nep-fmk New Economics Papers
on Financial Markets
Issue of 2016‒02‒17
seven papers chosen by

  1. Nonlinear Expectation Formation in the U.S. Stock Market By Reitz, Stefan; Pierdzioch, Christian; Rülke, Jan-Christoph
  2. A Shadow-Rate Term Structure Model for the Euro Area By Lemke, Wolfgang; Vladu, Andreea
  3. Regional Economic Activity and Stock Returns By Smajlbegovic, Esad
  4. Stock liquidity in forefront of anticipated announcements By Gelman, Sergey; Lushchikov, Roman
  5. Advertising, Attention, and Financial Markets By Focke, Florens; Ruenzi, Stefan; Ungeheuer, Michael
  6. Advertisement-Financed Credit Ratings By Siemering, Christian
  7. Debt maturity and the liquidity of secondary debt markets By Max Bruche; Anatoli Segura

  1. By: Reitz, Stefan; Pierdzioch, Christian; Rülke, Jan-Christoph
    Abstract: This research applies data from the Livingston survey to study the time variation in the sentiment of U.S. stock-market forecasters. A Panel Smooth Transition Regression (STR) model is estimated to identify the importance of market conditions summarized by stock-market misalignments and recent returns for the formation of regressive and extrapolative expectations. We find that survey participants expect little mean reversion in times of large misalignments reflecting the observed substantial and persistent swings in stock prices. Recent returns are negatively extrapolated depending on the sign and the size of the return revealing a contrarian behavior of forecasters in the presence of market exuberance.
    JEL: C15 E37 G15
    Date: 2015
  2. By: Lemke, Wolfgang; Vladu, Andreea
    Abstract: We model the dynamics of the euro area yield curve using a shadow-rate term structure model (SRTSM), with particular attention to the period since late 2011 when interest rates have been at the lowest level since the inception of EMU. The shadow rate is driven by latent factors with linear Gaussian dynamics, while the actual short rate is the maximum between the shadow rate and a lower bound (estimated at 10 bps) so that interest rates will never fall below that level. The estimated SRTSM performs attractively with respect to cross-sectional fit and forecast performance. The model implies that since mid-2012 the median horizon when future one-month rates would return to 50 bps has been ranging between about 25 and 40 months. Deriving such lift-off timing instead from the simple metric of the forward curve crossing 50 bps would underestimate the SRTSM-implied median timing by between 5 to 15 months. As a novelty in the literature, we analyze the effect of a downward shift in the lower bound on the yield curve: for short maturities, rates decrease one-to-one with a drop in the lower bound, while the effect diminishes for longer maturities. The shift-down in the euro area yield curve between April and June 2014 appears to partially reflect such a drop in the (perceived) lower bound.
    JEL: G12 C32 E43
    Date: 2015
  3. By: Smajlbegovic, Esad
    Abstract: This study analyzes the impact of regional economic conditions on 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 regional economic activity. Using this proxy, I find that economic conditions of firm-relevant U.S. regions positively influence 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. Additionally, these results indicate that information arising from all relevant states matters over and above the information content of the mere headquarter state. Furthermore, I show that forecasts on regional economic activity predict stock returns. A zero-cost trading strategy based on this new predictive variable generates a risk-adjusted return of 6.3 (8.3) percent per year using an equal-weighted (value-weighted) portfolio. 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, this study shows that information on regional economic activity is gradually incorporated into stock prices and that the return predictability is stronger among difficult-to-arbitrage firms.
    JEL: G12 G14 R11
    Date: 2015
  4. By: Gelman, Sergey; Lushchikov, Roman
    Abstract: The paper studies the effects of anticipated earnings announcements on liquidity before the earnings announcement day, utilizing full limit order book data. We find very convincing supportive evidence of deteriorating liquidity due to the increase in information asymmetry, which is in line with existing literature. We contribute to the literature showing that supply and demand elasticities, and hence overall market depth, are much stronger adversely affected, as best bid and best ask quotes would suggest.
    JEL: G14 G12 G30
    Date: 2015
  5. By: Focke, Florens; Ruenzi, Stefan; Ungeheuer, Michael
    Abstract: We investigate the impact of product market advertising on investor attention and financial market outcomes. Using daily advertising data allows us to identify short-term effects of advertising. We measure daily investor attention based the company's number of Wikipedia page views. We show that TV and newspaper advertising positively impacts short-term investor attention. It also positively impacts turnover and liquidity, but the effects are not economically significant. Most importantly, asset prices are not influenced by advertising in the short run. These findings are different from studies using yearly advertising expenditures and suggest that attempts to temporarily inflate stock returns via short-term adjustments to advertising are ineffective.
    JEL: G10 G14 M37
    Date: 2015
  6. By: Siemering, Christian
    Abstract: Traditional business models of credit rating agencies (CRAs) are criticized for creating incentives for misreporting. This paper investigates a potential alternative in which CRAs receive revenue from advertisement only. We use a two-period Bayesian reputation model and show that CRAs will shirk when their reputation is either very high or very low. When reputation is at a medium level, the prospect of exploiting better reputation in the future might discipline CRAs to exert high effort in the present. However, when misreporting is possible, the CRA will always shirk and conduct either rating inflation or deflation with positive probability.
    JEL: G24 D82 L15
    Date: 2015
  7. By: Max Bruche (Cass Business School); Anatoli Segura (Bank of Italy)
    Abstract: We develop an equilibrium model of the debt maturity choice of firms, in the presence of fixed issuance costs in the primary debt market, and search frictions in the secondary debt market. Liquidity in the secondary market is related to the ratio of buyers to sellers, which is determined in equilibrium via the free entry of buyers. Short maturities improve the bargaining position of sellers in the secondary debt market and hence reduce the interest rate firms need to offer in the primary market. Long maturities reduce re-issuance costs. The optimally chosen maturity trades off both considerations. We find that the laissez-faire equilibrium exhibits inefficiently short maturity choices because an individual firm does not internalize that choosing a longer maturity increases the expected gains from trade in the secondary market, which attracts more buyers, and hence also facilitates the sale of debt issued by other firms.
    Keywords: debt maturity, search, liquidity
    JEL: G12 G32
    Date: 2016–01

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