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on Financial Markets |
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Issue of 2014‒09‒08
eleven papers chosen by |
| By: | Hideaki Tamura (Graduate School of Economics, Kobe University); Yoichi Matsubayashi (Graduate School of Economics, Kobe University) |
| Abstract: | This paper develops a new method for solving both equity premium and risk free rate puzzles based on the standard utility function. The method for solving the equity premium puzzle in accordance with Mehra and Prescott (1985) needs to be simultaneously consistent with the method for solving the risk-free rate puzzle presented by Weil (1989). That is, the reasonable estimated values for the degree of relative risk aversion in the former solution and for the subjective discount rate in the latter solution need to plausibly fall within experiential bounds. This study indicates that a consistent solution is possible for the equity premium and risk-free rate puzzles even when there is a standard constant relative risk aversion (CRRA) type utility function. This solution is possible by formularizing the Euler equation for consumption, considering the precautionary saving effect. |
| Keywords: | equity premium puzzle, risk-free rate puzzle, uncertainty, Euler equation |
| JEL: | E21 E44 G12 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:koe:wpaper:1422&r=fmk |
| By: | Sofiane Aboura; Julien Chevallier |
| Abstract: | This article adopts the asymmetric DCC with one exogenous variable (ADCCX) model developed by Vargas (2008), by updating the concept of ‘volatility surprise’ to capture cross-market relationships. Current methods for measuring spillovers do not focus on volatility interactions, and neglect cross-effects between the conditional variances. This paper aims to fill this gap. The dataset includes four aggregate indices representing equities, bonds, foreign exchange rates and commodities from 1983 to 2013. The results provide strong evidence of spillover effects coming from the ‘volatility surprise’ component across markets. Against the background of the recent financial crisis, the aim is to contribute to the literature on the interdependencies of financial markets, both in conditional means and (co)variances. In addition, asset management implications are derived. |
| Keywords: | Cross-market relationships, Volatility surprise, Volatility spillover, ADCCX, Asset management. |
| JEL: | C32 C4 G15 |
| Date: | 2014–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-469&r=fmk |
| By: | Tepper, Alexander (Federal Reserve Bank of New York); Borowiecki, Karol Jan (Department of Business and Economics) |
| Abstract: | We employ a model of leverage-induced explosive behavior in financial markets to develop a measure of financial market instability. Specifically, we derive a quantitative condition for how large levered investors can become relative to the whole market before the demand curve for securities suddenly becomes upward-sloping and small price declines cascade as levered investors are forced to liquidate. The size and leverage of all levered investors and the elasticity of demand of unlevered investors define the minimum market size for stability (or MinMaSS), the smallest market size that can support a given group of levered investors. The ratio of actual market size to MinMaSS is termed the instability ratio, and can give regulators and policymakers advance warning of financial crises. We apply the instability ratio in an investigation of the 1998 demise of the hedge fund Long-Term Capital Management. We find that a forced liquidation of the fund threatened to destabilize some financial markets, particularly for bank funding and equity volatility. |
| Keywords: | Leverage; financial crisis; financial stability; minimum market size for stability (MinMass); instability ratio; Long-Term Capital Management (LTCM) |
| JEL: | E58 G01 G10 G20 G21 |
| Date: | 2014–08–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sdueko:2014_014&r=fmk |
| By: | Furkan Emirmahmutoglu; Nicholas Apergis; Beatrice D. Simo-Kengne; Tsangyao Chang; Rangan Gupta |
| Abstract: | This paper investigates the causal relationship between asset prices and per capita output across 50 US states and the District of Columbia over 1975 to 2012. A bootstrap panel Granger causality approach is applied on a trivariate VAR comprising of real house prices, real stock prices and real per capita personal income (proxying output), which allows us to account not only for heterogeneity and cross-sectional dependence, but also for interdependency between the two asset markets. Empirical results reveal the existence of a unidirectional causality running from both asset prices to output. This confirms the leading indicator property of asset prices for the real economy, while also substantiating the wealth and/or collateral transmission mechanism. Moreover, the absence of reverse causation from the personal income per capita to both housing and stock prices tend to suggest that noneconomic fundamentals may have played an important role in the formation of bubbles in these markets. |
| Keywords: | house prices, stock prices, output, granger causality |
| JEL: | C32 G10 O18 |
| Date: | 2014–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-466&r=fmk |
| By: | Walid Chkili; Chaker Aloui; Duc Khuong Nguyen |
| Abstract: | This article uses the DCC-FIAPARCH model to examine the time-varying properties of conditional return and volatility of crude oil and US stock markets as well as their dynamic correlations over the period 1988-2013. Our results indicate that both the long memory and asymmetric behavior characterize the conditional volatility of oil and stock market returns. On the other hand, the dynamic conditional correlations (DCC) between the crude oil and US stock markets are affected by several economic and geopolitical events. When looking at the optimal design of an oil-stock portfolio, we find that investors in the US markets should have more stocks than crude oil asset in order to reduce their portfolio risk. Finally, the use of the DCC-FIAPARCH model that explicitly accounts for long memory and asymmetric volatility effects enables the investors to effectively hedge the risk of their stock portfolios with lower costs, as compared to the standard DCC-GARCH model. |
