nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒11‒15
five papers chosen by

  1. Sequential Detection of Market shocks using Risk-averse Agent Based Models By Vikram Krishnamurthy; Sujay Bhatt
  2. Anchoring Adjusted Capital Asset Pricing Model By Siddiqi, Hammad
  3. Equilibrium Alpha in Asset Pricing in an Ambiguity-averse Economy By Katsutoshi Wakai
  4. The Effectiveness of the ECB’s Asset Purchase Programs of 2009 to 2012 By Heather D. Gibson; Stephen G. Hall; George S. Tavlas
  5. How the Euro-Area Sovereign-Debt Crisis Led to a Collapse in Bank Equity Prices By Heather D. Gibson; Stephen G. Hall; George S. Tavlas

  1. By: Vikram Krishnamurthy; Sujay Bhatt
    Abstract: This paper considers a statistical signal processing problem involving agent based models of financial markets which at a micro-level are driven by socially aware and risk- averse trading agents. These agents trade (buy or sell) stocks by exploiting information about the decisions of previous agents (social learning) via an order book in addition to a private (noisy) signal they receive on the value of the stock. We are interested in the following: (1) Modelling the dynamics of these risk averse agents, (2) Sequential detection of a market shock based on the behaviour of these agents. Structural results which characterize social learning under a risk measure, CVaR (Conditional Value-at-risk), are presented and formulation of the Bayesian change point detection problem is provided. The structural results exhibit two interesting prop- erties: (i) Risk averse agents herd more often than risk neutral agents (ii) The stopping set in the sequential detection problem is non-convex. The framework is validated on data from the Yahoo! Tech Buzz game dataset.
    Date: 2015–11
  2. By: Siddiqi, Hammad
    Abstract: An anchoring adjusted Capital Asset Pricing Model (ACAPM) is developed in which the payoff volatilities of well-established stocks are used as starting points that are adjusted to form volatility judgments about other stocks. Anchoring heuristic implies that such adjustments are typically insufficient. ACAPM converges to CAPM with correct adjustment, so CAPM is a special case of ACAPM. The model provides a unified explanation for the size, value, and momentum effects in the stock market. A key prediction of the model is that the equity premium is larger than what can be justified by market volatility. Hence, anchoring could potentially provide an explanation for the well-known equity premium puzzle. Anchoring approach predicts that stock splits are associated with positive abnormal returns and an increase in return volatility. The approach predicts that reverse stock-splits are associated with negative abnormal returns, and a fall in return volatility. Existing empirical evidence strongly supports these predictions.
    Keywords: Size Premium, Value Premium, Behavioral Finance, Stock splits, Equity premium puzzle, Anchoring Heuristic, CAPM, Asset Pricing, Financial Economics, G12, G11, G02,
    Date: 2015–10
  3. By: Katsutoshi Wakai
    Abstract: We derive an equilibrium asset pricing relation analogous to the cap-ital asset pricing model (CAPM) for investors whose preferences follow the robust mean-variance preferences introduced by Maccheroni, Mari-nacci, and Ru‘ no (2013). Our model de?nes a precise relation between the value of alpha from the market regression and ambiguity: alpha is positive if the asset has greater exposure to market ambiguity than market risk, and vice versa.
    Keywords: Ambiguity aversion, asset pricing, capital asset pricing model (CAPM), robust mean-variance preferences
    JEL: D81 G11 G12
    Date: 2015–11
  4. By: Heather D. Gibson; Stephen G. Hall; George S. Tavlas
    Abstract: We examine the impact of the ECB’s Securities Market Program (SMP) and the ECB’s two Covered Bond Purchase Programs (CBPPs) on sovereign bond spreads and covered-bond prices, respectively, for five euro-area stressed countries -- Greece, Ireland, Italy, Portugal, and Spain. Our data are monthly and cover the period from 2004M01 through 2014M07. In contrast to previous studies, we use actual, confidential, intervention data. Our results indicate that the respective asset purchase programs reduced sovereign spreads and raised covered bond prices. The quantitative effects of the programs were modest in magnitude, but nevertheless significant. We also provide a simple theoretical model that explains why official asset purchases can reduce a country’s default-risk spreads.
    Keywords: Monetary-policy effectiveness, ECB’s asset purchase programs, euro-area crisis.
    JEL: E43 E51 E52 E63 F33 F41 G01 G12
    Date: 2015–11
  5. By: Heather D. Gibson; Stephen G. Hall; George S. Tavlas
    Abstract: We quantify the linkages among banks’ equity performance and indicators of sovereign stress by using panel GMM to estimate a three-equation system that examines the impact of sovereign stress, as reflected in both sovereign spreads and sovereign ratings, on bank share prices. We use data for a panel of five euro-area stressed countries. Our findings indicate that a long-run recursive relationship between sovereigns and banks operated during the euro-area crisis. Specifically, for the five crisis countries considered shocks to sovereign spreads fed-through to sovereign ratings, which affected commercial banks’ equity-prices. Our results also point to the importance of using levels of equity prices -- rather than rates of return -- in measuring banks’ performance. The use of levels allows us to derive the determinants of long-run equity prices.
    Keywords: euro-area financial crisis, sovereign-bank linkages, banks’ performance, banking stability.
    JEL: E3 G01 G14 G21
    Date: 2015–11

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