nep-fmk New Economics Papers
on Financial Markets
Issue of 2021‒11‒15
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Impact of the Covid-19 Pandemic on Persistence in the European Stock Markets By Guglielmo Maria Caporale; Luis A. Gil-Alana; Isabel Arrese Lasaosa
  2. Private company valuations by mutual funds By Agarwal, Vikas; Barber, Brad M.; Cheng, Si; Hameed, Allaudeen; Yasuda, Ayako
  3. A primer on green finance: From wishful thinking to marginal impact By Krahnen, Jan Pieter; Rocholl, Jörg; Thum, Marcel
  4. Data-driven Hedging of Stock Index Options via Deep Learning By Jie Chen; Lingfei Li
  5. Witching Days and Abnormal Profits in the US Stock Market By Guglielmo Maria Caporale; Alex Plastun
  6. Dynamic Interdependence and Volatility Transmission from the American to the Brazilian Stock Market By Edson Z. Monte; Lucas B. Defanti

  1. By: Guglielmo Maria Caporale; Luis A. Gil-Alana; Isabel Arrese Lasaosa
    Abstract: This paper analyses the impact of the Covid-19 pandemic on the degree of persistence of European stock markets. Specifically, it uses fractional integration methods to estimate persistence at the daily, weekly and monthly frequencies in the case of ten major European stock market indices; the effects of the pandemic are assessed by comparing the pre-pandemic estimates (over the period 2005-2019) to those from a sample extended until July 2021 which includes the pandemic period. The approach used is more general than the standard one based on the stationarity versus non-stationarity dichotomy and allows for a wider range of dynamic processes. Three different model specifications are considered, and these are estimated under two alternative assumptions for the disturbances (white noise and autocorrelation). The findings indicate that there has not been any significant impact of the Covid-19 pandemic on the degree of persistence of the European stock market indices, though their volatility persistence has decreased.
    Keywords: Covid-19 pandemic, European stock market indices, persistence, fractional integration
    JEL: C22 G15
    Date: 2021
  2. By: Agarwal, Vikas; Barber, Brad M.; Cheng, Si; Hameed, Allaudeen; Yasuda, Ayako
    Abstract: Mutual funds value private security holdings at considerably different prices, update evaluations infrequently, and revise valuations dramatically at follow-on funding events. Predictable private valuation changes at follow-on rounds yield predictable fund returns, but effects are muted for large families, families with large investment in the private security, and families with large percentage stakes in funding rounds. Mutual funds with high exposure to private securities have outflows that are more sensitive to poor fund performance when the venture capital market also performs poorly. The results have welfare implications for retail investors interested in accessing private startups via investments in mutual funds.
    Keywords: Mutual funds,Venture capital,Private valuation,Stale prices,Financial fragility
    Date: 2021
  3. By: Krahnen, Jan Pieter; Rocholl, Jörg; Thum, Marcel
    Abstract: We raise some critical points against a naïve interpretation of "green finance" products and strategies. These critical insights are the background against which we take a closer look at instruments and policies that might allow green finance to become more impactful. In particular, we focus on the role of a taxonomy and investor activism. We also describe the interaction of government policies with green finance practice - an aspect, which has been mostly neglected in policy debates but needs to be taken into account. Finally, the special case of green government bonds is discussed.
    Keywords: Green Finance,Climate Change,Sustainability,Taxonomy,ESG
    Date: 2021
  4. By: Jie Chen; Lingfei Li
    Abstract: We develop deep learning models to learn the hedge ratio for S&P500 index options directly from options data. We compare different combinations of features and show that a feedforward neural network model with time to maturity, Black-Scholes delta and a sentiment variable (VIX for calls and index return for puts) as input features performs the best in the out-of-sample test. This model significantly outperforms the standard hedging practice that uses the Black-Scholes delta and a recent data-driven model. Our results demonstrate the importance of market sentiment for hedging efficiency, a factor previously ignored in developing hedging strategies.
    Date: 2021–11
  5. By: Guglielmo Maria Caporale; Alex Plastun
    Abstract: This paper examines price effects related to witching days in the US stock market using both weekly and daily data for three major indices, namely the Dow Jones, SP500 and Nasdaq, over the period 2000-2021. First it analyses whether or not anomalies in price behaviour arise from witching by using various parametric (Student’s t-test, and ANOVA) and non-parametric (Mann-Whitney) tests as well as an event study method and regressions with dummies; then it investigates whether or not any detected anomalies give rise to profit opportunities by applying a trading simulation approach. The results suggest the presence of the anomaly in daily returns on witching days which can be exploited by means of suitably designed trading strategies to earn abnormal profits, especially in the case of the Nasdaq index. Such evidence is inconsistent with the Efficient Market Hypothesis (EMH).
    Keywords: witching days, abnormal returns, stock markets, anomalies, trading
    JEL: G12 C63
    Date: 2021
  6. By: Edson Z. Monte; Lucas B. Defanti
    Abstract: The main aim of this paper is to verify the dynamic interdependence and transmission of volatility from the American (SP500) to the Brazilian stock market (IBOVESPA and sectoral indexes). Estimates were performed by GARCH/BEKK methodology, considering the period from January 2007 to December 2019. In the periods considered as “critical events†there was a significant increase in the conditional covariance between SP500 and Brazilian stock indexes (IBOVESPA and sector indices), which suggests for the hypothesis of financial contagion. The covariance increased more intensely and persistently during the so-called subprime crisis, one that had a major impact on the Brazilian economy, especially for the financial and industrial indexes. Furthermore, conditional variance estimates for Brazilian indexes revealed that that internal turmoil, whether economic or political, regardless of the international scenario (“critical events†), affected the volatility of the Brazilian stock market. These results have important implications regarding the future decisions of economic agents (politicians and investors), contributing to a better understanding of the behavior of the Brazilian stock market vis-à -vis the American stock market and the internal turbulences in the Brazilian economy, whether political or economic.
    Keywords: United States; Brazil; Stock Market; Volatility; GARCH-BEKK.
    JEL: G17 C32 C58
    Date: 2021–10–09

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