nep-fmk New Economics Papers
on Financial Markets
Issue of 2023‒10‒30
ten papers chosen by
Kwang Soo Cheong, Johns Hopkins University

  1. Can Green Bonds be a Safe Haven for Equity Investors? By Flavin, Thomas; Sheenan, Lisa
  2. Inflation news coverage, expectations and risk premium By Perico Ortiz, Daniel
  3. Mental Models of the Stock Market By Peter Andre; Philipp Schirmer; Johannes Wohlfart
  4. Green Bonds, Conventional Bonds and Geopolitical Risk By Sheenan, Lisa
  5. PAMS: Platform for Artificial Market Simulations By Masanori Hirano; Ryosuke Takata; Kiyoshi Izumi
  6. Borrower Technology Similarity and Bank Loan Contracting By Mingze Gao; Yunying Huang; Steven Ongena; Eliza Wu
  7. U.S. Interest Rates and Emerging Market Currencies: Taking Stock 10 Years After the Taper Tantrum By Nira Harikrishnan; Benjamin Silk; Emre Yoldas
  8. Quantitative Easing and the Functioning of the Gilts Repo Market By Mahmoud Fatouh; Simone Giansante; Steven Ongena
  9. Asymmetric Spillovers in ASEAN Bond Markets By Yahya, Muhammad; Luo, Tianqi; Uddin , Gazi Salah; Park, Donghyun; Tian, Shu; Jayasekera, Ranadeva
  10. Temporary Border Controls and the Stock Market: Evidence from the Schengen Area By Adam Levai; Jean-François Maystadt

