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on Financial Markets |
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Issue of 2014‒05‒09
seventeen papers chosen by |
| By: | Ovidiu Racorean |
| Abstract: | A simple and elegant arrangement of stock components of a portfolio (market index-DJIA) in a recent paper [1], has led to the construction of crossing of stocks diagram. The crossing stocks method revealed hidden remarkable algebraic and geometrical aspects of stock market. The present paper continues to uncover new mathematical structures residing from crossings of stocks diagram by introducing topological properties stock market is endowed with. The crossings of stocks are categorized as overcrossings and undercrossings and interpreted as generators of braid that stocks form in the process of prices quotations in the market. Topological structure of the stock market is even richer if the closure of stocks braid is considered, such that it forms a knot. To distinguish the kind of knot that stock market forms, Alexander-Conway polynomial and the Jones polynomials are calculated for some knotted stocks. These invariants of knots are important for the future practical applications topological stock market might have. Such application may account of the relation between Jones polynomial and phase transition statistical models to provide a clear way to anticipate the transition of financial markets to the phase that leads to crisis. The resemblance between braided stocks and logic gates of topological quantum computers could quantum encode the stock market behavior. |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1404.6637&r=fmk |
| By: | Yongmiao Hong; Jun Tu; Guofu Zhou |
| Abstract: | In this paper, we provide a model-free test for asymmetric correlations which suggest stocks tend to have greater correlations with the market when the market goes down than when it goes up. We also provide such tests for asymmetric betas and covariances. In addition, we evaluate the economic significance of asymmetric correlations by answering the question that what is the utility gain for an investor who switches from a belief of symmetric stock returns into a belief of asymmetric returns. Applying our methodology to three portfolios grouped by size, Fama and the size of French and book-to-market, and industry, we find that asymmetries show up in sample estimates for all the portfolios, but they are statistically ignificant primarily for small size portfolios. Nevertheless, asymmetries are of substantial economic importance for an investor who switches her symmetry belief into an asymmetric one, irrespective of the portfolios. |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:journl:002070&r=fmk |
| By: | Kent Wang; Jiawei Li; Shicheng Huang |
| Abstract: | This study employs an innovative market-based approach, where ROE are employed as proxy for cash-flow news and a state-space model is used for market news decomposition. We document that the explanatory power of the Bad Beta Good Beta (BBGB) model of Campbell and Vuolteenaho (2004) is about 30% for the cross-section of stock returns. We also find the BBGB model adequately explains the size effect leading to its superior performance. The results are obtained controlling for news decomposition method and market news proxies bias. We contribute to the literature by providing an alternative easy-to implement and consistent market-based method for news decomposition. |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:journl:002153&r=fmk |
| By: | Mario Bonino; Matteo Camelia; Paolo Pigato |
| Abstract: | We study a bivariate mean reverting stochastic volatility model, finding an explicit expression for the decay of cross-asset correlations over time. We compare our result with the empirical time series of the Dow Jones Industrial Average and the Financial Times Stock Exchange 100 in the period 1984-2013, finding an excellent agreement. The main features of the model consist in the jumps in the volatilities and a nonlinear mean reversion. Based on these features, we propose an algorithm for the detection of jumps in the volatility. |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1404.7632&r=fmk |
| By: | Yi-Fang Liu (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - Tianjin University, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne); Wei Zhang (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - Tianjin University); Chao Xu (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - Tianjin University); Jørgen Vitting Andersen (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne); Hai-Chuan Xu (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - Tianjin University) |
