nep-fmk New Economics Papers
on Financial Markets
Issue of 2018‒10‒01
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Competition among Securities Markets By Pierre-Cyrille Hautcoeur; Amir Rezaee; Angelo Riva
  2. Quantile co-movement in financial markets: A panel quantile model with unobserved heterogeneity By Ando, Tomohiro; Bai, Jushan
  3. Enhancing Stock Market Prediction with Extended Coupled Hidden Markov Model over Multi-Sourced Data By Xi Zhang; Yixuan Li; Senzhang Wang; Binxing Fang; Philip S. Yu
  4. Preferential treatment of government bonds in liquidity regulation: Implications for bank behaviour and financial stability By Neyer, Ulrike; Sterzel, André
  5. Blockchain Finance: Questions Regulators Ask By Ozili, Peterson K
  6. Lighting up the dark: Liquidity in the German corporate bond market By Gündüz, Yalin; Ottonello, Giorgio; Pelizzon, Loriana; Schneider, Michael; Subrahmanyam, Marti G.
  7. Did the Basel process of capital regulation enhance the resiliency of European Banks? By Gehrig, Thomas; Iannino, Maria Chiara
  8. BSE: A Minimal Simulation of a Limit-Order-Book Stock Exchange By Dave Cliff

  1. By: Pierre-Cyrille Hautcoeur (PSE - Paris School of Economics); Amir Rezaee (ISG - International Business School [Paris]); Angelo Riva (European Business School Paris)
    Abstract: We study the causes and the consequences of two regulatory changes affecting the competition between the transparent Parquet and the OTC-like Coulisse markets in Paris at the turn of the 20th century. First, we provide evidence supporting the interest group theory to explain regulatory changes. By using these changes as natural experiments, we show then that competition widens bid-ask spreads while monopoly makes them narrower. These results are in line with recent literature questioning the effects of "dark" competition: a transparent monopoly could be more effective than competition if the latter involves opaque markets.
    Keywords: Paris Stock Exchange,Market microstructure,Reforms,Regulation,Monopoly,Spreads
    Date: 2018–08
    URL: http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01863942&r=fmk
  2. By: Ando, Tomohiro; Bai, Jushan
    Abstract: This paper introduces a new procedure for analyzing the quantile co-movement of a large number of financial time series based on a large-scale panel data model with factor structures. The proposed method attempts to capture the unobservable heterogeneity of each of the financial time series based on sensitivity to explanatory variables and to the unobservable factor structure. In our model, the dimension of the common factor structure varies across quantiles, and the factor structure is allowed to be correlated with the explanatory variables. The proposed method allows for both cross-sectional and serial dependence, and heteroskedasticity, which are common in financial markets. We propose new estimation procedures for both frequentist and Bayesian frameworks. Consistency and asymptotic normality of the proposed estimator are established. We also propose a new model selection criterion for determining the number of common factors together with theoretical support. We apply the method to analyze the returns for over 6,000 international stocks from over 60 countries during the subprime crisis, European sovereign debt crisis, and subsequent period. The empirical analysis indicates that the common factor structure varies across quantiles. We find that the common factors for the quantiles and the common factors for the mean are different.
    Keywords: Data-augmentation; Endogeneity; Heterogeneous panel; Quantile factor structure; Serial and cross-sectional correlations.
    JEL: C33 C38
    Date: 2018–06–30
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:88765&r=fmk
  3. By: Xi Zhang; Yixuan Li; Senzhang Wang; Binxing Fang; Philip S. Yu
    Abstract: Traditional stock market prediction methods commonly only utilize the historical trading data, ignoring the fact that stock market fluctuations can be impacted by various other information sources such as stock related events. Although some recent works propose event-driven prediction approaches by considering the event data, how to leverage the joint impacts of multiple data sources still remains an open research problem. In this work, we study how to explore multiple data sources to improve the performance of the stock prediction. We introduce an Extended Coupled Hidden Markov Model incorporating the news events with the historical trading data. To address the data sparsity issue of news events for each single stock, we further study the fluctuation correlations between the stocks and incorporate the correlations into the model to facilitate the prediction task. Evaluations on China A-share market data in 2016 show the superior performance of our model against previous methods.
    Date: 2018–09
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1809.00306&r=fmk
  4. By: Neyer, Ulrike; Sterzel, André
    Abstract: This paper analyses the impact of different treatments of government bonds in bank liquidity regulation on financial stability. Using a theoretical model, we show that a sudden increase in sovereign default risk may lead to liquidity issues in the banking sector, implying the insolvency of a significant number of banks. Liquidity requirements do not contribute to a more resilient banking sector in the case of sovereign distress. However, the central bank acting as a lender of last resort can prevent illiquid banks from going bankrupt. Then, introducing liquidity requirements in general and repealing the preferential treatment of government bonds in liquidity regulation in particular actually undermines financial stability. The driving force is a regulation-induced change in bank investment behaviour.
