nep-fmk New Economics Papers
on Financial Markets
Issue of 2017‒10‒01
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Modelling Return and Volatility Spillovers in Global Foreign Exchange Markets By Afees A. Salisu; Oluwatomisinn Oyewole; Ismail O. Fasanya
  2. A Matter of Trust? The Bond Market Benefits of Corporate Social Capital during the Financial Crisis By Amiraslani, Hami; Lins, Karl; Servaes, Henri; Tamayo, Ane
  3. Single Beta and Dual Beta Models: A Testing of CAPM on Condition of Market Overreactions By Ferikawita M. Sembiring
  4. Herding behaviour of Dutch pension funds in sovereign bond investments By Ian Koetsier; Jacob Bikker
  5. Political Risk and Stock Returns in Indonesia By Paulina Yuritha Amtiran

  1. By: Afees A. Salisu (Centre for Econometric and Allied Research, University of Ibadan); Oluwatomisinn Oyewole (Department of Economics, College of Management Sciences Federal University of Agriculture, Abeokuta, Nigeria); Ismail O. Fasanya (Department of Economics, College of Management Sciences Federal University of Agriculture, Abeokuta, Nigeria)
    Abstract: In this paper, we measure return and volatility spillovers in global foreign exchange (FX) markets using six most traded currency pairs in the world namely the aussie, cable, euro, gropher, loonie and swissie. We employ the Diebold and Yilmaz (2012) approach and consequently, we compute Total Spillover, Directional Spillover and Net Spillover indexes. We utilize daily data from Jaunary 01 1999 to December 31, 2014. We also carry out rolling sample analyses in order to capture secular and cyclical movements in global FX markets. We find evidence of interdependence among the major traded currency pairs based on the spillover indexes. In addition, return spillovers exhibit mild trends and bursts while volatility spillovers exhibit significant bursts but no trends. We also identify crisis episodes that seem to have influenced the recorded fluctuations in returns and volatilities of global FX markets. Our results are robust to the VAR lag structure, forecast horizon and rolling window width.
    Keywords: FX market, Returns, Volatilities, Vector autoregression (VAR), Forecast error variance, Spillover index
    JEL: Q54 F31 G15
    Date: 2017–09
  2. By: Amiraslani, Hami; Lins, Karl; Servaes, Henri; Tamayo, Ane
    Abstract: We investigate whether a firm's social capital, and the trust that it engenders, are viewed favorably by bondholders. Using the financial crisis as an exogenous shock to trust, and firms' corporate social responsibility (CSR) activities as a proxy for social capital, we show that high-CSR firms benefited from lower bond spreads in the secondary market during the financial crisis compared to low-CSR firms. These findings are more pronounced for firms that, when in distress, have a greater opportunity to engage in asset substitution or divert cash to shareholders. High-CSR firms were also able to raise more debt capital on the primary market during this period, and those high-CSR firms that raised more debt were able to do so at lower at-issue bond spreads, better initial credit ratings, and for longer maturities. Our results suggest that debt investors believe that high-CSR firms are less likely to engage in asset substitution and diversion that would be detrimental to stakeholders, including debtholders. These findings also indicate that the benefits of CSR that accrued to shareholders during the financial crisis carry across to another important asset class, debt capital.
    Keywords: corporate bonds; cost of debt; CSR; financial crisis; social capital; Trust
    JEL: G12 G21 G32 M14
    Date: 2017–09
  3. By: Ferikawita M. Sembiring (Jenderal Achmad Yani University, Indonesia. Author-2-Name: Sulaeman Rahman Author-2-Workplace-Name: Padjadjaran University, Bandung Indonesia. Author-3-Name: Nury Effendi Author-3-Workplace-Name: Padjadjaran University, Bandung Indonesia. Author-4-Name: Rachmat Sudarsono Author-4-Workplace-Name: Padjadjaran University, Bandung Indonesia.)
    Abstract: "Objective – A previous study conducted by the same authors found that the conditions of market overreaction occurred in Indonesia and the market factor in CAPM, or a single beta, is able to explain the portfolio returns. As a continuation of that study, we now use the concept of conditional CAPM, or a dual beta, to test whether the performance of the dual beta can outperform the single beta. Methodology/Technique – The research uses the stocks of non-financial sector company on the Indonesian Stock Exchange during the period between July 2005 and December 2015, which have been divided into two portfolios; the winner and the loser. The conditional CAPM is applied by separating the market into upstream markets and downstream markets, so the dual beta model can be formulated. Findings – The results are consistent with the findings of Pettengill et al. (1995). The results of a single beta test do not comply with the conditions required in the CAPM model and this can be corrected through conditional beta testing that includes the testing on the up beta, down beta, and the dual beta. Novelty – The dual beta model can explain the returns of the portfolio in accordance with the expected results in CAPM testing. The explanation by using the dual beta model is more accurate and more successful than the single beta model."
    Keywords: Conditional CAPM, Dual Beta, Loser Portfolio, Winner Portfolio.
    JEL: J11 G31
    Date: 2017–06–21
  4. By: Ian Koetsier; Jacob Bikker
    Abstract: This study investigates herding behaviour exhibited by Dutch pension funds in the sovereign bond market. It uses a unique dataset on sovereign bond holdings of pension funds, mutations and transactions between December 2008 and December 2014. It covers 67 large Dutch pension funds that invest in 109 countries. We find evidence of intensive herding behaviour of Dutch pension funds in sovereign bonds. Our findings also show that institutional factors, the macroeconomic environment and the financial market environment are among the determinants of herding behaviour in sovereign bonds. Our results also indicate that high diversification is not without costs as it intensifies herding behaviour. We find mixed evidence on whether pension funds are stabilising actors. The destabilising effect is most pronounced on the sell side, while stabilisation is most prominent under more extreme price shocks. The distinction between developing and emerging economies and developed economies does not change these results.
    Keywords: Herd behaviour; stabilising; destabilising; pension funds; sovereign bonds
    JEL: G11 G15 G18 G23
    Date: 2017–09
  5. By: Paulina Yuritha Amtiran (Economic and Business Faculty, Universitas Nusa Cendana, Indonesia Author-2-Name: Rina Indiastuti Author-2-Workplace-Name: Universitas Padjadjaran, Bandung, Indonesia)
    Abstract: "Objective – The research aims to find the relationship between the political risk with stock returns. Methodology/Technique – Using the purposive sampling, secondary data on 30 companies listed in Indonesia Stock Exchange (BEI) of the year 2007-2015. Analysis technique used is weighted least square regression Findings – The results of study Political risks significantly positively associated with stock returns. These results imply a change from the shock of political risk will affect cost of capital of the company increased, causing the company's stock price will go up which in the end impact on improving the company's stock returns obtained. Novelty – The study implies Shock due to the change of political risk has a direct impact on the company's financial condition primarily of the cost of capital companies because it involves policy and investment decisions are made in Indonesia."
    Keywords: BEI; Market Capitalization; Market Returns; Political Risk; Stock Returns.
    JEL: G30 G32
    Date: 2017–06–21

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