|
on Financial Markets |
|
Issue of 2017‒01‒01
eight papers chosen by |
| By: | Harris, Richard (University of Exeter); Stoja, Evarist (University of Bristol); Nguyen, Linh (University of Exeter) |
| Abstract: | We propose new systematic tail risk measures constructed using two different approaches. The first extends the canonical downside beta and co-moment measures, while the second is based on the sensitivity of stock returns to innovations in market crash risk. Both tail risk measures are associated with a significantly positive risk premium after controlling for other measures of downside risk, including downside beta, co-skewness and co-kurtosis. Using these measures, we examine the relevance of the tail risk premium for investors with different investment horizons. |
| Keywords: | Asset pricing; downside risk; tail risk; co-moments; value at risk; systematic risk |
| JEL: | C13 C31 C58 G01 G10 G12 |
| Date: | 2016–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0637&r=fmk |
| By: | Sriya Anbil; Alessio Saretto; Heather Tookes |
| Abstract: | Risk management is the most widely-cited reason that non-financial corporations use derivatives. If hedging programs are effective, then firms using derivatives should have lower credit risk than those that do not. Surprisingly, we find that firms with derivative positions without a hedge accounting designation (typically higher basis risk) have higher CDS spreads than firms that do not hedge at all. We do not find evidence that these non-designated positions are associated with future credit realizations. We examine alternative explanations and find evidence that is consistent with a market penalty for high basis risk positions when overall market conditions are poor. |
| Keywords: | Counterparty credit risk ; Derivatives, futures, and options ; Risk management ; Hedging |
| Date: | 2016–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-100&r=fmk |
| By: | Agarwal, Vikas; Vashishtha, Rahul; Venkatachalam, Mohan |
| Abstract: | Pressure from institutional money managers to generate profits in the short run is often blamed for corporate myopia. Theoretical research suggests that money managers' short term focus stems from their career concerns and greater fund transparency can amplify these concerns. Using a difference-in-differences design around a regulatory shock that increased transparency about fund managers' portfolio choices, we examine whether increased transparency encourages myopic corporate investment behavior. We find that corporate innovation declines following the regulatory shock. Moreover, evidence from mutual fund trading behavior corroborates that these results are driven by increased short-term focus of money managers. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1610&r=fmk |
| By: | Albuquerque de Sousa, J.A.; Beck, T.; van Bergeijk, P.A.G.; van Dijk, M.A. |
| Abstract: | We study the success and failure of 59 newly established (“nascent”) stock markets since 1975 in their first 40 years of activity. Nascent markets differ markedly in their success, as measured by number of listings, market capitalization, and trading activity. Long-term success is in part determined by early success: a high initial number of listings and trading activity are necessary, though not sufficient, conditions for long-term success. Banking sector development at the time of establishment and development of national savings over the life of the stock market are the other two most reliable predictors of success. We find little evidence that structural factors such as country size or legal and political institutions matter. Rather, our results point to an important role of banks, demand factors, and initial success in fostering long-term stock market development. |
| Keywords: | stock markets, emerging and developing economies, success factors |
| Date: | 2016–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:ems:euriss:94639&r=fmk |
| By: | Barsky, Robert (Federal Reserve Bank of Chicago); Bogusz, Theodore (University of Michigan); Easton, Matthew (Federal Reserve Bank of Chicago) |
| Abstract: | Markets for risky loans clear on two dimensions - an interest rate (or equivalently a spread above the riskless rate) and a specification of the amount of collateral per dollar of lending. The latter is summarized by the margin or "haircut" associated with the loan. Some key models of endogenous collateral constraints imply that the primary equilibrating force will be in the form of haircuts rather than movements in interest rate spreads. Indeed, an important benchmark model, derived in a two-state world, implies that haircuts will adjust to render all lending riskless, and that a loss of risk capital on the part of borrowers has profound effects on asset prices. Quantitative analysis of a model of collateral equilibrium with a continuum of states turns these results on their heads. The bulk of the response to lenders' perception of increased default risk is in the form of higher default premia. Further, with high initial leverage, reductions in risk capital decrease equilibrium margins almost proportionately, while asset prices barely move. To the extent that one believes that it is a stylized fact that haircuts move more than spreads - as seen, for example, in bilateral repo data from 2007-2008 - this reversal is disturbing. |
