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on Financial Markets |
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Issue of 2016‒04‒23
four papers chosen by |
| By: | Kim, Jae |
| Abstract: | This paper examines the validity of statistical significance reported in the seminal studies of the weather effect on stock return. It is found that their research design is statistically flawed and seriously biased against the null hypothesis of no effect. This, coupled with the test statistics inflated by massive sample sizes, strongly suggests that the statistical significance is spurious as an outcome of Type I error. The alternatives to the p-value criterion for statistical significance soundly support the null hypothesis of no weather effect. As an application, the effect of daily sunspot numbers on stock return is examined. Under the same research design as that of a seminal study, the number of sunspots is found to be highly statistically significant although its economic impact on stock return is negligible. |
| Keywords: | Anomaly, Behavioural finance, Data mining, Market efficiency, Sunspot numbers, Type I error, Weather |
| JEL: | G12 G14 |
| Date: | 2016–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70692&r=fmk |
| By: | Carmen Broto (Banco de España); Matías Lamas (Banco de España) |
| Abstract: | We propose a new synthetic liquidity indicator that summarises the data on a broad set of market liquidity measures both for sovereign and corporate fixed income markets in the US. Our index is based on 17 variables that cover the main dimensions of market liquidity. The methodology used to calculate the index consists of two steps. First, a transformation of the individual liquidity measures is made, based on the methodology proposed by Holló et al. (2012) for the CISS (Composite Indicator of Systemic Stress). The transformed variables are then weighted using a principal component analysis. The indicator shows that liquidity in US fixed income markets has been impaired after the global financial crisis, mainly as a result of weaker liquidity conditions in US Treasury markets, whereas those in the corporate debt market remained stable. |
| Keywords: | market liquidity, synthetic index, principal component analysis, US fixed income markets. |
| JEL: | G10 G15 C43 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1608&r=fmk |
| By: | Braun-Munzinger, Karen (Bank of England); Liu, Zijun (Bank of England); Turrell, Arthur (Bank of England) |
| Abstract: | We construct a heterogeneous agent-based model of the corporate bond market capturing the interaction of market maker behaviour, fund trading strategies, and cash allocation by investors in funds to study feedback effects and the impact of market changes. The model parameters are calibrated against empirical data on US corporate bond trading. Where available, inputs are taken from market data. Others are calibrated through matching statistical features of market returns such as auto-correlations, volatility and fat tails. We use the model to explore the impact of shocks. We find that the sensitivity of the market maker to demand and the degree to which momentum traders are active strongly influence the over and undershooting of yields in response to a shock. This suggests that correlation in funds’ trading strategies can exacerbate extreme price movements and contribute to the procyclicality of financial markets. While the behaviour of investors in funds based on past experience plays a comparatively smaller role in model dynamics, it represents another source of amplification which could be particularly problematic if investors respond to a shock with greater risk aversion. Simple measures to reduce the speed with which investors can redeem investments can reduce the extent of yield dislocation. We also explore the impact of the growth in passive investment, and find that it increases the tail risk of big yield dislocations after shocks, though, on average, volatility may be reduced. |
| Keywords: | Agent-based model; corporate bond market; trading strategies |
| JEL: | C63 G11 G12 G17 |
| Date: | 2016–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0592&r=fmk |
| By: | Elif Akben-Selcuk (Kadir Has University) |
| Abstract: | The objective of this study is to investigate the dynamic relation between daily BIST-100 index returns and percentage changes in Borsa Istanbul trading volume. A vector autoregression (VAR) model is constructed to test for Granger causality between stock prices and volume. The causality structure of the two variables is analyzed using the approach by Engle-Granger (1987). Analysis results show the existence of univariate causality from stock returns to changes in trading volume. This implies that past stock prices can be used to predict futures changes in trading volume. Furthermore, the results suggest that Borsa Istanbul is still inefficient since information contained in past prices is useful for making forecasts. |
| Keywords: | Granger causality, stock prices, trading volume, Turkey. |
| JEL: | G00 G12 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:3505908&r=fmk |