nep-fmk New Economics Papers
on Financial Markets
Issue of 2023‒09‒18
four papers chosen by
Kwang Soo Cheong, Johns Hopkins University

  1. Predicting Financial Crises: The Role of Asset Prices By Tristan Hennig; Mr. Plamen K Iossifov; Mr. Richard Varghese
  2. How do Financial Crises Redistribute Risk? By Kris James Mitchener; Angela Vossmeyer
  3. Portfolio Selection via Topological Data Analysis By Petr Sokerin; Kristian Kuznetsov; Elizaveta Makhneva; Alexey Zaytsev
  4. Contagion Effects of the Silicon Valley Bank Run By Dong Beom Choi; Paul Goldsmith-Pinkham; Tanju Yorulmazer

  1. By: Tristan Hennig; Mr. Plamen K Iossifov; Mr. Richard Varghese
    Abstract: We explore the early warning properties of a composite indicator which summarizes signals from a range of asset price growth and asset price volatility indicators to capture mispricing of risk in asset markets. Using a quarterly panel of 108 advanced and emerging economies over 1995-2017, we show that the combination of rapid asset price growth and low asset price volatility is a good predictor of future financial crises. Elevated levels of our indicator significantly increase the probability of entering a crisis within the next three years relative to normal times when the indicator is not elevated. The indicator outperforms credit-based early warning metrics, a result robust to prediction horizons, methodological choices, and income groups. Our results are consistent with the idea that measures based on asset prices can offer critical information about systemic risk levels to policymakers.
    Keywords: Early Warning Indicator; ROC; Financial Crises
    Date: 2023–08–04
  2. By: Kris James Mitchener; Angela Vossmeyer
    Abstract: We examine how financial crises redistribute risk, employing novel empirical methods and micro data from the largest financial crisis of the 20th century – the Great Depression. Using balance-sheet and systemic risk measures at the bank level, we build an econometric model with incidental truncation that jointly considers bank survival, the type of bank closure (consolidations, absorption, and failures), and changes to bank risk. Despite roughly 9, 000 bank closures, risk did not leave the financial system; instead, it increased. We show that risk was redistributed to banks that were healthier prior to the financial crisis. A key mechanism driving the redistribution of risk was bank acquisition. Each acquisition increases the balance-sheet and systemic risk of the acquiring bank by 25%. Our findings suggest that financial crises do not quickly purge risk from the system, and that merger policies commonly used to deal with troubled financial institutions during crises have important implications for systemic risk.
    JEL: C3 E44 G21 N12
    Date: 2023–08
  3. By: Petr Sokerin; Kristian Kuznetsov; Elizaveta Makhneva; Alexey Zaytsev
    Abstract: Portfolio management is an essential part of investment decision-making. However, traditional methods often fail to deliver reasonable performance. This problem stems from the inability of these methods to account for the unique characteristics of multivariate time series data from stock markets. We present a two-stage method for constructing an investment portfolio of common stocks. The method involves the generation of time series representations followed by their subsequent clustering. Our approach utilizes features based on Topological Data Analysis (TDA) for the generation of representations, allowing us to elucidate the topological structure within the data. Experimental results show that our proposed system outperforms other methods. This superior performance is consistent over different time frames, suggesting the viability of TDA as a powerful tool for portfolio selection.
    Date: 2023–08
  4. By: Dong Beom Choi (Seoul National University); Paul Goldsmith-Pinkham (Yale University and NBER); Tanju Yorulmazer (Koç University)
    Abstract: This paper analyzes the contagion effects associated with the failure of Silicon Valley Bank (SVB) and identifies bank-specific vulnerabilities contributing to the subsequent declines in banks’ stock returns. We find that uninsured deposits, unrealized losses in held-to-maturity securities, bank size, and cash holdings had a significant impact, while better-quality assets or holdings of liquid securities did not help mitigate the negative spillovers. Interestingly, banks whose stocks performed worse post SVB also had lower returns in the previous year following Federal Reserve interest rate hikes. The stock market partially anticipated risks associated with uninsured deposit reliance, but did not price in unrealized losses due to interest rate hikes nor risks linked to bank size. While mid-sized banks experienced particular stress immediately after the SVB failure, over time negative spillovers became widespread except for the largest banks.
    Keywords: Contagion, Banking crisis, Bank run, Systemic risk, Interest rate risk, Hidden losses, Held-to-maturity.
    JEL: G01 G21 G14 G28 E58 E43
    Date: 2023–09

This nep-fmk issue is ©2023 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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