nep-fmk New Economics Papers
on Financial Markets
Issue of 2014‒09‒05
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Predicting Stock Market Returns Based on the Content of Annual Report Narrative: A New Anomaly By Wisniewski, Tomasz Piotr; Yekini, Liafisu Sina
  2. Individual investors’ stock buying behavior: Does experience matter in a developing economy stock market. By Osaro Agbontaen; Enase Okonedo
  3. Selling Failed Banks By Joao Granja; Gregor Matvos; Amit Seru
  4. A Theory of Credit Scoring and Competitive Pricing of Default Risk By Dean Corbae
  5. Credit Rating Impact on European Stock Markets By Jose Faias; Ana Mão de Ferro; Carlos Moreira
  6. Credit Rating Agency Downgrades and the Eurozone Sovereign Debt Crises By Christopher Baum; Margarita Karpava; Dorothea Schäfer; Andreas Stephan

  1. By: Wisniewski, Tomasz Piotr; Yekini, Liafisu Sina
    Abstract: This paper uses the tools of computational linguistics to analyze the qualitative part of the annual reports of UK listed companies. More specifically, the frequency of words associated with praise, concreteness and activity is measured and used to forecast future stock returns. We find that our language indicators predict subsequent price increases, even after controlling for a wide range of factors. Elevated values of the linguistic variables, however, are not symptomatic of exacerbated risk. Consequently, investors are advised to peruse the annual report narrative, as it contains valuable information that may still not have been discounted in the prices.
    Keywords: Content Analysis, Annual Reports, Stock Market Returns
    JEL: G12 G14 M41
    Date: 2014–08–24
  2. By: Osaro Agbontaen; Enase Okonedo
    Abstract: Investigate how retail investors determine their stock trading through experience to achieve the desired portfolio returns. To examine how retail investors coordinate their expected returns and perceived risk. Verify how retail investors’ trade potentials augment transactions on the stock market in a developing economy. Ascertain how retail investors’ forecasting ability is influenced by their trading experiences. Disclose how experience aids the prospects of trade performance and deduces how retail investors adjust their risk trading behavior.Fixed regression modelThe results obtained revealed that experience do not strongly dictate retail investors’ willingness to carry out a purchase on the stock market but experience is essential for stock sales transactions. We obtained evidences that it influences trade quality. Overconfidence in trading was noticed to influence retail investors’ transactions on the stock market. Subsequently, they adjusted their possibilities to trade which in turn enhanced their prospects to trade off their investments.
    Keywords: Nigeria, Finance, Developing countries
    Date: 2014–07–03
  3. By: Joao Granja; Gregor Matvos; Amit Seru
    Abstract: We study the recent episode of bank failures and provide simple facts to better understand who acquires failed banks and which forces drive the losses that the FDIC realizes from these sales. We document three distinct forces related to the allocation of failed banks to potential acquirers. First, a geographically proximate bank is significantly more likely to acquire a failed bank: only 15% of acquirers do not have branches within the state. Sales are more local in regions with more soft information. Second, a failed bank is more likely to be purchased by a bank that has a similar loan portfolio and that offers similar services, highlighting the role of failed banks’ asset specificity. Third, low capitalization of potential acquirers decreases their ability to acquire a failed bank and potentially distorts failed bank allocation. The results are robust to restricting the data to actual bidders, confirming that they are not driven by auction eligibility criteria imposed by the FDIC. We relate these forces to FDIC losses from failed bank sales. We organize these facts using the fire sales framework of Shleifer and Vishny (1992). Our findings speak to recent policies that are predicated on the idea that a bank’s ability to lend is embodied in its collection of assets and employees and cannot be easily replaced or sold.
    JEL: E65 G18 G21
    Date: 2014–08
  4. By: Dean Corbae (University of Wisconsin)
    Abstract: We propose a theory of unsecured consumer credit where: (i) borrowers have the legal option to default; (ii) defaulters are not exogenously excluded from future borrowing; (iii) there is free entry of lenders; and (iv) lenders cannot collude to punish defaulters. In our framework, limited credit or credit at higher interest rates following default arises from the lender's optimal response to limited information about the agent's type and earnings realizations. The lender learns from an individual's borrowing and repayment behavior about his type and encapsulates his reputation for not defaulting in a credit score. We take the theory to data choosing the parameters of the model to match key data moments such as the overall and subprime delinquency rates. We test the theory by showing that our underlying framework is broadly consistent with the way credit scores affect unsecured consumer credit market behavior. The framework can be used to shed light on household consumption smoothing with respect to transitory income shocks and to examine the welfare consequences of legal restrictions on the length of time adverse events can remain on one's credit record.
    Date: 2014
  5. By: Jose Faias; Ana Mão de Ferro; Carlos Moreira
    Abstract: The impact of credit rating changes in both the bond and the stock market has been a widely discussed subject in the press since the outburst of the financial crises we are going through nowadays. However, the scientific coverage of the topic has been limited since 2007 and has not focused on advanced economies. Therefore, in this paper, we study home and foreign stock market impacts of sovereign credit rating downgrades by Standard and Poor’s in Europe – focusing on Portugal, Ireland, Italy, Greece and Spain – since 2008. To understand if sovereign credit rating changes by S&P impact market returns and convey new information to the market, we performed an event study of the downgrade impact on the above mentioned countries index returns using S&P 500 index as a benchmark to calculate the abnormal returns. In terms of own market effect, we confirm the existence of a statistically significant average abnormal market reaction of minus 140 basis points to credit downgrades. These results are robust to changes in the benchmark, in the estimation window, in our country sample and to different statistical methodology for t-stat computation. We find that when there is a credit rating downgrade, other European countries tend to underperform vis-à-vis the S&P 500 (the selected benchmark) by approximately 38 basis points.
    Keywords: Portugal, Spain, Italy, Greece, Finance, Miscellaneous
    Date: 2013–06–21
  6. By: Christopher Baum; Margarita Karpava; Dorothea Schäfer; Andreas Stephan
    Abstract: This paper studies the impact 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.GARCH modeling of sovereign bond yields and the value of the EuroCRA downgrade announcements negatively affected the value of the Euro currency and also increased its volatility. Downgrading increased the yields of French, Italian and Spanish bonds but lowered the German bond's yields. We infer from these findings that CRA announcements significantly influenced crisis-time capital allocation in the Eurozone.
    Keywords: France, Italy, Germany, Spain, Impact and scenario analysis, Finance
    Date: 2014–07–03

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