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on Financial Markets |
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Issue of 2015‒05‒09
six papers chosen by |
| By: | Bell, Peter N |
| Abstract: | Tail hedging is a portfolio management strategy meant to reduce the risk of large losses. For an investor who holds a stock market index fund, the strategy entails buying out of the money put options on the index. Research suggests the strategy works well in practice and I explore the returns to tail hedging in a simple theoretical model. I calculate descriptive statistics for the returns to tail hedging when the stock price has either a normal or fat tailed distribution. I find that tail hedging is rewarding when stock prices have fat tails. |
| Keywords: | Portfolio management, tail option, fat tail, simulation. |
| JEL: | B50 C63 G11 G32 |
| Date: | 2015–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:62160&r=fmk |
| By: | Kandrac, John (Board of Governors of the Federal Reserve System (U.S.)); Schlusche, Bernd (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | In this paper, we document that mortgage-backed securities (MBS) held by the Federal Reserve exhibit faster principal prepayment rates than MBS held by the rest of the market. Next, we show that this stylized fact persists even when controlling for factors that affect prepayment behavior, and thus determine the MBS that are delivered to the Federal Reserve. After ruling out several potential explanations for this result, we provide evidence that points to an agency problem in the secondary market for MBS, which has not previously been documented, as the most likely explanation for the abnormal prepayment behavior of Federal Reserve-held MBS. This agency problem--a key feature of the MBS market--arises when originators of mortgages that underlie the MBS no longer share in the prepayment risk of the securities, thereby increasing incentives to solicit refinancing activity. Therefore, Federal Reserve MBS holdings acquired from originators as a result of large-scale asset purchases can help stimulate economic activity through a so-called "solicited refinancing channel." Finally, we provide an estimate of the additional refinancing activity resulting from the solicited refinancing channel in the years after the Federal Reserve's first MBS purchase program, demonstrating that this channel conveyed savings on monthly mortgage payments to homeowners. |
| Keywords: | Federal Reserve; LSAP; Monetary policy; QE; mortgage; mortgage-backed securities; prepayment rates |
| JEL: | E52 G01 G21 R38 |
| Date: | 2015–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-27&r=fmk |
| By: | Sehgal, Sanjay; Gupta, Priyanshi; Deisting, Florent |
| Abstract: | In this paper, we examine the financial integration process amongst 17 EMU countries from January 2002 to June 2013 over a normal period as well as for the Global Financial Crisis (GFC) and Eurozone Debt Crisis (EDC) periods. We classify the economies in three groups (A, B and C) based on their GDP to examine whether the economic size influences financial integration. Seven indicators are used for the purpose, namely, Beta Convergence, Sigma Convergence, Variance Ratio, Asymmetric DCC, Dynamic Cointegration, Market Synchronisation Measure and Common Components Approach. The results suggest that large sized EMU economies (termed as Group A) exhibit strong financial integration. Moderate financial integration is observed for middle-sized EMU economies with old membership (termed as Group B). Small sized economies (termed as Group C) economies seemed to be least integrated within the EMU stock market system. The findings further suggest presence of contagion effects as one moves from normal to crisis periods, which are specifically stronger for more integrated economies of Group A. We recommend institutional, regulatory and other policy reforms for Group B and especially Group C to achieve higher level of integration. |
| Keywords: | EMU, Global Financial crisis, Eurozone Debt Crisis, Stock Market integration, Time-varying financial integration, Beta Convergence, Sigma Convergence, Variance Ratio, Asymmetric DCC, Rolling Cointegration, Carhart four factor model, Markov Regime Switching Model |
| JEL: | C22 E44 F36 G14 G15 |
| Date: | 2014–10–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64078&r=fmk |
| By: | Simon Hagemann; Christoph Weber (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen) |
| Abstract: | This paper presents an analytical benchmark model for national intraday adjustment needs under consideration of fundamental drivers, market concentration and portfolio internal netting. The benchmark model is used to calculate the intraday market outcomes if (i) large and small players as well as transmissions operators trade and (ii) only large players and transmission system operators trade. Transaction costs may prevent the competitive fringe from intraday market participation. The theoretical national intraday trading volumes are calculated with market data from three European countries with auction-based intraday markets (Italy, Portugal, Spain) and four countries with continuous intraday markets (Denmark, France, Germany, United Kingdom). The model results allow two main conclusions: The competitive fringe is not trading on exchanges in Denmark and France but in Germany. The second conclusion is that the high observed volumes in auction-based intraday markets cannot be explained by fundamentals or the auction-based design but are mainly caused by market peculiarities. The same result applies to the UK. |
| Keywords: | Renewables market integration, Liquidity modeling, continuous and auction-based intraday markets |
| JEL: | L94 Q41 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:dui:wpaper:1503&r=fmk |
| By: | Huai-Long Shi (ECUST); Zhi-Qiang Jiang (ECUST); Wei-Xing Zhou (ECUST) |
| Abstract: | This paper reexamines the profitability of loser, winner and contrarian portfolios in the Chinese stock market using monthly data of all stocks traded on the Shanghai Stock Exchange and Shenzhen Stock Exchange covering the period from January 1997 to December 2012. We find evidence of short-term and long-term contrarian profitability in the whole sample period when the estimation and holding horizons are 1 month or longer than 12 months and the annualized returns of contrarian portfolios increases with the estimation and holding horizons. We perform subperiod analysis and find that the long-term contrarian effect is significant in both bullish and bearish states while the short-term contrarian effect disappears in bullish states. We compare the performance of contrarian portfolios based on different grouping manners in the estimation period and unveil that decile grouping outperforms quintile grouping and tertile grouping, which is more evident and robust in the long run. Generally, loser portfolios and winner portfolios have positive returns and loser portfolios perform much better than winner portfolios. Both loser and winner portfolios in bullish states perform better than those in the whole sample period. In contrast, loser and winner portfolios have smaller returns in bearish states in which loser portfolio returns are significant only in the long term and winner portfolio returns become insignificant. These results are robust to the one-month skipping between the estimation and holding periods and for the two stock exchanges. Our findings show that the Chinese stock market is not efficient in the weak form. These findings also have obvious practical implications for financial practitioners. |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1505.00328&r=fmk |
| By: | J. L. Subias |
| Abstract: | The present paper analyses the formal parallelism existing between the laws of thermodynamics and some economic principles. Based on previous works, we shall show how the existence in Economics of principles analogous to those in thermodynamics involves the occurrence of economic events that remind of well-known phenomenological thermodynamic paradigms (i.e., the magnetocaloric effect and population inversion). We shall also show how the phase transition and renormalization theory provides a natural framework to understand and predict trend changes in stock markets. Finally, current negotiation strategies in financial markets are briefly reviewed. |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1505.00471&r=fmk |