nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒12‒20
six papers chosen by

  1. Do investors trade too much? A laboratory experiment By Joao da Gama Batista; Domenico Massaro; Jean-Philippe Bouchaud; Damien Challet; Cars Hommes
  2. Down-side Risk Metrics as Portfolio Diversification Strategies across the GFC By Allen, D.E.; McAleer, M.J.; Powell, R.J.; Singh, A.K.
  3. Stock Exchange Mergers and Market By Amélie Charles; Olivier Darné; Jae H. Kim; Etienne Redor
  4. Enhancing Bank Supervision in Asia: Lessons Learned from the Financial Crisis By Zamorski, Michael; Lee, Minsoo
  5. Efficiency and Risk Convergence of Eurozone Financial Markets By Wild, Joerg
  6. Bond Market Development in Developing Asia By Burger, John; Warnock, Francis; Warnock, Veronica Cacdac

  1. By: Joao da Gama Batista; Domenico Massaro; Jean-Philippe Bouchaud; Damien Challet; Cars Hommes
    Abstract: We run experimental asset markets to investigate the emergence of excess trading and the occurrence of synchronised trading activity leading to crashes in the artificial markets. The market environment favours early investment in the risky asset and no posterior trading, i.e. a buy-and-hold strategy with a most probable return of over 600%. We observe that subjects trade too much, and due to the market impact that we explicitly implement, this is detrimental to their wealth. The asset market experiment was followed by risk aversion measurement. We find that preference for risk systematically leads to higher activity rates (and lower final wealth). We also measure subjects' expectations of future prices and find that their actions are fully consistent with their expectations. In particular, trading subjects try to beat the market and make profits by playing a buy low, sell high strategy. Finally, we have not detected any major market crash driven by collective panic modes, but rather a weaker but significant tendency of traders to synchronise their entry and exit points in the market.
    Date: 2015–12
  2. By: Allen, D.E.; McAleer, M.J.; Powell, R.J.; Singh, A.K.
    Abstract: This paper features an analysis of the effectiveness of a range of portfolio diversification strategies, with a focus on down-side risk metrics, as a portfolio diversification strategy in a European market context. We apply these measures to a set of daily arithmetically compounded returns on a set of ten market indices representing the major European markets for a nine year period from the beginning of 2005 to the end of 2013. The sample period, which incorporates the periods of both the Global Financial Crisis (GFC) and subsequent European Debt Crisis (EDC), is challenging one for the application of portfolio investment strategies. The analysis is undertaken via the examination of multiple investment strategies and a variety of hold-out periods and back-tests. We commence by using four two year estimation periods and subsequent one year investment hold out period, to analyse a naive 1/N diversification strategy, and to contrast its effectiveness with Markowitz mean variance analysis with positive weights. Markowitz optimisation is then compared with various down- side investment opimisation strategies. We begin by comparing Markowitz with CVaR, and then proceed to evaluate the relative e effctiveness of Markowitz with various draw-down strategies, utilising a series of backtests. Our results suggest that none of the more sophisticated optimisation strategies appear to dominate naive diversification.
    Keywords: portfolio diversification, Markowitz analysis, downside risk, CVaR, draw-down
    JEL: G11 C61
    Date: 2015–11–01
  3. By: Amélie Charles (Audencia Recherche - Audencia); Olivier Darné (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - UN - Université de Nantes); Jae H. Kim (School of Economics and Finance - School of Economics and Finance); Etienne Redor (Audencia Recherche - Audencia)
    Abstract: The aim of this article is to examine the impact of stock exchange mergers on the degree of informational efficiency. For this purpose, we apply the generalized spectral shape test for the martingale difference hypothesis to the stock returns before and after the 31 domestic and crossborder mergers completed from 1997 to 2011. The test is conducted with moving subsample windows, allowing us to detect the periods of (in)efficiency, and thus to conduct a comparative analysis for pre-merger and post-merger periods. We find that higher levels of efficiency are less frequent than lower levels of efficiency after a stock exchange merger. We also find that the impact on the level of efficiency depends on a range of merger characteristics such as the level of development, size, geographical diversification and industrial diversification of stock exchange
    Keywords: Stock exchange mergers, market efficiency, martingale difference sequence
    Date: 2015–12
  4. By: Zamorski, Michael (South East Asian Central Banks); Lee, Minsoo (Asian Development Bank)
    Abstract: The global financial crisis underlined that sound and effective bank regulation is vital to financial stability. Assessments of the global financial crisis invariably point to ineffective finance regulation and supervision as the main reasons for the onset of the crisis and its severity. In particular, lapses in banking regulation contributed significantly to the outbreak. The crisis reflected the failure of regulatory authorities to keep pace with financial innovation. Bank supervision had been weak by any measure. Supervisors did not conduct regular onsite bank inspections or examinations of sufficient depth. They did not properly implement risk-based supervision, and they failed to identify shortcomings in banks’ risk-management methods, governance structures, and risk cultures. Meanwhile, offsite surveillance systems rely too heavily on banks’ self-reported data to effectively monitor risk. Banking regulation is the primary safeguard against financial instability, but it should be supplemented by macroprudential policies and other new policy instruments now available to regulatory authorities.
    Keywords: Basel Committee’s core principles; finance regulation and supervision; global financial crisis; macroprudential policy
    JEL: G01 G18 G21 G28
    Date: 2015–08–12
  5. By: Wild, Joerg
    Abstract: This paper discusses beta and sigma convergence of commercial, savings, and cooperative banks in the Eurozone from 1999 to 2012. For this purpose, concepts of the growth and efficiency convergence literature are consulted and GMM, fixed effects models, and OLS are applied. Convergence is analyzed by calculating two efficiency metrics – data envelop- ment analysis (DEA) and stochastic frontier analysis (SFA) – and two risk metrics – equity to total assets (E/TA or EQTOAS) and Z-scores (ZSCORN). For commercial banks, efficiency convergence of both metrics is found, however, savings banks show no signs of convergence and cooperative banks only show signs of SFA convergence. Banks of all three specializa- tions show E/TA convergence, but only savings banks convergence with respect to Z-scores. Nevertheless, the EU’s Single Market Program still has a long way to go to create identical conditions for all member countries’ financial markets. The discovery that there are considerable differences between banks’ specializations, and even more, that there is convergence with respect to E/TA as a risk metric are among the main academic contributions of this paper. The final published manuscript can be obtained under: 9.015.
    Keywords: Bank efficiency, Financial risk, Convergence, DEA, SFA, Eurozone
    JEL: C5 F36 G01 G15 G21
    Date: 2015–09–09
  6. By: Burger, John (Loyola University Maryland); Warnock, Francis (Darden School of Business); Warnock, Veronica Cacdac (Darden School of Business)
    Abstract: We describe and assess two dimensions of the current state of bond market development in developing Asia: the role of bond markets in overall financial systems and a comparison of the salient features of bond market development in developing Asia and other regions. We highlight key drivers and constraints of bond market development in developing Asia, particularly in smaller economies, as well as key implications for policymakers, especially for promoting bond market development in the region. Our analysis suggests that high inflation volatility presents a serious obstacle to bond market development. We find that smaller developing Asian economies could enable bond market development by pursuing creditor friendly policies and strengthening the legal rights of borrowers.
    Keywords: bond market; financial development; financial system
    JEL: F30 G10 G15
    Date: 2015–09–01

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