nep-fmk New Economics Papers
on Financial Markets
Issue of 2014‒12‒29
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Stock Price Booms and Expected Capital Gains By Adam, Klaus; Beutel, Johannes; Marcet, Albert
  2. Securitization and Asset Prices By Yunus Aksoy; Henrique S. Basso
  3. Reconsidering Corporate Ratings. By Bertrand K Hassani; Xin Zhao
  4. Sorting out commodity and macroeconomic risk in expected stock returns By Boons, M.F.
  5. Causes of the Financial Crisis and the Slow Recovery: A Ten-Year Perspective By John B. Taylor
  6. Market Perceptions of US and European Policy Actions Around the Subprime Crisis By Theoharry Grammatikos; Thorsten Lehnert; Yoichi Otsubo
  7. Exploring Diversification Benefits in Asia-Pacific Equity Markets By Mensah, Jones Odei; Premaratne, Gamini
  8. Why do small Chinese firms list on the Frankfurt Stock Exchange? By Xu, Hongmei
  9. Assessing the Basel II Internal Ratings-Based Approach: Empirical Evidence from Australia By Marek Rutkowski; Silvio Tarca

  1. By: Adam, Klaus; Beutel, Johannes; Marcet, Albert
    Abstract: The booms and busts in U.S. stock prices over the post-war period can to a large extent be explained by fluctuations in investors` subjective capital gains expectations. Survey measures of these expectations display excessive optimism at market peaks and excessive pessimism at market throughs. Formally incorporating subjective price beliefs into an otherwise standard asset pricing model with utility maximizing investors, we show how subjective belief dynamics can temporarily delink stock prices from their fundamental value and give rise to asset price booms that ultimately result in a price bust. The model successfully replicates (1) the volatility of stock prices and (2) the positive correlation between the price dividend ratio and expected returns observed in survey data. We show that models imposing objective or `rational` price expectations cannot simultaneously account for both facts. Our findings imply that large parts of U.S. stock price fluctuations are not due to standard fundamental forces, instead result from self-reinforcing belief dynamics triggered by these fundamentals.
    Keywords: asset prices; subjective beliefs; survey data
    JEL: D84 G12
    Date: 2014–05
  2. By: Yunus Aksoy (Department of Economics, Mathematics & Statistics, Birkbeck); Henrique S. Basso (Banco de Espana)
    Abstract: During the 15 years prior to the global financial crisis the volume of securitized assets transacted in the US has grown substantially, reflecting a change in the nature of the financial intermediation process. Together with increased securitization, financial entities, who participate more heavily in the asset-backed security (ABS) market and hold a diversified portfolio of assets, have also become more relevant. As a result, the volume of securitization, although traditionally associated with credit markets, influences the outcomes of other asset markets. We investigate the link between securitization and asset prices and show that increases in the growth rate of the volume of ABS issuance lead to a decline in both the bond and equity premia. We then build a model of bank portfolio choice where the creation of synthetic securities may occur. The pooling and tranching of credit assets relaxes both the funding and the risk constraints financial entities face allowing them to increase balance sheet holdings. This increase in asset demand depresses the compensation for undertaking risk in the economy, confirming our empirical results. We show that financial intermediation is linked with asset prices through this portfolio mechanism, whose strength depends on the volume of deals in the securitization market.
    Keywords: Pooling and Tranching, Equity, Government Bonds, Bank Portfolio, Risk Premia.
    JEL: E44 G12 G2
    Date: 2014–11
  3. By: Bertrand K Hassani (Grupo Santander et Centre d'Economie de la Sorbonne); Xin Zhao (Morgan Stanley et Centre d'Economie de la Sorbonne)
    Abstract: In this paper, a new corporate ratings methodology is proposed. In this innovating approach corporate ratings are calibrated from data with different frequency in two-steps. Information of firms' credit quality from annual accounting ratios and daily credit derivative spreads yields are combined through a Bayesian approach. To test the performance of this new rating, an empirical analysis is carried out on a sample of 197 public traded international corporations with credit ratings from the big-three credit rating agencies. The ratings generated from the presented approach perform better than the ratings from the external agencies as it is more representative of companies' credit quality over time, therefore this approach is a suitable alternative to internal rating methods.
    Keywords: Corporate Rating, market implied rating, corporate Bond Yields.
    JEL: C23 E44 G15
    Date: 2014–10
  4. By: Boons, M.F. (Tilburg University, School of Economics and Management)
    Abstract: The dissertation consists of three essays in asset pricing. Chapter I is motivated by the recent surge in institutional investment in commodity futures markets. The chapter studies how commodity risk is priced in stock and futures markets and asks whether this risk premium is time-varying with these changes in investment practices. Chapter II and III are at the intersection of macroeconomics and asset pricing. Chapter II is motivated by the introduction of real bonds as well as the poor empirical track record for inflation as a risk factor in stock returns. The chapter estimates the inflation risk premium in the stock market and identifies the proximate causes of its variation over time. Chapter III tests an element that is common to most asset pricing models, but often overlooked in empirical tests: time-series and cross-sectional consistency. The chapter studies whether risk premiums for state variable risks in the cross-section of individual stocks are consistent with how these variables predict macroeconomic activity in the time-series. The dissertation resuscitates a central role for real factors in asset pricing and identifies a novel channel through which stock market risk premiums vary over time: the introduction of an asset that hedges the underlying risk more adequately.
