nep-fmk New Economics Papers
on Financial Markets
Issue of 2019‒03‒11
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Impact of ESG on Stocks’ Downside Risk and Risk Adjusted Return By Lööf, Hans; Stephan, Andreas
  2. Testing for Episodic Predictability in Stock Returns By Demetrescu, Matei; Georgiev, Iliyan; Rodrigues, Paulo MM; Taylor, AM Robert
  3. A critique of momentum anomalies By de Oliveira Souza, Thiago
  4. Artificial Counselor System for Stock Investment By Hadi NekoeiQachkanloo; Benyamin Ghojogh; Ali Saheb Pasand; Mark Crowley
  5. Repo rates and the collateral spread puzzle By Nyborg, Kjell G
  6. Limit Orders under Knightian Uncertainty By Michael Greinecker; Christoph Kuzmics
  7. The Risk Exposures of Safe Havens to Global and Regional Stock Market Shocks: A Novel Approach By Mehmet Balcilar; Riza Demirer; Rangan Gupta; Mark E. Wohar
  8. Halloween Effect in Developed Stock Markets: A US Perspective By Alex Plastun; Xolani Sibande; Rangan Gupta; Mark E. Wohar
  9. Stock Market Impact of Cross-Border Acquisitions in Emerging Markets By Norbäck, Pehr-Johan; Persson, Lars
  10. Cross-shareholding networks and stock price synchronicity: Evidence from China By Fenghua Wen; Yujie Yuan; Wei-Xing Zhou
  11. FinTech in Sub-Saharan African Countries; A Game Changer? By Amadou N Sy; Rodolfo Maino; Alexander Massara; Hector Perez Saiz; Preya Sharma

  1. By: Lööf, Hans (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Stephan, Andreas (Jönköping International Business School, Jönköping University & Centre of Excellence for Science and Innovation Studies (CESIS))
    Abstract: Investments considering corporate social responsibility continue to expand. Are companies pursuing a CSR agenda benefiting shareholders by reducing their financial downside risk? This paper investigates the relationship between a firm’s environmental, social and corporate governance (ESG) scores and its downside risk on the stock market. We study this link using a panel of 887 stocks listed in five European countries over the period 2005-2017. Our empirical results show that higher ESG scores are associated with reduced downside risk of stock returns. Based on the Fama-French three factor model, we found no systematic relationship between ESG and the level of risk-adjusted return.
    Keywords: ESG; Value at Risk; Risk-adjusted return; stock market; panel data
    JEL: D22 G11 G14 G32
    Date: 2019–03–06
    URL: http://d.repec.org/n?u=RePEc:hhs:cesisp:0477&r=all
  2. By: Demetrescu, Matei; Georgiev, Iliyan; Rodrigues, Paulo MM; Taylor, AM Robert
    Abstract: Standard tests based on predictive regressions estimated over the full available sample data have tended to find little evidence of predictability in stock returns. Recent approaches based on the analysis of subsamples of the data have been considered, suggesting that predictability where it occurs might exist only within so-called 'pockets of predictability' rather than across the entire sample. However, these methods are prone to the criticism that the sub-sample dates are endogenously determined such that the use of standard critical values appropriate for full sample tests will result in incorrectly sized tests leading to spurious findings of stock returns predictability. To avoid the problem of endogenously-determined sample splits, we propose new tests derived from sequences of predictability statistics systematically calculated over sub-samples of the data. Specifically, we will base tests on the maximum of such statistics from sequences of forward and backward recursive, rolling, and double-recursive predictive sub-sample regressions. We develop our approach using the over-identified instrumental variable-based predictability test statistics of Breitung and Demetrescu (2015). This approach is based on partial-sum asymptotics and so, unlike many other popular approaches including, for example, those based on Bonferroni corrections, can be readily adapted to implementation over sequences of subsamples. We show that the limiting distributions of our proposed tests are robust to both the degree of persistence and endogeneity of the regressors in the predictive regression, but not to any heteroskedasticity present even if the sub-sample statistics are based on heteroskedasticity-robust standard errors. We therefore develop fixed regressor wild bootstrap implementations of the tests which we demonstrate to be first-order asymptotically valid. Finite sample behaviour against a variety of temporarily predictable processes is considered. An empirical application to US stock returns illustrates the usefulness of the new predictability testing methods we propose.
