nep-fmk New Economics Papers
on Financial Markets
Issue of 2017‒12‒03
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Financial Innovation and Asset Prices By Buss, Adrian; Uppal, Raman
  2. Equity in Startups By Herv\'e Lebret
  3. Risk Management and Regulation By Adrian, Tobias

  1. By: Buss, Adrian; Uppal, Raman
    Abstract: We study the effects of financial innovation on the dynamics of asset prices. We show that when some investors are less well informed about the new asset but rationally learn about it, many "intuitive'' results are reversed: financial innovation increases the volatility of investors' portfolios along with the return volatility and risk premium for the new asset, which decline to their pre-innovation levels only slowly. Moreover, illiquidity of the new asset causes shocks to the new asset to spill over to the traditional asset, increasing their return correlation and giving rise to a liquidity premium for the new asset.
    Keywords: differences in beliefs; parameter uncertainty; rational learning; recursive utility; spillover effects
    JEL: G11 G12
    Date: 2017–11
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:12416&r=fmk
  2. By: Herv\'e Lebret
    Abstract: Startups have become in less than 50 years a major component of innovation and economic growth. An important feature of the startup phenomenon has been the wealth created through equity in startups to all stakeholders. These include the startup founders, the investors, and also the employees through the stock-option mechanism and universities through licenses of intellectual property. In the employee group, the allocation to important managers like the chief executive, vice-presidents and other officers, and independent board members is also analyzed. This report analyzes how equity was allocated in more than 400 startups, most of which had filed for an initial public offering. The author has the ambition of informing a general audience about best practice in equity split, in particular in Silicon Valley, the central place for startup innovation.
    Date: 2017–11
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1711.00661&r=fmk
  3. By: Adrian, Tobias
    Abstract: The evolution of risk management has resulted from the interplay of financial crises, risk management practices, and regulatory actions. In the 1970s, research lay the intellectual foundations for the risk management practices that were systematically implemented in the 1980s as bond trading revolutionized Wall Street. Quants developed dynamic hedging, Value-at-Risk, and credit risk models based on the insights of financial economics. In parallel, the Basel I framework created a level playing field among banks across countries. Following the 1987 stock market crash, the near failure of Salomon Brothers, and the failure of Drexel Burnham Lambert, in 1996 the Basel Committee on Banking Supervision published the Market Risk Amendment to the Basel I Capital Accord; the amendment went into effect in 1998. It led to a migration of bank risk management practices toward market risk regulations. The framework was further developed in the Basel II Accord, which, however, from the very beginning, was labeled as being procyclical due to the reliance of capital requirements on contemporaneous volatility estimates. Indeed, the failure to measure and manage risk adequately can be viewed as a key contributor to the 2008 global financial crisis. Subsequent innovations in risk management practices have been dominated by regulatory innovations, including capital and liquidity stress testing, macroprudential surcharges, resolution regimes, and countercyclical capital requirements.
    Keywords: Banking; Financial crises; regulation; Risk management
    JEL: G00 G01 G21 G24 G28
    Date: 2017–11
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:12422&r=fmk

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