nep-fmk New Economics Papers
on Financial Markets
Issue of 2014‒02‒21
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. News Cohesiveness: an Indicator of Systemic Risk in Financial Markets By Matija Pi\v{s}korec; Nino Antulov-Fantulin; Petra Kralj Novak; Igor Mozeti\v{c}; Miha Gr\v{c}ar; Irena Vodenska; Tomislav \v{S}muc
  2. Empirical symptoms of catastrophic bifurcation transitions on financial markets: A phenomenological approach By M. Koz{\l}owska; T. Gubiec; T. R. Werner; M. Denys; A. Sienkiewicz; R. Kutner; Z. Struzik
  3. The interbank market risk premium, central bank interventions, and measures of market liquidity By Alexius, Annika; Birenstam, Helene; Eklund, Johanna
  4. Tests of Financial Market Contagion- Evolutionary Cospectral Analysis V.S. Wavelet Analysis By Zied Ftiti; Aviral Tiwari; Amél Belanès
  5. Semiparametric Generalized Long Memory Modelling of GCC Stock Market Returns: A Wavelet Approach By Heni Boubaker; Nadia Sghaier
  6. Are emerging markets exposed to contagion from U.S.: Evidence from stock and sovereign bond markets By Irfan Akbar Kazi; Hakimzadi Wagan
  7. Testing for Multiple Bubbles in the BRICS Stock Markets By Tsangyao Chang; Tsung-pao Wu; Goodness C. Aye; Rangan Gupta
  8. Regional Financial Regulation in Asia By Kawai, Masahiro; Morgan, Peter J.
  9. Contagion in EU Sovereign Yield Spreads By António Afonso; Ana Catarina Ramos Félix
  10. Shock and Volatility Transmissions between Bank Stock Returns in Romania: Evidence from a VARGARCH Approach By Anissa Chaibi; Maria Ulici
  11. Equity Market Integration and Currency Risk: Empirical Evidence for Indonesia By Khaled Guesmi; Frederic Teulon
  12. Islamic finance: a review of the literature By Jean-Yves MOISSERON; Bruno-Laurent MOSCHETTO; Frédéric TEULON

  1. By: Matija Pi\v{s}korec; Nino Antulov-Fantulin; Petra Kralj Novak; Igor Mozeti\v{c}; Miha Gr\v{c}ar; Irena Vodenska; Tomislav \v{S}muc
    Abstract: Motivated by recent financial crises significant research efforts have been put into studying contagion effects and herding behaviour in financial markets. Much less has been said about influence of financial news on financial markets. We propose a novel measure of collective behaviour in financial news on the Web, News Cohesiveness Index (NCI), and show that it can be used as a systemic risk indicator. We evaluate the NCI on financial documents from large Web news sources on a daily basis from October 2011 to July 2013 and analyse the interplay between financial markets and financially related news. We hypothesized that strong cohesion in financial news reflects movements in the financial markets. Cohesiveness is more general and robust measure of systemic risk expressed in news, than measures based on simple occurrences of specific terms. Our results indicate that cohesiveness in the financial news is highly correlated with and driven by volatility on the financial markets.
    Date: 2014–02
  2. By: M. Koz{\l}owska; T. Gubiec; T. R. Werner; M. Denys; A. Sienkiewicz; R. Kutner; Z. Struzik
    Abstract: The principal aim of this work is the evidence on empirical way that catastrophic bifurcation breakdowns or transitions, proceeded by flickering phenomenon, are present on notoriously significant and unpredictable financial markets. Overall, in this work we developed various metrics associated with catastrophic bifurcation transitions, in particular, the catastrophic slowing down (analogous to the critical slowing down). All these things were considered on a well-defined example of financial markets of small and middle to large capitalization. The catastrophic bifurcation transition seems to be connected with the question of whether the early-warning signals are present in financial markets. This question continues to fascinate both the research community and the general public. Interestingly, such early-warning signals have recently been identified and explained to be a consequence of a catastrophic bifurcation transition phenomenon observed in multiple physical systems, e.g. in ecosystems, climate dynamics and in medicine (epileptic seizure and asthma attack). In the present work we provide an analogical, positive identification of such phenomenon by examining its several different indicators in the context of a well-defined daily bubble; this bubble was induced by the recent worldwide financial crisis on typical financial markets of small and middle to large capitalization.
