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on Financial Markets |
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Issue of 2014‒01‒24
eight papers chosen by |
| By: | Daniel L. Greenwald; Martin Lettau; Sydney C. Ludvigson |
| Abstract: | Three mutually uncorrelated economic shocks that we measure empirically explain 85% of the quarterly variation in real stock market wealth since 1952. We use a model to show that they are the observable empirical counterparts to three latent primitive shocks: a total factor productivity shock, a risk aversion shock that is unrelated to aggregate consumption and labor income, and a factors share shock that shifts the rewards of production between workers and shareholders. On a quarterly basis, risk aversion shocks explain roughly 75% of variation in the log difference of stock market wealth, but the near-permanent factors share shocks plays an increasingly important role as the time horizon extends. We find that more than 100% of the increase since 1980 in the deterministically detrended log real value of the stock market, or a rise of 65%, is attributable to the cumulative effects of the factors share shock, which persistently redistributed rewards away from workers and toward shareholders over this period. Indeed, without these shocks, today's stock market would be about 10% lower than it was in 1980. By contrast, technological progress that rewards both workers and shareholders plays a smaller role in historical stock market fluctuations at all horizons. Finally, the risk aversion shocks we identify, which are uncorrelated with consumption or its second moments, largely explain the long-horizon predictability of excess stock market returns found in data. These findings are hard to reconcile with models in which time-varying risk premia arise from habits or stochastic consumption volatility. |
| JEL: | G0 G12 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19818&r=fmk |
| By: | Peter J. Wallison (American Enterprise Institute) |
| Abstract: | In a September 2013 report, the Office of Financial Research (OFR), a US Treasury agency set up by the Dodd-Frank Act, suggested that the asset management industry could be a future source of systemic risk. However, the chances that an asset manager could trigger a systemic event is vanishingly small. The FSOC should spend its time elsewhere. |
| Keywords: | systemic risk,SIFIs,FSOC,Dodd-Frank Act |
| JEL: | A G |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:aei:rpaper:39937&r=fmk |
| By: | Baule, Rainer; Korn, Olaf; Saßning, Sven |
| Abstract: | Option-implied betas are a promising alternative to historical beta estimators, because they are inherently forward-looking and can incorporate new information immediately and fully. Recently, different implied beta estimators have been developed in previous literature, but very little is known about their properties and information content. This paper presents a first systematic comparison between six different implied beta estimators, which provides some guidance for applications and identifies directions for further improvements. The main results of the empirical study reveal that betas derived from implied variances are better predictors of realized betas than betas obtained from implied skewness, and that cross-sectional information from all stocks in the market improves beta estimation significantly. We also find that option-implied betas generally have a higher information content in periods of relatively high trading activity in options markets. -- |
| Keywords: | beta,option-implied information |
| JEL: | G11 G12 G13 G14 G17 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1311&r=fmk |
| By: | Jan Hanousek; Evžen Kočenda; Jan Novotný |
| Abstract: | We analyze the dynamics of price jumps and the impact of the European debt crisis using the high-frequency data reported by selected stock exchanges on the European continent during the period January 2008 to June 2012. We employ two methods to identify price jumps: Method 1 minimizes the probability of false jump detection (the Type-II Error-Optimal price jump indicator) and Method 2 maximizes the probability of successful jump detection (the Type-I Error-Optimal price jump indicator). We show that individual stock markets exhibited differences in price jump intensity before and during the crisis. We also show that in general the variance of price jump intensity could not be distinguished as different in the pre-crisis period from that during the crisis. Our results indicate that, contrary to common belief, the intensity of price jumps does not uniformly increase during a period of financial distress. However, there do exist differences in price jump dynamics across stock markets and investors have to model emerging and mature markets differently to properly reflect their individual dynamics. |
| Keywords: | European stock markets, price jump indicators, non-parametric testing, clustering analysis, financial econometrics, emerging markets. |
| JEL: | C14 C58 F37 G15 G17 |
| Date: | 2013–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2013-1059&r=fmk |
| By: | Michele Leonardo Bianchi (Bank of Italy); Frank J. Fabozzi (EDHEC Business School); Svetlozar T. Rachev (Stony Brook University) |
| Abstract: | In this paper we consider several time-varying volatility and/or heavy-tailed models to explain the dynamics of return time series and to fit the volatility smile for exchange-traded options where the underlying is the main ‘Borsa Italiana’ stock index. Given observed prices for the time period we investigate, we calibrate both continuous-time and discrete-time models. First, we estimate the models from a time-series perspective (i.e. under the historical probability measure) by investigating more than ten years of daily index price log-returns. Then, we explore the risk-neutral measure by fitting the values of the implied volatility for numerous strikes and maturities during the highly volatile period from April 1, 2007 (prior to the subprime mortgage crisis in the U.S.) to March 30, 2012. We assess the extent to which time-varying volatility and heavy-tailed distributions are needed to explain the behavior of the most important stock index of the Italian market. |
| Keywords: | volatility smile, option pricing, non-Gaussian Ornstein-Uhlenbeck processes, Lévy processes, tempered stable processes and distributions, stochastic volatility models, time-changed Lévy processes, GARCH model, filtered historical simulation, particle filter |
| JEL: | C02 C46 C58 C61 C63 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_944_14&r=fmk |
| By: | Dalia El-Shiaty (Faculty of Management Technology, The German University in Cairo); Ahmed Abdelmotelib Badawi (American University of the Middle East) |
| Abstract: | This paper examines herding behavior in the Egyptian stock market using the CH model developed by Christie and Huang (1995) and the CCK model developed by Chang et al. (2000). We use daily returns data of the 20 most traded stocks in the Egyptian Exchange in addition to the daily returns of the market index EGX 100 during a period of five years from January 2006 till December 2010. The paper is an attempt towards thorough examination of herding behavior in the Middle East and Africa region which has been investigated only as an entire region and not disaggregated into the specific countries. The results show that there is no herding present in the Egyptian stock market. |
| Keywords: | Herd behavior, Egyptian stock market, behavioral finance |
| JEL: | G02 G10 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:guc:wpaper:37&r=fmk |
| By: | Yusaku Nishimura (Institute of International Economy, University of International Business and Economics); Yoshiro Tsutsui (Graduate School of Economics, Osaka University); Kenjiro Hirayama (School of Economics, Kwansei Gakuin University) |
| Abstract: | We analyze the mechanism of return and volatility spillover effects from the Chinese to the Japanese stock market. We construct a stock price index comprised of those companies that have substantial operations in China. This China-related index responds to changes in the Shanghai Composite Index more strongly than does the TOPIX (the market index of the Tokyo Stock Exchange). This result suggests that China has a large impact on Japanese stocks via China-related firms in Japan. Furthermore, we find evidence that this response has become stronger as the Chinese economy has gained importance in recent years. |
| Keywords: | return and volatility spillover; China related stock index; high-frequency data; intraday periodicity; long memory |
| JEL: | G10 G14 G15 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1401&r=fmk |
| By: | Sheng, Andrew; Singh, Ajit |
| Abstract: | This study is a sequel to the 2012 Sheng and Singh article that identified and explained the significance of the two central tenets of Islamic finance: namely, its underpinning by a strong ethical system, and the absolute prohibition of the use of interest rates. That study also argued that the cooperation between the conventional Western system and the Islamic system is eminently sensible and will lead to a Pareto optimal increase in world welfare |
| Keywords: | Islamic Finance, interest rates, western system |
| JEL: | G2 P4 P49 |
| Date: | 2013–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53035&r=fmk |