nep-fmk New Economics Papers
on Financial Markets
Issue of 2014‒03‒22
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Global financial stability - the road ahead By Dudley, William
  2. Reforming the international monetary system in the 1970s and 2000s: would an SDR substitution account have worked? By Robert N McCauley; Catherine R Schenk
  3. Rating Agencies By Harold Cole; Thomas F. Cooley
  4. Liquidity policies and systemic risk By Adrian, Tobias; Boyarchenko, Nina
  5. Estimating the Risk-Return Trade-off with Overlapping Data Inference By Esben Hedegaard; Robert J. Hodrick
  6. Predicting market instability: New dynamics between volume and volatility By Zeyu Zheng; Zhi Qiao; Joel N. Tenenbaum; H. Eugene Stanley; Baowen Li
  7. Impact Of Short Selling Activity On Market Dynamics: Evidence From An Emerging Market By Cihat Sobaci; Ahmet Sensoy; Mutahhar Erturk
  8. Co-movements between Germany and International Stock Markets: Some New Evidence from DCC-GARCH and Wavelet Approaches By Gazi Salah Uddin; Mohamed Arouri; Aviral Kumar Tiwari
  9. Empirical properties of inter-cancellation durations in the Chinese stock market By Gao-Feng Gu; Xiong Xiong; Wei Zhang; Yong-Jie Zhang; Wei-Xing Zhou
  10. The Stock Exchange of Suriname: Returns, Volatility, Correlations and Weak-form Efficiency By Bodeutsch, D.; Franses, Ph.H.B.F.
  11. Volatility Transmission of Overnight Rate along the Yield Curve in Pakistan By Mahmood, Asif

  1. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the Tenth Asia-Pacific High Level Meeting on Banking Supervision, Auckland, New Zealand
    Keywords: global financial system; shadow banking; global systemically important financial institutions(G-SIFIs); too big to fail; Comprehensive Capital Analysis and Review (CCAR); single point of entry (SPE); gone concern loss absorption capacity (GLAC); lender-of-last-resort (LOLR); Liquidity Coverage Ratio (LCR); Net Stable Funding Ratio (NSFR); central counterparties (CCPs); Financial Stability Board (FSB); Data Gaps Initiative (DGI)
    JEL: F30 G28
    Date: 2014–02–26
    URL: http://d.repec.org/n?u=RePEc:fip:fednsp:130&r=fmk
  2. By: Robert N McCauley; Catherine R Schenk
    Abstract: This paper analyses the discussion of a substitution account in the 1970s and how the account might have performed had it been agreed in 1980. The substitution account would have allowed central banks to diversify away from the dollar into the IMF’s Special Drawing Right (SDR), comprised of US dollar, Deutsche mark, French franc (later euro), Japanese yen and British pound, through transactions conducted off the market. The account’s dollar assets could fall short of the value of its SDR liabilities, and hedging would have defeated the purpose of preventing dollar sales. In the event, negotiators were unable to agree on how to distribute the open-ended cost of covering any shortfall if the dollar’s depreciation were to exceed the value of any cumulative interest rate premium on the dollar. As it turned out, the substitution account would have encountered solvency problems had the US dollar return been based on US Treasury bill yields, even if a substantial fraction of the IMF’s gold had been devoted to meet the shortfall at recent, high prices for gold. However, had the US dollar return been based on US Treasury bond yields, the substitution account would have been solvent even without any gold backing.
    Keywords: Special Drawing Right, substitution account, reserve currency, foreign exchange reserves; International Monetary Fund
    Date: 2014–03
    URL: http://d.repec.org/n?u=RePEc:bis:biswps:444&r=fmk
  3. By: Harold Cole; Thomas F. Cooley
    Abstract: For decades credit rating agencies were viewed as trusted arbiters of creditworthiness and their ratings as important tools for managing risk. The common narrative is that the value of ratings was compromised by the evolution of the industry to a form where issuers pay for ratings. In this paper we show how credit ratings have value in equilibrium and how reputation insures that, in equilibrium, ratings will reflect sound assessments of credit worthiness. There will always be an information distortion because of the fact that purchasers of ratings need not reveal them. We argue that regulatory reliance on ratings and the increasing importance of risk-weighted capital in prudential regulation have more likely contributed to distorted ratings than the matter of who pays for them. In this respect, much of the regulatory obsession with the conflict created by issuers paying for ratings is a distraction.
