New Economics Papers
on Financial Markets
Issue of 2013‒11‒16
nine papers chosen by

  1. Seasoned equity offerings: Stock market liquidity and the rights offer paradox By Ginglinger, Edith; Koenig-Matsoukis, Laure; Riva, Fabrice
  2. Disentangling the bond-CDS nexus: a stress test model of the CDS market By Vuillemey, Guillaume; Peltonen, Tuomas A.
  3. Bank ratings: What determines their quality? By Harald Hau; Sam Langfield; David Marques-Ibanez
  4. Competition And Bank Risk: The Role Of Securitization And Bank Capital By Yener Altunbas; Michiel van Leuvensteijn; David Marques-Ibanez
  5. Are Stock Prices Related to Political Uncertainty Index in OECD Countries? Evidence from Bootstrap Panel Causality Test By Tsangyao Chang; Wen-Yi Chen; Rangan Gupta; Duc Khuong Nguyen
  6. The Impact of Sovereign Credit Signals on Bank Share Prices during the European Sovereign Debt Crisis By Gwion Williams; Rasha Alsakka; Owain ap Gwilym
  7. The Co-Movement and Causality between the U.S. Real Estate and Stock Markets in the Time and Frequency Domains By Tsangyao Chang; Xiao-lin Li; Stephen M. Miller; Mehmet Balcilar; Rangan Gupta
  8. Oil price shocks and stock market volatility: evidence from European data By Stavros Degiannakis; George Filis; Renatas Kizys
  9. How strong are the causal relationships between Islamic stock markets and conventional financial systems? Evidence from linear and nonlinear tests By Ahdi Noomen Ajmi; Shawkat Hammoudeh; Duc Khuong Nguyen; Soodabeh Sarafrazi

