nep-fmk New Economics Papers
on Financial Markets
Issue of 2017‒03‒26
six papers chosen by

  1. Predicting Bond Betas using Macro-Finance Variables By Nektarios Aslanidis; Charlotte Christiansen; Andrea Cipollini
  2. An Agent-based Model of Contagion in Financial Networks By Leonardo dos Santos Pinheiro; Flavio Codeco COelho
  3. Reversals in Global Market Integration and Funding Liquidity By Amir Akbari; Francesca Carrieri; Aytek Malkhozov
  4. Pricing VIX Derivatives With Free Stochastic Volatility Model By Wei Lin; Shenghong Li; Shane Chern
  5. Credit Ratings and Predictability of Stock Returns and Volatility of the BRICS and the PIIGS: Evidence from a Nonparametric Causality-in-Quantiles Approach By Mehmet Balcilar; Deven Bathia; Riza Demirer; Rangan Gupta
  6. Ottoman stock returns during the Turco-Italian and Balkan Wars of 1910-1914 By Hanedar, Avni Önder; Hanedar, Elmas Yaldız

  1. By: Nektarios Aslanidis (University Rovira Virgili, CREIP); Charlotte Christiansen (Aarhus University and CREATES); Andrea Cipollini (University of Palermo)
    Abstract: We conduct in-sample and out-of-sample forecasting using the new approach of combining explanatory variables through complete subset regressions (CSR). We predict bond CAPM betas and bond returns conditioning on various macro-fi?nance variables. We explore differences across long-term government bonds, investment grade corporate bonds, and high-yield corporate bonds. The CSR method performs well in predicting bond betas, especially in-sample, and, mainly high-yield bond betas when the focus is out-of-sample. Bond returns are less predictable than bond betas.
    Keywords: bond betas, complete subset regressions, corporate bonds, macro-?finance variables, model confi?dence set, risk-return trade-off.
    JEL: G12 G14
    Date: 2017–01–10
  2. By: Leonardo dos Santos Pinheiro; Flavio Codeco COelho
    Abstract: This work develops an agent-based model for the study of how the leverage through the use of repurchase agreements can function as a mechanism for the propagation and amplification of financial shocks in a financial system. Based on the analysis of financial intermediaries in the repo and interbank lending markets during the 2007-08 financial crisis we develop a model that can be used to simulate the dynamics of financial contagion.
    Date: 2017–03
  3. By: Amir Akbari; Francesca Carrieri; Aytek Malkhozov
    Abstract: This paper looks at the reversals in global financial integration through the funding liquidity lens. First, we construct a segmentation indicator based on differences in funding liquidity across countries as measured by the performance of betting-against-beta strategies. Second, we find that funding liquidity shocks help explain recent reversals in integration in the absence of explicit foreign investment barriers. These findings are consistent with tighter limits to arbitrage and increased home bias during funding distress periods. Our empirical analysis is guided by a margin-CAPM model generalized to an international setting.
    Keywords: International Finance ; Market Segmentation ; Integration Reversals ; Funding Liquidity
    JEL: F36 G01 G12 G15
    Date: 2017–03
  4. By: Wei Lin; Shenghong Li; Shane Chern
    Abstract: In this paper, we relax the power parameter of instantaneous variance and develop a new stochastic volatility plus jumps model that generalize the Heston model and 3/2 model as special cases. This model has two distinctive features. First, we do not restrict the new parameter, letting the data speak as to its direction. The Generalized Methods of Moments suggests that the newly added parameter is to create varying volatility fluctuation in different period discovered in financial market. Moreover, upward and downward jumps are separately modeled to accommodate the market data. Our model is novel and highly tractable, which means that the quasi-closed-form solutions for future and option prices can be effectively derived. We have employed data on VIX future and corresponding option contracts to test this model to evaluate its ability of performing pricing and capturing features of the implied volatility. To sum up, the free stochastic volatility model with asymmetric jumps is able to adequately capture implied volatility dynamics and thus it can be seen as a superior model relative to the fixed volatility model in pricing VIX derivatives.
    Date: 2017–03
  5. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Northern Cyprus, Turkey); Deven Bathia (Queen Mary University of London, School of Business and Management, London, United Kingdom); Riza Demirer (Department of Economics & Finance, Southern Illinois University Edwardsville, Edwardsville, USA); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: This paper provides a novel perspective to the predictive ability of credit rating announcements over stock market returns and volatility using a novel methodology that formally distinguishes between different market states that can be characterized as bull, bear and normal market conditions. Using data on the credit rating announcements published by the three well-established credit rating agencies and data on BRICS and PIIGS stock markets, we show that the stock markets react heterogeneously, and in quantile-specific patterns, to ratings announcements with more persistent and widespread effects observed for PIIGS stock markets. The effect of rating announcements is generally stronger and more widespread in the case of volatility of returns, implying significant risk effects of these announcements. Finally, we show that the results of the aggregate ratings are driven mostly by rating upgrades rather than downgrades, implying asymmetry in the predictive ability of ratings announcements during good and bad times. Overall, our findings show that predictive models can be greatly enhanced by disaggregating the overall rating announcements and taking into account nonlinearity in the relationship between ratings announcements and stock return dynamics.
    Keywords: Stock Markets Returns and Volatility, Credit Ratings, Nonparametric Quantile Causality, BRICS, PIIGS
    JEL: C22 G15
    Date: 2017–03
  6. By: Hanedar, Avni Önder; Hanedar, Elmas Yaldız
    Abstract: In this paper, we use new historical data on the most popular stocks traded at the Istanbul bourse between 1910 and 1914, to examine the effect of wars on stock market prices. During this period, the Ottoman Empire was involved in the Turco-Italian and the Balkan wars, leading to massive land losses before the First World War. The data are manually collected from the available volumes of two daily Ottoman newspapers, Tercüman-ı Hakikat and Tanin. Our findings are quite surprising, as we observe only a temporary and small drop of prices, indicating little perceived risk by stock investors of the Istanbul bourse.
    Keywords: the Istanbul stock exchange,stocks,the Turco-Italian war,the Balkan wars,structural breaks
    JEL: G1 N25 N45
    Date: 2017

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