nep-fmk New Economics Papers
on Financial Markets
Issue of 2014‒11‒07
eight papers chosen by

  1. Subprime mortgages and the MBSs in generating and transmitting the global financial crisis By Michal Jurek; Pawel Marszalek
  2. Benchmark tipping in the global bond market By Lawrence Kreicher; Robert N McCauley; Philip Wooldridge
  3. 4-Factor Model for Overnight Returns By Zura Kakushadze
  4. Commodity Risk Factors and the Cross-Section of Equity Returns By Chris Brooks; Adrian Fernandez-Perez; Joëlle Miffre; Ogonna Nneji
  5. Enhanced Funds Seeking Higher Returns By Szabolcs Szikszai; Tamas Badics
  6. Factors behind the Decline in Real Long-Term Government Bond Yields By Romain Bouis; Kei-Ichiro Inaba; Łukasz Rawdanowicz; Ane Kathrine Christensen
  7. Spot Market Volatility and Futures Trading: The Pitfalls of Using a Dummy Variable Approach By Martin T. Bohl; Jeanne Diesteldorf; Christian A. Salm; Bernd Wilfling
  8. Risk-sharing or risk-taking? An incentive theory of counterparty risk, clearing and margins By Biais, Bruno; Heider, Florian; Hoerova, Marie

