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on Financial Markets |
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Issue of 2019‒08‒12
ten papers chosen by |
| By: | Thomas Delcey (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Francesco Sergi (UWE Bristol - University of the West of England [Bristol]) |
| Abstract: | This article investigates the origins and early development of the association between the efficient market hypothesis and rational expectations. These two concepts are today distinctive theoretical benchmarks for mainstream approaches to, respectively, finance and macroeconomics. Moreover, scholars in each of these two fields tend to associate the two ideas as related equilibrium concepts; they also claim that the two have a common historical origin. Although some historical accounts have been provided about either the origins of rational expectations or of the efficient market hypothesis, very few historians have been investigating the history of the association between the two concepts (or, more generally, the history of the interactions between macroeconomics and finance). The contribution of this paper is precisely to fill this gap in the historical literature, while assessing and challenging self-produced narratives told by practitioners. We suggest that the two concepts were independently developed in the 1960s. Then, we illustrate how they were associated for the first time the early 1970s, within a debate about the term structure of the interest rates involving Sargent, Modigliani, Shiller, and Fama. Finally, we discuss some early controversies about the association, which nevertheless became, at the turn of the 1970s, a step-stone for both macroeconomics and finance. |
| Keywords: | Efficient market hypothesis,Fama (Eugene),Lucas (Robert E),history of finance,history of macroeconomics,rational expectations,Sargent (Thomas J) |
| Date: | 2019–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:hal-02187362&r=all |
| By: | Calès, Ludovic (European Commission); Chalkis, Apostolos (National and Kapodistrian University of Athens); Emiris, Ioannis Z. (National and Kapodistrian University of Athens) |
| Abstract: | The aim of this paper is to study the distribution of portfolio returns across portfolios and for given asset returns. We focus on the most common type of investment considering portfolios whose weights are non-negative and sum up to 1. We provide algorithms and formulas from computational geometry and the literature on splines to compute the exact values of the probability density function, and of the cumulative distribution function at any point. We also provide closed-form solutions for the computation of its first four moments, and an algorithm to compute the higher moments. All algorithms and formulas allow for equal asset returns. |
| Keywords: | Cross-section of portfolios, Finance, Geometry, B-spline |
| JEL: | C6 G11 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:jrs:wpaper:201911&r=all |
| By: | Juan M. Londono; Nancy R. Xu |
| Keywords: | Variance risk premium, downside variance risk premium, international stock markets, asymmetric state variables, stock return predictability |
| JEL: | F36 G12 G13 G15 |
| Date: | 2019–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1247&r=all |
| By: | Petr Koldanov |
| Abstract: | Wide class of elliptically contoured distributions is a popular model of stock returns distribution. However the important question of adequacy of the model is open. There are some results which reject and approve such model. Such results are obtained by testing some properties of elliptical model for each pair of stocks from some markets. New property of equality of $\tau$ Kendall correlation coefficient and probability of sign coincidence for any pair of random variables with elliptically contoured distribution is proved in the paper. Distribution free statistical tests for testing this property for any pair of stocks are constructed. Holm multiple hypotheses testing procedure based on the individual tests is constructed and applied for stock markets data for the concrete year. New procedure of testing the elliptical model for stock returns distribution for all years of observation for some period is proposed. The procedure is applied for the stock markets data of China, USA, Great Britain and Germany for the period from 2003 to 2014. It is shown that for USA, Great Britain and Germany stock markets the hypothesis of elliptical model of stock returns distribution could be accepted but for Chinese stock market is rejected for some cases. |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1907.10306&r=all |
| By: | Dumitriu, Ramona; Stefanescu, Răzvan |
| Abstract: | The classical Friday the 13th Effect refers to a calendar anomaly of financial markets which is generated by the fear of bad luck shared by the superstitious investors. As a result of their behavior, the returns from the supposed unlucky day of Friday the 13th are significant lower than those from the other Fridays. The superstition could also affect the returns from the trading days there are adjacent to Friday the 13th. In order to avoid the bad luck, some investors sell their stocks a trading day before and their transactions lead to a fall of the prices. Those who are reluctant to buy stocks on Friday the 13th delay such transactions to the next trading day causing prices to rise. In time, the knowledge about this pattern could induce significant changes in investors’ behavior, even to those that are not superstitious. Once become aware that one trading day before Friday the 13th the stock prices are usually low, many investors would prefer to sell two or three trading days before. There also were investors that would buy stocks not one trading day after Friday the 13th, when the prices are expected to be high, but two or three trading days after. Other investors could exploit the opportunities to buy cheap on Friday the 13th or one trading day before or to sell high one trading day after and their transactions could attenuate the abnormal returns from these days. In such ways the classical form of Friday the 13th Effect could be replaced by an extended form which consists in abnormal returns for a specific time interval that starts some trading days before the supposed unlucky day and ends some trading days after. This paper explores the behavior of the stock returns of 42 companies, from seven sectors of the United States economy, in the period January 2010 – March 2019, for a time interval that starts three trading days before Friday the 13th and ends three trading days after. The results indicate, for many of them, significant low returns in some trading days before Friday the 13th and/or significant high returns some trading days after. We also found some particularities of the extended Friday the 13th Effect among the seven sectors. |