    JEL: G1 G24
    Date: 2014–03
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:19972&r=fmk
  4. By: Adrian, Tobias (Federal Reserve Bank of New York); Boyarchenko, Nina (Federal Reserve Bank of New York)
    Abstract: The growth of wholesale-funded credit intermediation has motivated liquidity regulations. We analyze a dynamic stochastic general equilibrium model in which liquidity and capital regulations interact with the supply of risk-free assets. In the model, the endogenously time-varying tightness of liquidity and capital constraints generates intermediaries’ leverage cycle, influencing the pricing of risk and the level of risk in the economy. Our analysis focuses on liquidity policies’ implications for household welfare. Within the context of our model, liquidity requirements are preferable to capital requirements, as tightening liquidity requirements lowers the likelihood of systemic distress without impairing consumption growth. In addition, we find that intermediate ranges of risk-free asset supply achieve higher welfare.
    Keywords: liquidity regulation; systemic risk; DSGE; financial intermediation
    JEL: E02 E32 G00 G28
    Date: 2014–12–01
    URL: http://d.repec.org/n?u=RePEc:fip:fednsr:661&r=fmk
  5. By: Esben Hedegaard; Robert J. Hodrick
    Abstract: Asset pricing models such as the conditional CAPM are typically estimated with MLE using a monthly or quarterly horizon with data sampled to match the horizon even though daily data are available. We develop an overlapping data inference methodology (ODIN) that uses all of the data while maintaining the monthly or quarterly forecasting period, and we apply it to the conditional CAPM. Our approach recognizes that the first order conditions of MLE can be used as orthogonality conditions of GMM. Using historical data, we find considerable differences in the estimates from the non-overlapping samples that begin on different days.
    JEL: G12
    Date: 2014–03
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:19969&r=fmk
  6. By: Zeyu Zheng; Zhi Qiao; Joel N. Tenenbaum; H. Eugene Stanley; Baowen Li
    Abstract: Econophysics and econometrics agree that there is a correlation between volume and volatility in a time series. Using empirical data and their distributions, we further investigate this correlation and discover new ways that volatility and volume interact, particularly when the levels of both are high. We find that the distribution of the volume-conditional volatility is well fit by a power-law function with an exponential cutoff. We find that the volume-conditional volatility distribution scales with volume, and collapses these distributions to a single curve. We exploit the characteristics of the volume-volatility scatter plot to find a strong correlation between logarithmic volume and a quantity we define as local maximum volatility (LMV), which indicates the largest volatility observed in a given range of trading volumes. This finding supports our empirical analysis showing that volume is an excellent predictor of the maximum value of volatility for both same-day and near-future time periods. We also use a joint conditional probability that includes both volatility and volume to demonstrate that invoking both allows us to better predict the largest next-day volatility than invoking either one alone.
    Date: 2014–03
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1403.5193&r=fmk
  7. By: Cihat Sobaci; Ahmet Sensoy; Mutahhar Erturk
    Abstract: With unique daily short sale data of Borsa Istanbul (stock exchange of Turkey), we investigate the dynamic relationship between short selling activity, volatil- ity, liquidity and market returns from January 2005 to December 2012 using a VAR(p)-cDCC-FIEGARCH(1,d,1) approach. Our findings suggest that short sellers are contrarian traders and contribute to ecient stock market in Turkey. We also show that increased short selling activity is associated with higher liquidity and decreased volatility. However this relation weakens during the financial turmoil of 2008. Our results indicate that any ban on short sales maybe detrimental for financial stability and market quality of Turkey.
