nep-fmk New Economics Papers
on Financial Markets
Issue of 2018‒10‒29
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. A Survey of Systemic Risk Indicators By Antonio Di Cesare; Anna Rogantini Picco
  2. Who bears interest rate risk? By Hoffmann, Peter; Langfield, Sam; Pierobon, Federico; Vuillemey, Guillaume
  3. Gold Price and Exchange Rates: A Panel Smooth Transition Regression Model for the G7 Countries By Nikolaos Giannellis; Minoas Koukouritakis
  4. The portfolio balance channel: an analysis on the impact of quantitative easing on the US stock market By Imran Shah; Francesca Schmidt-Fischer; Issam Malki
  5. Successes and Drawbacks of the Federal Reserve and the Impact on Financial Markets. By Rashid, Muhammad Mustafa
  6. China's Local Government Bond Market By W. Raphael Lam; Jingsen Wang
  7. Sovereign Bond Yields Spreads Spillovers in the EMU By António Afonso; Mina Kazemi
  8. Do the Winners repeat their performance? A Case Indian Mutual Funds? By Kalpakam Gopalakrishnan; Smita Ramakrishna

  1. By: Antonio Di Cesare (Bank of Italy); Anna Rogantini Picco (European University Institute)
    Abstract: The aim of this survey is to provide a rigorous, but not so technical, introduction to several systemic risk indicators frequently used in official publications by institutions involved in macroprudential analysis and policy. The selected indicators are classified using three taxonomies. The first one adopts the point of view of regulators and policy-makers, whose attention is usually focused on the implementability and forward-looking nature of the indicators. The second taxonomy highlights the features that are most relevant for researchers, i.e. the reliance on a sound theoretical background and the use of advanced analytical techniques. The third taxonomy classifies the indicators according to the specific aspects of systemic risks that are captured. For each indicator both general and technical descriptions are provided, as well as specific examples.
    Keywords: systemic risk, financial stability, systemic risk indicators
    JEL: G21 G28 G14 C13
    Date: 2018–10
  2. By: Hoffmann, Peter; Langfield, Sam; Pierobon, Federico; Vuillemey, Guillaume
    Abstract: We study the allocation of interest rate risk within the European banking sector using novel data. Banks’ exposure to interest rate risk is small on aggregate, but heterogeneous in the cross-section. In contrast to conventional wisdom, net worth is increasing in interest rates for approximately half of the institutions in our sample. Cross-sectional variation in banks’ exposures is driven by cross-country differences in loan-rate fixation conventions for mortgages. Banks use derivatives to partially hedge on-balance sheet exposures. Residual exposures imply that changes in interest rates have redistributive effects within the banking sector. JEL Classification: G21, E43, E44
    Keywords: Banking, Hedging, Interest Rate Risk, Risk Management
    Date: 2018–09
  3. By: Nikolaos Giannellis (Department of Economics); Minoas Koukouritakis
    Abstract: In this paper we investigate whether the price of gold is affected by internal and external macroeconomic performance, which is reflected in exchange rate movements
    Keywords: G7, external balance model, panel cointegration, misalignment rate, panel smooth transition regression model
    JEL: E42 F31 F41
    Date: 2018–10–20
  4. By: Imran Shah (University of Bath); Francesca Schmidt-Fischer; Issam Malki (University of Westminster)
    Abstract: This paper provides empirical evidence on the pass-through of quantitative easing (QE) on equity returns in the United States (US). The methodology mimics the programme’s impact on investors’ required returns for financial assets through the QE portfolio balance channel. This analysis of monetary policy involves using a VAR model, simulating a reduction in the share of sovereign bonds as part of central bank purchases. The findings suggest that QE caused a significant reduction in the equity risk premium (ERP) for the S&P 500. This equates to an increase in equity prices of 9.6% and acts as evidence for an active portfolio rebalancing of private sector individuals into risky assets following QE. The findings of the paper also suggest that the impact of a monetary policy expansion results in varying effects, while an expansionary policy has a stronger positive effect on equity prices with QE than without. Furthermore, we test for the presence of structural breaks in the VAR model. Firstly, using a multiple structural breaks approach, we find evidence of regime shifts and secondly accounting for the shifts in the conditional mean leads to similar conclusions as found earlier.
