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on Financial Markets |
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Issue of 2016‒12‒11
five papers chosen by |
| By: | Juhani T. Linnainmaa; Michael R. Roberts |
| Abstract: | Using data spanning the 20th century, we show that most accounting-based return anomalies are spurious. When examined out-of-sample by moving either backward or forward in time, anomalies' average returns decrease, and volatilities and correlations with other anomalies increase. The data-snooping problem is so severe that even the true asset pricing model is expected to be rejected when tested using in-sample data. Our results suggest that asset pricing models should be tested using out-of-sample data or, when not feasible, by whether a model is able to explain half of the in-sample alpha. |
| JEL: | G11 G12 G14 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22894&r=fmk |
| By: | Svetlozar Rachev; Frank Fabozzi |
| Abstract: | We study markets with no riskless (safe) asset. We derive the corresponding Black-Scholes-Merton option pricing equations for markets where there are only risky assets which have the following price dynamics: (i) continuous diffusions; (ii) jump-diffusions; (iii) diffusions with stochastic volatilities, and; (iv) geometric fractional Brownian and Rosenblatt motions. No arbitrage and market completeness conditions are derived in all four cases. |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1612.02112&r=fmk |
| By: | Nikolaos Mitianoudis (Democritus University of Thrace, Greece); Theologos Dergiades (University of Macedonia, Greece) |
| Abstract: | Accepting non-linearities as an endemic feature of financial data, this paper re-examines Cochrane's "new fact in finance" hypothesis (Cochrane, Economic Perspectives -FRB of Chicago 23, 36-58, 1999). By implementing two methods, frequently encountered in digital signal processing analysis, (Undecimated Wavelet Transform and Empirical Mode Decomposition- both methods extract components in the time-frequency domain), we decompose the real stock prices and the real dividends, for the US economy, into signals that correspond to distinctive frequency bands. Armed with the decomposed signals and acting within a non-linear framework, the predictability of stock prices through the use of dividends is assessed at alternative horizons. It is shown that the "new fact in finance" hypothesis is a valid proposition, provided that dividends contribute significantly to predicting stock prices at horizons spanning beyond 32 months. The identified predictability is entirely non-linear in nature. |
| Keywords: | Stock prices and dividends, Time-frequency decomposition. |
| JEL: | G10 C14 C22 C29 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:mcd:mcddps:2016_04&r=fmk |
| By: | V\'it Per\v{z}ina; Jan M. Swart |
| Abstract: | We consider a simple model for the evolution of a limit order book in which limit orders of unit size arrive according to independent Poisson processes. The frequency of buy limit orders below a given price level, respectively sell limit orders above a given level are described by fixed demand and supply functions. Buy (resp. sell) limit orders that arrive above (resp. below) the current ask (resp. bid) price are converted into market orders. There is no cancellation of limit orders. This model has independently been reinvented by several authors, including Stigler in 1964 and Luckock in 2003, who was able to calculate the equilibrium distribution of the bid and ask prices. We extend the model by introducing market makers that simultaneously place both a buy and sell limit order at the current bid and ask price. We show how the introduction of market makers reduces the spread, which in the original model is unrealistically large. In particular, we are able to calculate the exact rate of market makers needed to close the spread completely. |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1612.00981&r=fmk |
| By: | Veronika Kajurova (Department of Economics, Faculty of Business and Economics, Mendel university in Brno, Zemedelska 1, 613 00 Brno, Czech Republic); Jana Hvozdenska (Depatment of Finance, Faculty of Economics and Administration, Masaryk University, Lipova 41a, 602 00 Brno, Czech Republic) |
| Abstract: | Nowadays, when information has a significant role in financial markets and is reflected in prices of instruments very rapidly, investors, who are interested in arbitrage, hedging or speculation activities in markets, and other market participants would like to know in which market information is embedded into price more rapidly. The aim of the presented paper is to find out if new information is reflected in prices earlier in credit default swap market or in stock or bond markets and to confirm or disprove whether the theoretical assumptions about the links between markets hold. Panel co- integration tests, panel vector error correction models and panel Granger causality tests are employed to examine the long-term and short-term interactions between markets. Assessing the leading role of chosen market within price discovery process can be beneficial for all market participants within their decision making processes. Our results indicate that the relations between credit default swap and stock markets are in accordance with the theoretical assumptions. The results on the relationship between credit default swap and bond markets met the theoretical assumptions during the crisis period, however the role of these two markets has changed in the post- crisis period. |
| Keywords: | bond market, CDS market, information, panel data, stock market |
| JEL: | C33 C58 G01 G30 G20 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:men:wpaper:63_2016&r=fmk |