nep-fmk New Economics Papers
on Financial Markets
Issue of 2016‒08‒07
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Time-Varying Crash Risk: The Role of Stock Market Liquidity By Peter Christoffersen; Bruno Feunou; Yoontae Jeon; Chayawat Ornthanalai
  2. Relationships in the Interbank Market By Jonathan Chiu; Cyril Monnet
  3. Asymmetric volatility connectedness on forex markets By Jozef Barunik; Evzen Kocenda; Lukas Vacha
  4. Testing for Financial Market Integration of the Chinese Market with the US Market By Hatemi-J, Abdulnasser; Mustafa, Alan
  5. International portfolio selection on European stock markets based on time-varying betas By José Soares da Fonseca
  6. Asia Bond Monitor - June 2016 By Asian Development Bank (ADB); Asian Development Bank (ADB); Asian Development Bank (ADB); Asian Development Bank (ADB)
  7. The Intraday Market Liquidity of Japanese Government Bond Futures By Naoshi Tsuchida; Toshiaki Watanabe; Toshinao Yoshiba
  8. Financial Markets and Financial Institutions in Russia in 2015 By Abramov Alexander

  1. By: Peter Christoffersen; Bruno Feunou; Yoontae Jeon; Chayawat Ornthanalai
    Abstract: We estimate a continuous-time model with stochastic volatility and dynamic crash probability for the S&P 500 index and find that market illiquidity dominates other factors in explaining the stock market crash risk. While the crash probability is time-varying, its dynamic depends only weakly on return variance once we include market illiquidity as an economic variable in the model. This finding suggests that the relationship between variance and jump risk found in the literature is largely due to their common exposure to market liquidity risk. Our study highlights the importance of equity market frictions in index return dynamics and explains why prior studies find that crash risk increases with market uncertainty level.
    Keywords: Asset Pricing, Econometric and statistical methods, Financial stability
    JEL: G01 G12
    Date: 2016
  2. By: Jonathan Chiu; Cyril Monnet
    Abstract: The market for central bank reserves is mainly over-the-counter and exhibits a core-periphery network structure. This paper develops a model of relationship lending in the unsecured interbank market. In equilibrium, a tiered lending network arises endogenously as banks choose to build relationships to insure against liquidity shocks and to economize on the cost to trade in the interbank market. Relationships matter for banks’ bidding strategies at the central bank auction and introduce a relationship premium that can significantly distort the observed overnight rate. For example, it can explain some anomalies in the level of interest rates—namely, that banks sometimes trade above (below) the central bank’s lending (deposit) rate. The model also helps to explain how monetary policy affects the network structure of the interbank market and its functioning, and how the market responds dynamically to an exit from the floor system. We also use the model to discuss the potential effects of bilateral exposure limits on relationship lending.
    Keywords: Interest rates, Monetary policy implementation, Transmission of monetary policy
    JEL: E4 E5
    Date: 2016
  3. By: Jozef Barunik; Evzen Kocenda; Lukas Vacha
    Abstract: We show how bad and good volatility propagate through forex markets, i.e., we provide evidence for asymmetric volatility connectedness on forex markets. Using high-frequency, intra-day data of the most actively traded currencies over 2007 - 2015 we document the dominating asymmetries in spillovers that are due to bad rather than good volatility. We also show that negative spillovers are chiefly tied to the dragging sovereign debt crisis in Europe while positive spillovers are correlated with the subprime crisis, different monetary policies among key world central banks, and developments on commodities markets. It seems that a combination of monetary and real-economy events is behind the net positive asymmetries in volatility spillovers, while fiscal factors are linked with net negative spillovers.
    Date: 2016–07
  4. By: Hatemi-J, Abdulnasser; Mustafa, Alan
    Abstract: This paper investigates empirically whether or not the financial market of China is integrated with the financial market of the US. Unlike most previous studies on financial market integration, we allow for asymmetry in our investigation. The underlying data is transformed into cumulative partial sums by using a software component that is created by authors in Octave language. By estimating the asymmetric generalized impulse response functions we find that the financial markets of these two biggest economies in the world are linked interactively when the markets are falling. However, no significant impact between the two underlying markets are found when markets are rising. These results support the view that allowing for asymmetry in financial markets is important and it has crucial repercussions for both policy makers and investors.
