nep-fmk New Economics Papers
on Financial Markets
Issue of 2016‒10‒16
two papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Stock Return Expectations in the Credit Market By Byström, Hans
  2. On the return-volatility relationship in the Bitcoin market around the price crash of 2013 By Bouri, Elie; Azzi, Georges; Haubo Dyhrberg, Anne

  1. By: Byström, Hans (Department of Economics, Lund University)
    Abstract: In this paper we compute long-term stock return expectations (across the business cycle) for individual firms using information backed out from the credit derivatives market. Our methodology builds on previous theoretical results in the literature on stock return expectations and, empirically, we demonstrate a close relationship between credit-implied stock return expectations and future realized stock returns. We also find stock portfolios selected based on credit-implied stock return forecasts to beat equally- and value-weighted portfolios of the same stocks out-of-sample. Contrary to many other studies, our expectations/predictions are made at the individual stock level rather than at the portfolio level, and no parameter estimations using historical stock price- or credit spread observations are needed.
    Keywords: stock market; credit default swap; implied volatility; CreditGrades; return expectations
    JEL: G01 G10
    Date: 2016–10–12
  2. By: Bouri, Elie; Azzi, Georges; Haubo Dyhrberg, Anne
    Abstract: The authors examine the relation between price returns and volatility changes in the Bitcoin market using a daily database denominated in various currencies. The results for the entire period provide no evidence of an asymmetric return-volatility relation in the Bitcoin market. They test if there is a difference in the return-volatility relation before and after the price crash of 2013 and show a significant inverse relation between past shocks and volatility before the crash and no significant relation after. This finding shows that, prior to the price crash of December 2013, positive shocks increased the conditional volatility more than negative shocks. This inverted asymmetric reaction of Bitcoin to positive and negative shocks is contrary to what the authors observe in equities. As leverage effect and volatility feedback don't adequately explain this reaction, they propose the safe-haven effect (Baur, Asymmetric volatility in the gold market, 2012). The authors highlight the benefits of adding Bitcoin to a US equity portfolio, especially in the pre-crash period. Robustness analyses show, among others, a negative relation between the US implied volatility index (VIX) and Bitcoin volatility. Those additional analyses further support their findings and provide useful information for economic actors who are interested in adding Bitcoin to their equity portfolios or are curious about the capabilities of Bitcoin as a financial asset.
    Keywords: bitcoin,asymmetric GARCH,safe haven
    JEL: G11 G15
    Date: 2016

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