nep-fmk New Economics Papers
on Financial Markets
Issue of 2019‒07‒08
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Systemic Risk and Collateral Adequacy By Radoslav Raykov
  2. The Dark Side of Prudential Measures By PAulo Roberto Scalco; Benjamin M. Tabak; Anderson Mutter Teixeira
  3. On the Growth and Interconnectedness of Financial Markets and the Bubble Effect By Odedoyin, Stephen
  4. Financial Crises and Liberalization: Progress or Reversals? By Saka, Orkun; Campos, Nauro F; De Grauwe, Paul; Ji, Yuemei; Martelli, Angelo
  5. On the (in)efficiency of cryptocurrencies: Have they taken daily or weekly random walks? By Natalya Apopo; Andrew Phiri
  6. Persistence, non-linearities and structural breaks in European stock market indices By Guglielmo Maria Caporale; Luis A. Gil-Alana; Carlos Poza
  7. FTSE/JSE Index Migration: Testing for the Index Effect in Stocks Entering and Exiting the Top 40 By Nico Katzke; Charlotte van Tiddens

  1. By: Radoslav Raykov
    Abstract: Many derivatives markets use collateral requirements calculated with industry-standard but dated methods that are not designed with systemic risk in mind. This paper explores whether the conservative nature of conventional collateral requirements outweighs their lack of consideration of systemic risk. To investigate this issue, we calculate a new systemic risk metric: the expected systemic market shortfall. We analyze the composition of systemic risk across firms both before and after applying conventional collateral requirements. Our results show that the conservative nature of conventional collateral levels does buffer systemic risk adequately and results in only small risk spillovers above collateral. These spillovers do not meaningfully add to banks' pre-existing systemic risk. We verify the robustness of this result by exploring alternative systemic risk measures, allowing for an implausibly large margin of error. Even under the most extreme scenario, the maximum market-wide shortfall in excess of collateral barely reaches 1 per cent of banks' market capitalization. This maximum shortfall therefore does not exceed the effect of a 1 per cent decline in stock price.
    Keywords: Financial Institutions; Financial markets
    JEL: G10 G20
    Date: 2019–06
  2. By: PAulo Roberto Scalco (FACE-UFG); Benjamin M. Tabak; Anderson Mutter Teixeira (FACE/UFG)
    Abstract: In the aftermath of the financial crisis of 2008 and 2009, there is a series of changes in the scenario of financial regulation. Globally, several macroprudential measures that seek to limit systemic risk are currently in use. We evaluated the e ect of these measures on the market power of banks in the Brazilian case, in which there was a process of great banking concentration that coexists with high bank spreads. Using an innovative methodology, we show that the e ect of macroprudential measures is to reduce bank competition by increasing the market power of banks. It is essential that financial regulators consider this adverse effect in the design of a financial regulation that not only aims at financial stability but also a more competitive banking system.
    Keywords: Bank Regulation, Prudential Measures, Market Power, Lerner Index, Stochastic Frontier.
    Date: 2019–06
  3. By: Odedoyin, Stephen
    Abstract: The paper considers how the interconnectedness of global financial markets has led their growth over time in line with the evolution of these institutions across the globe. This development leads inevitably to the ‘bubble effect’ in the global financial architecture as it continuously evolves in accordance with the learning process that is going in these markets. Descriptive and analytical methods were employed in carrying out the examination of the parameters involved.
