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on Financial Markets |
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Issue of 2022‒10‒10
eleven papers chosen by |
| By: | Couaillier, Cyril; Reghezza, Alessio; Rodriguez d’Acri, Costanza; Scopelliti, Alessandro |
| Abstract: | This paper investigates the impact of the capital relief package adopted to support euro area banks at the outbreak of the COVID-19 pandemic. By leveraging confidential supervisory and credit register data, we uncover two main findings. First, capital relief measures support banks' capacity to supply credit to firms. Second, not all measures are equally successful. Banks adjust their credit supply only if the capital relief is permanent or implemented through established processes that foresee long release periods. By contrast, discretionary relief measures are met with limited success, possibly owing to the uncertainty surrounding their capital replenishment path. Moreover, requirement releases are more effective for banks with a low capital headroom over requirements and do not trigger additional risk-taking. These findings provide key insights on how to design effective bank capital requirement releases in crisis time. JEL Classification: E61, G01, G18, G21 |
| Keywords: | bank capital requirements, coronavirus, countercyclical policy, credit register, macroprudential policy |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222720&r= |
| By: | Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Jacobus Nel (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Joshua Nielsen (Boulder Investment Technologies, LLC, 1942 Broadway Suite 314C, Boulder, CO ,80302, USA) |
| Abstract: | We use the multi-scale Log-Periodic Power Law Singularity (LPPLS) confidence indicator approach to detect both positive and negative bubbles at short-, medium- and long-run for the stock markets of the BRICS countries. We were able to detect major crashes and rallies in the five stock markets over 2nd week of February, 1999 to 2nd week of September, 2020. We also observed similar timing of strong (positive and negative) LPPLS indicator values across the countries, suggesting interconnectedness of the extreme movements in these stock markets. Then, we utilize impulse responses obtained from the local projection method (LPM) framework to capture the effect of US monetary policy shocks on a specific-type of bubble of a particular equity market of the BRICS bloc, by controlling for lagged values of the category of bubble under consideration of all the five countries, due to the synchronicity of bubbles. In general, the effect of US monetary policy shocks on the six bubble indicators for each country is limited, with strong positive impact observed under the medium-term negative bubble indicator of Brazil, China and South Africa. Given the findings, associated policy implications are discussed. |
| Keywords: | Multi-Scale Bubbles, Local Projection Method, US Monetary Policy, BRICS Countries |
| JEL: | C22 E52 G15 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:202243&r= |
| By: | Yang Bai |
| Abstract: | Using new annual data of 16 developed countries across bond, equity, and housing markets, I study the return predictability using the payout-price ratios, i.e., coupon price, dividend price, and rent price. None of the 48 country-asset combinations shows consistent in-sample and out-of-sample performance with positive utility gain for the mean-variance investor. Only 3 (4/2) countries show positive economic gains in their equity (housing/bond) markets. The return predictability for the representative agents' risky asset portfolios and wealth portfolios is even weaker, suggesting that timing the investment return of a country using payout-price ratios will not make the investors better off. The predictive regressions based on the VAR analysis by Cochrane (2008, 2011) suggest that 14 (5) countries have predictable payout growth in the equity (housing) markets, ex., the dividend price predicts the dividend growth in the US. The VAR simulation using data from all the countries does not reject the null that the dividend growth is predictable. This paper presents firm evidence against the return predictability based on payout ratios. |
| Date: | 2022–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2209.00121&r= |
| By: | Andrada Bilan; Yalin Gündüz |
| Abstract: | We study the response of bond spreads to a liquidity supply shock in the credit default swap (CDS) market. Our identification strategy exploits the exogenous exit of a large dealer from the single-name CDS market as well as granular data on CDS transactions and bond portfolio holdings of German investors. Following the shock, CDS market liquidity declines and bond spreads increase, especially for the reference firms intermediated by the dealer. Individual portfolio data indicate hedging motives as a mechanism: as CDS insurance on their bond holdings becomes costlier, investors offload the bonds. Our results therefore show that frictions in derivative markets affect the underlying securities, which can raise firms' cost of capital. |
| Keywords: | Credit default swaps, dealer markets, bonds markets, credit risk, Depository Trust and Clearing Corporation (DTCC) |
| JEL: | G11 G18 G20 G28 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2022-09&r= |
| By: | Karen K. Lewis; Edith Liu |
| Abstract: | When available financial securities allow investors to optimally diversify risk across countries, standard theory implies that exchange rates should reflect this behavior. However, exchange rates observed in the data deviate from these predictions. In this paper, we develop a framework to value the welfare costs of these exchange rate wedges, as disciplined by asset returns. This framework applies to a general class of asset pricing and exchange rate models. We further decompose the value of these wedges into components, showing that the ability of goods markets to respond to financial markets through exchange rate adjustment has significant implications for welfare. |
| JEL: | F30 F31 F41 G10 G15 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30422&r= |
| By: | Xiaochuan Pang; Shushang Zhu; Xueting Cui; Jiali Ma |
