nep-fmk New Economics Papers
on Financial Markets
Issue of 2018‒09‒17
three papers chosen by

  1. Learning and Risk Premiums in an Arbitrage-Free Term Structure Model By Giacoletti, Marco; Laursen, Kristoffer T.; Singleton, Kenneth J.
  2. How does latent liquidity get revealed in the limit order book? By Lorenzo Dall'Amico; Antoine Fosset; Jean-Philippe Bouchaud; Michael Benzaquen
  3. Why do you trust me? A structural equation model of trustworthiness in financial advisory By Caterina Cruciani; Gloria Gardenal; Ugo Rigoni

  1. By: Giacoletti, Marco (U of Southern California); Laursen, Kristoffer T. (AQR Capital Management, LLC); Singleton, Kenneth J. (Stanford U)
    Abstract: We study the evolution of risk premiums on US Treasury bonds from the perspective of a real-time Bayesian learner RA who updates her beliefs using a dynamic term structure model. Learning about the historical dynamics of yields led to substantial variation in RA's subjective risk premiums. Moreover, she gained substantial forecasting power by conditioning her learning on measures of disagreement among professional forecasters about future yields. This gain was distinct from the (much weaker) forecasting power of macroeconomic information. RA's views about the pricing distribution of yields remained nearly constant over time. Her learning rule outperformed consensus forecasts of market professionals, particularly following U.S. recessions.
    Date: 2018–05
  2. By: Lorenzo Dall'Amico; Antoine Fosset; Jean-Philippe Bouchaud; Michael Benzaquen
    Abstract: Latent order book models have allowed for significant progress in our understanding of price formation in financial markets. In particular they are able to reproduce a number of stylized facts, such as the square-root impact law. An important question that is raised -- if one is to bring such models closer to real market data -- is that of the connection between the latent (unobservable) order book and the real (observable) order book. Here we suggest a simple, consistent mechanism for the revelation of latent liquidity that allows for quantitative estimation of the latent order book from real market data. We successfully confront our results to real order book data for over a hundred assets and discuss market stability. One of our key theoretical results is the existence of a market instability threshold, where the conversion of latent order becomes too slow, inducing liquidity crises. Finally we compute the price impact of a metaorder in different parameter regimes.
    Date: 2018–08
  3. By: Caterina Cruciani (Dept. of Management, Università Ca' Foscari Venice); Gloria Gardenal (Dept. of Management, Università Ca' Foscari Venice); Ugo Rigoni (Dept. of Management, Università Ca' Foscari Venice)
    Abstract: The paper provides a comprehensive model of trust formation in financial advisory using a dataset of 1,184 Italian advisors that differ across some specific characteristics (bank advisors or tied agents, market maturity of the bank/institution they work for, classified as new player or incumbent). The goal is twofold: on one side, we aim at demonstrating the validity of a trust-formation model that explicitly accounts for both a professional and a relational component; on the other, we wish to investigate whether different types of financial advisory induce different trust formation processes. The latter goal is of particular relevance with respect to the introduction of the MiFiD II Directive, as different trust formation processes may rely on features that are differentially affected by the regulatory changes. Through the estimation of a structural equation model, we are able to prove both its validity and the differential impact of the two dimensions in the trust-formation process. In particular, we find that the novelties introduced by the legislator, favouring the anticipated reciprocation dimension, could help increasing competition in the advisory industry. In fact, this dimension is the one that plays a fundamental role for the advisors of new entrant institutions and that could help support their accreditation in the market.
    Keywords: leadership, leadership styles, scale validation
    JEL: M40
    Date: 2018–09

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