nep-fmk New Economics Papers
on Financial Markets
Issue of 2018‒04‒09
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Do Better Informed Investors Always Do Better? A Buyback Puzzle By Glenn Boyle; Gerald Ward
  2. Stock Price Prediction using Principle Components By Mahsa Ghorbani; Edwin K. P. Chong
  3. Predicting Bond Betas using Macro-Finance Variables By Aslanidis, Nektarios,; Christiansen, Charlotte; Cipollini, Andrea; Bons -- Models matemàtics
  4. The equity risk premium and the low frequency of the term spread By Faria, Conçalo; Verona, Fabio
  5. Predicting risk premia in short-term interest rates and exchange rates By Gräb, Johannes; Kostka, Thomas
  6. The Capital Markets Union: Key Challenges By Allen, Franklin; Pástor, Luboš
  7. Positive Liquidity Spillovers from Sovereign Bond-Backed Securities By Dunne, Peter G.
  8. Sovereign Bond-Backed Securities: A VAR-for-VaR and Marginal Expected Shortfall Assessment By De Sola Perea, Maite; Dunne, Peter G.; Puhl, Martin; Reininger, Thomas
  9. How Effective are Sovereign Bond-Backed Securities as a Spillover Prevention Device By Cronin, David; Dunne, Peter G.
  10. Dynamic Equicorrelation between S&P500 Index and S&P GSCI By Abdelkader Derbali; Tarek Chebbi

  1. By: Glenn Boyle (University of Canterbury); Gerald Ward
    Abstract: We explore the value of private investment information using data from a singular source: auctions of yearling racehorses. Horse breeders possess superior information about their own horses and have strong financial incentives to buy the best of these back at auction. However, those they repurchase subsequently perform significantly worse on average, earning 30% less at the racetrack than horses purchased by out-siders. Moreover, this underperformance is concentrated in male horses, despite these being purchased exclusively for racing purposes. These puzzling findings can-not be explained by differences in horse risk or breeder abilities, or by non-financial objectives, or by behavioral or selection biases.
    Keywords: Auctions; racehorses; buybacks
    JEL: G02 G11 G14 L83 D44
    Date: 2018–04–01
  2. By: Mahsa Ghorbani; Edwin K. P. Chong
    Abstract: The literature provides strong evidence that stock prices can be predicted from past price data. Principal component analysis (PCA) is a widely used mathematical technique for dimensionality reduction and analysis of data by identifying a small number of principal components to explain the variation found in a data set. In this paper, we describe a general method for stock price prediction using covariance information, in terms of a dimension reduction operation based on principle component analysis. Projecting the noisy observation onto a principle subspace leads to a well-conditioned problem. We illustrate our method on daily stock price values for five companies in different industries. We investigate the results based on mean squared error and directional change statistic of prediction, as measures of performance, and volatility of prediction as a measure of risk.
    Date: 2018–03
  3. By: Aslanidis, Nektarios,; Christiansen, Charlotte; Cipollini, Andrea; Bons -- Models matemàtics
    Abstract: We predict bond betas conditioning on various macro-finance variables. We explore differences across long-term government bonds, investment grade corporate bonds, and high yield corporate bonds. We conduct out-of-sample forecasting using the new approach of combining explanatory variables through complete subset regressions (CSR). We consider the robustness of CSR forecasts across the 1-month, 3-month, and 12-month forecasting horizon. The CSR method performs well in predicting bond betas. Keywords: bond betas; complete subset regressions; corporate bonds; government bonds; macro-finance variables; model confidence set. JEL Classifications: C22; C53; C55; G12.
    Keywords: Bons -- Models matemàtics, 336 - Finances. Banca. Moneda. Borsa,
    Date: 2018
  4. By: Faria, Conçalo; Verona, Fabio
    Abstract: We extract cycles in the term spread (TMS) and study their role for predicting the equity risk premium (ERP) using linear models. The low frequency component of the TMS is a strong and robust out-of-sample ERP predictor. It obtains out-of-sample R-squares (versus the historical mean benchmark) of 1.98% and 22.1% for monthly and annual data, respectively. It forecasts well also during expansions and outperforms several variables that have been proposed as good ERP predictors. Its predictability power comes exclusively from the discount rate channel. Contrarily, the high and business-cycle frequency components of the TMS are poor out-of-sample ERP predictors.
    JEL: C58 G11 G12 G17
    Date: 2018–04–03
  5. By: Gräb, Johannes; Kostka, Thomas
    Abstract: We assess the ability of yield curve factors to predict risk premia in short-term interest rates and exchange rates across a large sample of major advanced economies. We find that the same tick-shaped linear combination of (relative) bond yields predicts risk premia in both short-term interest rates and exchange rates at returnforecasting horizons of up to six months for all (but one) countries and currencies in our sample. Our single forecasting factor loads positively on the short and long end of the curve and negatively on the medium-term and is therefore inversely related to Nelson-Siegel’s curvature factor. In line with recent interpretations of the yield curve factors, our findings suggest that the hump of the yield curve bears important information about future short-term interest rates. A relatively high curvature predicts a surprise rise in short-term interest rates beyond expectations and, coincidentally, an appreciation of the home currency in line with uncovered interest rate parity. JEL Classification: C23, C53, G11
    Keywords: exchange rates, interest rates, predictability, risk premia, yield curve
    Date: 2018–02
  6. By: Allen, Franklin; Pástor, Luboš
    Abstract: In September 2015, the European Commission announced the first actions of its plan to build a Capital Markets Union in Europe. We describe the key features of the Commission's plan and discuss the economic rationale behind it. The plan has many strengths but also some weaknesses, such as limited ambition in the supervision and enforcement of securities regulations. Other challenges to the development of European capital markets include the financial transactions tax, the low-interest-rate environment, cultural reasons, and potential political opposition.
