nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒06‒13
nine papers chosen by

  1. A Macroeconomic Framework for Quantifying Systemic Risk By He, Zhiguo; Krishnamurthy, Arvind
  2. Securities Transactions Taxes and Financial Crises By Benoît Carmichael; Jean Armand Gnagne; Kevin Moran
  3. The Term Structure of Returns: Facts and Theory By Jules H. van Binsbergen; Ralph S.J. Koijen
  4. Optimal Static Quadratic Hedging By Tim Leung; Matthew Lorig
  5. The Long-Term Effects of Hedge Fund Activism By Lucian A. Bebchuk; Alon Brav; Wei Jiang
  6. Facts and Fantasies about Commodity Futures Ten Years Later By Geetesh Bhardwaj; Gary Gorton; Geert Rouwenhorst
  7. Time-scale analysis of sovereign bonds market co-movement in the EU By Filip Smolik; Lukas Vacha
  8. Do financial markets react to regulatory sanctions? An event study of the French case By Rezaee, Amir; Kirat, Thierry
  9. Forward Premia in Electricity Markets: Two Caveats By Silvester Van Koten

  1. By: He, Zhiguo (University of Chicago); Krishnamurthy, Arvind (Stanford University)
    Abstract: Systemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. We present a macroeconomic model with a financial intermediary sector subject to an equity capital constraint. The novel aspect of our analysis is that the model produces a stochastic steady state distribution for the economy, in which only some of the states correspond to systemic risk states. The model allows us to examine the transition from "normal" states to systemic risk states. We calibrate our model and use it to match the systemic risk apparent during the 2007/2008 financial crisis. We also use the model to compute the conditional probabilities of arriving at a systemic risk state, such as 2007/2008. Finally, we show how the model can be used to conduct a macroeconomic "stress test" linking a stress scenario to the probability of systemic risk states.
    JEL: E44 G12 G20
    Date: 2015–03
  2. By: Benoît Carmichael; Jean Armand Gnagne; Kevin Moran
    Abstract: This paper assesses the impact that a widely-based Securities Transaction Tax (STT) could have on the likelihood of systemic financial crises. We apply the methodology developed by Demirgüç-Kunt and Detragiache (1998) [IMF Staff Papers 45 (1)] to a panel dataset of 34 OECD countries for the sample 1973 – 2012, using a measure of a country’s average bid-ask spread in financial markets as a proxy for the likely effect of a STT on transactions costs. Our results indicate that the establishment of a STT could sizeably increase the risk of financial crises.
    Keywords: Securities Transaction Tax, Tobin Tax, Regulation, Financial Crises
    JEL: E13 G15 G17
    Date: 2015
  3. By: Jules H. van Binsbergen; Ralph S.J. Koijen
    Abstract: We summarize and extend the new literature on the term structure of equity. Short-term equity claims, or dividend strips, have on average significantly higher returns than the aggregate stock market. The returns on short-term dividend claims are risky as measured by volatility, but safe as measured by market beta. These facts are hard to reconcile with traditional macro-finance models and we provide an overview of new models that can reproduce some of these facts. We relate our evidence on dividend strips to facts about other asset classes such as nominal and corporate bonds, volatility, and housing. We conclude by discussing the broader economic implications by linking the term structure of returns to real economic decisions such as hiring and investment.
    JEL: G12
    Date: 2015–06
  4. By: Tim Leung; Matthew Lorig
    Abstract: We propose a flexible framework for hedging a contingent claim by holding static positions in vanilla European calls, puts, bonds, and forwards. A model-free expression is derived for the optimal static hedging strategy that minimizes the expected squared hedging error subject to a cost constraint. The optimal hedge involves computing a number of expectations that reflect the dependence among the contingent claim and the hedging assets. We provide a general method for approximating these expectations analytically in a general Markov diffusion market. To illustrate the versatility of our approach, we present several numerical examples, including hedging path-dependent options and options written on a correlated asset.
    Date: 2015–06
  5. By: Lucian A. Bebchuk; Alon Brav; Wei Jiang
