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on Financial Markets |
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Issue of 2020‒06‒22
eleven papers chosen by |
| By: | Nicholas C. Barberis; Lawrence J. Jin; Baolian Wang |
| Abstract: | We present a new model of asset prices in which investors evaluate risk according to prospect theory and examine its ability to explain 22 prominent stock market anomalies. The model incorporates all the elements of prospect theory, takes account of investors' prior gains and losses, and makes quantitative predictions about an asset's average return based on empirical estimates of its volatility, skewness, and past capital gain. We find that the model is helpful for thinking about a majority of the 22 anomalies. |
| JEL: | G11 G12 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27155&r=all |
| By: | Cieslak, Anna; Pang, Hao |
| Abstract: | We propose a new approach to identify economic shocks (monetary, growth, and risk-premium news) from stock returns and Treasury yields. The method allows us to study the drivers of asset prices at a daily frequency over the last three-and-a-half decades. We analyze the content of news from the Fed, major macro announcements, and sources of time-varying stock-bond comovement. The results emphasize the importance of two risk-premium shocks-compensation for discount-rate and cash-flow news-which have different effects on stocks and bonds. The impact of the Fed on both risk premiums explains why stocks but not bonds earn high FOMC-day returns. |
| Keywords: | Federal Reserve; risk premia; stock-bond comovement |
| JEL: | E43 E44 G12 G14 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14708&r=all |
| By: | Junyi Li; Xitong Wang; Yaoyang Lin; Arunesh Sinha; Micheal P. Wellman |
| Abstract: | We propose an approach to generate realistic and high-fidelity stock market data based on generative adversarial networks (GANs). Our Stock-GAN model employs a conditional Wasserstein GAN to capture history dependence of orders. The generator design includes specially crafted aspects including components that approximate the market's auction mechanism, augmenting the order history with order-book constructions to improve the generation task. We perform an ablation study to verify the usefulness of aspects of our network structure. We provide a mathematical characterization of distribution learned by the generator. We also propose statistics to measure the quality of generated orders. We test our approach with synthetic and actual market data, compare to many baseline generative models, and find the generated data to be close to real data. |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2006.04212&r=all |
| By: | Neofytos Rodosthenous; Hongzhong Zhang |
| Abstract: | We consider risk averse investors with different levels of anxiety about asset price drawdowns. The latter is defined as the distance of the current price away from its best performance since inception. These drawdowns can increase either continuously or by jumps, and will contribute towards the investor's overall impatience when breaching the investor's private tolerance level. We investigate the unusual reactions of investors when aiming to sell an asset under such adverse market conditions. Mathematically, we study the optimal stopping of the utility of an asset sale with a random discounting that captures the investor's overall impatience. The random discounting is given by the cumulative amount of time spent by the drawdowns in an undesirable high region, fine tuned by the investor's personal tolerance and anxiety about drawdowns. We prove that in addition to the traditional take-profit sales, the real-life employed stop-loss orders and trailing stops may become part of the optimal selling strategy, depending on different personal characteristics. This paper thus provides insights on the effect of anxiety and its distinction with traditional risk aversion on decision making. |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2006.00282&r=all |
| By: | Hoppe-Wewetzer, Heidrun C.; Siemering, Christian |
| Abstract: | This paper investigates the incentives of a credit rating agency (CRA) to generate accurate ratings under an advertisement-based business model. We study a two-period endogenous reputation model in which the CRA can choose to provide private effort in evaluating financial products in each period. We show that the advertisement-based business model may provide sufficient incentives to improve the precision of signals when the CRA has an intermediate reputation. Furthermore, we identify conditions under which truthful reporting is incentive compatible. |
| Keywords: | advertisement; Credit rating agencies; Information Acquisition; rating precision; reputation |
| JEL: | D82 G24 L15 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14735&r=all |
| By: | Xiao, Tim |
| Abstract: | This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American style options in most cases, which require a backward induction valuation. To correct a common mistake in the literature, we emphasize that the market value of a defaultable derivative is actually a risky value rather than a risk-free value. Credit value adjustment (CVA) is also elaborated. A practical framework is developed for pricing defaultable derivatives and calculating their CVAs at a portfolio level. |
| Date: | 2020–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:jc43a&r=all |
| By: | Beck, Thorsten; Radev, Deyan; Schnabel, Isabel |