    Keywords: bank liquidity regulation,government bonds,sovereign risk,financial contagion,lender of last resort
    JEL: G28 G21 G01
    Date: 2018
    URL: http://d.repec.org/n?u=RePEc:zbw:dicedp:301&r=fmk
  5. By: Ozili, Peterson K
    Abstract: This article provides a discussion on some issues in blockchain finance that regulators are concerned about – an area which bitcoin promoters have remained silent about. Blockchain technology in finance has several benefits for financial intermediation in the financial system; notwithstanding, several issues persist which if addressed can make the adoption of blockchain technology in finance easier and accepted by regulators. The blockchain issues discussed in this article are relevant for recent debates in blockchain finance.
    Keywords: Bitcoin; Blockchain; Finance, Fintech, Financial stability, Financial intermediation; Financial institutions; Banking regulation
    JEL: G21 G23 G28
    Date: 2018
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:88811&r=fmk
  6. By: Gündüz, Yalin; Ottonello, Giorgio; Pelizzon, Loriana; Schneider, Michael; Subrahmanyam, Marti G.
    Abstract: We study the impact of transparency on liquidity in OTC markets. We do so by providing an analysis of liquidity in a corporate bond market without trade transparency (Germany), and comparing our findings to a market with full post-trade disclosure (the U.S.). We employ a unique regulatory dataset of transactions of German financial institutions from 2008 until 2014 to find that: First, overall trading activity is much lower in the German market than in the U.S. Second, similar to the U.S., the determinants of German corporate bond liquidity are in line with search theories of OTC markets. Third, surprisingly, frequently traded German bonds have transaction costs that are 39-61 bp lower than a matched sample of bonds in the U.S. Our results support the notion that, while market liquidity is generally higher in transparent markets, a sub-set of bonds could be more liquid in more opaque markets because of investors "crowding" their demand into a small number of more actively traded securities.
    Keywords: Corporate Bonds,WpHG,Liquidity,Transparency,OTC markets
    JEL: G15
    Date: 2018
    URL: http://d.repec.org/n?u=RePEc:zbw:safewp:230&r=fmk
  7. By: Gehrig, Thomas; Iannino, Maria Chiara
    Abstract: This paper analyses the evolution of the safety and soundness of the European banking sector during the various stages of the Basel process of capital regulation. In the first part we document the evolution of various measures of systemic risk as the Basel process unfolds. Most strikingly, we find that the exposure to systemic risk as measured by SRISK has been steeply rising for the highest quintile, moderately rising for the second quintile and remaining roughly stationary for the remaining three quintiles of listed European banks. This observation suggests that the Basel process has succeeded in containing systemic risk for the majority of European banks but not for the largest and most risky institutions. In the second part we analyze the drivers of systemic risk. We find compelling evidence that the increase in exposure to systemic risk (SRISK) is intimately tied to the implementation of internal models for determining credit risk as well as market risk. Based on this evidence, the sub-prime crisis found especially the largest and more systemic banks ill-prepared and lacking resiliency. This condition has even aggravated during the European sovereign crisis. Banking Union has not restored aggregate resiliency to pre-crises levels. Finally, low interest rates considerably a ect the contribution to systemic risk for the safer banks.
    JEL: B26 E58 G21 G28 H12 N24
    Date: 2018–09–27
    URL: http://d.repec.org/n?u=RePEc:bof:bofrdp:2018_016&r=fmk
  8. By: Dave Cliff
    Abstract: This paper describes the design, implementation, and successful use of the Bristol Stock Exchange (BSE), a novel minimal simulation of a centralised financial market, based on a Limit Order Book (LOB) such as is common in major stock exchanges. Construction of BSE was motivated by the fact that most of the world's major financial markets have automated, with trading activity that previously was the responsibility of human traders now being performed by high-speed autonomous automated trading systems. Research aimed at understanding the dynamics of this new style of financial market is hampered by the fact that no operational real-world exchange is ever likely to allow experimental probing of that market while it is open and running live, forcing researchers to work primarily from time-series of past trading data. Similarly, university-level education of the engineers who can create next-generation automated trading systems requires that they have hands-on learning experience in a sufficiently realistic teaching environment. BSE as described here addresses both those needs: it has been successfully used for teaching and research in a leading UK university since 2012, and the BSE program code is freely available as open-source on GitHuB.
    Date: 2018–09
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1809.06027&r=fmk

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