nep-fmk New Economics Papers
on Financial Markets
Issue of 2016‒03‒29
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. How are VIX and Stock Index ETF Related? By Chia-Lin Chang; Tai-Lin Hsieh; Michael McAleer
  2. Stock prices, inflation and inflation uncertainty in the U.S.: Testing the long-run relationship considering Dow Jones sector indexes By Claudiu Albulescu; Christian Aubin; Daniel Goyeau
  3. What Makes US Government Bonds Safe Assets? By Zhiguo He; Arvind Krishnamurthy; Konstantin Milbradt
  4. The Political Determinants of Government Bond Holdings By Eichler, Stefan; Plaga, Timo
  5. The Impacts of Oil Price Shocks on Stock Market Volatility: Evidence from the G7 Countries By Andrea Bastianin; Francesca Conti; Matteo Manera

  1. By: Chia-Lin Chang (Department of Applied Economics Department of Finance National Chung Hsing University, Taiwan); Tai-Lin Hsieh (Department of Applied Economics National Chung Hsing University Taichung, Taiwan); Michael McAleer (Department of Quantitative Finance National Tsing Hua University, Taiwan.)
    Abstract: As stock market indexes are not tradeable, the importance and trading volume of Exchange Traded Funds (ETFs) cannot be understated. ETFs track and attempt to replicate the performance of a specific index. Numerous studies have demonstrated a strong relationship between the S&P500 Composite Index and the Volatility Index (VIX), but few empirical studies have focused on the relationship between VIX and ETF returns. The purpose of the paper is to investigate whether VIX returns affect ETF returns by using vector autoregressive (VAR) models to determine whether daily VIX returns with different moving average processes affect ETF returns. The ARCH-LM test shows conditional heteroskedasticity in the estimation of ETF returns, so that the diagonal BEKK model is used to accommodate multivariate conditional heteroskedasticity in the VAR estimates of ETF returns. Daily data on ETF returns that follow different stock indexes in the USA and Europe are used in the empirical analysis. The estimates show that daily VIX returns have: (1) significant negative effects on European ETF returns in the short run; (2) stronger significant effects on single market ETF returns than on European ETF returns; and (3) lower impacts on the European ETF returns than on S&P500 returns.
    Keywords: Stock market indexes, Exchange Traded Funds, Volatility Index (VIX), Vector autoregressions, Moving average processes, Conditional heteroskedasticity, Diagonal BEKK.
    JEL: C32 C58 G12 G15
    Date: 2016–02
  2. By: Claudiu Albulescu (UPT); Christian Aubin (CRIEF); Daniel Goyeau (CRIEF)
    Abstract: We test for the long-run relationship between stock prices, inflation and its uncertainty for different U.S. sector stock indexes, over the period 2002M7 to 2015M10. For this purpose we use a cointegration analysis with one structural break to capture the crisis effect, and we assess the inflation uncertainty based on a time-varying unobserved component model. In line with recent empirical studies we discover that in the long-run, the inflation and its uncertainty negatively impact the stock prices, opposed to the well-known Fisher effect. In addition we show that for several sector stock indexes the negative effect of inflation and its uncertainty vanishes after the crisis setup. However, in the short-run the results provide evidence in the favor of a negative impact of uncertainty, while the inflation has no significant influence on stock prices, except for the consumption indexes. The consideration of business cycle effects confirms our findings, which proves that the results are robust, both for the long-and the short-run relationships.
    Date: 2016–03
  3. By: Zhiguo He; Arvind Krishnamurthy; Konstantin Milbradt
    Abstract: US government bonds are widely considered to be the world’s safe store of value. US government bonds are a large fraction of safe asset portfolios, such as the porfolios of many central banks. The world demand for safe assets leads to low yields on US Treasury bonds. During periods of economic turmoil, such as the events of 2008, these yields fall even further. Moreover, despite the fact that US government debt has risen substantially relative to US GDP over the last decade, US government bond yields have not risen. What makes US government bonds “safe assets”? Our answer in short is that safe asset investors have nowhere else to go but invest in US government bonds.
    JEL: E0 F0 F3 G0 G11
    Date: 2016–02
  4. By: Eichler, Stefan; Plaga, Timo
    Abstract: This paper analyzes the link between political factors and sovereign bond holdings of US investors in 60 countries over the 2003-2013 period. We find that, in general, US investors hold more bonds in countries with few political constraints on the government. Moreover, US investors respond to increased uncertainty around major elections by reducing government bond holdings. These effects are particularly significant in democratic regimes and countries with sound institutions, which enable effective implementation of fiscal consolidation measures or economic reforms. In countries characterized by high current default risk or a sovereign default history, US investors show a tendency towards favoring higher political constraints as this makes sovereign default more difficult for the government. Political instability, characterized by the fluctuation in political veto players, reduces US investment in government bonds. This effect is more pronounced in countries with low sovereign solvency.
    Keywords: Government bond portfolio, Political factors, Treasury International Capital data, PPML
    JEL: G11 G15 G18 H63 H11
    Date: 2016–03
  5. By: Andrea Bastianin (University of Milan and Fondazione Eni Enrico Mattei); Francesca Conti (Fondazione Eni Enrico Mattei); Matteo Manera (University of Milan-Bicocca and Fondazione Eni Enrico Mattei)
    Abstract: We study the effects of crude oil price shocks on the stock market volatility of the G7 economies. We rely on a structural VAR model to identify the causes underlying the oil price shocks and gauge the differential impact that oil supply and oil demand innovations have on financial volatility. We show that stock market volatility does not respond to oil supply shocks. On the contrary, demand shocks impact significantly on the variability of the G7 stock markets.
    Keywords: Volatility, Oil Price Shocks, Oil Price, Stock Prices, Structural VAR
    JEL: C32 C58 E44 Q41 Q43
    Date: 2015–10

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