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on Financial Markets |
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Issue of 2020‒08‒31
twelve papers chosen by |
| By: | Josef Klement (Faculty of Economics, University of Economics, Prague); Adela Zubikova (Faculty of Economics, University of Economics, Prague); Miroslav Sevcik (Faculty of Economics, University of Economics, Prague); Tomas Lejsek (Faculty of Economics, University of Economics, Prague) |
| Abstract: | The worldwide spread of coronavirus has shaken stock markets and significantly increased risk. The most-watched US stock index S&P 500 fell by 35% from 19th February to 23rd March. Indices of other countries registered a similar development. Although the spread of the virus has been brought under control in many countries currently, the worldwide number of infections is still growing. Unprecedented monetary and fiscal stimuli, on the other hand, have reversed sentiment in the markets. From 23rd March 2020, stock markets gradually had been growing until the S&P 500 index reached only 5% below historical highs on 8th June 2020. The paper deals with the development of volatility of selected stock indices, their mutual correlations, and the relationship with the number of infected in a given country.Acknowledgment: The publication of this article was supported by the University of Economics, Prague research grant IGA no. IGS F5/41/2020 |
| Keywords: | coronavirus, COVID-19, volatility, stock indices, financial markets |
| JEL: | F44 F65 G15 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iefpro:10913113&r=all |
| By: | Rabhi, Ayoub |
| Abstract: | This paper studies empirically the emerging Asian stock market vulnerability to pandemics. Taking the Covid-19 virus as a case study, we used the ARDL panel data approach to investigate the impact of the daily Covid-19 confirmed cases along with a behavioral component based on a triggering fear event related to news about Covid-19 deaths. The results indicate that both the reported daily growth of Covid-19 confirmed cases along with the triggering fear event related to news about death, affected the Asian stock markets performance negatively, other variables such as oil price, gold price, exchange rates, and the U.S stock market were also found to be determinants of the Asian stock markets during the studied period. |
| Keywords: | Behavioral finance, Covid-19, Event study, Pandemic, Stock market |
| JEL: | C4 C5 G1 G10 G15 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:101774&r=all |
| By: | Marco Cipriani; Andrew F. Haughwout; Benjamin Hyman; Anna Kovner; Gabriele La Spada; Matthew Lieber; Shawn Nee |
| Abstract: | In March, with the outbreak of the COVID-19 pandemic in the United States, the market for municipal securities was severely stressed: mutual fund redemptions sparked unprecedented selling of municipal securities, yields increased sharply, and issuance dried up. In this post, we describe the evolution of municipal bond market conditions since the onset of the COVID-19 crisis. We show that conditions in municipal markets have improved significantly, in part a result of the announcement and implementation of several Federal Reserve facilities. Yields have decreased substantially, mutual funds have received significant inflows, and issuance has rebounded. These improvements in municipal market conditions help ensure that state and local governments have better access to funding for critical capital investments. |
| Keywords: | state and local governments; municipal debt; MLF; municipal debt markets; COVID-19 |
| JEL: | E58 E62 H0 |
| Date: | 2020–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:88240&r=all |
| By: | Bekaert, Geert; De Santis, Roberto A. |
| Abstract: | Corporate bond returns in the major developed economies increase with risk, as measured by maturity and ratings. From a pricing perspective, we find little to no evidence against the World CAPM model, where the market consists out of equity, sovereign and corporate bonds. However, from a factor model perspective, local factors contribute substantially more to the variation of corporate bond returns than global factors. The factor exposures show intuitive patterns: as ratings worsen, equity betas show a hockey stick pattern, sovereign betas decline monotonically and corporate bond betas increase steeply. JEL Classification: G10, G11, G15 |
| Keywords: | asset class integration, bond ratings, CAPM, corporate bond markets, international market integration, return, risk |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202452&r=all |
| By: | Ben-Zhang Yang; Xin-Jiang He; Song-Ping Zhu |
| Abstract: | Under mean-variance-utility framework, we propose a new portfolio selection model, which allows wealth and time both have influences on risk aversion in the process of investment. We solved the model under a game theoretic framework and analytically derived the equilibrium investment (consumption) policy. The results conform with the facts that optimal investment strategy heavily depends on the investor's wealth and future income-consumption balance as well as the continuous optimally consumption process is highly dependent on the consumption preference of the investor. |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2007.06510&r=all |
| By: | Young Shin Kim |
| Abstract: | In this paper, we propose a multivariate market model with returns assumed to follow a multivariate normal tempered stable distribution defined by a mixture of the multivariate normal distribution and the tempered stable subordinator. This distribution is able to capture two stylized facts: fat-tails and asymmetric tails, that have been empirically observed for asset return distributions. On the new market model, a new portfolio optimization method, which is an extension of Markowitz's mean-variance optimization, is discussed. The new optimization method considers not only reward and dispersion but also asymmetry. The efficient frontier is also extended from the mean-variance curve to a surface on three dimensional space of reward, dispersion, and asymmetry. We also propose a new performance measure which is an extension of Sharpe Ratio. Moreover, we derive closed-form solutions for two important measures used by portfolio managers in portfolio construction: the marginal Value-at-Risk (VaR) and the marginal Conditional VaR (CVaR). We illustrate the proposed model using stocks comprising the Dow Jones Industrial Average. First perform the new portfolio optimization and then demonstrating how the marginal VaR and marginal CVaR can be used for portfolio optimization using the model. Based on the empirical evidence presented in this paper, our framework offers realistic portfolio optimization and tractable methods for portfolio risk management. |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2007.13972&r=all |