| Abstract: | We investigate the portfolio selection problem against the systemic risk which is measured by CoVaR. We first demonstrate that the systemic risk of pure stock portfolios is essentially uncontrollable due to the contagion effect and the seesaw effect. Next, we prove that it is necessary and sufficient to introduce options to make the systemic risk controllable by the correlation hedging and the extreme loss hedging. In addition to systemic risk control, we show that using options can also enhance return-risk performance. Then, with a reasonable approximation of the conditional distribution of optioned portfolios, we show that the portfolio optimization problem can be formulated as a second-order cone program (SOCP) that allows for efficient computation. Finally, we carry out comprehensive simulations and empirical tests to illustrate the theoretical findings and the performance of our method. |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2209.04685&r= |
| By: | Jukonis, Audrius |
| Abstract: | Market participants use leveraged derivatives to gain access to equity market exposure through broker banks. Leverage and interconnectedness via overlapping portfolios of dealer banks can amplify adverse market movements, potentially causing sizeable losses. I propose a model, based on granular data, to simulate losses from a banks’ trading book in case of an adverse market scenario. Following a move in asset prices, banks mark their positions and issue margin calls; some (leveraged) counterparties fail to pay their margins, forcing banks to liquidate their positions causing a pressure on asset prices due to market impact. The impact is amplified because of the leverage and when counterparties are exposed to multiple banks over the same underlying. I employ the model to assess current capital and margin rules in covering risks from broker’s exposure to highly leveraged clients. JEL Classification: C60, G23, G13, G17 |
| Keywords: | EMIR, Initial margin, leverage, market risk, Variation margin |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222722&r= |
| By: | Jacobus Nel (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha, 6708 Pine Street, Omaha, NE 68182, USA); Christian Pierdzioch (Department of Economics, Helmut Schmidt University, Holstenhofweg 85, P.O.B. 700822, 22008 Hamburg, Germany) |
| Abstract: | We analyze whether metrics of climate risks, as captured primarily by changes in temperature anomaly and its stochastic volatility, can predict returns and volatility of 25 commodities, covering the overall historical period of 1258 to 2021. To this end, we apply a higher-order nonparametric causality-in-quantiles test to not only uncover potential predictability in the entire conditional distribution of commodity returns and volatility, but also to account for nonlinearity and structural breaks which exist between commodity returns and the metrics of climate risks. We find that, unlike in the misspecified linear Granger causality tests, climate risks do predict commodity returns and volatility, though the impact on the latter is stronger, in terms of the coverage of the conditional distribution. Insights from our findings can benefit academics, investors, and policymakers in their decision-making. |
| Keywords: | Climate risks, Commodities, Returns and volatility predictions, Higher-order nonparametric causality-in-quantiles test |
| JEL: | C22 C53 Q02 Q54 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:202242&r= |
| By: | Elie Bouri (School of Business, Lebanese American University, Beirut, Lebanon); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Hardik A. Marfatia (Department of Economics, Northeastern Illinois University, BBH 344G, 5500 N. St. Louis Avenue, Chicago, IL 60625, USA); Jacobus Nel (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | We analyse the ability of textual-analysis-based daily proxies of physical (natural disasters and global warming) and transition (US climate policy and international summits) climate risks to predict daily movements in the US housing market over the period 2nd August, 2007 to 29th November, 2019. To this end, we apply a nonparametric causality-in-quantiles test not only to uncover potential predictability in the entire conditional distribution of housing returns and volatility but also to account for nonlinearity and structural breaks which exist between housing returns and climate risk factors. We find that climate risk factors (and the associated uncertainty) do predict housing returns and volatility across the conditional distribution. These results are robust to alternative daily data of aggregate housing prices for the US and ten major metropolitan statistical areas (MSAs). Insights from our findings can benefit academics, investors, and policymakers in their decision-making. |
| Keywords: | Physical and transitional climate risks, US housing returns and volatility, higher-order nonparametric causality-in-quantiles test, natural disasters and global warming, US climate policy and international summits |
| JEL: | C22 C32 Q54 R30 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:202240&r= |
| By: | Viral V. Acharya; Timothy Johnson; Suresh Sundaresan; Tuomas Tomunen |
| Abstract: | We exploit regional variations in exposure to heat stress to study if physical climate risk is priced in municipal and corporate bonds as well as in equity markets. We find that local exposure to damages related to heat stress equaling 1% of GDP is associated with municipal bond yield spreads that are higher by around 15 basis points per annum (bps), the effect being larger for longer-term, revenue-only and lower-rated bonds, and arising mainly from the expected increase in energy expenditures and decrease in labor productivity. Among S&P 500 companies, one standard deviation increase in exposure to heat stress is associated with yield spreads that are higher by around 40 bps for sub-investment grade corporate bonds, with little effect for investment grade bond spreads, and with conditional expected returns on stocks that are higher by around 45 bps. These results are (i) observed robustly only starting in 2013–15, (ii) mostly absent for physical risks other than exposure to heat stress, and (iii) consistent with the class of macroeconomic models where climate change has a direct and large negative impact on aggregate consumption. |
| JEL: | G12 G32 Q54 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30445&r= |
| By: | Financial Markets Department (Bank of Japan) |
| Date: | 2022–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojron:mor220928&r= |