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on Financial Markets |
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Issue of 2021‒02‒08
thirteen papers chosen by |
| By: | Min Shu; Ruiqiang Song; Wei Zhu |
| Abstract: | We employed the log-periodic power law singularity (LPPLS) methodology to systematically investigate the 2020 stock market crash in the U.S. equities sectors with different levels of total market capitalizations through four major U.S. stock market indexes, including the Wilshire 5000 Total Market index, the S&P 500 index, the S&P MidCap 400 index, and the Russell 2000 index, representing the stocks overall, the large capitalization stocks, the middle capitalization stocks and the small capitalization stocks, respectively. During the 2020 U.S. stock market crash, all four indexes lost more than a third of their values within five weeks, while both the middle capitalization stocks and the small capitalization stocks have suffered much greater losses than the large capitalization stocks and stocks overall. Our results indicate that the price trajectories of these four stock market indexes prior to the 2020 stock market crash have clearly featured the obvious LPPLS bubble pattern and were indeed in a positive bubble regime. Contrary to the popular belief that the COVID-19 led to the 2020 stock market crash, the 2020 U.S. stock market crash was endogenous, stemming from the increasingly systemic instability of the stock market itself. We also performed the complementary post-mortem analysis of the 2020 U.S. stock market crash. Our analyses indicate that the 2020 U.S. stock market crash originated from a bubble which began to form as early as September 2018; and the bubbles in stocks with different levels of total market capitalizations have significantly different starting time profiles. This study not only sheds new light on the making of the 2020 U.S. stock market crash but also creates a novel pipeline for future real-time crash detection and mechanism dissection of any financial market and/or economic index. |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2101.03625&r=all |
| By: | Schlingemann, Frederik P. (U of Pittsburgh and European Corporate Governance Institute); Stulz, Rene M. (Ohio State U and European Corporate Governance Institute) |
| Abstract: | The firms listed on the stock market in aggregate as well as the top market capitalization firm contribute less to total non-farm employment and GDP now than in the 1970s. A major reason for this development is the decline of manufacturing and the growth of the service economy as firms providing services are less likely to be listed on exchanges. We develop quantitative measures of representativeness showing how firms' market capitalizations differ from their contribution to employment and GDP. Representativeness is worst when the market is most highly valued and worsens over time for employment, but not for value added. |
| JEL: | E44 G23 G32 K22 L16 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2020-22&r=all |
| By: | Birru, Justin (Ohio State U); Gokkaya, Sinan (Ohio U); Liu, Xi (Miami U of Ohio); Stulz, Rene M. (Ohio State U and European Corporate Governance Institute) |
| 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:ecl:ohidic:2020-24&r=all |
| By: | Anna Cieslak; Hao Pang |
| Abstract: | We propose an approach to identifying economic shocks (monetary, growth, and risk-premium news) from stock returns and Treasury yield changes, which allows us to study the drivers of asset prices at a daily frequency since the early 1980s. We apply the identification to examine investors’ responses to news from the Fed and key macro announcements. We uncover two risk-premium shocks—time-varying compensation for discount-rate and cash-flow news—which have distinct effects on stocks and bonds. Since the mid-1990s, the Fed-induced reductions in both risk premium sources have generated high average stock returns but an ambiguous response in bonds on FOMC days. |
| JEL: | E43 E44 G12 G14 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28184&r=all |
| By: | Christian Zimpelmann |
| Abstract: | The amount of risk that households take when investing their savings has long-term consequences for their financial well-being. However, a substantial share of observed heterogeneity in financial risk-taking remains unexplained by factors like risk aversion and wealth levels. This study explores whether subjective beliefs about stock market returns can close this knowledge gap. I make use of a unique data set that comprises incentivized, repeated elicitations of stock market beliefs and high-quality administrative asset data for a probability-based population sample. Households with more optimistic stock market expectations hold more risk in their portfolio, where the effect size is about half of the effect size of risk aversion. Furthermore, changes in expectations over time are related to changes in portfolio risk, which demonstrates that cross-sectional correlations are not driven by a time-invariant third variable. The results suggest that stock market expectations are an important component of portfolio choice. More generally, the study shows that subjective beliefs can be reliably measured in surveys and are related to actual high-stakes decisions. |
| Keywords: | Surveys, Subjective Expectations, Behavioral Finance, Household Finance |
| JEL: | D14 D84 E21 G11 G4 G5 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_258&r=all |
| By: | Bernard Dumas; Marcel Savioz |
| Abstract: | We construct recursive solutions for, and study the properties of the dynamic equilibrium of an economy with three types of agents: (i) house- hold/investors who supply labor with a finite elasticity, consume a large variety of goods that are not perfect substitutes and trade government bonds; (ii) firms that produce those varieties of goods, receive productivity shocks and set prices in a Calvo manner; (iii) a government that collects an exogenous fiscal surplus and acts mechanically, buying and selling bonds in accordance with a Taylor policy rule based on expected inflation. In this setting we show that stock market returns are much less than one-for-one related to inflation over a one-year holding period, which means that stock securities have a strong nominal character. We also show that their nominal character diminishes as the length of the stock-holding period increases, in accordance with empirical evidence. |
| JEL: | G12 G18 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28186&r=all |
| By: | Ujwal Kandi; Sasikanth Gujjula; Venkatesh Buddha; V S Bhagavan |
| Abstract: | As more and more data being created every day, all of it can help take better decisions with data analysis. It is not different from data generated in financial markets. Here we examine the process of how the global economy is affected by the market sentiment influenced by the micro-blogging data (tweets) of American President Donald Trump. The news feed is gathered from The Guardian and Bloomberg from the period between December 2016 and October 2019, which are used to further identify the potential tweets that influenced the markets as measured by changes in equity indices. |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2101.03205&r=all |