    Keywords: short selling, contrarian trading, nancial stability, market quality, dynamic conditional correlation
    JEL: C51 G11 G14 G18
    Date: 2014–02
    URL: http://d.repec.org/n?u=RePEc:bor:wpaper:1417&r=fmk
  8. By: Gazi Salah Uddin; Mohamed Arouri; Aviral Kumar Tiwari
    Abstract: The analysis of co-movements of stock market returns is a fundamental issue in finance. The aim of this paper is to examine the co-movement between Germany and major International Stock Markets in the time–frequency space. Our sample period goes from 01 June 1992 to 26 March 2013 and includes the financial crisis that erupted in US financial institutions in the summer of 2007 and spread beyond the US to other developed economies in the first half of 2008. We use DCC-GARCH and wavelet-based measures of co-movements which make it possible to find a balance between the time and frequency domain features of the data. The results suggest that the difference in the co-movement dynamics could be the result of the different natures of the financial crises or a change in regime. The finding of this paper has relevant policy implications in asset allocation and risk management in designing international portfolios for investment decisions.
    Keywords: DCC-GARCH; Co-movement; Wavelet coherence; Germany
    JEL: G15 C40 F30
    Date: 2014–02–25
    URL: http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-143&r=fmk
  9. By: Gao-Feng Gu; Xiong Xiong; Wei Zhang; Yong-Jie Zhang; Wei-Xing Zhou
    Abstract: Order cancellation process plays a crucial role in the dynamics of price formation in order-driven stock markets and is important in the construction and validation of computational finance models. Based on the order flow data of 18 liquid stocks traded on the Shenzhen Stock Exchange in 2003, we investigate the empirical statistical properties of inter-cancellation durations in units of events defined as the waiting times between two consecutive cancellations. The inter-cancellation durations for both buy and sell orders of all the stocks favor a $q$-exponential distribution when the maximum likelihood estimation method is adopted; In contrast, both cancelled buy orders of 6 stocks and cancelled sell orders of 3 stocks prefer Weibull distribution when the nonlinear least-square estimation is used. Applying detrended fluctuation analysis (DFA), centered detrending moving average (CDMA) and multifractal detrended fluctuation analysis (MF-DFA) methods, we unveil that the inter-cancellation duration time series process long memory and multifractal nature for both buy and sell cancellations of all the stocks. Our findings show that order cancellation processes exhibit long-range correlated bursty behaviors and are thus not Poissonian.
    Date: 2014–03
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1403.3478&r=fmk
  10. By: Bodeutsch, D.; Franses, Ph.H.B.F.
    Abstract: __Abstract__ The empirical properties of stock returns are studied for 10 companies listed at the Suriname Stock Exchange (SSE), which is a young and growing stock market. Individual stock returns are found to be predictable from the own past to some extent, but the equal-weighted index returns are not. Dynamic correlations with large Latin-American stock markets appear to be zero. It is concluded that there is much more efficiency to be gained for the SSE.
    Keywords: emerging markets, developing countries, returns, volatility, market weak-form efficiency
    JEL: G15 G14
    Date: 2014–02–01
    URL: http://d.repec.org/n?u=RePEc:ems:eureir:50639&r=fmk
  11. By: Mahmood, Asif
    Abstract: This paper presented the empirical results of the volatility transmission of overnight rate along the yield curve in case of Pakistan. The results indicate that the volatility transmission of overnight repo rate is higher at the shorter end of the yield curve while lower at the longer end. These results are in line with both theoretical and empirical underpinning of the interest rates volatility transmission process found in other countries. Moreover, the results also suggest that the pass-through level of overnight volatility transmission to other market interest rates decreased after State Bank of Pakistan (SBP) adopted the interest rate corridor framework in August 2009. This indicates the enhancement of effective and smooth transmission of SBP policy rate changes to other market interest rates under the current framework. However, absence of any explicit desired level of operational target in the monetary policy framework of SBP still imparts higher volatility in interest rates when compared to other countries following the similar interest rate corridor framework.
    Keywords: monetary policy, volatility, yield curve, GARCH
    JEL: E4 E5 G1
    Date: 2014–03–09
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:54256&r=fmk

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