nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒11‒07
five papers chosen by

  1. On Origins of Alpha By Zura Kakushadze
  2. Analyzing and Comparing Basel's III Sensitivity Based Approach for the interest rate risk in the trading book By Mabelle Sayah
  3. A backward Monte Carlo approach to exotic option pricing By Giacomo Bormetti; Giorgia Callegaro; Giulia Livieri; Andrea Pallavicini
  4. Stability Bonds for the Euro Area By Angel Ubide
  5. Does The Accrual Anomaly Exists In Stock Market? Evidence From Pakistan By Baloch, Muhammad Saad

  1. By: Zura Kakushadze
    Abstract: We argue that an important contributing factor into market inefficiency is the lack of a robust mechanism for the stock price to rise if a company has good earnings, e.g., via buybacks/dividends. Instead, the stock price is prone to volatility due to rather random perception/interpretation of earnings announcements (among other data) by market participants. We present empirical evidence indicating that dividend paying stocks on average are less volatile, even factoring out market cap. We further ponder possible ways of increasing market efficiency via 1) instituting such a mechanism, 2) a taxation scheme that would depend on holding periods, and 3) a universal crossing engine/exchange for mutual and pension funds (and similar long holding horizon vehicles) with no dark pools, 100% transparency, and no advantage for timing orders.
    Date: 2015–11
  2. By: Mabelle Sayah (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1, ISFA - Institut des Science Financière et d'Assurances - PRES Université de Lyon, Faculte des Sciences - Universite Saint Joseph - USJ - Université Saint-Joseph de Beyrouth)
    Abstract: A bank's capital charge computation is a widely discussed topic with new approaches emerging continuously. Each bank is computing this figure using internal methodologies in order to reflect its capital adequacy; however, a more homogeneous model is recommended by the Basel committee to enable judging the situation of these financial institutions and comparing different banks among each other. In this paper, we compare different numerical and econometric models to the sensitivity based approach (SBA) implemented by BCBS under Basel III in its February 2015 publication in order to compute the capital charge, we study the influence of having several currencies and maturities within the portfolio and try to define the time horizon and confidence level implied by Basel s III approach through an application on bonds portfolios. By implementing several approaches, we are able to find equivalent VaRs to the one computed by the SBA on a pre-defined confidence level (97.5 %). However, the time horizon differs according to the chosen methodology and ranges from 1 month up to 1 year.
    Keywords: Sensitivity Based approach,Capital charge,GARCH,Basel III,PCA,bonds portfolio,Dynamic Nelson Siegel,ICA,interest rate risk,trading book
    Date: 2015–10–23
  3. By: Giacomo Bormetti; Giorgia Callegaro; Giulia Livieri; Andrea Pallavicini
    Abstract: We propose a novel algorithm which allows to sample paths from an underlying price process in a local volatility model and to achieve a substantial variance reduction when pricing exotic options. The new algorithm relies on the construction of a discrete multinomial tree. The crucial feature of our approach is that -- in a similar spirit to the Brownian Bridge -- each random path runs backward from a terminal fixed point to the initial spot price. We characterize the tree in two alternative ways: in terms of the optimal grids originating from the Recursive Marginal Quantization algorithm and following an approach inspired by the finite difference approximation of the diffusion's infinitesimal generator. We assess the reliability of the new methodology comparing the performance of both approaches and benchmarking them with competitor Monte Carlo methods.
    Date: 2015–11
  4. By: Angel Ubide (Peterson Institute for International Economics)
    Abstract: The rules and buffers created in the last few years to enable the euro area to withstand another sudden stop of credit and market-driven panic in one or more of its member states are welcome steps, but they are widely recognized as inadequate. Ubide proposes creating a system of stability bonds in the euro area, to be issued by a new European Debt Agency, to partially finance the debt of euro area countries—up to 25 percent of GDP. These stability bonds should be initially backed by tax revenues transferred from national treasuries, but ultimately by the creation of euro area–wide tax revenues, and used to fund the operations of national governments. They could also be used for euro area–wide fiscal stimulus, to complement the fiscal policies of member states. Such bonds would strengthen the euro area economic infrastructure, creating incentives for countries to reduce their deficits but not forcing them to do so when such actions would drive their economies further into a downturn. The bonds would permit the euro area to adopt a more flexible or expansionary fiscal policy during recessions.
    Date: 2015–10
  5. By: Baloch, Muhammad Saad
    Abstract: This study examined the existence of accrual anomaly exclusively in Karachi Stock Exchange by measuring accruals from cash flow approach and by using a sample of 100 non-financial firms registered at Karachi Stock Exchange (KSE) for the time period of 2002 to 2013. The objective of the study is to examine the accrual anomaly by measuring accruals from cash flow approach as measuring accruals from balance sheet approach may contain estimation errors which may lead to biased result i.e. existence of accrual anomaly. Robust Fixed Effect method is used to achieve the objective. Result revealed that accruals predict the future stock returns positively when accruals are measured through cash flow approach which is contradictory to the accrual anomaly. It proved that measuring accruals from balance sheet approach contain estimation errors which lead to biased results. The study concluded that accrual anomaly does not exist in KSE and selection of specific estimation method is reason for accrual anomaly.
    Keywords: Accrual Anomaly, Accruals, Accounting, Earning Management, KSE, Pakistan
    JEL: M41 M49
    Date: 2015–09–30

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.