nep-fmk New Economics Papers
on Financial Markets
Issue of 2017‒04‒09
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Investment CAPM By Lu Zhang
  2. Asset Mispricing By Kurt F. Lewis; Francis A. Longstaff; Lubomir Petrasek
  3. Interconnectedness in the Global Financial Market By Matthias Raddant; Dror Y. Kenett

  1. By: Lu Zhang
    Abstract: A new class of Capital Asset Pricing Models (CAPM) arises from the first principle of real investment for individual firms. Conceptually as "causal"' as the consumption CAPM, yet empirically more tractable, the investment CAPM emerges as a leading asset pricing paradigm. Firms do a good job in aligning investment policies with costs of capital, and this alignment drives many empirical patterns that are anomalous in the consumption CAPM. Most important, integrating the anomalies literature in finance and accounting with neoclassical economics, the investment CAPM succeeds in mounting an efficient markets counterrevolution to behavioral finance in the past 15 years.
    JEL: E13 E22 G12 G14 G31
    Date: 2017–03
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:23226&r=fmk
  2. By: Kurt F. Lewis; Francis A. Longstaff; Lubomir Petrasek
    Abstract: We use a unique dataset of corporate bonds guaranteed by the full faith and credit of the U.S. to test a number of recent theories about why asset prices may diverge from fundamental values. These models emphasize the role of funding liquidity, slow-moving capital, the leverage of financial intermediaries, and other frictions in allowing mispricing to occur. Consistent with theory, we find there are strong patterns of commonality in mispricing and that changes in dealer haircuts and funding costs are significant drivers of mispricing. Furthermore, mispricing can trigger short-term margin and funding-cost spirals. Using detailed bond and dealer-level data, we find that most of the cross-sectional variation in mispricing is explained by differences in dealer funding costs, inventory positions, and trading liquidity measures. These results provide strong empirical support for a number of current theoretical models.
    JEL: G12
    Date: 2017–03
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:23231&r=fmk
  3. By: Matthias Raddant; Dror Y. Kenett
    Abstract: The global financial system is highly complex, with cross-border interconnections and interdependencies. In this highly interconnected environment, local financial shocks and events can be easily amplified and turned into global events. This paper analyzes the dependencies among nearly 4,000 stocks from 15 countries. The returns are normalized by the estimated volatility using a GARCH model and a robust regression process estimates pairwise statistical relationships between stocks from different markets. The estimation results are used as a measure of statistical interconnectedness, and to derive network representations, both by country and by sector. The results show that countries like the United States and Germany are in the core of the global stock market. The energy, materials, and financial sectors play an important role in connecting markets, and this role has increased over time for the energy and materials sectors. Our results confirm the role of global sectoral factors in stock market dependence. Moreover, our results show that the dependencies are rather volatile and that heterogeneity among stocks is a non-negligible aspect of this volatility.
    Date: 2017–04
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1704.01028&r=fmk

This nep-fmk issue is ©2017 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at http://nep.repec.org. For comments please write to the director of NEP, Marco Novarese at <director@nep.repec.org>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.