nep-fmk New Economics Papers
on Financial Markets
Issue of 2020‒08‒31
twelve papers chosen by

  1. The Impact of the Global COVID-19 Pandemic on the Stock Market Indices of Selected Countries By Josef Klement; Adela Zubikova; Miroslav Sevcik; Tomas Lejsek
  2. Stock market vulnerability to the Covid-19 pandemic: Evidence from emerging Asian stock markets By Rabhi, Ayoub
  3. Municipal Debt Markets and the COVID-19 Pandemic By Marco Cipriani; Andrew F. Haughwout; Benjamin Hyman; Anna Kovner; Gabriele La Spada; Matthew Lieber; Shawn Nee
  4. Risk and return in international corporate bond markets By Bekaert, Geert; De Santis, Roberto A.
  5. Mean-variance-utility portfolio selection with time and state dependent risk aversion By Ben-Zhang Yang; Xin-Jiang He; Song-Ping Zhu
  6. Portfolio Optimization on the Dispersion Risk and the Asymmetric Tail Risk By Young Shin Kim
  7. Financial Statecraft: Government Choice of Debt Instruments By Eric Arias; Layna Mosely; B. Peter Rosendorff
  8. Equity Tail Risk in the Treasury Bond Market By Mirco Rubin; Dario Ruzzi
  9. Advertising arbitrage By Kovbasyuk, Sergey; Pagano, Marco
  10. Staged equity financing By Magnus, Blomkvist; Korkeamäki, Timo; Takalo, Tuomas
  11. How Liquid Is the New 20-Year Treasury Bond? By Michael J. Fleming; Francisco Ruela
  12. News on Stock Market Returns and Conditional Volatility in Nigeria: An EGARCH-in-Mean Approach. By Okpara, Godwin Chigozie

  1. 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
  2. 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
  3. 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
  4. 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
  5. 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
  6. 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
  7. 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
  8. 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
  9. 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
  10. 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
  11. 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
  12. 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

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.