nep-fmk New Economics Papers
on Financial Markets
Issue of 2022‒04‒25
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Saved by the bell? Equity market responses to surprise Covid-19 lockdowns and central bank interventions By Aakriti Mathur; Rajeswari Sengupta; Bhanu Pratap
  2. Contagion across Financial Markets during COVID-19: A Look at Volatility Spillovers between the Stock and Foreign Exchange Markets in South Africa By Chevaughn van der Westhuizen; Reneé van Eyden; Goodness Aye
  3. Collective Moral Hazard and the Interbank Market By Levent Altinoglu; Joseph E. Stiglitz
  4. Stock Market Stimulus By Robin Greenwood; Toomas Laarits; Jeffrey Wurgler
  5. Dynamics of Subjective Risk Premia By Stefan Nagel; Zhengyang Xu
  6. Bitcoin: Future or Fad? By Tut, Daniel
  7. Stock Volatility and the War Puzzle By Gustavo S. Cortes; Angela Vossmeyer; Marc D. Weidenmier
  8. Portfolio Rebalancing with Realization Utility By Min Dai; Cong Qin; Neng Wang
  9. Will Chinese Twenty-four Solar Terms Affect Stock Return: Evidence from Shanghai Index of China By Zhou Tianbao; Li Xinghao; Zhao Junguang
  10. The bond market impact of the South African Reserve Bank bond purchase programme By Roy Havemann; Henk Janse van Vuuren; Daan Steenkamp; Rossouw van Jaarsveld

  1. By: Aakriti Mathur (The Graduate Institute of International and Development Studies); Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Bhanu Pratap (Reserve Bank of India)
    Abstract: Negative equity market reactions at the onset of the Covid-19 crisis raised concerns about the vulnerabilities in non-financial firms, requiring swift actions by central banks to prevent system-wide stresses. We investigate the Indian context, where the announcement of a surprise, nationwide lockdown in March 2020, was followed by the announcement of an unanticipated policy package by the central bank a few days later. Using natural language processing on quarterly earnings call reports, we construct a firm-specific measure of concern about the pandemic for a set of Indian non-financial firms. We find that firms that were exposed to the pandemic in early 2020 had worse stock market performance when the lockdown was announced. These results are explained by the implications of pandemic-related uncertainty for the future cash flows of these firms. The central bank's policy package seemed to have reversed the impact of the lockdown announcement in the short-term.
    Keywords: Covid-19, event study, earnings calls, firm performance, uncertainty, central bank policies
    JEL: G14 G18 G32 E58 L25 D8
    Date: 2022–03
  2. By: Chevaughn van der Westhuizen; Reneé van Eyden; Goodness Aye
    Abstract: The onset of the novel coronavirus pandemic (COVID-19) and previous crises have heightened interest in the interaction of stock market and exchange rate volatility. This paper aims to investigate the interdependence and volatility transmissions between the stock and foreign exchange markets for South Africa over the period 1979:01–2021:08, including the effect the COVID-19 pandemic has had on the interdependence and transmissions. Using bivariate Exponential Generalised Autoregressive Conditional Heteroscedasticity (EGARCH) modelling, this paper provides strong evidence in support of the “stock-orientated’ approach, where significant price and volatility spillovers propagate from the stock market into the foreign exchange market; whilst evidence of the “flow-orientated†approach is seen in the second moment and significant shock and asymmetric spillovers from the exchange to stock market are found. The results support the asymmetric and long-range persistence volatility spillover effect and show strong evidence of contagion between stock and foreign exchange market. These spillovers became more pronounced during the COVID-19 pandemic, confirming heightened contagion during periods of crisis. The results heed important implications for not only policymakers who are concerned by the contagion and better regulation of these markets, but also for investors and fund managers who seek to hedge investment risks in South Africa.
    Keywords: COVID-19 Pandemic; Stock market returns; Exchange rate changes; Bivariate EGARCH model; Asymmetric volatility spillover
    JEL: C22 C58 F31 G10 O11
    Date: 2022–02
  3. By: Levent Altinoglu; Joseph E. Stiglitz
    Abstract: The concentration of risk within the financial system leads to systemic instability. We propose a theory to explain the structure of the financial system and show how it alters the risk taking incentives of financial institutions when the government optimally intervenes during crises. By issuing interbank claims, risky institutions endogenously become too interconnected to fail. This concentrated structure enables institutions to share the risk of systemic crises in a privately optimal way, but leads to excessive risk taking even by peripheral institutions. Interconnectedness and excessive risk taking reinforce one another. Macroprudential regulation which limits the interconnectedness of risky institutions improves welfare.
    JEL: E44 E61 G01 G18 G28
    Date: 2022–02
  4. By: Robin Greenwood; Toomas Laarits; Jeffrey Wurgler
    Abstract: We study the stock market effects of the arrival of the three rounds of “stimulus checks” to U.S. taxpayers and the single round of direct payments to Hong Kong citizens. The first two rounds of U.S. checks appear to have increased retail buying and share prices of retail-dominated portfolios. The Hong Kong payments increased overall market turnover and share prices in Hong Kong and mainland Chinese markets, especially in large-cap portfolios. We cannot rule out that these price effects were permanent. The findings raise novel questions about the role of fiscal stimulus in the stock market.
