nep-fmk New Economics Papers
on Financial Markets
Issue of 2017‒11‒26
seven papers chosen by

  1. Asset volatility By Correia, Maria; Kang, Johnny; Richardson, Scott
  2. Daily Price Limits and Destructive Market Behavior By Ting Chen; Zhenyu Gao; Jibao He; Wenxi Jiang; Wei Xiong
  3. The Use of Financial Market Variables in Forecasting By Stefan Gebauer
  4. The multiplex dependency structure of financial markets By Musmeci, Nicoló; Nicosia, Vincenzo; Aste, Tomaso; Di Matteo, Tiziana; Latora, Vito
  5. Capital Market Integration and Macroeconomic Stability By Franziska Bremus; Ruth Stelten
  6. An index of Treasury Market liquidity: 1991-2017 By Adrian, Tobias; Fleming, Michael J.; Vogt, Erik
  7. A tale of two indexes: predicting equity market downturns in China By Lleo, Sebastien; Ziemba, William T.

  1. By: Correia, Maria; Kang, Johnny; Richardson, Scott
    Abstract: We examine whether fundamental measures of volatility are incremental to market based measures of volatility in (i) predicting bankruptcies (out of sample), (ii) explaining crosssectional variation in credit spreads, and (iii) explaining future credit excess returns. Our fundamental measures of volatility include (i) historical volatility in profitability, margins, turnover, operating income growth, and sales growth, (ii) dispersion in analyst forecasts of future earnings, and (iii) quantile regression forecasts of the interquartile range of the distribution of profitability. We find robust evidence that these fundamental measures of volatility improve out of sample forecasts of bankruptcy and are useful in explaining crosssectional variation in credit spreads. This suggests that an analysis of credit risk can be enhanced with a detailed analysis of fundamental information. As a test case of the benefit of volatility forecasting, we document an improved ability to forecast future credit excess returns, particularly when using fundamental measures of volatility.
    JEL: M40 F3 G3
    Date: 2017–07–21
  2. By: Ting Chen; Zhenyu Gao; Jibao He; Wenxi Jiang; Wei Xiong
    Abstract: We use account-level data from the Shenzhen Stock Exchange to show that daily price limits, a widely adopted market stabilization mechanism, may lead to unintended, destructive market behavior: large investors tend to buy on the day when a stock hits the 10% upper price limit and then sell on the next day; and their net buying on the limit-hitting day predicts stronger long-run price reversal. We also analyze a sample of special treatment (ST) stocks, which face tighter 5% daily price limits, and provide a causal validation from comparing market dynamics before and after they are assigned the ST status.
    JEL: G12 G28
    Date: 2017–11
  3. By: Stefan Gebauer
    Abstract: Financial market indicators can provide valuable information for forecasting macroeconomic developments. In response to the global financial crisis of 2007/2008, the role of financial variables for forecasting has been revisited, and new empirical and theoretical forecasting methods able to explicitly incorporate financial market information have been developed. This roundup discusses characteristics of financial variable movements and the relation to business cycles. It furthermore summarizes some of the new theoretical and empirical approaches at hand for forecasting macroeconomic variables with financial market information, and highlights main challenges forecasters willing to consider financial market information in forecasting exercises have to face.
    Date: 2017
  4. By: Musmeci, Nicoló; Nicosia, Vincenzo; Aste, Tomaso; Di Matteo, Tiziana; Latora, Vito
    Abstract: We propose here a multiplex network approach to investigate simultaneously different types of dependency in complex datasets. In particular, we consider multiplex networks made of four layers corresponding, respectively, to linear, nonlinear, tail, and partial correlations among a set of financial time series. We construct the sparse graph on each layer using a standard network filtering procedure, and we then analyse the structural properties of the obtained multiplex networks. The study of the time evolution of the multiplex constructed from financial data uncovers important changes in intrinsically multiplex properties of the network, and such changes are associated with periods of financial stress. We observe that some features are unique to the multiplex structure and would not be visible otherwise by the separate analysis of the single-layer networks corresponding to each dependency measure.
    JEL: F3 G3
    Date: 2017–09–20
  5. By: Franziska Bremus; Ruth Stelten
    Abstract: After the establishment of the Banking Union, the European Commission is working on measures to foster capital market deepening in Europe. Key goals for a European Capital Markets Union are to provide firms with alternative funding sources to bank credit and to make economies more resilient to local shocks through better international risk sharing. While open capital markets can improve portfolio diversification, growth and welfare, the recent financial crisis was a reminder that capital market integration also carries risks in terms of economic stability. This article summarizes pros and cons of capital market openness and discusses stability implications of different forms of capital market integration.
    Date: 2017
  6. By: Adrian, Tobias (International Monetary Fund); Fleming, Michael J. (Federal Reserve Bank of New York); Vogt, Erik (‎Citadel LLC)
    Abstract: Order book and transactions data from the U.S. Treasury securities market are used to calculate daily measures of bid-ask spreads, depth, and price impact for a twenty-six-year sample period (1991-2017). From these measures, a daily index of Treasury market liquidity is constructed, reflecting the fact that the varying measures capture different aspects of market liquidity. The liquidity index is then correlated with various metrics of funding liquidity, volatility, and macroeconomic conditions. The liquidity index points to poor liquidity during the 2007-09 financial crisis and around the near failure of Long-Term Capital Management, but suggests that current liquidity is good by historical standards. Market liquidity tends to be strongly correlated with funding liquidity at times of market stress, but otherwise exhibits little correlation.
    Keywords: Treasury securities; market liquidity; funding liquidity; volatility; index
    JEL: G12
    Date: 2017–11–01
  7. By: Lleo, Sebastien; Ziemba, William T.
    Abstract: Predicting stock market crashes is a focus of interest for both researchers and practitioners. Several prediction models have been developed, mostly for use on mature financial markets. In this paper, we investigate whether traditional crash predictors, the price-to-earnings ratio, the Cyclically Adjusted Price-to-Earnings ratio and the Bond-Stock Earnings Yield Differential model, predicts crashes for the Shanghai Stock Exchange Composite Index and the Shenzhen Stock Exchange Composite Index
    Keywords: equity markets; crashes; China; BSEYD; CAPE
    JEL: G10 G12 G14 G15
    Date: 2017–08–01

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