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on Financial Markets |
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Issue of 2010‒08‒14
six papers chosen by |
| By: | Atakan Yalcýn (Koc University); Nuri Ersahin (Koc University) |
| Abstract: | This paper tests whether the conditional CAPM accurately prices assets utilizing data from the Istanbul Stock Exchange (ISE) over the time period from February 1997 to April 2008. In our empirical analysis, we closely follow the methodology introduced in Lewellen and Nagel (2006). Our results show that the conditional CAPM fairs no better than the static counterpart in pricing assets. Although market betas do vary significantly over time, the intertemporal variation is not nearly large enough to drive average conditional alphas to zero. |
| Keywords: | Conditional CAPM |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1025&r=fmk |
| By: | Paolo Angelini (Bank of Italy); Giovanni Guazzarotti (Bank of Italy) |
| Abstract: | Recent theoretical papers suggest that high uncertainty about firms’ economic prospects can explain delays in the adjustment of their stock prices to economic news. Using analyst forecast revisions and earnings announcements as proxies of news, we find mixed evidence in support of this hypothesis. We confirm that stocks of firms whose prospects are highly uncertain display a relatively large delayed price reaction (so-called continuation) after the release of news, but we argue that this evidence does not necessarily imply a slower adjustment speed. Indeed, for these stocks the immediate reaction to news is also relatively strong. In fact, the magnitude of the delayed price reaction (the price continuation) depends both on the degree of price sluggishness and on the “scale” of the news hitting the stock. We therefore consider both the delayed and immediate responses, and compute measures of adjustment speed that do not depend on the “scale” of the news. We then compare these measures across portfolios of stocks characterized by different degrees of uncertainty. Our findings indicate that: (i) stock prices characterized by high uncertainty tend to adjust to bad news more sluggishly than those characterized by low uncertainty; (ii) the opposite holds true in the case of good news; (iii) stock prices characterized by high uncertainty tend to adjust to bad news more sluggishly than to good news. Previous empirical literature focuses on price continuation patterns but neglects to control for the “scale” of the news, reaching erroneous conclusions. |
| Keywords: | stock price continuation, price adjustment speed, news, earnings announcements, analysts forecasts, post-earnings announcement drift, post-analyst forecast revisions drift, managers incentives |
| JEL: | G11 G14 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_765_10&r=fmk |
| By: | Vitali Alexeev (Department of Economics, University of Guelph, Canada.); Francis Tapon (Department of Economics, University of Guelph, Canada.) |
| Abstract: | We believe that in order to test for weak form efficiency in the market a vast pool of individual stocks must be analyzed rather than a stock market index. In this paper, we use a model-based bootstrap to generate a series of simulated trials and apply a modified chart pattern recognition algorithm to all stocks listed on the Toronto Stock Exchange (TSX). We compare the number of patterns detected in the original price series with the number of patterns found in the simulated series. By simulating the price path we eliminate specific time dependencies present in real data, making price changes purely random. Patterns, if consistently identified, carry information which adds value to the investment process, however, this informativeness does not guarantee profitability. We draw conclusions on the relative efficiency of some sectors of the economy. Although, we fail to reject the null hypothesis of weak form efficiency on the TSX, some sectors of the Canadian economy appear to be less efficient than others. In addition, we find negative dependency of pattern frequencies on the two moments of return distributions, variance and kurtosis. |
| Keywords: | Market efficiency, weak form market efficiency, Canada, Toronto Stock Exchange |
| JEL: | G14 C22 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:gue:guelph:2010-02.&r=fmk |
| By: | Chen Zhou |
| Abstract: | This paper studies why the micro-prudential regulations fails to maintain a stable financial system by investigating the impact of micro-prudential regulation on the systemic risk in a cross-sectional dimension. We construct a static model for risk-taking behavior of financial institutions and compare the systemic risks in two cases with and without a capital requirement regulation. In a system with a capital requirement regulation, the individual risk-taking of the financial institutions are lower, whereas the systemic linkage within the system is higher. With a proper systemic risk measure combining both individual risks and systemic linkage, we find that, under certain circumstance, the systemic risk in a regulated system can be higher than that in a regulation-free system. We discuss a sufficient condition under which the systemic risk in a regulated system is always lower. Since the condition is based on comparing balance sheets of all institutions in the system, it can be verified only if information on risk-taking behaviors and capital structures of all institutions are available. This suggests that a macro-prudential framework is necessary for establishing banking regulations towards the stability of the financial system as a whole. |
| Keywords: | Banking regulation; systemic risk; capital requirement; macro-prudential regulation |
| JEL: | G28 G32 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:256&r=fmk |
| By: | Scott, Kenneth E. |
| Abstract: | This necessarily simplified account is divided into 3 stages: first, a look at the key factors that led to the increasing riskiness of US home mortgages; second, how those risks were transmitted as securities from US housing lenders to institutional investors around the globe; and third, how those risks led to huge losses and created a credit crunch that moved the impact from the financial economy to the real economy. The goal is to lay a factual foundation for deriving the lessons that ought to be taken away from this very expensive experience. |
| Keywords: | Technology and Industry |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:reg:wpaper:30&r=fmk |
| By: | Gorton, Gary |
| Abstract: | All bond prices plummeted (spreads rose) during the financial crisis, not just the prices of subprimerelated bonds. These price declines were due to a banking panic in which institutional investors and firms refused to renew sale and repurchase agreements (repo) – short?term, collateralized, agreements that the Fed rightly used to count as money. Collateral for repo was, to a large extent, securitized bonds. Firms were forced to sell assets as a result of the banking panic, reducing bond prices and creating losses. There is nothing mysterious or irrational about the panic. There were genuine fears about the locations of subprime risk concentrations among counterparties. This banking system (the “shadow” or “parallel” banking system) - repo based on securitization - is a genuine banking system, as large as the traditional, regulated and banking system. It is of critical importance to the economy because it is the funding basis for the traditional banking system. Without it, traditional banks will not lend and credit, which is essential for job creation, will not be created. |
| Keywords: | Technology and Industry |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:reg:wpaper:41&r=fmk |