nep-fmk New Economics Papers
on Financial Markets
Issue of 2022‒10‒03
twelve papers chosen by

  1. Risk-Free Rates and Convenience Yields Around the World By William Diamond; Peter Van Tassel
  2. Stock Market Prediction using Natural Language Processing -- A Survey By Om Mane; Saravanakumar kandasamy
  3. An analysis of objective inflation expectations and inflation risk premia By Sara Cecchetti; Adriana Grasso; Marcello Pericoli
  4. The Efficient Market Hypothesis for Bitcoin in the context of neural networks By Mike Kraehenbuehl; Joerg Osterrieder
  5. An Experimental Analysis of Investor Sentiment By Béatrice BOULU-RESHEF; Catherine BRUNEAU; Maxime NICOLAS; Thomas RENAULT
  6. Common Idiosyncratic Quantile Risk By Jozef Barunik; Matej Nevrla
  7. Wealth Shocks and Portfolio Choice By Dimitris Christelis; Dimitris Georgarakos; Tullio Jappelli; Geoff Kenny
  8. Decentralized finance research and developments around the World By Ozili, Peterson K
  9. Metanomics: Adaptive market and volatility behaviour in Metaverse By Shah, Anand; Bahri, Anu
  10. The ECB?s Financial Stability impact on Credit Default Swaps Market By Georgios Alexopoulos
  11. Environmental and Social Preferences and Investments in Crypto-Assets By Pavel Ciaian; Andrej Cupák; Pirmin Fessler; d’Artis Kancs
  12. Macrofinancial Stress Testing on Australian Banks By Nicholas Garvin; Samuel Kurian; Mike Major; David Norman

  1. By: William Diamond; Peter Van Tassel
    Abstract: This paper constructs risk-free interest rates implicit in index option prices for ten of the major G11 currencies. We compare these rates to the yields of government bonds to provide international estimates of the convenience yield earned by safe assets. Average convenience yields across countries are highly correlated with the average interest rate in each country, ranging from 2 basis points in low-rate Switzerland to 61 basis points in high-rate Australia, with the moderate-rate United States providing a middling 34 basis points. For each country, a covered interest parity (CIP) deviation constructed from its option-implied rates and those of the United States is negative, with these negative CIP deviations growing sharply in periods of financial distress, including the 2020 COVID crisis when convenience yields themselves remained moderate. We conclude that risk-free discount rates in the United States are especially low due to its central position in the global financial system, particularly during financial crises, but that U.S. safe assets do not earn an unusually large convenience yield in addition.
    Keywords: risk-free rates; convenience yields; Covered interest rate parity; options
    JEL: G12 G15 C58
    Date: 2022–09–01
  2. By: Om Mane; Saravanakumar kandasamy
    Abstract: The stock market is a network which provides a platform for almost all major economic transactions. While investing in the stock market is a good idea, investing in individual stocks may not be, especially for the casual investor. Smart stock-picking requires in-depth research and plenty of dedication. Predicting this stock value offers enormous arbitrage profit opportunities. This attractiveness of finding a solution has prompted researchers to find a way past problems like volatility, seasonality, and dependence on time. This paper surveys recent literature in the domain of natural language processing and machine learning techniques used to predict stock market movements. The main contributions of this paper include the sophisticated categorizations of many recent articles and the illustration of the recent trends of research in stock market prediction and its related areas.
    Date: 2022–08
  3. By: Sara Cecchetti (Bank of Italy); Adriana Grasso (European Central Bank); Marcello Pericoli (Bank of Italy)
    Abstract: We study euro-area risk-adjusted expected inflation and the inflation risk premium at different maturities, leveraging inflation swaps, inflation options and survey-based forecasts. We introduce a model that features time-varying long-term average inflation and time-varying inflation volatility and we anchor market-based risk-adjusted measures of expected inflation to survey-based inflation forecasts. The results show that medium-term risk-adjusted expected inflation was close to the ECB's aim from 2010 to mid-2014, has since fallen to a low in March 2020 and has risen significantly since the second half of 2021. The medium-term inflation risk premium was positive until 2014 and turned negative since 2015 despite a sharp rise at the end of 2021. The risk-adjusted probabilities of exceeding the ECB's inflation aim and of seeing deflation over the medium term have been low on average.
