nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒11‒01
six papers chosen by

  1. Stock returns over the FOMC cycle By Annette Vissing-Jorgensen; Adair Morse; Anna Cieslak
  2. Hedge fund predictability and optimal asset allocation By Ekaterini Panopoulou; Theologos Pantelidis; Spyridon Vrontos
  3. Financial Symmetry and Moods in the Market By Roberto Savona; Maxence Soumare; Jorgen Vitting Andersen
  4. Earnings Management to Avoid Delisting from a Stock Market By Ales Cornanic; Jiri Novak
  5. Interactions between financial markets and macroeconomic variables in EU: a nonlinear modeling approach By Lucian-Liviu Albu; Radu Lupu; Adrian Cantemir Calin

  1. By: Annette Vissing-Jorgensen (University of California at Berkeley); Adair Morse (University of California at Berkeley); Anna Cieslak (Northwestern University)
    Abstract: We document that since 1994 the US equity premium follows an alternating weekly pattern measured in FOMC cycle time, i.e. in time since the last Federal Open Market Committee meeting. The equity premium is earned entirely in weeks 0, 2, 4 and 6 in FOMC cycle time (with week 0 starting the day before a scheduled FOMC announcement day). We show that this pattern is likely to reflect a risk premium for news (about monetary policy or the macro economy) coming from the Federal Reserve: (1) The FOMC calendar is quite irregular and changes across sub-periods over which our finding is robust. (2) Even weeks in FOMC cycle time do not line up with other macro releases. (3) Volatility in the fed funds futures market and the federal funds market (but not to the same extent in other markets) peaks during even weeks in FOMC cycle time. (4) Information processing/decision making within the Fed tends to happen bi-weekly in FOMC cycle time: Before 1994, when changes to the Fed funds target in between meetings were common, they disproportionately took place during even weeks in FOMC cycle time. In addition, after 2001 Board of Governors discount rate meetings (at which the board aggregates policy requests from regional federal reserve banks and receives staff briefings) tend to take place bi-weekly in FOMC cycle time. As for how the information gets from the Federal Reserve to the market, we rule out the Federal Reserve signaling policy via open market operations post-1994. Furthermore, the high return weeks do not systematically line up with official information releases from the Federal Reserve or with the frequency of speeches by Fed officials. We end with a discussion of quiet policy communications and unintended information flows.
    Date: 2015
  2. By: Ekaterini Panopoulou (University of Kent); Theologos Pantelidis (University of Macedonia); Spyridon Vrontos (University of Essex)
    Abstract: The degree of both return and volatility hedge fund predictability is revealed using a regime switching framework. Optimal combinations of regime switching model forecasts allow us to capture the stylized facts of hedge fund returns and construct superior hedge fund return forecasts in the presence of parameter instability and model uncertainty. Our dataset consists of individual hedge fund data from the Barclays hedge fund database for the period January 1994 to December 2013. Our extensive set of predictors contains the Fung and Hsieh factors, factors related to style investing and to investment policies, macro related / business indicators variables and market-oriented factors. The economic value of the proposed predictability models is investigated by studying its effects on asset allocation and active portfolio management.
    Keywords: Hedge fund predictability; regime switching model; asset allocation
    JEL: C53 G11
  3. By: Roberto Savona (Department of Economics and Management - Università degli studi di Brescia); Maxence Soumare (Labboratoire J.-A. Dieudonné, CNRS, Université de Nice - Sophia Antipolis, Parc Valrose, F-06108 Nice, France - affiliation inconnue); Jorgen Vitting Andersen (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    Abstract: This paper studies how certain speculative transitions in financial markets can be ascribed to a symmetry break that happens in the collective decision making. Investors are assumed to be bounded rational, using a limited set of information including past price history and expectation on future dividends. Investment strategies are dynamically changed based on realized returns within a game theoretical scheme with Nash equilibria. In such a setting, markets behave as complex systems whose payoff reflect an intrinsic financial symmetry that guarantees equilibrium in price dynamics (fundamentalist state) until the symmetry is broken leading to bubble or anti-bubble scenarios (speculative state). We model such two-phase transition in a micro-to-macro scheme through a Ginzburg-Landau-based power expansion leading to a market temperature parameter which modulates the state transitions in the market. Via simulations we prove that transitions in the market price dynamics can be phenomenologically explained by the number of traders, the number of strategies and amount of information used by agents, all included in our market temperature parameter.