    Keywords: financial markets; interconnectedness; bubble effect; market growth; volatility
    JEL: G15
    Date: 2019–04–25
  4. By: Saka, Orkun (University of Essex); Campos, Nauro F (Brunel University); De Grauwe, Paul (London School of Economics); Ji, Yuemei (University College London); Martelli, Angelo (London School of Economics)
    Abstract: Financial crisis can trigger policy reversals, i.e. they can lead to a process of re- regulation of financial markets. Using a recent comprehensive dataset on financial liberalization across 94 countries for the period between 1973 and 2015, we formally test the validity of this prediction for the member states of the European Union as well as for a global sample. We contribute by (a) using a new up-to-date dataset of reforms and crises and (b) subjecting it to a combination of difference-in-differences and local projection estimations. In the global sample, our findings consistently confirm that crises lead to a reversal of liberal reforms, suggesting that governments react to crises by re-regulating financial markets. However, in a dynamic setting with impulse-responses, we also find that these new regulations are only temporary and a liberalization process restarts a few years after a financial crisis. One decade later, financial markets have returned to their pre-crisis level of liberalization. In the EU sample, however, we do not find sufficient evidence to support these observations.
    Keywords: financial reforms, financial crises, reform reversals, local projections
    JEL: G01 G28 P11 P16
    Date: 2019–06
  5. By: Natalya Apopo (Department of Economics, Nelson Mandela University); Andrew Phiri (Department of Economics, Nelson Mandela University)
    Abstract: The legitimacy of virtual currencies as an alternative form of monetary exchange has been the centre of an ongoing heated debated since the catastrophic global financial meltdown of 2007-2008. We contribute to the relative fresh body of empirical research on the informational market efficiency of cryptomarkets by investigating the weak-form efficiency of the top-five cryptocurrencies. In differing from previous studies, we implement random walk testing procedures which are robust to asymmetries and unobserved smooth structural breaks. Moreover, our study employs two frequencies of cryptocurrency returns, one corresponding to daily returns and the other to weekly returns. Our findings validate the random walk hypothesis for daily series hence validating the weak-form efficiency for daily returns. On the other hand, weekly returns are observed to be stationary processes which is evidence against weak-form efficiency for weekly returns. Overall, our study has important implications for market participants within cryptocurrency markets.
    Keywords: Efficient Market Hypothesis (EMH); Cryptocurrencies; Random Walk Model (RWM); Flexible Fourier Form (FFF) unit root tests; Smooth structural breaks.
    JEL: C22 C32 C51 E42 G14
    Date: 2019–06
  6. By: Guglielmo Maria Caporale; Luis A. Gil-Alana; Carlos Poza
    Abstract: This paper examines persistence, structural breaks and non-linearities in the case of five European stock market indices, namely the FTSE100 (UK), DAX30 (Germany), CAC40 (France), IBEX35 (Spain) and FTSE MIB40 (Italy), using fractional integration methods. The empirical results provide no evidence of non-linearities in either prices or returns; the former are found to exhibit unit roots and the latter to be I(0) in most cases. Further, between 2 and 4 structural breaks are found for each of the return series, and mean reversion in some subsamples.
    Keywords: European stock markets, nonstationarity, unit roots, fractional integration, persistence, non-linearities
    JEL: C22 C58
    Date: 2019
  7. By: Nico Katzke (Department of Economics, Stellenbosch University and Prescient Securities); Charlotte van Tiddens (Department of Economics, Stellenbosch University and Prescient Securities)
    Abstract: This paper seeks to uncover whether periodic changes to the constituents in the Top 40 index lead to price distortions during quarterly index rebalancing. The premise for this research follows from the notable increase in assets under management of index tracker funds both globally and locally, in recent years. A larger asset base tracking a given index would imply larger volumes of forced buying and selling by passive tracker funds when changes are made to the constituents underlying the index. This follows as the passive trackers are tracking error sensitive as opposed to being price sensitive, which should lead to predictable excesses in demand for stocks entering and supply of stocks exiting the index. The objective of this research is to uncover whether these dynamics result in price distortions in the local index, and in particular whether it can be profitably exploited by front-running anticipated changes. Our study indeed confirms the existence of a highly profitable index effect, conditional upon timing trading actions correctly and being able to accurately predict entrants and deletions ahead of the public announcement.
    Keywords: Index front-running, passive rebalancing trade
    JEL: G11 G14
    Date: 2019

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