nep-fmk New Economics Papers
on Financial Markets
Issue of 2014‒03‒01
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Systemic Risk and Default Clustering for Large Financial Systems By Konstantinos Spiliopoulos
  2. Socially Responsible and Conventional Investment Funds: Performance Comparison and the Global Financial Crisis By Leonardo Becchetti; Rocco Ciciretti; Ambrogio Dalo; Stefano Herzel
  3. Estimation Error of Expected Shortfall By Imre Kondor
  4. Throttling hyperactive robots - Message to trade ratios at the Oslo Stock Exchange By Jørgensen, Kjell; Skjeltorp, Johannes Atle; Ødegaard, Bernt Arne

  1. By: Konstantinos Spiliopoulos
    Abstract: As it is known in the finance risk and macroeconomics literature, risk-sharing in large portfolios may increase the probability of creation of default clusters and of systemic risk. We review recent developments on mathematical and computational tools for the quantification of such phenomena. Limiting analysis such as law of large numbers and central limit theorems allow to approximate the distribution in large systems and study quantities such as the loss distribution in large portfolios. Large deviations analysis allow us to study the tail of the loss distribution and to identify pathways to default clustering. Sensitivity analysis allows to understand the most likely ways in which different effects, such as contagion and systematic risks, combine to lead to large default rates. Such results could give useful insights into how to optimally safeguard against such events.
    Date: 2014–02
  2. By: Leonardo Becchetti (University of Rome "Tor Vergata"); Rocco Ciciretti (University of Rome "Tor Vergata"); Ambrogio Dalo (CEIS University of Rome "Tor Vergata"); Stefano Herzel (University of Rome Tor Vergata)
    Abstract: We investigate the performance of Socially Responsible Funds (SRFs) and Conventional Funds (CFs) in different market segments during the 1992-2012 period. From an unbalanced sample of more that 22,000 funds, we define a matched sample using a beta-distance measure to match any SRF with the \nearest neighbor" CF in terms of risk factors. Using this novel matching approach and a recursive analysis, we identify several switch points in the lead/lag relationship between the two investment styles over time in different market segments (geographical area and size). A relevant finding of our analysis is that SRFs played an "insurance role" outperforming CFs during the 2007 global financial crisis.
    Keywords: Socially Responsible Investment Fund; Jensen's Alpha; Global Financial Crisis.
    JEL: D84 E44 F30 G17 C53
    Date: 2014–02–18
  3. By: Imre Kondor
    Abstract: The problem of estimation error of Expected Shortfall is analyzed, with a view of its introduction as a global regulatory risk measure.
    Date: 2014–02
  4. By: Jørgensen, Kjell (Norwegian Business School (BI) and University of Stavanger); Skjeltorp, Johannes Atle (Norges Bank); Ødegaard, Bernt Arne (University of Stavanger (UiS) and Norwegian School of Economics (NHH))
    Abstract: We use the introduction of a cost on high message to trade ratios for traders at the Oslo Stock Exchange to investigate the effects on market quality and fragmentation of introduction of such ``speed bumps'' to equity trading. The exchange introduced a fee payable by market participants whose orders (messages to the exchange's trade system) exceeded seventy times the number of consummated trades. Market participants quickly adjusted their behavior to avoid paying the extra cost. The overall ratios of messages to trades fell, but common measures of the quality of trading, such as liquidity, transaction costs, and realized volatility, did not deteriorate, they were essentially unchanged. This is a policy intervention where we can match the treated sample (OSE listed stocks) with the same assets traded elsewhere. We can therefore do a ``diff in diff'' analysis of liquidity in Oslo compared with liquidity of the same asset traded on other exchanges. Surprisingly, we see that liquidity, as measured by the spread, deteriorated on alternative market places when the tax was introduced, a tax that is only valid for trading at the OSE. The spread is the only liquidity measure for which we observe this difference between the OSE and other markets, for depth and turnover we do not find any differences between other markets and the OSE.
    Keywords: High Frequency Trading; Regulation; Message to Trade Ratio; Order to Trade Ratio
    JEL: G10 G20
    Date: 2014–02–18

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