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on Financial Markets |
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Issue of 2015‒11‒21
six papers chosen by |
| By: | Julius Bonart; Martin Gould |
| Abstract: | We perform an empirical analysis of how trades influence liquidity in a limit order book (LOB). Using a recent, high-quality data set from Nasdaq, we calculate the mean net flow of limit orders before and after the arrival of a market order. We find strong evidence to suggest that liquidity providers dynamically adapt their limit order flow to the arrivals of market orders. By examining the temporal evolution of this net order flow, we argue that strategic liquidity providers consider both adverse selection and expected waiting costs when deciding how to act. We also note that our results could be consistent with an alternative hypothesis: that liquidity providers successfully forecast market order arrivals before they actually occur. |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1511.04116&r=fmk |
| By: | Paweł Sakowski (Faculty of Economic Sciences, University of Warsaw; Union Investment TFI S.A.); Robert Ślepaczuk (Faculty of Economic Sciences, University of Warsaw); Mateusz Wywiał (Faculty of Economic Sciences, University of Warsaw; Quedex Derivatives Exchange) |
| Abstract: | This article aims to extend evaluation of classic multifactor model of Carhart (1997) for the case of global equity indices and to expand analysis performed in Sakowski et. al.(2015). Our intention is to test several modifications of these models to take into account different dynamics of equity excess returns between emerging and developed equity indices. Proposed extensions include volatility regime switching mechanism (using dummy variables and the Markov approach) and the fifth risk factor based on realized volatility of index returns. Moreover, instead of using data for stocks of a particular market (which is a common approach in the literature), we check performance of these models for weekly data of 81 world investable equity indices in the period of 2000-2015. Such approach is proposed to estimate equity risk premium for a single country. Empirical evidence reveals important differences between results for classical models estimated on single stocks (either in international or US-only framework) and models evaluated for equity indices. Additionally, we observe substantial discrepancies between results for developed countries and emerging markets. Finally, using weekly data for the last 15 years we illustrate importance of model risk and data overfitting effects when drawing conclusions upon results of multifactor models. |
| Keywords: | cross-sectional models, asset pricing models, equity risk premia, equity indices, new risk factors, sensitivity analysis, book to market, momentum, market price of risk, emerging and developed equity indices, data overfitting, model risk |
| JEL: | C15 G11 F30 G12 G13 G14 G15 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2015-39&r=fmk |
| By: | Guglielmo Maria Caporale; Faek Menla Ali; Fabio Spagnolo; Nicola Spagnolo |
| Abstract: | This paper investigates the effects of equity and bond portfolio inflows on exchange rate volatility, using monthly bilateral data for the US vis-a-vis eight Asian developing and emerging countries (India, Indonesia, South Korea, Pakistan, Hong Kong, Thailand, the Philippines, and Taiwan) over the period 1993:01-2012:11, and estimating a time-varying transition probability Markov-switching model. We find that net equity (bond) inflows drive the exchange rate to a high (low) volatility state. In particular, net bond inflows increase the probability of remaining in the low volatility state in the case of Pakistan, Thailand, and the Philippines, whilst they increase the probability of staying in the high volatility state in the case of Indonesia. Finally, net equity inflows from India, Indonesia, South Korea, Hong Kong, and Taiwan towards the US also increase the probability of staying in the high volatility state. These findings can be plausibly interpreted in terms of the "return-chasing" hypothesis and suggest that credit controls on portfolio flows could be an effective tool to stabilise the foreign exchange market. |
| Keywords: | Bond flows, Equity flows, Exchange rates, Regime switching |
| JEL: | F31 F32 G15 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1519&r=fmk |
| By: | Esad Smajlbegovic |
| Abstract: | This study analyzes the link between regional economic conditions and stock returns. I identify all U.S. states that are economically relevant for a firm through textual analysis of annual reports and construct a novel proxy for future regional economic activity. Using this proxy, I find that forecasts on economic conditions of firm-relevant U.S. regions positively predict stock returns on a monthly basis. This finding is robust to short-term reversal, individual stock momentum, industry momentum, geographic dispersion and a list of standard controls. A zero-cost trading strategy based on this new predictive variable generates a risk-adjusted return of 5.75 (5.30) percent per year using an equal-weighted (value-weighted) portfolio. Additionally, these results indicate that information arising from all relevant states matters over and above the information content of the mere headquarter state. Further evidence indicates that forecasts of regional activity also predict firms' real operations, suggesting that economic conditions of U.S. regions capture an important cash flow component of stock returns. Finally, I show that the gradual diffusion of regional information is slower among difficult-to-arbitrage firms. |
| JEL: | G12 G14 M41 R11 |
| Date: | 2015–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2015:psm196&r=fmk |
| By: | Fink, Kilian; Krüger, Ulrich; Meller, Barbara; Wong, Lui-Hsian |
| Abstract: | We propose an algorithm to model contagion in the interbank market via what we term the credit quality channel. In existing models on contagion via interbank credit, external shocks to banks often spread to other banks only in case of a default. In contrast, shocks are transmitted via asset devaluations and deteriorations in the credit quality in our algorithm: First, the probability of default (PD) of those banks directly affected by some shock increases. This increases the expected loss of the credit portfolios of the initially affected banks' counterparties, thereby reducing the counterparties' regulatory capital ratio. From a logistic regression, we estimate the increase in the counterparties' PD due to a reduced capital ratio. Their increased PDs in turn affect the counterparties' counterparties, and so on. This coherent and flexible framework is applied to bilateral interbank credit exposure of the entire German banking system in order to examine policy questions. For that purpose, we propose to measure the potential cost of contagion of a given shock scenario by the aggregated regulatory capital loss computed in our algorithm. |
| Keywords: | contagion,systemic risk,macroprudential policy,policy evaluation,interconnectedness |
| JEL: | C63 G01 G17 G21 G28 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:382015&r=fmk |
| By: | Samuel Huber; Jaehong Kim |
| Abstract: | In the post-crisis period, increased regulation of financial intermediaries led to a signifi- cant decline in corporate bond market liquidity. In order to stabilize these markets, policy makers recently proposed that the trading of corporate bonds should be more centralized. In this paper, we show that a centralization of corporate bond markets always leads to an inferior outcome when compared with the initial over-the-counter structure. The regulator may achieve a superior allocation only if it is feasible for him to also affect market liquidity, by either increasing or decreasing it. |
| Keywords: | Monetary theory, over-the-counter markets, financial regulation, corporate bonds, liquidity |
| JEL: | D52 D62 E31 E44 E50 G11 G12 G28 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:211&r=fmk |