nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒07‒04
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. An Intertemporal CAPM with Stochastic Volatility By Campbell, John Y; Giglio, Stefano W; Polk, Christopher; Turley, Robert
  2. What moves international stock and bond markets? By MGino Cenedese; Enrico Mallucci
  3. Can Oil Prices Help Predict US Stock Market Returns: An Evidence Using a DMA Approach By Naser, Hanan; Alaali, Fatema
  4. Local currency bond market development in Sub-Saharan Africa: A stock-taking exercise and analysis of key drivers By Essers, Dennis; Blommestein, Hans; Cassimon, Danny; Ibarlucea Flores, Perla

  1. By: Campbell, John Y; Giglio, Stefano W; Polk, Christopher; Turley, Robert
    Abstract: This paper studies the pricing of volatility risk using the first-order conditions of a long-term equity investor who is content to hold the aggregate equity market rather than tilting towards value stocks and other equity portfolios that are attractive to short-term investors. We show that a conservative long-term investor will avoid such tilts in order to hedge against two types of deterioration in investment opportunities: declining expected stock returns, and increasing volatility. Empirically, we present novel evidence that low-frequency movements in equity volatility, tied to the default spread, are priced in the cross-section of stock returns.
    Keywords: ICAPM; stochastic volatility; time-varying expected returns; value premium
    JEL: G12 N22
    Date: 2015–06
  2. By: MGino Cenedese (Bank of England); Enrico Mallucci (London School of Economics (LSE))
    Abstract: We study the relation between international mutual fund ows and the different return components of aggregate equity and bond markets. First, we decompose international equity and bond market returns into changes in expectations of future real cash payments, interest rates, exchange rates, and discount rates. News about future cash flows, rather than discount rates, is the main driver of international stock returns. This evidence is in contrast with the typical results reported only for the US. Inflation news instead is the main driver of international bond returns. Next, we turn to the interaction between these return components and international portfolio flows. We find evidence consistent with price pressure, short-term trend chasing, and short-run overreaction in the equity market. We also find that international bond flows to emerging markets are more sensitive to interest rate shocks than equity flows.
    Keywords: International Capital Flows, Return Decomposition, International Equity Markets, International Bond Markets, Mutual Funds
    JEL: F31 G15
    Date: 2015–06
  3. By: Naser, Hanan; Alaali, Fatema
    Abstract: Crude oil price behaviour has fluctuated wildly since 1973 which has a major impact on key macroeconomic variables. Although the relationship between stock market returns and oil price changes has been scrutinized excessively in the literature, the possibility of predicting future stock market returns using oil prices has attracted less attention. This paper investigates the ability of oil prices to predict S&P 500 price index returns with the use of other macroeconomic and financial variables. Including all the potential variables in a forecasting model may result in an over-fitted model. So instead, dynamic model averaging and dynamic model selection are applied to utilize their ability of allowing the best forecasting model to change over time while parameters are also allowed to change. The empirical evidence shows that applying the DMA/DMS approach leads to significant improvements in forecasting performance in comparison to other forecasting methodologies and the performance of these models are better when oil prices are included within predictors.
    Keywords: Bayesian methods, Econometric models, Macroeconomic forecasting, Kalman filter, Model selection, Dynamic model averaging, Stock returns predictability, Oil prices
    JEL: C11 C53 G17 Q43
    Date: 2015–01–19
  4. By: Essers, Dennis; Blommestein, Hans; Cassimon, Danny; Ibarlucea Flores, Perla
    Abstract: This paper studies the current state and drivers of government local currency bond market (LCBM) development in Sub-Saharan Africa. We argue that well-developed government LCBMs could reduce countries’ exposure to external shocks; help overcome ‘original sin’; facilitate domestic savings mobilisation; and may have important financial, macroeconomic and institutional spill-overs. With detailed information collected from various sources the paper first shows that quite a few African countries have made significant progress in developing LCBMs. Increasingly, African governments issue fixed-rate local currency bonds with tenors of ten years and more on a regular basis. However, we also find that LCBMs in Africa often have low liquidity, feature very few corporate securities and generally have relatively narrow investor bases dominated by commercial banks. The second part of the study presents an econometric analysis of the drivers of African government LCBMs based on a new high-quality panel dataset compiled by the OECD. Our results indicate that LCBM capitalisation is correlated negatively with governments’ fiscal balance and inflation, and positively with common law legal origins, institutional quality and strong democratic political systems.
    Keywords: public debt; local currency bonds; Sub-Saharan Africa
    JEL: H63 O16 O55
    Date: 2015–06

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