| Abstract: | This paper studies the switching of trading strategies and its effect on the market volatility in a continuous double auction market. We describe the behavior when some uninformed agents, who we call switchers, decide whether or not to pay for information before they trade. By paying for the information they behave as informed traders. First, we verify that our model is able to reproduce some of the stylized facts in real financial markets. Next we consider the relationship between switching and the market volatility under different structures of investors. We find that there exists a positive relationship between the market volatility and the percentage of switchers. We therefore conclude that the switchers are a destabilizing factor in the market. However, for a given fixed percentage of switchers, the proportion of switchers that decide to buy information at a given moment of time is negatively related to the current market volatility. In other words, if more agents pay for information to know the fundamental value at some time, the market volatility will be lower. This is because the market price is closer to the fundamental value due to information diffusion between switchers. |
| Keywords: | Agent-based model; heterogeneity; switching behavior; market volatility |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00983051&r=fmk |
| By: | Bruno Feunou; Jean-Sébastien Fontaine |
| Abstract: | Cochrane and Piazzesi (2005) show that (i) lagged forward rates improve the predictability of annual bond returns, adding to current forward rates, and that (ii) a Markovian model for monthly forward rates cannot generate the pattern of predictability in annual returns. These results stand as a challenge to modern Markovian dynamic term structure models (DTSMs). We develop the family of conditional mean DTSMs where the yield dynamics depend on current yields and their history. Empirically, we find that (i) current and past yields generate cyclical risk-premium variations, (ii) the model risk premia offer better returns forecasts, and (iii) the model coefficients are close to Cochrane-Piazzesi regressions of long-horizon returns. Yield decompositions differ significantly from what a standard model suggests - the expectation component decreases less in a recession and increases less in the recovery. A small Markovian factor “hidden” in measurement error (Duffee, 2011) explains some of the differences but is not sufficient to match the evidence. |
| Keywords: | Asset Pricing, Interest rates |
| JEL: | E43 E47 G12 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:14-13&r=fmk |
| By: | Yongmiao Hong; Hai Lin; Chunchi Wu |
| Abstract: | This paper examines the predictability of corporate bond returns using the transaction-based index data for the period from October 1, 2002 to December 31, 2010. We find evidence of significant serial and cross-serial dependence in daily investment-grade and high-yield bond returns. The serial dependence exhibits a complex nonlinear structure. Both investment-grade and high-yield bond returns can be predicted by past stock market returns in-sample and out-of-sample, and the predictive relation is much stronger between stocks and high-yield bonds. By contrast, there is little evidence that stock returns can be predicted by past bond returns. These findings are robust to various model specifications and test methods, and provide important implications for modeling the term structure of defaultable bonds. |
| Keywords: | Return predictability; Generalized spectrum; Autocorrelation; Causality; Nonlinearity; Bond pricing; Market efficiency |
| JEL: | G12 G14 G17 |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:journl:002156&r=fmk |
| By: | Xiaobing Feng; Haibo Hu |
| Abstract: | The negative externalities from an individual bank failure to the whole system can be huge. One of the key purposes of bank regulation is to internalize the social costs of potential bank failures via capital charges. This study proposes a method to evaluate and allocate the systemic risk to different countries/regions using a SIR type of epidemic spreading model and the Shapley value in game theory. The paper also explores features of a constructed bank network using real globe-wide banking data. |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1404.5689&r=fmk |
| By: | Yongmiao Hong; Yanhui Liu; Shouyang Wang |
| Abstract: | Controlling and monitoring extreme downside market risk is important for financial risk management and portfolio/investment diversification. In this paper, we introduce a new concept of Granger causality in risk and propose a class of kernel-based tests to detect extreme downside risk spillover between financial markets, where risk is measured by the left tail of the distribution or equivalently by the Value at Risk (VaR). The proposed tests have a convenient asymptotic standard normal distribution under the null hypothesis of no Granger causality in risk. They check a large number of lags and thus can detect risk spillover that occurs with a time lag or that has weak spillover at each lag but carries over a very long distributional lag. Usually, tests using a large number of lags may have low power against alternatives of practical importance, due to the loss of a large number of degrees of freedom. Such power loss is fortunately alleviated for our tests because our kernel approach naturally discounts higher order lags, which is consistent with the stylized fact that today’s financial markets are often more influenced by the recent events than the remote past events. A simulation study shows that the proposed tests have reasonable size and power against a variety of empirically plausible alternatives in nite samples, including the spillover from the dynamics in mean, variance, skewness and kurtosis respectively. In particular, nonuniform weighting delivers better power than uniform weighting and a Granger type regression procedure. The proposed tests are useful in investigating large comovements between financial markets such as financial contagions. An application to the Eurodollar and Japanese Yen highlights the merits of our approach. |