| Keywords: | asymmetric volatility, long memory, crude oil, stock returns, hedging strategy. |
| JEL: | C58 G1 G15 Q43 |
| Date: | 2014–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-549&r=fmk |
| By: | Carlo Altavilla (European Central Bank and CSEF); Domenico Giannone (LUISS University of Rome, ECARES, EIEF and CEPR); Michele Modugno (Federal Reserve Board) |
| Abstract: | We analyze the reaction of the U.S. Treasury bond market to innovations in macroe-economic fundamentals. We identify these innovations based on macroeconomic news, which are defined as differences between the actual releases and market expectations. We find that that macroeconomic news explain about one-third of the low frequency (quarterly) fluctuations in long-term bond yields. When we focus on the high frequency (daily) movements, this decrease to one-tenth. This is because macroeconomic news have a persistent effect on bond yields, whereas non-fundamental factors have substantial effects on the day-to-day movements of bond yields, although their effects are shorter lived. |
| Keywords: | macroeconomic announcement, news, treasury bond yield |
| JEL: | E43 E44 E47 G14 |
| Date: | 2014–08–22 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:372&r=fmk |
| By: | Marcel Aloy; Gilles de Truchis; Gilles Dufrenot; Benjamin Keddad |
| Abstract: | This paper attempts to provide evidence of “shift-volatility” transmission in the East Asian equity markets. By “shift-volatility”, we mean the volatility shifts from a low level to a high level, corresponding respectively to tranquil and crisis periods. We examine the interdependence of equity volatilities between Hong Kong, Indonesia, Japan, Malaysia, the Philippines, Singapore, Thailand and the United States. Our main issue is whether shift-volatility needs to be considered as a regional phenomenon, or from a more global perspective. We find that the timing/spans of high volatility regimes correspond adequately to years historically documented as those of crises (the Asian crisis and the years following the 2008 crisis). Moreover, we suggest dierent indicators that could be useful to guide the investors in their arbitrage behavior in the dierent regimes: the duration of each state, the sensitivity of the volatility in a market following a change in the volatility in another market. Finally, we are able to identify which market can be considered as leading markets in terms of volatility. |
| Keywords: | Regime shifts, Equity Volatility, East Asia, TVPMS |
| JEL: | R31 G15 C32 |
| Date: | 2014–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-500&r=fmk |
| By: | Shawkat Hammoudeh; Duc Khuong Nguyen; Juan Carlos Reboredo; Xiaoqian Wen |
| Abstract: | In this article, we examine the recent trends in dependence structure between the fast-growing commodity markets and the stock markets in China in order to draw implications for portfolio investment. We address this issue by using copula functions that allow for measuring both average and tail dependence. Our results provide evidence of small and positive correlations between these markets, suggesting that commodity futures are a desirable asset class for portfolio diversification. By comparing the market risks of alternative portfolio strategies, we show that Chinese investors can take advantage of commodity futures to obtain risk diversification and downside risk reduction benefits. |
| Keywords: | China; commodity futures; equity markets; co-movement; copulas; portfolio risk management. |
| JEL: | C52 G11 G15 |
| Date: | 2014–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-561&r=fmk |
| By: | Tsangyao Chang; Goodness C. Aye; Rangan Gupta |
| Abstract: | In this study, we apply a new recursive test proposed by Philips et al (2013) to investigate whether there exist multiple bubbles in the BRICS (Brazil, Russia, India, China and South Africa) stock markets, using monthly data on stock price-dividend ratio. Our empirical results, the first of its kind for these economies, indicate that there did exist multiple bubbles in the stock markets of the BRICS. Further, the dates of the bubbles also corresponded to specific events in the stocks markets of these economies. This finding has important economic and policy implications. |
| Keywords: | Multiple bubbles; BRICS stock markets; GSADF test |
| JEL: | C12 C15 G12 G15 |
| Date: | 2014–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-462&r=fmk |
| By: | Marcio Garcia (Department of Economics PUC-Rio); Marcelo Medeiros (Department of Economics PUC-Rio); Francisco Eduardo de Luna e Almeida Santos (Department of Economics PUC-Rio) |
| Abstract: | A model of realized variance-covariance is proposed using a portfolio with the most liquid stockassets of Ibovespa. The purpose is to evaluate the economic gains associated with following avolatility timing strategy based on the model’s conditional forecasts. Comparing with traditionalvolatility methods, we find that economic gains associated with realized measures perform wellwhen estimation risk is controlled and increase proportionally to the target return. Whenexpected returns are bootstrapped, however, performance fees are not significant, which is anindication that economic gains of realized volatility are offset by estimation risk. |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:624&r=fmk |
| By: | Mehmet Balcilar; Charl Jooste; Shawkat Hammoudeh; Rangan Gupta; Vassilios Babalos |
| Abstract: | We compare nonlinear cointegration tests with the standard cointegration tests in studying the relationship of the Dow Jones Islamic finance index with three other conventional equity market indices. Our results show that there is a long-run nonlinear cointegrating relationship between the Dow Jones Islamic stock market index and other conventional stock market indices. Our findings rely on a battery of standard tests as well as on the Bierens and Martins (2010) test that investigates time-varying coefficient cointegration in a multivariate system. Islamic markets seem to offer little, if any, long-run diversification to international investors. |
| Keywords: | Islamic and conventional finance, time-varying cointegration |
| JEL: | C5 C12 G1 |
| Date: | 2014–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-566&r=fmk |