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on Financial Markets |
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Issue of 2016‒02‒12
six papers chosen by |
| By: | Philip Ernst; James Thompson; Yinsen Miao |
| Abstract: | We empirically show the power of the equally weighted S&P 500 portfolio over Sharpe's market capitalization weighted S&P 500 portfolio. We proceed to consider the MaxMedian rule, a nonproprietary rule which was designed for the investor who wishes to do his/her own investing on a laptop with the purchase of only 20 stocks. Shockingly, the rule beats equal weight by a factor of 1.24 and posts annual returns that exceed even those once allegedly promised by Bernie Madoff. |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1602.00782&r=fmk |
| By: | Hai-Chuan Xu; Wei Chen; Xiong Xiong; Wei Zhang; Wei-Xing Zhou |
| Abstract: | In order-driven markets, limit-order book (LOB) resiliency is an important microscopic indicator of market quality when the order book is hit by a liquidity shock and plays an essential role in the design of optimal submission strategies of large orders. However, the evolutionary behavior of LOB resilience around liquidity shocks is not well understood empirically. Using order flow data sets of Chinese stocks, we quantify and compare the LOB dynamics characterized by the bid-ask spread, the LOB depth and the order intensity surrounding effective market orders with different aggressiveness. We find that traders are more likely to submit effective market orders when the spreads are relatively low, the same-side depth is high, and the opposite-side depth is low. Such phenomenon is especially significant when the initial spread is 1 tick. Although the resiliency patterns show obvious diversity after different types of market orders, the spread and depth can return to the sample average within 20 best limit updates. The price resiliency behavior is dominant after aggressive market orders, while the price continuation behavior is dominant after less-aggressive market orders. Moreover, the effective market orders produce asymmetrical stimulus to limit orders when the initial spreads equal to 1 tick. Under this case, effective buy market orders attract more buy limit orders and effective sell market orders attract more sell limit orders. The resiliency behavior of spread and depth is linked to limit order intensity. Finally, we present applications for high-frequency arbitrage based on LOB resiliency analysis and find that both long and short arbitrage strategies we design can achieve significantly positive returns. |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1602.00731&r=fmk |
| By: | Ahn, Jung-Hyun (NEOMA Business School); Bignon, Vincent (Banque de France); Breton, Régis (Banque de France); Martin, Antoine (Federal Reserve Bank of New York) |
| Abstract: | We develop a model in which financial intermediaries hold liquidity to protect themselves from shocks. Depending on parameter values, banks may choose to hold too much or too little liquidity on aggregate compared with the socially optimal amount. The model endogenously generates a situation of cash hoarding, leading to the associated market freezes or underinsurance against liquidity choice. The model therefore provides a unified framework for thinking, on the one hand, about policy measures that can reduce hoarding of cash by banks and, on the other hand, about liquidity requirements of the type imposed by the new Basel III regulation. In our model, banks hold tradable and nontradable assets. Nontradable assets are subject to a liquidity shock, and an injection of cash is required for the asset to mature if it is hit by the shock. Banks have access to an interbank market on which they obtain cash against their tradable securities. The quantity of cash obtained on this market is determined endogenously by the market value of the tradable assets and is subject to cash-in-the-market pricing. Banks holding an asset that turns out to be bad may be constrained on the interbank market and therefore may have to interrupt their nontradable project. |
| Keywords: | money market; liquidity regulation; nonconventional monetary policy; cash-in-the-market pricing |
| JEL: | E58 G21 G28 |
| Date: | 2016–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:763&r=fmk |
| By: | Massimiliano Caporin (University of Padova, Italy); Chia-Lin Chang (National Chung Hsing University, Taiwan); Michael McAleer (National Tsing Hua University, Taiwan; Erasmus University Rotterdam, the Netherlands; Complutense University of Madrid, Spain.) |
| Abstract: | The energy sector is one of the most important in the world, so that time series fluctuations in leading energy sources have been analysed widely. As the leading energy commodities are traded on international stock exchanges, the analysis of the fluctuations in stock and financial derivatives prices and returns have also been investigated extensively in recent years. Much of the empirical analysis has concentrated on using daily, weekly or monthly data, with little research based on intra-day data. The paper analyses the relationships among the S&P 500 Index and futures prices, returns and volatility of three leading energy commodities, namely crude oil, natural gas and ethanol, using intra-day data. The detailed analysis of intra-day temporal aggregation in examining returns relationships and volatility spillovers across the equity and energy futures markets, and the effects of overnight returns, volume, realized volatility, asymmetry, and spillovers across the four financial markets, leads to interesting and useful results for decision making and hedging strategies. The empirical results relating to alternative models of mean and variance feedback and asymmetry for intra-daily returns, asymmetry and volatility spillovers, and dynamic conditional correlations and covariances, show that the relationships between the stock market and alternative energy financial derivatives, specifically futures prices and returns, can and do vary according to the trading range, whether daily or overnight effects are considered, and the temporal aggregation and time frequencies that are used. |
| Keywords: | Trading range, Intra-day prices and returns, S&P 500 Index, Crude oil futures, Natural gas futures, Ethanol futures, Overnight returns, Overnight volume, Overnight realized volatility, Asymmetry, Spillovers |
| JEL: | C22 C32 C58 G12 G15 |
| Date: | 2016–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20160006&r=fmk |
| By: | Paul-Olivier Klein (LaRGE Research Center, Université de Strasbourg); Laurent Weill (LaRGE Research Center, Université de Strasbourg) |
| Abstract: | There has been a considerable expansion of corporate bond markets in China in the recent years. The objective of this study is to examine the stock market reaction following bond issuance by Chinese companies. In addition to analyzing for positive or negative reactions to bond issues, we consider the influences of ownership and management characteristics on the stock market reaction. Applying an event-study methodology to a sample of 481 bond issues of 347 Chinese companies over the period 2009–2013, the univariate results show that Chinese bond issues typically generate a positive stock market reaction. The reaction is only significantly positive, however, in the case of central state-owned companies (as opposed to those owned by local or provincial governments). The multivariate results indicate that insider ownership influences stock market reaction to a bond issue, while management characteristics have no discernable impact. |
| Keywords: | China, Emerging Markets, Corporate Bonds, Event Study. |
| JEL: | G14 P34 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2016-01&r=fmk |
| By: | Q. Farooq Akram (Norges Bank (Central Bank of Norway)); Casper Christophersen (European Insurance and Occupational Pensions Authority (EIOPA) and Norges Bank (Central Bank of Norway)) |
| Abstract: | We investigate the effects of central bank liquidity and possible implicit government guarantees against default on Norwegian overnight interbank interest rates. We conduct an econometric study of these interest rates over the period 2006-2009, which includes the sharp fall in interbank trading during the financial crisis. Our findings suggest relatively lower funding costs for banks of systemic importance, particularly for banks with many and valuable linkages to other banks. Moreover, interest rates are found to depend not only on overall liquidity in the interbank market, but on its distribution among banks as well. There is also evidence of stronger effects on interest rates of systemic importance, creditworthiness and liquidity demand and supply factors during the financial crisis. |
| Keywords: | Interbank money market, Interest rates, Systemic importance |
| JEL: | G21 E43 E58 |
| Date: | 2015–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2016_02&r=fmk |