    Date: 2014
  5. By: John B. Taylor (Department of Economics, Stanford University)
    Abstract: This paper examines the causes of the financial crisis and the relatively slow economic recovery since then. It expands the timeline to the five years before and after the financial crisis in order to get a more complete assessment of what went wrong and how government policy largely caused the crisis.
    Date: 2014–01
  6. By: Theoharry Grammatikos (University of Luxembourg (E-mail: theoharry.; Thorsten Lehnert (University of Luxembourg (E-mail:; Yoichi Otsubo (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper explores the impacts of key policy actions by US and European authorities on stock returns of systemically important banks in Europe and US around the subprime crisis. We find that the US policy announcements had a stronger impact on the European and US banking industry than the European policy announcements. In particular, the announcements of monetary policies by the US authorities were accompanied by higher abnormal returns compared to related announcements of European authorities. We also find that the policy announcements, regardless of which side of the Atlantic the news arrived from, has increased the return volatility during the crisis. We further analyze the reactions of implied volatility. The findings suggest that the currency swaps had a non-negligible effect in reducing future uncertainty.
    Keywords: Event study, Policy announcement, Subprime crisis
    JEL: G01 G14 G18 G21 G28
    Date: 2014–11
  7. By: Mensah, Jones Odei; Premaratne, Gamini
    Abstract: This paper examines the benefits of regionally and globally diversified portfolios from the perspective of investors holding domestic-only portfolios from different Asia-Pacific countries. Three groups of regional portfolio are constructed, with sorting based on relative strength ranking technique of Levy (1967). The step-down spanning technique is employed to uncover evidence that the global minimum-variance portfolio of a local investor can be improved by investing regionally or globally, but the evidence that the tangency portfolio can be improved is weak in all cases. The results also show an increase in Sharpe ratio when the investor invests regionally or globally but this benefit declines under the assumption of short-selling. The paper concludes that there are gains in diversifying globally but higher gains are realized by investing regionally.
    Keywords: Asia-Pacific Region; Sectoral diversification benefits; Relative Strength Ranking; Mean-Variance Spanning
    JEL: C10 F3 G11 G15
    Date: 2014–10
  8. By: Xu, Hongmei
    Abstract: Recently, Chinese firms have become more active in attempting to go public on the Frankfurt Stock Exchange (FWB). This paper uses multivaria te probit analysis to test the motivations of Chinese firms to list on the FWB. In general, Chinese firms are driven by the following motivations. Firstly, they pursue relatively more stringent listing standards and closer monitoring than the Hong Kong Growth Enterprise Market (GEM) and the London Alternative Investment Market (AIM) provide. Secondly, they are motivated by emerging needs for external financing. Moreover, this paper also examines the post-issue performance of Chinese listings on the FWB. It turns out that Chinese firms listed on the FWB show bad operating performance as well as bad stock performance. However, these are no exceptions since many Chinese firms listed on other foreign stock exchanges also underperform the market average.
    Abstract: In letzter Zeit ist zu beobachten, dass chinesische Unternehmen vermehrt einen Börsengang an der Frankfurter Wertpapierbörse (FWB) anstreben. Dieser Artikel prüft mittels multivariaten Probit-Analysen, mit welcher Motivation chinesische Firmen den Börsengang in Frankfurt anstreben. Im Allgemeinen sind chinesische Firmen durch die folgenden Aspekte motiviert. Erstens herrschen an der Frankfurter Wertpapierbörse strengere Zulassungsregeln und eine sorgfältigere Überwachung als am Growth Enterprise Market (GEM) in Hong Kong oder am Alternative Investment Market (AIM) in London. Zweitens werden chinesische Unternehmen für einen Börsengang in Frankfurt durch neuen Bedarf an externer Finanzierung motiviert. Außerdem untersucht dieser Artikel auch den Erfolg chinesischer Börsennotierungen an der FWB nach dem Börsengang. Dabei stellt sich heraus, dass chinesische Firmen, die an der FWB notiert sind, nicht nur im operativen Geschäft, sondern auch bei der Kursentwicklung schlecht abschneiden. Dies ist jedoch nicht außergewöhnlich, da die Wirtschaftsleistung vieler chinesischer Unternehmen, die an ausländischen Börsen notiert sind, ebenfalls unter dem jeweiligen Marktdurchschnitt liegt.
    JEL: F23 F31 G10 G15 M20 M40
    Date: 2014
  9. By: Marek Rutkowski; Silvio Tarca
    Abstract: The Basel II internal ratings-based (IRB) approach to capital adequacy for credit risk implements an asymptotic single risk factor (ASRF) model. Measurements from the ASRF model of the prevailing state of Australia's economy and the level of capitalisation of its banking sector find general agreement with macroeconomic indicators, financial statistics and external credit ratings. However, given the range of economic conditions, from mild contraction to moderate expansion, experienced in Australia since the implementation of Basel II, we cannot attest to the validity of the model specification of the IRB approach for its intended purpose of solvency assessment. With the implementation of Basel II preceding the time when the effect of the financial crisis of 2007-09 was most acutely felt, our empirical findings offer a fundamental assessment of the impact of the crisis on the Australian banking sector. Access to internal bank data collected by the prudential regulator distinguishes our research from other empirical studies on the recent crisis.
    Date: 2014–11

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