    Keywords: Financial Market Integration, Asymmetry, Impulses, US, China, Octave
    JEL: C3 G11 G15
    Date: 2016
  5. By: José Soares da Fonseca (Faculdade de Economia da Universidade de Coimbra)
    Abstract: The research presented in this article estimated three asset pricing models, applied to sixteen European stock markets, to create efficient portfolios, based on the solution originally proposed by Elton, Gruber and Padberg (1976, 1978). This solution overcomes the need to solve a mathematical programming problem, as required by the mean-variance approach proposed by Markowitz (1952). The innovative approach proposed consists of extending the original method of Elton et al. to include the market timing and lower partial moments. In the empirical analysis of this article three asset pricing models were estimated and their parameters and risk measures were used to create beta-based efficient portfolios. The first asset pricing model is the standard CAPM, the second model adds an additional variable which represents market timing, and the third model includes two additional variables, one representing market timing, and the other representing lower partial moments. The asset pricing models were estimated by rolling regressions applied to moving samples. Three types of efficient portfolios were constructed and evaluated on a daily basis, each type being related to one of the three asset pricing models estimated. The efficient portfolios were recomposed daily as they benefited from the new parameters that were given by the most recent rolling estimation. The results showed that the beta-based efficient portfolios dominated the equally weighted portfolios and the investment in the European index, which served as benchmarks.
    Keywords: Efficient portfolios, Lower partial moments, Market timing, Time-varying betas. JEL Classification: F36, G11, G15.
    Date: 2016–07
  6. By: Asian Development Bank (ADB); Asian Development Bank (ADB) (Economic Research and Regional Cooperation Department, ADB); Asian Development Bank (ADB) (Economic Research and Regional Cooperation Department, ADB); Asian Development Bank (ADB)
    Abstract: This publication reviews recent developments in East Asian local currency bond markets along with the outlook, risks, and policy options. It covers the 10 members of the Association of Southeast Asian Nations plus the People’s Republic of China; Hong Kong, China; and the Republic of Korea.
    Keywords: bonds, local currency, foreign currency, bond yields, emerging East Asia, bonds outstanding, bond issuance, bond market, foreign investor holdings, People’s Republic of China, Hong Kong, China, Indonesia, Republic of Korea, Malaysia, Philippines, Singapore, Thailand, Viet Nam, credit spreads, government bonds, corporate bonds, US Federal Reserve, G3 currency, interest rate, treasury bonds, treasury bills, central bank, CPI, PPI
    Date: 2016–06
  7. By: Naoshi Tsuchida (Deputy Director and Economist, Institute for Monetary and Economic Studies (currently Financial System and Bank Examination Department), Bank of Japan (E-mail:; Toshiaki Watanabe (Professor, Institute of Economic Research, Hitotsubashi University; Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Toshinao Yoshiba (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: We investigate the intraday market liquidity of the Japanese government bond (JGB) futures. First, we overview the movement of various market liquidity indicators during the past decade, classifying them into four categories: tightness, depth, resiliency, and volume. Second, using the data under the current trade time, we extract their intraday pattern and the autocorrelation. Third, we find that the announcement of economic indicator has a negative effect on these liquidity indicators while the monetary policy announcement and the surprise of economic indicator have a positive effect on volume indicators. Fourth, we show that the shock persistence in liquidity indicators rises around April 2013, and the increased persistence remains in some liquidity indicators even several months after April 2013.
    Keywords: Japanese government bond (JGB), market liquidity, liquidity indicator, transaction data
    JEL: C32 G12 G14
    Date: 2016–07
  8. By: Abramov Alexander (RANEPA)
    Abstract: The year 2015 saw a continuation of the longest slump in the history of Russia's stock market, which had started in May 2008. In 1997–1998, after the RTS Index had dropped by 91.3%, and the MICEX Index - by 73.0%, from their pre-crisis highs over a period that lasted slightly more than a year, they both managed to recover their former quotes in 58 and 8 months respectively. Now, as of February 2016, after their plummet during the acute phase of the 2008 crisis, both these stock indices have never recovered: the MICEX Index over the period of 88 months, and the RTS Index – 85 months.
    Keywords: Russian economy, financial markets, financial institutions
    JEL: G01 G12 G18 G21 G24 G28 G32 G33
    Date: 2016

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