nep-fmk New Economics Papers
on Financial Markets
Issue of 2019‒05‒13
seven papers chosen by

  1. A Pareto Criterion on Systemic Risk By Wang, Weijia
  2. Online reviews can predict long-term returns of individual stocks By Junran Wu; Ke Xu; Jichang Zhao
  3. Market runs of hedge funds during financial crises By Sung, Sangwook; Cho, Hoon; Ryu, Doojin
  4. Decomposing changes in the functioning of the sterling repo market By Noss, Joseph; Patel, Rupal
  5. Initial Crypto-asset Offerings (ICOs), tokenization and corporate governance By St\'ephane Bl\'emus; Dominique Guegan
  6. Assessing Abenomics: Evidence from Inflation-Indexed Japanese Government Bonds By Christensen, Jens H. E.; Spiegel, Mark M.
  7. Asian Bond Market Development By Masahiro Kawai

  1. By: Wang, Weijia
    Abstract: Perfect risk sharing is not an optimal design for financial system because it can increase systemic risk by facilitating risk contagion among financial institutions. However, risk sharing dominates betting according to most Pareto efficiency criteria. One reason for this might be that those Pareto criteria consider individual risk rather than systemic risk and neglect that betting may reduce systemic risk by segmenting the financial system and preventing financial contagion. Refining Pareto criterion to cover systemic risk, I pro- pose the systemic Pareto criterion which has two features: 1) satisfying facts that betting dominates risk sharing when systemic risk is considered. 2) be- ing applicable to scenarios with constant endowment to which current criteria cannot provide compelling suggestions. One implication from this paper is that betting can act as the stabilizer of the economy and prohibiting betting is not always helpful for financial stability.
    Keywords: Risk Sharing, Heterogenous Beliefs, Pareto Efficiency, Systemic Risk
    JEL: D61 D62 G18
    Date: 2019–05–06
  2. By: Junran Wu; Ke Xu; Jichang Zhao
    Abstract: Online reviews are feedback voluntarily posted by consumers about their consumption experiences. This feedback indicates customer attitudes such as affection, awareness and faith towards a brand or a firm and demonstrates inherent connections with a company's future sales, cash flow and stock pricing. However, the predicting power of online reviews for long-term returns on stocks, especially at the individual level, has received little research attention, making a comprehensive exploration necessary to resolve existing debates. In this paper, which is based exclusively on online reviews, a methodology framework for predicting long-term returns of individual stocks with competent performance is established. Specifically, 6,246 features of 13 categories inferred from more than 18 million product reviews are selected to build the prediction models. With the best classifier selected from cross-validation tests, a satisfactory increase in accuracy, 13.94%, was achieved compared to the cutting-edge solution with 10 technical indicators being features, representing an 18.28% improvement relative to the random value. The robustness of our model is further evaluated and testified in realistic scenarios. It is thus confirmed for the first time that long-term returns of individual stocks can be predicted by online reviews. This study provides new opportunities for investors with respect to long-term investments in individual stocks.
    Date: 2019–04
  3. By: Sung, Sangwook; Cho, Hoon; Ryu, Doojin
    Abstract: A hedge fund's capital structure is fragile because uninformed fund investors are highly loss sensitive and easily withdraw capital in response to bad news. Hedge fund managers, sharing common investors and interacting with each other through market price, sensitively react to other funds' investment decisions. In this environment, panic-based market runs can arise not because of systematic risk but because of the fear of runs. The authors find that when the market regime changes from a normal state to a "bad" state (in which runs are possible), hedge funds reduce investment prior to runs. In addition, the market runs are more likely to occur in a market where hedge funds hold greater market exposure and uninformed traders have greater sensitivity to past price movement.
    Keywords: market sustainability,market runs,hedge funds,limits of arbitrage,financial crises,synchronization risk
    JEL: G01 G23
    Date: 2019
  4. By: Noss, Joseph (Financial Stability Board); Patel, Rupal (Bank of England)
    Abstract: We identify the degree to which changes in gilt repo market functioning have been driven by changes in the supply of — and the demand for — market intermediation. To do so, we use a structural vector auto regression (SVAR) model with sign and zero restrictions. We find that changes in gilt repo market functioning over the past five years have been driven largely by changes in the supply of repo market intermediation by dealers, rather than by changes in the demand of end-users. Following the introduction of the UK leverage ratio, our model suggests that an increase in demand for repo by end-users results in a larger increase in the cost of repo transactions and a smaller increase in their volume. This effect is stronger in the case of transactions that are not nettable via central counterparties. These findings are consistent with the notion that the leverage ratio may reduce dealers’ ability and/or willingness to act as repo market intermediaries. This may have implications for the resilience of repo markets in future periods of stress.
    Keywords: Repo market; capital regulation; leverage ratio; non-bank financial institutions
    JEL: C58 G10 G12 G18 G23
    Date: 2019–05–03
  5. By: St\'ephane Bl\'emus (UP1); Dominique Guegan (CES, UP1)
    Abstract: This paper discusses the potential impacts of the so-called `initial coin offerings', and of several developments based on distributed ledger technology (`DLT'), on corporate governance. While many academic papers focus mainly on the legal qualification of DLT and crypto-assets, and most notably in relation to the potential definition of the latter as securities/financial instruments, the authors analyze some of the use cases based on DLT technology and their potential for significant changes of the corporate governance analyses. This article studies the consequences due to the emergence of new kinds of firm stakeholders, i.e. the crypto-assets holders, on the governance of small and medium-sized enterprises (`SMEs') as well as of publicly traded companies. Since early 2016, a new way of raising funds has rapidly emerged as a major issue for FinTech founders and financial regulators. Frequently referred to as initial coin offerings, Initial Token Offerings (`ITO'), Token Generation Events (`TGE') or simply `token sales', we use in our paper the terminology Initial Crypto-asset Offerings (`ICO'), as it describes more effectively than `initial coin offerings' the vast diversity of assets that could be created and which goes far beyond the payment instrument issue.
    Date: 2019–03
  6. By: Christensen, Jens H. E. (Federal Reserve Bank of San Francisco); Spiegel, Mark M. (Federal Reserve Bank of San Francisco)
    Abstract: We assess the impact of news concerning the reforms associated with “Abenomics” using an arbitrage-free term structure model of nominal and real yields. Our model explicitly accounts for the deflation protection enhancement embedded in Japanese inflation-indexed bonds issued since 2013, which pay their original nominal principal when deflation has occurred from issue to maturity. The value of this enhancement is sizable and time-varying, with substantive impacts on estimates of expected inflation compensation. After properly accounting for deflation protection, our results suggest that Japanese inflation risk premia were mostly negative during this period. Moreover, long-term inflation expectations remained positive throughout, despite extensive spells of realized deflation. Finally, initial market responses to policy changes associated with Abenomics and afterwards were not as inflationary as they appear under standard modeling procedures, implying that the program was less “disappointing” than many perceive.
    JEL: C32 E43 E52 G12 G17
    Date: 2019–05–07
  7. By: Masahiro Kawai (Economic Research Institute for Northeast Asia (ERINA))
    Keywords: local-currency bonds; market liquidity; Asian Bond Fund; Asian Bond Markets Initiative; credit rating; cross-border securities settlement
    Date: 2019–01

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