nep-fmk New Economics Papers
on Financial Markets
Issue of 2017‒02‒05
twelve papers chosen by

  1. News Articles and Equity Trading By Albert S. Kyle; Anna Obizhaeva; Nitish Ranjan Sinha; Tugkan Tuzun
  2. Volatility Spillovers among Global Stock Markets: Measuring Total and Directional Effects By Santiago Gamba-Santamaria; Jose Eduardo Gomez-Gonzalez; Jorge Luis Hurtado-Guarin; Luis Fernando Melo-Velandia
  3. Macroeconomic Determinants of Stock Market Volatility and Volatility Risk-Premiums By Valentina Corradi; Walter Distaso; Antonio Mele
  4. Intraday Trading Invariance in the E-mini S&P 500 Futures Market By Torben G. Andersen; Oleg Bondarenko; Albert S. Kyle; Anna Obizhaeva
  5. Contagion in Experimental Financial Markets By Suren Vardanyan
  6. Asymmetric volatility connectedness on the forex market By Jozef Barunik; Evzen Kocenda; Lukas Vacha
  7. Implied volatility sentiment: A tale of two tails By Felix, Luiz; Kräussl, Roman; Stork, Philip
  8. Redemption risk and cash hoarding by asset managers By Stephen Morris; Ilhyock Shim; Hyun Song Shin
  9. Microstructure Invariance in U.S. Stock Market Trades By Albert S. Kyle; Anna Obizhaeva; Tugkan Tuzun
  10. Revisiting the Effect of Crude Oil Price Movements on US Stock Market Returns and Volatility By Ralph Sonenshine; Michael Cauvel
  11. European banking regulation after the financial crisis: Franco-German conflict of interest during the negotiations on a single resolution fund By Ferber, Tim
  12. Has the South African Reserve Bank responded to equity prices since the sub-prime crisis? An asymmetric convergence approach By Phiri, Andrew

  1. By: Albert S. Kyle (Robert H. Smith School of Business, University of Maryland); Anna Obizhaeva (New Economic School); Nitish Ranjan Sinha (Board of Governors of the Federal Reserve System); Tugkan Tuzun (Board of Governors of the Federal Reserve System)
    Abstract: Using a database of news articles from Thomson Reuters for 2003-2008, we investigate how the arrival rate of news articles mentioning an individual stock varies with the level of trading activity in that stock. Defining trading activity W as the product of dollar volume and volatility, we estimate that the arrival rate of news articles is proportional to W0.68. Market microstructure invariance predicts that the stock trading process unfolds in "business time" which passes at a rate proportional to W2=3. Since the estimated exponent of 0.68 is close to 2=3, we conclude that information in news articles ows into the market in the same units of business time that microstructure invariance predicts to govern the trading process for stocks. The arrival of news articles is well approximated by a negative binomial process with the over-dispersion parameter equal to 2:11.
    Date: 2017–01
  2. By: Santiago Gamba-Santamaria (Banco de la República de Colombia); Jose Eduardo Gomez-Gonzalez (Banco de la República de Colombia); Jorge Luis Hurtado-Guarin (Banco de la República de Colombia); Luis Fernando Melo-Velandia (Banco de la República de Colombia)
    Abstract: In this study we construct volatility spillover indexes for some of the major stock market indexes in the world. We use a DCC-GARCH framework for modelling the multivariate relationships of volatility among markets. Extending the framework of Diebold and Yilmaz [2012] we compute spillover indexes directly from the series of returns considering the time-variant structure of their covariance matrices. Our spillover indexes use daily stock market data of Australia, Canada, China, Germany, Japan, the United Kingdom, and the United States, for the period January 2001 to August 2016. We obtain several relevant results. First, total spillovers exhibit substantial time-series variation, being higher in moments of market turbulence. Second, the net position of each country (transmitter or receiver) does not change during the sample period. However, their intensities exhibit important time-variation. Finally, transmission originates in the most developed markets, as expected. Of special relevance, even though the Chinese stock market has grown importantly over time, it is still a net receiver of volatility spillovers. Classification JEL: G01; G15; C32
    Keywords: Volatility spillovers; DCC-GARCH model; Global stock market linkages; financial crisis
    Date: 2017–01
  3. By: Valentina Corradi (University of Warwick); Walter Distaso (Imperial College Business School); Antonio Mele (Swiss Finance Institute, University of Lugano, and Centre for Economic Policy Research (CEPR))
    Abstract: How does stock market volatility relate to the business cycle? We develop, and estimate, a no-arbitrage model to study the cyclical properties of stock volatility and the risk-premiums the market requires to bear the risk of uctuations in this volatility. The level of stock market volatility cannot be explained by the mere existence of the business cycle. Rather, it relates to the presence of some unobserved factor. At the same time, our model predicts that such an unobservable factor cannot explain the ups and downs stock volatility experiences over time - the "volatility of volatility." Instead, the volatility of stock volatility relates to the business cycle. Finally, volatility risk-premiums are strongly countercyclical, even more so than stock volatility, and are partially responsible for the large swings in the VIX index occurred during the 2007-2009 subprime crisis, which our model does capture in out-of-sample experiments.