    Keywords: predictive regression; rolling and recursive IV estimation; persistence; endogeneity; conditional and unconditional heteroskedasticity
    Date: 2019–02–27
    URL: http://d.repec.org/n?u=RePEc:esy:uefcwp:24137&r=all
  3. By: de Oliveira Souza, Thiago (Department of Business and Economics)
    Abstract: This paper offers theoretical, empirical, and simulated evidence that momentum regularities in asset prices are not anomalies. Within a general, frictionless, rational expectations, risk-based asset pricing framework, riskier assets tend to be in the loser portfolios after (large) increases in the price of risk. Hence, the risk of momentum portfolios usually decreases with the prevailing price of risk, and their risk premiums are approximately negative quadratic functions of the price of risk (and the market premium) theoretically truncated at zero. The best linear (CAPM) function describing this relation unconditionally has exactly the negative slope and positive intercept documented empirically.
    Keywords: Momentum; risk; puzzle; ranking; conditional
    JEL: G11 G12 G14
    Date: 2019–02–20
    URL: http://d.repec.org/n?u=RePEc:hhs:sdueko:2019_005&r=all
  4. By: Hadi NekoeiQachkanloo; Benyamin Ghojogh; Ali Saheb Pasand; Mark Crowley
    Abstract: This paper proposes a novel trading system which plays the role of an artificial counselor for stock investment. In this paper, the stock future prices (technical features) are predicted using Support Vector Regression. Thereafter, the predicted prices are used to recommend which portions of the budget an investor should invest in different existing stocks to have an optimum expected profit considering their level of risk tolerance. Two different methods are used for suggesting best portions, which are Markowitz portfolio theory and fuzzy investment counselor. The first approach is an optimization-based method which considers merely technical features, while the second approach is based on Fuzzy Logic taking into account both technical and fundamental features of the stock market. The experimental results on New York Stock Exchange (NYSE) show the effectiveness of the proposed system.
    Date: 2019–03
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1903.00955&r=all
  5. By: Nyborg, Kjell G
    Abstract: Repo rates frequently exceed unsecured rates in practice. As an explanation, this paper derives a constrained-arbitrage relation between the unsecured rate, the repo rate, and the illiquidity adjusted expected rate of return of the underlying collateral. The theory is based on unsecured borrowing constraints in the market for liquidity. Repos and security cash-market trades are alternative means to get liquidity. Collateral spreads (unsecured less repo rate) can turn negative if borrowing constraints tighten, unsecured rates spike down, or from a depressed and illiquid security market. The constrained-arbitrage theory sheds light on the evolution of collateral spreads over time.
    Keywords: collateral spread; constrained-arbitrage; general collateral; liquidity; market linkages; repo rate; unsecured rate
    JEL: G01 G12 G21
    Date: 2019–02
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:13546&r=all
  6. By: Michael Greinecker (University of Graz, Austria); Christoph Kuzmics (University of Graz, Austria)
    Abstract: Investors who maximize subjective expected utility will generally trade in an asset unless the market price exactly equals the expected return, but few people participate in the stock market. [Dow and da Costa Werlang, Econometrica 1992] show that an ambiguity averse decision maker might abstain from trading in an asset for a wide interval of prices and use this fact to explain the lack of participation in the stock market. We show that when markets operate via limit orders, all investment behavior will be observationally equivalent to maximizing subjective expected utility; ambiguity aversion has no additional explanatory power.
    Keywords: Ambiguity; Knightian uncertainty; Dominance; Stock market participation; Limit orders
    JEL: D81 D83 G11 G12
    Date: 2019–03
    URL: http://d.repec.org/n?u=RePEc:grz:wpaper:2019-03&r=all
  7. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, via Mersin 10, Northern Cyprus, Turkey; Department of Economics, University of Pretoria, Pretoria, 0002, South Africa; Montpellier Business School, Montpellier, France.); Riza Demirer (Department of Economics and Finance, Southern Illinois University Edwardsville, Edwardsville, IL 62026- 1102, USA); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha, 6708 Pine Street, Omaha, NE 68182, USA and School of Business and Economics, Loughborough University, Leicestershire, LE11 3TU, UK)
    Abstract: This paper examines the fundamental linkages between stock markets and safe haven assets by developing a two-factor, regime-based volatility spillover model with global and regional stock market shocks as risk factors. The risk exposures of safe havens with respect to global and regional shocks are found to display significant time variation and regime-specific features, with the exception of VIX for which consistent negative risk exposures are observed with respect to both global and regional shocks. While traditional safe havens like precious metals exhibit positive risk exposures to both regional and global shocks during high volatility periods, Swiss Francs, Japanese Yen and U.S. Treasuries are found to display either insignificant or negative risk exposures during market stress periods to equity market shocks, implying these assets would serve as more effective hedges or safe havens for equity investors. Our findings highlight the importance of dynamic models in assessing the linkages between safe haven assets and stock returns as static models would introduce large biases in diversification measures and optimal hedge ratios.
