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on Financial Markets |
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Issue of 2014‒10‒13
three papers chosen by |
| By: | Michael Wickens |
| Abstract: | This lecture is about how best to evaluate economic theories in macroeconomics and finance, and the lessons that can be learned from the past use and misuse of evidence. It is argued that all macro/finance models are ‘false’ so should not be judged solely on the realism of their assumptions. The role of theory is to explain the data, They should therefore be judged by their ability to do this. Data mining will often improve the statistical properties of a model but it does not improve economic understanding. These propositions are illustrated with examples from the last fifty years of macro and financial econometrics. |
| Keywords: | Theory and evidence in economics, DSGE modelling, time series modelling, asset price modelling |
| JEL: | B1 C1 E1 G1 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:14/17&r=fmk |
| By: | O. de Bandt; J.-C. Héam; C. Labonne; S. Tavolaro |
| Abstract: | In response to the very large number of quantitative indicators that have been put forward to measure the level of systemic risk since the start of the subprime crisis, the paper surveys the different indicators available in the economic and financial literature. It distinguishes between (i) indicators related to institutions, based either on market data or regulatory/accounting data; (ii) indicators addressing risks in financial markets and infrastructures; (iii) indicators measuring interconnections and network effects - where research is currently very active-; and (iv) comprehensive indicators. All these indicators are critically assessed and ways forward for a better understanding of systemic risk are suggested. |
| Keywords: | systemic risk, market data, balance sheet data, regulatory data, financial network, funding liquidity. |
| JEL: | G2 G3 E44 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:decfin:6&r=fmk |
| By: | Massimiliano Caporin (University of Padova); Luca Corazzini (University of Padova); Michele Costola (University Ca’ Foscari of Venice) |
| Abstract: | We study the evolution of the behavioral component of the financial market by estimating a Bayesian mixture model in which two types of investors coexist: one rational, with standard subjective expected utility theory (SEUT) preferences, and one behavioral, endowed with an S-shaped utility function. We perform our analysis by using monthly data on the constituents of the S&P 500 index from January 1962 to April 2012. We assume that agents take investment decisions by ranking the alternative assets according to their performance measures. A tuning parameter blending the rational and the behavioral choices can be estimated by using a criterion function. The estimated parameter can be interpreted as an endogenous market sentiment index. This is confirmed by a number of checks controlling for the correlation of our endogenous index with measures of (implied) financial volatility, market sentiments and financial stress. Our results confirm the existence of a significant behavioral component that reaches its peaks during periods of recession. Moreover, after controlling for a number of covariates, we observe a significant correlation between the estimated behavioral component and the S&P 500 return index. |
| Keywords: | Investment decision, behavioral agents, mixture model, behavioral expectations |
| JEL: | G01 G02 G11 G17 C58 |
| Date: | 2014–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2014-33&r=fmk |