nep-fmk New Economics Papers
on Financial Markets
Issue of 2017‒08‒20
five papers chosen by

  1. What is the effect of insider trading on price efficiency? Evidence from a betting exchange By Paolo Bizzozero; Raphael Flepp; Egon Franck
  2. Systemic Risk in Financial Systems: a feedback approach By Thiago Christiano Silva; Michel Alexandre da Silva; Benjamin Miranda Tabak
  3. Liquidity premia in CDS markets By Kamga, Merlin Kuate; Wilde, Christian
  4. FinTech and Financial Innovation : Drivers and Depth By John W. Schindler
  5. Dotcom Price Spiral By Pinheiro, Roberto; de Carvalho, Antonio Gledson; Sampaio, Joelson Oliveira

  1. By: Paolo Bizzozero (Department of Business Administration, University of Zurich); Raphael Flepp (Department of Business Administration, University of Zurich); Egon Franck (Department of Business Administration, University of Zurich)
    Abstract: We present evidence that insider trading substantially contributes to the price discovery process after important news events and thus helps to create effcient markets. Live betting offers a unique opportunity to isolate and measure the activity of traders with earlier access to information (insiders). We perform an event study using detailed, point-by-point data from 141 men’s singles matches at two major professional tennis tournaments. The results show that betting prices start updating long before the general public receives the new information, indicating the existence of insider traders. Most importantly, the cumulative abnormal return during the first few seconds of insider trading following an important event is more than 60% of the full price reaction observed once the public receives the new information, meaning that insider trading has a large impact on price discovery. We also show that a simple trading strategy based on inside information can generate significant returns.
    Keywords: Market effciency, insider trading, event study, tennis betting
    JEL: G14 L83
    Date: 2017–08
  2. By: Thiago Christiano Silva; Michel Alexandre da Silva; Benjamin Miranda Tabak
    Abstract: We develop an innovative framework to estimate systemic risk that accounts for feedback effects between the real and financial sectors. We model the feedback effects through successive deterioration of borrowers’ creditworthiness and illiquidity spreading, thus giving rise to a micro-level financial accelerator between firms and banks. We demonstrate that the model converges to a unique fixed point and the key role that centrality plays in shaping the level of amplification of shocks. We also provide a mathematical framework to explain systemic risk variations in time as a function of the network characteristics of economic agents. Finally, we supply empirical evidence on the economic significance of the feedback effects on comprehensive loan-level data of the Brazilian credit register. Our results corroborate the importance of incorporating new contagion channels besides the traditional interbank market in systemic risk models. Our model sheds light on the policy issue regarding risk-weighting of assets that also internalizes the costs of systemic risk
    Date: 2017–08
  3. By: Kamga, Merlin Kuate; Wilde, Christian
    Abstract: We develop a state-space model to decompose bid and ask quotes of CDS into two components, fair default premium and liquidity premium. This approach gives a better estimate of the default premium than mid quotes, and it allows to disentangle and compare the liquidity premium earned by the protection buyer and the protection seller. In contrast to other studies, our model is structurally much simpler, while it also allows for correlation between liquidity and default premia, as supported by empirical evidence. The model is implemented and applied to a large data set of 118 CDS for a period ranging from 2004 to 2010. The model-generated output variables are analyzed in a difference-in-difference framework to determine how the default premium, as well as the liquidity premium of protection buyers and sellers, evolved during different periods of the financial crisis and to which extent they differ for financial institutions compared to non-financials.
    Keywords: CDS,liquidity
    JEL: C22 G12
    Date: 2017
  4. By: John W. Schindler
    Abstract: This paper answers two questions that help those analyzing FinTech understand its origins, growth, and potential to affect financial stability. First, it answers the question of why "FinTech" is happening right now. Many of the technologies that support FinTech innovations are not new, but financial institutions and entrepreneurs are only now applying them to financial products and services. Analysis of the supply and demand factors that drive "traditional" financial innovation reveals a confluence of factors driving a large quantity of innovation. Second, this paper answers the question of why FinTech is getting so much more attention than traditional innovation normally does. The answer to this question has to do with the 'depth' of innovation, a concept introduced in this paper. The deeper an innovation, the greater the ability of that innovation to transform financial services. The paper shows that many FinTech innovations are deep innovations and hence have a greater potential to change financial services. A greater potential to transform can also lead to a greater chance of affecting financial stability.
    Keywords: FinTech ; Financial innovation
    JEL: G10 G18 G28
    Date: 2017–08–10
  5. By: Pinheiro, Roberto (Federal Reserve Bank of Cleveland); de Carvalho, Antonio Gledson (Fundação Getulio Vargas, School of Business at São Paulo); Sampaio, Joelson Oliveira (Fundação Getulio Vargas, School of Economics at São Paulo)
    Abstract: We show that during the bubble implied growth rates coming from the underpricing of IPO market explains short term returns on the NASDAQ index. This result remains even if we replace actual underprice for others different instruments for underpricing that are based on predetermined variables and not correlated to market returns. We also do placebo tests to assess the relation between underpricing and NASDAQ returns over other periods. We show that growth proxies that are not contaminated by the booms and busts of the stock market are uncorrelated with the returns on the NASDAQ index in periods outside the bubble.
    Keywords: Internet bubble; underpricing; spinning; analyst lust; risk composition hypothesis;
    JEL: G14 G24 L1 O33
    Date: 2017–07–25

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