nep-fmk New Economics Papers
on Financial Markets
Issue of 2014‒07‒13
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Common Risk Factors in Equity Markets By Victoria Atanasov
  2. Does Competition make Banks more Risk-seeking? By Stefan Arping
  3. Credit rating agency downgrades and the Eurozone sovereign debt crises By Christopher F Baum; Margarita Karpava; Dorothea Schäfer; Andreas Stephen
  4. The Evolution of Risk Premium as a Measure for Intra-regional Equity Market Integration By Khaled Guesmi; Frederic Teulon; Ahmed Taneem Muzaffar
  5. Equity Risk Premium and Regional Integration By Mohamed Arouri; Frédéric Teulon; Christophe Rault
  6. Impact of Fed Tapering Announcements on Emerging Markets By Prachi Mishra; Kenji Moriyama; Papa M'B. P. N'Diaye; Lam Nguyen
  7. Emerging Market Local Currency Bond Yields and Foreign Holdings in the Post-Lehman Period - a Fortune or Misfortune? By Christian Ebeke; Yinqiu Lu
  8. Asia’s Stock Markets: Are There Crouching Tigers and Hidden Dragons? By Fabian Lipinsky; Li Lian Ong

  1. By: Victoria Atanasov (VU University Amsterdam, the Netherlands)
    Abstract: Empirical measures of world consumption growth risk have failed to rationalize the cross-section of country equity returns. We propose a new factor, termed “the global consumption factor”, to explain the patterns in risk premiums on international equity markets. We identify this factor as the difference between the return on a portfolio of equity market indices with high consumption growth rates and the return on a portfolio of equity market indices with low consumption growth rates. We show that the global consumption factor accounts for about 70% of the cross- sectional variation in equity returns from 47 developed and emerging market countries over a four-decade period. Our risk factor reflects changes in the cross-country consumption dispersion and commands a significant premium to compensate investors for taking on common macroeconomic risks. Empirically, we find that high consumption growth economies have considerably higher consumption dispersion risk than low consumption growth economies, and this can explain their higher average returns.
    Keywords: stock returns, asset pricing, macroeconomic risks, consumption dispersion
    JEL: G11 G12
    Date: 2014–06–17
  2. By: Stefan Arping (University of Amsterdam)
    Abstract: This article presents a model in which, contrary to conventional wisdom, competi- tion can make banks more reluctant to take excessive risks: As competition intensifies and margins decline, banks face more-binding threats of failure, to which they may respond by reducing their risk-taking. Yet, at the same time, banks become riskier. This is because the direct, destabilizing effect of lower margins outweighs the disciplining effect of competition; moreover, a substantial rise in competition reduces banks’ incentive to build precautionary capital buffers. A key implication is that the effects of competition on risk-taking and on failure risk can move in opposite directions.
    Keywords: Charter Value Hypothesis, Bank Franchise Value, Bank Competition, Financial Stability, Capital Requirements
    JEL: G2 G3
    Date: 2014–05–12
  3. By: Christopher F Baum (Boston College; DIW Berlin); Margarita Karpava (MediaCom London); Dorothea Schäfer (DIW Berlin; JIBS); Andreas Stephen (JIBS; DIW Berlin; Ratio Institute Stockholm)
    Abstract: This paper studies of credit rating agency (CRA) downgrade announcements on the value of the Euro and the yields of French, Italian, German and Spanish long-term sovereign bonds during the culmination of the Eurozone debt crisis in 2011-2012. The employed GARCH models show that CRA downgrade announcements negatively affected the value of the Euro currency and also increased the volatility. Downgrading increased the yields of French, Italian and Spanish bonds but lowered the German bond’s yields, although Germany’s rating status was never touched by CRA. There is no evidence for Gander causality from bond yields to rating announcement. We infer from these findings that CRA announcements increasingly influenced crisis-time capital allocation in the Eurozone. Their downgradings caused investors to rebalance their portfolio across member countries, out of ailing states’ debt into more stable borrowers’ securities.