| By: | Jasmin Gider; Simon N. M. Schmickler; Christian Westheide |
| Abstract: | We study how stock price informativeness changes with the presence of high-frequency trading (HFT). Our estimate is based on the staggered start of HFT participation in a panel of international exchanges. With HFT presence market prices are a less reliable predictor of future cash flows and investment, even more so for longer horizons. Further, idiosyncratic volatility decreases, mutual funds trade less actively and their holdings deviate less from the market-capitalization weighted portfolio. These findings suggest that price informativeness declines with HFT presence, consistent with theoretical models of HFTs' ability to anticipate informed order flow, reducing incentives to acquire fundamental information. |
| Keywords: | High-Frequency Trading, Price Efficiency, Information Acquisition, Information Production |
| JEL: | G10 G14 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_257&r=all |
| By: | Dasgupta, Aditya; Ziblatt, Daniel |
| Abstract: | By giving political rights to poor voters, did democratic political institutions pose a risk to financial capital? This paper draws lessons from the reaction of sovereign bond markets to franchise extensions between 1800 and 1920. If franchise extension transferred political power from economic and financial elites to workers, as redistributive theories of democratization suggest, then this should have resulted in a fall in the market price (increase in the yield) of a country’s bonds. Exploiting the asynchronous timing of franchise reforms across countries, we provide evidence that franchise extension contributed to large increases in the premium demanded by investors to hold sovereign debt, reflecting an increased risk of default. However, bond markets became less sensitive to franchise extensions over time, a pattern potentially due to the structure of inequality and the strategic adoption of institutions which protected financial interests. |
| Date: | 2021–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:s2pqn&r=all |
| By: | Kaan Celebi (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW)); Paul J.J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW)) |
| Abstract: | This study looks into the linkages between rates of return in stock markets - and stock market volatility - and labor income risk and the unemployment rate, respectively, in the United States. After considering basic theoretical links between labor income risk plus unemployment and stock market dynamics, an empirical analysis is conducted which follows two earlier papers by FAMA/FRENCH and FAMA/MACBETH in terms of their empirical approaches. The new approach presented here includes additional variables while interesting results regarding Granger causality analysis are also derived. We find that rate of return development is Granger causal for labor income risk and unemployment in the US. Labor income and unemployment significantly affect the stock market rates of return and the volatility of such returns. There are several key policy conclusions based on the empirical findings presented herein; the results indicate that stocks provide a rather good hedge against labor income declines. Crucial conclusions could be drawn in particular by the US Administration, in particular the new Biden Administration. |
| Keywords: | Labor income risk, stock markets, labor market, rates of return, volatility, unemployment rate, USA, economic policy reform |
| JEL: | D53 E24 E44 G10 J08 J20 J30 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:bwu:eiiwdp:disbei291&r=all |
| By: | Felix Haase; Matthias Neuenkirch |
| Abstract: | The empirical literature of stock market predictability mainly suffers from model uncertainty and parameter instability. To meet this challenge, we propose a novel approach that combines the documented merits of diffusion indices, regime-switching models, and forecast combination to predict the dynamics in the S&P 500. First, we aggregate the weekly information of 115 popular macroeconomic and financial variables through an interaction of principal component analysis and shrinkage methods. Second, we estimate one-step Markov-switching models with time-varying transition probabilities using the diffusion indices as predictors. Third, we pool the forecasts in clusters to hedge against model risk and to evaluate the usefulness of different specifications. Our results show that we can adequately predict regime dynamics. Our forecasts provide a statistical improvement over several benchmarks and generate economic value by boosting returns, improving the certainty equivalent return, and reducing tail risk. Using the same approach for return forecasts, however, does not lead to a consistent outperformance of the historical average. |
| Keywords: | forecast combination, Markov-Switching Models, shrinkage methods, stock market regimes, time-varying transition probabilities |
| JEL: | C53 G11 G17 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8828&r=all |
| By: | Magnani, Jacopo; Wang, Yabin |
| Abstract: | This paper examines how the introduction of bond lending in China's bond market has affected violations of the law of one price, measured by the yield spread between similar treasury bonds. To identify the effect of bond lending, we exploit the fact that in China identical bonds are traded on two segmented markets and bond lending has been introduced in only one of the two markets. We find that the introduction of bond lending has led to a decline in deviations from the law of one price. Consistent with an interpretation based on limits to arbitrage, a significant fraction of the deviations from the law of one price in our sample represent actual profit opportunities and the introduction of bond lending has reduced arbitrage profits. |
| Keywords: | China's bond markets, bond lending, law of one price |
| JEL: | G12 G18 |
| Date: | 2020–12–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:105027&r=all |
| By: | Zhang, Jing; Zhang, Wei; Li, Youwei; Feng, Xu |
| Abstract: | We document that hedge funds nurture mispricing in the Chinese financial market. We exploit the relationship between hedge fund holdings and the degree of mispricing in case that hedge fund holdings of stocks are mainly for arbitrage purpose but not for hedging, and that with and without short-selling restrictions. Hedge funds intentionally hold overvalued stocks. Their trades, which generate an abnormal return to 1.78% per month, also impede the dissipation of stock mispricing. Further, we find trend chasing may be the reason why hedge funds prefer to hold overvalued stocks. This research sheds new lights on the information content and potential investment value of hedge funds holdings in emerging markets. |
| Keywords: | Hedge funds; stock mispricing; asset pricing; arbitrage |
| JEL: | G11 G12 G23 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:105377&r=all |