nep-fmk New Economics Papers
on Financial Markets
Issue of 2020‒11‒30
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Stand Still and Do Nothing: COVID-19, Stock Returns and Volatility By Akbar, Muhammad; Tahir, Aima
  2. Observable implications of the conditional CAPM By de Oliveira Souza, Thiago
  3. Who Benefits from Analyst “Top Picks”? By Justin Birru; Sinan Gokkaya; Xi Liu; René M. Stulz
  4. Exchange Rates, Stock Prices, and Stock Market Uncertainty By Fatemeh Salimi Namin
  5. The Financial Firefighter’s Manual By Schuler, Kurt
  6. Investment funds, monetary policy, and the global financial cycle By Kaufmann, Christoph
  7. Commodity Futures Return Predictability and Intertemporal Asset Pricing By John Cotter; Emmanuel Eyiah-Donkor; Valerio Potí
  8. Analysis and Forecasting of Financial Time Series Using CNN and LSTM-Based Deep Learning Models By Sidra Mehtab; Jaydip Sen; Subhasis Dasgupta
  9. "A Note Concerning Government Bond Yields" By Tanweer Akram
  10. Stock Market Reactions to Legislated Tax Changes: Evidence from the United States, Germany, and the United Kingdom By Bernd Hayo; Sascha Mierzwa
  11. Concentration in the market of authorized participants of US fixed-income exchange-traded funds By Rohan Arora; Sébastien Betermier; Guillaume Ouellet Leblanc; Adriano Palumbo; Ryan Shotlander

  1. By: Akbar, Muhammad; Tahir, Aima
    Abstract: We examine the intraday returns and volatility in the US equity market amid the COVID-19 pandemic crisis. Our empirical results suggest increase in volatility overtime with mostly negative returns and higher volatility in last trading session of the day. Our Univariate analysis reveal structural break(s) since the first trading halt in March 2020 and that failure to account for this may lead to biased and unstable conditional estimates. Allowing for time varying conditional variance and conditional correlation, our dynamic conditional correlation tests suggest that COVID-19 cases and deaths are jointly related to stock returns and realised volatility.
    Date: 2020–11–19
    URL: http://d.repec.org/n?u=RePEc:akf:cafewp:7&r=all
  2. By: de Oliveira Souza, Thiago (Department of Business and Economics)
    Abstract: The derivation of observable implications of the conditional CAPM theory often includes the joint (internally inconsistent) hypothesis that the stock portfolio used in the tests is the theoretical, mean-variance efficient, market portfolio. The present paper generalizes this derivation by avoiding this joint hypothesis. The generalization reveals that the conditional CAPM plausibly explains asset pricing anomalies, such as the unconditional alphas and betas of momentum, value, and size portfolios, while the unconditional CAPM theory is still rejected by portfolios with negative unconditional betas and positive unconditional alphas. Hence, relaxing this joint assumption does not render the CAPM theory untestable.
    Keywords: Conditional CAPM; anomalies; test; proxy; mean-variance frontier
    JEL: G11 G12 G14
    Date: 2020–11–10
    URL: http://d.repec.org/n?u=RePEc:hhs:sdueko:2020_013&r=all
  3. By: Justin Birru; Sinan Gokkaya; Xi Liu; René M. Stulz
    Abstract: Following the Global Settlement, analysts extensively use a top pick designation to highlight their highest conviction best ideas. Such a designation enables analysts to provide greater granularity of information, but it can potentially be influenced by conflicts of interest. Examining a comprehensive sample of top picks, we find, even though top picks are more likely to be investment banking clients, they have greater investment value, attract greater media and investor attention, and lead to more trading than buy recommendations. Bad top picks are more likely to be influenced by strategic objectives and have adverse consequences for analysts. Institutions, but not retail investors, discern between good and bad top picks.
