New Economics Papers
on Financial Markets
Issue of 2014‒03‒30
nine papers chosen by

  1. Modelling Returns and Volatilities During Financial Crises: a Time Varying Coefficient Approach By Menelaos Karanasos; Alexandros Paraskevopoulos; Faek Menla Ali; Michail Karoglou; Stavroula Yfanti
  2. The Stock Market, the Real Economy and Contagion By Dirk G Baur; Isaac Miyakawa
  3. Competing for order flow in OTC markets By Lester, Benjamin; Rocheteau, Guillaume; Weill, Pierre-Olivier
  4. A Hybrid Model for Pricing and Hedging of Long Dated Bonds By Jan Baldeaux; Man Chung Fung; Katja Ignatieva; Eckhard Platen
  5. Single stock circuit breakers on the London Stock Exchange: do they improve subsequent market quality? By James Brugler; Oliver Linton
  6. Do global factors impact BRICS stock markets? A quantile regression approach By Walid Mensi; Shawkat Hammoudeh; Juan Carlos Reboredo; Duc Khuong Nguyen
  7. Financial market regulation in Germany under the special focus of capital requirements of financial institutions By Detzer, Daniel
  8. Descriptive analysis of the Finnish stock market: Part II By Nyberg, Peter; Vaihekoski, Mika
  9. Studying the Validity of the Efficient Market Hypothesis (EMH) in the Egyptian Exchange (EGX) after the 25th of January Revolution By Kamal, Mona

