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on Financial Markets |
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Issue of 2014‒04‒11
eight papers chosen by |
| By: | Arina Nikandrova (Department of Economics, Mathematics & Statistics, Birkbeck) |
| Abstract: | Costly information acquisition is introduced into a dynamic trading model of Glosten and Milgrom (1985). The market maker and some traders, called "value traders," value the asset at its fundamental value, which can be either high or low. The remaining traders, called "liquidity traders," have idiosyncratic valuations that are independent of the fundamental. At a cost, each value trader can acquire an informative, but imperfect, signal about the fundamental. In this setting, at equilibrium, each value trader acquires the signal if and only if the uncertainty about the fundamental's value conditional on publicly available information is sufficiently high. Thus, the prices quoted by the market maker are "informationally inefficient," as they do not reveal the value of the fundamental, even in the long-run. Equilibrium amount of information acquisition is either excessive or insufficient relative to the social optimum and results in an inefficient allocation of the asset among the market maker and liquidity traders. |
| Keywords: | Sequential Trading, Cost of Information, Endogenous Information Acquisition. |
| JEL: | D80 D83 D84 G12 G14 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1403&r=fmk |
| By: | Mollah, Sabur (Stockholm University, School of Business); Zafirov, Goran (Stockholm University, School of Business); Quoreshi, AMM Shahiduzzaman (CITR, Blekinge Inst of Technology) |
| Abstract: | Scholars worldwide have provided both theoretical and empirical insights into financial market contagion. The devastation from the recent financial crisis is immeasurable, and researchers commonly believe that the crisis seemingly originated from the U.S. and spread immediately to the other global financial hubs. Several studies have been conducted on financial markets, but this issue has yet to be addressed. Using U.S. dollar-denominated MSCI daily indices for the period 2006–2010, this paper employs Dynamic Conditional Correlation-Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) and vector error correction (VEC) models to address the multi-dimensional phenomena around financial market contagion. The empirical results demonstrate the existence of contagion in the financial markets during the global crisis. However, the crisis originated in the U.S., and its effects escalated immediately to the other global markets. The results also indicate that benefits from portfolio diversification decayed significantly among countries during the crisis. |
| Keywords: | Contagion; Financial Markets; Global Crisis |
| JEL: | C58 F36 G01 |
| Date: | 2014–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bthcsi:2014-005&r=fmk |
| By: | Minxian Yang (School of Economics, Australian School of Business, the University of New South Wales) |
| Abstract: | The risk return relationship is analysed in bivariate models for return and realised variance(RV) series. Based on daily time series from 21 international market indices for more than 13 years (January 2000 to February 2013), the empirical findings support the arguments of risk return tradeoff, volatility feedback and statistical balance. It is reasoned that the empirical risk return relationship is primarily shaped by two important data features: the negative contemporaneous correlation between the return and RV, and the difference in the autocorrelation structures of the return and RV. |
| Keywords: | risk premium, volatility feedback, return predictability, realised variance model, statistical balance |
| JEL: | C32 C52 G12 G10 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2014-16&r=fmk |
| By: | Paulo Rocha; Frank Raischel; Jo\~ao P. da Cruz; Pedro G. Lind |
| Abstract: | Using available data from the New York stock market (NYSM) we test four different bi-parametric models to fit the correspondent volume-price distributions at each $10$-minute lag: the Gamma distribution, the inverse Gamma distribution, the Weibull distribution and the log-normal distribution. The volume-price data, which measures market capitalization, appears to follow a specific statistical pattern, other than the evolution of prices measured in similar studies. We find that the inverse Gamma model gives a superior fit to the volume-price evolution than the other models. We then focus on the inverse Gamma distribution as a model for the NYSM data and analyze the evolution of the pair of distribution parameters as a stochastic process. Assuming that the evolution of these parameters is governed by coupled Langevin equations, we derive the corresponding drift and diffusion coefficients, which then provide insight for understanding the mechanisms underlying the evolution of the stock market. |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1404.1730&r=fmk |
| By: | Klaus Adam; Johannes Beutel; Albert Marcet |
