nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒06‒27
five papers chosen by

  1. Comovement Revisited By Honghui Chen; Vijay Singal; Robert F. Whitelaw
  2. Model-free Superhedging Duality By Matteo Burzoni; Marco Frittelli; Marco Maggis
  3. Time-scale analysis of sovereign bonds market co-movement in the EU By Smolik, Filip; Vacha, Lukas
  4. Stock market volatility and exchange rates: MGARCH-DCC and wavelet approaches By Hashim, Khairul Khairiah; Masih, Mansur
  5. Stress Test of Banks in India: A VAR Approach By Sreejata Banerjee; Divya Murali

  1. By: Honghui Chen; Vijay Singal; Robert F. Whitelaw
    Abstract: Recent evidence of excessive comovement among stocks following index additions (Barberis, Shleifer, and Wurgler, 2005) and stock splits (Green and Hwang, 2009) challenges traditional finance theory. Based on a simple model, we show that the bivariate regressions relied upon in the literature often provide little or no information about the economic magnitude of the phenomenon of interest, and the coefficients in these regressions are very sensitive to time-variation in the characteristics of the return processes that are unrelated to excess comovement. Instead, univariate regressions of the stock return on the returns of the group it is leaving (e.g., non-S&P stocks) and the group it is joining (e.g., S&P stocks) reveal the relevant information. When we reexamine the empirical evidence using control samples matched on past returns and compute Dimson betas, almost all evidence of excess comovement disappears. The results in the literature are consistent with changes in the fundamental factor loadings of the stocks. One key element to understanding these striking results is that, in both the examples we study, the stocks exhibit strong returns prior to the event in question. We document the heretofore unknown empirical regularity that winner stocks exhibit increases in betas. Thus, much of the apparent excess comovement is just a manifestation of momentum.
    JEL: G14
    Date: 2015–06
  2. By: Matteo Burzoni; Marco Frittelli; Marco Maggis
    Abstract: In a model free discrete time financial market, we prove the superhedging duality theorem, where trading is allowed with dynamic and semi-static strategies. We also show that the initial cost of the cheapest portfolio that dominates a contingent claim on every possible path $\omega \in \Omega$, might be strictly greater than the upper bound of the no-arbitrage prices. We therefore characterize the subset of trajectories on which this duality gap disappears and prove that it is an analytic set.
    Date: 2015–06
  3. By: Smolik, Filip; Vacha, Lukas
    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 period, 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. Furthermore, we demonstrate that co-movement of bond yields significantly varies across scales.
    Keywords: financial crisis,co-movement,wavelet,sovereign debt crisis,sovereign bonds
    JEL: C32 C49 C58 H63
    Date: 2015
  4. By: Hashim, Khairul Khairiah; Masih, Mansur
    Abstract: This study discusses the relationship between stock price index and exchange rate in Malaysia. Establishing the relationship between stock prices and exchange rate is important for several reasons. Firstly, it may affect the economic decisions in terms of monetary policy and fiscal policy. Secondly, by understanding the relationship of stock prices and exchange rate, it will assist to predict the possibility of financial downturn. This study makes an attempt to examine the positive or negative relationship between stock prices and exchange rate. The causality between stock price and exchange rate is important in order to assist in making economic decision. This study employs MGARCH-DCC and wavelet approach, more specifically the continuous wavelet transform (CWT) and maximum overlap discrete wavelet transform (MODWT). The earlier studies used time-domain framework in their search for a relationship when the true relations might exist at different frequencies. The findings show that there is negative relationship between stock prices index and exchange rate in the case of Malaysia for both Islamic and conventional stock indices. The stock price index leads exchange rate in the long term investment horizon. This empirical research may have several implications for traders, portfolio managers and policymakers. It can be helpful for the traders in explaining the flow of information between stock and foreign exchange markets.
    Keywords: Stock volatility, exchange rates, MGARCH-DCC, Wavelets
    JEL: C22 C58 E44 G15
    Date: 2015–06–24
  5. By: Sreejata Banerjee (Madras School of Economics); Divya Murali (Research Associate at Athenainfonomics)
    Abstract: Banking crisis have serious repercussion causing loss of household savings and decline in confidence and soundness in the banking sector. The present study is an attempt to analyze this aspect in light of the challenges of financial sector reforms faced by banks in India . Stress test of banks operating in India is undertaken to identify factors that adversely influence banks’ non-performing assets (NPA) which is the key indicator of banks’ soundness. We examine the response of bank’s NPA to unexpected shocks from external and domestic macroeconomic factors namely interest rate, exchange rate, GDP. NPAs are regressed in Vector Auto Regressive model on a set of macroeconomic variables with quarterly data from 1997 to 2012 to examine whether there is divergence in the response across the four types ownership: public, old private, new private, and foreign. Granger Causality, IRF and FEVD are used to verify the VAR results. Interest rate significantly impairs asset quality for all banks in two-way causality. Exchange rate, net foreign institutional investor flow and deposits Granger cause public banks’ NPA. GDP gap Granger cause NPA in old private and foreign banks. IRF show banks are vulnerable to inflation shock requiring 8 quarters to stabilize. The stress test clearly demonstrates that all banks need to re-capitalize and improve asset quality.
    Keywords: Macro Stress test, Non-performing Assets, Impulse response function, Vector Auto Regression, Granger Causality
    JEL: C33 E32 E37
    Date: 2015–04

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