| Keywords: | Extended calendar anomalies, US stock returns, Friday the 13th Effect |
| JEL: | G02 G14 G19 |
| Date: | 2019–07–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95296&r=all |
| By: | Anne Opschoor (Vrije Universiteit Amsterdam); André Lucas (Vrije Universiteit Amsterdam) |
| Abstract: | We present a new model to decompose total daily return volatility into a filtered (high-frequency based) open-to-close volatility and a time-varying scaling factor. We use score-driven dynamics based on fat-tailed distributions to limit the impact of incidental large observations. Applying our new model to 100 stocks of the S&P 500 during the period 2001-2014 and evaluating (in-sample and out-of-sample) in terms of Value-at-Risk and Expected Shortfall, we find our model outperforms alternatives like the HEAVY model that uses close-to-close returns and realized variances, and models treating close-to-open en open-to-close returns as separate processes. Results also indicate that the ratio between total and open-to-close volatility changes substantially through time, especially for financial stocks. |
| Keywords: | overnight volatility, realized variance, F distribution, score-driven dynamics |
| JEL: | C32 C58 |
| Date: | 2019–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20190052&r=all |
| By: | Czech, Robert (Bank of England) |
| Abstract: | Using regulatory data on CDS holdings and corporate bond transactions, I provide evidence for a liquidity spillover effect from CDS to bond markets. Bond trading volumes are larger for investors with CDS positions written on the debt issuer, in particular around rating downgrades. I use a quasi-natural experiment to validate these findings. I also provide causal evidence that CDS mark-to-market losses lead to fire sales in the bond market. I instrument for the prevalence of mark-to-market losses with the fraction of non-centrally cleared CDS contracts of an individual counterparty. The monthly corporate bond sell volumes of investors exposed to large mark-to-market losses are three times higher than those of unexposed counterparties. Returns decrease by more than 100 bps for bonds sold by exposed investors, compared to same-issuer bonds sold by unexposed investors. My findings underline the risk of a liquidity spiral in the credit market. |
| Keywords: | Corporate bonds; credit default swaps; trading volume; regulation; central clearing; liquidity spiral; financial stability |
| JEL: | G11 G12 G18 G20 G28 |
| Date: | 2019–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0810&r=all |
| By: | Fontana, Silvia Dalla; Holz auf der Heide, Marco; Pelizzon, Loriana; Scheicher, Martin |
| Abstract: | Using a novel regulatory dataset of fully identified derivatives transactions, this paper provides the first comprehensive analysis of the structure of the euro area interest rate swap (IRS) market after the start of the mandatory clearing obligation. Our dataset contains 1.7 million bilateral IRS transactions of banks and non-banks. Our key results are as follows: 1) The euro area IRS market is highly standardised and concentrated around the group of the G16 Dealers but also around a significant group of core "intermediaries"(and major CCPs). 2) Banks are active in all segments of the IRS euro market, whereas non-banks are often specialised. 3) When using relative net exposures as a proxy for the "flow of risk" in the IRS market, we find that risk absorption takes place in the core as well as the periphery of the network but in absolute terms the risk absorption is largely at the core. 4) Among the Basel III capital and liquidity ratios, the leverage ratio plays a key role in determining a bank's IRS trading activity. |
| Keywords: | derivatives,network analysis,interest rate risk,banking,risk management,hedging |
| JEL: | G21 E43 E44 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:255&r=all |
| By: | Zhenzhen Fan; Juan M. Londono; Xiao Xiao |
| Date: | 2019–07–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1253&r=all |
| By: | Lilit Popoyan (Laboratory of Economics and Management); Mauro Napoletano (Observatoire français des conjonctures économiques); Andrea Roventini (Observatoire français des conjonctures économiques) |
| Abstract: | We develop a macroeconomic agent-based model to study how financial instability can emerge from the co-evolution of interbank and credit markets and the policy responses to mitigate its impact on the real economy. The model is populated by heterogenous firms, consumers, and banks that locally interact in dfferent markets. In particular, banks provide credit to firms according to a Basel II or III macro-prudential frameworks and manage their liquidity in the interbank market. The Central Bank performs monetary policy according to dfferent types of Taylor rules. We find that the model endogenously generates market freezes in the interbank market which interact with the financial accelerator possibly leading to firm bankruptcies, banking crises and the emergence of deep downturns. This requires the timely intervention of the Central Bank as a liquidity lender of last resort. Moreover, we find that the joint adoption of a three mandate Taylor rule tackling credit growth and the Basel III macro-prudential frame-work is the best policy mix to stabilize financial and real economic dynamics. However, as the Liquidity Coverage Ratio spurs financial instability by increasing the pro-cyclicality of banks’ liquid reserves, a new counter-cyclical liquidity buffer should be added to Basel III to improve its performance further. Finally, we find that the Central Bank can also dampen financial in- stability by employing a new unconventional monetarypolicy tool involving active management of the interest-rate corridor in the interbank market. |
| Keywords: | Financial instability; Interbank market freezes; Monetary policy; Macro-prudential policy; Basel III regulation; Tinbergen principle; Agent - based models |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/1j4v8sl4fc9a49ankmnhv6bb6a&r=all |