| Keywords: | leverage cycle; margins; financial crises; repo; risk; collateral; belief disagreements |
| JEL: | D53 E44 G00 G01 |
| Date: | 2016–11–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2016-19&r=fmk |
| By: | Adrian, Tobias (Federal Reserve Bank of New York); Boyarchenko, Nina (Federal Reserve Bank of New York); Shachar, Or (Federal Reserve Bank of New York) |
| Abstract: | Do regulations decrease dealer incentives to intermediate trades? Using a unique data set of dealer-bond-level transactions, we construct the dealer-specific market liquidity metrics for the U. S. corporate bond market. Unlike prior studies, the transactions that we observe are uncapped in size and include the identity of dealer counterparties to the transaction. The granular nature of our data allows us to link changes in liquidity of individual corporate bonds to dealer transaction activity. We show that, in the full sample, bond-level liquidity is higher when institutions that are active traders in the bond are more levered, have higher trading revenue, have higher liquidity mismatch, are more vulnerable, have lower risk-weighted assets, are less reliant on repo funding, and hold fewer illiquid assets. In the rule implementation period (post January 2014), bonds traded by more vulnerable institutions and institutions with greater liquidity mismatch are less liquid, suggesting that prudential regulations may be having an effect on bond market liquidity. |
| Keywords: | bond liquidity; regulation; dealer constraints |
| JEL: | G12 G18 G21 |
| Date: | 2016–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:803&r=fmk |
| By: | Omokolade Akinsomi (School of Construction Economics and Management, University of Witwatersrand, Johannesburg, South Africa); Yener Coskun (Capital Markets Board of Turkey, Eskisehir Yolu, Ankara, Turkey); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa.); Chi Keung Marco Lau (Newcastle Business School, Northumbria University, Newcastle, UK) |
| Abstract: | Employing static and dynamic models that capture herding under different market regimes, we provide novel evidence on the herding behaviour of UK-listed Real Estate Investment Trusts (REITs). Our sample is extensive and covers the period from 30/6/2004 to 5/4/2016. Estimates of herding behaviour are derived using a Markov regime-switching model. The analysis suggests the existence of three market regimes (low, high and extreme or crash volatility) with transition ordered as ‘low, high and crash volatility’. Although static herding model rejects the existence of herding in REITs markets, estimates of the regimes switching model reveal substantial evidence of herding behaviours under the low volatility regime. Most interestingly we observe a shift from anti-herding behaviour during high volatility regimes to herding behaviour under low volatility regime, with this caused by the UK VIX. |
| Keywords: | Herd behavior, UK REITs;, Markov-switching, Time-varying probabilities |
| JEL: | C32 G11 G15 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201688&r=fmk |
| By: | Lei Pan; Vinod Mishra |
| Abstract: | It is important to understand the interplay between stock market and real economy to figure out the various channels through which financial markets drive economic growth. In the current study we investigate this relationship for Chinese economy, the fastest growing and largest emerging economy in the world. Using the methodology of unit root testing in the presence of structural breaks and using an ARDL model, we find that Global Financial Crises had a significant impact on both China’s real sector and financial sector. Our findings also suggest that Shanghai A share market has a long run negative association with the real sector of the economy, however the magnitude of impact is tiny and can be ignored. We conjecture that this negative relationship is the proof of so called existence of irrational prosperity on the stock market and the bubbles in China’s financial sector. We do not find any evidence of a relationship between stock market and real economy in the short run. Toda Yamamoto causality test supports the demand-driven hypothesis that economic growth spurs development of stock markets for China’s B share market. |
| Keywords: | China, Stock Market, Unit Root, Cointegration, Economic Growth |
| JEL: | O40 G10 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2016-16&r=fmk |