nep-fmk New Economics Papers
on Financial Markets
Issue of 2018‒08‒27
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Factors that Fit the Time Series and Cross-Section of Stock Returns By Martin Lettau; Markus Pelger
  2. Mood Betas and Seasonalities in Stock Returns By David Hirshleifer; Danling Jiang; Yuting Meng
  3. The CAPM, National Stock Market Betas, and Macroeconomic Covariates: A Global Analysis By Michael Curran; Adnan Velic
  4. Fee Structure and Mutual Fund Choice: An Experiment By Mikhail Anufriev; Te Bao; Angela Sutan; Jan Tuinstra
  5. Identifying Repo Market Microstructure from Securities Transactions Data By Nicholas Garvin
  6. The Run on Repo and the Fed's Response By Gary Gorton; Toomas Laarits; Andrew Metrick
  7. Basel III capital requirements and heterogeneous banks By Müller, Carola
  8. Dividend Omission Announcement Effect to Market Reaction in Indonesia Stock Exchange By Darmawan, Mr

  1. By: Martin Lettau; Markus Pelger
    Abstract: We propose a new method for estimating latent asset pricing factors that fit the time-series and cross-section of expected returns. Our estimator generalizes Principal Component Analysis (PCA) by including a penalty on the pricing error in expected returns. We show that our estimator strongly dominates PCA and finds weak factors with high Sharpe-ratios that PCA cannot detect. Studying a large number of characteristic sorted portfolios we find that five latent factors with economic meaning explain well the cross-section and time-series of returns. We show that out-of-sample the maximum Sharpe-ratio of our five factors is more than twice as large as with PCA with significantly smaller pricing errors. Our factors are based on only a subset of the stock characteristics implying that a significant amount of characteristic information is redundant.
    JEL: C14 C38 C52 C58 G0 G12
    Date: 2018–07
  2. By: David Hirshleifer; Danling Jiang; Yuting Meng
    Abstract: Existing research has documented cross-sectional seasonality of stock returns—the periodic outperformance of certain stocks relative to others during the same calendar month, weekday, or pre-holiday periods. A model in which stocks differ in their sensitivities to investor mood explains these effects and implies new sets of seasonal patterns. We find that relative performance across stocks during past high or low mood months and weekdays tends to recur in future periods with congruent mood, and to reverse in periods with non-congruent mood. Stocks with higher sensitivities to aggregate mood swings—higher mood betas—earn higher expected returns during future high mood periods and lower expected returns during future low mood periods, including those induced by Daylight Saving Time changes, weather conditions and anticipation of major holidays.
    JEL: D53 D91 G12 G14
    Date: 2018–06
  3. By: Michael Curran (Villanova University); Adnan Velic (Dublin Institute of Technology)
    Abstract: Using global data on aggregate stock market prices, this paper finds that the standard capital asset pricing model (CAPM) fares much better than suggested in the literature. At shorter time horizons, our results also show that the positive risk-reward relation can collapse during times of high volatility. Compared to advanced and emerging markets, we retrieve evidence of lower systematic risks across frontier stock market portfolios. We find that countries characterized by higher levels of financial and trade openness, exchange rate volatility, and larger economic size are exposed to higher systematic covariances with the world stock market. Conversely, we obtain evidence of an inverse link between international reserves and systematic risks in national equity.
    Keywords: portfolios, stock market, cross-country, systematic risk, capital asset pricing model, macroeconomic covariates
    JEL: F30 F31 F41 G15
    Date: 2018–08
  4. By: Mikhail Anufriev (The University of Technology Sydney); Te Bao (Division of Economics, Nanyang Technological University, Singapore); Angela Sutan (Burgundy School of Business, University Bourgogne Franche-Comte CEREN, Dijon, France); Jan Tuinstra (CeNDEF, Amsterdam School of Economics, University of Amsterdam)
    Abstract: We present a laboratory experiment which is designed to investigate the effect of the fee structure on mutual fund choice. We find that subjects tend to ignore periodic and small operating expenses fees and base their decisions on gross, instead of net, returns. A fee in the form of a, much larger, front-end load leads to lock-in into one of the funds. It is used by some subjects as a commitment device, but exacerbates the decision errors of other subjects. Although past returns do not convey information about future returns, return chasing helps explain subjects' behavior.
