nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒03‒27
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Trying to Predict Opening Stock Returns By Andrey Kudryavtsev
  2. Funding Liquidity, Market Liquidity and the Cross-Section of Stock Returns By Jean-Sébastien Fontaine; René Garcia; Sermin Gungor
  3. Press Freedom and Jumps in Stock Prices By Thorsten Lehnert
  4. Familiarity and Competition: The Case of Mutual Funds By Ariadna Dumitrescu; Javier Gil-Bazo
  5. Does Basel III bring anything new? A comparison between capital accords Basel II and Basel III By Max Kubat
  6. Relevance of uncertainty on the volatility and trading volume in the US Treasury bond futures market By Laakkonen, Helinä

  1. By: Andrey Kudryavtsev (The Max Stern Yezreel Valley Academic College)
    Abstract: In present study, I explore the dynamics of the interday stock price reversals. In particular, I try to shed light on reversals in opening stock returns, that is, on the price reversals during the opening trading sessions with respect to previous day's price tendencies. I analyze intraday price data on thirty stocks currently making up the Dow Jones Industrial Index, employing high-to-close and low-to-close price differences as a proxy for "large" prices moves, and open-to-close stock returns as a proxy for "regular" price moves. I document that opening returns tend to be: (i) higher following the days with relatively large high-to-close price changes (price decreases at the end of the day), and lower following the days with relatively large low-to-close price changes (price increases at the end of the day); and (ii) higher following the days with relatively low open-to-close returns. Based on these findings, I construct a number of daily-adjusted portfolios involving a long (short) position in the opening session in the stocks on the days when, according to the findings, their opening returns are expected to be high (low), and demonstrate that the returns on these portfolios are significantly positive.
    Keywords: Intraday Stock Prices; Opening Stock Returns; Overreaction; Stock Price Reversals
    JEL: G11 G14 G19
    Date: 2014–07
  2. By: Jean-Sébastien Fontaine; René Garcia; Sermin Gungor
    Abstract: Following theory, we check that funding risk connects illiquidity, volatility and returns in the cross-section of stocks. We show that the illiquidity and volatility of stocks increase with funding shocks, while contemporaneous returns decrease with funding shocks. The dispersions of illiquidity, volatility and returns widen following funding shocks. Funding risk is priced, generating a returns spread of 4.25 percent (annually) between the most and least illiquid portfolios, and of 5.30 percent between the most and least volatile portfolios. Estimates are robust using mimicking portfolio returns, alternative portfolio sorts, traditional test assets, other risk factors, monthly returns or quarterly returns.
    Keywords: Asset Pricing, Financial markets
    JEL: E E4 E43 H H1 H12
    Date: 2015
  3. By: Thorsten Lehnert (Luxembourg School of Finance)
    Abstract: Proponents of the efficient markets hypothesis would claim that investors correctly and timely incorporate new information into asset prices. Bayesian rationality is assumed to be a good description of investor behavior (Fama (1965, 1970)). However, the quality of information disclosure differs substantially across countries. Media- or press freedom reflects the degree of freedom that journalists or news organizations enjoy in each country, and the efforts made by the authorities to respect and ensure respect for this freedom. In a ‘free’ environment, characterized by good information disclosure, any news becomes immediately public knowledge through mediums including various electronic media and published materials. In an ‘unfree’ environment, characterized by bad information disclosure, the media become strategic goals and targets for groups or individuals who attempt to control news. We argue that stock markets in countries characterized by a high degree of press freedom tend to have good information disclosure. In those markets, economic agents would have no discretion to hide bad news or to release bad news slowly. However, stock markets in countries characterized by a low degree of press freedom tend to have poor information disclosure. In those markets, economic agents would have a greater discretion to hide bad news or to release bad news slowly, which at the stock market level would be reflected in a lower frequency of (substantial) negative jumps in stock prices. Hence, stock market returns in countries characterized by a low degree of press freedom are likely to be less negatively skewed. A number of recent empirical and theoretical studies find evidence for the existence of jumps and their substantial impact (see e.g. Johannes (2004)). Using an equilibrium asset-pricing model in an economy under jump diffusion, we decompose the moments of the returns of international stock markets into a diffusive and jump part. Using stock market data for a balanced panel of 50 countries, we show that in an economy with a free press, the free disclosure of bad news leads to more frequent negative jumps, which directly relates to a more negatively skewed return distribution. At the same time, the contribution of jump risk to stock market volatility is not affected by any of our country- and market-specific explanatory variables.
