nep-fmk New Economics Papers
on Financial Markets
Issue of 2017‒05‒07
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Value-at-Risk Diversification of $\alpha$-stable Risks: The Tail-Dependence Puzzle By Umberto Cherubini; Paolo Neri
  2. The beneficial aspect of FX volatility for market liquidity By Jakree Koosakul; Ilhyock Shim
  3. Credit Misallocation During the European Financial Crisis By Fabiano Schivardi; Enrico Sette; Guido Tabellini
  4. Dependence of Stock Markets with Gold and Bonds under Bullish and Bearish Market States By Shahzad, Syed Jawad Hussain; Raza, Naveed; Shahbaz, Muhammad; Ali, Azwadi
  5. Effect of Flaming on Stock Price: Case of Japan By Tatsuo Tanaka

  1. By: Umberto Cherubini; Paolo Neri
    Abstract: We consider the problem of risk diversification of $\alpha$-stable heavy tailed risks. We study the behaviour of the aggregated Value-at-Risk, with particular reference to the impact of different tail dependence structures on the limits to diversification. We confirm the large evidence of sub-additivity violations, particularly for risks with low tail index values and positive dependence. So, reinsurance strategies are not allowed to exploit diversification gains, or only a very limited amount of them. Concerning the impact of tail dependence, we find the peculiar results that for high tail dependence levels the limits to diversification are uniformly lower for all the levels of dependence, and for all levels of $\alpha
    Date: 2017–04
  2. By: Jakree Koosakul; Ilhyock Shim
    Abstract: A substantial body of existing research suggests that asset price volatility is harmful to market liquidity. This paper explores a contrarian view that, by creating opportunities for profit making, exchange rate volatility can be beneficial to trading activity. Utilising granular data from the Thai foreign exchange (FX) market from January 2010 to March 2016, we find that the volatility of the US dollar-Thai baht exchange rate has significant positive effects on trading volume in the spot market, except at very high levels of volatility. We also observe significant heterogeneity in such effects across different types of market participant. In particular, FX volatility has positive effects on the FX trading activity of foreign and interbank players, but it negatively affects that of local players. These results are robust when we control for potential confounding variables, such as information arrivals, that can generate a positive but non-causal co-movement between volatility and volume.
    Keywords: asset price volatility, foreign exchange market, investor type, market liquidity, nonlinear effect
    Date: 2017–04
  3. By: Fabiano Schivardi; Enrico Sette; Guido Tabellini
    Abstract: Do banks with low capital extend excessive credit to weak firms, and does this matter for aggregate efficiency? Using a unique data set that covers almost all bank-firm relationships in Italy in the period 2004-2013, we find that, during the Eurozone financial crisis: (i) Under-capitalized banks were less likely to cut credit to non-viable firms. (ii) Credit misallocation increased the failure rate of healthy firms and reduced the failure rate of non viable firms. (iii) Nevertheless, the adverse effects of credit misallocation on the growth rate of healthier firms were negligible, and so were the effects on TFP dispersion. This goes against previous in uential findings that, we argue, face serious identification problems. Thus, while banks with low capital can be an important source of aggregate inefficiency in the long run, their contribution to the severity of the great recession via capital misallocation was modest. Keywords: Bank capitalization, zombie lending, capital misallocation JEL classification number: D23, E24, G21
    Date: 2017
  4. By: Shahzad, Syed Jawad Hussain; Raza, Naveed; Shahbaz, Muhammad; Ali, Azwadi
    Abstract: This paper examines the dependence of gold and benchmark bonds with ten stock markets including five larger developed markets (e.g. USA, UK, Japan, Canada and Germany) and five Eurozone peripheral GIPSI countries (Greece, Ireland, Portuguese, Spain and Ireland) stock markets. We use a novel quantile-on-quantile (QQ) approach to construct the dependence estimates of the quantiles of gold and bond with the quantiles of stock markets. The QQ approach, recently developed by Sim and Zhou (2015), captures the dependence between the entire distributions of financial assets and uncovers some nuance features of the relationship. The empirical findings primarily show that gold is strong hedge and diversifier for the stock portfolio except when both the markets are under stress. Further, the flight to safety phenomenon is short-lived because national benchmark bonds exhibit a positive dependence with their respective countries stock indices at various quantiles. Unlike the existing literature, the QQ approach suggest that bonds act as safe havens for the stock portfolio but gold does not. Our findings also suggest that dependence between stock-gold and stock-bond pairs is not uniform and this relationship is market state (e.g. bearish, mild bearish, optimistic or bullish) and country specific.
    Keywords: Stock, Gold, Quantile-on-Quantile, Diversification
    JEL: C01
    Date: 2017–04–05
  5. By: Tatsuo Tanaka (Faculty of Economics, Keio University)
    Abstract: In this paper, we examined the effect of flaming on the stock price in the case of Japanese firms. Flaming refers to massively offensive comments on the internet that sometimes damage firms' reputations or performance. We collected 77 flaming cases during 2012-2015 in Japan and found that the flaming reduced companies' stock prices by 0.7%. The effect of flaming is nonlinear in the sense that a threshold level exists for the degree of flaming beyond which stock prices start to decrease. At the maximum, flaming reduces a company's stock price by approximately 5%. A decline in the stock price occurs only when flaming attacks the quality of the firm's core product and services, suggesting that flaming might be a motivation for firms to improve the quality of their products and services.
    Keywords: flaming, stock price, internet, SNS, difference-in-difference
    JEL: G14 L15 L25
    Date: 2017–01–20

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