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on Financial Markets |
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Issue of 2016‒04‒16
five papers chosen by |
| By: | Jon Danielsson; Marcela Valenzuela; Ilknur Zer |
| Abstract: | We study the effects of volatility on the probability of financial crises by constructing a cross-country database spanning 211 years. We find that volatility is not a significant predictor of crises whereas unexpected high and low volatilities are. Low volatility leads to banking crises and both high and low volatilities make stock market crises more likely, while volatility in any form has little impact on currency crises. The volatility-crisis relationship becomes stronger when financial markets are more prominent and less regulated. Finally, low-risk environments are conducive to greater buildup of risk-taking, providing empirical support for the Minsky hypothesis. |
| Keywords: | Stock market volatility; financial crises predictability; volatility paradox; minsky hypothesis; financial instability; risk taking |
| JEL: | J1 F3 G3 |
| Date: | 2016–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:66046&r=fmk |
| By: | Schmitt, Noemi; Westerhoff, Frank |
| Abstract: | We propose a simple agent-based financial market model in which speculators follow a linear mix of technical and fundamental trading rules to determine their orders. Volatility clustering arises in our model due to speculators' herding behavior. In case of heightened uncertainty, speculators observe other speculators' actions more closely. Since speculators' trading behavior then becomes less heterogeneous, the market maker faces a less balanced excess demand and consequently adjusts prices more strongly. Estimating our model using the method of simulated moments reveals that it is able to explain a number of stylized facts of financial markets quite well. Keywords: Agent-based financial market models, stylized facts of financial markets, technical and fundamental analysis, heterogeneity, herding behavior, method of simulated moments. |
| JEL: | C63 D84 G15 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bamber:107&r=fmk |
| By: | Luis A. Gil-Alana (University of Navarra, Faculty of Economics and ICS (NCID), Spain); Rangan Gupta (Department of Economics, University of Pretoria); Olanrewaju I. Shittu (Department of Statistics, University of Ibadan, Ibadan, Nigeria); OlaOluwa S. Yaya (Department of Statistics, University of Ibadan, Ibadan, Nigeria) |
| Abstract: | We investigate financial market efficiency in the time series of four daily Baltic stock market indices namely Baltic Benchmark Gross Index (OMXBBGI), all share index of Tallin-Lithuanian (OMXT), all share index of Riga (OMXR) and all share index of Vilnius (OMXV), based on historical data from 1 January, 2000 to 22 January 2016. We use fractional integration methods to test the hypothesis of efficiency. Realizing that long-memory estimation could be spurious in the presence of structural breaks, we identify bull and bear market phases from each of the time series. Applying the fractional integration approach, we find that the random walk hypothesis of market efficiency is generally not rejected in the overall and at two bull and one bear sub-samples of the four Baltic stock indices. The volatility at the bear markets of these stocks persists more than the volatility at the bull markets. Our results therefore provide evidence of weak form of efficiency in the Baltic stock markets, with some exceptions. |
| Keywords: | Baltic stocks, Bull and bear phases, Efficient market hypothesis, Fractional cointegration, Fractional integration, Volatility |
| JEL: | C22 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201617&r=fmk |
| By: | Hellström, Jörgen (Umeå School of Business and Economics); Liu, Yuna (Department of Economics, Umeå University); Sjögren, Tomas (Department of Economics, Umeå University) |
| Abstract: | In this paper we study whether the creation of a uniform Nordic and Baltic stock trading platform has affected weak-form information efficiency. In the study, a time-varying measure of return predictability for individual stocks is used in a panel-data setting to test for stock market merger effects. The results indicate that the stock market consolidations have had a positive effect on the information efficiency and turnover for an average firm. The merger effects are, however, asymmetrically distributed which indicates a flight to liquidity effect in the sense that relatively large (small) firms located on relatively large (small) markets experience an improved (reduced) information efficiency and turnover. Although the results indicate that changes in the level of investor attention (measured by turnover) may explain part of the changes in information efficiency, they also lend support to the hypothesis that merger effects may partially be driven by changes in the composition of informed versus uninformed investors following a stock. |
| Keywords: | Time-varying return predictability; market structure |
| JEL: | G12 G14 G15 |
| Date: | 2016–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0923&r=fmk |
| By: | Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Turkey and Department of Economics, University of Pretoria, South Africa.); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria); Mark Wohar (Department of Economics, University of Nebraska-Omaha, USA and Loughborough University, UK) |
| Abstract: | This paper studies the existence and timing of bubbles in South Africa’s stock market. An empirical model of bubble formation is tested against three competing models of asset price returns that rule out the existence of bubbles. The model controls for nonlinearities inherent in asset price returns by allowing for the existence of multiple regimes. The regimes are all related to the size of the bubble and allows for a bubble to persist and survive over a significant period of time – as was observed with the housing market before the financial crisis in 2008/09. Two regimes are identified – a bubble survival regime and a bubble collapse regime. The bubble model fits the data better than the competing models and suggests that the formation and existence of periodically collapsing bubbles are a reality. The model identifies probabilities of survival and collapses that are directly related to the size of the bubble relative to the fundamental price of the stock market. The results show that stock market returns ought to decrease as the size of the bubble grows, which could burst the bubble and cause a collapse in the stock exchange – far below the correction required to return to equilibrium. |
| Keywords: | Bubbles, Regime Switching, Collapse, JSE |
| JEL: | C12 C22 G12 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201624&r=fmk |