nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒06‒20
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The importance of High Frequency Data on the Financial Markets By Simona Adascalitei
  2. Risk Premia and Knightian Uncertainty in an Experimental Market Featuring a Long-Lived Asset By John Griffin
  3. The Network of Counterparty Risk: Analysing Correlations in OTC Derivatives By Vahan Nanumyan; Antonios Garas; Frank Schweitzer
  4. Fiscal Retrenchment and Sovereign Risk By Felix Strobel
  5. Is investing in Islamic stocks profitable? Evidence from the Dow Jones Islamic market indexes By Hooi Hooi Lean; Vinod Mishra; Russell Smyth
  6. Private Equity Investment in India: Efficiency vs Expansion By Troy D. Smith

  1. By: Simona Adascalitei (Romanian Academy Iasi Branch)
    Abstract: While the High Frequency Trading (HFT) activity is in decline and researchers have inconclusive results about its net (positive/negative) impact on the financial markets, massive quantities of High Frequency Data (HFD) become more and more accessible. The purpose of this paper is to highlight the importance of HFD on the Financial Markets. To support this statement, we will analyze some of the special characteristics of High Frequency Data (HFD) compared to the characteristics of Low Frequency Data (LFD). Then we will make a review of the papers that have proven that the use of HFD can improve the accuracy of volatility measures, volatility estimators, and volatility forecasts. Given this superiority of HFT over LFD, our aim is to encourage academics and practitioners to start focusing more on this type of data in order to have a better understanding of the highly dynamic financial markets.
    Keywords: High Frequenc Trading, High Frequency Data, Financial Markets, Volatility
    JEL: G10 G17
    URL: http://d.repec.org/n?u=RePEc:sek:iacpro:2503637&r=fmk
  2. By: John Griffin (U.S. Department of Defense)
    Abstract: Objectives: I examine risk premia and the influence of Knightian uncertainty in a laboratory market featuring a long-lived asset. Methods: I employ an experimental asset market, utilizing features which are designed to forestall bubbles and crashes. I alter the riskiness of the asset from market to market along two dimensions— expected variance and upside/downside potential. Furthermore, I include a treatment which introduces uncertainty with respect to the expected value of the asset. Results: Bubbles and crashes are absent. Positive, statistically significant risk premia emerge. The risk premia are not sensitive to expected variance, but do vary positively with the magnitude of potential loss. The introduction of Knightian uncertainty does not appear to influence market prices, however it does increase trading volume. Conclusions: When speculative activity is tempered, risk aversion is manifest in market prices. Subjects appear to view risk in the context of potential loss rather than volatility. Return premia for uncertainty are absent, suggesting a lack of uncertainty aversion. Increased trading activity in the presence of uncertainty may be due to differing opinions with regards to the value of the asset or to divergent levels of uncertainty aversion.
    Keywords: Risk Premia, Risk Aversion, Loss Aversion, Ambiguity, Uncertainty
    JEL: C92 D81 D83 G11 G12
    URL: http://d.repec.org/n?u=RePEc:frd:wpaper:dp2015-01&r=fmk
  3. By: Vahan Nanumyan; Antonios Garas; Frank Schweitzer
    Abstract: Counterparty risk denotes the risk that a party defaults in a bilateral contract. This risk not only depends on the two parties involved, but also on the risk from various other contracts each of these parties hold. In rather informal markets, such as the OTC (over-the-counter) derivative market, institutions only report their aggregated quarterly risk exposure, but no details about their counterparties. Hence, little is known about the diversification of counterparty risk. In this paper, we reconstruct the weighted and time-dependent network of counterparty risk in the OTC derivative market of the United States between 1998 and 2012. To proxy unknown bilateral exposures, we first study the co-occurrence patterns of institutions based on their quarterly activity and ranking in the official report. The network obtained this way is further analysed by a weighted k-core decomposition, to reveal a core-periphery structure. This allows us to compare the activity-based ranking with a topology-based ranking, to identify the most important institutions and their mutual dependencies. We also analyse correlations in these activities, to show strong similarities in the behavior of the core institutions. Our analysis clearly demonstrates the clustering of counterparty risk in a small set of about a dozen US banks. This not only increases the default risk of the central institutions, but also the default risk of peripheral institutions which have contracts with the central ones. Hence, all institutions indirectly have to bear (part of) the counterparty risk of all others, which needs to be better reflected in the price of OTC derivatives.
