nep-fmk New Economics Papers
on Financial Markets
Issue of 2017‒09‒10
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Market entry waves and volatility outbursts in stock markets By Blaurock, Ivonne; Schmitt, Noemi; Westerhoff, Frank
  2. Sovereign Bond Prices, Haircuts and Maturity By Asonuma, Tamon; Niepelt, Dirk; Rancière, Romain
  3. Firm-Specific Risk-Neutral Distributions : The Role of CDS Spreads By Sirio Aramonte; Mohammad Jahan-Parvar; Samuel Rosen; John W. Schindler
  4. The U.S. Treasury Premium By Wenxin Du; Joanne Im; Jesse Schreger

  1. By: Blaurock, Ivonne; Schmitt, Noemi; Westerhoff, Frank
    Abstract: We develop a simple agent-based financial market model in which speculators' market entry decisions are subject to herding behavior and market risk. Moreover, speculators' orders depend on price trends, market misalignments and fundamental news. Using a mix of analytical and numerical tools, we show that a herding-induced market entry wave may amplify excess demand, triggering lasting volatility outbursts. Eventually, however, higher stock market risk reduces stock market participation and volatility decreases again. Simulations furthermore reveal that our approach is also able to produce bubbles and crashes, excess volatility, fat-tailed return distributions and serially uncorrelated price changes.
    Keywords: stock markets,heterogeneous speculators,exponential replicator dynamics,herding behavior,stylized facts
    JEL: C63 D84 G15
    Date: 2017
  2. By: Asonuma, Tamon; Niepelt, Dirk; Rancière, Romain
    Abstract: Rejecting a common assumption in the sovereign debt literature, we document that creditor losses ("haircuts") during sovereign restructuring episodes are asymmetric across debt instruments. We code a comprehensive dataset on instrument-specific haircuts for 28 debt restructurings with private creditors in 1999-2015 and find that haircuts on shorter-term debt are larger than those on debt of longer maturity. In a standard asset pricing model, we show that increasing short-run default risk in the run-up to a restructuring episode can explain the stylized fact. The data confirms the predicted relation between perceived default risk, bond prices, and haircuts by maturity.
    Keywords: Bond Pricing; debt restructuring; Sovereign debt
    JEL: F3 F34 G11
    Date: 2017–08
  3. By: Sirio Aramonte; Mohammad Jahan-Parvar; Samuel Rosen; John W. Schindler
    Abstract: We propose a method to extract individual firms' risk-neutral return distributions by combining options and credit default swaps (CDS). Options provide information about the central part of the distribution, and CDS anchor the left tail. Jointly, options and CDS span the intermediate part of the distribution, which is driven by moderate-sized jump risk. We study the returns on a trading strategy that buys (sells) stocks exposed to positive (negative) moderate-sized jump risk unspanned by options or CDS individually. Controlling for many known factors, this strategy earns a 0.5% premium per month, highlighting the economic value of combining options and CDS.
    Keywords: Risk neutral distributions ; CDS spreads ; Cross-section of expected returns
    JEL: G12 G13 G14
    Date: 2017–08–31
  4. By: Wenxin Du; Joanne Im; Jesse Schreger
    Abstract: We quantify the difference in the convenience yield of U.S. Treasuries and the bonds of near default-free sovereigns by measuring the gap between the FX swap-implied dollar yield paid by foreign governments and the U.S. Treasury dollar yield. We call this wedge the “U.S. Treasury Premium.” We find that this premium was approximately 21 basis points for five-year bonds prior to the Global Financial Crisis, increased up to 90 basis points during the crisis, and has disappeared since the crisis with the post-crisis mean at -8 basis points. We show the decline in the premium cannot be explained away by credit risk or FX swap market mispricings. In addition, we present evidence that the relative supply of government bonds in the United States and foreign countries affects the premium.
    JEL: E4 F30 G12 G15
    Date: 2017–08

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