    JEL: G11 G12 G14 G20 G23 G24
    Date: 2020–10
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:28038&r=all
  4. By: Fatemeh Salimi Namin (Aix-Marseille University, CNRS, AMSE, France)
    Abstract: While the reference framework for international portfolio choice emphasizes a mean-variance framework, uncovered parity conditions only involve mean stock or bond returns. We propose to augment the empirical specification by using the relative stock market uncertainty of two countries as an extra determinant of their bilateral exchange rate returns. A rise in the relative uncertainty of one stock market will lead capital to flow to the other stock market and generate an appreciation in the currency of the latter. By focusing on the JPY/USD exchange rate returns during the most recent decade (2009-2019) and relying on a nonlinear framework, we provide evidence that the Japanese-US differential stock market uncertainty affects the JPY/USD returns both contemporaneously and with weekly lags. This finding is robust when we control for the stock returns differential and the differential changes in Japanese and US unconventional monetary policy measures.
    Keywords: exchange rate determination, implied volatility, UEP, flight to safety, flight to quality
    JEL: F31 F32 G15
    Date: 2020–11
    URL: http://d.repec.org/n?u=RePEc:aim:wpaimx:2037&r=all
  5. By: Schuler, Kurt (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: Apparently no up to date compilation exists of the various measures governments and the private sector have undertaken to address economic crises, especially financial crises. This paper tries to provide an overview that is comprehensive but brief. It is not an exhaustive analysis of crises, but rather an aid to thinking about how to respond to them, especially at their most acute.
    Keywords: Financial; crises
    Date: 2020–11
    URL: http://d.repec.org/n?u=RePEc:ris:jhisae:0169&r=all
  6. By: Kaufmann, Christoph
    Abstract: This paper studies the role of international investment funds in the transmission of global financial conditions to the euro area using structural Bayesian vector auto regressions. While cross-border banking sector capital flows receded significantly in the aftermath of the global financial crisis, portfolio flows of investors actively searching for yield on financial markets world-wide gained importance during the post-crisis “second phase of global liquidity” (Shin, 2013). The analysis presented in this paper shows that a loosening of US monetary policy leads to higher investment fund inflows to equities and debt globally. Focussing on the euro area, these inflows do not only imply elevated asset prices, but also coincide with increased debt and equity issuance. The findings demonstrate the growing importance of non-bank financial intermediation over the last decade and have important policy implications for monetary and financial stability. JEL Classification: F32, F42, G15, G23
    Keywords: capital flows, international spillovers, monetary policy, non-bank financial intermediation
    Date: 2020–11
    URL: http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202489&r=all
  7. By: John Cotter (Michael Smurfit Graduate Business School, University College Dublin); Emmanuel Eyiah-Donkor (Rennes School of Business); Valerio Potí (Michael Smurfit Graduate Business School, University College Dublin)
    Abstract: We find out-of-sample predictability of commodity futures excess returns using forecast combinations of 28 potential predictors. Such gains in forecast accuracy translate into economically significant improvements in certainty equivalent returns and Sharpe ratios for a mean-variance investor. Commodity return forecasts are closely linked to the real economy. Return predictability is countercyclical, and the combination forecasts of commodity returns have significantly positive predictive power for future economic activity. Two-factor models featuring innovations in each of the combination forecasts and the market factor explain a substantial proportion of the cross-sectional variation of commodity and equity returns. The associated positive risk prices are consistent with the Intertemporal Capital Asset Pricing Model (ICAPM) of Merton (1973), given how the predictors forecast an increase in future economic activity in the time-series. Overall, combination fore- casts act as state variables within the ICAPM, thus resurrecting a central role for macroeconomic risk in determining expected returns.
