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on Financial Markets |
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Issue of 2016‒08‒28
four papers chosen by |
| By: | Robert P. Bartlett, III; Justin McCrary |
| Abstract: | We use new timestamp data from the two Securities Information Processors (SIPs) to examine SIP reporting latencies for quote and trade reports. Reporting latencies average 1.13 milliseconds for quotes and 22.84 milliseconds for trades. Despite these latencies, liquidity-taking orders gain on average $0.0002 per share when priced at the SIP-reported national best bid or offer (NBBO) rather than the NBBO calculated using exchanges’ direct data feeds. Trading surrounding SIP-priced trades shows little evidence that fast traders initiate these liquidity-taking orders to pick-off stale quotes. These findings contradict claims that fast traders systematically exploit traders who transact at the SIP NBBO. |
| JEL: | G10 G15 G18 G23 G28 K22 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22551&r=fmk |
| By: | Ben Ammar, Semir |
| Abstract: | Property-casualty (P&C) insurers are exposed to rare but severe natural disasters. This paper analyzes the relation between catastrophe risk and the implied volatility smile of insurance stock options. We find that the slope is significantly steeper compared to non-financials and other financial institutions. We show that this effect has increased over time, suggesting a higher risk compensation for catastrophic events. We are able to link the insurance-specific tail risk component derived from options with the risk spread from catastrophe bonds. Our results provide an accurate, high-frequency calculation for catastrophe risk linking the traditional derivatives market with insurance-linked securities (ILS). |
| Keywords: | Implied volatility, Options, Catastrophe risk, Tail risk, Natural disasters |
| JEL: | G12 G13 G14 G22 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:usg:sfwpfi:2016:17&r=fmk |
| By: | Brauning, Falk (Federal Reserve Bank of Boston); Fecht, Falko (Frankfurt School of Finance & Management) |
| Abstract: | We empirically investigate the effect that relationship lending has on the availability and pricing of interbank liquidity. Our analysis is based on a daily panel of unsecured overnight loans between 1,079 distinct German bank pairs from March 2006 to November 2007, a period that includes the 2007 liquidity crisis that marked the beginning of the 2007/08 global financial crisis. We find that (i) relationship lenders are more likely to provide liquidity to their closest borrowers, (ii) particularly opaque borrowers obtain liquidity at lower rates when borrowing from their relationship lenders, and (iii) during the crisis, relationship lenders provided cheaper loans to their closest borrowers. Our results hold after controlling for search frictions as well as a large set of (time-varying) bank and bank-pair control variables and fixed effects. While we find some indication that lending relationships help banks reduce search frictions in the over-the-counter interbank market, our results establish that bank-pair relationships have a significant impact on interbank credit availability and pricing due to mitigating uncertainty about counterparty credit quality. |
| Keywords: | interbank market; relationship lending; financial crisis; central counterparty; financial contagion |
| JEL: | D61 E44 G10 G21 |
| Date: | 2016–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:16-7&r=fmk |
| By: | García, Juan Angel; Werner, Sebastian E. V. |
| Abstract: | This paper investigates the power of macroeconomic factors to explain euro area bond risk premia using (i) a large dataset that captures the nowadays data-rich environment (ii) the Elastic Net variable selection. We find that macroeconomic factors, in particular economic activity and sentiment indicators, explain 40% of the variability of risk premia before the crisis, and up to 55% during the financial crisis, and both for core countries (from 40% to 60%) and periphery countries (from 35% to 44%). Moreover, macroeconomic factor models clearly outperform financial indicators like the CP-factor and credit default swap (CDS) premia, even in periods of significant market turbulence. JEL Classification: E43, E44, G01, G12, C52, C55 |
| Keywords: | bond risk premium, financial crisis, macro factors, model selection, variable selection |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161938&r=fmk |