nep-fmk New Economics Papers
on Financial Markets
Issue of 2020‒04‒27
thirteen papers chosen by

  1. Treasury Market Liquidity during the COVID-19 Crisis By Michael J. Fleming; Francisco Ruela
  2. The COVID-19 Pandemic and the Fed’s Response By Michael J. Fleming; Asani Sarkar; Peter Van Tassel
  3. Commodity Price Volatility and the Economic Uncertainty of Pandemics By Dimitrios Bakas; Athanasios Triantafyllou
  4. Attention to the tail(s): global financial conditions and exchange rate risks By Sokol, Andrej; Eguren-Martin, Fernando
  5. On the Valuation and Analysis of Risky Debt: A Practical Approach Using Raging Migrations By Edwin O. Fischer; Lisa-Maria Kampl; Ines Wöckl
  6. Risk characteristics of covered bonds: monitoring beyond ratings By Grothe, Magdalena; Zeyer, Jana
  7. The Conditional Risk and Return Trade-Off on Currency Portfolios By Joseph, Byrne; Sakemoto, Ryuta
  8. Cryptocurrency Market Reactions to Regulatory News By Raphael Auer; Stijn Claessens
  9. Financial Stability Committees and Basel III Macroprudential Capital Buffers By Rochelle M. Edge; J. Nellie Liang
  10. Relief Rally: Senators As Feckless As the Rest of Us at Stock Picking By William Belmont; Bruce Sacerdote; Ian Van Hoek
  11. Post-graduation from the original sin problem The effects of market participation on sovereign debt markets By Ocampo, José Antonio; Orbegozo, German D.; Villamizar-Villegas, Mauricio
  12. On the informative value of the EU-wide stress tests and the determinants of banks’ stock return reactions By Georgoutsos, Dimitris; Moratis, George
  13. Empirical evidence of jump behaviour in the Colombian intraday bond market By Castro, C; Romero, M; Vélez, S

  1. By: Michael J. Fleming; Francisco Ruela
    Abstract: A key objective of recent Federal Reserve policy actions is to address the deterioration in financial market functioning. The U.S. Treasury securities market, in particular, has been the subject of Fed and market participants’ concerns, and the venue for some of the Fed’s initiatives. In this post, we evaluate a basic metric of market functioning for Treasury securities— market liquidity—through the first month of the Fed’s extraordinary actions. Our particular focus is on how liquidity in March 2020 compares to that observed over the past fifteen years, a period that includes the 2007-09 financial crisis.
    Keywords: COVID-19; coronavirus; liquidity; Treasury securities
    JEL: G1
    Date: 2020–04–17
  2. By: Michael J. Fleming; Asani Sarkar; Peter Van Tassel
    Abstract: The Federal Reserve has taken unprecedented actions to mitigate the effects of the COVID-19 pandemic on U.S. households and businesses. These measures include cutting the Fed’s policy rate to the zero lower bound, purchasing Treasury and mortgage-backed securities (MBS) to promote market functioning, and establishing several liquidity and credit facilities. In this post, we briefly review the developments motivating these actions, summarize what the Fed has done and why, and compare the Fed’s response with its response to the 2007-09 financial crisis.
    Keywords: COVID-19; coronavirus; pandemic; Federal Reserve
    JEL: E52
    Date: 2020–04–15
  3. By: Dimitrios Bakas (Department of Economics, Nottingham Trent University, UK; Rimini Centre for Economic Analysis); Athanasios Triantafyllou (Essex Business School, University of Essex, UK)
    Abstract: In this paper, we empirically investigate the impact of pandemics on commodity price volatility. In specific, we explore the impact of economic uncertainty related to global pandemics on the volatility of the S&P GSCI commodity index as well as on the sub-indexes of crude oil and gold. The results show that uncertainty related to pandemics have a strong negative impact on the volatility of commodity markets and especially on crude oil market, while the effect on gold market is positive but less significant. Our findings remain robust to a series of robustness checks.
