nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒01‒31
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. A forecast evaluation of expected equity return measures By Chin, Michael ; Polk, Christopher
  2. Spare Tire? Stock Markets, Banking Crises, and Economic Recoveries By Ross Levine ; Chen Lin ; Wensi Xie
  3. Testing for systemic risk using stock returns By Paul H. Kupiec
  4. Re-use of collateral in the repo market By Lucas Marc Fuhrer ; Basil Guggenheim ; Silvio Schumacher
  5. Market Efficiency in Asian and Australasian Stock Markets: A Fresh Look at the Evidence By Jae Kim ; Hristos Doucouliagos ; Hendrix College
  6. A good news or bad news has greater impact on the Vietnamese stock market? By Nguyen Van, Phuong

  1. By: Chin, Michael (Bank of England ); Polk, Christopher (London School of Economics )
    Abstract: Recent studies find evidence in favour of return predictability, and argue that their positive findings result from their ability to capture expected returns. We assess the forecasting performance of two popular approaches to estimating expected equity returns, a dividend discount model (DDM) commonly used to estimate `implied cost of capital', and a vector autoregression (VAR) model commonly used to decompose equity returns. In line with recent evidence, in-sample tests show that both estimates generate substantially lower forecast errors compared to traditional predictor variables such as price-earnings ratios and dividend yields. Out-of-sample, the VAR and DDM estimates generate economically and statistically significant forecast improvements relative to a historical average benchmark. Our results tentatively suggest that the VAR approach better captures expected returns compared to the DDM.
    Keywords: Expected returns; implied cost of capital; dividend discount model; return predictability; forecasting
    JEL: G10 G11 G12 G17
    Date: 2015–01–16
  2. By: Ross Levine ; Chen Lin ; Wensi Xie
    Abstract: Do stock markets act as a “spare tire” during banking crises, providing an alternative corporate financing channel and mitigating the economic severity of banking crises? Using firm-level data in 36 countries from 1990 through 2011, we find that the adverse consequences of banking crises on firm profitability, employment, equity issuances, and investment efficiency are smaller in countries with stronger shareholder protection laws. These findings are not explained by the development of stock markets or financial institutions prior to the crises, the severity of the crisis, or overall economic, legal, and institutional development. The evidence is consistent with the view that stronger shareholder protection laws provide the legal infrastructure for stock markets to act as alternative sources of finance when banking systems go flat, easing the impact of the crisis on the economy.
    JEL: D22 E02 G21 G3 G38 K22
    Date: 2015–01
  3. By: Paul H. Kupiec (American Enterprise Institute )
    Abstract: Conditional value at risk (CoVaR) and marginal expected shortfall (MES) have been proposed as stock return based measures of the systemic risk created by individual financial institutions even though the literature provides no formal hypothesis test for detecting systemic risk. Our conclusion is that CoVaR and MES are not reliable measures of systemic risk.
    Keywords: systemic risk, AEI Economic Policy Working Paper Series, The Ledger, CoVaR, MES
    JEL: A
    Date: 2015–01
  4. By: Lucas Marc Fuhrer ; Basil Guggenheim ; Silvio Schumacher
    Abstract: This paper introduces a methodology to estimate the re-use of collateral based on actual transaction data. With a comprehensive dataset from the Swiss franc repo market we are able to provide the first systematic empirical study on the re-use of collateral. We find that re-use was most popular prior to the financial crisis, when roughly 10% of the outstanding interbank volume was based on re-used collateral. Furthermore, we show that re-use increases with the scarcity of collateral. By giving an estimate of collateral re-use and explaining its drivers, the paper contributes to the ongoing debate on collateral availability.
    Keywords: Re-use of collateral, repo, money market, financial stability, Switzerland
    JEL: E58 G01 G18 G21 G32
    Date: 2015
  5. By: Jae Kim ; Hristos Doucouliagos ; Hendrix College
    Abstract: Market efficiency is an important feature of successful financial markets. The aim of this paper is to analyze the available evidence on the efficient market hypothesis (EMH). Meta-regression analysis is applied to 1,560 estimates of the Variance Ratio test of the efficiency of Asian and Australasian stock markets. We test if there is evidence of violation of the EMH and we also explain the heterogeneity in the reported test results. Our meta-regression analysis specifically accommodates the possibility of publication selection in favor of accepting the null hypothesis of market efficiency. We find that Asian stock markets are, on average, not informationally efficient. However, market efficiency has improved over time and market capitalization and economic freedom influences stock market efficiency; more developed and less regulated stock markets are more efficient.
    Keywords: Random walk, meta-regression, efficient market hypothesis
    JEL: G10 G14
    Date: 2014–11–06
  6. By: Nguyen Van, Phuong
    Abstract: The arrival of news plays an extremely important role in the stock market because it mainly drives the movement of the stock market. In this paper, therefore, we would like to investigate how the Vietnamese stock market responses to the arrival of news via applying the AR – EGARCH in Mean model. Our research result indicates that the arrival of bad news has a greater impact on the conditional volatility than the arrival of good news does. We also found that there exists a positive tradeoff between the stock market returns and conditional volatility in the Vietnamese stock market.
    Keywords: The Vietnamese stock market, unit root, ARCH effect, volatility.
    JEL: G00 G10
    Date: 2015–01–09

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