  1. By: Michal Jurek (Poznan University of Economics, Poland); Pawel Marszalek (Poznan University of Economics, Poland)
    Abstract: The paper addresses numerous factors which generated and transmitted the 2007-2009 financial crisis, with the special attention paid to phenomena observed in the subprime mortgages and MBSs markets. The aim of the paper is to provide a critical survey which systematically examine the literature of those factors. The paper discusses the roots of the subprime crisis and characterizes briefly the most important milestones in the process of the crisis propagation. Then it presents analysis of the impact of the subprime and MBSs markets on the outburst of the global financial crisis provided by staff of selective international financial institutions and central banks. The special attention is paid to factors of crisis propagation after the subprime mortgage and MBSs markets collapse. Strict interdependencies among tall discussed factors are emphasized.
    Keywords: global financial crisis, subprime mortgages, structured credit products, risk exposure,
    JEL: E44 G18 G21 G24
    Date: 2014–06–01
  2. By: Lawrence Kreicher; Robert N McCauley; Philip Wooldridge
    Abstract: We analyse the turnover of fixed income derivatives in seven currencies to test the hypothesis that market participants increasingly use contracts based on private rather than government rates to hedge and to take positions. In the US dollar money market, private benchmarks long ago displaced government benchmarks. In the bond markets, evidence from organised exchanges and the Triennial Central Bank survey on over-the-counter (OTC) markets suggests that the benchmark is tipping from government bond futures to private interest rate swaps. The global financial crisis seems only to have interrupted this process in the US dollar bond market, the European sovereign bond strains may have accelerated it in the euro bond market; and the policy to clear centrally OTC trades does not seem to be impeding it. Cross-sectional analysis of 35 bond markets identifies bond market size and GDP per capita as key determinants of the existence of government bond futures. Based on these results, one may expect uccessful introduction of government bond futures in China and Brazil even as such contracts continue to lose ground in today's major markets.
    Keywords: Benchmark, safe assets, government bond futures, interest rate swaps, US Treasury bonds, German bunds, Japanese government bonds, UK gilts
    Date: 2014–10
  3. By: Zura Kakushadze
    Abstract: We propose a 4-factor model for overnight returns and give explicit definitions of our 4 factors. Long horizon fundamental factors such as value and growth lack predictive power for overnight (or similar short horizon) returns and are not included. All 4 factors are constructed based on intraday price and volume data and are analogous to size (price), volatility, momentum and liquidity (volume). Historical regressions a la Fama and MacBeth (1973) suggest that our 4 factors have sizable serial t-statistic and appear to be relevant predictors for overnight returns. We check this by using our 4-factor model in an explicit intraday mean-reversion alpha.
    Date: 2014–10
  4. By: Chris Brooks (ICMA Centre, Henley Business School, University of Reading); Adrian Fernandez-Perez (Auckland University of Technology); Joëlle Miffre (EDHEC Business School, France); Ogonna Nneji (ICMA Centre, Henley Business School, University of Reading)
    Abstract: The article examines whether commodity risk is priced in the cross-section of equity returns. Alongside a long-only equally-weighted portfolio of commodity futures, we employ as an alternative commodity risk factor a term structure portfolio that captures the propensity of commodity futures markets to be backwardated or contangoed. Equity-sorted portfolios with greater sensitivities to the two commodity risk factors command higher average returns. The two commodity portfolios are also found to explain part of the size, value and momentum anomalies. Conclusions regarding the pricing of the commodity risk factors are not an artifact driven by crude oil and are robust to the inclusion of financial and macroeconomic variables and to the addition of a composite leading indicator in the pricing model.
    Keywords: Long-only commodity portfolio, term structure portfolio, commodity risk, cross-section of equity returns
    JEL: G11 G13
    Date: 2014–09
  5. By: Szabolcs Szikszai (University of Pannonia (Department of Economics)); Tamas Badics (University of Pannonia (Department of Economics))
    Abstract: In this report we discuss the factors driving the growth of the global financial sector that are considered by many authors (e.g. Toporowski,1999 and Orhangazi, 2008) to have precipitated the financial crisis of 2007-2008. Our analysis focuses on the behavior of the different types of financial as well as non-financial companies that financed the global expansion of financial assets. First, we find that investors of hedge funds and private equity funds lacked clear guidance on the expected performance due to the lack of transparency of operation and because conventional risk-return measures have proven to be inapplicable. Furthermore, it is also likely that hedge funds drastically decreased liquidity in certain markets during the crisis as they rushed to cash in on their assets. On the other hand, most of their investors were institutional investors, which prepared for potential losses and the collapse of hedge funds during the crisis did not shake the financial system. We also demonstrate the important role of NFCs in the process of financialisation of the economy. We point out that, as a result of a change in NFCs’ relationship with financial markets following 1980, financial assets held by non- financial corporations increased relative to the value of their real assets. This micro- based process of financialisation was triggered by a shift in corporate governance norms towards maximizing shareholder value as well as NFCs’ drive to compensate for falling rates of return in the real sector. The increased interconnectedness of the financial and the corporate sector also seems to explain why the crisis of thefinancial sector inevitably led to a full-fledged economic crisis. Finally, we show that the active proprietary trading of the leading US investment banks was also an important element in the buildup of risks in the financial system preceding the crisis.
    Keywords: financial crisis, regulation, insurance fund, hedge fund, mutual fund, pension fund, private equity fund, wealth fund, investment bank, proprietary trading, financialization, share buyback
    JEL: G01 G22 G23 G24 G31 G32
  6. By: Romain Bouis; Kei-Ichiro Inaba; Łukasz Rawdanowicz; Ane Kathrine Christensen
    Abstract: This paper describes developments in real long-term interest rates in the main OECD economies and surveys their various determinants. Real long-term government bond yields declined from the 1980s to very low levels in the recent period, though they have not reached the historical lows of the 1970s. The decline in real interest rates has been driven by a combination of factors whose importance has varied over time. In the 1990s, the decline in inflation levels and in volatility was key. In the 2000s, purchases of US government bonds by official investors in emerging market economies, played an important role. More recently, quantitative easing and other unconventional monetary policy action, and possibly the Basel-III-induced increase in bank demand for safe assets, have been main drivers. Higher perceptions of risks after the last crisis do not seem to have put lasting downward pressures on government bond yields. Facteurs à l'origine de la baisse des rendements des obligations d'État à long terme Ce document décrit l’évolution des taux d’intérêt réels à long terme dans les principales économies de l’OCDE et en recense les différents facteurs déterminants. Les rendements réels des obligations d’État à long terme ont diminué à partir des années 80 pour s’établir récemment à des niveaux très peu élevés, sans toutefois atteindre les plus bas niveaux historiques des années 70. La baisse des taux d'intérêt réels est attribuable à une combinaison de facteurs dont l'importance a varié au fil du temps. Dans les années 90, la baisse de l’inflation et la volatilité ont été les principaux facteurs. Dans les années 2000, les achats d’obligations d’État américaines par les investisseurs officiels des économies de marché émergentes ont joué un rôle important. Plus récemment, ce sont l’assouplissement quantitatif ainsi que d'autres mesures non conventionnelles de politique monétaire, et potentiellement l'augmentation de la demande d’actifs sûrs de la part des établissements bancaires, induite par l’Accord de Bâle III, qui ont primé. La plus grande perception des risques depuis la dernière crise ne semble pas avoir durablement pesé sur les rendements des obligations d’État.
    Keywords: monetary policy, foreign exchange reserve accumulation, real interest rates, government bond yields, quantitative easing, assouplissement quantitatif, rendements des obligations d’État, accumulation des réserves de change, politique monétaire, taux d’intérêt réels
    JEL: E43 E58 G15
    Date: 2014–10–13
  7. By: Martin T. Bohl; Jeanne Diesteldorf; Christian A. Salm; Bernd Wilfling
    Abstract: This paper challenges the existing literature examining the impact of the introduction of index futures trading on the volatility of its underlying. To overcome econometric shortcomings of previously published work using the dummy variable approach, we employ a Markov-switching-GARCH technique. This approach endogenously identifes distinct volatility regimes rather than modelling an exogenously defined one-step change in the volatility process. We investigate stock market volatility in France, Germany, Japan, the UK and the US. Our empirical results indicate that index futures trading does neither stabilize nor destabilize the underlying spot market.
    Keywords: Stock Index Futures, Stock Market Volatility, Markov-Switching-GARCH Model
    JEL: C32 G10 G14 G20
    Date: 2014–10
  8. By: Biais, Bruno; Heider, Florian; Hoerova, Marie
    Abstract: Derivatives activity, motivated by risk-sharing, can breed risk taking. Bad news about the risk of the asset underlying the derivative increases the expected liability of a protection seller and undermines her risk prevention incentives. This limits risk-sharing, and may create endogenous counterparty risk and contagion from news about the hedged risk to the balance sheet of protection sellers. Margin calls after bad news can improve protection sellers incentives and enhance the ability to share risk. Central clearing can provide insurance against counterparty risk but must be designed to preserve risk-prevention incentives.
    Keywords: Hedging; Insurance; Derivatives; Moral hazard; Risk management;Counterparty risk; Contagion; Central clearing; Margin requirements
    JEL: D82 G21 G22
    Date: 2014–06

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