    Keywords: Pandemics, Commodity Markets, Economic Uncertainty, Volatility
    JEL: C32 Q02 I10
    Date: 2020–04
  4. By: Sokol, Andrej; Eguren-Martin, Fernando
    Abstract: We document how the distribution of exchange rate returns responds to changes in global financial conditions. We measure global financial conditions as the common component of country-specific financial condition indices, computed consistently across a large panel of developed and emerging economies. Based on quantile regression results, we provide a characterisation and ranking of the tail behaviour of a large sample of currencies in response to a tightening of global financial conditions, corroborating (and quantifying) some of the prevailing narratives about safe haven and risky currencies. Our approach delivers a more nuanced picture than one based on standard OLS regression. We then carry out a portfolio sorting exercise to identify the macroeconomic fundamentals associated with such different tail behaviour, and find that currency portfolios sorted on the basis of net foreign asset positions, relative interest rates, current account balances and levels of international reserves display a higher likelihood of large losses in response to a tightening of global financial conditions. JEL Classification: F31, G15
    Keywords: exchange rates, financial conditions indices, global financial cycle, quantile regression, tail risks
    Date: 2020–04
  5. By: Edwin O. Fischer (Institute of Finance, Karl-Franzens-University Graz); Lisa-Maria Kampl (Institute of Finance, University of Graz); Ines Wöckl (Institute of Finance, University of Graz)
    Abstract: This paper is concerned with the valuation and analysis of risky debt instruments with arbitrary interest and principal payments subject to default risk. For the valuation, we use a risk-neutral present value model with expected payments for risk-neutral investors and risk-free spot rates. The required risk-neutral default probabilities are derived from historically observable risk-averse migration matrices. Based on this debt valuation, we calculate various key figures for the analysis of risky debt from the point of view of risk-averse investors (e.g., promised and expected yields, yield spreads, Z-spreads, risk premia, risk-averse default probabilities, and risk-averse expected payments). Our approach is well-suited for practical applications, since the parameters required are easily available from observable data.
    Date: 2020–04–08
  6. By: Grothe, Magdalena; Zeyer, Jana
    Abstract: This paper proposes a set of indicators relevant for the risk characteristics of covered bonds, as based on granular publicly available transparency data. The indicators capture various aspects of cash flow risks related to the issuer, the cover pool and the payment structure. They offer unified risk metrics for the European covered bond universe, which ensures comparability across covered bonds issued by different issuers and rated by different credit rating agencies. The availability of granular risk indicators adds to the overall transparency of the market in the context of risk monitoring. JEL Classification: G12, G24, G21, C30
    Keywords: covered bonds, covered bond transparency data, credit ratings, risk indicators, risk monitoring
    Date: 2020–04
  7. By: Joseph, Byrne; Sakemoto, Ryuta
    Abstract: If asset price risk-return relations vary over time based upon changing economic states, standard unconditional models may "wash out" state dependence and fail to identify that additional risk is contingently compensated with higher return. We address this matter by considering conditional risk-return relations for currency portfolios. Doing so within a data rich environment, we also develop broad based measures of investor risk. In general we find that agents require positive compensation for risks in some times and for some investment strategies. Our results identify that relations between currency returns and risk vary over time. Also we find that there are positive risk-return relations on momentum and value currency portfolios during the financial crisis. Furthermore, the risk-return relation on the momentum portfolio is counter-cyclical.
    Keywords: Time-varying Parameters, Currency Carry Trade, Momentum, Value, Conditional Factor Model
    JEL: C12 C58 F3 G11 G15
    Date: 2020–04–07
  8. By: Raphael Auer; Stijn Claessens
    Abstract: Cryptocurrencies are often thought to operate out of the reach of national regulation, but in fact their valuations, transaction volumes and user bases react substantially to news about regulatory actions. The impact depends on the specific regulatory category to which the news relates: events related to general bans on cryptocurrencies or to their treatment under securities law have the greatest adverse effect, followed by news on combating money laundering and the financing of terrorism, and on restricting the interoperability of cryptocurrencies with regulated markets. News pointing to the establishment of specific legal frameworks tailored to cryptocurrencies and initial coin offerings coincides with strong market gains. These results suggest that cryptocurrency markets rely on regulated financial institutions to operate and that these markets are segmented across jurisdictions.
    JEL: E42 E51 F31 G12 G28 G32 G38
    Date: 2020–04–15
  9. By: Rochelle M. Edge; J. Nellie Liang
    Abstract: We evaluate how a country’s governance structure for macroprudential policy affects its implementation of Basel III macroprudential capital buffers. We find that the probabilities of using the countercyclical capital buffer (CCyB) are higher in countries that have financial stability committees (FSCs) with stronger governance mechanisms and fewer agencies, which reduces coordination problems. These higher probabilities are more sensitive to credit growth, consistent with the CCyB being used to mitigate systemic risk. A country’s probability of using the CCyB is even higher when the FSC or ministry of finance has direct authority to set the CCyB, perhaps because setting the CCyB involves establishing a new macro-financial analytical process to regularly assess systemic risks and allows these new entities to influence the process. These results are consistent with elected officials creating the FSCs with the strongest governance and fewer agencies for functional delegation reasons, but most FSCs are created for symbolic political reasons.
