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on Financial Markets |
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Issue of 2016‒05‒28
five papers chosen by |
| By: | Rosengren, Eric S. (Federal Reserve Bank of Boston) |
| Abstract: | In a speech at Central Connecticut State University, Boston Fed President Eric Rosengren said the U.S. economy is fundamentally sound, weathering headwinds from abroad, and likely to perform better than the domestic economies of most trading partners. |
| Date: | 2016–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbsp:106&r=fmk |
| By: | Dehua Shen (Department of Economics, Universitat Jaume I, Castellón, Spain); Xiao Li (College of Management and Economics, Tianjin University, China); Andrea Teglio (Department of Economics, Universitat Jaume I, Castellón, Spain); Wei Zhang (College of Management and Economics, Tianjin University, China) |
| Abstract: | Since the familiarity-based investment plays an important role in portfolio construction, mounting literature has investigated the nature of familiarity and summarized two contradicting hypotheses: information-based trading and behavioral heuristic explanation. However, existing studies leave blank for this issue in Chinese stock market. In this paper, we prove that the familiarity-based investment is driven by information through utilizing the “Approach Your Company, Know Your Investment” activities organized by Shenzhen Stock Exchange. In particular, the empirical results show that investors holding stocks with high degrees of familiarity earn more abnormal returns compared with those investing in stocks with less familiarity and such discrepancy remains in the subsequent 50 trading days. Moreover, we observe that the information-based familiarity results in significant decreases in both liquidity and volatility. All these findings not only complement the existing literature through providing alternative evidence for the nature of familiarity in developing markets, but also have implications for both individual investors and policy makers. |
| Keywords: | Familiarity, Information advantages, Home bias, Psychological bias, Liquidity and volatility |
| JEL: | G11 G14 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:jau:wpaper:2016/08&r=fmk |
| By: | Kenichiro McAlinn; Asahi Ushio; Teruo Nakatsuma |
| Abstract: | We discuss generalizing the correlation between an asset's return and its volatility-- the leverage effect-- in the context of stochastic volatility. While it is a long standing consensus that leverage effects exist, empirical evidence paradoxically show that most individual stocks do not exhibit this correlation. We extend the standard linear correlation to a nonlinear generalization in order to capture the complex nature of this effect using a newly developed Bayesian sequential computation method. Examining 615 stocks that comprise the S&P500 and Nikkei 225, we find nearly all of the stocks to exhibit leverage effects, of which most would have been lost under the standard linear assumption. We further the analysis by exploring whether there are clear traits that characterize the complexity of the leverage effect. |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1605.06482&r=fmk |
| By: | Ivan Petzev; Andreas Schrimpf; Alexander F. Wagner |
| Abstract: | We show that in recent years global factor models have been catching up significantly with their local counterparts in terms of explanatory power (R2) for international stock returns. This catch-up is driven by a rise in global factor betas, not a rise in factor volatilities, suggesting that the effect is likely to be permanent. Yet, there is no conclusive evidence for a global factor model catch-up in terms of pricing errors (alpha) or a convergence in country-specific factor premia. These findings suggest that global financial markets have progressed surprisingly little towards fully integrated pricing, different from what should be expected under financial market integration. We discuss alternative explanations for these patterns and assess implications for practice. |
| Keywords: | International asset pricing, size, value, momentum, financial integration, factor models |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:560&r=fmk |
| By: | Jiao Li |
| Abstract: | This paper studies the optimal VIX futures trading problems under a regime-switching model. We consider the VIX as mean reversion dynamics with dependence on the regime that switches among a finite number of states. For the trading strategies, we analyze the timings and sequences of the investor's market participation, which leads to several corresponding coupled system of variational inequalities. The numerical approach is developed to solve these optimal double stopping problems by using projected-successive-over-relaxation (PSOR) method with Crank-Nicolson scheme. We illustrate the optimal boundaries via numerical examples of two-state Markov chain model. In particular, we examine the impacts of transaction costs and regime-switching timings on the VIX futures trading strategies. |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1605.07945&r=fmk |