nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒09‒18
six papers chosen by

  1. Daily Market News Sentiment and Stock Prices By David E. Allen; Michael McAleer; Abhay K. Singh
  2. Dividend Dynamics, Learning, and Expected Stock Index Returns By Ravi Jagannathan; Binying Liu
  3. The Financial Market Impact of Unconventional Monetary Policies in the U.S., the U.K., the Eurozone, and Japan By Kaoru Hosono; Shogo Isobe
  4. Bond markets and monetary policy dilemmas for the emerging markets By Jhuvesh Sobrun; Philip Turner
  5. Enhancing Financial Stability in Developing Asia By Adam Posen; Nicolas Veron
  6. Stock market efficiency in Iran: unit root testing with smooth structural breaks and non-trading days By Vince, Daly; Paytakhti Oskooe, Seyyed Ali

  1. By: David E. Allen (School of Accounting, Finance and Economics Edith Cowan University, Australia.); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute, The Netherlands, Department of Quantitative Economics, Complutense University of Madrid, and Institute of Economic Research, Kyoto University.); Abhay K. Singh (School of Accounting, Finance and Economics, Edith Cowan University, Australia)
    Abstract: In recent years there has been a tremendous growth in the influx of news related to traded assets in international financial markets. This financial news is now available via print media but also through real-time online sources such as internet news and social media sources. The increase in the availability of financial news and investor’s ease of access to it has a potentially significant impact on market price formation as these news items are swiftly transformed into investors sentiment which in turn drives prices. Various commercial agencies have started developing their own financial news data sets which are used by investors and traders to support their algorithmic trading strategies. Thomson Reuters News Analytics (TRNA)1 is one such data set. In this study we use the TRNA data set to construct a series of daily sentiment scores for Dow Jones Industrial Average (DJIA) stock index component companies. We use these daily DJIA market sentiment scores to study the influence of financial news sentiment scores on the stock prices of these companies using a multi-factor model. We use an augmented Fama French Three Factor Model to evaluate the additional effects of financial news sentiment on stock prices in the context of this model. Our results suggest that even when market factors are taken into account, sentiment scores have a significant effect on Dow Jones constituent company returns and that lagged daily sentiment scores are often significant, suggesting that information compounded in these scores is not immediately reflected in security prices and related return series.
    Keywords: Sentiment Analysis; Financial News; Factor Models; Asset Pricing.
    JEL: G12 G14 C31
    Date: 2015–07
  2. By: Ravi Jagannathan; Binying Liu
    Abstract: We develop a model for dividend dynamics and allow investors to learn about model parameters over time. The model predicts 31.3% of the variation in annual dividend growth rates during 1976-2013. When investors' beliefs about the persistence of dividend growth rates increase, dividend-to-price ratios increase, and short-horizon expected returns decrease after controlling for dividend-to-price ratios. These findings are consistent with investors' preferences for early resolution of uncertainty. We embed learning about dividend dynamics in an equilibrium asset pricing model. The model predicts 22.8% of the variation in annual stock index returns. Learning accounts for forty-percent of that 22.8%.
    JEL: G10 G11 G12
    Date: 2015–09
  3. By: Kaoru Hosono (Professor Faculty of Economics, Gakushuin University); Shogo Isobe (Researcher, Policy Research Institute)
    Abstract: This paper investigates the impact of the unconventional policies implemented by the Federal Reserve, the Bank of England, the European Central Bank, and the Bank of Japan on the returns on a broad class of assets in a comprehensive and consistent manner. Controlling for market expectations, we find that for most economies and periods, policies had the effect of lowering long-term government bond yields and the exchange rate of the home currency; for some economies and periods we also find an impact on corporate bond spreads, interbank loan spreads, and stock prices. We further find that policy announcements that were accompanied by forward guidance tended to have a more significant and greater impact on a broad range of assets than policy announcements without forward guidance.
    Keywords: Unconventional monetary policies; Event study; Announcement
    JEL: E58 G12 F31
  4. By: Jhuvesh Sobrun; Philip Turner
    Abstract: Financial conditions in the emerging markets (EMs) have become more dependent on the 'world' long-term interest rate, which has been driven down by monetary policies in the advanced economies - notably Quantitative Easing (QE) - and by several non-monetary factors. This paper analyses some new mechanisms that link global long-term rates to monetary policy and to domestic bank lending in the EMs. Understanding these mechanisms could help EM central banks prepare for the exit from QE and higher (and perhaps divergent) policy rates in advanced economies. Although monetary policy in the EMs has continued to be guided by domestic objectives, it has nevertheless lost some traction. Difficult trade-offs now confront central banks.
    Keywords: Exit from QE, long-term interest rate, emerging market economies, bond markets
    Date: 2015–08
  5. By: Adam Posen (Peterson Institute for International Economics); Nicolas Veron (Peterson Institute for International Economics)
    Abstract: Given no generally accepted framework for financial stability, policymakers in developing Asia need to manage, not avoid, financial deepening. This paper supports Asian policymakers’ judgment through analysis of the recent events in the United States and Europe and of earlier crisis episodes, including Asia during the 1990s. There is no simple linear relationship between financial repression and stability—financial repression not only has costs but, so doing can itself undermine stability. Bank-centric financial systems are not inherently safer than systems that include meaningful roles for securities and capital markets. Domestic financial systems should be steadily diversified in terms of both number of domestic competitors and types of savings and lending instruments available (and thus probably types of institutions). Financial repression should be focused on regulating the activities of financial intermediaries, not on compressing interest rates for domestic savers. Cross-border lending should primarily involve creation of multinational banks’ subsidiaries in the local economy—and local currency lending and bond issuance should be encouraged. Macroprudential tools can be useful, and, if anything, are more effective in less open or less financially deep economies than in more advanced financial centers.
    Keywords: Financial stability, fi nancial development, nonbank institutions, macroprudential policy, capital flows
    JEL: E44 G28 O16
    Date: 2015–09
  6. By: Vince, Daly (Kingston University London); Paytakhti Oskooe, Seyyed Ali (Islamic Azad University)
    Abstract: A ‘flexible Fourier trend’ unit root test, permitting smooth structural breaks of unknown form and dates, is used to test weak-form market efficiency in the Tehran stock market’s TEPIX index. Monte Carlo experiments show that this test has low power when non-trading-day gaps in the daily data are filled with missing value codes. The test’s properties for weekly returns and for data as published, with non-trading-day gaps suppressed, are better and similar to each other. Analysis of the full sample of TEPIX data as published supports a unit root null but indicates the presence of additional autocorrelation – questioning weak-form efficiency. Sub-sample analysis again finds evidence of a unit root, but also of complex autocorrelation. Support for the unit root increased in the years (2000-2004) following regulatory reform and has decreased since 2008. A Diebold and Mariano (1995) test is used to assess whether the revealed autocorrelation provides an effective basis for predicting price deviations from trend on the basis of their own history. Predictive effectiveness is found at a horizon of one trading day. We conclude that this market has not shown weak-form efficiency.
    Keywords: Market efficiency; Unit root tests; Structural breaks; Non-trading days
    JEL: C22 G12 O16
    Date: 2015–09–08

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