    Keywords: Capital Markets Union
    JEL: G18 G28 G38
    Date: 2018–02
  7. By: Dunne, Peter G. (Central Bank of Ireland)
    Abstract: There are competing arguments about the likely effects of Sovereign Bond-Backed Securitisation on the liquidity of sovereign bond markets. By analysing hedging and diversification opportunities, this paper shows that positive liquidity spillovers would dominate or at least constrain the extent of any negative effects. This relies on dealers using Sovereign Bond-Backed Securities (SBBS) as instruments to hedge inventory risk and it assumes that they diversify their activities widely across euro area sovereign markets. Through a simple arbitrage relation, the existence of low-cost hedging and diversification opportunities limits the divergence of bid-ask spreads between national and SBBS markets. This is demonstrated using estimated SBBS yields (`a la Sch¨onbucher (2003)).
    Keywords: Safe Assets, Securitisation, Dealer Behaviour, Liquidity Bid-Ask Spread
    JEL: E44 G12 G24 C53 C58
    Date: 2018–02
  8. By: De Sola Perea, Maite (National Bank of Belgium); Dunne, Peter G. (Central Bank of Ireland); Puhl, Martin (Oesterreichishe Nationalbank); Reininger, Thomas (Oesterreichishe Nationalbank)
    Abstract: Brunnermeier et al., (2017) propose a securitisation solution for the bank-sovereign doom-loop. This shields senior tranche investors from actual defaults but whether it stabilises flight-to-safety panics is unclear. We apply dynamic VaR and Marginal Expected Shortfall methods to assess whether real-time risks to investors are attenuated by holding sovereign bond-backed securities. Price dynamics are derived using a Monte Carlo method. We find that holders of the senior tranche would be as safe as holders of German bunds. Mezzanine risk exposure would be moderate. The junior tranche experiences less severe shocks than high-risk sovereigns. The proposal significantly reduces destabilising market dynamics.
    Keywords: Safe Assets, Sovereign Bonds, Value-at-Risk, Spillover, CAViaR, Co-Dependence
    JEL: E43 E44 E52 E53 G12 G14
    Date: 2018–02
  9. By: Cronin, David (Central Bank of Ireland); Dunne, Peter G. (Central Bank of Ireland)
    Abstract: Brunnermeier et al. (2017) propose the introduction of sovereign bond-backed securities (SBBS) in the euro area. That and other papers assess how the securitisation would insulate senior bond holders from actual default-related losses. This paper generalises the assessment by using the VAR-based Diebold and Yilmaz (2012) spillover index methodology to assess potential attenuation of the spillover of shocks in holding-period returns across bond markets due to the introduction of SBBS. This is made possible by employing SBBS yields estimated from historical euro area member state sovereign bond yields using Monte Carlo methods, as described in Sch¨onbucher (2003). A lower spillover of shocks between SBBS securities compared to what arises between eleven member states’ bond markets is observed. Spillover values fall during the euro area sovereign bond crisis. Gross and net spillovers are lower for a 70-30 tranching than for a 70-20-10 case but in both cases the senior tranche becomes more insulated from shocks in the more junior tranches during periods of financial stress.
    Keywords: Safe Assets, Sovereign Bond Securitisation, Bank-Sovereign Diabolic Loop
    JEL: C58 G11 G12 G17
    Date: 2018–02
  10. By: Abdelkader Derbali (Université de Sousse, Institut Supérieur de Gestion Sousse); Tarek Chebbi (Université de Sousse)
    Abstract: In this paper, we use for the first time the GARCH-DECO (1,1) to investigate empirically the dependence between S&P500 index and the sixteen selected S&P GSCI commodities index. We employ daily prices of S&P500 and S&P GSCI commodities indices over the period from January 01, 2003 to December 31, 2015. From the empirical results, the conditional dependence between S&P500 and S&P GSCI commodities indices demonstrate the presence of highly volatility and validate the existence of a greatly time-varying variance in the dynamic equicorrelation between time serie returns obtained after the estimation of the GARCH-DECO (1,1) model. Besides, the conditional heteroscedasticity volatility prediction attains their maximum after the financial crisis of 2007, especially on both years 2008 and 2009. Our empirical finding indicates the existence of highly dependency between S&P500 and S&P GSCI commodities indices which prove the financialisation of US stock market indices and commodities.
    Keywords: S&P 500,S&P GSCI,Commodities,Equicorrelation,GARCH-DECO
    Date: 2018–01–29

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