    JEL: E62 G0 G14 G38 G4
    Date: 2022–03
  5. By: Stefan Nagel; Zhengyang Xu
    Abstract: We examine subjective risk premia implied by return expectations of individual investors and professionals for aggregate portfolios of stocks, bonds, currencies, and commodity futures. While in-sample predictive regressions with realized excess returns suggest that objective risk premia vary countercyclically with business cycle variables and aggregate asset valuation measures, subjective risk premia extracted from survey data do not comove much with these variables. This lack of cyclicality of subjective risk premia is a pervasive property that holds in expectations of different groups of market participants and in different asset classes. A similar lack of cyclicality appears in out-of-sample forecasts of excess returns, which suggests that investors’ learning of forecasting relationships in real time may explain much of the cyclicality gap. These findings cast doubt on models that explain time-varying objective risk premia inferred from in-sample regressions with countercyclical variation in perceived risk or risk aversion. We further find a link between subjective perceptions of risk and subjective risk premia, which points toward a positive risk-return tradeoff in subjective beliefs.
    JEL: G12 G41
    Date: 2022–02
  6. By: Tut, Daniel
    Abstract: Is Bitcoin the payment system of the future? In these notes, we argue that Bitcoin is neither currency nor gold, but that it is a tradable asset and an alternative form of investments. Bitcoin also exhibits some features as an investment asset that are similar to collectibles. The true value of Bitcoin lies not in its speculative nature but in the embedded technology which has the long term potential of revolutionizing traditional nance. Blockchain technology can provide solutions to Big Data challenges and provide an o -ramp during political uncertainty. Bitcoin's long-term survivability and viability as an asset will largely depend on its diversification role, institutional adoption, tax treatment and regulations.
    Keywords: Bitcoin, Cryptocurrency, Blockchain technology, smart contracts, digital assets, NFTs, Payment Systems, Money
    JEL: D8 D84 E4 G0 G02 G1 G17 G18 K22 M21 O3 O31 O33
    Date: 2022–03–10
  7. By: Gustavo S. Cortes; Angela Vossmeyer; Marc D. Weidenmier
    Abstract: U.S. stock volatility is 33 percent lower during wartime and periods of conflict. This is true even for World Wars I and II, which would seemingly increase uncertainty. In a seminal paper, Schwert (1989) identified the “war puzzle” as one of the most surprising facts from two centuries of stock volatility data. We propose an explanation for the puzzle: the profits of firms become easier to forecast during wartime due to massive government spending. We test this hypothesis using newly-constructed data on more than 100 years of defense spending. The aggregate analysis finds that defense spending reduces stock volatility. The sector level regressions show that defense spending predicts lower stock volatility for firms that produce military goods. Finally, an event-study demonstrates that earnings forecasts of defense firms by equity analysts become significantly less disperse after 9/11 and the invasions of Afghanistan (2001) and Iraq (2003).
    JEL: E30 G1 H56 N12
    Date: 2022–03
  8. By: Min Dai; Cong Qin; Neng Wang
    Abstract: We develop a model where a realization-utility investor (Barberis and Xiong, 2009, 2012; Ingersoll and Jin, 2013) optimally targets her liquid-illiquid wealth ratio at a constant w∗. By saving in the risk-free asset (w∗ > 0), she makes smaller bets in the illiquid asset and realizes gains/losses more frequently. By leveraging (w∗
    JEL: D03 G11 G12
    Date: 2022–03
  9. By: Zhou Tianbao; Li Xinghao; Zhao Junguang
    Abstract: In this article, readers will see the impact on Chinese stock index brought by twenty-four solar terms, a unique division of annual season in Chinese tradition. Based on the data in the past 26 years, the study focused on whether the daily return (revenue) of Shanghai Index shows significant value and special feature on and after each solar term.On several solar terms did the index return result large mean value and high probability of extreme value occurrence such as on solar term No.1 and No.3 while on solar term No.2 and solar term No.4, the results were completely the opposite.The study also found that the volatility of index return during those solar terms in the beginning of the year were more active than the rest of them. Index return 10 days and 15days after solar term No.6 and solar term No.8 displayed high final return and large volatility whereas in any cases, the index went very steady after solar term No.18.The study also proposed that it is almost impossible to make numeric prediction with the current technical analysis tools, the effective way in stock analysis to collect more feature and characteristics based on historical data, identifying if the similar situation is happening when similar feature of stock shows up in the future.
    Date: 2022–03
  10. By: Roy Havemann; Henk Janse van Vuuren; Daan Steenkamp; Rossouw van Jaarsveld
    Abstract: We use a unique dataset comprising over a million trades and quotes to assess the impact of the unexpected announcement of a bond purchase programme by the South African Reserve Bank on intraday market liquidity, yields and pricing volatility. Our dataset details the timing and order details of individual bonds purchased by the South African Reserve Bank during the COVID-19 pandemic, as well as data from over a million other fixed-coupon bond trades and intraday quotes. We find that the programme was successful at shoring up market confidence and addressing dislocation in the government bond market. We show that bond spreads fell both on announcement and after purchases themselves. Bond pricing adjusted slowly, with effects typically strengthening over the course of the trading day. We find that announcement effects dominated the impact of purchases themselves. Lastly, our intraday dataset enables assessment of the spillovers of central bank announcements in major economies and we show that the Federal Reserve played an important role in stabilising South Africa’s bond market, helping to support the actions of SARB.
    Keywords: bond purchase programme, liquidity, yield curve
    JEL: C5 E43 E58 G12 G14
    Date: 2022–03

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