    Keywords: Delegation; Financial stability committees; Credit growth; Macroprudential policy; Countercyclical capital buffer; Bank regulators
    JEL: G21 G28 H11 P16
    Date: 2020–02–18
  10. By: William Belmont; Bruce Sacerdote; Ian Van Hoek
    Abstract: We examine the stock trading behavior and returns of U.S. Senators from 2012-March 2020. Stocks purchased by senators on average slightly underperform stocks in the same industry and size (market cap) categories by 11 basis points, 28 basis points and 17 basis points at the 1, 3, and 6-month time horizons. Stocks sold by senators underperform slightly for the first three months and then outperform slightly (a statistically insignificant 14 basis points) by the one year mark. We find no evidence that Senators have industry specific stock picking ability related to their committee assignments. Neither Republican nor Democratic senators are skilled at picking stocks to buy, while stocks sold by Republican senators underperform by 50 basis points over three months. Stocks sold following the January 24th COVID-19 briefing do underperform the market by a statistically significant 9 percent while stocks purchased during this period underperform by 3 percent. Our findings contrast somewhat with recent news reports and studies of pre-STOCK Act (2012) data.
    JEL: G0 G12 G18
    Date: 2020–04
  11. By: Ocampo, José Antonio; Orbegozo, German D.; Villamizar-Villegas, Mauricio
    Abstract: We evaluate the effects of the sovereign debt structure by examining various degrees of bond market participation and diversification within different bond maturities and investor type. We use a unique Colombian panel dataset, comprised of all government bond maturities in the hands of public and private institutions during 2006-2018. For identification, we propose an instrumental variable approach, specific to each investor group. We find that an increase in non-residents' market share of a 1 percentage point reduces bond yields by 35% and lowers volatility by 0.8%, relative to their mean values. Alternatively, we see an opposite effect for both pension funds and the banking sector. Finally, we find that market concentration makes local-currency yields more sensitive to global financial shocks.
    Keywords: Term structure; Bond market participation; Bond market concentration; Bond holdings
    JEL: E43 G01 G11 G15
    Date: 2020–04
  12. By: Georgoutsos, Dimitris; Moratis, George
    Abstract: We examine the informative value of the 2016 and 2018 supervisory EU stress tests on the basis of the bank stock and CDS abnormal returns they have caused. Our conclusions are based on results from event study analysis and from regressions on the determinants of bank stocks’ abnormal returns. We conclude that the 2018 stress test has been comparatively more informative for investors but only for a sub-group of banks based on sovereign debt-ridden and non-Eurozone countries. The robustness of our results is tested by applying an exhaustive set of event study test statistics on abnormal returns generated from both single and Fama-French factor models. The equity Tier I, leverage and profitability ratios are important determinants of abnormal bank stock returns for the same group of countries as in the event study analysis. Non-linear reactions highlight the fact that investors assign varying degrees of importance on the information they get from the stress tested financial ratios. Overall, our results substantiate the claim that the recent EU stress tests have been calibrated towards revealing the weaknesses of the banking sectors of peripheral Eurozone and non-Eurozone countries.
    Keywords: EBA stress tests, event study analysis, factor models, quantile regression analysis
    JEL: G28
    Date: 2020–02
  13. By: Castro, C; Romero, M; Vélez, S
    Abstract: Simulations and empirical studies suggest that incorporating a discontinuous jump process in asset pricing models improve volatility forecasting, pricing of instruments, and hedging positions in a portfolio. In this paper we analyze high frequency market data of Colombian sovereign bonds in order to study the presence or absence of discontinuities in the price generating process. We find that Colombian sovereign debt experiments jumps across all maturities but with different frequencies, in particular, we do not find that long term bonds jump less frequently than short term bonds. Furthermore, bonds with closer maturities cojump in greater magnitude than those with a greater distance between them. Finally, we find significant day-of-the-week effects, as well as an important increase in the jump frequency due to surprises in economic information related to US monetary policy and no effect due to direct monetary policy announcements in Colombia or the US.
    Keywords: Jumps, Realized Variance, High Frequency, Preferred habitattheory, Monetary Policy Announcements
    JEL: G12 E43 C58
    Date: 2020–04–13

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.