nep-fmk New Economics Papers
on Financial Markets
Issue of 2018‒01‒08
seven papers chosen by

  1. Stock Price Crashes: Role of Capital Constrained Traders By Mila Getmansky; Ravi Jagannathan; Loriana Pelizzon; Ernst Schaumburg; Darya Yuferova
  2. Variance Premium, Downside Risk and Expected Stock Returns By Bruno Feunou; Ricardo Lopez Aliouchkin; Roméo Tedongap; Lai Xi
  3. Does the Stock Market Make Firms More Productive? By Benjamin Bennett; René Stulz; Zexi Wang
  4. Credit Risk Transfer and Bank Insolvency Risk By Maarten van Oordt
  5. Liquidity Stress Tests for Investment Funds: A Practical Guide By Antoine Bouveret
  6. Basel III and Bank-Lending: Evidence from the United States and Europe By Sami Ben Naceur; Caroline Roulet
  7. International Financial Integration and Funding Risks: Bank-Level Evidence from Latin America By Luis Catão; Valeriya Dinger; Daniel Marcel te Kaat

  1. By: Mila Getmansky; Ravi Jagannathan; Loriana Pelizzon; Ernst Schaumburg; Darya Yuferova
    Abstract: We study two fast crashes using orders/cancellations/trades data with trader identities for a stock trading in the spot and single stock futures markets on the National Stock Exchange of India during April-June/2006 when there was no algorithmic trading. Spot (futures) prices fell by 6.1% (4.6%) and 11.1% (12.3%) within 15 minutes during crashes. Buying by capital constrained short-term-traders who were the primary intraday liquidity providers was not sufficient to halt price decline. Domestic mutual funds, slow to move in, bought sufficient quantities leading to price recovery. Crashes and recoveries began in the spot market though volume was higher in futures.
    JEL: G00 G1 G12 G14 G18 G2
    Date: 2017–12
  2. By: Bruno Feunou; Ricardo Lopez Aliouchkin; Roméo Tedongap; Lai Xi
    Abstract: We decompose total variance into its bad and good components and measure the premia associated with their fluctuations using stock and option data from a large cross-section of firms. The total variance risk premium (VRP) represents the premium paid to insure against fluctuations in bad variance (called bad VRP), net of the premium received to compensate for fluctuations in good variance (called good VRP). Bad VRP provides a direct assessment of the degree to which asset downside risk may become extreme, while good VRP proxies for the degree to which asset upside potential may shrink. We find that bad VRP is important economically; in the cross-section, a one-standard-deviation increase is associated with an increase of up to 13% in annualized expected excess returns. Simultaneously going long on stocks with high bad VRP and short on stocks with low bad VRP yields an annualized risk-adjusted expected excess return of 18%. This result remains significant in double-sort strategies and cross-sectional regressions controlling for a host of firm characteristics and exposures to regular and downside risk factors.
    Keywords: Asset Pricing, Financial markets
    JEL: G12
    Date: 2017
  3. By: Benjamin Bennett; René Stulz; Zexi Wang
    Abstract: We test the hypothesis that greater stock price informativeness (SPI) leads to higher firm-level productivity (TFP). Management, directly or indirectly, learns more from more informative stock prices, so that more informative stock prices should make firms more productive. We find a positive relation between SPI and TFP. The relation is stronger for smaller, younger, riskier, less capital-intensive, and financially-constrained firms. Product market competition and better governance amplify the relation, while diversification weakens it. We address endogeneity concerns with fixed effects, instrumental variables, and the use of brokerage house research department closures and S&P 500 additions as plausibly exogenous events.
    JEL: D22 G14 G31
    Date: 2017–12
  4. By: Maarten van Oordt
    Abstract: The present paper shows that, everything else equal, some transactions to transfer portfolio credit risk to third-party investors increase the insolvency risk of banks. This is particularly likely if a bank sells the senior tranche and retains a sufficiently large first-loss position. The results do not rely on banks increasing leverage after the risk transfer, nor on banks taking on new risks, although these could aggravate the effect. High leverage and concentrated business models increase the vulnerability to the mechanism. These results are useful for risk managers and banking regulation. The literature on credit risk transfers and information asymmetries generally tends to advocate the retention of ‘information-sensitive’ first-loss positions. The present study shows that, under certain conditions, such an approach may harm financial stability, and thus calls for further reflection on the structure of securitization transactions and portfolio insurance.
    Keywords: Credit risk management, Financial Institutions, Financial stability
    JEL: G21 G28 G32
    Date: 2017
  5. By: Antoine Bouveret
    Abstract: This paper outlines a framework to perform liquidity stress tests for investment funds. Practical aspects related to the calibration of the redemption shock, the measurement of liquidity buffers and the assessment of the resilience of investment funds are discussed. The integration of liquidity stress tests with banking sector stress tests and possible bank-fund interlinkages are also covered.
    Keywords: Liquidity;stress test, investment funds, redemption, Financial Markets and the Macroeconomy, Asset Pricing
    Date: 2017–10–31
  6. By: Sami Ben Naceur; Caroline Roulet
    Abstract: Using data on commercial banks in the United States and Europe, this paper analyses the impact of the new Basel III capital and liquidity regulation on bank-lending following the 2008 financial crisis. We find that U.S. banks reinforce their risk absorption capacities when expanding their credit activities. Capital ratios have significant, negative impacts on bank-retail-and-other-lending-growth for large European banks in the context of deleveraging and the “credit crunch” in Europe over the post-2008 financial crisis period. Additionally, liquidity indicators have positive but perverse effects on bank-lending-growth, which supports the need to consider heterogeneous banks’ characteristics and behaviors when implementing new regulatory policies.
    Date: 2017–11–15
  7. By: Luis Catão; Valeriya Dinger; Daniel Marcel te Kaat
    Abstract: Using a sample of over 700 banks in Latin America, we show that international financial liberalization lowers bank capital ratios and increases the shares of short-term funding. Following liberalization, large banks substitute interbank borrowing for equity and long-term funding, whereas small banks increase the proportions of retail funding in their liabilities, which have been particularly vulnerable to flight-to-quality during periods of financial distress in much of Latin America. We also find evidence that riskier bank funding in the aftermath of financial liberalizations is exacerbated by asymmetric information, which rises on geographical distance and the opacity of balance sheets.
    Date: 2017–10–31

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