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on Financial Markets |
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Issue of 2014‒04‒29
five papers chosen by |
| By: | Marta Gómez-Puig (Department of Economic Theory, Riskcenter-IREA, Universitat de Barcelona); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid) |
| Abstract: | This paper contributes to the literature by applying the Granger-causality approach and endogenous breakpoint test to offer an operational definition of contagion to examine European Economic and Monetary Union (EMU) countries public debt behaviour. A database of yields on 10-year government bonds issued by 11 EMU countries covering fourteen years of monetary union is used. The main results suggest that the 41 new causality patterns, which appeared for the first time in the crisis period, and the intensification of causality recorded in 70% of the cases, provide clear evidence of contagion in the aftermath of the current euro debt crisis. |
| Keywords: | Sovereign bond yields, Granger causality, contagion, Euro area |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:bak:wpaper:201403&r=fmk |
| By: | Bahaji, Hamza |
| Abstract: | This research provides an alternative framework for the analysis of employee stock option exercise patterns. It develops a binomial model where the exercise decision obeys to a policy that maximizes the expected utility to a representative employee exhibiting preferences as described by the Cumulative Prospect Theory (CPT). Using a large database on exercise transactions in 12 US public corporations, I examined the performance of the model in predicting actual exercise patterns. Interestingly, the probability weighting coefficients yielded by the model calibration are consistent with those from the experimental literature. Further, the results suggest that the model outperforms the Expected Utility Theory-based model in predicting actual exercise decisions in the sample. These findings convey the main contribution of this paper: the strong ability of the CPT framework to explain employees exercise behavior. It therefore provides rationale for using this framework in order to get more relevant fair value estimates of stock options. |
| Keywords: | Stock options; Exercise behavior; Cumulative Prospect Theory; Fair value; Option valuation; |
| JEL: | G13 G30 J33 M41 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:dau:papers:123456789/13098&r=fmk |
| By: | Ekaterina Neretina; Cenkhan Sahin; Jakob de Haan |
| Abstract: | We investigate the effects of the announcement and the disclosure of the clarification, methodology, and outcomes of the US banking stress tests on banks' equity prices, credit risk, systematic risk, and systemic risk during the 2009-13 period. We find only weak evidence that stress tests after 2009 affected equity returns of large US banks. In contrast, CDS spreads declined in response to the disclosure of stress test results. We also find that bank systematic risk, as measured by betas, declined in some years after the publication of stress test results. Our evidence suggests that stress tests affect systemic risk. |
| Keywords: | stress tests; bank equity returns; CDS spreads; bank betas; systemic risk |
| JEL: | G21 G28 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:419&r=fmk |
| By: | Mark Higgins |
| Abstract: | Most models for barrier pricing are designed to let a market maker tune the model-implied covariance between moves in the asset spot price and moves in the implied volatility skew. This is often implemented with a local volatility/stochastic volatility mixture model, where the mixture parameter tunes that covariance. This paper defines an alternate model where the spot/volatility correlation is a separate mean-reverting stochastic variable which is itself correlated with spot. We also develop an efficient approximation for barrier option and one touch pricing in the model based on semi-static vega replication and compare it with Monte Carlo pricing. The approximation works well in markets where the risk neutral drift is modest. |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1404.4028&r=fmk |
| By: | Malik, Saif Ullah; Elahi, Muhammad Ather |
| Abstract: | The objectives of this paper are to explore the herd behavior in the Karachi Stock Exchange (KSE) by using Ordinary Least Square (OLS) and Quantile Regression analysis for normal as well as bullish (up) and bearish(down) market conditions. Greed stimulates people to make increasingly risky investments and therefore investors tend to follow one another blindly and ignore rational analysis. Herd behavior can be defined as when investor ignore available information and follow other investors during investment decision making. The results show the existence of herding in KSE during normal and both bullish and bearish markets. The analysis of herding is important because the mistakes of investors at the collective level may result in an inefficient pricing of assets. The results of this paper may help to avoid psychological traps linked with investing and are important for both investors and those regulatory institutions responsible for securing the strength of financial systems. |
| Keywords: | Herd Behavior, Greed, Quantile Regression, Karachi Stock Exchange (KSE) |
| JEL: | C21 G02 |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:55322&r=fmk |