nep-fmk New Economics Papers
on Financial Markets
Issue of 2018‒03‒19
seven papers chosen by

  1. Stock Market Cross-Sectional Skewness and Business Cycle Fluctuations By Thiago Revil T. Ferreira
  2. Cross-stock market spillovers through variance risk premiums and equity flows By Masazumi Hattori; Ilhyock Shim; Yoshihiko Sugihara
  3. Stock Market Visualization By Zura Kakushadze; Willie Yu
  4. Effects of asymmetric information on market timing in the mutual fund industry By Vanessa Tchamyou; Simplice Asongu; Jacinta Nwachukwu
  5. Are credit rating agencies discredited? Measuring market price effects from agency sovereign debt announcements By Mahir Binici; Michael M Hutchison; Evan Weicheng Miao
  6. Does CDS trading affect risk-taking incentives in managerial compensation? By Jie Chen; Woon Sau Leung; Wei Song; Davide Avino
  7. Circuit breakers: A survey among international trading venues By Clapham, Benjamin; Gomber, Peter; Haferkorn, Martin; Jentsch, Paul; Panz, Sven

  1. By: Thiago Revil T. Ferreira
    Abstract: Using U.S. data from 1926 to 2015, I show that financial skewness—a measure comparing cross-sectional upside and downside risks of the distribution of stock market returns of financial firms—is a powerful predictor of business cycle fluctuations. I then show that shocks to financial skewness are important drivers of business cycles, identifying these shocks using both vector autoregressions and a dynamic stochastic general equilibrium model. Financial skewness appears to reflect the exposure of financial firms to the economic performance of their borrowers.
    Keywords: Cross-Sectional Skewness ; Business Cycle Fluctuations ; Financial Channel
    JEL: C32 E32 E37 E44
    Date: 2018–03–06
  2. By: Masazumi Hattori; Ilhyock Shim; Yoshihiko Sugihara
    Abstract: We estimate variance risk premiums (VRPs) in the stock markets of major advanced economies (AEs) and emerging market economies (EMEs) over 2007-15 and decompose the VRP into variance-diffusive risk premium (DRP) and variance-jump risk premium (JRP). Daily VAR analysis reveals significant spillovers from the VRPs of the United States and eurozone's AEs to the VRPs of other economic areas, especially during the post-Global Financial Crisis (GFC) period. We also find that during the post-GFC period, shocks to the DRPs of the United States and the eurozone's AEs have relatively strong and long-lived positive effects on the VRPs of other economic areas whereas shocks to their JRPs have relatively weak and short-lived positive effects. In addition, we show that increases in the size of US VRP, DRP and JRP tend to significantly reduce weekly equity fund flows to all other AEs and some EMEs during the post-GFC period. Finally, US DRP plays a more important role than US JRP in the determination of equity fund flows to all other AEs and some EMEs after the GFC, while the opposite holds true for equity fund flows to all other AEs during the GFC. Such results indicate the possibility of equity fund flows working as a channel of cross-market VRP spillovers.
    Keywords: cross-stock market correlation, emerging market economy, equity fund flow, variance risk premium
    JEL: F32 G12 G15 G23
    Date: 2018–02
  3. By: Zura Kakushadze; Willie Yu
    Abstract: We provide complete source code for a front-end GUI and its back-end counterpart for a stock market visualization tool. It is built based on the "functional visualization" concept we discuss, whereby functionality is not sacrificed for fancy graphics. The GUI, among other things, displays a color-coded signal (computed by the back-end code) based on how "out-of-whack" each stock is trading compared with its peers ("mean-reversion"), and the most sizable changes in the signal ("momentum"). The GUI also allows to efficiently filter/tier stocks by various parameters (e.g., sector, exchange, signal, liquidity, market cap) and functionally display them. The tool can be run as a web-based or local application.
    Date: 2018–02
  4. By: Vanessa Tchamyou (Yaoundé/Cameroun); Simplice Asongu (Yaoundé/Cameroun); Jacinta Nwachukwu (Coventry University, UK.)
    Abstract: The paper investigates the effects of information asymmetry (between the realised return and the expected return) on market timing in the mutual fund industry. For the purpose, we use a panel of 1488 active open-end mutual funds for the period 2004-2013. We use fund-specific time-dynamic betas. Information asymmetry is measured as the standard deviation of idiosyncratic risk. The dataset is decomposed into five market fundamentals in order to emphasis the policy implications of our findings with respect to (i) equity, (ii) fixed income, (iii) allocation, (iv) alternative and (v) tax preferred mutual funds. The empirical evidence is based on endogeneity-robust Difference and System Generalised Method of Moments. The following findings are established. First, information asymmetry broadly follows the same trend as volatility, with a higher sensitivity to market risk exposure. Second, fund managers tend to raise (cutback) their risk exposure in time of high (low) market liquidity. Third, there is evidence of convergence in equity funds. We may therefore infer that equity funds with lower market risk exposure are catching-up with their counterparts with higher exposure to fluctuation in market conditions. The paper complements the scarce literature on market timing in the mutual fund industry with time-dynamic betas, information asymmetry and an endogeneity-robust empirical approach.
