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on Financial Markets |
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Issue of 2018‒12‒24
six papers chosen by |
| By: | Kuvshinov, Dmitry; Zimmermann, Kaspar |
| Abstract: | This paper presents annual stock market capitalization data for 17 advanced economies from 1870 to today. Extending our knowledge beyond individual benchmark years in the seminal work of Rajan and Zingales (2003) reveals a striking new time series pattern: over the long run, the evolution of stock market size resembles a hockey stick. The stock market cap to GDP ratio was stable for more than a century, then tripled in the 1980s and 1990s and remains high to this day. This trend is common across countries and mirrors increases in other financial and price indicators, but happens at a much faster pace. We term this sudden structural shift 'the big bang' and use novel data on equity returns, prices and cashflows to explore its underlying drivers. Our first key finding is that the big bang is driven almost entirely by rising equity prices, rather than quantities. Net equity issuance is sizeable but relatively constant over time, and plays very little role in the short, medium and long run swings in stock market cap. Second, much of this price increase cannot be explained by more favourable fundamentals such as profits and taxes. Rather, it is driven by lower equity risk premia. Third, consistent with this risk premium view of stock market size, the market cap to GDP ratio is a reliable indicator of booms and busts in the equity market. High stock market capitalization - the 'Buffet indicator' - forecasts low subsequent equity returns, and low - rather than high - cashflow growth, outperforming standard predictors such as the dividend-price ratio. |
| JEL: | E44 G10 G20 N10 N20 O16 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ibfpps:0218&r=fmk |
| By: | Farhi, Emmanuel (Harvard University); Gourio, Francois (Federal Reserve Bank of Chicago) |
| Abstract: | Real risk-free interest rates have trended down over the past 30 years. Puzzlingly in light of this decline, (1) the return on private capital has remained stable or even increased, creating an increasing wedge with safe interest rates; (2) stock market valuation ratios have increased only moderately; (3) investment has been lackluster. We use a simple extension of the neoclassical growth model to diagnose the nexus of forces that jointly accounts for these developments. We find that rising market power, rising unmeasured intangibles, and rising risk premia, play a crucial role, over and above the traditional culprits of increasing savings supply and technological growth slowdown. |
| Keywords: | investment; equity premium; risk-free rate; profitability; valuation ratios; labor share; competition; markups; safe assets |
| JEL: | E32 G12 |
| Date: | 2018–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2018-19&r=fmk |
| By: | Pietro Bonaldi; Mauricio Villamizar-Villegas |
| Abstract: | There are several financial markets where a few dealers trade a large share of total volume, while also having access to periodic auctions of the same asset conducted by a third party. For such a market, we derive a test of private information about the value of the asset that combines data on both bidding behavior and market trades. Our approach is to test for private versus common values, as defined in auction theory. We use changes in trading prices of extreme bidders before and after the auction to test the null hypothesis of private values (no private information) against the alternative of common values (private information). Additionally, we use a regression discontinuity design where we compare the behavior of dealers bidding right below and right above the auction's cutoff price to control for inventory effects. Our case study are foreign exchange auctions conducted by the Central Bank of Colombia during the period 2008-2014, and the corresponding interdealer market for Colombian Pesos against US dollars. Overall, our test rejects the null hypothesis. Specifically, information revealed to the bidders about their relative valuations has a subsequent effect on trading prices, at an hourly trading window, equivalent to 23% - 39% of the standard deviation of currency prices. **** RESUMEN: Existen varios mercados financieros en los que algunos intermediarios tranzan una gran parte del volumen total, además de tener acceso a subastas periódicas del mismo activo realizadas por un tercero. Para dicho mercado, derivamos una prueba de información privada sobre el valor del activo que combina datos sobre el comportamiento de las pujas y las transacciones de mercado. Nuestro enfoque es probar valores privados versus