nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒04‒02
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Predicting the direction of US stock markets using industry returns By Pönkä, Harri
  2. The Role of Information in Stock Market By Mahmood Mahmoodzadeh; Saleh Ghavidel; Mir Hosein Mousavi
  3. Measuring too-big-to-fail funding advantages from small banks’ CDS spreads By M. Bijlsma; J.H.J. Lukkezen; K. Marinova
  4. The Impact of Stock Market Structure on Volatility: Evidence from a Call Auction Suspension By Camilleri, Silvio John
  5. The Equity-like Behaviour of Sovereign Bonds By Alfonso Dufour; Andrei Stancu; Simone Varotto
  6. TIPS and the VIX: Spillovers from Stock Market Panic to Breakeven Inflation in a Semi-automated, Non-linear Modeling Framework By Josh R. Stillwagon
  7. Liquidity Risk Premia in the International Shipping Derivatives Market By Amir Alizadeh; Konstantina Kappou; Dimitris Tsouknidis; Ilias Visvikis
  8. How much diversification potential is there in a single market? Evidence from the Australian Stock Exchange By Libin Yang; William Rea; Alethea Rea

  1. By: Pönkä, Harri
    Abstract: In this paper, we examine the directional predictability of excess stock market returns by lagged excess returns from industry portfolios and a number of other commonly used variables by means of dynamic probit models. We focus on the directional component of the market returns because, for investment purposes, forecasting the direction of return correctly is presumably more relevant than the accuracy of point forecasts. Our findings suggest that only a small number of industries have predictive power for market returns. We also find that the binary response models outperform conventional predictive regressions in forecasting the direction of the market return. Finally, we test trading strategies and find that a number of industry portfolios contain information that can be used to improve investment returns.
    Keywords: industry excess return, sign prediction, probit model, forecasting
    JEL: C25 C53 C58 G17
    Date: 2014–02–24
  2. By: Mahmood Mahmoodzadeh (Firoozkooh Branch, Islamic Azad University, Firoozkooh); Saleh Ghavidel (Firoozkooh Branch, Islamic Azad University, Firoozkooh); Mir Hosein Mousavi (Alzahra University)
    Abstract: With relying on game theory, this paper investigates the role of information played in decisions of economic agents in Tehran Stock Exchange (TSE). The behavior of economic agents in a company in the Cement, Lime & Gypsum industry named Tehran Cement listed on the TSE has been investigated through GARCH class models for the period of July 1999 to June 2006. The results suggest that general information through GARCH (1, 1) model affects the company stock price, while private information through GARCH (2, 1) model affects the trading volume. Having explored general and private information, we studied the role of this information in determining stock price and trading volume, according to which the results demonstrate that general information has more influence than private information in determining stock price and trading volume. Therefore, we accept information cascades theory in TSE which means economic agents mostly rely on general information in their trading decisions.
    Keywords: herd behavior, social learning theory, information cascades, ARCH/ GARCH Models
    JEL: C58 D89 G10
    Date: 2014–10
  3. By: M. Bijlsma; J.H.J. Lukkezen; K. Marinova
    Abstract: Large banks derive a funding advantage from being too-big-to-fail, while small banks do not. To estimate the funding advantage we explain the CDS spreads of small banks in six major European countries during the crisis by market fundamentals and bank-specific characteristics. Next, we extrapolate and predict the CDS spreads of large banks. The difference between the predicted and the observed spread is then interpreted as the funding advantage and amounts to 67 basis points for large banks and 121 for GSIFIs.
    Keywords: Too big to fail, credit default swaps, bank funding, costs of crisis
    Date: 2014
  4. By: Camilleri, Silvio John
    Abstract: The purpose of this paper is to investigate the volatility impacts of the suspension of a call auction system by the National Stock Exchange of India (NSE) in June 1999, thus extending prior empirical work relating to this area. The realised volatility on NSE is compared with that of the Bombay Stock Exchange using two volatility proxies: modulus of log returns and scaled intra-day price difference. We also focus on conditional volatility by estimating an AGARCH model on seasonally-adjusted NSE Nifty Index data. Whilst some results yield contrasting inferences, the overall outcomes indicate that volatility was higher during the auction period, and we do not find any evidence that supports the foreseen benefits of auction frameworks. Results reinforce the idea that market designers should think about the possible interactions with subsidiary market microstructure features when formulating auction protocols, since the latter may compromise auction efficacy.