    Keywords: Commodity futures returns; Predictability; Asset allocation; Macroeconomic risk; Intertemporal pricing
    JEL: G10 G12 G15
    Date: 2020–11–12
    URL: http://d.repec.org/n?u=RePEc:ucd:wpaper:202011&r=all
  8. By: Sidra Mehtab; Jaydip Sen; Subhasis Dasgupta
    Abstract: Prediction of stock price and stock price movement patterns has always been a critical area of research. While the well-known efficient market hypothesis rules out any possibility of accurate prediction of stock prices, there are formal propositions in the literature demonstrating accurate modeling of the predictive systems can enable us to predict stock prices with a very high level of accuracy. In this paper, we present a suite of deep learning-based regression models that yields a very high level of accuracy in stock price prediction. To build our predictive models, we use the historical stock price data of a well-known company listed in the National Stock Exchange (NSE) of India during the period December 31, 2012 to January 9, 2015. The stock prices are recorded at five minutes interval of time during each working day in a week. Using these extremely granular stock price data, we build four convolutional neural network (CNN) and five long- and short-term memory (LSTM)-based deep learning models for accurate forecasting of future stock prices. We provide detailed results on the forecasting accuracies of all our proposed models based on their execution time and their root mean square error (RMSE) values.
    Date: 2020–11
    URL: http://d.repec.org/n?u=RePEc:arx:papers:2011.08011&r=all
  9. By: Tanweer Akram
    Abstract: This paper relates Keynes's discussions of money, the state theory of money, financial markets, investors' expectations, uncertainty, and liquidity preference to the dynamics of government bond yields for countries with monetary sovereignty. Keynes argued that the central bank can influence the long-term interest rate on government bonds and the shape of the yield curve mainly through the short-term interest rate. Investors psychology, herding behavior in financial markets, and uncertainty about the future reinforce the effects of the short-term interest rate and the central bank's monetary policy actions on the long-term interest rate. Several recent empirical studies that examine the dynamics of government bond yields substantiate the Keynesian perspective that the long-term interest rate responds markedly to the short-term interest rate. These empirical studies not only vindicate the Keynesian perspective but also have relevance for macroeconomic theory and policy.
    Keywords: Money; State Theory of Money; Chartalism; Monetary Theory; Central Bank; Government Bond Yields; Interest Rate; John Maynard Keynes
    JEL: E12 E40 E43 E50 E58 E60 F30 G10 G12 H62 H63
    Date: 2020–11
    URL: http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_977&r=all
  10. By: Bernd Hayo (Philipps University Marburg); Sascha Mierzwa (Philipps University Marburg)
    Abstract: We study the effect of tax policy on stock market returns in the United States, Germany, and the United Kingdom using GARCH models and a unique daily dataset of legislative tax changes during the period 1 December 1978 to 31 January 2018. We find that days of discretionary tax legislation during all stages of the process often matter for returns, both in terms of statistical significance as well as economic relevance. Further disaggregating the tax shocks shows that news about personal income tax cuts affects stock market returns positively, whereas business tax legislation is rarely influential. We find evidence of stock market spillovers, mainly from US tax changes to European stock markets, but, albeit less pronounced, also the other way round. In several cases, we measure significant effects of changes in tax legislation on the days the changes are implemented. The US House Committee Report appears to be the most influential legislative stage in our sample. During the financial crisis, stock markets were more responsive to tax legislation. Finally, S&P500 returns tend to react at earlier legislative stages than do DAX returns, whereas FT30 returns barely react on days of domestic legislative action.
    Keywords: Fiscal policy, legislative tax changes, stock markets, income tax, business tax, indirect tax, Germany, United Kingdom, United States
    JEL: E62 F65 G18 H24 H25
    Date: 2020
    URL: http://d.repec.org/n?u=RePEc:mar:magkse:202047&r=all
  11. By: Rohan Arora; Sébastien Betermier; Guillaume Ouellet Leblanc; Adriano Palumbo; Ryan Shotlander
    Abstract: We show that a small number of authorized participants (APs) actively create and redeem shares of US-listed fixed-income exchange-traded funds (FI-ETFs). In 2019, three APs performed 82 percent of gross creations and redemptions of FI-ETF shares. In contrast, the group of active APs for equity ETFs was much more diverse.
    Keywords: Coronavirus disease (COVID-19); Financial markets; Financial stability
    JEL: G1 G2 G20 G23
    Date: 2020–11
    URL: http://d.repec.org/n?u=RePEc:bca:bocsan:20-27&r=all

This nep-fmk issue is ©2020 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at http://nep.repec.org. For comments please write to the director of NEP, Marco Novarese at <director@nep.repec.org>. 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.