nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒12‒08
six papers chosen by

  1. Fund flows inducing mispricing of risk in competitive financial markets By Axel Stahmer
  2. Option-Based Estimation of the Price of Co-Skewness and Co-Kurtosis Risk By Peter Christoffersen; Mathieu Fournier; Kris Jacobs; Mehdi Karoui
  3. Realized Volatility Analysis in A Spin Model of Financial Markets By Tetsuya Takaishi
  4. Asset Bubbles and Bailouts By Tomohiro Hirano; Masaru Inaba; Noriyuki Yanagawa
  5. Monitoring the Unsecured Interbank Funds Market By Miguel Sarmiento; Jorge Cely; Carlos León
  6. Calendar Effects in Latin American Stock Markets By Iberico, Luis Antonio; Winkelried, Diego

  1. By: Axel Stahmer (ESMT European School of Management and Technology)
    Abstract: This paper studies the effect of new fund flows on investment behavior and the resulting equilibrium price of risk. The Small Fund Industry model shows equilibria with overinvestment in unprofitable and underinvestment in profitable investment opportunities. The Large Fund Industry model derives market prices for risk and analyzes the resulting price distortions in equilibrium. New flow of funds to the asset management industry lead to inefficient investment decisions, mispricing of risk, and distortion of market implied probabilities. Furthermore, the paper provides an explanation for partial market failure and trade among identical asset managers without assuming heterogeneous beliefs.
    Date: 2015–11–27
  2. By: Peter Christoffersen (University of Toronto - Rotman School of Management and CREATES); Mathieu Fournier (HEC Montreal); Kris Jacobs (University of Houston - C.T. Bauer College of Business); Mehdi Karoui (McGill University)
    Abstract: We show that the prices of risk for factors that are nonlinear in the market return are readily obtained using index option prices. We apply this insight to the price of co-skewness and co-kurtosis risk. The price of co-skewness risk corresponds to the spread between the physical and the risk-neutral second moments, and the price of co-kurtosis risk corresponds to the spread between the physical and the risk-neutral third moments. The option-based estimates of the prices of risk lead to reasonable values of the associated risk premia. An out-of-sample analysis of factor models with co-skewness and co-kurtosis risk indicates that the new estimates of the price of risk improve the models performance. Models with higher-order market moments also robustly outperform standard competitors such as the CAPM and the Fama-French model.
    Keywords: Co-skewness, co-kurtosis, risk premia, options, cross-section, out-of-sample
    JEL: G12 G13 G17
    Date: 2015–01–09
  3. By: Tetsuya Takaishi
    Abstract: We calculate the realized volatility in the spin model of financial markets and examine the returns standardized by the realized volatility. We find that moments of the standardized returns agree with the theoretical values of standard normal variables. This is the first evidence that the return dynamics of the spin financial market is consistent with the view of the mixture-of-distribution hypothesis that also holds in the real financial markets.
    Date: 2015–11
  4. By: Tomohiro Hirano; Masaru Inaba; Noriyuki Yanagawa
    Abstract: As long as bubble size is relatively small, bubbles increase production level, but once the size becomes too large, then bubbles reduce it. Given this non-monotonic relationship, this paper investigates the relationship between bubbles and government bailouts. It shows that bailouts for bursting bubbles may positively influence ex-ante production efficiency and relax the existence condition of stochastic bubbles. The level of bailouts has a non-monotonic relationship with production efficiency and a partial bailout policy achieves production efficiency. Moreover, it examines the welfare effects of bailout policies rigorously and shows that even non-risky bubbles may be undesirable for taxpayers.
    Date: 2015–10
  5. By: Miguel Sarmiento (Banco de la República de Colombia); Jorge Cely (Banco de la República de Colombia); Carlos León (Banco de la República de Colombia)
    Abstract: A core goal of regulators and financial authorities is to understand how market prices convey information on the financial health of its participants. From this viewpoint we build an Early-Warning Indicators System (EWIS) that allows for identifying those financial institutions perceived as risky counterparts by the participants of the interbank market. We use micro-level data from bilateral overnight unsecured loans performed in the interbank market between January 2011 and December 2014. The EWIS identifies those participants that systematically pay high prices for liquidity in this market. We employ coverage tests to estimate EWIS’ robustness and consistency. We find that financial institutions with an elevated frequency of signals tend to exhibit a net borrower liquidity position in the interbank market, hence suggesting they are facing recurrent liquidity needs. Those institutions also exhibit higher probability of insolvency measured by the Z-score indicator. Thus, our results support the existence of market discipline based on peer-monitoring. Overall, the EWIS may assist financial authorities in focusing their attention and resources on those financial institutions perceived by the market as those closer to distress. Classification JEL: E40; G14; G21
    Keywords: Early warning indicators, interbank markets, market discipline, bank risk.
    Date: 2015–11
  6. By: Iberico, Luis Antonio (Universidad del Pacífico); Winkelried, Diego (Universidad del Pacífico)
    Abstract: One of the most well-documented empirical regularities in international finance is the presence of calendar effects in historical stock returns. The literature focuses mainly on developed countries and in general, emerging markets have not received much attention on this issue. We aim to bridge this gap by documenting the existence of significant and robust calendar effects for the main stock markets in Latin America. Upon performing an extreme bounds analysis that adjusts our estimations for model uncertainty, we find a significantly negative Monday effect, generally compensated by a significantly positive Friday effect. These effects are robust to model specification and are stable through time. Even though not as widespread, we also find evidence for a robust turn-of-the-month effect.
    Keywords: Monday effect, effect coding, extreme bounds analysis, Latin America
    JEL: C50 G10 G14 G15
    Date: 2015–11

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.