    Keywords: Press Freedom, Asset Pricing, Jumps, Volatility, Skewness
    JEL: G12 Z13 G15
    Date: 2014–12
  4. By: Ariadna Dumitrescu; Javier Gil-Bazo
    Abstract: We build a model of mutual fund competition in which a fraction of investors ("unsophisticated") exhibit a preference for familiarity. Funds differ both in their quality and their visibility: While unsophisticated investors have varying degrees of familiarity with respect to more visible funds, they avoid low-visibility funds altogether. In equilibrium, bad low-visibility funds are driven out of the market of sophisticated investors by good low-visibility funds. High-visibility funds do not engage in competition for sophisticated investors either, and choose instead, to cater to unsophisticated investors. If familiarity bias is high enough, bad funds survive competition from higher quality funds despite offering lower after-fee performance. Our model can thus shed light on the persistence of underperforming funds. But it also delivers a completely new prediction: Persistent differences in performance should be observed among more visible funds but not in the more competitive low-visibility segment of the market. Using data on US domestic equity funds, we find strong evidence supporting this prediction. While performance differences survive at least one year for the whole sample, they vanish within the year for low-visibility funds. These results are not explained by differences in persistence due to fund size or investment category. The evidence also suggests that differences in persistence are not the consequence of other forms of segmentation on the basis of investor type (retail or institutional) or the distribution channel.
    Keywords: familiarity bias, competition, mutual funds, performance persistence
    JEL: G2 G23
    Date: 2015–03
  5. By: Max Kubat (University of Economics, Prague)
    Abstract: Basel Accords represent the most important documents of banking supervision. Basel II came into force almost at the same time as the financial crisis set in. Relatively soon after this, the work on the new capital accord known as Basel III was initiated. The question is whether the new agreement brings something really principally different from Basel II, or whether it is just a tool to reassure the public and markets with some form of stricter requirements. Basel Committee is based on G-20 countries representation. Introduction contains a brief explanation of how the Basel capital accords are reflected in European law. The first part of the article explains core principles of Basel II with several possible explanations of its failure. The second part clarifies the main principles of Basel III and compares them with Basel II. The criterion for comparison is search for fundamental distinctions between the introduced tools. From five monitored areas (definition of capital, capital requirements, risk coverage, leverage ratio, liquidity management) three of them meet this criterion. The redefinition of capital means only better clarification and unification of definitions. The risk coverage part focuses on technical issues, but no new risks are perceived. There is a significant change about new capital requirements. Two new buffers are requested. While previous capital requirement were based on direct connection with risks, the connection between capital conservation buffer and countercyclical buffer is only indirect to measured risks. Also the leverage ratio and liquidity management bring new tools and thus principle change. There is a significant change in leverage ratio that brings a new tool which is not based on risk. It makes the calculation easier and should avoid cheating in capital manipulation. Liquidity management is a completely new part of banking regulation measures, therefore there is nothing to compare with Basel II.
    Keywords: Basel capital accords; Basel II; Basel III; capital requirements; capital adequacy
    JEL: L51 F02 G28
    Date: 2014–05
  6. By: Laakkonen, Helinä (Bank of Finland, Department of Financial Markets and Statistics)
    Abstract: This paper studies the impact of uncertainty on the investors' reactions to news on macroeconomic statistics. With daily data on realized volatility and trading volume, we show that the investors in the US Treasury bond futures market react significantly stronger to US macroeconomic news in times of low macroeconomic, financial and political uncertainty. We also find that investors are more sensitive to the uncertainty in the financial market compared to the macroeconomic and political uncertainties. Our results might partly explain the sudden freeze and low liquidity in some financial markets during the latest financial crisis.
    Keywords: ambiguity; uncertainty; volatility; trading volume; bond market; macroeconomic announcements
    JEL: C22 G12 G14
    Date: 2015–03–02

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