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on Financial Markets |
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Issue of 2019‒02‒18
six papers chosen by |
| By: | Anil Savio Kavuri; Alistair Milne |
| Abstract: | New financial technologies (FinTech) have erupted around the world. Consequently, there has been a considerable increase in academic literature on FinTech over the last five years. Research tends to be scantily connected with no coherent research agenda. Significant research gaps and important questions remain. There is much work to be done before this area becomes an established academic discipline. This paper offers coherent research themes formulated through focus group meetings with policymakers and academics, and also based on a critical assessment of the literature. We outline seven key research gaps with questions that could form the basis of academic study. If these are addressed it would help this area become an established academic discipline. |
| Keywords: | FinTech, industrial structure, customer benefits, barriers, vulnerable customers, identity, cyber security, AI, financial stability, regulation cryptocurrencies, payments, business models, Bitcoin, Blockchain |
| JEL: | E58 G18 G20 G21 G28 G29 K12 O30 O32 O33 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2019-18&r=all |
| By: | Deku, Solomon Y.; Kara, Alper; Marqués-Ibáñez, David |
| Abstract: | We examine the link between issuer reputation and mortgage-backed security (MBS) performance using a sample of 4,247 European MBS issued between 1999 and 2007. We measure performance with credit rating downgrades and delinquencies and track their changes over the long term. We find that, overall, MBS sold by reputable issuers are collateralised by higher quality asset pools which have lower delinquency rates and are less likely to be downgraded. However, as credit standards declined during the boom period of 2005-2007, asset pools securitized by reputable issuers were of worse quality compared to those securitized by less reputable issuers. Therefore, reputation as a self-disciplining mechanism failed to incentivise the production of high quality securities during the credit boom. JEL Classification: G21, G24, G28 |
| Keywords: | issuer reputation, mortgage-backed securities, rating shopping |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192236&r=all |
| By: | Josefin Meyer; Carmen M. Reinhart; Christoph Trebesch |
| Abstract: | This paper studies external sovereign bonds as an asset class. We compile a new database of 220,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering 91 countries. Our main insight is that, as in equity markets, the returns on external sovereign bonds have been sufficiently high to compensate for risk. Real ex-post returns averaged 7% annually across two centuries, including default episodes, major wars, and global crises. This represents an excess return of around 4% above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds. The observed returns are hard to reconcile with canonical theoretical models and with the degree of credit risk in this market, as measured by historical default and recovery rates. Based on our archive of more than 300 sovereign debt restructurings since 1815, we show that full repudiation is rare; the median haircut is below 50%. |
| JEL: | F30 F34 G12 G15 N10 N20 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25543&r=all |
| By: | Chariton Chalvatzis; Dimitrios Hristu-Varsakelis |
| Abstract: | We present a deep long short-term memory (LSTM)-based neural network for predicting asset prices, together with a successful trading strategy for generating profits based on the model's predictions. Our work is motivated by the fact that the effectiveness of any prediction model is inherently coupled to the trading strategy it is used with, and vise versa. This highlights the difficulty in developing models and strategies which are jointly optimal, but also points to avenues of investigation which are broader than prevailing approaches. Our LSTM model is structurally simple and generates predictions based on price observations over a modest number of past trading days. The model's architecture is tuned to promote profitability, as opposed to accuracy, under a strategy that does not trade simply based on whether the price is predicted to rise or fall, but rather takes advantage of the distribution of predicted returns, and the fact that a prediction's position within that distribution carries useful information about the expected profitability of a trade. The proposed model and trading strategy were tested on the S&P 500, Dow Jones Industrial Average (DJIA), NASDAQ and Russel 2000 stock indices, and achieved cumulative returns of 329%, 241%, 468% and 279%, respectively, over 2010-2018, far outperforming the benchmark buy-and-hold strategy as well as other recent efforts. |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1902.03125&r=all |
| By: | Willem THORBECKE |
| Abstract: | Using three identification strategies, this paper finds that supply-driven oil price increases lowered U.S. stock returns before the Global Financial Crisis in various sectors including industrial machinery, industrial engineering, chemicals, and marine transport but raised them in these sectors after the crisis. It also reports that oil prices are a priced factor in a multi-factor asset pricing model both before and after the crisis. While oil prices mattered in both periods, the beneficial effects of oil price increases on the U.S. economy have risen and the harmful effects have fallen since U.S. oil production soared after 2010. |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:19003&r=all |
| By: | Wataru Hirata (Bank of Japan); Mayumi Ojima (Bank of Japan) |
| Abstract: | Bank competition and financial stability is a recurrent research issue, and researchers have begun to shed light on the competition effect on systemic-risk. Japan is an interesting case in this venue since its regional banking system has confronted intensified competition and there is growing evidence that the competition has led the portfolio of Japan's regional banks to be more overlapped, an indication of increased systemic risk. In this paper, we first examine the empirical relationship between competition and systemic-risk for Japan's regional banks. We find that the bank mark-up is negatively associated with the level of systemic risk, indicating that competition undermines the system-wide financial stability in Japan. However, this result is at odds with existing studies. To this end, we perform a theoretical analysis focusing on bank's portfolio diversification. We demonstrate that Japan's regional banks tend to diversify toward alternative lending when the profitability of the core business declines. This diversification results in the build-up of systemic risk through higher common exposure, a form of indirect interconnectedness. |
| Keywords: | Competition; Mark-up; Systemic-risk; Indirect interconnectedness |
| JEL: | G11 G21 L51 |
| Date: | 2019–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp19e01&r=all |