nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒05‒16
six papers chosen by

  1. Size Matters: Tail Risk, Momentum and Trend Following in International Equity Portfolios By Andrew Clare; James Seaton; Peter N. Smith; Stephen Thomas
  2. Did banks and financial markets developments lead to economic growth in MENA region? Evidence from Dynamic panel data estimation By Hamdi, Helmi; Hakimi, Abdelaziz
  3. Securitization and Credit Default Swaps (CDSs): Towards Diagnostic of the Fundamental Problem and Suggested Solutions By Shanuka Senarath
  4. Carry and Trend Following Returns in the Foreign Exchange Market By Andrew Clare; James Seaton; Peter N. Smith; Stephen Thomas
  5. Bank sovereign bond holdings, sovereign shock spillovers, and moral hazard during the European crisis By Andrea Beltratti; René M. Stulz
  6. A New Risk Appetite Index and CDS spreads: Evidence from an Emerging Market By Fatih Kiraz; Ozgur Uysal; Yakup Ergincan

  1. By: Andrew Clare; James Seaton; Peter N. Smith; Stephen Thomas
    Abstract: We investigate the relationship between size and momentum across a wide range of international equity markets. A distinction is made between relative momentum where assets are ranked according to their performance against each other, and absolute momentum (or trend following) where assets are categorized according to whether they have recently exhibited positive, nominal return characteristics. We find only limited evidence for the outperformance of relative momentum portfolios. Trend following, however, is observed to be a very effective strategy over the study period delivering superior risk-adjusted returns across a range of size categories in both developed and emerging markets while not reversing the performance superiority of smaller firms. We also find, contrary to popular perception, that it is the mid cap-sector that dominates in emerging markets and suggest that this sector should be considered as the equivalent to developed economy small-cap investing.
    Keywords: International equity markets, firm size, momentum, trend following, tail risk
    JEL: G0 G11 G15
    Date: 2015–05
  2. By: Hamdi, Helmi; Hakimi, Abdelaziz
    Abstract: This study examines the consequences of banks and stock markets developments on economic growth for eleven Middle Eastern and North African (MENA) countries for the period from 1995 to 2010. We perform dynamic panel data estimation and we use GMM estimator as suggested by Arellano and Bond (1991). The overall results suggest a positive relationship between banking and financial developments and economic growth. The results reveal that stock markets in MENA countries are still at an early stage of development and the sector needs the implementation of deep policy reforms to attract investors and to promote the contribution of the financial market in economic development.
    Keywords: Financial development, Economic growth, MENA, Dynamic Panel Data
    JEL: E44 G20 O16
    Date: 2015–05–12
  3. By: Shanuka Senarath (Griffith University)
    Abstract: Most of the blame for the present Global Financial Crisis (GFC) has been attributed to securitization and CDSs in the years preceding growth of the crisis. On reflection, most of the blame must be “sheeted home” to the former U.S government’s mandate to banks and other financial institutions to mitigate their normal lending criteria on U.S home loans. The fundamental problem with these securitization contracts was not the securitization of good loans, but the securitization of “lemons”. The loans should have never been entered into in the first place. The “failure” of securitization contracts was therefore a failure of well-intended (but poor) government policy makers in foreseeing the unintended consequences. In order to “insure” against expected defaults, the lenders and the investors entered CDS contracts in the shadow banking sector. The fundamental problem with the CDS contracts which are much touted in the regulated and shadow banking sectors as being “desirable” as a profitable form of “insurance”, was that they were (and are) able to be used for wagering or betting purposes. In contrast to the conventional insurance, CDS contracts do not require an insurable interest; do not require compliance with the indemnity principle; and are not uberrima fides.
    Keywords: Credit Default Swaps, Securitization, Global Financial Crisis
    JEL: G01
  4. By: Andrew Clare; James Seaton; Peter N. Smith; Stephen Thomas
    Abstract: Recent research has confirmed the behaviour of traders that significant excess returns can be achieved from following the predictions of the carry trade which involves buying currencies with relatively high short-term interest rates, or equivalently a high forward premium, and selling those with relatively low interest rates. This paper shows that similar-sized excess returns can be achieved by following a trend-following strategy which buys long positions in currencies that have achieved positive returns and otherwise holds cash. We demonstrate that market risk is an important determinant of carry returns but that the standard unconditional CAPM is inadequate in explaining the cross-section of forward premium ordered portfolio returns. We also show that the downside risk CAPM fails to explain this cross-section, in contrast to recent literature. A conditional CAPM which makes the impact of the market return as a risk factor depend on a measure of market liquidity performs very well in explaining more than 90% of the variation in portfolio returns and more than 90% of the average returns to the carry trade. Trend following is found to provide a significant hedge against these risks. The performance of the trend following factor is more surprising given that it does not have the negative skewness or maximum drawdown characteristic which is shown by the carry trade factor.
    Keywords: Forward exchange rate returns, trend following, carry trade, market liquidity and exchange risk
    JEL: F31 G12 G11 G15
    Date: 2015–05
  5. By: Andrea Beltratti; René M. Stulz
    Abstract: From 2010 to 2012, the relation between bank stock returns from European Union (EU) countries and the returns on sovereign CDS of peripheral (GIIPS) countries is negative. We use days with tail sovereign CDS returns of peripheral countries to identify the effects of shocks to the cost of borrowing of these countries on EU banks from other countries. A CDS tail return affects banks with greater exposure to the country experiencing that return more, but it has an impact on banks regardless of exposure. Shocks to peripheral countries that are more pervasive impact the returns of banks from countries that experience no shock more than shocks to small individual peripheral countries. In general, the impact of tail returns is asymmetric in that banks suffer less from adverse shocks to peripheral countries than they gain from favourable shocks to such countries.
    JEL: F34 G12 G15 G21 H63
    Date: 2015–05
  6. By: Fatih Kiraz (MKK (Central Securities Depository of Turkey)); Ozgur Uysal (MKK (Central Securities Depository of Turkey)); Yakup Ergincan (MKK (Central Securities Depository of Turkey))
    Abstract: The aim of this study is introducing a new risk appetite index (RISE) methodology and then elaborating especially on its benefits while dealing with sovereign default probabilities. More specifically, providing two types of risk appetite indices, both calculated at individual investor level before aggregation, we present the relationships of these indices with 5y CDS spreads and then discuss the possibility of some new financial instruments which could well be used for hedging or speculating. The core weekly data include all investors’ individual holdings of all securities on the stock exchange (BIST) of Turkey, closing prices of largest 100 firms’ index (BIST100), and 5y CDS spreads of Turkey since 2008. Because of data limitations, the evidence comes from only one developing country but generalization of the main finding seems to be quite possible and testable since the new methodology introduced is flexible enough to be applied in different settings and / or countries.
    Keywords: Risk appetite, CDS, Sovereign, Emerging markets, Turkey
    JEL: E44 G00 G01

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