nep-fmk New Economics Papers
on Financial Markets
Issue of 2016‒10‒02
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. "Minsky at Basel: A Global Cap to Build an Effective Postcrisis Banking Supervision Framework" By Giuseppe Mastromatteo; Giuseppe Mastromatteo
  2. Risk-Consistent Conditional Systemic Risk Measures By Hannes Hoffmann; Thilo Meyer-Brandis; Gregor Svindland
  3. Taking Orders and Taking Notes: Dealer Information Sharing in Treasury Markets By Boyarchenko, Nina; Lucca, David O; Veldkamp, Laura
  4. Does Geopolitical Risks Predict Stock Returns and Volatility of Leading Defense Companies? Evidence from a Nonparametric Approach By Nicholas Apergis; Matteo Bonato; Rangan Gupta; Clement Kyei
  5. Short Maturity Asian Options in Local Volatility Models By Dan Pirjol; Lingjiong Zhu
  6. Volatility Contagion across the Equity Markets of Developed and Emerging Market Economies By Hattori, Masazumi; Shim, Ilhyock; Sugihara, Yoshihiko
  7. The stock market effects of a securities transaction tax: quasi-experimental evidence from Italy By Cappelletti, Giuseppe; Guazzarotti, Giovanni; Tommasino, Pietro

  1. By: Giuseppe Mastromatteo; Giuseppe Mastromatteo
    Abstract: The global financial crisis shattered the conventional wisdom about how financial markets work and how to regulate them. Authorities intervened to stop the panic -- short-term pragmatism that spoke volumes about the robustness of mainstream economics. However, their very success in taming the collapse reduced efforts to radically change the "big bank" business model and lessened the possibility of serious banking reform -- meaning that a strong and possibly even bigger financial crisis is inevitable in the future. We think an overall alternative is needed and at hand: Minsky's theories on investment, financial stability, the growing weight of the financial sector, and the role of the state. Building on this legacy, it is possible to analyze which aspects of the post-2008 reforms actually work. In this respect, we argue that the only effective solution is to impose a global cap on the absolute size of banks.
    Keywords: Banking Regulation; Financial Stability; Minsky; Basel 3
    JEL: E12 G01 G28
    Date: 2016–09
  2. By: Hannes Hoffmann; Thilo Meyer-Brandis; Gregor Svindland
    Abstract: We axiomatically introduce risk-consistent conditional systemic risk measures defined on multidimensional risks. This class consists of those conditional systemic risk measures which can be decomposed into a state-wise conditional aggregation and a univariate conditional risk measure. Our studies extend known results for unconditional risk measures on finite state spaces. We argue in favor of a conditional framework on general probability spaces for assessing systemic risk. Mathematically, the problem reduces to selecting a realization of a random field with suitable properties. Moreover, our approach covers many prominent examples of systemic risk measures from the literature and used in practice.
    Date: 2016–09
  3. By: Boyarchenko, Nina; Lucca, David O; Veldkamp, Laura
    Abstract: The use of order flow information by financial firms has come to the forefront of the regulatory debate. A central question is: Should a dealer who acquires information by taking client orders be allowed to use or share that information? We explore how information sharing affects dealers, clients and issuer revenues in U.S. Treasury auctions. Because one cannot observe alternative information regimes, we build a model, calibrate it to auction results data, and use it to quantify counter-factuals. We estimate that yearly auction revenues with full-information sharing (with clients and between dealers) would be $5 billion higher than in a "Chinese Wall'' regime in which no information is shared. When information sharing enables collusion, the collusion costs revenue, but prohibiting information sharing costs more. For investors, the welfare effects of information sharing depend on how information is shared. Surprisingly, investors benefit when dealers share information with each other, not when they share more with clients. For the market, when investors can bid directly, information sharing creates a new financial accelerator: Only investors with bad news bid through intermediaries, who then share that information with others. Thus, sharing amplifies the effect of negative news. Tests of two model predictions support its key features.