    Keywords: Safe haven assets, Multivariate regime-switching, Equity market shocks
    JEL: C32 G11 G15
    Date: 2019–02
    URL: http://d.repec.org/n?u=RePEc:pre:wpaper:201915&r=all
  8. By: Alex Plastun (Faculty of Economics and Management, Sumy State University, Sumy, Ukraine); Xolani Sibande (Department of Economics, University of Pretoria, Pretoria, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha, 6708 Pine Street, Omaha, NE 68182, USA and School of Business and Economics, Loughborough University, Leicestershire, LE11 3TU, UK)
    Abstract: In this paper, we conduct a comprehensive investigation of the Halloween effect evolution in the US stock market over its entire history. We employ various statistical techniques (average analysis, Student’s t-test, ANOVA, and the Mann-Whitney test) and the trading simulation approach to analyse the evolution of the Halloween effect. The results suggest that in the US stock market the Halloween effect became more persistent since the middle of the 20th century. Despite the decline in its prevalence since that time, nowadays it is still present in the US stock market and provides opportunities to build a trading strategy which can beat the market. These results are well in line with other developed stock markets. Therefore, in the main, our results are inconsistent with the Efficient Market Hypothesis.
    Keywords: Calendar Anomalies, Halloween Effect, Stock Market, Efficient Market Hypothesis
    JEL: G12 C63
    Date: 2019–02
    URL: http://d.repec.org/n?u=RePEc:pre:wpaper:201914&r=all
  9. By: Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: Entry by multinational enterprises (MNEs) into emerging markets has increased substantially over the last decades. Many of these MNE entries have taken place in concentrated markets. To capture these features, we construct a strategic interaction model of MNE cross-border acquisition and greenfield entry into an oligopolistic market. We provide an event study framework suitable to derive predictions for the stock market values of MNE entries. We show that share values of acquirers will increase when an acquisition is announced if and only if the domestic assets are not too strategically important. If there is risk associated with cross-border M&As, we show that such risks reduce the likelihood and the acquisition price of cross-border M&As. These mechanisms provide an explanation for why acquirers tend to overperform when acquiring in emerging markets but underperform when acquiring in developed markets. We also show that shareholders of targets firms in emerging markets may benefit from not selling their firms too early in the development phase.​
    Keywords: FDI; Cross-Border Mergers and Acquisitions; Stock Market Value; Emerging Markets
    JEL: F23 G34 L13
    Date: 2019–02–28
    URL: http://d.repec.org/n?u=RePEc:hhs:iuiwop:1267&r=all
  10. By: Fenghua Wen (CSU); Yujie Yuan (CSU); Wei-Xing Zhou (ECUST)
    Abstract: This paper investigates the effect of cross-shareholding on stock price synchronicity, as a measure of price informativeness, of the listed firms in the Chinese stock market. We gauge firms' levels of cross-shareholdings in terms of centrality in the cross-shareholding network. It is confirmed that it is through a noise-reducing process that cross-shareholding promotes price synchronicity and reduces price delay. More importantly, this effect on price informativeness is pronounced for large firms and in the periods of market downturns. Overall, our analyses provide insights into the relation between the ownership structure and price informativeness.
    Date: 2019–03
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1903.01655&r=all
  11. By: Amadou N Sy; Rodolfo Maino; Alexander Massara; Hector Perez Saiz; Preya Sharma
    Abstract: FinTech is a major force shaping the structure of the financial industry in sub-Saharan Africa. New technologies are being developed and implemented in sub-Saharan Africa with the potential to change the competitive landscape in the financial industry. While it raises concerns on the emergence of vulnerabilities, FinTech challenges traditional structures and creates efficiency gains by opening up the financial services value chain. Today, FinTech is emerging as a technological enabler in the region, improving financial inclusion and serving as a catalyst for the emergence of innovations in other sectors, such as agriculture and infrastructure.
    Keywords: Sub-Saharan Africa;Financial services;Technological innovation;Financial inclusion;FinTech; Financial Technology; Financial Inclusion; Innovation; Sub-Saharan Africa
    Date: 2019–02–14
    URL: http://d.repec.org/n?u=RePEc:imf:imfdep:19/04&r=all

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