    Date: 2018–08–01
  5. By: Rashid, Muhammad Mustafa
    Abstract: The purpose of this paper is to provide an outline of the success and draw backs of the Federal Reserve and the consequent impact on financial markets. A review of the relevant literature from Hubbard (2008) and Dowd & Hutchinson (2010) will provide insights into the success and failures of the Federal Reserve and the impact on financial markets. Further insights will be drawn from; Gorton & Metrick (2013) and their interpretation of the Federal Reserve’s actions since its formation, Romer & Romer (2013) on the pessimism of monetary policy and Dyugen-Bump (et. al 2013) on their assessment of the effectiveness of emergency liquidity measures.
    Keywords: Federal Reserve, Financial Markets, Financial Crises, Financial Regulations
    JEL: G0 G01 G18 G21 G28 G3 G38
    Date: 2018–08–19
  6. By: W. Raphael Lam; Jingsen Wang
    Abstract: Local governments play a significant role in China’s public finance and fiscal operations. The size of local government debt has grown rapidly over the past years, exceeding the stock of sovereign debt in China. How does this development compare to other countries and what policies can foster the sound development of the bond markets? This paper finds that despite its rapid growth, the local government bond market is still underdeveloped. Severe impediments—low liquidity, weak credit discipline, structural fiscal deficit in local governments—have become more visible. Reforms to develop a sound local government bond market should harmonize tax and regulations, build liquidity, and advance fiscal reforms to tighten off-budget borrowing and address intergovernmental imbalances.
    Date: 2018–09–28
  7. By: António Afonso; Mina Kazemi
    Abstract: We study the sovereign bond market co-movements and spillovers within 10 EMU countries, the so-called "periphery" and "core" countries, during the period 1999:01 to 2016:07. Implementing Generalized Methods for Moments (GMM) within a panel setting and bivariate VAR analysis, we find that an increase in the lagged spreads of Italian and Austrian bonds negatively affect the spreads of the whole sample while in the increase in the Irish, Portuguese, Belgian and French lagged yields increased the overall spreads. In the VAR analysis we find that spillover effects within the sample are mostly positive.
    Keywords: sovereign yields spreads, spillovers, euro area, panel data
    JEL: C23 E52 G10
    Date: 2018–10
  8. By: Kalpakam Gopalakrishnan (K J Somaiaya Institute of Management Studies and Research); Smita Ramakrishna (K J Somaiya Institute of Management Studies and Research)
    Abstract: Mutual funds are vehicles for wealth generation in the long term. Therefore investors, fund managers and advisors need to predict the future winners in term of investment style and economic cycles. Indian mutual fund industry has reached new heights in the last decade and witnessed a healthy evolution in terms of number of players, number of folios opened and total assets under management. With a plethora of schemes available in the Indian market, investors before making any investment decision considers the past performance of these mutual fund schemes although past performance is not a guarantee for future performance. Thus, this paper analyses and presents the empirical evidence with regard to the performance persistence of mutual fund schemes and examines whether their past performance provides useful information for predicting the future performance. We have taken a sample of 30 mutual funds schemes and analysed for a period of eleven years from January 2007 to December 2017. For the analysis, various parametric and non-parametric techniques such as Risk Adjusted, regression analysis, etc have been used. Results are a mix of persistence and nonpersistence and do not confirm presence of performance persistence in mutual funds. The results are typical of an industry still evolving and in a nascent stage.This study attempts to examine whether winners in terms of Risk Adjusted Returns and the Returns of a scheme are persisting/ repeating over a time span and also compare Midcap Mutual Funds with Largecap Mutual funds for performance persistence Data is sourced from NAVIndia of Capitaline database for analysis. Monthly NAV of these equity schemes since 2007 is used. The sample would consist of thirty schemes from funds in India. For analysis, various parametric and non-parametric techniques such as Risk Adjusted, regression analysis, etc have been usedAs long term investors, persistence in terms of returns and risk adjusted returns is an important factor to consider while investing in a fund. We find partial persistence over various time spans as well as in fund categories. This study helps investors and fund managers to base their decisions based on performance persistence.
    Keywords: Mutual Funds , Performance Evaluation, Performance Persistence
    JEL: G11 N20
    Date: 2018–07

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