New Economics Papers
on Financial Markets
Issue of 2014‒06‒28
eight papers chosen by

  1. On possible origins of trends in financial market price changes By Ryo Murakami; Tomomichi Nakamura; Shin Kimura; Masashi Manabe; Toshihiro Tanizawa
  2. The cross-section of stock returns in an early stock market By Ye, Qing; Turner, John D.
  3. How to hedge extrapolated yield curves By Andreas Lager{\aa}s
  4. Mandatory portfolio disclosure, stock liquidity, and mutual fund performance By Agarwal, Vikas; Mullally, Kevin Andrew; Tang, Yuehua; Yang, Baozhong
  5. Window dressing in mutual funds By Agarwal, Vikas; Gay, Gerald D.; Ling, Leng
  6. Sovereign and bank CDS spreads: two sides of the same coin for European bank default predictability? By Avino, Davide; Cotter, John
  7. Asymptotic Exponential Arbitrage and Utility-based Asymptotic Arbitrage in Markovian Models of Financial Markets By Martin Le Doux Mbele Bidima; Mikl\'os R\'asonyi
  8. Extreme negative coexceedances in South Eastern European stock markets By Dragan Tevdovski

  1. By: Ryo Murakami; Tomomichi Nakamura; Shin Kimura; Masashi Manabe; Toshihiro Tanizawa
    Abstract: We investigate possible origins of trends using a deterministic threshold model, where we refer to long-term variabilities of price changes (price movements) in financial markets as trends. From the investigation we find two phenomena. One is that the trend of monotonic increase and decrease can be generated by dealers' minuscule change in mood, which corresponds to the possible fundamentals. The other is that the emergence of trends is all but inevitable in the realistic situation because of the fact that dealers cannot always obtain accurate information about deals, even if there is no influence from fundamentals and technical analyses.
    Date: 2014–06
  2. By: Ye, Qing; Turner, John D.
    Abstract: Using a new dataset which contains monthly data on 1,015 stocks traded on the London Stock Exchange between 1825 and 1870, we investigate the cross section of stock returns in this early capital market. Unique features of this market allow us to evaluate the veracity of several popular explanations of asset pricing behavior. Using portfolio analysis and Fama-MacBeth regressions, we find that stock characteristics such as beta, illiquidity, dividend yield, and past-year return performance are all positively correlated with stock returns. However, market capitalization and past-three-year return performance have no significant correlation with stock returns. --
    Keywords: cross-sectional stock returns,anomalies,size effect,value effect
    JEL: G12 N23
    Date: 2014
  3. By: Andreas Lager{\aa}s
    Abstract: We present a framework on how to hedge the interest rate sensitivity of liabilities discounted by an extrapolated yield curve. The framework is based on functional analysis in that we consider the extrapolated yield curve as a functional of an observed yield curve and use its G\^ateaux variation to understand the sensitivity to any possible yield curve shift. We apply the framework to analyse the Smith-Wilson method of extrapolation that is proposed by the European Insurance and Occupational Pensions Authority (EIOPA) in the coming EU legislation Solvency II, and the method recently introduced, and currently prescribed, by the Swedish Financial Supervisory Authority.
    Date: 2014–06
  4. By: Agarwal, Vikas; Mullally, Kevin Andrew; Tang, Yuehua; Yang, Baozhong
    Abstract: We examine the impact of mandatory portfolio disclosure by mutual funds on stock liquidity and fund performance. We develop a model of informed trading with disclosure and test its predictions using the SEC regulation in May 2004 requiring more frequent disclosure. Stocks with higher fund ownership, especially those held by more informed funds or subject to greater information asymmetry, experience larger increases in liquidity after the regulation change. More informed funds, especially those holding stocks with greater information asymmetry, experience greater performance deterioration after the regulation change. Overall, mandatory disclosure improves stock liquidity but imposes costs on informed investors. --
    Date: 2014
  5. By: Agarwal, Vikas; Gay, Gerald D.; Ling, Leng
    Abstract: We provide a rationale for window dressing where investors respond to conflicting signals of managerial ability inferred from a fund's performance and disclosed portfolio holdings. We contend that window dressers take a risky bet on their performance during a reporting delay period, which affects investors' interpretation of the conflicting signals and hence their capital allocations. Conditional on good (bad) performance, window dressers benefit from higher (lower) investor flows as compared to non-window dressers. Window dressers also have poor past performance, possess little skill, and incur high portfolio turnover and trade costs, characteristics which in turn result in worse future performance. --
    Keywords: Mutual funds,Window dressing,Portfolio disclosure,Fund flows
    JEL: G11 G20
    Date: 2014
  6. By: Avino, Davide; Cotter, John
    Abstract: This paper investigates the relationship between sovereign and bank CDS spreads with reference to their ability to convey timely signals on the default risk of European sovereign countries and their banking systems. For a sample including six major European economies, we find that sovereign and bank CDS spreads are cointegrated variables at the country level. We then perform a more in-depth investigation of the underlying price discovery mechanisms, and find that both variables have an important price discovery role in the period preceding the financial crisis of 2007-2009. However, during the global financial crisis and the subsequent European sovereign debt crisis, sovereign CDS spreads dominate the price discovery process. Our findings strongly suggest that, especially during crisis periods, sovereign CDS spreads incorporate more timely information on the default probability of European banks than their corresponding bank CDS spreads. Price discovery measures based on CDS prices could be used as market triggers to increase equity levels at financial institutions and in the various forms of contingent capital
    Keywords: Credit default swap spreads; price discovery; information flow; financial crisis; banks; sovereign risk; bank capital; contingent capital
    JEL: D8 G01 G12 G14 G20
    Date: 2013–06
  7. By: Martin Le Doux Mbele Bidima; Mikl\'os R\'asonyi
    Abstract: Consider a discrete-time infinite horizon financial market model in which the logarithm of the stock price is a time discretization of a stochastic differential equation. Under conditions different from those given in a previous paper of ours, we prove the existence of investment opportunities producing an exponentially growing profit with probability tending to $1$ geometrically fast. This is achieved using ergodic results on Markov chains and tools of large deviations theory. Furthermore, we discuss asymptotic arbitrage in the expected utility sense and its relationship to the first part of the paper.
    Date: 2014–06
  8. By: Dragan Tevdovski (University Ss. Cyril and Methodius and CREATES)
    Abstract: The aim of this paper is to analyze the financial integration of the South Eastern Europe (SEE) stock markets. We use a multinomial logistic regression to analyze how persistence, asset class and volatility effects are related with negative coexceedances in SEE markets. We find evidence in favor of the continuation hypothesis in SEE stock markets. However, the factors associated with the coexceedances differ between the EU member countries from SEE and EU accession countries from SEE stock markets. The EU member countries are more dependent from the signals from major EU economies, while the accession countries are mainly influenced by the signals from the region.
    Keywords: financial market integration, co-movement, stock markets, emerging markets, South Eastern Europe
    JEL: C25 F36 G15
    Date: 2014–06–24

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.