nep-fmk New Economics Papers
on Financial Markets
Issue of 2016‒05‒21
four papers chosen by

  1. Arbitrage without borrowing or short selling? By Mikko S. Pakkanen; Jani Lukkarinen
  2. Quantum theory of securities price formation in financial markets By Jack Sarkissian
  3. Hedging Inflation with Individual US stocks: A long-run portfolio analysis By Georgios Bampinas; Theodore Panagiotidis
  4. Macroeconomic Variables and Stock Price Volatility in Ghana By Prempeh, Kwadwo Boateng

  1. By: Mikko S. Pakkanen (Imperial College London and CREATES); Jani Lukkarinen (University of Helsinki)
    Abstract: We show that a trader, who starts with no initial wealth and is not allowed to borrow money or short sell assets, is theoretically able to attain positive wealth by continuous trading, provided that she has perfect foresight of future asset prices, given by a continuous semimartingale. Such an arbitrage strategy can be constructed as a process of finite variation that satisfies a seemingly innocuous self-financing condition, formulated using a pathwise Riemann-Stieltjes integral. Our result exemplifies the potential intricacies of formulating economically meaningful self-financing conditions in continuous time, when one leaves the conventional arbitrage-free framework.
    Keywords: Short selling, self-financing condition, arbitrage, Riemann-Stieltjes integral, stochastic integral, semimartingale 2010 Mathematics Subject Classification: 60H05, 90G10, 60G44
    JEL: C22 G11 G14
    Date: 2016–04–26
  2. By: Jack Sarkissian
    Abstract: We develop a theory of securities price formation and dynamics based on quantum approach and without presuming any similarities with quantum mechanics. Disorder introduced by trading environment leads to probability distribution of returns that is not a smooth curve, but a speckle-pattern fluctuating in both price coordinate and time. This means that any given return can at times acquire a substantial probability of occurring while remaining low on average in time. Still, due to local character of order interaction during price formation the distribution width grows smoothly, has a minimum value at small time scale and a square root behavior at large time scale. Examples of calibration to market data, both intraday and daily, are provided.
    Date: 2016–04
  3. By: Georgios Bampinas (Department of Economics, University of Macedonia, Greece); Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece; The Rimini Centre for Economic Analysis, Italy)
    Abstract: This paper examines whether individual stocks can act as inflation hedgers. We focus on longer investment horizons and construct in- and out-of-sample portfolios based on the long-run relationship (cointegration) of stock prices with respect to consumer prices. Empirical evidence suggests that investors are better off by holding a portfolio of stocks with higher long-run betas as part of asset selection and allocation strategy. Stocks that outperform inflation tend to be drawn from the Energy and Industrial sectors. Finally, we observe that the companies average inflation hedging ability declined steadily over the past ten years, while the number of firms that hedge inflation has decreased considerably after the recent downturn of the US economy.
    Date: 2016–04
  4. By: Prempeh, Kwadwo Boateng
    Abstract: This study empirically examined the impact of some macroeconomic variables on stock price volatility in the Ghana Stock Exchange (GSE) using annual time series data over the period of 1990-2014. Secondary data on the performance of the stock exchange: GSE-All Shares was obtained from the Ghana stock exchange website whiles that of macroeconomic variables was obtained from the Bank of Ghana website. The macroeconomic variables used in this study are inflation rate, real gross domestic product growth rate and interest rate. The Granger causality test was employed to determine the causal link between stock prices and macroeconomic variables in Ghana. The results of the Granger causality test shows that at 10% significance level, real domestic product rate granger causes stock price but stock price does not granger cause real domestic product rate. There is, therefore, a unidirectional causality running from Real Gross Domestic Product growth rate to stock price The other variables: inflation rate and interest rate do not granger cause stock prices. This shows that a shock in real domestic product growth rate affects stock price volatility in Ghana. The Ghana Stock Exchange should track likely factors that are responsible for stock price volatility. Also, to stabilize stock price movement, real gross domestic product growth rate should be one of the main factors to be addressed apart from other internal factors that affect liquidity such as stock market liquidity and volume of shares. Laws and regulations governing the operations of the stock exchange should be strengthened to protect the interest of buyers and sellers on the stock market. This will increase the confidence of investors as well as boost domestic investor participation and enlarge stock ownership base in the economy.
    Keywords: GSE-All Share Index, inflation, interest rate, Real Gross Domestic Product growth rate, Ghana
    JEL: G10
    Date: 2016–04–09

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