    Keywords: Aggregate stock market volatility, volatility risk-premiums, volatility of volatility, business cycle, no-arbitrage restrictions, simulation-based inference
    JEL: C15 C32 E37 E44 G13 G17
  4. By: Torben G. Andersen (Kellogg School of Management, Northwestern University); Oleg Bondarenko (Department of Finance (MC 168), University of Illinois at Chicago); Albert S. Kyle (Robert H. Smith School of Business, University of Maryland); Anna Obizhaeva (New Economic School)
    Abstract: The intraday trading patterns in the E-mini S&P 500 futures contract between January 2008 and November 2011 are consistent with the following invariance relationship: The return variation per transaction is log-linearly related to trade size, with a slope coefficient of -2. This association applies both across the pronounced intraday diurnal pattern and across days in the time series. The documented factor of proportionality deviates sharply from prior hypotheses relating volatility to transactions count or trading volume. Intraday trading invariance is motivated a priori by the intuition that market microstructure invariance, introduced by Kyle and Obizhaeva (2016c) to explain bets at low frequencies, also applies to transactions over high intraday frequencies.
    Keywords: market microstructure, invariance, bets, high-frequency trading, liquidity, volatility, volume, business time, time series, intraday patterns
    Date: 2016–03
  5. By: Suren Vardanyan
    Abstract: We experimentally study the possibility that news of a crisis in one market may cause a contagious crisis in another market though there are no links between those markets. Literature provides models of contagion in which news of a crisis may cause contagion in Bandwagon and Strategic risk channels; however, these models lack empirical evidence. The reason may be that it is difficult to isolate the effect of news of a crisis in real data, as markets are linked in many ways. To our knowledge this is the first research into contagious effects of the news of a crisis. We modify the influential experimental design of Smith et al. (1988) to construct an environment in which two separate markets are traded simultaneously, and there is no link between these markets other than possibility of observing prices in the other market. We create a crisis in one market by simulating a price drop in that market and observe whether prices in the other market drop in a contagious manner. Our results show that news of a crisis is a significant source of contagion and the Bandwagon channel is significant, while the Strategic risk channel is not. Further, news of a crisis may cause contagion in channels other than Bandwagon and Strategic risk; however, we do not identify which channels in the present study, leaving it for future research.
    Keywords: asset market; contagion; experiment;
    JEL: C92 G12
    Date: 2016–12
  6. By: Jozef Barunik (Institute of Economic Studies, Charles University Institute of Information Theory and Automation, The Czech Academy of Sciences); Evzen Kocenda (Institute of Economic Studies, Charles University); Lukas Vacha (Institute of Economic Studies, Charles University Institute of Information Theory and Automation, The Czech Academy of Sciences)
    Abstract: We show how bad and good volatility propagate through the forex market, i.e., we provide evidence for asymmetric volatility connectedness on the forex market. Using highfrequency, intra-day data of the most actively traded currencies over 2007-2015 we document the dominating asymmetries in spillovers that are due to bad, rather than good, volatility. We also show that negative spillovers are chiefly tied to the dragging sovereign debt crisis in Europe while positive spillovers are correlated with the subprime crisis, different monetary policies among key world central banks, and developments on commodities markets. It seems that a combination of monetary and real-economy events is behind the positive asymmetries in volatility spillovers, while scal factors are linked with negative spillovers.
    Keywords: volatility, connectedness, spillovers, semivariance, asymmetric effects, forexmarket
    JEL: C18 C58 E58 F31 G15
    Date: 2017–01
  7. By: Felix, Luiz; Kräussl, Roman; Stork, Philip
    Abstract: Low probability events are overweighted in the pricing of out-of-the-money index puts and single stock calls. We find that this behavioral bias is strongly time-varying, linked to equity market sentiment, and higher moments of the risk-neutral density. An implied volatility (IV) sentiment measure that is jointly derived from index and single stock options explains investors' overweight of tail events the best. Our findings also suggest that IV-sentiment predicts equity markets reversals better than overweight of small probabilities itself. When employed in a trading strategy, IV-sentiment delivers economically significant results, which are more consistent than the ones produced by the market sentiment factor. The joint use of information from the single stock and index option markets seems to explain the forecasting power of IVsentiment. Out-of-sample tests on reversal prediction show that our IV-sentiment measure adds value over and above traditional factors in the equity risk premium literature, especially as an equity-buying signal. This reversals prediction seems to improve time-series and cross-sectional momentum strategies.
    Keywords: sentiment,implied volatility skew,equity-risk premium,reversals,predictability
    JEL: G12 G14 G17
    Date: 2017
  8. By: Stephen Morris; Ilhyock Shim; Hyun Song Shin
    Abstract: Open-end mutual funds face redemptions by investors, but the sale of the underlying assets depends on the portfolio decision of asset managers. If asset managers use their cash holding as a buffer to meet redemptions, they can mitigate fire sales of the underlying asset. If they hoard cash in anticipation of redemptions, they will amplify fire sales. We present a global game model of investor runs and identify conditions under which asset managers hoard cash. In an empirical investigation of global bond mutual funds, we find that cash hoarding is the rule rather than the exception, and that less liquid bond funds display a greater tendency toward cash hoarding.
