nep-fmk New Economics Papers
on Financial Markets
Issue of 2018‒06‒11
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Searching for Yield Abroad : Risk-Taking Through Foreign Investment in U.S. Bonds By John Ammer; Stijn Claessens; Alexandra M. Tabova; Caleb Wroblewski
  2. Dynamic Relation between Volatility Risk Premia of Stock and Oil Returns By NAKAMURA Nobuhiro; OHASHI Kazuhiko
  3. CDS market structure and risk flows: the Dutch case By Anouk Levels; René de Sousa van Stralen; Sînziana Kroon Petrescu; Iman van Lelyveld
  4. Why did Warrant Markets Close in China but not Taiwan? By Wing-Keung Wong; Hooi Hoi Lean; Michael McAleer; Feng-Tse Tsai

  1. By: John Ammer; Stijn Claessens; Alexandra M. Tabova; Caleb Wroblewski
    Abstract: The risk-taking effects of low interest rates, now prevailing in many advanced countries, "search-for-yield," can be hard to analyze due to both a paucity of data and challenges in identification. Unique, security-level data on portfolio investment into the United States allow us to overcome both problems. Analyzing holdings of investors from 36 countries in close to 15,000 unique U.S. corporate bonds between 2003 and 2016, we show that declining home-country interest rates lead investors to shift their portfolios toward riskier U.S. corporate bonds, consistent with "search-for-yield". We estimate even stronger effects when home interest rates reach a low level, suggesting that risk-taking further accelerates.
    Keywords: Low interest rates ; Risk-taking ; Search for yield ; Portfolio choice ; Corporate debt ; Unites States
    JEL: F21 F34 G11 G20
    Date: 2018–03–28
  2. By: NAKAMURA Nobuhiro; OHASHI Kazuhiko
    Abstract: Volatility risk premium (VRP), defined as the difference between implied and realized volatilities, is found to have predictive power on the returns of many different assets (e.g., stocks, exchange rates, and commodities). While most of the extant research analyzes the return predictability of VRP, in this paper, we instead investigate the relation between the VRP of different assets, specifically stocks and oil. Using daily data of VRP from May 10, 2007 to May 16, 2017, we conduct VAR analyses on the stock and oil VRP and find that the effects of the stocks VRP on the oil VRP are limited and short-lived, if any. On the other hand, the VRP of oil has significantly positive and long-lasting effects on that of stocks after the outbreak of financial crises. These results suggest that the investors' sentiments (measured by VRP) are transmitted from the oil market to the stock market over time, but not the other way around, which is rather unexpected because financialization of commodities means a massive increase in investment in commodities by investors in traditional stock and bond markets, and hence the direction of effects is thought to be from the stock market to the commodity market.
    Date: 2018–05
  3. By: Anouk Levels; René de Sousa van Stralen; Sînziana Kroon Petrescu; Iman van Lelyveld
    Abstract: Using new regulatory data, this paper contributes to the growing literature on derivatives markets and (systemic) risk, by providing a first account of the Dutch CDS market, investigating the factors that drive buying and selling of credit protection ('flow-of risk'), and analysing the impact of Brexit. We find that the CDS market has a 'core-periphery' structure in which Dutch banks are CDS sellers while insurance firms and pension funds (ICPF's) and 'other financial institutions' (OFIs) are buyers. When the volatility of a reference entity increases, the propensity to sell CDS decreases for banks and increases for ICPFs and OFIs. This hints at procyclical behaviour by banks and countercyclical behaviour by ICPFs and OFIs. The 'core-periphery' structure of the CDS market became more pronounced around Brexit events, making the CDS market more vulnerable to shocks emanating from 'systemic' players. Banks reduced net buying and selling of CDS protection on UK reference entities, while OFIs and investment funds became more dominant. This underpins the importance of adequate buyers for systemic institutions and extending the regulatory perimeter beyond banking.
    Keywords: EMIR; trade repositories; CDS markets; Brexit
    JEL: G15 G18
    Date: 2018–05
  4. By: Wing-Keung Wong (Asia University, China Medical University Hospital, Lingnan University); Hooi Hoi Lean (Universiti Sains Malaysia); Michael McAleer (Asia University, University of Sydney Business School, EUR); Feng-Tse Tsai (Asia University)
    Abstract: The paper bridges a gap in the literature by using moment analysis, CAPM statistics, stochastic dominance (SD) test, and volume analysis to examine investor preferences for warrants between China and Taiwan, and investigating why the market for warrants in China has to close while the market for Taiwan warrants is successful. Using moment analysis, it is shown that that buying China warrants has a higher likelihood of losses than its Taiwan counterpart. Using CAPM analysis, in general, both the Sharpe ratio and Jensen index for warrants from the Taiwan market are more reasonable, while that from the China market is too negative. On the other hand, the Treynor index for China warrants shows that China warrants are highly volatile. This could make investors avoid investing in China warrants which, in turn, could lead to its closure. Using SD analysis, though there is no arbitrage opportunity between the China and Taiwan warrant markets, it is shown that the markets for China and Taiwan warrants are not efficient, and second- and third-order risk averters prefer to invest in China warrants to warrants in Taiwan. This implies that the warrant issuers prefer to issue Taiwan warrants than China warrants. Using volume analysis, the China warrant market is much more active than the Taiwan warrant market. This could imply that there are more speculative activities in China than in Taiwan which, in turn, could lead to China’s decision to close its warrant market. The findings in the paper are useful for investors for investment decisions regarding Taiwan and China warrants, for academic analysis for modelling Taiwan and China warrants, and policy makers for policy making related to Taiwan and China warrants. In the future, China may rethink reopening warrant markets and learning from mature-covered warrant markets such as Taiwan how to inhibit excess speculation and educate warrant investors.
    Keywords: Moment analysis; CAPM statistics; Stochastic dominance; Volume analysis; Arbitrage opportunity; Market efficiency; Warrants; China market; Taiwan market
    JEL: G14 G15
    Date: 2018–05–25

This nep-fmk issue is ©2018 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.