  1. By: Flavin, Thomas; Sheenan, Lisa
    Abstract: We investigate if green bonds can act as a safe-haven asset for equity investors by analysing their relationship with stocks and other alternative safe havens, namely sovereign bonds and gold. Safe havens are defined as assets that exhibit zero or negative comovement with equity during a stock market downturn. We analyse the interrelationships between the asset classes using the Marginal Expected Shortfall of Acharya et al. (2017) and by comparing the regime-dependent GIRFs from a Markovswitching VAR model. Our results suggest that green bonds are not safe haven assets for equity investors but rather show positive comovement during periods of market stress. The sovereign bond is the most consistent in delivering diversification benefits across market conditions, while gold acts as a safe-haven asset during all regimes except during rare periods of extreme turbulence.
    Keywords: Green bonds, Contagion, Financial crisis, Markov-switching VAR
    JEL: C15 C34 Q56
    Date: 2023
  2. By: Perico Ortiz, Daniel
    Abstract: This paper investigates the effects of inflation news coverage on market-based inflation expectations and outcomes in the inflation-protected securities market. We employ a large corpus of news headlines from top U.S. newspapers and market data on the U.S. yield curve and inflation-protected securities. Our results indicate that news coverage, particularly regarding specific topics, exerts a significant influence on inflation compensation, expectations, and risk premiums. We observe that the impact of news diminishes as the maturity increases and varies across different news topics. This study contributes to the understanding of media influence on financial markets, specifically in shaping inflation expectations.
    Keywords: Inflation, expectations, risk premium, newspapers, term structure
    JEL: C22 D83 D84 E13 E31 E65
    Date: 2023
  3. By: Peter Andre (SAFE and Goethe University Frankfurt); Philipp Schirmer (University of Bonn); Johannes Wohlfart (University of Copenhagen)
    Abstract: Investors’ return expectations are pivotal in stock markets, but the reasoning behind these expectations remains a black box for economists. This paper sheds light on economic agents’ mental models – their subjective understanding – of the stock market, drawing on surveys with the US general population, US retail investors, US financial professionals, and academic experts. Respondents make return forecasts in scenarios describing stale news about the future earnings streams of companies, and we collect rich data on respondents’ reasoning. We document three main results. First, inference from stale news is rare among academic experts but common among households and financial professionals, who believe that stale good news lead to persistently higher expected returns in the future. Second, while experts refer to the notion of market effi-ciency to explain their forecasts, households and financial professionals reveal a neglect of equilibrium forces. They naively equate higher future earnings with higher future returns, neglecting the offsetting effect of endogenous price adjustments. Third, a se-ries of experimental interventions demonstrate that these naive forecasts do not result from inattention to trading or price responses but reflect a gap in respondents’ mental models – a fundamental unfamiliarity with the concept of equilibrium.
    JEL: D83 D84 G11 G12 G41 G51 G53
    Date: 2023–10
  4. By: Sheenan, Lisa
    Abstract: This paper analyses linkages between green, conventional (corporate and sovereign) bond markets and geopolitical risk in high and low volatility periods between 2014 and 2022 using a Markov-switching VAR (MS-VAR) framework. The results indicate that geopolitical risk significantly affects green bonds in periods of high volatility, but does not do so to conventional bond markets. Green bond markets are significantly affected by sovereign and corporate bonds in both regimes, with stronger effects from corporate bonds evident in high volatility periods. This suggests that green bonds behave differently to conventional bonds and may be more susceptible to geopolitical risk and contagion.
    Keywords: Green bonds, Geopolitical Risk, Markov Switching
    JEL: G10 G11 C34
    Date: 2023
  5. By: Masanori Hirano; Ryosuke Takata; Kiyoshi Izumi
    Abstract: This paper presents a new artificial market simulation platform, PAMS: Platform for Artificial Market Simulations. PAMS is developed as a Python-based simulator that is easily integrated with deep learning and enabling various simulation that requires easy users' modification. In this paper, we demonstrate PAMS effectiveness through a study using agents predicting future prices by deep learning.
    Date: 2023–09
  6. By: Mingze Gao (University of Sydney); Yunying Huang (University of Sydney); Steven Ongena (University of Zurich; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Eliza Wu (University of Sydney)
    Abstract: Do banks accumulate knowledge about corporate technology, and does it matter for their lending? To answer this question, we combine corporate innovation with syndicated loan data. We find that loans to firms sharing similar technologies with banks’ prior borrowers obtain lower loan spreads. We can rule out product market competition, the value of their technology and ability to innovate, and/or numerous other firm characteristics as alternative explanations. By exploiting the adoption of intellectual property protection laws and the consummation of bank mergers and acquisitions, we can show that shocks to banks’ technology knowledge causally affect loan spreads.
    Keywords: technology similarity, loan contracting, matching model, relationship lending
    JEL: G21 G32 O33
    Date: 2023–09
  7. By: Nira Harikrishnan; Benjamin Silk; Emre Yoldas
    Abstract: In 2013, a shift in expectations of market participants for the timing of the tapering of the Federal Reserve's asset purchases, and its ramifications for normalization of U.S. monetary policy, led to sharp increases in longer-term U.S. Treasury yields and volatility in broader financial markets. The episode came to be known as the "taper tantrum" because the strong market reaction came in response to Federal Reserve communications that were largely consistent with market analysts' expectations.
    Date: 2023–10–04
  8. By: Mahmoud Fatouh (University of Essex; Bank of England); Simone Giansante (University of Palermo); Steven Ongena (University of Zurich; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))
    Abstract: We assess the impact of quantitative easing (QE) on the provisioning of liquidity and the pricing in the UK gilt repo market. We compare the behaviour of banks that received reserves injections via QE operations to other similar banks in terms of the amounts lent and pricing. We also investigate whether leverage ratio capital requirements affected the amounts of liquidity supplied by broker-dealers and the spreads they charged. We find that QE interventions can improve liquidity provision, and that their size determines how this is attained. QE can also reduce the cost of borrowing in the repo market, unless it was associated with spikes in demand for liquidity. Our findings further indicate that the leverage ratio supports the provision of liquidity during stress, as it prompts banks to become less leveraged. However, the larger capital charge repo transactions attract under the leverage ratio requirement is reflected in their spreads.
    Keywords: Monetary policy, quantitative easing, gilt repo market, leverage ratio
    JEL: G10 G21 G23
    Date: 2023–09
  9. By: Yahya, Muhammad (Inland Norway University of Applied Sciences); Luo, Tianqi (Trinity College Dublin); Uddin , Gazi Salah (Linköping University); Park, Donghyun (Linköping University); Tian, Shu (Asian Development Bank); Jayasekera, Ranadeva (Trinity College Dublin)
    Abstract: The financial markets of members of the Association of Southeast Asian Nations (ASEAN) have become increasingly integrated with regional and global markets. ASEAN economies also exhibit strong trade connectedness and interdependence with regional and global business cycles. Such connectedness can foster the spread of global shocks to ASEAN members and distress local financial markets. Global shocks, such as financial crises or commodity price changes, can have asymmetric and nonlinear effects on other financial and commodity markets around the world. This paper aims to estimate and evaluate the intensity and directionality of bond market connectedness between ASEAN and major regional and global markets. Furthermore, we aim to identify factors impacting the interconnectedness dynamics among these markets. This study derives an uncertainty connectedness measure grounded on the attributes of static and dynamic dependence frameworks and empirically evaluates its role in transmitting or receiving shocks based on various information spillover and contagion channels. The findings of this study have important implications for market participants, regulators, and policymakers.
    Keywords: asymmetric spillover; uncertainty; connectedness; ASEAN
    JEL: E52 E58 F42
    Date: 2023–10–10
  10. By: Adam Levai (Luxembourg Institute of Socio-Economic Research (LISER)); Jean-François Maystadt (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper evaluates the impact of temporary border controls on the stock market. We construct a new dataset on the reintroduction of border controls by collecting data from official documents. We use these data in two complementary research designs. First, we conduct a quasi-experimental event study using the first refugee-induced border control, which occurred in Germany in September 2015. Second, we conduct a Schengen area analysis covering all border controls between 2006 and 2016, using both a difference-in-difference and a synthetic control method. In both analyses, we find a small negative and short-lived effect on daily stock returns, as well as an increase in their short-lived volatility. These effects are driven by medium and large firms, which are more likely to be involved in cross-border activities. Overall, we find that these border controls initially mildly worsen market expectations, but the market does not overreact by interpreting them as a sign of a possible collapse of the Schengen Agreement.
    Keywords: Borders, Border Controls, Schengen, Stock Market, Refugees
    JEL: F20 F55 G14 O52
    Date: 2023–09–10

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