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on Financial Markets |
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Issue of 2017‒09‒03
six papers chosen by |
| By: | Davide Valenti; Giorgio Fazio; Bernardo Spagnolo |
| Abstract: | In financial markets, greater volatility is usually considered synonym of greater risk and instability. However, large market downturns and upturns are often preceded by long periods where price returns exhibit only small fluctuations. To investigate this surprising feature, here we propose using the mean first hitting time, i.e. the average time a stock return takes to undergo for the first time a large negative or positive variation, as an indicator of price stability, and relate this to a standard measure of volatility. In an empirical analysis of daily returns for $1071$ stocks traded in the New York Stock Exchange, we find that this measure of stability displays nonmonotonic behavior, with a maximum, as a function of volatility. Also, we show that the statistical properties of the empirical data can be reproduced by a nonlinear Heston model. This analysis implies that, contrary to conventional wisdom, not only high, but also low volatility values can be associated with higher instability in financial markets. |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1708.08695&r=fmk |
| By: | Andolfatto, David (Federal Reserve Bank of St. Louis); Berentsen, Aleksander (University of Basel); Martin, Fernando M. (Federal Reserve Bank of St. Louis) |
| Abstract: | The fact that money, banking, and financial markets interact in important ways seems self-evident. The theoretical nature of this interaction, however, has not been fully explored. To this end, we integrate the Diamond (1997) model of banking and financial markets with the Lagos and Wright (2005) dynamic model of monetary exchange--a union that bears a framework in which fractional reserve banks emerge in equilibrium, where bank assets are funded with liabilities made demandable for government money, where the terms of bank deposit contracts are constrained by the liquidity insurance available in financial markets, where banks are subject to runs, and where a central bank has a meaningful role to play, both in terms of inflation policy and as a lender of last resort. The model provides a rationale for nominal deposit contracts combined with a central bank lender-of-last-resort facility to promote efficient liquidity insurance and a panic-free banking system. |
| Date: | 2017–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-023&r=fmk |
| 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 dataset 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 fixed effects, revenues, and profits add substantial explanatory power for compensation. |
| Keywords: | financial sector income; mutual fund performance; Portfolio manager compensation |
| JEL: | G00 G23 J24 J31 J33 J44 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12241&r=fmk |
| By: | Stavros Stavroyiannis |
| Abstract: | Digital currencies and cryptocurrencies have hesitantly started to penetrate the investors, and the next step will be the regulatory risk management framework. We examine the Value-at-Risk and Expected Shortfall properties for the major digital currencies, Bitcoin, Ethereum, Litecoin, and Ripple. The methodology used is GARCH modelling followed by Filtered Historical Simulation. We find that digital currencies are subject to a higher risk, therefore, to higher sufficient buffer and risk capital to cover potential losses. |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1708.09343&r=fmk |
| By: | Garbade, Kenneth D. (Federal Reserve Bank of New York); Keane, Frank M. (Federal Reserve Bank of New York) |
| Abstract: | Modern money and capital markets are not free-form bazaars where participants are left alone to contract as they choose, but rather are circumscribed by a variety of statutes, regulations, and behavioral norms. This paper examines the circumstances surrounding the introduction of a set of norms recommended by the Treasury Market Practices Group (TMPG) and pertinent to trading in U.S. government securities. The TMPG is a voluntary association of market participants that does not have any direct or indirect statutory authority; its recommendations do not have the force of law. The recommendations do, however, carry the cachet of respected market participants and are targeted to behaviors that are widely acknowledged to impinge on market liquidity and that risk damaging the reputation of the market. |
| Keywords: | Treasury Market Practices Group; behavioral norms; fails charge; dealer time; margin |
| JEL: | E58 G20 N22 |
| Date: | 2017–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:822&r=fmk |
| By: | Khan, Muhammad Kamran; Teng, Jian -Zhou; Parviaz, Javed; Chaudhary, Sunil Kumar |
| Abstract: | Economist and stock managers always focus on stock market return. This study investigated short and long run relationship between economic factors and stock returns in China by applying ARDL approach from 01/2000 to 12/2016. Estimated results of bound test for co-integration shows that long run relationships exist among the variables except inflation rate. Results of short and long run ARDL demonstrate that exchange rate and inflation rate have positive effect on stock returns in China while interest rate have negative effect on stock returns. Results indicate that stock returns in China are very sensitive and can be affected positively or negatively with increase and decrease in economic factors. Both local and regional factors in China can directly and indirectly explain Shanghai Stock Exchange stock returns. |
| Keywords: | stock returns, economic factors, ARDL |
| JEL: | E4 G10 |
| Date: | 2017–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:81017&r=fmk |