    Keywords: agent-based modelling,game theory,Ginzburg-landau theory,financial symmetry
    Date: 2015
  4. By: Ales Cornanic (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic); Jiri Novak (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)
    Abstract: We show that firms ‘in danger’ of being delisted from a stock market (NASDAQ) report higher performance-adjusted discretionary accruals and the inflated accruals are associated with an increased likelihood of maintained listing. Accruals of firms ‘in danger’ are less positive in fiscal quarters audited by a Big-4 auditor and after the implementation of SOX. In contrast, accruals are higher for firms that benefit most from public listing and for firms with good future prospects. This suggests that managers consider reputation and litigation risk associated with earnings management and they manage earnings only when they believe the firm will recover in near future. The market can thus interpret discretionary accruals as a signal revealing managers’ private information about firm quality. Consistent with the signaling explanation we observe a stronger stock price reaction on the announcement of earnings that contain large accruals in threatened firms.
    Keywords: Delisting, earnings management, discretionary accruals, insider trading, reverse stock split, audit, Sarbanes-Oxley Act
    Date: 2015–08
  5. By: Lucian-Liviu Albu; Radu Lupu; Adrian Cantemir Calin
    Abstract: There is a general acceptance of the fact that a significant direct relationship between financial markets and macroeconomic variables exists, especially by considering the assertion that developed financial markets correspond to high GDP levels. This paper provides an investigation of the correlation between the market capitalization and stock market dynamics on one hand and GDP per capita on the other hand, for two groups of regions in EU (western countries, EU15, and central and eastern countries, EU11). Based on data for a number of EU countries (both western and eastern) and using some special modelling techniques, we provide an analysis of the convergence phenomenon for both the macroeconomic variables and the financial ones. Using a deep time resolution and some spline functions we generated high frequency time series (the so-called virtual monthly GDP) to investigate the correlations with financial markets. In spite of ECB?s carefull monitoring of the financial integration within the euro zone, a possible financial integration process within the non-euro zone continues to be ignored. It seems that due to the weak development of financial markets, the economies outside of the euro zone are relatively more protected against crisis when compared to those inside the euro zone. Therefore, the so-called contagion effect is weaker in the Central and Eastern region of European Union.
    Keywords: macroeconomic variables; financial crisis; convergence; non-linear modeling
    JEL: G01 G15 E44 E47 O47
    Date: 2015–10
  6. By: Thomas Mc Cluskey (Dublin City University)
    Abstract: The findings of studies on US data indicate a statistical relationship between the dividend policy of firms and the tax bracket of their shareholders while studies on UK data concluded that taxation does effect the valuation of dividend income in the UK. However a recent Irish study, based on interviews with Irish stockbrokers and funds managers, appears to contradict the widely held view among academics that taxation effects the valuation of dividend income. This study considers, in the light of that evidence, whether Irish shareholders are indeed indifferent to the differential taxation treatment of dividends and retained profits by examining the impact of a major change in the taxation of capital gains and dividend income in Ireland on 3rd December 1997 after which dividends were and continue to be taxed at more than double the tax rate on capital gains. We conclude that consistent with recent qualitative evidence Irish shareholders appear indifferent to the differential taxation treatment of dividends and retained profits and therefore the notion that a particular company may appeal to a particular clientele of shareholders is not supported in an Irish context.
    Keywords: Ex- Dividend Day Reaction in the Irish Stock Market
    JEL: G30

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