nep-fmk New Economics Papers
on Financial Markets
Issue of 2016‒04‒09
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Stock Return Predictability: Evaluation based on prediction intervals By Amélie Charles; Olivier Darné; Jae H. Kim
  2. Cash Inflow and Trading Horizon in Asset Markets By Michael Razen; Jürgen Huber; Michael Kirchler
  3. Does socially responsible mutual fund performance vary over the business cycle? New insights on the role of ethical strategy focus and green industry idiosyncratic risk By Juan Carlos Matallín-Sáez; Amparo Soler-Domínguez; Emili Tortosa-Ausina
  4. Formation of the Credit Rating Agency Regulation in Russia By Anton S. Selivanovsky

  1. 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 (La Trobe University [Melbourne])
    Abstract: This paper evaluates the predictability of monthly stock return using out-of-sample (multi-step ahead and dynamic) prediction intervals. Past studies have exclusively used point forecasts, which are of limited value since they carry no information about the intrinsic predictive uncertainty associated. We compare empirical performances of alternative prediction intervals for stock return generated from a naive model, univariate autoregressive model, and multivariate model (predictive regression and VAR), using the U.S. data from 1926. For evaluation free from data snooping bias, we adopt moving sub-sample windows of different lengths. It is found that the naive model often provides the most informative prediction intervals, outperforming those generated from the univariate model and multivariate models incorporating a range of economic and financial predictors. This strongly suggests that the U.S. stock market has been informationally efficient in the weak-form as well as in the semi-strong form, subject to the information set considered in this study.
    Keywords: Autoregressive Model, Bootstrapping, Financial Ratios, Forecasting, Interval Score, Market Efficiency
    Date: 2016–03–30
  2. By: Michael Razen; Jürgen Huber; Michael Kirchler
    Abstract: It is conjectured that one of the major ingredients of historic financial bubbles was the inflow of money in various forms. We run 36 laboratory asset markets and investigate the joint effect of cash inflow and trading horizon on price efficiency. We show that only markets with cash inflow and long trading horizon exhibit bubbles and crashes. We also observe that markets with extended trading horizon but without cash inflow and markets with shorter trading horizon do not trigger bubbles. Finally, we report that beliefs about prices and, importantly, about (constant) fundamentals follow bubble patterns as well.
    Keywords: experimental finance, cash inflow, trading horizon, backward induction, asset market, price efficiency
    JEL: C92 D84 G10
    Date: 2016–03
  3. By: Juan Carlos Matallín-Sáez (Department of Finance & Accounting, Universitat Jaume I, Castellón, Spain); Amparo Soler-Domínguez (Department of Finance & Accounting, Universitat Jaume I, Castellón, Spain); Emili Tortosa-Ausina (IVIE, Valencia and Department of Economics, Universidad Jaume I, Castellón, Spain)
    Abstract: This paper analyses the performance of US social responsible (SR) mutual funds in relation to the fund’s ethical strategy focus and whether the business cycle is in a state of expansion or recession. Our results show that in aggregated terms the abnormal performance of SR funds is negative and there are no significant differences based on their ethical strategy focus: environmental, ESG, religious and undefined. In general we also find no significant differences in performance according the state of the business cycle. In terms of methodology our analysis shows the relevance of considering a benchmark to cover idiosyncratic risks linked to the asset classes in which the fund invests according to its ethical commitments. This effect is especially relevant in the case of environmental funds due to the poor performance of the renewable energy industry since the 2008 financial crisis as a result of changes in green government policy and lower oil prices. Thus, part of the mutual fund performance will not be linked to managers but rather to the behaviour of these asset classes.
    Keywords: Mutual fund, performance, business cycle, environmental, ESG, SRI
    JEL: G23 G11 M14 Q56
    Date: 2016
  4. By: Anton S. Selivanovsky (National Research University Higher School of Economics)
    Abstract: This Working Paper is dedicated to the new system of legal regulation of credit rating agency (hereinafter “CRA”) activity in Russia. The main focus of the new rules is administrative regulation and rigid control of procedural issues by the Russian mega-regulator for financial markets. The author criticizes current legislation and argues that such rules will obstruct CRA activity and adversely affect protection of investors’ and creditors’ rights, and will ultimately lead to an increase in transaction costs. It is necessary to continue work on CRA regulation in order to develop effective mechanisms to ensure a balance of interests among parties to the credit rating contract, and ensure that investors and the regulator take into account not only legal, but also economic, managerial, organizational and a number of other issues. Regulation of CRA focused only on rigid control of procedural issues by the Bank of Russia will not lead to the desired result. CRA regulation should instead be "delicate and fine."
    Keywords: credit rating agencies, securities market, conflict of interests, regulation of credit rating agencies, liability of rating agencies
    JEL: Z
    Date: 2016

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