nep-fmk New Economics Papers
on Financial Markets
Issue of 2022‒09‒19
eight papers chosen by

  1. COVID-19 and Corporate Finance By Marco Pagano; Josef Zechner
  2. COVID and Financial Stability: Practice Ahead of Theory By Jing Yang; Hélène Desgagnés; Grzegorz Halaj; Yaz Terajima
  3. Beta-Sorted Portfolios By Matias D. Cattaneo; Richard K. Crump; Weining Wang
  4. No-Arbitrage Pricing, Dynamics and Forward Prices of Collateralized Derivatives By Alessio Calvelli
  5. An Event Based Analysis of Stock Return and Political Uncertainty in Pakistan: Revisited By Audi, Marc; Sulehri, Fiaz Ahmad; Ali, Amjad; Al-Masri, Razan
  6. Revisiting The Determinants Of Sovereign Bond Yield Volatility. By Carlos Alberto Piscarreta Pinto Ferreira
  7. Are Stocks Pricing in Recession Risks? Evidence from Dividend Futures By Markus F. Ibert; Benjamin Knox; Francisco Vazquez-Grande
  8. The cost of complying with Basel III liquidity regulations for South African banks By Howard Diesel; Mukelani Nkuna; Tim Olds; Daan Steenkamp

  1. By: Marco Pagano (University of Naples Federico II, CSEF, EIEF, and CEPR.); Josef Zechner (WU Vienna University of Economics and Business, the Vienna Graduate School of Finance (VGSF), and CEPR.)
    Abstract: We distill evidence about the effects of COVID-19 on companies. Stock price reactions to the shock differed greatly across firms, depending on their resilience to social distancing, financial flexibility, and corporate culture. The same characteristics affected the response of firms’ sales, employment, and asset growth. Despite the shock, firms expanded their balance sheets and liquidity by raising funds from banks, bonds, and equity markets. While listed firms reduced their leverage, unlisted ones, especially small and medium enterprises, increased it. Government support programs helped firms access external funding. We conclude by identifying unexplored research issues regarding the long-run effects of COVID-19 on companies.
    Keywords: COVID-19, pandemic, firm resilience, social distancing, financial flexibility, corporate culture, credit supply, leverage, government support, public loan guarantees, Paycheck Protection Program.
    JEL: G11 G12 G13 G21 G24 G28 G32 G33 G35 G38 H81 H84
    Date: 2022–08–09
  2. By: Jing Yang; Hélène Desgagnés; Grzegorz Halaj; Yaz Terajima
    Abstract: The COVID-19 pandemic forced policy-makers to deploy a range of unprecedented measures to support the economy. In this discussion paper, we discuss the outcome of the economic measures implemented in the context of financial stability in Canada. We also present related challenging policy questions that are being tackled by staff at the Bank. These include the uneven impact of the pandemic on households’ financial conditions and how it affects the transmission of policy, the challenges associated with setting banks’ countercyclical capital buffers, detecting imbalances in a buoyant housing market, and policy coordination challenges.
    Keywords: Coronavirus disease (COVID-19); Financial stability; Financial system regulation and policies
    JEL: H3 H84 G21 E61 E58
    Date: 2022–08
  3. By: Matias D. Cattaneo; Richard K. Crump; Weining Wang
    Abstract: Beta-sorted portfolios -- portfolios comprised of assets with similar covariation to selected risk factors -- are a popular tool in empirical finance to analyze models of (conditional) expected returns. Despite their widespread use, little is known of their statistical properties in contrast to comparable procedures such as two-pass regressions. We formally investigate the properties of beta-sorted portfolio returns by casting the procedure as a two-step nonparametric estimator with a nonparametric first step and a beta-adaptive portfolios construction. Our framework rationalize the well-known estimation algorithm with precise economic and statistical assumptions on the general data generating process and characterize its key features. We study beta-sorted portfolios for both a single cross-section as well as for aggregation over time (e.g., the grand mean), offering conditions that ensure consistency and asymptotic normality along with new uniform inference procedures allowing for uncertainty quantification and testing of various relevant hypotheses in financial applications. We also highlight some limitations of current empirical practices and discuss what inferences can and cannot be drawn from returns to beta-sorted portfolios for either a single cross-section or across the whole sample. Finally, we illustrate the functionality of our new procedures in an empirical application.
    Date: 2022–08
  4. By: Alessio Calvelli