  1. By: Menelaos Karanasos; Alexandros Paraskevopoulos; Faek Menla Ali; Michail Karoglou; Stavroula Yfanti
    Abstract: We examine how the most prevalent stochastic properties of key financial time series have been affected during the recent financial crises. In particular we focus on changes associated with the remarkable economic events of the last two decades in the mean and volatility dynamics, including the underlying volatility persistence and volatility spillovers structure. Using daily data from several key stock market indices we find that stock market returns exhibit time varying persistence in their corresponding conditional variances. Furthermore, the results of our bivariate GARCH models show the existence of time varying correlations as well as time varying shock and volatility spillovers between the returns of FTSE and DAX, and those of NIKKEI and Hang Seng, which became more prominent during the recent financial crisis. Our theoretical considerations on the time varying model which provides the platform upon which we integrate our multifaceted empirical approaches are also of independent interest. In particular, we provide the general solution for low order time varying specifications, which is a long standing research topic. This enables us to characterize these models by deriving, first, their multistep ahead predictors, second, the first two time varying unconditional moments, and third, their covariance structure.
    Date: 2014–03
  2. By: Dirk G Baur (Finance Discipline Group, UTS Business School, University of Technology, Sydney); Isaac Miyakawa (Finance Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: In this paper we analyze the link between stock market performance and macroe conomic performance for a large number of countries. We study the short-run and long-run relationships and find that stock market returns do not coherently predict future macroeconomic changes for the majority of countries, i.e. the estimates vary considerably both across prediction horizons and across countries. Moreover, we test whether the financial and real economy dynamic linkages increased in the financial crisis in 2008 implying “macro-financial” contagion. The crisis-specific analysis of macro-financial linkages broadens the perspective of existing studies of financial contagion. Our findings indicate that the stock market does not merely reflect future economic conditions but also influences them justifying policy responses as witnessed during the 2008 financial and economic crisis.
    Keywords: global stock markets; real economic activity; predictive regressions; contagion; financial crises; co-integration
    JEL: C22 C32 E44 G01 G14 G15 G18
    Date: 2014–01–01
  3. By: Lester, Benjamin (Federal Reserve Bank of Philadelphia); Rocheteau, Guillaume (University of California–Irvine); Weill, Pierre-Olivier (University of California–Los Angeles)
    Abstract: The authors develop a model of a two-sided asset market in which trades are intermediated by dealers and are bilateral. Dealers compete to attract order flow by posting the terms at which they execute trades, which can include prices, quantities, and execution times, and investors direct their orders toward dealers that offer the most attractive terms of trade. Equilibrium outcomes have the following properties. First, investors face a trade-off between trading costs and speeds of execution. Second, the asset market is endogenously segmented in the sense that investors with different asset valuations and different asset holdings will trade at different speeds and different costs. For example, under a Leontief technology to match investors and dealers, per unit trading costs decrease with the size of the trade, in accordance with the evidence from the market for corporate bonds. Third, dealers’ implicit bargaining powers are endogenous and typically vary across sub-markets. Finally, the authors obtain a rich set of comparative statics both analytically, by studying a limiting economy where trading frictions are small, and numerically. For instance, the authors find that the relationship between trading costs and dealers’ bargaining power can be hump-shaped.
    Keywords: Over-the-counter markets; OTC Markets; Order Flow;
    Date: 2014–03–13
  4. By: Jan Baldeaux; Man Chung Fung (Australian School of Business, University of New South Wales); Katja Ignatieva (Australian School of Business, University of New South Wales); Eckhard Platen (Finance Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: Long dated xed income securities play an important role in asset-liability management, in life insurance and in annuity businesses. This paper applies the benchmark approach, where the growth optimal portfolio (GOP) is employed as numeraire together with the real world probability measure for pricing and hedging of long dated bonds. It employs a time dependent constant elasticity of variance model for the discounted GOP and takes stochastic interest rate risk into account. This results in a hybrid framework that models the stochastic dynamics of the GOP and the short rate simultaneously. We estimate and compare a variety of continuous-time models for short-term interest rates using non-parametric kernel-based estimation. The hybrid models remain highly tractable and t reasonably well the observed dynamics of proxies of the GOP and interest rates. Our results involve closed-form expressions for bond prices and hedge ratios. Across all models under consideration we nd that the hybrid model with the 3/2 dynamics for the interest rate provides the best t to the data with respect to lowest prices and least expensive hedges.
    Keywords: Long dated bond pricing; stochastic interest rate; growth optimal portfolio; nonparametric kernel
    Date: 2014–03–01
  5. By: James Brugler; Oliver Linton (Institute for Fiscal Studies and Cambridge University)
    Abstract: This paper uses proprietary data to evaluate the efficacy of single-stock circuit breakers on the London Stock Exchange during July and August 2011. We exploit exogenous variation in the length of the uncrossing periods that follow a trading suspension to estimate the effect of auction length on market quality, measured by volume of trades, frequency of trading and the change in realized variance of returns. We also estimate the effect of a trading suspension in one FTSE-100 stock on the volume of trades, trading frequency and the change in realized variance of returns for other FTSE-100 stocks. We find that auction length has a significant detrimental effect on market quality for the suspended security when returns are negative but no discernible effect when returns are positive. We also find that trading suspensions help to ameliorate the spread of market microstructure noise and price inefficiency across securities during falling markets but the reverse is true during rising markets. Although trading suspensions may not improve the trading process within a particular security, they do play an important role preventing the spread of poor market quality across securities in falling markets and therefore can be effective tools for promoting market-wide stability.
    Date: 2014–02
  6. By: Walid Mensi; Shawkat Hammoudeh; Juan Carlos Reboredo; Duc Khuong Nguyen
    Abstract: This paper examines the dependence structure between the emerging stock markets of the BRICS countries (Brazil, Russia, India, China and South Africa) and influential global factors (the S&P 500 index, the commodity markets, the global stock market uncertainty and the US economic policy uncertainty). Using the quantile regression approach, our results for the period from September 1997 to September 2013 show that the BRICS stock markets exhibit asymmetric dependence with the global stock market and this dependence has not changed since the onset of the recent global financial crisis. Moreover, oil prices display a symmetric tail independence with all those BRICS markets (except that of South Africa), even though the dependence between oil and BRICS markets significantly increased with the onset of the financial crisis. The gold price returns co-move with those of the BRICS markets at both the upper and lower tails (except for Russia and China) but the degree of comovement has decreased since the crisis. Finally, the stock market uncertainty (VIX) is found to drive the stock returns in a bear market but this relationship is insignificant in a bull market. On the other hand, the economic policy uncertainty has no impact on the BRICS stock markets both before and since the onset of the financial crisis. These results have implications for international investors in terms of risk management which should vary according to changes in the economic and financial global factors.
    Keywords: Asymmetric dependence; global factors; BRICS; global financial crisis; quantile regression.
    JEL: G14 G15
    Date: 2014–02–25
  7. By: Detzer, Daniel
    Abstract: This paper examines capital adequacy regulation in Germany. After a short overview about financial regulation in Germany in general, the paper focuses on the most important development in the area of capital adequacy regulation from the 1930s up to the financial crisis. Two main trends are identified: a gradual softening of the eligibility criteria for regulatory equity and the increasing reliance on banks' internal risk models for the determination of risk weights. The first trend has been reversed with the regulatory reforms following the financial crisis. Internal risk models will still play a central role. The rest of the paper focuses on the problems with the use of internal risk models for regulatory purposes. The discussion includes the moral hazard problem, the technical problems with the models, the difference between economically and socially optimal capital requirements, the pro-cyclicality of the models and the problem occurring due to the existence of fundamental uncertainty. The regulatory reforms due to Basel 2.5 and Basel III and their potential to alleviate the identified problems are then examined. It is concluded that those cannot solve the most relevant problems and that currently the use of models for financial regulation is problematic. Finally, some suggestions of how the problems could be addressed are given. --
    Keywords: Banking Regulation,Financial Regulation,Capital Requirements,Capital Adequacy,Bank Capital,Basel Accord,Risk Management,Risk Models,Germany
    JEL: G18 G28 N24 N44
    Date: 2014
  8. By: Nyberg, Peter (Aalto University School of Business, Department of Finance); Vaihekoski, Mika (Turku School of Economics, University of Turku)
    Abstract: This paper continues the data collection procedure and analysis set forth in Nyberg and Vaihekoski (2009). A number of new time series that are commonly used in finance literature are collected, created, and analyzed for the first time. These series include, among others, monthly dividend yields and market capitalization values. The series are also compared with GDP to evaluate the overall role of the stock market in the Finnish economy. The value-weighted average dividend yield from 1912 to 1988 is 4.98%. The average stock market capitalization to GDP ratio is found to be 15.14%.
    Keywords: stock market; financial history; dividend yield; capitalization values; trading turnover; Finland; Helsinki Stock Exchange; Nasdaq OMX
    JEL: G10 G11 N24
    Date: 2014–03–14
  9. By: Kamal, Mona
    Abstract: There is no doubt that the close of the Egyptian Exchange (EGX) during the period 28/1- 22/3/2011 in the wake of 25th of January Revolution has a consequence on the efficiency of the stock market. This paper assesses the 'close-open-effect' on the main price indices. The results indicate the absence of unit roots in the main price indices before and after the revolution. This implies the rejection of weak-form efficiency. The estimation of the (EGARCH model) reflects information asymmetry after the revolution with bad news affecting the investors’ expectations more rapidly. In addition, a negative and significant 'close-open-effect' on the returns of the main price index is evident in the results.
    Keywords: The Egyptian Exchange (EGX), the Efficient Market Hypothesis (EMH).
    JEL: G1 G14
    Date: 2014–03–23

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