| Keywords: | Cross-spectrum, Extreme downside risk, Financial contagion, Granger causality in risk,Nonlinear time series, Risk management, Value at Risk |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:wpaper:001986&r=fmk |
| By: | Gilchrist, S.; Mojon, B. |
| Abstract: | We construct credit risk indicators for euro area banks and non-financial corporations. These are the average spreads on the yield of euro area private sector bonds relative to the yield on German federal government securities of matched maturities. The indicators are also constructed at the country level for Germany, France, Italy and Spain. These indicators reveal that the financial crisis of 2008 has dramatically increased the cost of market funding for both banks and non-financial firms. In contrast, the prior recession following the 2000 U.S. dot-com bust led to widening credit spreads of non-financial firms but had no effect on the credit spreads of financial firms. The 2008 financial crisis also led to a systematic divergence in credit spreads for financial firms across national boundaries. This divergence in cross-country credit risk increased further as the European debt crisis has unfolded since 2010. Since that time, credit spreads for both non-financial and financial firms increasingly reflect national rather than euro area financial conditions. Consistent with this view, credit spreads provide substantial predictive content for a variety of real activity and lending measures for the euro area as a whole and for individual countries. VAR analysis implies that disruptions in corporate credit markets lead to sizeable contractions in output, increases in unemployment, and declines in inflation across the euro area. |
| Keywords: | credit cycle, euro area, financial crisis. |
| JEL: | E32 E43 E44 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:482&r=fmk |
| By: | Gregory C. Chow; Changjiang Liu; Linlin Niu |
| Abstract: | We use time-varying regression to model the relationship between returns in the Shanghai and New York stock markets, with possible inclusion of lagged returns. The parameters of the regressions reveal that the effect of current stock return of New York on Shanghai steadily increases after the 1997 Asian financial crisis and turns significantly and persistently positive after 2002 when China entered WTO. The effect of current return of Shanghai on New York also becomes significantly positive and increasing after 2002. The upward trend has been interrupted �during the recent global financial crisis, but reaches the level of about 0.4-0.5 in 2010 for both �markets. Our results show that China’s stock market has become more and more integrated to the �world market in the past twenty years with interruptions occurring during the recent global �economic downturn. |
| Keywords: | China; Globalization; Rate of Return; Stock Markets; Time-varying parameter regression. |
| JEL: | C29 C58 G14 P43 |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:journl:002146&r=fmk |
| By: | Gregory C Chow; Shicheng Huang; Linlin Niu |
| Abstract: | This paper studies the economic integration of East Asian economies among one another and with the US using co-movement of stock market prices. Both time-varying correlations and regressions are employed. We have traced the increased integration from 1980 to 2011 among the NIEs of Korea, Hong Kong, Taiwan and Singapore, the increase in integration of China since the Shanghai stock market opened in 1990 and the effect of the recent great economic recession of the US on its economic influence on the East Asian economies. |
| Keywords: | economic integration, time-varying regressions, East Asia, China, US, Japan, stock prices. |
| JEL: | C22 G12 |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:wpaper:002042&r=fmk |
| By: | Shihe Fu; Liwei Shan |
| Abstract: | Existing studies in finance have documented the comovement of stock returns of companies headquartered in the same location. The interpretation is that local investors have a “local bias†due to an information advantage on local companies. This paper argues that localized agglomeration economies affect the fundamentals of local companies, resulting in the local comovement of stock returns. Using the data for China A-share listed companies from 1997-2007, we confirm the local comovement of stock returns of companies headquartered in the same city; moreover, the stock returns of a company headquartered in a city with stronger agglomeration economies are also correlated more highly with stock returns of other companies headquartered in the same city. The local comovement of earnings among companies headquartered in the same city is also found, and the local comovement of stock returns is correlated with the local comovement of earnings. We conclude that correlated local fundamentals due to localized agglomeration economies can explain the local comovement of stock returns. |
| Keywords: | Stock returns; Local bias; Agglomeration economies |
| JEL: | G1 R1 R3 |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:wpaper:002041&r=fmk |
