nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒02‒22
three papers chosen by

  1. Stock Market Volatility and Learning By Adam, Klaus; Marcet, Albert; Nicolini, Juan Pablo
  2. Does the Type of Debt Matter? Stock Market Perception in Europe By Zuzana FUNGACOVA; Christophe J. GODLEWSKI; Laurent WEILL
  3. Modeling and predicting the market volatility index: The case of VKOSPI By Han, Heejoon; Kutan, Ali M.; Ryu, Doojin

  1. By: Adam, Klaus (University of Mannheim); Marcet, Albert (Institute d'Analisi Economica); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: Consumption-based asset pricing models with time-separable preferences can generate realistic amounts of stock price volatility if one allows for small deviations from rational expectations. We consider rational investors who entertain subjective prior beliefs about price behavior that are not equal but close to rational expectations. Optimal behavior then dictates that investors learn about price behavior from past price observations. We show that this imparts momentum and mean reversion into the equilibrium behavior of the price-dividend ratio, similar to what can be observed in the data. When estimating the model on U.S. stock price data using the method of simulated moments, we find that it can quantitatively account for the observed volatility of returns, the volatility and persistence of the price-dividend ratio, and the predictability of long-horizon returns. For reasonable degrees of risk aversion, the model generates up to one-half of the equity premium observed in the data. It also passes a formal statistical test for the overall goodness of fit, provided one excludes the equity premium from the set of moments to be matched.
    Keywords: Asset pricing; Learning; Subjective beliefs; Internal rationality
    JEL: E44 G12
    Date: 2015–02–10
  2. By: Zuzana FUNGACOVA (Bank of Finland); Christophe J. GODLEWSKI (LaRGE Research Center, Université de Strasbourg); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    Abstract: We study the effect of bank loan and bond announcements on borrower’s stock price. We apply an event study methodology on a sample of companies from 17 European countries. We find that debt announcement generates a positive stock market reaction. However our main conclusion is that the issuance of a loan exerts a significantly higher reaction than the issuance of a bond. This finding supports the hypothesis that loan issuance conveys a positive certification effect. The analysis of the determinants of abnormal returns following debt announcements shows a positive impact of financial development and a negative effect of the Eurozone crisis.
    Keywords: corporate bonds, syndicated loans, event study, stock returns, Europe.
    JEL: G14 G20
    Date: 2015
  3. By: Han, Heejoon; Kutan, Ali M.; Ryu, Doojin
    Abstract: The KOSPI 200 options are one of the most actively traded derivatives in the world. This paper empirically examines (a) the statistical properties of the Korea's representative implied volatility index (VKOSPI) derived from the KOSPI 200 options and (b) macroeconomic and financial variables that can predict the implied volatility process of the index, using augmented heterogeneous autoregressive (HAR) models with exogenous covariates. The results suggest that the dynamics of the VKOSPI is well described by the elaborate HAR framework and that some Korea's macroeconomic variables significantly explain the VKOSPI. In addition, we find that the stock market return and implied volatility index of the US market (i.e., the S&P 500 spot return and the VIX from S&P 500 options) play a key role in predicting the level of VKOSPI and explaining its dynamics, and their explanatory power dominates that of Korea's macro-finance variables. Further, while Korea's stock market return does not predict the VKOSPI, US stock market return well predicts the future VKOSPI level. When both US stock market return and US implied volatility index are incorporated into the HAR framework, the model's both in-sample fitting and out-of-sample forecasting ability exhibits the best performance.
    Keywords: heterogeneous autoregressive (HAR) model,implied volatility index,VKOSPI,VIX,KOSPI 200 options
    JEL: C22 C50 G14 G15
    Date: 2015

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