nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒10‒17
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The banking crisis with interbank market freeze. By Jin Cheng; Meixing Dai; Frédéric Dufourt
  2. Dynamic term structure models: the best way to enforce the zero lower bound in the US By Andreasen, Martin M; Meldrum, Andrew
  3. ‘High and dry’: the liquidity and credit of colonial and foreign government debt in the London Stock Exchange (1880–1910) By Chavaz, Matthieu; Flandreau, Marc
  4. An Application of a Short Memory Model with Random Level Shifts to the Volatility of Latin American Stock Market Returns By Rodríguez, Gabriel; Tramontana, Roxana
  5. Asymmetric volatility of the Thai stock market: evidence from high-frequency data By Thakolsri, Supachok; Sethapramote, Yuthana; Jiranyakul, Komain
  6. Is the Indian Stock Market efficient - A comprehensive study of Bombay Stock Exchange Indices By Achal Awasthi; Oleg Malafeyev

  1. By: Jin Cheng; Meixing Dai; Frédéric Dufourt
    Abstract: This paper studies banking crises characterized by interbank market freeze, fire sale and contagion in a model with collateralized interbank loans. We examine the role of interbank market in spreading and amplifying crises by distinguishing three sources of liquidity risks, i.e., panic-induced run, foreign sovereign debt crisis and gambling behavior. Our results underline that ex-post insufficient bank capital and/or liquidity reserves could lead the interbank market to malfunction. However, implementing more restrictive regulations to reinforce banks' resilience to shocks could hamper their role as financial intermediary and may have perverse effects on their gambling behaviors. Therefore, the crisis management by a government even without monetary sovereignty is crucial in ensuring the well-functioning of the interbank market and hence the stability of the banking system, and it is effective as long as the scale of bailout is credible in the sense of not compromising the government's solvency.
    Keywords: Banking crisis, interbank market, market discipline, capital ratio, multiple equilibria, bank run, gambling asset, asymmetric information, and sovereign debt crisis.
    JEL: E43 G01 G11 G12 G18 G02 G28
    Date: 2015
  2. By: Andreasen, Martin M; Meldrum, Andrew (Bank of England)
    Abstract: This paper studies whether dynamic term structure models for US nominal bond yields should enforce the zero lower bound by a quadratic policy rate or a shadow rate specification. We address the question by estimating quadratic term structure models (QTSMs) and shadow rate models (SRMs) with at most four pricing factors. Our findings suggest that QTSMs give a better in-sample fit than SRMs with two and three factors, whereas the SRM marginally dominates with four factors. Loadings from Campbell-Shiller regressions are generally better matched by the SRMs, which also outperform the QTSMs when forecasting bond yields, particularly with four pricing factors.
    Keywords: Bias-adjustment; forecasting study; quadratic term styructure models; sequential regression approach; shadow rate models
    JEL: C10 C50 G12
    Date: 2015–09–29
  3. By: Chavaz, Matthieu (Bank of England); Flandreau, Marc (Bank of England)
    Abstract: We gather the most comprehensive database of government bonds for the first globalisation era to date to conduct the first historically informed study of the importance of liquidity for colonial and sovereign yield spreads. Considering both liquidity and credit shows that the two markets were segmented: credit was the most important factor in the pricing of sovereign debt, but liquidity predominated in the colonial market, explaining 10% to 39% of colonial yield spreads. This reflected both different market microstructures and bond clienteles, themselves influenced by heterogeneous political, institutional and financial arrangements. The flows from the colonies to British ‘ordinary’ investors in the form of illiquidity premia should be taken into account in future studies of the political economy of empire.
    Keywords: Government bonds; British Empire; liquidity; credit risk; colonial finance
    JEL: G12 N23 N43
    Date: 2015–10–06
  4. By: Rodríguez, Gabriel (Pontificia Universidad Católica del Perú); Tramontana, Roxana (Pontificia Universidad Católica del Perú)
    Abstract: Empirical research indicates that the volatility of stock return time series have long memory. However, it has been demonstrated that short memory processes contaminated with random level shifts can often be confused as being long memory. Often this feature is referred to as spurious long memory. This paper represents an empirical study of the random level shift (RLS) model using the approach of Lu and Perron (2010) and Li and Perron (2013) for the volatility of daily stocks returns data for …ve Latin American countries. The RLS model consists of the sum of a short term memory component and a level shift component, where the level shift component is governed by a Bernoulli process with a shift probability . The estimation results suggest that the level shifts in the volatility of daily stocks returns data are infrequent but once they are taken into account, the long memory characteristic and the GARCH e¤ects disappear. An out-of-sample forecasting exercise is also provided.
    Date: 2015–07
  5. By: Thakolsri, Supachok; Sethapramote, Yuthana; Jiranyakul, Komain
    Abstract: This study employs the daily data of the Stock Exchange of Thailand to test for the leverage and volatility feedback effects. The period of investigation is during January 4, 2005 to December 27, 2013, which includes the Subprime crisis period in the US that might affect the volatility of stock market return in emerging stock markets. The results from this study show that the US subprime crisis imposes a minimal positive impact on volatility. In addition, the estimations of the three parametric asymmetric volatility models give the results showing some evidence of the volatility feedback and leverage effects. The findings give implications for portfolio diversification and risk management.
    Keywords: Asymmetric volatility, feedback effect, leverage effect, emerging stock market
    JEL: C22 G10
    Date: 2015–10
  6. By: Achal Awasthi; Oleg Malafeyev
    Abstract: How an investor invests in the market is largely influenced by the market efficiency because if a market is efficient, it is extremely difficult to make excessive returns because in an efficient market there will be no undervalued securities i.e. securities whose value is less than its assumed intrinsic value, which offer returns that are higher than the deserved expected returns, given their risk. However, there is a possibility of making excessive returns if the market is not efficient. This article analyses the five popular stock indices of BSE. This would not only test the efficiency of the Indian Stock Market but also test the random walk nature of the stock market. The study undertaken in this paper has provided strong evidence in favor of the inefficient form of the Indian Stock Market. The series of stock indices in the Indian Stock Market are found to be biased random time series and the random walk model can't be applied in the Indian Stock Market. This study confirms that there is a drift in market efficiency and investors can capitalize on this by correctly choosing the securities that are undervalued.
    Date: 2015–10

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