    Date: 2014–02
  3. By: Alexius, Annika (Dept. of Economics, Stockholm University); Birenstam, Helene (Department of Statistics, Stockholm University); Eklund, Johanna (Sveriges Riksbank)
    Abstract: When the interbank market risk premium soared during the finnancial crisis, it created a wedge between interest rates actually paid by private agents and the rapidly falling policy rates. Many central banks attempted to improve the situation by supplying liquidity to the domestic interbank market. This paper studies the Swedish interbank market risk premium using a unique data set on traded volume between banks and between banks and the Riksbank. We find that the main determinants of the Swedish interbank premium are international variables, such as US and EURO area risk premia. International exchange rate volatility and the EURO/USD deviations from CIP also matters, while standard mesures of domestic market liquidity and domestic credit risk have insignificant effects. Our measure of actual turnover in the interbank market is however associated with a significant reduction of the interbank market risk premium, as are credit provisions by the central bank.
    Keywords: Interbank market risk premium; liquidity risk; credit risk; credit provisions.
    JEL: F31 F41
    Date: 2014–02–06
  4. By: Zied Ftiti; Aviral Tiwari; Amél Belanès
    Abstract: This paper examines the co-movements dynamics between OCDE countries with the US and Europe. The core focus is to suggest advantageous techniques allowing the investigation with respect to time and frequency, namely evolutionary co-spectral analysis and wavelet analysis. Our study puts in evidence the existence of both long run and short-run co-movements. Both interdependence and contagion are well identified across markets; but with slight differences. Both investors and policymakers can derive worthwhile information from this research. Recognizing countries sensitivity to permanent and transitory shocks enables investors to select rational investment strategies. Similarly, policymakers can make safe crisis management policies.
    Keywords: contagion, interdependence, stock markets index, evolutionary co-spectral analysis, wavelet analysis.
    Date: 2014–01–06
  5. By: Heni Boubaker; Nadia Sghaier
    Abstract: This paper proposes a new class of semiparametric generalized long memory model with FIA- PARCH errors (SEMIGARMA-FIAPARCH model) that extends the conventionnel GARMA model to incorporate nonlinear deterministic trend, in the mean equation, and to allow for time varying volatility, in the conditional variance equation. The parameters of this model are estimated in a wavelet domain. We provide an empirical application of this model to examine the dynamic of the stock market returns in six GCC countries. The empirical results show that the model proposed o¤ers an interesting framework to describe the seasonal long range dependence and the nonlinear deterministic trend in the return as well as persistence to shocks in the conditional volatiliy. We also compare its performance predictive to the traditional long memory model with FIAPARCH errors (FARMA-FIAPARCH model). The predictive results indicate that the model proposed out performs the FARMA-FIAPARCH model.
    Keywords: semiparametric generalized long memory process, FIAPARCH errors, wavelet do- main, stock market returns.
    JEL: C13 C22 C32 G15
    Date: 2014–01–06
  6. By: Irfan Akbar Kazi; Hakimzadi Wagan
    Abstract: The aim of this article is to examine: how the dynamics of correlations between five emerging countries (Argentina, Chili, Hungary, Russia and Poland), two emerging regions (Latin America (LAC) and Europe (EU)) and U.S. evolved from January 2004 to September 2011. The main contribution of this study is to explore whether the plunging stock market in U.S., in the aftermath of global financial crisis (2008-2009), exert contagion effects on emerging equity and sovereign bond markets. To this end we rely on Asymmetric Dynamic Conditional Correlation (ADCC) model developed by Cappiello et al. (2006), which accounts for asymmetries in conditional variances and correlations to negative returns. We show that there is mean shift in the estimated DCC immediately after the Lehman Brothers failure in September 2008. We refer this finding as contagion from U.S. stock market to emerging equity and sovereign bond markets especially in emerging LAC region.
    Keywords: Global financial crisis, contagion, emerging equity markets, sovereign risk.
    JEL: C32 E44 F30 G01 G12
    Date: 2014–01–06
  7. By: Tsangyao Chang (Department of Finance, Feng Chia University, Taichung, Taiwan); Tsung-pao Wu; Goodness C. Aye (Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: In this study, we apply a new recursive test proposed by Philips et al (2013) to investigate whether there exist multiple bubbles in the BRICS (Brazil, Russia, India, China and South Africa) stock markets, using monthly data on stock price-dividend ratio. Our empirical results, the first of its kind for these economies, indicate that there did exist multiple bubbles in the stock markets of the BRICS. Further, the dates of the bubbles also corresponded to specific events in the stocks markets of these economies. This finding has important economic and policy implications.