    Keywords: Information asymmetry; Mutual funds; Market timing; Market uncertainty
    JEL: G12 G14 G18
    Date: 2018–01
  5. By: Mahir Binici; Michael M Hutchison; Evan Weicheng Miao
    Abstract: This paper investigates whether the price response to credit rating agency (CRA) announcements on sovereign bonds has diminished since the Global Financial Crisis (GFC). We characterize credit rating events more precisely than previous work, controlling agency announcements for the prior credit state - outlook, watch/review, or stable status as well as the level of the credit rating. Emphasizing the transition from one state to another allows us to distinguish between different types of announcement (rating changes, watch and outlook events) and their price effects. We employ an event study methodology and gauge market response by standardized cumulative abnormal returns (SCAR) and directional change statistics in daily credit default swap (CDS) spreads. We find that rating announcements provide a rich and varied set of information on how credit rating agencies in fluence market perceptions of sovereign default risk. CRA announcements continued to have significant effects on CDS spreads after the GFC, but the magnitude of the responses generally fell. Moreover, we find that accurate measurement of these effects depends on conditioning for the prior credit state of the sovereign bond.
    Keywords: CDS spreads, credit ratings, sovereign debt
    JEL: F30 G01 G24 H63
    Date: 2018–02
  6. By: Jie Chen (Cardiff Business School, Cardiff University); Woon Sau Leung (Cardiff Business School, Cardiff University); Wei Song (School of Management, Swansea University); Davide Avino (Cardiff Business School, Cardiff University)
    Abstract: We find that managers receive more risk-taking incentives in their compensation packages once their firms are referenced by credit default swap (CDS) trading, particularly in firms with bank debt, greater institutional holdings, and in financial distress. These findings suggest that boards offer pay packages that encourage greater managerial risk taking to take advantage of the reduced creditor monitoring after CDS trade initiation. Further, we find that the onset of CDS trading attenuates the effect of vega on leverage, consistent with the view that the threat of exacting creditors restrains managerial risk appetite.
    Keywords: Credit default swaps, Executive compensation, Risk taking, Leverage
    JEL: G32 G34
    Date: 2018–02–24
  7. By: Clapham, Benjamin; Gomber, Peter; Haferkorn, Martin; Jentsch, Paul; Panz, Sven
    Abstract: Circuit Breakers are widely implemented in 2016. Currently, the majority (86%) of the responding trading venues use circuit breakers to ensure investor protection and to increase market integrity and stability. Compared to the previous study (WFE, 2008), the proportion of exchanges using circuit breakers increased from 60% to 86%. The most widely-used circuit breaker mechanisms are market-wide trading halts and volatility interruptions. On cash markets, market-wide trading halts and volatility interruptions represent 72% of the implementations. On derivatives markets, most exchanges coordinate their circuit breaker with their cash market (40%) followed by market-wide trading halts (20%) and volatility interruptions (13%). The majority of mechanisms do not differentiate between upward or downward market movements. Either way, when price fluctuations are extensive, circuit breakers are triggered. In the cash market segment, only 15 of 47 (32%) mechanisms react solely to downward market movements. Thirteen of 15 (87%) circuit breakers on the derivatives markets are triggered in both directions. Only in two cases of internal coordination between cash and derivatives markets, the respective trading halt on both market segments is only triggered in the event of down-ward market movements. Most circuit breakers are triggered by predetermined price ranges that are either static or dynamic with the former being set wider than the latter. It is noticeable that only volatility interruption mechanisms apply dynamic price ranges (in most cases in combination with static ranges). The other three types of circuit breakers rely on static price ranges, which typically refer to the previous day´s closing prices or last auction prices. Transparency dominates when it comes to providing information on the thresholds to market participants. The vast majority (92%) of responding exchanges publishes all information regarding the threshold determination process and the thresholds themselves. However, three exchanges only provide general information, but do not disclose specific parameters such as the width of price ranges to avoid deliberate triggering of the circuit breaker. There is support for greater coordination of circuit breakers across venues. The study gathered a multitude of opinions of global trading venues and thus serves as further input to this important topic. Although 20 of 29 responding exchanges (69%) generally favor the concept of coordination, only 32% of the exchanges that make use of circuit breakers already co-ordinate them with other venues.
    Date: 2018

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