| Abstract: | The booms and busts in U.S. stock prices over the post-war period can to a large extent be explained by fluctuations in investors’subjective capital gains expectations. Survey measures of these expectations display excessive optimism at market peaks and excessive pessimism at market throughs. Formally incorporating subjective price beliefs into an otherwise standard asset pricing model with utility maximizing investors, we show how subjective be- lief dynamics can temporarily de-link stock prices from their fundamental value and give rise to asset price booms that ultimately result in a price bust. The model successfully replicates (1) the volatility of stock prices and (2) the positive correlation between the price dividend ratio and expected returns observed in survey data. We show that models imposing objective or ‘rational’price expectations cannot simultaneously account for both facts. Our …findings imply that large part of U.S. stock price fluctuations are not due to standard fundamental forces, instead result from self-reinforcing belief dynamics triggered by these fundamentals. |
| Keywords: | Stock Price Volatility, learning, survey expectations, internal rationality |
| JEL: | G12 D84 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:757&r=fmk |
| By: | Carlos F. Alves (Faculdade de Economia do Porto); João Vaz Nunes (Faculdade de Economia do Porto); Ana Paula Serra (Faculdade de Economia do Porto) |
| Abstract: | We analyze the equity portfolio composition of investment funds of 15 European countries. We find that these institutions tend to prefer larger, more liquid, high dividend, low volatility stocks that belong to the main stock market indices. These results are consistent with previous studies that analyze institutional preferences for stock characteristics. These results are also consistent with theories of “prudent” behavior by institutions and are robust to factors such as funds holding a small number of stocks and funds with unusually large holdings relative to the number of outstanding shares of a single company. When we compare institutional preferences across sub-groups of funds, we find no relevant differences between the stock preferences of funds from Portugal, Ireland, Italy, Greece and Spain and those of funds from other countries; also, there seem to be no significant differences between funds with different investment styles and preferences before and during the recent financial crisis in Europe. We also find similar preferences for funds located in countries that adopted the Euro and funds from other countries. Additionally, we find that funds with long-term strategies are more conforming with “prudent” behavior than funds more focused on the short-term. |
| Keywords: | mutual fund; institutional investors behaviour |
| JEL: | G11 G23 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:533&r=fmk |
| By: | Federico GIRI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali) |
| Abstract: | The aim of this paper is to assess the impact of the interbank market on the business cycle fluctuations. We build a DSGE model with heterogeneous households and banks. Two kind of banks are in the model: Deficit banks which are net borrowers on the interbank market and they provide credit to the real economy. The surplus bank are net lender and they could choose to provide interbank lending or purchase government bonds.;The portfolio choice of the surplus bank is affected by an exogenous shock that modifies the riskiness of the interbank lending thus allowing us to capture the collapse of the interbank market and the fl y to quality mechanism underlying the 2007 financial crisis.;The main result is that an interbank riskiness shock seems to explain part of the 2007 downturn and the rise of the interest rate on the credit market just after the financial turmoil. |
| Keywords: | Bayesan estimation, DSGE model, financial frictions, interbank market |
| JEL: | E30 E44 E51 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wpaper:398&r=fmk |
| By: | Adnen Ben Nasr (Laboratoire BESTMOD, ISG de Tunis, Universite de Tunis, Tunisia); Thomas Lux (Department of Economics, University of Kiel, Germany and Banco de Espana Chair in Computational Economics, University Jaume I, Castellon, Spain); Ahdi N. Ajmi (College of Science and Humanities in Slayel, Salman bin Abdulaziz University, Kingdom of Saudi Arabia); Rangan Gupta (Department of Economics, University of Pretoria) |
| Abstract: | The financial crisis has fueled interest in alternatives to traditional asset classes that might be less affected by large market gyrations and, thus, provide for a less volatile development of a portfolio. One attempt at selecting stocks that are less prone to extreme risks, is obeyance of Islamic Sharia rules. In this light, we investigate the statistical properties of the Dow Jones Islamic Finance (DJIM) index and explore its volatility dynamics using a number of up-to-date statistical models allowing for long memory and regime-switching dynamics. We find that the DJIM shares all stylized facts of traditional asset classes, and estimation results and forecasting performance for various volatility models are also in line with prevalent ndings in the literature. Overall, the relatively new Markov-switching multifractal model performs best under the majority of time horizons and loss criteria. Long memory GARCH-type models always improve upon the short-memory GARCH specification and additionally allowing for regime changes can further improve their performance. |
| Keywords: | Islamic finance, volatility dynamics, long memory, multifractals |
| JEL: | G15 G17 G23 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201412&r=fmk |