nep-fmk New Economics Papers
on Financial Markets
Issue of 2014‒12‒13
two papers chosen by

  1. . . . and the Cross-Section of Expected Returns By Campbell R. Harvey; Yan Liu; Heqing Zhu
  2. A Fragmentation Indicator for Euro Area Sovereign Bond Markets By Moloney, Kitty; Killeen, Neill; Givlarry, Oliver

  1. By: Campbell R. Harvey; Yan Liu; Heqing Zhu
    Abstract: Hundreds of papers and hundreds of factors attempt to explain the cross-section of expected returns. Given this extensive data mining, it does not make any economic or statistical sense to use the usual significance criteria for a newly discovered factor, e.g., a t-ratio greater than 2.0. However, what hurdle should be used for current research? Our paper introduces a multiple testing framework and provides a time series of historical significance cutoffs from the first empirical tests in 1967 to today. Our new method allows for correlation among the tests as well as missing data. We also project forward 20 years assuming the rate of factor production remains similar to the experience of the last few years. The estimation of our model suggests that a newly discovered factor needs to clear a much higher hurdle, with a t-ratio greater than 3.0. Echoing a recent disturbing conclusion in the medical literature, we argue that most claimed research findings in financial economics are likely false.
    JEL: C01 C58 G0 G1 G12 G3
    Date: 2014–10
  2. By: Moloney, Kitty (Central Bank of Ireland); Killeen, Neill (Central Bank of Ireland); Givlarry, Oliver (Central Bank of Ireland)
    Abstract: This Letter presents a simple indicator which can be used to monitor fragmentation in euro area sovereign bond markets. The indicator is a moving average cross-correlation of bond yield log returns between Germany and other euro area countries. We suggest that a lower correlation implies greater market fragmentation. We do not distinguish between fragmentation based on fundamentals and that based on market sentiment, although we expect sentiment to play a key role. We compare the simple indicator to a bivariate dynamic conditional correlation (DCC) GARCH estimate which accounts for heteroskedasticity. The estimates indicate that the core countries decouple from Germany and then re-attach, whereas the peripheral countries remain fragmented during the entire sample period.
    Date: 2014–10

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