    Abstract: This paper analyzes the pricing of collateralized derivatives, i.e. contracts where counterparties are not only subject to financial derivatives cash flows but also to collateral cash flows arising from a collateral agreement. We do this along the lines of the brilliant approach of the first part of Moreni and Pallavicini (2017): in particular we extend their framework where underlyings are continuous processes driven by a Brownian vector, to a more general setup where underlyings are semimartingales (and hence jump processes). First of all, we briefly derive from scratch the theoretical foundations of the main subsequent achievements i.e. the extension of the classical No-Arbitrage theory to dividend paying semimartingale assets, where by dividend we mean any cash flow earned/paid from holding the asset. In this part we merge, in the same treatment and under the same notation, the principal known results with some original ones. Then we extend the approach of Moreni and Pallavicini (2017) in different directions and we derive not only the pricing formulae but also the dynamics and forward prices of collateralized derivatives (extending the achievements of the first part of Gabrielli et al. (2019)). Finally, we study some important applications (Repurchase Agreements, Securities Lending and Futures contracts) of previously established theoretical frameworks, obtaining some results that are commonly used in practitioners literature, but often not well understood.
    Date: 2022–08
  5. By: Audi, Marc; Sulehri, Fiaz Ahmad; Ali, Amjad; Al-Masri, Razan
    Abstract: This study examines the impact of political events on the Pakistan Stock Exchange with the help of larger data set, the stock market of Pakistan which is considered the top-performing market in the region has suffered as well as foreign investors are reluctant to invest in Pakistan stock markets due to uncertainty caused by political instability. Pakistan is struggling against many problems; political instability is a significant problem due to which the economic growth of the country is being hindered and the confidence of the investors has been shaken. A total of 66 political events were considered in the study out of which 33 events were coded as positive and the other 33 were deemed negative. The first-day abnormal return, five-day cumulative abnormal return, and ten-day cumulative return were calculated for all of the events. The political events were analyzed by segregating these into Pre-Musharraf, Musharraf, and Post-Musharraf eras and also on the bases of their category. This study finds evidence that political events affect the Pakistan Stock Exchange, but their impact is different considering the economic and political implications of these events. Certain events had a stronger impact on the stock market like the takeover of Musharraf, suspension of the chief justice, and assassination of Benazir Bhutto. Political events provided more consistent results where elections yield positive stock returns and the selection of prime minister yields negative stock returns after elections. Overall, this study lays the foundation to make further explorations into the phenomenon of uncertainty caused by political events in relevance to stock markets in Pakistan.
    Keywords: Stock Return, Political instability
    JEL: G24 P16
    Date: 2022
  6. By: Carlos Alberto Piscarreta Pinto Ferreira
    Abstract: Although there is an extensive literature regarding volatility in the financial markets, to our knowledge, few empirical studies specifically focus on the drivers of volatility of sovereign bond yields. This empirical paper aims to fill part of this gap and to provide more up to date empirical insights. We add to previous work by examining the issue simultaneously in a broad number of advanced economies. Our analysis shows that sovereign bond unconditional volatility exhibits mean-reversion and persistence. Bond yield volatility responds to proximate market movements and global risk. However, that response is found to be uneven across geographies, asymmetric in some cases and possibly time-varying. Macro and policy uncertainty impact depends on the specific uncertainty measures used and rarely is very meaningful.
    Keywords: Volatility, Bond Market, Public Debt, Sovereign Risk, Panel Data, Fixed Effects
    JEL: C23 E44 G11 G15 H63
    Date: 2022–07
  7. By: Markus F. Ibert; Benjamin Knox; Francisco Vazquez-Grande
    Abstract: Since the beginning of this year, broad equity price indexes around the world have declined significantly. In interpreting the declines, market commentaries have highlighted the risks to the economic outlook in the United States and other advanced economies.
    Date: 2022–08–18
  8. By: Howard Diesel; Mukelani Nkuna; Tim Olds; Daan Steenkamp
    Abstract: The cost of complying with Basel III liquidity regulations for South African banks
    Date: 2022–08–12

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.