nep-fmk New Economics Papers
on Financial Markets
Issue of 2018‒04‒30
six papers chosen by

  1. A New Indicator for Describing Bull and Bear Markets By German Forero-Laverde
  2. Evidence of Idiosyncratic Seasonality in ETFs Performance By Carlos Francisco Alves; Duarte André de Castro Reis
  3. Pricing Financial Derivatives Subject to Counterparty Risk and Credit Value Adjustment By David Lee
  4. Sovereign Credit Risk and Exchange Rates: Evidence from CDS Quanto Spreads By Patrick Augustin; Mikhail Chernov; Dongho Song
  5. The European ETF Market: What can be done better? By Thomadakis, Apostolos
  6. Corporate Foreign Bond Issuance and Interfirm Loans in China By Yi Huang; Ugo Panizza; Richard Portes

  1. By: German Forero-Laverde (PhDc in Economic History at Universitat de Barcelona)
    Abstract: Abstract We present new short, medium, and long-run indicators to date and characterise expansions and contractions in financial and economic time series. These Bull-Bear Indicators (BBIs) measure the risk-adjusted excess return with respect to average, to different time horizons, expressed in standard deviations. We illustrate the benefits of this measure by describing the boom-bust cycle in the UK stock market between 1922 and 2015. We compare our results with those obtained from frequently used methodologies in the literature and find that our measures contain substantially more information than the usual binary sequences that describe expansions and contractions and allow for a more granular and nuanced description of time series.
    Keywords: Boom-bust cycle; Bull and bear markets; Stock market; Time series analysis; Severity measures; Dating rules
    JEL: C1 C43 E32 G01 G1 N14
    Date: 2018–04
  2. By: Carlos Francisco Alves (Faculdade de Economia da Universidade do Porto); Duarte André de Castro Reis (Faculdade de Economia da Universidade do Porto)
    Abstract: Studies of the seasonality of ETFs are relatively scarce compared with other financial assets. Moreover, most of the existing literature on ETFs did not assess the seasonality patterns of risk-adjusted returns and tracking error. This article seeks to suppress some of these gaps. The results provide evidence of a first-half of the year effect (higher returns), an outperformance of the second quarter and an underperformance of the fourth quarter compared with the remaining quarters, and higher (lower) returns in the first (third) month of the quarter vs the other months of the quarter. Furthermore, April exhibits a superior and December an inferior performance compared with the remaining months. Besides, higher (lower) returns on Wednesdays (Fridays) were observed compared with the other weekdays. Regarding the tracking error, some seasonal patterns are also reported. For example, the replication was more accurate in April than it was in remaining months and in the first month of each quarter. Finally, the effects detected in ETFs returns were not reflected in indices returns, with the exception of the April effect, indicating that the main seasonality patterns detected are caused by idiosyncratic ETFs factors and not to the constituents of the underlying indices.
    Keywords: ETFs seasonality; indices seasonality; raw returns; risk-adjusted returns; tracking error; US equity.
    JEL: G12 G14
    Date: 2018–04
  3. By: David Lee (FinPricing)
    Abstract: This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American style options in most cases, which require a backward induction valuation. To correct a common mistake in the literature, we emphasize that the market value of a defaultable derivative is actually a risky value rather than a risk-free value. Credit value adjustment (CVA) is also elaborated. A practical framework is developed for pricing defaultable derivatives and calculating their CVAs at a portfolio level.
    Keywords: credit value adjustment (CVA), credit risk modeling, risky valuation, collateralization,margin and netting
    Date: 2018–04–03
  4. By: Patrick Augustin; Mikhail Chernov; Dongho Song
    Abstract: Sovereign CDS quanto spreads – the difference between CDS premiums denominated in U.S. dollars and a foreign currency – tell us how financial markets view the interaction between a country's likelihood of default and associated currency devaluations (the twin Ds). A no-arbitrage model applied to the term structure of quanto spreads can isolate the interaction between the twin Ds and gauge the associated risk premiums. We study countries in the Eurozone because their quanto spreads pertain to the same exchange rate and monetary policy, allowing us to link cross-sectional variation in their term structures to cross-country differences in fiscal policies. The ratio of the risk-adjusted to the true default intensities is 2, on average. Conditional on the occurrence default, the true and risk-adjusted 1-week probabilities of devaluation are 4% and 75%, respectively. The risk premium for the euro devaluation in case of default exceeds the regular currency premium by up to 0.4% per week.
    JEL: C1 E43 E44 G12 G15
    Date: 2018–04
  5. By: Thomadakis, Apostolos
    Abstract: Growing demand in recent years for low-cost, easily tradeable, liquid and transparent investment products, resulted in the global expansion of the Exchange-Traded Fund (ETF) industry. Since 2007, global assets under management in ETFs skyrocketed from €0.8 trillion to €4.7 trillion – the market climbed 37% just in 2017. However, and despite the fact that US and European markets have each grown at a yearly average rate of approximately 18%, the latter represents only 16% of the global market. The lag in the European ETF market demonstrates that: i) it is highly fragmented with multiple listings across many exchanges, ii) Europe’s capital markets have not been successful in attracting retail investors, iii) more on-exchange ETF trading is necessary, and iv) regulation and innovation can further develop and harmonise the market to move it towards more transparency and cost-efficiency.
    Date: 2018–04
  6. By: Yi Huang; Ugo Panizza; Richard Portes
    Abstract: This paper uses firm-level data to document and analyze international bond issuance by Chinese non-financial corporations and the use of the proceeds of issuance. We find that dollar issuance is positively correlated with the differential between domestic and foreign interest rates. This interest rate differential increases the likelihood of dollar bond issuance by risky firms and decreases the likelihood of dollar bond issuance of exporters and profitable firms. Moreover, and most strikingly, we find that risky firms do more inter-firm lending than non-risky firms and that this lending rose significantly after the regulatory shock of 2008-09, when the authorities sought to restrict the financial activities of risky firms. Risky firms try to boost profitability by engaging in speculative activities that mimic the behavior of financial institutions while escaping prudential regulation that limits risk-taking by financial firms.
    JEL: F32 F34 G15 G30
    Date: 2018–04

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