    Keywords: Call Auctions, National Stock Exchange of India, Seasonality, Stock Markets, Volatility
    JEL: G12 G18
    Date: 2015
  5. By: Alfonso Dufour (ICMA Centre, Henley Business School, University of Reading); Andrei Stancu; Simone Varotto
    Abstract: Using a rich dataset of high frequency historical information we study the determinants of European sovereign bond returns over calm and crisis periods. We find that the importance of the equity risk factor varies greatly over time and crucially depends on country risk. In low risk countries, government bond returns are negatively related to equity returns, regardless of market conditions. Investors appear to migrate from low risk government bonds to stocks in calm periods and in the opposite direction when markets are under stress. On the other hand, government bonds of high risk countries lose their “safe-asset” status and exhibit more equity- like behaviour during the sovereign debt crisis, with positive and strongly significant co- movements relative to the stock market. Interestingly, this segmentation of the government bond market results in higher diversification benefits for fixed income investors and pension funds in periods of sovereign stress.
    Keywords: government bonds, subprime crisis, sovereign debt crisis, credit risk, liquidity risk, asset pricing
    JEL: G01 G12 G15 E43
    Date: 2014–12
  6. By: Josh R. Stillwagon (Department of Economics, Trinity College)
    Abstract: This paper examines the determinants of the breakeven inflation rate (BEI) on 5 and 10 year US Treasury inflation protected securities (TIPS). The estimation is conducted using a bias-corrected, automated model selection algorithm with indicator saturation and non-linearities. The vast majority of the variation in BEI, over 70%, is attributable not to changes in inflation expectations or liquidity itself but rather a changing preference for liquidity driven by financial market uncertainty. The degree of financial panic is proxied for with the CBOE Volatility Index (VIX). The effect of the VIX on BEI is significant at the 0.1% level, holds even after controlling for inflation expectations and liquidity, and is robust to numerous specifications. Further, a rising VIX is associated with increases in the liquidity premium on TIPS at an increasing rate. Significant effects can also be found under certain specifications for inflation expectations, inflation forecast dispersion, liquidity, and an interaction term between the VIX and liquidity.
    Keywords: TIPS, breakeven inflation, VIX, liquidity premia, inflation expectations, automated model selection, non-linearities
    JEL: E43 G12 G01 C22 C52
    Date: 2015–02
  7. By: Amir Alizadeh (Cass Business School); Konstantina Kappou (ICMA Centre, Henley Business School, University of Reading); Dimitris Tsouknidis (Regents University London); Ilias Visvikis (World Maritime University)
    Abstract: The study examines the existence of liquidity risk premia on freight derivatives returns. The Amihud liquidity ratio and bid-ask spreads are utilized to assess the existence of liquidity premia. Other macroeconomic variables are used to control for market risk. Results indicate that liquidity risk is priced and both liquidity measures have a significant role in determining freight derivatives returns. Consistent with expectations, both liquidity measures are found to have positive and significant effects on the returns of near-month freight derivatives contracts. The results have important implications for modeling freight derivatives returns, and consequently, for trading and risk management purposes.
    Keywords: forward freight agreements, liquidity risk, bid–ask spreads, shipping, panel data
    JEL: G12 G13 G14 C23
    Date: 2014–12
  8. By: Libin Yang; William Rea (University of Canterbury); Alethea Rea
    Abstract: We present four methods of assessing the diversification potential within a stock market, two of these are based on principal component analysis. They were applied to the Australian stock exchange for the years 2000 to 2014 and all show a consistent picture. The potential for diversification declined almost monotonically in the three years prior to the 2008 financial crisis. On one of the measures the diversification potential declined even further in the 2011 European debt crisis and the American credit downgrade.
    Keywords: Principal component analysis, stock selection, diversification, stock portfolios
    JEL: G11
    Date: 2015–03–17

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