nep-fmk New Economics Papers
on Financial Markets
Issue of 2017‒08‒06
seven papers chosen by

  1. The "Size Premium" in Equity Markets: Where is the Risk? By Stefano Ciliberti; Emmanuel S\'eri\'e; Guillaume Simon; Yves Lemp\'eri\`ere; Jean-Philippe Bouchaud
  2. Does Investor Risk Perception Drive Asset Prices in Markets? Experimental Evidence By Jürgen Huber; Stefan Palan; Stefan Zeisberger
  3. Stock market participation in the aftermath of an accounting scandal By Renuka Sane
  4. Private Equity and Financial Fragility during the Crisis By Shai Bernstein; Josh Lerner; Filippo Mezzanotti
  5. Back to the Future: Backtesting Systemic Risk Measures during Historical Bank Runs and the Great Depression By Brownlees, Christian; Chabot, Ben; Ghysels, Eric; Kurz, Christopher
  6. Profitability of CAPM Momentum Strategies in the US Stock Market By Chong, Terence Tai Leung; He, Qing; Ip, Hugo Tak Sang; Siu, Jonathan T.
  7. Downside Risk in the Chinese Stock Market - Has it Fundamentally Changed? By Ghysels, Eric; Liu, Hanwei

  1. By: Stefano Ciliberti; Emmanuel S\'eri\'e; Guillaume Simon; Yves Lemp\'eri\`ere; Jean-Philippe Bouchaud
    Abstract: We find that when measured in terms of dollar-turnover, and once $\beta$-neutralised and Low-Vol neutralised, the Size Effect is alive and well. With a long term t-stat of $5.1$, the "Cold-Minus-Hot" (CMH) anomaly is certainly not less significant than other well-known factors such as Value or Quality. As compared to market-cap based SMB, CMH portfolios are much less anti-correlated to the Low-Vol anomaly. In contrast with standard risk premia, size-based portfolios are found to be virtually unskewed. In fact, the extreme risk of these portfolios is dominated by the large cap leg; small caps actually have a positive (rather than negative) skewness. The only argument that favours a risk premium interpretation at the individual stock level is that the extreme drawdowns are more frequent for small cap/turnover stocks, even after accounting for volatility. This idiosyncratic risk is however clearly diversifiable.
    Date: 2017–08
  2. By: Jürgen Huber (Department of Banking and Finance, University of Innsbruck); Stefan Palan (Department of Banking and Finance, University of Graz); Stefan Zeisberger (Institute for Management Research, Radboud University Nijmegen)
    Abstract: What people perceive as risk clearly goes beyond variance. Several papers have shown that, e.g., probability of loss plays a more prominent role in perceived risk than does variance. We are the first to explore how individual risk perception influences prices and trading behavior in a market setting by exposing subjects to a number of differently shaped return distributions which they then trade on. We first elicit subjects' individual risk perceptions, finding results in line with earlier papers. We then let subjects trade assets with these return distributions on a continuous double auction market. In the markets we observe active trading and prices strongly driven by average risk perception. While standard finance theory predicts identical prices for most of our assets we find average prices to vary by up to 20 percent, with assets perceived as being less risky trading at significantly higher prices.
    Date: 2017–07–24
  3. By: Renuka Sane (National Institute of Public Finance and Policy; Institute of Economic Growth)
    Abstract: In this paper we study the impact on investor behaviour of fraud revelation. We ask if investors with direct exposure to stock market fraud (treated investors) are more likely to decrease their participation in the stock market than investors with no direct exposure to fraud (control investors)? Using daily investor account holdings data from the National Stock Depository Limited (NSDL), the largest depository in India, we find that treated investors cash out almost 10.6 percentage points of their overall portfolio relative to control investors post the crisis. The cashing out is largely restricted to the bad stock's. Over the period of a month,there is no difference in the trading behaviour of the treated and control investors. These results are contrary to those found in mature economies.
    Keywords: corporate fraud; household stock market participation; India
    JEL: D12 D14 G30
    Date: 2017–07
  4. By: Shai Bernstein; Josh Lerner; Filippo Mezzanotti
    Abstract: Do private equity firms contribute to financial fragility during economic crises? We find that during the 2008 financial crisis, PE-backed companies increased investments relative to their peers, while also experiencing greater equity and debt inflows. The effects are stronger among financially constrained companies and those whose private equity investors had more resources at the onset of the crisis. PE-backed companies consequentially experienced higher asset growth and increased market share during the crisis.
    JEL: E32 G24
    Date: 2017–07
  5. By: Brownlees, Christian; Chabot, Ben; Ghysels, Eric; Kurz, Christopher
    Abstract: We evaluate the performance of two popular systemic risk measures, CoVaR and SRISK, during eight financial panics in the era before FDIC insurance. Bank stock price and balance sheet data were not readily available for this time period. We rectify this shortcoming by constructing a novel dataset for the New York banking system before 1933. Our evaluation exercise focuses on assessing whether systemic risk measures were able to detect systemically important financial institutions and to provide early warning signals of aggregate financial sector turbulence. The predictive ability of CoVaR and SRISK is measured controlling for a set of commonly employed market risk measures and bank ratios. We find that CoVaR and SRISK help identifying systemic institutions in periods of distress beyond what is explained by standard risk measures up to six months prior to the panic events. Increases in aggregate CoVaR and SRISK precede worsening conditions in the financial system; however, the evidence of predictability is weaker.
    Keywords: Financial crises; Risk Measures; systemic risk
    JEL: G01 G21 G28 N21
    Date: 2017–07
  6. By: Chong, Terence Tai Leung; He, Qing; Ip, Hugo Tak Sang; Siu, Jonathan T.
    Abstract: This paper provides a historical review of the performance of the risk-adjusted momentum strategies when buying and selling stocks according to the alpha estimates of the CAPM and Fama–French regressions. Our sample covers over 60 million US daily firm-return observations. High Sharpe ratios are obtained under our risk-adjusted strategies. It is also found that stock market crashes have no apparent impact on our momentum profits.
    Keywords: Momentum Strategies; Sharpe Ratio; Fama-French Model; CAPM Model.
    JEL: G14
    Date: 2017–06–29
  7. By: Ghysels, Eric; Liu, Hanwei
    Abstract: The Chinese economy has gained a more significant role on the world stage. As a consequence, a wide range of investors, both domestic and foreign, have paid more attention to the Chinese stock market. One focal point has been the downside risk, in particular in light of the large price movements and the regulatory changes which took place over time. In this paper we study the pattern of downside risks using the 1\% and 5\% conditional quantiles of the equity index returns. One of our ultimate goals is to provide an objective assessment of the regulatory policy changes and government actions in the Chinese market. We discover several break dates linked to major financial crises and trading reforms put forth by the China Securities Regulatory Commission. Furthermore, our findings indicate that breaks in the B shares and the H shares downside risk tend to appear earlier than those corresponding to the A shares returns. Lastly, the revised Qualified Foreign Institutional Investor (QFII) program in 2006 and government share purchasing actions in 2015 have shown to be effective at alleviating downside risks in the Shanghai A shares.
    Date: 2017–07

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