nep-fmk New Economics Papers
on Financial Markets
Issue of 2017‒01‒22
six papers chosen by

  1. The capital asset pricing theory and its misconceptions By Tenani, Paulo Sérgio
  2. Do Cross-Sectional Stock Return Predictors Pass the Test without Data-Snooping Bias? By Yu-Chin Hsu; Hsiou-Wei Lin; Kendro Vincent
  3. Money growth and aggregate stock returns By Böing, Tobias; Stadtmann, Georg
  4. Sovereign Credit Rating Mismatches By António Afonso; André Albuquerque
  5. Risk Taking and Interest Rates : Evidence from Decades in the Global Syndicated Loan Market By Seung Jung Lee; Lucy Qian Liu; Viktors Stebunovs
  6. Stock Market Liquidity in Chile By Luis Brandao-Marques

  1. By: Tenani, Paulo Sérgio
    Abstract: The CAPM is the fundamental model for pricing financial securities. Nevertheless, the way it is proved in Finance textbooks can be fairly confusing, and more complicated than necessary; with an excessive use of figures at the expense of equations. In addition, depending on the Finance textbook, the set of assumptions that are supposedly needed to prove the CAPM may actually differ. This paper tries to provide an intuitive and straightforward proof of the CAPM and it also illustrates at which instances of the proof the traditional assumptions are actually needed. The main conclusion is that a much simpler version of the CAPM would possibly be as formidable and ingenious as the traditional one and yet, with a much more intuitive proof and fewer unrealistic assumptions.
    Date: 2016–12–26
  2. By: Yu-Chin Hsu (Institute of Economics, Academia Sinica, Taipei, Taiwan); Hsiou-Wei Lin (Department of International Business National Taiwan University); Kendro Vincent (Department of International Business National Taiwan University)
    Abstract: This study examines the possible data-snooping bias as a competing explanation for the anomalies in the cross-section of stock returns. We posit that the exhaustive standalone searches for profitable strategies could lead to recommending spuriously predictive variables. In order to explore the severity of this problem, we use a multiple testing method to evaluate the profitability of portfolios constructed by these predictors. Our empirical analyses suggest that over half of the findings based on individual testing method are no longer statistically significant after we adjust for data-snooping bias. Excluding the micro-cap stocks before portfolios construction and applying the notion of economic significance in this study further weaken the evidence for predictability. JEL Classification: G11, G12, G14
    Keywords: anomalies, data-snooping bias, stock return predictability, portfolio strategies
    Date: 2017–01
  3. By: Böing, Tobias; Stadtmann, Georg
    Abstract: We empirically evaluate the predictive power of money growth measured by M2 for stock returns of the S&P 500 index. We use monthly US data and predict multiperiod returns over 1, 3, and 5 years with long-horizon regressions. In-sample regressions show that money growth is useful for predicting returns. Higher recent money growth has a significantly negative effect on subsequent returns of the S&P 500. An out-of-sample analysis shows that a simple model with money growth as a single predictor performs as goods as the constant expected returns model, while models with several predictor variables perform worse than those simple models.
    Keywords: Money growth,M2,Stock Market,S&P 500,Stock Returns,Out-of-Sample
    JEL: C58 E44 E47 G14 G17
    Date: 2016
  4. By: António Afonso; André Albuquerque
    Abstract: We study the factors behind split ratings in sovereign credit ratings from different agencies, for the period 1980-2015. We employ random effects ordered and simple probit approaches to assess the explanatory power of different macroeconomic, government and financial variables. Our results show that structural balances and the existence of a default in the last ten years were the least significant variables whereas the level of net debt, budget balances, GDP per capita and the existence of a default in the last five years were found to be the most relevant variables explaining rating mismatches across agencies. For speculative-grade ratings, we also find that a default in the last two or five years decreases the rating difference between S&P and Fitch. For the positive rating difference between S&P and Moody’s for investment-grade ratings, an increase in external debt leads to a smaller rating gap between the two agencies
    Keywords: sovereign ratings; split ratings; panel data; random effects ordered probit
    JEL: C23 C25 E44 F34 G15 H63
    Date: 2017–01
  5. By: Seung Jung Lee; Lucy Qian Liu; Viktors Stebunovs
    Abstract: We study how low interest rates in the United States affect risk taking in the market for cross-border corporate loans. Because banks tend to originate these loans with intent to sell to nonbank investors, we examine risk taking by the broad financial system. To the extent that actions of the Federal Reserve affect U.S. interest rates, our analysis provides evidence of cross-border spillover effects of U.S. monetary policy and highlights the global lending and risk-taking channels. We find that movements in the U.S. interest rates have an important effect on ex-ante credit risk of cross-border corporate loans, though the channels are different in the pre- and post-crisis periods. Before the crisis, banks made ex-ante riskier loans to non-U.S. borrowers in response to a decline in U.S. short-term interest rates, and, after it, banks and nonbanks originated such loans in response to a decline in U.S. longer- term interest rates. Economic uncertainty, risk appetite, and the U.S. dollar exchange rate appear to play a limited role in explaining ex-ante credit risk. Our results highlight the potential policy challenges faced by central banks in affecting credit risk cycles in their own jurisdictions.
    Keywords: Syndicated loans ; Risk taking ; Monetary policy ; International spillovers
    JEL: E44 E52 F30 F42 G15 G20
    Date: 2017–01
  6. By: Luis Brandao-Marques
    Abstract: Chile has a large but relatively illiquid stock market. Global factors such as global risk appetite and monetary policy in advanced economies are key cyclical determinants of liquidity in Chilean equities. Evidence from a cross-section of emerging markets suggests strong protection of minority shareholders can help improve stock market liquitidity. Currently, illiquid in Chilean may have to pay 3½ percent more as cost of equity. Corporate governance should be improved, namely through the adoption of a stewardship code.
    Keywords: Stock markets;Chile;Liquidity;Business cycles;Corporate governance;Emerging markets;Cross country analysis;Panel analysis;Market liquidity; investor protection; corporate governance; liquidity premium.
    Date: 2016–11–16

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