nep-fmk New Economics Papers
on Financial Markets
Issue of 2018‒12‒17
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Municipal Bond Markets By Cestau, Dario; Hollifield, Burton; Li, Dan; Schürhoff, Norman
  2. The cross-sectional spillovers of single stock circuit breakers By Brugler, James; Linton, Oliver; Noss, Joseph; Pedace, Lucas
  3. Bull Bear Balance: A Cluster Analysis of Socially Informed Financial Volatility By Jonathan Manfield; Derek Lukacsko; Th\'arsis T. P. Souza
  4. Robust Classification of Financial Risk By Suproteem K. Sarkar; Kojin Oshiba; Daniel Giebisch; Yaron Singer
  5. The Effect of Tax Treaties on Market Based Finance: Evidence using Firm-Level Data By Ronald B. Davies; Neill Killeen

  1. By: Cestau, Dario; Hollifield, Burton; Li, Dan; Schürhoff, Norman
    Abstract: The effective functioning of the municipal bond market is crucial for the provision of public services, as it is the largest capital market for state and municipal issuers. Prior research has documented tax, credit, liquidity, and segmentation effects in municipal bonds. Recent regulatory initiatives to improve transparency have made granular trade data available to researchers, rendering it a natural laboratory to study financial intermediation, asset pricing in decentralized markets, and local public finance. Trade-by-trade studies have found large trading costs, contemporaneous price dispersion and other deviations from the law-of-one- price. More research is required to understand optimal market design and the impact of post-crisis regulation, sustainability, and financial technology.
    Keywords: centrality premium; electronification; green bonds; muni-bond puzzle; Municipal Bonds; Over-the-counter markets; trading cost
    JEL: G12 G14 G18 G24 G28 H21 H6 H7
    Date: 2018–11
  2. By: Brugler, James (University of Melbourne); Linton, Oliver (University of Cambridge); Noss, Joseph (Financial Stability Board); Pedace, Lucas (Bank of England)
    Abstract: This paper uses transaction data to estimate how single stock circuit breakers on the London Stock Exchange affect other stocks that remain in continuous trading. This ‘spillover’ effect is estimated by calculating the effect of a trading halt on the market quality of stocks that remain in continuous trading and comparing this with the effect of a stock whose absolute returns are of a magnitude nearly sufficient to trigger a trading halt but do not do so. Market quality is measured using a combination of trading costs, volatility and volume. We find that circuit breakers lead to a significant improvement in the liquidity, and reduction in the volatility, of stocks that remain in continuous trading. This might suggest that — at least over the period covered by our data — single stock circuit breakers play an important role in reducing the spillover of poor market quality across stocks.
    Keywords: Circuit breakers; market microstructure; market quality
    JEL: G12 G14 G15 G18
    Date: 2018–10–12
  3. By: Jonathan Manfield; Derek Lukacsko; Th\'arsis T. P. Souza
    Abstract: Using a method rooted in information theory, we present results that have identified a large set of stocks for which social media can be informative regarding financial volatility. By clustering stocks based on the joint feature sets of social and financial variables, our research provides an important contribution by characterizing the conditions in which social media signals can lead financial volatility. The results indicate that social media is most informative about financial market volatility when the ratio of bullish to bearish sentiment is high, even when the number of messages is low. The robustness of these findings is verified across 500 stocks from both NYSE and NASDAQ exchanges. The reported results are reproducible via an open-source library for social-financial analysis made freely available.
    Date: 2018–11
  4. By: Suproteem K. Sarkar; Kojin Oshiba; Daniel Giebisch; Yaron Singer
    Abstract: Algorithms are increasingly common components of high-impact decision-making, and a growing body of literature on adversarial examples in laboratory settings indicates that standard machine learning models are not robust. This suggests that real-world systems are also susceptible to manipulation or misclassification, which especially poses a challenge to machine learning models used in financial services. We use the loan grade classification problem to explore how machine learning models are sensitive to small changes in user-reported data, using adversarial attacks documented in the literature and an original, domain-specific attack. Our work shows that a robust optimization algorithm can build models for financial services that are resistant to misclassification on perturbations. To the best of our knowledge, this is the first study of adversarial attacks and defenses for deep learning in financial services.
    Date: 2018–11
  5. By: Ronald B. Davies; Neill Killeen
    Abstract: Tax arbitrage is often cited as a potential motive for the substantial growth and complexity of market based finance. Tax treaties are an important feature of the international tax system and can be used to reduce the tax burden on cross-border capital flows. Using an EU firm-level dataset and a number of alternative tax treaty measures, this paper investigates the importance of tax treaties on the investment decisions of a large sample of non-bank financial institutions. The novel dataset includes conduits such as special purpose entities which are often used to channel cross-border investments. Our results show that tax treaties influence the extensive margin of non-bank financial FDI with conduit related investments particularly sensitive to international taxation.
    Keywords: Tax treaties; Market-based finance; Shadow banking system; Conditional logit model; Mixed logit model; Nested logit model
    JEL: F23 G23 G32
    Date: 2018–10

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