    Keywords: inflation density, inflation risk premium, objective probability
    JEL: C22 C58 G12 E31 E44
    Date: 2022–07
  4. By: Mike Kraehenbuehl; Joerg Osterrieder
    Abstract: This study examines the weak form of the efficient market hypothesis for Bitcoin using a feedforward neural network. Due to the increasing popularity of cryptocurrencies in recent years, the question has arisen, as to whether market inefficiencies could be exploited in Bitcoin. Several studies we refer to here discuss this topic in the context of Bitcoin using either statistical tests or machine learning methods, mostly relying exclusively on data from Bitcoin itself. Results regarding market efficiency vary from study to study. In this study, however, the focus is on applying various asset-related input features in a neural network. The aim is to investigate whether the prediction accuracy improves when adding equity stock indices (S&P 500, Russell 2000), currencies (EURUSD), 10 Year US Treasury Note Yield as well as Gold&Silver producers index (XAU), in addition to using Bitcoin returns as input feature. As expected, the results show that more features lead to higher training performance from 54.6% prediction accuracy with one feature to 61% with six features. On the test set, we observe that with our neural network methodology, adding additional asset classes, no increase in prediction accuracy is achieved. One feature set is able to partially outperform a buy-and-hold strategy, but the performance drops again as soon as another feature is added. This leads us to the partial conclusion that weak market inefficiencies for Bitcoin cannot be detected using neural networks and the given asset classes as input. Therefore, based on this study, we find evidence that the Bitcoin market is efficient in the sense of the efficient market hypothesis during the sample period. We encourage further research in this area, as much depends on the sample period chosen, the input features, the model architecture, and the hyperparameters.
    Date: 2022–06
  5. By: Béatrice BOULU-RESHEF; Catherine BRUNEAU; Maxime NICOLAS; Thomas RENAULT
    Keywords: , Investor sentiment, Efficient market hypothesis, Natural language, Emojis, Social media, Experimental finance, Behavioral finance.
    Date: 2022
  6. By: Jozef Barunik; Matej Nevrla
    Abstract: We propose a new model of asset returns with common factors that shift relevant parts of the stock return distributions. We show that shocks to such non-linear common movements in the panel of firm's idiosyncratic quantiles are priced in the cross-section of the US stock returns. Such risk premium is not subsumed by the common volatility, tail beta, downside beta, as well as other popular risk factors. Stocks with high loadings on past quantile risk in the left tail earn up to an annual five-factor alpha 7.4\% higher than stocks with low tail risk loadings. Further, we show that quantile factors have predictive power for aggregate market returns.
    Date: 2022–08
  7. By: Dimitris Christelis (University of Glasgow, CSEF, CFS, CEPR and Netspar); Dimitris Georgarakos (European Central Bank and CFS); Tullio Jappelli (Università di Napoli Federico II, CSEF, CFS, CEPR and Netspar); Geoff Kenny (European Central Bank)
    Abstract: We use new euro area representative data from the Consumer Expectations Survey (CES) to elicit household-specific propensities to invest and consume out of positive wealth shocks. Using a randomized assignment of hypothetical lottery gains ranging from 5,000 to 50,000 euros and a realistic menu of consumption, saving and asset choices, we estimate the causal effect of wealth shocks on risky asset ownership and conditional asset shares. Wealth shocks have a positive effect on stockholding (about a 10 percentage points increase for the largest wealth shock). The majority of households in the sample do not participate in the stock market, even after a large increase in wealth. The conditional asset share invested in stocks does not depend on the size of wealth shocks, with the small exception of very high values of the latter, for which the conditional risky asset share slightly increases. This result is consistent with the notion that preferences are characterized by constant relative risk aversion for the vast majority of risky asset investors.
    Keywords: Household finance; Stock market participation; Risk aversion; Consumer Expectations Survey.
    JEL: D14 G11 G51
    Date: 2022–09–13
  8. By: Ozili, Peterson K
    Abstract: Decentralized finance is financial services offered on a public blockchain over the internet. This paper reviews the decentralized finance (DeFi) research and development around the world. The findings of the literature review are that decentralized finance offers many benefits such as broadening financial inclusion; encouraging permission-less innovation; eliminating the need for intermediaries; ensuring the immutability of transactions; censorship resistance and making cross-border transactions cheaper. The associated risks include execution risk in smart contracts, legal liability risk, data theft risk, interconnectedness risk, external data risk, and greater propensity for illicit activity using DeFi applications. The review of existing DeFi research show that there are few studies on DeFi, and a large number of DeFi research studies are non-empirical studies. Most studies hold a positive view about DeFi. They emphasize the benefits of DeFi in great depth but the challenges of DeFi were not analysed in great depth, and there are no critical studies on DeFi. Observations on DeFi developments from around the world show that there is growing interest in decentralized finance in Europe, U.S., Asia and Oceania. There are concerns that regulating decentralized finance can impede growth in decentralized finance markets in Asia. There are also concerns that banning crypto assets can hinder the growth of decentralized finance in African countries where regulators do not fully permit blockchain-enabled cryptocurrencies. Several policy issues associated with DeFi are discussed. Areas for further research are provided to advance the literature on decentralized finance.