    Keywords: Multiple bubbles, BRICS stock markets, GSADF test
    JEL: C12 C15 G12 G15
    Date: 2014–02
  8. By: Kawai, Masahiro (Asian Development Bank Institute); Morgan, Peter J. (Asian Development Bank Institute)
    Abstract: The Asian financial crisis (1997–1998) and the global financial crisis (2007–2009) highlighted the potential value of financial regionalism, i.e., regional-level cooperation in financial policy. This paper argues that there is a mediating role for regional-level institutions of financial regulation between national regulators in Asia and global-level institutions such as the International Monetary Fund and the Financial Stability Board. This potential role includes: (i) monitoring financial markets and capital flows to identify regional systemic risks such as capital flows; (ii) coordinating financial sector surveillance and regulation to promote regional financial stability; and (iii) cooperating with global-level institutions in rule formulation, surveillance and crisis management. This is particularly important in an environment of increasing financial integration and harmonization in the region. The paper considers experiences of the European Union (EU) and Asia in regional financial cooperation and regulation and draws lessons for Asia. The EU represents the most advanced stage of regional financial integration and regulation in the world today, and can provide valuable lessons for Asia. Asia’s greater diversity of financial development and openness requires a more nuanced approach to integration. Despite its shortcomings and slow pace, the Association of Southeast Asian Nations (ASEAN) Economic Community process probably provides the most feasible and relevant model for regulatory cooperation on a voluntary basis. It would be desirable to extend this framework further in Asia, say to the ASEAN+3 countries for a start. Asian economies can also strengthen existing surveillance processes; enhance and diversify the resources, functions and membership of the Chiang Mai Initiative Multilateralization and the Macroeconomic Research Office for surveillance and provision of a financial safety net; and create an Asian financial stability dialogue to monitor regional financial markets, facilitate policy dialogue and cooperation, and secure regional financial stability.
    Keywords: financial regulation; financial surveillance; regional cooperation; financial safety net; international financial markets; international monetary arrangements and institutions
    JEL: F33 F36 G15 G18 G28
    Date: 2014–02–12
  9. By: António Afonso; Ana Catarina Ramos Félix
    Abstract: Since the beginning of the sovereign debt crisis in the Euro Area, a main concern for European leaders is the prevention of the possible contagion from distressed countries. In our research, we assess if there is a spillover effect from those countries and which determinants can be considered transmission mechanisms of the sovereign debt crisis. We use a panel of 13 EU countries (Austria, Belgium, Denmark, Finland, France, Greece, Ireland, Italy, The Netherlands, Portugal, Spain, Sweden and the United Kingdom), covering the period Q1:2000 to Q1:2013 and we also analyse each country individually, on the basis of a SUR analysis. We find that those countries with worse macro and fiscal fundamentals are more vulnerable to contagion and are more affected by international liquidity and credit risks.
    Keywords: sovereign yield spreads, spillover effects, contagion.
    JEL: C33 E62 G15 H62
    Date: 2014–01
  10. By: Anissa Chaibi; Maria Ulici
    Abstract: We develop a VAR-GRACH approach to invesigate shock and volatility transmissions between bank stock returns in Romania during the 2007-2009 international financial crisis.Our findings provide eveidence of significant shock and volatility transmissions between Romanian bank returns.We also show how our empirical results can be used to build effective diversification and hedging strategies.
    Keywords: Shock and volatility transmission, financial crisis, Romanian banks.
    JEL: G1 G2 P2
    Date: 2014–02–12
  11. By: Khaled Guesmi; Frederic Teulon
    Abstract: This paper tests the time-varying degree of Indonesian market integration using conditional version of the International Capital Asset Pricing Model (ICAPM) with applying a GDC-GARCH. The use of the GDC-GARCH technique allows us to first, describe the time-varying stochastic conditional covariance matrix and second, take into account the dynamic changes in the degree of market integration and risk premium. Our empirical results show clear evidence of market integration varying degree, explained by the U.S term premium and the level of market openness. Even though it reaches high values during turmoil periods, and exhibits an upward trend towards the end of the estimation period, Indonesian stock market still remain substantially segmented from the regional market. These results thus suggest that diversification into emerging market assets continues to produce substantial profits, and that the asset pricing rules should reflect a state of partial integration. Our investigation addresses the evolution and formation of total risk premiums and confirms this empirically. In fact, the total risk premium decomposition shows that the variance risk related to the local market index (the local risk factor), explains more than 50% of the total risk premium on average.
    Keywords: Time-varying integration, risk premium, ICAPM, GCC-GARCH
    JEL: C32 F36 G11
    Date: 2014–02–12
  12. By: Jean-Yves MOISSERON; Bruno-Laurent MOSCHETTO; Frédéric TEULON
    Abstract: In recent years, a number of Islamic banks have been created to cater to the growing demand, driven by globalization and the vast wealth of some Muslim states in the Middle East and Southeast Asia, and Islamic finance has moved from a niche position to become a mainstream component of the global banking system. Islamic banking refers to a financial system which is consistent with principles of Islamic law (or 'sharia') and guided by Islamic ethics. A large amount of research has been undertaken into this subject. This paper presents islamic finance’s role in the new world order.
    Date: 2014–02–12

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