    Keywords: asset manager, bond market liquidity, cash hoarding, global game, investor redemption, strategic complementarity
    Date: 2017–01
  9. By: Albert S. Kyle (Robert H. Smith School of Business, University of Maryland); Anna Obizhaeva (New Economic School); Tugkan Tuzun (Board of Governors of the Federal Reserve System)
    Abstract: This paper studies invariance relationships in tick-by-tick transaction data in the U.S. stock market. Over the 1993-2001 period, the estimated monthly regression coefficients of the log of trade arrival rate on the log of trading activity have an almost constant value of 0:666, strikingly close to the value of 2=3 predicted by the invariance hypothesis. Over the 2001-14 period, the estimated coefficients rise, and their average value is equal to 0:79, suggesting that the reduction in tick size in 2001 and the subsequent increase in algorithmic trading resulted in a more intense order shredding in more liquid stocks. The distributions of trade sizes, adjusted for differences in trading activity, resemble a log-normal before 2001; there is clearly visible truncation at the round-lot boundary and clustering of trades at even levels. These distributions change dramatically over the 2001-14 period with their means shifting downward. The invariance hypothesis explains about 88 percent of the cross-sectional variation in trade arrival rates and average trade sizes; additional explanatory variables include the invariance-implied measure of effective price volatility.
    Keywords: market microstructure, transactions data, market frictions, trade size, tick size, order shredding, clustering, TAQ data
    JEL: G10 G23
    Date: 2016–04
  10. By: Ralph Sonenshine; Michael Cauvel
    Abstract: From mid-2014 to 2016, oil prices plunged rapidly causing significant volatility in the US and global equity markets. This change in crude oil prices occurred after a significant run up in oil prices three to four years earlier. Each change in the growth trajectory of oil prices affects stock market returns. How and why do oil price shocks affect the expected stock market returns among key sectors of the economy? This paper explores this issue by examining how the magnitude of crude oil price changes affect the stock market returns and variances of key producing, banking and consuming segments of the US economy. Our findings provide some explanations for the asymmetric responses to positive and negative oil shocks found in these key sectors of the economy.
    Keywords: Deregulation, mergers, regulated industries, natural monopoly
    JEL: L94 L98 G34 G14
    Date: 2017
  11. By: Ferber, Tim
    Abstract: In response to the recent financial crisis, European policymakers put banking regulation in the Eurozone on top of the agenda. In 2016, as part of the newly created European banking union, a mechanism for resolving troubled banks, the Single Resolution Mechanism (SRM), became fully operational for the 19 member states of the euro area. The SRM was established to avoid future involvement of tax payers' money in the resolution of banks. This paper focuses on the negotiations on one of its instruments, the Single Resolution Fund (SRF), a fund of ex-ante contributions of Eurozone banks set up to winding down unviable banks. The SRF proved to be a main conflict issue during the negotiations. Germany and France were pushing for diverging preferences although both countries' banking sectors suffered from the crisis and both governments generally favored a regulatory approach on the European level. I provide an institutionalist explanation for these opposing positions of the two most important Eurozone countries. By drawing on the "Varieties of Capitalism" literature, I explain how the distinct features of these countries' financial and banking systems accounted for their preferences. On the one side, German negotiators sought to preserve the dominant way of bank-based corporate finance by particularly protecting savings and cooperative banks. On the other, the French government was in favor of higher contributions by the banking sector because market-based corporate finance is more prevalent in France. Nevertheless, France aimed at keeping its 'national champions' out as far as possible. This paper has important implications for how to think about preference formation in European financial regulation.
    Date: 2016
  12. By: Phiri, Andrew
    Abstract: The global financial crisis of 2008 sparked an ongoing debate concerning the interlink between monetary policy and equity returns. This study contributes to the debate by examining whether the South African Reserve Bank (SARB) repo rate responds asymmetrically to changes in the returns on four equity indices on the Johannesburg Stock Exchange (JSE). Our empirical model is the momentum threshold autoregressive (MTAR) model which is applied to monthly data corresponding to periods before the financial crisis (2002:01 - 2008:08) and periods after the crisis (2008:08 - 2016:12). There are three main findings which can be derived from our empirical analysis. Firstly, we significant negative relationship between equity prices to the repo rate before the crisis and this relationship turns insignificant in periods after the crisis. Secondly, we find that the Reserve Bank mainly monitored positive disturbances to equity indices before the crisis whereas after the crisis the Reserve Bank appears to be more responsive to negative equity deviations. Lastly, we find significant error correcting behaviour in periods before the crisis but not afterwards. Overall, our results indicate that the SARB appears to have been responsive to equity returns prior to the crisis but not for subsequent periods.
    Keywords: Repo rate; Stock market returns; Monetary Policy; South African Reserve Bank (SARB); Johannesburg Stock Exchange (JSE); Financial crisis; South Africa.
    JEL: C22 C51 C52 E52 G10
    Date: 2017–02–02

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