    Keywords: decentralized finance, DeFi, blockchain, ethereum, cryptocurrency, distributed ledger technology, protocol, token, total valued locked, smart contract, digital currency, literature review.
    JEL: G21 G24 G28 O31 O38
    Date: 2022
  9. By: Shah, Anand; Bahri, Anu
    Abstract: This study presents stylized facts of the fungible tokens/currencies (MANA/USD and SAND/USD) in the Metaverses (Decentraland and The Sandbox). Metaverse currency exchange rate market exhibits very high conditional volatility, albeit no leverage effect, less impact of the real-world crisis (Global Lockdown due to COVID 19 pandemic) and low correlation with either cryptocurrency index (CCi30) or real-world equity index (S&P 500). Surprisingly, MANA and SAND – fungible tokens/ currencies in different Metaverses exhibit significant and increasing correlation between each other. The relative market efficiency of Metaverse currency market is comparable to that observed in the cryptocurrency and equity markets in the real-world.
    Keywords: Metanomics, Metaverse, Fungible Tokens, Cryptocurrency, Non-Fungible Tokens (NFTs), Blockchain, Adaptive Market Hypothesis, Dynamic Conditional Correlation
    JEL: G01 G11 G14 G32
    Date: 2022–09–01
  10. By: Georgios Alexopoulos (University of Peloponnese, Paris)
    Abstract: This paper studies the value of ECB?s announcement and the impact on Stock and Credit Default Swaps Market during 2008?2018.We examine the relationship between ECB announcements, and systematic risk and unsystematic risk of 29 European countries? financial markets through the CAPM regression. Those 29 countries divided into 3 clusters of liquid markets, accordingly the experienced stress during the sovereign debt crisis and their Liquidity Coverage Ratio (LCR). The results indicate that ECB?s announcements tend to show more impact on stock markets than CDS markets especially in 1st cluster of liquid market. Furthermore, these two types of financial markets in 29 European countries exhibit more significant market reaction to Financial Sector news and Money Market news while Financial Stability news and Monetary Policy bring more risk and volatility to 2 and 3 cluster of liquid markets. We found that there is a 3 clusters of liquid markets so that in turn reshapes an unequal distribution of systemic risk and help the spread of a financial crisis. The results also reveal financial markets of Finland, Sweden, Austria, Ireland, Spain and Turkey take on more risk and volatility than other sample countries when ECB announcements published.
    Keywords: European Central Bank, Investment, Monetary Policy, Announcements
    JEL: G21 O11 E17
    Date: 2022–07
  11. By: Pavel Ciaian; Andrej Cupák (National Bank of Slovakia); Pirmin Fessler; d’Artis Kancs
    Abstract: Individuals invest in Environmental-Social-Governance (ESG)-assets not only because of (higher) expected returns but also driven by ethical and social considerations. Less is known about ESG-conscious investor subjective beliefs about crypto-assets and how these compare to traditional assets. Controversies surrounding the ESG footprint of certain crypto-asset classes – mainly on grounds of their energy-intensive crypto mining – offer a potentially informative object of inquiry. Leveraging a unique representative household finance survey for the Austrian population, we examine whether investors’ environmental and social preferences can explain cross-sectional differences in individual portfolio exposure to crypto-assets. We find a strong association between investors’ environmental and social preferences and the crypto-investment exposure but no significant relationship for the benchmarks of traditional asset classes such as bonds and shares.
    JEL: D14 G11 G41
    Date: 2022–09
  12. By: Nicholas Garvin (Reserve Bank of Australia); Samuel Kurian (Reserve Bank of Australia); Mike Major (Reserve Bank of Australia); David Norman (Reserve Bank of Australia)
    Abstract: Macrofinancial stress testing is a tool to help policymakers better understand the key systemic vulnerabilities in a financial system. The Reserve Bank of Australia's (RBA) macrofinancial bank stress testing model is an example of this, enabling the RBA to analyse potential financial risks to Australia's banking sector, such as those arising during the COVID-19 pandemic. The model projects how economic shocks may influence a bank's profitability, dividends, loan growth and capital position, primarily using decision rules and accounting identities that are uniformly applied to profit and balance sheet data for the nine largest banks operating in Australia. It is designed with a focus on understanding systemic vulnerabilities and a philosophy of prioritising transparency over complexity. The key advantages of this model are its ability to quickly produce estimates of the capital loss in response to various macroeconomic scenarios, model various forms of contagion across banks, and allow the modeller to undertake 'reverse' stress tests. The paper sets out the key features of this model, how it was used during the past two years and the areas in which further work is required.
    Keywords: banks; stress testing; Australia
    JEL: E02 F01 G21
    Date: 2022–09

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