| Abstract: | We assess the ability of bank resolution frameworks to deal with systemic banking fragility. Using a novel and detailed database on bank resolution regimes in 22 member countries of the Financial Stability Board, we show that systemic risk, as measured by â?³CoVaR, increases more for banks in countries with more comprehensive bank resolution frameworks after negative system-wide shocks, such as Lehman Brothers' default, while it decreases more after positive system-wide shocks, such as Mario Draghi's "whatever it takes'' speech. These results suggest that more comprehensive bank resolution may exacerbate the effect of system-wide shocks and should not be solely relied on in cases of systemic distress. |
| Keywords: | bail-in; Bank resolution regimes; systemic risk |
| JEL: | G01 G21 G28 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14724&r=all |
| By: | Hugues Dastarac |
| Abstract: | I study broker-dealers' trading activity in the US corporate bond market. I find evidence of broker-dealer market making when customers both buy and sell a bond in a day, which happens half of the time: as predicted by market making theories with adverse selection or inventory costs, prices go down (up) as customers sell (buy). Otherwise, evidence is in favor of proprietary trading as in limits of arbitrage theories: prices go up (down) when customers sell (buy), and dealers buy (sell) bonds that are relatively cheap (expensive). Proprietary trading is reduced after the crisis. Relatedly I show that before the crisis, large broker-dealers borrowed and sold Treasury bonds in amounts similar to their corporate bond holding, but not after. I give suggestive evidence that they were subject to a severe tightening of their margin constraints as early as July 2007, in particular following increased Treasury bond volatility. |
| Keywords: | : Credit Spreads, Dealer behavior, corporate bonds, limits of arbitrage, Volcker rule. |
| JEL: | G20 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:754&r=all |
| By: | Alin Marius Andries (Alexandru Ioan Cuza University - Faculty of Economics and Business Administration); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Nicu Sprincean (Alexandru Ioan Cuza University of Iasi) |
| Abstract: | Governments around the world are tackling the COVID-19 pandemic with a mix of public health, fiscal, macroprudential, monetary, or market-based policies. We assess the impact of the pandemic in Europe on sovereign CDS spreads using an event study methodology. We find that a higher number of cases and deaths and public health containment responses significantly increase the uncertainty among investors in European government bonds. Other governmental policies magnify the effect in the short run as supply chains are disrupted. |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2042&r=all |
| By: | Elena Carletti (Bocconi University and CEPR); Tommaso Oliviero (University of Naples Federico II and CSEF); Marco Pagano (University of Naples Federico II, CSEF and EIEF); Loriana Pelizzon (SAFE, Goethe University Frankfurt and Ca' Foscari University of Venice); Marti G. Subrahmanyam (Stern School of Business, New York University) |
| Abstract: | This paper estimates the drop in profits and the equity shortfall triggered by the COVID-19 shock and the subsequent lockdown, using a representative sample of 80,972 Italian firms. We find that a 3-month lockdown entails an aggregate yearly drop in profits of €170 billion, with an implied equity erosion of €117 billion for the whole sample, and €31 billion for firms that became distressed, i.e., ended up with negative book value after the shock. As a consequence of these losses, about 17% of the sample firms, whose employees account for 8.8% of total employment in the sample (about 800 thousand employees), become distressed. Small and medium-sized enterprises (SMEs) are affected disproportionately, with 18.1% of small firms, and 14.3% of medium-sized ones becoming distressed, against 6.4% of large firms. The equity shortfall and the extent of distress are concentrated in the Manufacturing and Wholesale Trading sectors and in the North of Italy. Since many firms predicted to become distressed due to the shock had fragile balance sheets even prior to the COVID-19 shock, restoring their equity to their pre-crisis levels may not suffice to ensure their long-term solvency. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:2014&r=all |
| By: | Daiki Maki; Yasushi Ota |
| Abstract: | This study investigates the impacts of asymmetry on the modeling and forecasting of realized volatility in the Japanese futures and spot stock markets. We employ heterogeneous autoregressive (HAR) models allowing for three types of asymmetry: positive and negative realized semivariance (RSV), asymmetric jumps, and leverage effects. The estimation results show that leverage effects clearly influence the modeling of realized volatility models. Leverage effects exist for both the spot and futures markets in the Nikkei 225. Although realized semivariance aids better modeling, the estimations of RSV models depend on whether these models have leverage effects. Asymmetric jump components do not have a clear influence on realized volatility models. While leverage effects and realized semivariance also improve the out-of-sample forecast performance of volatility models, asymmetric jumps are not useful for predictive ability. The empirical results of this study indicate that asymmetric information, in particular, leverage effects and realized semivariance, yield better modeling and more accurate forecast performance. Accordingly, asymmetric information should be included when we model and forecast the realized volatility of Japanese stock markets. |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2006.00158&r=all |