    Keywords: asymmetric information; auctions; Financial Intermediation; Treasury
    Date: 2016–09
  4. By: Nicholas Apergis (Department of Banking and Financial Management, University of Piraeus, Greece); Matteo Bonato (Department of Economics and Econometrics, University of Johannesburg, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, South Africa); Clement Kyei (Department of Economics, University of Pretoria, South Africa)
    Abstract: We use the k-th order nonparametric causality test at monthly frequency over the period of 1985:1 to 2016:06 to analyze whether geopolitical risks can predict movements in stock returns and volatility of twenty-four global defense firms. The nonparametric approach controls for the existing misspecification of a linear framework of causality, and hence, the mild evidence of causality obtained under the standard Granger tests cannot be relied upon. When we apply the nonparametric test, we find that there is no evidence of predictability of stock returns of these defense companies emanating from the geopolitical risk measure. However, the geopolitical risk index does predict realized volatility in 50 percent of the companies. Our results indicate that while global geopolitical events over a period of time is less likely to predict returns, such global risks are more inclined in affecting future risk profile of defense firms.
    Keywords: Geopolitical risks, returns, volatility, defense firms
    JEL: C22 G10
    Date: 2016–09
  5. By: Dan Pirjol; Lingjiong Zhu
    Abstract: We present a rigorous study of the short maturity asymptotics for Asian options with continuous-time averaging, under the assumption that the underlying asset follows a local volatility model. The asymptotics for out-of-the-money, in-the-money, and at-the-money cases are derived, considering both fixed strike and floating strike Asian options. The asymptotics for the out-of-the-money case involves a non-trivial variational problem which is solved completely. We present an analytical approximation for Asian options prices, and demonstrate good numerical agreement of the asymptotic results with the results of Monte Carlo simulations and benchmark test cases in the Black-Scholes model for option parameters relevant in practical applications.
    Date: 2016–09
  6. By: Hattori, Masazumi (Asian Development Bank Institute); Shim, Ilhyock (Asian Development Bank Institute); Sugihara, Yoshihiko (Asian Development Bank Institute)
    Abstract: Using variance risk premiums (VRPs) nonparametrically calculated from equity markets in selected major developed economies and emerging market economies (EMEs) over 2007‒2015, we document the correlation of VRPs across the markets and examine whether equity fund flows work as a path through which VRPs spill over globally. First, we find that VRPs tend to spike up during market turmoil such as the peak of the global financial crisis and the European debt crisis. Second, we find that all cross-equity market correlations of VRPs are positive, and that some economy pairs exhibit high levels of the correlation. In terms of volatility contagion, we find that an increase in VRPs in the United States significantly reduces equity fund flows to other developed economies, but not those to EMEs, in the period after the global financial crisis. Two-stage least squares estimation results show that equity fund flows are a channel for spillover of VRPs in the United States to VRPs in other developed economies.
    Keywords: equity market; equity fund flow; cross-equity market; spillover effects; global financial crisis; financial market volatility; variance risk premium; emerging market economies; eurozone; interest rate; nonparametric analysis; ordinary least squares; OLS; univariate; market correlation; regression analysis
    JEL: F32 G12 G15 G23
    Date: 2016–09–23
  7. By: Cappelletti, Giuseppe; Guazzarotti, Giovanni; Tommasino, Pietro
    Abstract: We study the effects on the stock market of a securities transaction tax (STT). In particular, we focus on the recent introduction of a STT in Italy. Indeed, a peculiarity of the Italian STT is that it only concerns stocks of corporations with a market capitalization above 500 million euros. We exploit this feature via a differences-in-differences approach (comparing taxed and non-taxed stocks both before and after the introduction of the new tax). We ?find that the new tax widened the bid-ask spread and increased volatility, while it left transaction volumes and returns substantially unaffected. Results are broadly similar using a regression discontinuity design, in which we confront the performance of stocks just above the threshold with those just below. JEL Classification: G14, G18, H24
    Keywords: market liquidity, market volatility, securities transaction tax
    Date: 2016–08

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