nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒10‒10
four papers chosen by

  1. Can a Financial Transaction Tax Prevent Stock Price Booms? By Klaus Adam; Albert Marcet; Sebastian Merkel; Johannes Beutel
  2. The impact of CCPs' margin policies on repo markets By Arianna Miglietta; Cristina Picillo; Mario Pietrunti
  3. Modeling financial sector joint tail risk in the euro area By Lucas, André; Schwaab, Bernd; Zhang, Xin
  4. The Effect of Risk Sharing on Asset Prices: Natural Experiment from the Chinese Stock Market Liberalization By Chan, Marc K; Kwok, Simon

  1. By: Klaus Adam; Albert Marcet; Sebastian Merkel; Johannes Beutel
    Abstract: We present a stock market model that quantitatively replicates the joint behavior of stock prices, trading volume and investor expectations. Stock prices in the model occasionally display belief-driven boom and bust cycles that delink asset prices from fundamentals and redistribute considerable amounts of wealth from less to more experienced investors. Although gains from trade arise only from subjective belief differences, introducing Â…financial transactions taxes (FTTs) remains undesirable. While FTTs reduce the size and length of boom-bust cycles, they increase the likelihood of such cycles, thereby overall return volatility and wealth redistribution. Contingent FTTs, which are levied only above a certain price threshold, give rise to problems of equilibrium multiplicity and non-existence.
    Keywords: Â…nancial transactions tax, Tobin tax, asset price booms
    JEL: G12 D84
    Date: 2015–09
  2. By: Arianna Miglietta; Cristina Picillo; Mario Pietrunti
    Abstract: This paper quantifies the impact on the cost of funding in repo markets of the initial margins applied by central clearing counterparties (CCPs). We use contract-level data on the general collateral (GC) segment of Italy's MTS Repo market between January 2011 and April 2014. The analysis shows that the initial margins, paid by all participants, had a positive and significant effect on the cost of funding. Such an impact is consistent across different model specifications and data subsamples.
    Keywords: repurchase agreements, central clearing counterparties, margin policies
    Date: 2015–10
  3. By: Lucas, André (VU University Amsterdam); Schwaab, Bernd (European Central Bank); Zhang, Xin (Research Department, Central Bank of Sweden)
    Abstract: We develop a novel high-dimensional non-Gaussian modeling framework to infer measures of conditional and joint default risk for many financial sector firms. The model is based on a dynamic Generalized Hyperbolic Skewed-t block-equicorrelation copula with time-varying volatility and dependence parameters that naturally accommodates asymmetries, heavy tails, as well as non-linear and time-varying default dependence. We apply a conditional law of large numbers in this setting to define joint and conditional risk measures that can be evaluated quickly and reliably. We apply the modeling framework to assess the joint risk from multiple defaults in the euro area during the 2008–2012 financial and sovereign debt crisis. We document unprecedented tail risks during 2011–2012, as well as their steep decline after subsequent policy actions.
    Keywords: dynamic equicorrelation; generalized hyperbolic distribution; law of large numbers; large portfolio approximation
    JEL: C32 G21
    Date: 2015–06–01
  4. By: Chan, Marc K; Kwok, Simon
    Abstract: In a recent stock market reform, over half of the stocks listed in the Shanghai Stock Exchange became purchasable by foreign investors. Theory predicts that the price revaluation of an investible stock should be positively associated with the reduction in systematic risk. Using the policy as a natural experiment, we test this implication using a difference-in-differences estimator and a sample of 786 stocks in the Shanghai market. We find that risk-sharing explains over 40 percent of the price revaluation of investible stocks during the eight-month window between reform announcement and implementation. The results support the efficiency of the Chinese stock market, to the extent that the reduction of systematic risk is priced into those stocks that are affected by the liberalization.
    Keywords: Abatement; Cap and Trade; Emission Markets; Environmental Policy; Emission Taxes; Permit Trading
    Date: 2015–10

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