    Abstract: We test the empirical validity of a claim that has been playing a central role in debates on corporate governance—the claim that interventions by activist hedge funds have a negative effect on the long-term shareholder value and corporate performance. We subject this claim to a comprehensive empirical investigation, examining a long five-year window following activist interventions, and we find that the claim is not supported by the data. We find no evidence that activist interventions, including the investment-limiting and adversarial interventions that are most resisted and criticized, are followed by short-term gains in performance that come at the expense of long-term performance. We also find no evidence that the initial positive stock-price spike accompanying activist interventions tends to be followed by negative abnormal returns in the long term; to the contrary, the evidence is consistent with the initial spike reflecting correctly the intervention’s long-term consequences. Similarly, we find no evidence for pump-and-dump patterns in which the exit of an activist is followed by abnormal long-term negative returns. Our findings have significant implications for ongoing policy debates.
    JEL: G12 G23 G32 G34 G35 G38 K22
    Date: 2015–06
  6. By: Geetesh Bhardwaj; Gary Gorton; Geert Rouwenhorst
    Abstract: Gorton and Rouwenhorst (2006) examined commodity futures returns over the period July 1959 to December 2004 based on an equally-weighted index. They found that fully collateralized commodity futures had historically offered the same return and Sharpe ratio as U.S. equities, but were negatively correlated with the return on stocks and bonds. Reviewing these results ten years later, we find that our conclusions largely hold up out-of-sample. The in- and out-of-sample average commodity risk premiums are not significantly different, nor is the cross-sectional relationship between average returns and the basis. Correlations among commodities and commodity correlations with other assets experienced a temporary increase during the financial crisis which is in line with historical experience of variation of these correlations over the business cycle.
    JEL: G1 G11 G12
    Date: 2015–06
  7. By: Filip Smolik; Lukas Vacha
    Abstract: We study co-movement of 10-year sovereign bond yields of 11 EU countries. Our analysis is focused mainly on changes of co-movement in the crisis pe- riod, especially near two significant dates - the fall of Lehman Brothers, September 15, 2008, and the announcement of increase of Greek's public deficit in October 20, 2009. We study co-movement dynamics using wavelet analysis, it allows us to observe how co-movement changes across scales, which can be interpreted as investment horizons, and through time. We divide the countries into three groups; the Core of the Eurozone, the Periphery of the Eurozone and the states outside the Eurozone. Results indicate that co-movement considerably decreased in the crisis period for all countries pairs, however there are significant differences among the groups. Further- more, we demonstrate that co-movement of bond yields significantly varies across scales.
    Date: 2015–06
  8. By: Rezaee, Amir; Kirat, Thierry
    Abstract: The paper offers an empirical analysis of the effects of sanctions decided by the Financial Markets Authority (AMF) on the reputation of firms in France. Using an event study, we intend to show the impact of three events on the stock prices : opening of an investigation by the AMF ; issuance of a monetary sanction ; publication of the information about sanction a newspaper. The reputational impact issue raises the broader issue of understanding of financial regulation enforcement operates in concreto. We find a strong negative impact of the announcement of sanction in press on the firms’ stock prices. We observe a reputational loss of the deferred firm following the disclosure of sanction in press. We observe also a weak decrease in stock prices when the firm has been notified of the opening of investigation on its misconducts, however we find no evidence on the impact of announcement of sanction directly to the firm on the stock prices. We carry out an OLS cross-section regression to assess the impact of the amount of sanction on the reputational loss of firm. The amount of monetary sanctions are too low, compared the market size of deferred companies, to influence stock prices and contribute in reputational loss.
    Keywords: Sanctions; Finances internationales; Autorité des marchés financiers; Finance regulation;
    JEL: K00
    Date: 2015–07
  9. By: Silvester Van Koten
    Abstract: Two important caveats are made for applications and empirical tests of Bessembinder and Lemmon's (2002) theoretical risk premium model for forward premia. Firstly, (relative) forward premia (eventually) decrease in mean power demand. Secondly, empirical tests should use a definition of mean power demand in line with Bessembinder and Lemmon's (2002) theory to avoid confounds.
    Keywords: forward premia; electricity markets; energy economics; mean power demand; financial markets;
    JEL: G13 G17 L94 Q41
    Date: 2015–06

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