nep-fmk New Economics Papers
on Financial Markets
Issue of 2017‒05‒14
seven papers chosen by

  1. The Decline in Asset Return Predictability and Macroeconomic Volatility By Alex Hsu; Francisco J. Palomino; Charles Qian
  2. Are Mutual Fund Managers Paid For Investment Skill? By Ibert, Marcus; Kaniel, Ron; van Nieuwerburgh, Stijn; Vestman, Roine
  3. Machine Learning for Better Models for Predicting Bond Prices By Swetava Ganguli; Jared Dunnmon
  4. Global commodity prices and global stock volatility shocks: Effects across countries By Wensheng Kang; Ronald A. Ratti; Joaquin Vespignani
  5. U.S. municipal yields and unfunded state pension liabilities By Beetsma, Roel; Lekniute, Zina; Ponds, Eduard
  6. "The Dynamics of Government Bond Yields in the Eurozone" By Tanweer Akram; Anupam Das
  7. Exuberance in Historical Stock Prices during the Mississippi and South Seas Bubble Episodes By Yang Hu; Les Oxley

  1. By: Alex Hsu; Francisco J. Palomino; Charles Qian
    Abstract: We document strong U.S. stock and bond return predictability from several macroeconomic volatility series before 1982, and a significant decline in this predictability during the Great Moderation. These findings are robust to alternative empirical specifications and out-of-sample tests. We explore the predictability decline using a model that incorporates monetary policy and shocks with time-varying volatility. The decline is consistent with changes in both policy and shock dynamics. While an increase in the response to inflation in the interest-rate policy rule decreases volatility, more persistent and less volatile shocks explain the lower predictability.
    Keywords: Asset return predictability ; Great Moderation ; Monetary policy ; Time-varying macroeconomic volatility
    JEL: E14 E44 G12 G18
    Date: 2017–05
  2. By: Ibert, Marcus; Kaniel, Ron; van Nieuwerburgh, Stijn; Vestman, Roine
    Abstract: Compensation of mutual fund managers is paramount to understanding agency frictions in asset delegation. We collect a unique registry-based data set on the compensation of Swedish mutual fund managers. We find a concave relationship between pay and revenue, in contrast to how investors compensate the fund company (firm). We also find a surprisingly weak sensitivity of pay to performance, even after accounting for the indirect effects of performance on revenue. Firm-level revenues and profits add substantial explanatory power for compensation to manager-level revenue and performance, highlighting the importance of the mutual fund firm.
    Keywords: financial sector income; mutual fund performance; Portfolio manager compensation
    JEL: G00 G23 J24 J31 J33 J44
    Date: 2017–04
  3. By: Swetava Ganguli; Jared Dunnmon
    Abstract: Bond prices are a reflection of extremely complex market interactions and policies, making prediction of future prices difficult. This task becomes even more challenging due to the dearth of relevant information, and accuracy is not the only consideration--in trading situations, time is of the essence. Thus, machine learning in the context of bond price predictions should be both fast and accurate. In this course project, we use a dataset describing the previous 10 trades of a large number of bonds among other relevant descriptive metrics to predict future bond prices. Each of 762,678 bonds in the dataset is described by a total of 61 attributes, including a ground truth trade price. We evaluate the performance of various supervised learning algorithms for regression followed by ensemble methods, with feature and model selection considerations being treated in detail. We further evaluate all methods on both accuracy and speed. Finally, we propose a novel hybrid time-series aided machine learning method that could be applied to such datasets in future work.
    Date: 2017–03
  4. By: Wensheng Kang; Ronald A. Ratti; Joaquin Vespignani
    Abstract: This paper investigates the time-varying dynamics of global stock volatility, commodity prices, and domestic output and consumer prices. The main empirical findings of this papers are: (i) stock volatility and commodity price shocks impact each other and the economy in a gradual and endogenous adjustment process; (ii) the impact of a commodity price shock on global stock volatility is far greater during the global financial crisis than at other times; (iii) the effects of global stock volatility on the US output are amplified by the endogenous commodity price responses; (iv) in the long run, shocks to commodity prices (stock market volatility) account for 11.9% (6.6%) and 25.1% (11.6%) of the variation in US output and consumer prices; (v) the effects of global stock volatility shocks on the economy are heterogeneous across nations and relatively larger in the developed countries.
    Keywords: Global commodity prices, Global stock volatility, Output, Heterogeneity
    JEL: D80 E44 E66 F62 G10
    Date: 2017–05
  5. By: Beetsma, Roel; Lekniute, Zina; Ponds, Eduard
    Abstract: We present empirical evidence that municipal bond yields are increasing in the pension debt towards U.S. state civil servants. However, positive yield effects of both pension and explicit debt are found only for the period since the start of the crisis, suggesting that the crisis triggered awareness of budgetary sustainability. The marginal yield effect of higher pension debt is smaller than that of higher explicit debt, but still economically meaningful. The effect of higher pension debt seems stronger when using market values of pension assets than actuarial values, suggesting that investors pay more attention to market values.
    Keywords: actuarial values; civil servants pension funds; explicit debt; implicit debt; market values; municipal yields; underfunding; unfunded pension liabilities
    JEL: G12 H55 H74 H75
    Date: 2017–04
  6. By: Tanweer Akram; Anupam Das
    Abstract: This paper investigates the determinants of nominal yields of government bonds in the eurozone. The pooled mean group (PMG) technique of cointegration is applied on both monthly and quarterly datasets to examine the major drivers of nominal yields of long-term government bonds in a set of 11 eurozone countries. Furthermore, autoregressive distributive lag (ARDL) methods are used to address the same question for individual countries. The results show that short-term interest rates are the most important determinants of long-term government bonds' nominal yields, which supports Keynes's (1930) view that short-term interest rates and other monetary policy measures have a decisive influence on long-term interest rates on government bonds.
    Keywords: Government Bond Yields; Interest Rates; Monetary Policy; Eurozone
    JEL: E43 E50 E60 G10 G12 O16
    Date: 2017–05
  7. By: Yang Hu (University of Waikato); Les Oxley (University of Waikato)
    Abstract: The Mississippi Bubble and the South Sea Bubble are the two most famous and earliest episodes in the history of speculation, which can be dated back to the eighteenth century. Unlike most studies focus on some recent financial bubble footprints, we pay special attention to the most remarkable events in 1720. We empirically test for evidence of exuberance in historical stock prices of the Mississippi Company and the South Sea Company during the well-documented Mississippi Bubble and South Sea Bubble episodes, respectively. The right-tailed unit root test of Phillips, Shi and Yu (2015, PSY) is utilised in this paper. In addition, contagion in these historical markets is also considered.
    Keywords: exuberance; generalized sup ADF test; South Sea Bubble; Mississippi Bubble
    JEL: C12 N2
    Date: 2017–04–28

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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.