nep-fmk New Economics Papers
on Financial Markets
Issue of 2017‒12‒11
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Relationship Trading in OTC Markets By Hendershott, Terrence; Li, Dan; Livdan, Dmitry; Schürhoff, Norman
  2. Estimation for high-frequency data under parametric market microstructure noise By Simon Clinet; Yoann Potiron
  3. Founding family ownership,stock market returns, and agency problems By Eugster, Nicolas; Isakov, Dusan
  4. Model Risk of Expected Shortfall By Emese Lazar; Ning Zhang;
  5. Volatility Spillovers across Global Asset Classes: Evidence from Time and Frequency Domains By Aviral Kumar Tiwari; Juncal Cunado; Rangan Gupta; Mark E. Wohar
  6. Asset prices and macroeconomic outcomes: a survey By Stijn Claessens; M Ayhan Kose
  7. Mutual Funds as Venture Capitalists? Evidence from Unicorns By Sergey Chernenko; Josh Lerner; Yao Zeng

  1. By: Hendershott, Terrence; Li, Dan; Livdan, Dmitry; Schürhoff, Norman
    Abstract: We examine the network of trading relations between insurers and dealers in the over-the-counter corporate bond market. Comprehensive regulatory data shows that many insurers use only one dealer while the largest insurers have networks of up to forty dealers. Large insurers receive better prices than small insurers. However, execution costs are a non-monotone function of the network size, increasing once the network size exceeds 20 dealers. To understand these facts we build a model of decentralized trade in which insurers trade off the benefits of repeat business against dealer competition. The model can quantitatively fit the distribution of insurers' network sizes and how prices depend on insurers' size.
    Keywords: corporate bond; Decentralization; Financial Networks; liquidity; Over-the-counter market; trading cost
    JEL: G12 G14 G24
    Date: 2017–11
  2. By: Simon Clinet; Yoann Potiron
    Abstract: In this paper, we propose a general class of noise-robust estimators based on the existing estimators in the non-noisy high-frequency data literature. The market microstructure noise is a known parametric function of the limit order book. The noise-robust estimators are constructed as a plug-in version of their counterparts, where we replace the efficient price, which is non-observable in our framework, by an estimator based on the raw price and the limit order book data. We show that the technology can be directly applied to estimate volatility, high-frequency covariance, functionals of volatility and volatility of volatility in a general nonparametric framework where, depending on the problem at hand, price possibly includes infinite jump activity and sampling times encompass asynchronicity and endogeneity.
    Date: 2017–12
  3. By: Eugster, Nicolas; Isakov, Dusan
    Abstract: This paper explores the relationship between founding family ownership and stock market returns. Using the entire population of non-financial firms listed on the Swiss stock market for 2003–2013, we find that the stock returns of family firms are significantly higher than those of non-family firms after adjusting the returns for different risk factors and firm characteristics. Family firms generate an annual abnormal return of 2.8% to 7.1%. Moreover, family firms potentially having more agency problems earn higher abnormal returns than other firms and markets participants are regularly positively surprised by the economic outcomes produced by these firms around earnings announcements. The evidence suggests that outside investors earn a premium for bearing the high expropriation risk of family firms.
    Keywords: Family firm; ownership structure; earnings surprise; market efficiency
    JEL: G31 G14
    Date: 2017–11–23
  4. By: Emese Lazar (ICMA Centre, Henley Business School, University of Reading); Ning Zhang (ICMA Centre, Henley Business School, University of Reading);
    Abstract: In this paper we study the model risk of Expected Shortfall (ES), extending the results of Boucher et al. (2014) on model risk of Value-at-Risk (VaR). We propose a correction formula for ES based on passing three backtests. Our results show that for the DJIA index, the smallest corrections are required for the ES estimates built using GARCH models. Furthermore, the 2.5% ES requires smaller corrections for model risk than the 1% VaR, which advocates the replacement of VaR with ES as recommended by the Basel Committee. Also, if the model risk of VaR is taken into account, then the correction made to ES estimates reduces by 50% on average.
    Keywords: model risk, Expected Shortfall, backtesting
    Date: 2017–11
  5. By: Aviral Kumar Tiwari (Center for Energy and Sustainable Development (CESD), Montpellier Business School, Montpellier, France); Juncal Cunado (University of Navarra, School of Economics, Edificio Amigos, Pamplona, Spain); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha USA, and School of Business and Economics, Loughborough University)
    Abstract: This paper analyzes the volatility spillovers across four global asset classes namely, stock, sovereign bonds, credit default swaps (CDS) and currency from September 2009 to September 2016, using both a time-domain and a frequency-domain framework. When the Diebold and Yilmaz (2012) methodology is applied, the estimated total connectedness index is 3.67%, suggesting a low level of connection among the four markets. Furthermore, the results show that the stock and CDS markets are net transmitters of volatility, while foreign exchange and bond markets are net receivers of the spillovers. When the Barunik and Krehlik (2017) frequency-domain analysis is carried out, the results indicate, first, that at higher frequencies, the degree of connectedness increases, and, second, that the stock market becomes the only net transmitter of volatility spillovers across the markets.
    Keywords: Volatility Spillovers, Financial Markets
    JEL: C32 E44 G10 G11
    Date: 2017–12
  6. By: Stijn Claessens; M Ayhan Kose
    Abstract: This paper surveys the literature on the linkages between asset prices and macroeconomic outcomes. It focuses on three major questions. First, what are the basic theoretical linkages between asset prices and macroeconomic outcomes? Second, what is the empirical evidence supporting these linkages? And third, what are the main challenges to the theoretical and empirical findings? The survey addresses these questions in the context of four major asset price categories: equity prices, house prices, exchange rates and interest rates, with a particular focus on their international dimensions. It also puts into perspective the evolution of the literature on the determinants of asset prices and their linkages with macroeconomic outcomes, and discusses possible future research directions.
    Keywords: equity prices, exchange rates, house prices, interest rates, credit, output, consumption, investment, real-financial linkages, macrofinancial linkages, imperfections, frictions
    JEL: D53 E21 E32 E44 E51 F36 F44 G01 G10 G12 G14 G15 G21
    Date: 2017–11
  7. By: Sergey Chernenko; Josh Lerner; Yao Zeng
    Abstract: Using novel contract-level data, we study the recent trend in open-end mutual funds investing in unicorns—highly valued, privately held start-ups—and the consequences of these investments for corporate governance provisions. Larger funds and those with more stable funding are more likely to invest in unicorns. Compared to venture capital groups (VCs), mutual funds have weaker cash flow rights and are less involved in terms of corporate governance, being particularly underrepresented on boards of directors. Having to carefully manage their own liquidity pushes mutual funds to require stronger redemption rights, suggesting contractual choices consistent with mutual funds’ short-term capital sources.
    JEL: G23 G24
    Date: 2017–10

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