nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒09‒11
six papers chosen by

  1. Mispricing Factors By Robert F. Stambaugh; Yu Yuan
  2. Default Premium By Luis Catão; Rui Mano
  3. Efficiency and credit ratings: a permutation-information-theory analysis By Aurelio F. Bariviera; Luciano Zunino; M. Belen Guercio; Lisana B. Martinez; Osvaldo A. Rosso
  4. Risk Premiums in the Cross-Section of Commodity Convenience Yields By Thomas Bollinger; Axel Kind
  5. Size and Momentum Profitability in International Stock Markets By Schmidt, Peter S.; Schrimpf, Andreas; von Arx, Urs; Wagner, Alexander F; Ziegler, Andreas
  6. Global Financial Spillovers to Emerging Market Sovereign Bond Markets By Christian Ebeke; Annette Kyobe

  1. By: Robert F. Stambaugh; Yu Yuan
    Abstract: A four-factor model with two "mispricing" factors, in addition to market and size factors, accommodates a large set of anomalies better than notable four- and five-factor alternative models. Moreover, our size factor reveals a small-firm premium nearly twice usual estimates. The mispricing factors aggregate information across 11 prominent anomalies by averaging rankings within two clusters exhibiting the greatest co-movement in long-short returns. Investor sentiment predicts the mispricing factors, especially their short legs, consistent with a mispricing interpretation and the asymmetry in ease of buying versus shorting. Replacing book-to-market with a single composite mispricing factor produces a better-performing three-factor model.
    JEL: G02 G12 G14
    Date: 2015–09
  2. By: Luis Catão; Rui Mano
    Abstract: We re-assess the view that sovereigns with a history of default are charged only a small and/or short-lived premium on the interest rate warranted by observed fundamentals. Our reassessment uses a metric of such a “default premium†(DP) that is consistent with asymmetric information models and nests previous metrics, and applies it to a much broader dataset relative to earlier studies. We find a sizeable and persistent DP: in 1870-1938, it averaged 250 bps upon market re-entry, tapering to around 150 bps five years out; in 1970- 2011 the respective estimates are about 400 and 200 bps. We also find that: (i) these estimates are robust to many controls including on actual haircuts; (ii) the DP accounts for as much as 60% of the sovereign spread within five years of market re-entry; (iii) the DP rises with market exclusion spells. These findings help reconnect theory and evidence on why sovereign defaults are infrequent and earlier debt settlements are desirable.
    Keywords: International financial markets;Sovereign debt;Emerging markets;Country Risk, Interest Rate Spread, Haircut, market, debt, default, interest, interest rate, International Lending and Debt Problems, General, International, or Comparative,
    Date: 2015–07–21
  3. By: Aurelio F. Bariviera; Luciano Zunino; M. Belen Guercio; Lisana B. Martinez; Osvaldo A. Rosso
    Abstract: The role of credit rating agencies has been under severe scrutiny after the subprime crisis. In this paper we explore the relationship between credit ratings and informational efficiency of a sample of thirty nine corporate bonds of US oil and energy companies from April 2008 to November 2012. For that purpose, we use a powerful statistical tool relatively new in the financial literature: the complexity-entropy causality plane. This representation space allows to graphically classify the different bonds according to their degree of informational efficiency. We find that this classification agrees with the credit ratings assigned by Moody's. Particularly, we detect the formation of two clusters, that correspond to the global categories of investment and speculative grades. Regarding to the latter cluster, two subgroups reflect distinct levels of efficiency. Additionally, we also find an intriguing absence of correlation between informational efficiency and firm characteristics. This allows us to conclude that the proposed permutation-information-theory approach provides an alternative practical way to justify bond classification.
    Date: 2015–09
  4. By: Thomas Bollinger (Department of Business and Economics, University of Basel, Switzerland); Axel Kind (Department of Economics, University of Konstanz, Germany)
    Abstract: This paper investigates risk premiums embedded in commodity convenience yields, i.e., returns on convenience-claim investments. The analysis is conducted in two steps. First, monthly convenience yields are extracted from a broad sample of commodity futures by using a three-factor model. Second, a multi-factor asset pricing model with conditional betas is estimated to determine risk premiums embedded in convenience-claim returns. The empirical analysis is carried out on monthly cross-sections of 22 commodities in the period from January 1991 to December 2011. It reveals the existence of significant premiums embedded in convenience yields for systematic risk factors typically related to other asset classes. While the predictability of the risk premiums via instrumental variables is limited, changes in conditional betas are found to forecast variations in convenience yields.
    Keywords: Commodity Futures, Convenience Yield, Term Structure, Risk Premiums
    JEL: G12 G13 E44
    Date: 2015–08–10
  5. By: Schmidt, Peter S.; Schrimpf, Andreas; von Arx, Urs; Wagner, Alexander F; Ziegler, Andreas
    Abstract: We study the link between the profitability of momentum strategies and firm size, drawing on an extensive dataset covering 23 stock markets across the globe. We first present evidence of an “extreme” size premium in a large number of countries. These size premia, however, are most likely not realizable due to low stock market depth. We also show that international momentum profitability declines sharply with market capitalization. Momentum premiums are also considerably diminished by trading costs, when taking into account the actual portfolio turnover incurred when implementing this strategy. In contrast to strategies based on size, we find that momentum premia especially for medium-sized stocks still remain economically and statistically significant in most equity markets worldwide after adjusting for transaction costs.
    Keywords: asset pricing anomalies; international equity markets; momentum; size; transaction costs
    JEL: C89 G12 G15
    Date: 2015–09
  6. By: Christian Ebeke; Annette Kyobe
    Abstract: Foreign holdings of emerging markets (EMs) government bonds have increased substantially over the last decade. While foreign participation in local-currency sovereign bond markets provides an additional source of financing and reduces sovereign yields, it raises concerns about increased sensitivity of yields to shifts in market sentiment. The analysis in this paper suggests that foreign participation and an undiversified investor base transmit global financial shocks to local-currency sovereign bond markets by increasing yield volatility and, beyond a certain threshold, amplify these spillovers. These estimates are robust to a range of econometric techniques including panel smooth threshold regression.
    Keywords: Bond yields;Bond markets;Financial crises;External shocks;Emerging markets;Spillovers;International financial markets;Interest rates;Foreign investment;Financial shocks, EM bond markets, Non-linearity, markets, currency, bond, holdings,
    Date: 2015–06–26

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