    Keywords: Mutual fund choice; fee structure; experimental economics; return chasing; learning
    JEL: C91 G02 G11
    Date: 2018–06–22
  5. By: Nicholas Garvin (Reserve Bank of Australia)
    Abstract: Interbank repo markets are arguably just as important as unsecured markets. Despite this, the global research community has not analysed the microstructure of interbank repo markets in the same detail as unsecured markets, because loan-level repo data have not been available. This paper provides and assesses an algorithm for extracting loan-level repo data from over-the-counter securities transactions data, and it applies to securities transactions data from Austraclear. This approach is similar to how loan-level unsecured data are typically obtained from payments data. False detection and false omission rates are estimated to be 3 per cent or less. While separate prudential data indicate a larger repo market than the algorithm data, likely reflecting repos transacted through foreign (i.e. non-Austraclear) infrastructure, the two datasets have a robust positive relationship. The algorithm data, capturing non-RBA repos of up to 14-days maturity from several 2-month data samples between 2006 and 2015, reveal various market features. From 2006 to 2015, the distribution of repo-rate spreads (to the cash rate) drifted up and tightened, and the market shifted towards overnight maturities. Loan-level repo rates depend on the loan size and the types of counterparties, but not how long the repo is open. In 2015, the market's network structure comprises a tightly integrated core, and a segmented periphery with few counterparties. Repo haircuts do not display obvious patterns, appearing randomly distributed around zero.
    Keywords: interbank markets; Furfine algorithm; false detection rates; repo markets; securities
    JEL: C63 E42 E43 G10
    Date: 2018–08
  6. By: Gary Gorton; Toomas Laarits; Andrew Metrick
    Abstract: The Financial Crisis began and accelerated in short-term money markets. One such market is the multi-trillion dollar sale-and-repurchase (“repo”) market, where prices show strong reactions during the crisis. The academic literature and policy community remain unsettled about the role of repo runs, because detailed data on repo quantities is not available. We provide quantity evidence of the run on repo through an examination of the collateral brought to emergency liquidity facilities of the Federal Reserve. We show that the magnitude of repo discounts (“haircuts”) on specific collateral is related to the likelihood of that collateral being brought to Fed facilities.
    JEL: E32 E44 E58 G01
    Date: 2018–07
  7. By: Müller, Carola
    Abstract: I develop a theoretical model to investigate the effect of simultaneous regulation with a leverage ratio and a risk-weighted ratio on banks' risk taking and banking market structure. I extend a portfolio choice model by adding heterogeneity in productivity among banks. Regulators face a trade-off between the efficient allocation of resources and financial stability. In an oligopolistic market, risk-weighted requirements incentivise banks with high productivity to lend to low-risk firms. When a leverage ratio is introduced, these banks lose market shares to less productive competitors and react with risk-shifting into high-risk loans. While average productivity in the low-risk market falls, market shares in the high-risk market are dispersed across new entrants with high as well as low productivity.
    Keywords: banking regulation,heterogeneous banks,banking competition,capital requirements,leverage ratio,Basel III
    JEL: G11 G21 G28
    Date: 2018
  8. By: Darmawan, Mr
    Abstract: This study examined the signalling theory about how the market/investors respond to dividend announcements made by companies listed on the Indonesia Stock Exchange during the period 2008-2012. This period was chosen because the economy and economic growth of Indonesia is relatively stable. In general, the objective of this research is to develop new theoretical approaches, in an effort to resolve the conceptual controversies regarding the impact of dividend policy on firm value. That in detail, in particular, objective: To analyze and empirically test the market reaction to the announcement dividend omissions, as well as Analyze and test empirically the firm-specific characteristics variables that affect the market reaction. The samples are all companies that announced dividend policy for 5 years as many as 242 companies with 729 event announcements. The results showed that in events dividend announcement found a significant reaction from the market. At the announcement of dividend omissions, there are 5 significant observations with 2 observations fit in theory. The study also shows none of the significant characteristics of the company is able to explain the market reaction to dividend announcements.
    Keywords: Characteristics of the Company; Dividend Omissions; Market Reactions
    JEL: G2
    Date: 2018–06–04

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