  1. By: Ginglinger, Edith; Koenig-Matsoukis, Laure; Riva, Fabrice
    Abstract: This paper examines the impact of market liquidity on seasoned equity offerings (SEO) characteristics in France. We find that, besides blockholders’ takeup, liquidity is an important determinant of SEO flotation method choice. We document higher direct equity offering flotation costs, but also improved stock market liquidity after public offerings and standby rights relative to uninsured rights. After controlling for endogeneity in the choice of SEO flotation method, we find that pure public offerings and standby rights are comparable in terms of direct costs and liquidity improvement. Our results provide new insights as to why firms choose public offerings despite apparently higher costs.
    Keywords: SEO; Seasoned equity offering; flotation method; flotation costs; rights issues; public offerings; liquidity; bid-ask spread;
    JEL: G34 G32
    Date: 2013
  2. By: Vuillemey, Guillaume; Peltonen, Tuomas A.
    Abstract: This paper presents a stress test model for the CDS market, with a focus on the interplay between banks’ bond and CDS holdings. The model enables the analysis of credit risk transfer mechanisms, includes features of market and liquidity risk, and allows for contagious propagation of counterparty failures. As an illustration, we calibrate the model using sovereign bond and CDS data for 65 major European banks. The model simulation shows that, in case of a sovereign credit event, banks’ losses due to direct and correlated bond exposures are significantly higher than losses due to CDS exposures. The main risk for CDS sellers is found to be sudden increases in collateral requirements on multiple correlated CDS exposures. Close-out netting considerably reduces the extent to which contagion may occur. JEL Classification: G21, H63, G15
    Keywords: collateral, Contagion, credit default swap, credit event, liquidity risk, market risk, stress test
    Date: 2013–10
  3. By: Harald Hau (University of Geneva, Swiss Finance Institute and CEPR); Sam Langfield (European Systemic Risk Board Secretariat and UK Financial Services Authority); David Marques-Ibanez (European Central Bank)
    Abstract: This paper examines the quality of credit ratings assigned to banks in Europe and the United States by the three largest rating agencies over the past two decades. We interpret credit ratings as relative assessments of creditworthiness, and define a new ordinal metric of rating error based on banks’ expected default frequencies. Our results suggest that rating agencies assign more positive ratings to large banks and to those institutions more likely to provide the rating agency with additional securities rating business (as indicated by private structured credit origination activity). These competitive distortions are economically significant and help perpetuate the existence of ‘too-big-to-fail’ banks. We also show that, overall, differential risk weights recommended by the Basel accords for investment grade banks bear no significant relationship to empirical default probabilities.
    Keywords: Rating Agencies, Credit Ratings, Conflicts of Interest, Prudential Regulation
    JEL: G21 G23 G28
  4. By: Yener Altunbas (Bangor University); Michiel van Leuvensteijn (APG); David Marques-Ibanez (European Central Bank)
    Abstract: We find that the increased use of securitization activity in the banking sector augmented the effect of competition on realized bank risk during the 2007-2009 crisis. Our results suggest that securitization by itself does not lead to augmented risk while higher levels of capital do not buffer the impact of competition on realized risk. It follows that cooperation between supervisory and competition authorities would be beneficial when acting on the financial stability implications of financial innovation and the effects of bank capital regulation.
    Keywords: securitization; competition; bank risk
    JEL: G21 D22
    Date: 2013–10
  5. By: Tsangyao Chang; Wen-Yi Chen; Rangan Gupta; Duc Khuong Nguyen
    Abstract: This study applies bootstrap panel causality, proposed by Kónya (2006), to investigate causal link between 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 dependency 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: 2013–10–15
  6. By: Gwion Williams (Bangor University); Rasha Alsakka (Bangor Business School); Owain ap Gwilym (Bangor Business School)
    Abstract: The ongoing financial crisis has drawn attention to the role of credit rating agencies (CRAs). We investigate the relative impacts of sovereign actions by different CRAs on the share prices of major European banks during the financial crisis. We examine how bank abnormal returns are affected by sovereign rating changes, watch and outlook announcements, to capture how the crisis spills over across countries and from the sovereign to the financial sector. We find that CRAs’ signals affect share prices, although there is no evidence that CRA actions are the dominant force leading to falling share prices during the crisis.
    Keywords: European sovereign debt crisis; Credit signals; Spillover effect; Credit outlook/watch; Bank shares
    JEL: G15 G21 G24
    Date: 2013–10
  7. By: Tsangyao Chang (Department of Finance, Feng Chia University, Taichung, Taiwan); Xiao-lin Li (Department of Finance, School of Economics and Management, Wuhan University, Wuhan, China); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas, Las Vegas, Nevada, 89154-6005 USA); Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, North Cyprus,via Mersin 10, Turkey); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: This study applies wavelet analysis to examine the relationship between the U.S. real estate and stock markets over the period 1890-2012. Wavelet analysis allows the simultaneous examination of co-movement and causality between the two markets in both the time and frequency domains. Our findings provide robust evidence that co-movement and causality vary across frequencies and evolve with time. Examining market co-movement in the time domain, the two markets exhibit positive co-movement over recent past decades, exception for 1998-2002 when a high negative co-movement emerged. In the frequency domain, the two markets correlate with each other mainly at low frequencies (longer term), except in the second half of the 1900s as well as in 1998-2002, when the two markets correlate at high frequencies (shorter term). In addition, we find that the causal effects between the markets in the frequency domain occur generally at low frequencies (longer term). In the time-domain, the time-varying nature of long-run causalities implies structural changes in the two markets. These findings provide a more complete picture of the relationship between the U.S. real estate and stock markets over time and frequency, offering important implications for policymakers and practitioners.
    Keywords: Stock market, real estate market, wavelet analysis, frequency domain, time domain
    JEL: C49 E44 G11
    Date: 2013–11
  8. By: Stavros Degiannakis (Bank of Greece); George Filis (Bournemouth University); Renatas Kizys (University of Portsmouth)
    Abstract: The paper investigates the effects of oil price shocks on stock market volatility in Europe by focusing on three measures of volatility, i.e. the conditional, the realised and the implied volatility. The findings suggest that supply-side shocks and oil specific demand shocks do not affect volatility, whereas, oil price changes due to aggregate demand shocks lead to a reduction in stock market volatility. More specifically, aggregate demand oil price shocks have significant explanatory power on both current- and forward-looking volatilities. The results are qualitatively similar for aggregate stock market volatility and industrial sectors’ volatilities. Finally, a robustness exercise using short- and long-run volatility models supports the findings.
    Keywords: Conditional Volatility; Realised Volatility; Implied Volatility; Oil Price Shocks; SVAR
    JEL: C13 C32 G10 G15 Q40
    Date: 2013–09
  9. By: Ahdi Noomen Ajmi; Shawkat Hammoudeh; Duc Khuong Nguyen; Soodabeh Sarafrazi
    Abstract: Past studies suggest that the Islamic Â…nance system is only weakly linked or even de- coupled from conventional markets. If this statement is true, then this system may provide a cushion against potential losses resulting from probable future Â…nancial crises. In this article, we make use of heteroscedasticity-robust linear Granger causality and nonlinear Granger causality tests to examine the links between the Islamic and global conventional stock markets, and between the Islamic stock market and several global economic and Â…nancial shocks. Our Â…ndings reveal evidence of signiÂ…cant linear and nonlinear causality between the Islamic and conventional stock markets but more strongly from the Islamic stock market to the other markets. They also show potent causality between the Islamic stock market and Â…nancial and risk factors. This evidence leads to the rejection of the hy- pothesis of decoupling of the Islamic market from their conventional counterparts, thereby reduces the portfolio beneÂ…ts from diversiÂ…cation with Sharia-based markets. A striking result shows a connection between the Islamic stock market and interest rates and interest- bearing securities, which is inconsistent with the Sharia rules. The results also suggest that modeling Islamic stock markets should be done within a nonlinear VAR system and not through a regression equation.
    Keywords: Islamic Â…nance, robust causality tests, Â…nancial and economic shocks.
    Date: 2013–10–15

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