    Date: 2015–06
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1506.04663&r=fmk
  4. By: Felix Strobel (Humboldt-Universitaet zu Berlin)
    Abstract: How does sovereign risk affect the dynamic consequences of identified contractionary fiscal policy shocks? I apply a regime-switching SVAR on Italian data and find that in periods in which government bond yield spreads are high and volatile, fiscal multipliers are smaller than in the calm regime. This empirical finding supports theoretical arguments that associate fiscal distress with low fiscal multipliers. Creation Date: 2015-06-05
    Keywords: Sovereign Risk, Fiscal Policy, Fiscal Multipliers
    JEL: E62 H60
    URL: http://d.repec.org/n?u=RePEc:bdp:wpaper:2015007&r=fmk
  5. By: Hooi Hooi Lean; Vinod Mishra; Russell Smyth
    Abstract: We examine whether the market for Islamic stocks is efficient and whether Islamic indices perform better than the market benchmark, after adjusting for volatility. To test the Efficient Market Hypothesis (EMH) we apply a series of unit root tests, including unit root tests that accommodate structural breaks and heteroskedasticity, to the Dow Jones Islamic Market Index (DJIMI) family of Islamic indices and the Dow Jones Industrial Average (DJIA), which we use as the market benchmark. We find that the EMH is supported for most of the Islamic indices. However, depending on the decision rule for choosing between unit root tests, between one and five Islamic indices were found to be mean reverting. We also find that the EMH is supported for the market benchmark. Based on the annualised Sharpe ratio for Islamic indices, we conclude that Islamic indices do not outperform the market benchmark after adjusting for risk. The one proviso to this conclusion is when the market as a whole is in a large downswing, we find that some Sharia compliant stocks do outperform the market as a whole. Finally, we implement a contrarian trading strategy, for trading horizons at one, three, six and 12 months and find that mean- reverting stocks outperform non-mean reverting stocks for trading horizons of three months or higher.
    Keywords: Islamic stocks; structural breaks; heteroskedasticity; efficient market
    Date: 2015–05
    URL: http://d.repec.org/n?u=RePEc:mos:moswps:2015-33&r=fmk
  6. By: Troy D. Smith (Stanford University)
    Abstract: While private equity (PE) is expanding rapidly in developing countries, there is little academic research on this subject. In this paper I exploit two new data sources and employ two distinct empirical strategies to identify the impact of PE on Indian firms. I compare the investments made by one of India’s largest PE firms to the investments that just missed (deals that made it to the final round of internal consideration). I also combine four large PE databases with accounting data on 34,000 public and private firms and identify effects using differences in the timing of investments. I find three results consistently in both databases. First, larger, more successful firms are more likely to receive PE investment. Second, firms that receive in- vestment are more likely to survive and also have greater increases in revenues, assets, employee compensation, and profits. Third, somewhat surprisingly, these firms’ productivity and return on assets do not improve after investment. This is consistent with PE channeling funding to high productivity firms rather than turning around low productivity firms. PE, at least in India, appears to alleviate expansion constraints and improve aggregate productivity through reducing misallocation rather than by increasing within-firm TFP.
    Keywords: Private Equity, India, Developing Countries, Entrepreneurship, Productivity, Emerging Markets.
    Date: 2015–06
    URL: http://d.repec.org/n?u=RePEc:sip:dpaper:15-011&r=fmk

This nep-fmk issue is ©2015 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at http://nep.repec.org. For comments please write to the director of NEP, Marco Novarese at <director@nep.repec.org>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.