    Keywords: Credit Rating Agencies, Euro Crisis, Sovereign Debt, Euro Exchange Rate
    JEL: G24 G01 G12 G14 E42 E43 E44 F31 F42
    Date: 2014
  4. By: Khaled Guesmi; Frederic Teulon; Ahmed Taneem Muzaffar
    Abstract: We estimate and test the conditional version of an international capital asset pricing model using a parsimonious multivariate GARCH process and the multivariate nonlinear least squares method. Since our approaches are fully parametric, we can recover a
    Keywords: time-varying integration, risk premium, ICAPM, multivariate GARCH.
    JEL: C32 F36 G11
    Date: 2014–06–23
  5. By: Mohamed Arouri; Frédéric Teulon; Christophe Rault
    Abstract: This article contributes to the literature on stock market integration by developing and estimating a capital asset pricing model with segmentation effects in order to assess stock market segmentation and its effects on risk premia at the regional level.
    Keywords: asset pricing, regional integration, equity risk premium.
    JEL: G15 F36 C32
    Date: 2014–06–23
  6. By: Prachi Mishra; Kenji Moriyama; Papa M'B. P. N'Diaye; Lam Nguyen
    Abstract: This paper analyzes market reactions to the 2013–14 Fed announcements relating to tapering of asset purchases and their relationship to macroeconomic fundamentals and country economic and financial structures. The study uses daily data on exchange rates, government bond yields, and stock prices for 21 emerging markets. It finds evidence of markets differentiating across countries around volatile episodes. Countries with stronger macroeconomic fundamentals, deeper financial markets, and a tighter macroprudential policy stance in the run-up to the tapering announcements experienced smaller currency depreciations and smaller increases in government bond yields. At the same time, there was less differentiation in the behavior of stock prices based on fundamentals.
    Keywords: Monetary policy;United States;Unconventional monetary policy instruments;Announcements;Emerging markets;Financial markets;Bond yields;Stock prices;Emerging markets, tapering, Fed policy announcements, vulnerability.
    Date: 2014–06–17
  7. By: Christian Ebeke; Yinqiu Lu
    Abstract: The paper shows that foreign holdings of local currency government bonds in emerging market countries (EMs) have reduced bond yields but have somewhat increased yield volatility in the post-Lehman period. Econometric analyses conducted from a sample of 12 EMs demonstrate that these results are robust and causal. We use an identification strategy exploiting the geography-based measure of EMs financial remoteness vis-à-vis major offshore financial centers as an instrumental variable for the foreign holdings variable.The results also show that, in countries with weak fiscal and external positions, foreign holdings are greatly associated with increased yield volatility. A case study using Poland data elaborates on the cross country findings.
    Keywords: Foreign investment;Bonds;Emerging markets;Poland;Cross country analysis;Economic models;Foreign Holdings; Domestic Bonds; Yields; and Volatility
    Date: 2014–02–12
  8. By: Fabian Lipinsky; Li Lian Ong
    Abstract: Stock markets play a key role in corporate financing in Asia. However, despite their increasing importance in terms of size and cross-border investment activity, the region’s markets are reputed to be more “idiosyncratic†and less reliant on economic and corporate fundamentals in their pricing. Using a model that draws on international asset pricing and economic theory, as well as accounting literature, we find evidence of greater idiosyncratic influences in the pricing of Asia’s stock markets, compared to their G-7 counterparts, beyond the identified systematic factors and local fundamentals. We also show proof of a significant relationship between the strength of implementation of securities regulations and the “noise†in stock pricing, which suggests that improvements in the regulation of securities markets in Asia could enhance the role of stock markets as stable and reliable sources of financing into the future.
    Keywords: Stock markets;Asia;Stock prices;Foreign investment;Securities regulations;Pricing policy;Developed countries;Emerging markets;Cross country analysis;Economic models;arbitrage pricing theory, Asian financial crisis, fundamentals, global financial crisis, idiosyncratic factors, integration, IOSCO, securities regulation, stock market, stock pricing, term structure of interest rates.
    Date: 2014–02–26

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