| By: | Erik Makela (Department of Economics, University of Turku) |
| Abstract: | The objective of this paper is to figure out how the Economic and Monetary Union in Europe (EMU) has affected on its member’s sovereign risk-premiums and long-term government bond yields. In order to estimate the effect, this paper utilizes synthetic control method. Contrary to the popular belief, this paper finds that the majority of member countries did not receive economic gains from EMU in sovereign debt markets. Synthetic counterfactual analysis finds strong evidence that Austria, Belgium, France, Germany and Netherlands have paid positive and substantial euro-premium in their 10-year government bonds since the adoption of single currency. After the latest financial crisis, government bond yields have been higher in all member countries compared to the situation that would have been without monetary unification. This paper concludes that from the sovereign borrowing viewpoint, it would be beneficial for a country to maintain its own currency and monetary policy. |
| Keywords: | Synthetic Control Method, Monetary Union, Sovereign Risk, Government Bond Yield |
| JEL: | F34 E42 G15 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp90&r=fmk |
| By: | Gao-Feng Gu (ECUST); Xiong Xiong (TJU); Yong-Jie Zhang (TJU); Wei Chen (SZSE); Wei Zhang (TJU); Wei-Xing Zhou (ECUST) |
| Abstract: | Price gap, defined as the logarithmic price difference between the first two occupied price levels on the same side of a limit order book (LOB), is a key determinant of market depth, which is one of the dimensions of liquidity. However, the properties of price gaps have not been thoroughly studied due to the less availability of ultrahigh frequency data. In the paper, we rebuild the LOB dynamics based on the order flow data of 26 A-share stocks traded on the Shenzhen Stock Exchange in 2003. Three key empirical statistical properties of price gaps are investigated. We find that the distribution of price gaps has a power-law tail for all stocks with an average tail exponent close to 3.2. Applying modern statistical methods, we confirm that the gap time series are long-range correlated and possess multifractal nature. These three features vary from stock to stock and are not universal. Furthermore, we also unveil buy-sell asymmetry phenomena in the properties of price gaps on the buy and sell sides of the LOBs for individual stocks. These findings deepen our understanding of the dynamics of liquidity of common stocks and can be used to calibrate agent-based computational financial models. |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1405.1247&r=fmk |
| By: | Cruz, Prince Christian (Asian Development Bank Institute); Gao, Yuning (Asian Development Bank Institute); Song, Lei Lei (Asian Development Bank Institute) |
| Abstract: | Domestic financial market development is a key determinant of a currency’s international status, and financial depth and market liquidity are two essential attributes for an international currency. This paper discusses the status of the People’s Republic of China’s (PRC) financial markets and their depth and liquidity conditions. The paper also compares the PRC’s financial markets with those in developed and emerging economies, contemporaneously and historically. The paper finds that the PRC’s financial markets are not as deep and liquid as those in developed economies, and are much less so than those with international currencies. To support the internationalization of the renminbi, the PRC needs to remove several major obstacles to deepen its financial markets and improve their liquidity conditions. |
| Keywords: | RMB internationalization; financial depth; bond markets; stock market; money markets |
| JEL: | E40 E50 |
| Date: | 2014–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0477&r=fmk |
| By: | Mohanty, Roshni; P, Srinivasan |
| Abstract: | This paper investigates the relationship between stock market returns and volatility in the Indian stock markets using AR(1)-EGARCH(p, q)-in-Mean model. The study considers daily closing prices of two major indexes of Indian stock exchanges, viz., S&P CNX NIFTY and the BSE-SENSEX of National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), respectively for the period from July 1, 1997 to December 31, 2013. The empirical results show positive but insignificant relationship between stock returns and conditional variance in the case of NSE Nifty and BSE SENSEX stock markets. Besides, the analysis reveals that volatility is persistent and there exists leverage effect supporting the work of Nelson (1991) in the Indian stock markets. The present study suggests that the capital market regulators, investors and market participants should employ the asymmetric GARCH-type model that sufficiently captures the stylized characteristics of the return, such as time varying volatility, high persistence and asymmetric volatility responses, in determining the hedging strategy and portfolio management and estimating and forecasting volatility for risk management decision making at Indian Stock Exchange. |
| Keywords: | Stock Market Returns, Weak-From Efficiency, India, AR-EGARCH-M model |
| JEL: | C58 G1 G12 |
| Date: | 2014–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:55660&r=fmk |