| By: | Eric Arias; Layna Mosely; B. Peter Rosendorff |
| Abstract: | We explore the diversity of means by which governments borrow - from commercial banks, sovereign bond issues, official bilateral creditors, and multilateral financial institutions. Although political economy scholars tend to analyze financing instruments in isolation from one another, governments make choices across borrowing instruments. Although these choices partly reflect governments' macroeconomic profiles and country creditworthiness, they also reflect governments' efforts to engage in financial statecraft, often for domestic reasons. These motivations include transparency: governments that are inclined not to make available information about the state of their economy and financial institutions will, all else equal, tend to borrow from commercial banks (versusto issue bonds), or to borrow from official bilateral creditors (rather than multilateral ones). Borrowing from these entities imposes fewer disclosure requirements, and disclosures are made to a narrower audience. We test, and find support for, our hypotheses using data on the composition of government debt over time, for a large set of developing countries. We further assess, and again find support for, our expectations using data on the borrowing behavior of Mexican municipalities. |
| Keywords: | government, debt |
| JEL: | H63 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:822&r=all |
| By: | Mirco Rubin; Dario Ruzzi |
| Abstract: | This paper quantifies the effects of equity tail risk on the US government bond market. We estimate equity tail risk with option-implied stock market volatility that stems from large negative price jumps, and we assess its value in reduced-form predictive regressions for Treasury returns and a term structure model for interest rates. We find that the left tail volatility of the stock market significantly predicts one-month excess returns on Treasuries both in- and out-of-sample. The incremental value of employing equity tail risk as a return forecasting factor can be of economic importance for a mean-variance investor trading bonds. The estimated term structure model shows that equity tail risk is priced in the US government bond market and, consistent with the theory of flight-to-safety, Treasury prices increase when the perception of tail risk is higher. Our results concerning the predictive power and pricing of equity tail risk extend to major government bond markets in Europe. |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2007.05933&r=all |
| By: | Kovbasyuk, Sergey; Pagano, Marco |
| Abstract: | Arbitrageurs with a short investment horizon gain from accelerating price discovery by advertising their private information. However, advertising many assets may overload investors' attention, reducing the number of informed traders per asset and slowing price discovery. So arbitrageurs optimally concentrate advertising on just a few assets, which they overweight in their portfolios. Unlike classic insiders, advertisers prefer assets with the least noise trading. If several arbitrageurs share information about the same assets, inefficient equilibria can arise, where investors' attention is overloaded and substantial mispricing persists. When they do not share, the overloading of investors' attention is maximal. |
| Keywords: | limits to arbitrage,advertising,price discovery,limited attention |
| JEL: | G11 G14 G2 D84 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:641&r=all |
| By: | Magnus, Blomkvist; Korkeamäki, Timo; Takalo, Tuomas |
| Abstract: | We propose a rationale for why firms often return to the equity market shortly after their initial public offering (IPO). We argue that hard to value firms conduct smaller IPOs, and that they return to the equity market conditional on positive valuation signal from the stock market. Thus, information asymmetry is not a necessary condition for staged financing. We find strong support for these arguments in a sample of 2,143 U.S. IPOs between 1981-2014. Hard to value firms conduct smaller IPOs, and upon positive post-IPO returns, they tend to return to the equity market quickly, following the IPO. |
| JEL: | G14 G24 G32 |
| Date: | 2020–08–26 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2020_015&r=all |
| By: | Michael J. Fleming; Francisco Ruela |
| Abstract: | On May 20, the U.S. Department of the Treasury sold a 20-year bond for the first time since 1986. In announcing the reintroduction, Treasury said it would issue the bond in a regular and predictable manner and in benchmark size, thereby creating an additional liquidity point along the Treasury yield curve. But just how liquid is the new bond? In this post, we take a first look at the bond’s behavior, evaluating its trading activity and liquidity using a short sample of data since the bond’s introduction. |
| Keywords: | treasury security; liquidity; 20-year bond |
| JEL: | G1 |
| Date: | 2020–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:88271&r=all |
| By: | Okpara, Godwin Chigozie |
| Abstract: | This paper aims at exploring the relationship between news on the stock market returns and conditional volatility in Nigeria. To determine this relationship, the researcher employed the exponential generalized conditional Heteroscedasticity (EGARCH) in mean model since the model accommodates asymmetric and leverage property. The results of the analysis shows that there is a significant relationship between stock market returns and conditional volatility. Secondly, that the persistence of shocks in the market takes a short time to die out, thirdly, that the stock market volatility is less sensitive to market events while asymmetric effect is positive and significant indicating that good news lowers volatility in Nigeria. In the light of the findings, the researcher suggests that Nigeria stock exchange should ensure that company specific information should be reliable with maximum transparency and speedy dissemination. Also, with the already existing good news lowering volatility and cost of capital in the economy, Government should avoid unnecessary modifications of her policies that are capable of changing the market trading pattern. These measures, the researcher believes, will bridge up information asymmetry and enhance the sensitivity of volatility to market events. |
| Keywords: | Stock returns,EGARCH in mean, information asymmetry, bad news, good news. |
| JEL: | C32 E32 F65 |
| Date: | 2020–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:102381&r=all |