMH), Johannesburg stock Exchange (JSE), South Africa, Threshold Autoregressive (TAR) model, Unit Roots. |
| JEL: | C01 C13 C22 G10 |
| Date: | 2013–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:50544&r=fmk |
| By: | Adam Gersl; Jitka Lesanovska |
| Abstract: | This paper focuses on the development of the interbank market risk premium in the Czech Republic during the global financial crisis. We explain the significant departure of interbank interest rates from the key monetary policy rate by a combination of different factors, including liquidity risk, counterparty risk, foreign influence, interbank relations, and strategic behavior. The results suggest a relevant role of market factors, and some importance of counterparty risk. |
| Keywords: | counterparty risk, interbank market, liquidity risk, risk premium. |
| JEL: | G19 G21 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2013/01&r=fmk |
| By: | Buti, Sabrina (University of Toronto); Rindi, Barbara (Bocconi University); Wen, Yuanji (Bocconi University); Werner, Ingrid M. (OH State University) |
| Abstract: | We show that following a tick size reduction in a decimal public limit order book (PLB) market quality and welfare fall for illiquid but increase for liquid stocks. If a Sub-Penny Venue (SPV) starts competing with a penny-quoting PLB, market quality deteriorates for illiquid, low priced stocks, while it improves for liquid, high priced stocks. As all traders can demand liquidity on the SPV, traders' welfare increases. If the PLB facing competition from a SPV lowers its tick size, PLB spread and depth decline and total volume and welfare increase irrespective of stock liquidity. |
| JEL: | G10 G12 G20 G23 G24 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2013-14&r=fmk |
| By: | Bao, Jack (OH State University); Hou, Kewei (OH State University) |
| Abstract: | We study heterogeneity in the comovement of corporate bonds and equities, both at the bond level and at the firm level. Using an extended Merton model, we illustrate that corporate bonds that mature late relative to the rest of the bonds in its issuer's maturity structure should have stronger comovement with equities. In contrast, endogenous default models suggest that a bond's position in its issuer's maturity structure has little relation with the strength of the comovement between bonds and equities. Empirically, we find results consistent with the prediction of the extended Merton model. In addition, we find that comovement between bonds and equities is stronger for firms with higher credit risk as proxied by the book-to-market ratio and distance-to-default even after controlling for ratings. Our evidence suggests that market participants are able to assess credit quality at a more granular level than ratings. |
| JEL: | G12 G13 G14 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2013-11&r=fmk |