valores comunes, tal como se define en la teoría de subastas. Utilizamos cambios en los precios de mercado de los postores extremos antes y después de la subasta para probar la hipótesis nula de valores privados (sin información privada) frente a la alternativa de valores comunes (información privada). Además, utilizamos un diseño de regresión discontinua en el que comparamos el comportamiento de los postores que ofertan justo debajo y encima del precio de corte de la subasta para controlar por posibles efectos de inventario. Nuestro caso de estudio son las subastas de divisas realizadas por el Banco de la República de Colombia durante el periodo 2008-2014, y el mercado cambiario correspondiente de pesos-dólar. En general, nuestra prueba rechaza la hipótesis nula. En particular, la información revelada a los postores sobre sus valoraciones relativas tiene un efecto sobre los precios de mercado, en una ventana de una hora, equivalente al 23% - 39% de la desviación estándar de los precios de las divisas. |
| Keywords: | Auctions, Common Values, Private Values, Private Information, Foreign Exchange Market, Regression Discontinuity Design, Subastas, Valores Comunes, Valores Privados, Información Privada, Mercado Cambiario, Regresión Discontinua. |
| JEL: | D44 F31 G14 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:rie:riecdt:1&r=fmk |
| By: | Cukierman, Alex |
| Abstract: | This paper reviews the interactions between policymaking, the financial system and the U.S. economy before, during and after the subprime crisis with particular attention to current controversies about the policy decisions that led to Lehman's downfall and their lessons for the future. The first part of the paper documents and analyzes the interactions between policy, financial markets and the economy during the acute and subsequent moderate phases of the crisis as well as during the later gradual exit from the zero lower bound and the extremely slow reduction in high powered money and bank reserves. The remaining parts develop alternative aspects of the thesis that mutual uncertainties inflicted by financial institutions on policymakers and by the latter on financial markets were at the root of the non-negligible surprises that the crisis inflicted on everybody. In particular, it discusses the political economy of bailout operations, reviews and evaluates recent controversies about the reasons for not rescuing Lehman Brothers and present informally the structure and policy lessons from a general equilibrium model of the financial sector which highlights the consequences of policy actions that have raised (Knightian) bailout uncertainty. The last section takes a brief look ahead and discusses some longer term consequences of the crisis. |
| Keywords: | bailouts; banks' reserves; credit; exit; financial crisis; monetary policy; uncertainty |
| JEL: | E51 E52 E58 E65 G1 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13373&r=fmk |
| By: | D'Amico, Stefania (Federal Reserve Bank of Chicago); Pancost, N. Aaron (University of Texas at Austin) |
| Abstract: | We estimate the joint term-structure of U.S. Treasury cash and repo rates using daily prices of all outstanding Treasury securities and corresponding special collateral (SC) repo rates. This allows us to derive a risk premium associated to the SC value of Treasuries and quantitatively link this premium to various price anomalies, such as the on-the-run premium. We show that a time-varying SC risk premium can explain between 74%–90% of the on-the-run premium, and is highly correlated with a number of other Treasury market anomalies. This suggests a commonality across these price anomalies, explicitly linked to the SC value of the highest-quality securities—recently-issued U.S. nominal Treasuries. |
| Keywords: | Bond prices; collateral; interest rates; risk premia |
| JEL: | E42 G12 G14 G32 |
| Date: | 2018–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2018-21&r=fmk |
| By: | Alanoud Al-Maadid; Guglielmo Maria Caporale; Fabio Spagnolo; Nicola Spagnolo |
| Abstract: | This paper investigates the impact of business and political news on stock market returns in the Gulf Cooperation Council (GCC) countries. For this purpose, it employs a Markov switching model including a separate index for each of the two categories of news considered. The results indicate the importance of news as drivers of GCC stock returns, with business news playing a more substantial role; further, news released in the largest financial markets in the regions are found to have significant cross-border effects. |
| Keywords: | business news, GCC countries, Markov switching model, political news |
| JEL: | C32 F36 G15 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7353&r=fmk |