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on Financial Markets |
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Issue of 2020‒05‒11
eleven papers chosen by |
| By: | Alan L. Lewis |
| Abstract: | We study equity risk premiums in the United States during the COVID-19 pandemic. |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2004.13871&r=all |
| By: | Jonathan S. Hartley; Urban Jermann |
| Abstract: | Since January 2014 the U.S. Treasury has been issuing floating rate notes (FRNs). We estimate that the U.S. FRNs have been paying excess interest between 5 and 39 basis points above the implied cost for other Treasury securities. We find a strong positive relation between our estimated excess spreads on FRNs and the subsequent realized excess returns of FRNs over related T-bill investment strategies. With more than 300 billion dollars of FRNs outstanding, the yearly excess borrowing costs are estimated to be several hundreds of millions of dollars. To rationalize this finding, we examine the role of FRNs from the perspective of optimal government debt management to smooth taxes. In the model, bills can be cheaper to issue than FRNs, and the payoffs for FRNs are perfectly correlated with future short rates. FRNs can be used to manage the refinancing risk from rolling over short-term debt. We derive conditions under which the issuance of FRNs can optimally be positive. |
| JEL: | E4 G12 H63 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27065&r=all |
| By: | Horn, Sebastian; Meyer, Josefin; Trebesch, Christoph |
| Abstract: | The history of joint European bond issuance has been largely forgotten. The authors show that bonds issued and guaranteed jointly by European states are not a novel instrument, but have repeatedly been issued since the 1970s. The issuance of one-off "Coronabonds", as currently proposed, would not be unprecedented, but quite the contrary. The first European community bond was issued in 1976 to mitigate the adverse impact of the oil crisis, which threatened the viability of the European Economic Union. The funds were raised on private capital markets and then passed on to crisis countries, including Italy and Ireland. In the 1980s and 1990s community bonds were issued in favor of France, Greece and Portugal and, in 2008/2009, to support the non-Eurozone countries Hungary, Latvia and Romania. Moreover, the EFSF and ESM facilities were created after 2010 to support Eurozone members. The most important lesson from history is that, during deep crises, the European governments have repeatedly shown willingness to extend rescue funds along with substantial guarantees to other members in need. The necessary institutional arrangements were often set up flexibly and quickly. A second lesson is that the EU budget played a central role in past European bond guarantee schemes. Direct guarantees via country quotas were only the second guarantee tier, in case EU funds did not suffice, and only until 1981. Not coincidentally, the repayment of "Coronabonds" through an enlarged future EU budget is currently being discussed. |
| Keywords: | EU-Anleihen,Europäische Union,Globale Krise,COVID-19,Euro bonds,European Union,global crisis,COVID-19 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkpb:136e&r=all |
| By: | Dinghai Xu (Department of Economics, University of Waterloo) |
| Abstract: | This paper focuses on investigating the impacts of the novel coronavirus (COVID-19) on the Canadian stock market volatility from a time-varying parameter volatility model point of view. |
| JEL: | C22 C58 G18 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:wat:wpaper:2001&r=all |
| By: | Naji Massad; J{\o}rgen Vitting Andersen |
| Abstract: | We introduce a non linear pricing model of individual stock returns that defines a stickiness parameter of the returns. The pricing model resembles the capital asset pricing model used in finance but has a non linear component inspired from models of earth quake tectonic plate movements. The link to tectonic plate movements happens, since price movements of a given stock index is seen adding stress to its components of individual stock returns, in order to follow the index. How closely individual stocks follow the indexs price movements, can then be used to define their stickiness |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2005.02351&r=all |
| By: | Tian Guo; Nicolas Jamet; Valentin Betrix; Louis-Alexandre Piquet; Emmanuel Hauptmann |
| Abstract: | Incorporating environmental, social, and governance (ESG) considerations into systematic investments has drawn numerous attention recently. In this paper, we focus on the ESG events in financial news flow and exploring the predictive power of ESG related financial news on stock volatility. In particular, we develop a pipeline of ESG news extraction, news representations, and Bayesian inference of deep learning models. Experimental evaluation on real data and different markets demonstrates the superior predicting performance as well as the relation of high volatility prediction to stocks with potential high risk and low return. It also shows the prospect of the proposed pipeline as a flexible predicting framework for various textual data and target variables. |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2005.02527&r=all |
| By: | Bask, Mikael (Department of Economics); Forsberg, Lars (Department of Statistics); Östling, Andreas (Department of Statistics) |
| Abstract: | Based on 58,256 news articles published in the Financial Times during a 15-year period that cover companies in the DJIA, we find that a trading strategy that longs stocks with the most negative news and shorts stocks with the least negative news is not profitable. Consistent with this result, we also find that the sentiment factor derived from the negativism in the language tone in news articles is not a priced risk factor in the cross-section of stock returns. Nevertheless, the sentiment factor is significant for two-thirds of the stocks when it is added to well-known factor models. |
| Keywords: | asset pricing; factor models; Fama-French; news articles; sentiment |
| JEL: | G01 G11 G12 |
| Date: | 2020–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:uunewp:2020_003&r=all |
| By: | Victor Olkhov |
| Abstract: | This paper modifies single assumption in the base of classical option pricing model and derives further extensions for the Black-Scholes-Merton equation. We regard the price as the ratio of the cost and the volume of market transaction and apply classical assumptions on stochastic Brownian motion not to the price but to the cost and the volume. This simple replacement leads to 2-dimensional BSM-like equation with two constant volatilities. We argue that decisions on the cost and the volume of market transactions are made under agents expectations. Random perturbations of expectations impact the market transactions and through them induce stochastic behavior of the underlying price. We derive BSM-like equation driven by Brownian motion of agents expectations. Agents expectations can be based on option trading data. We show how such expectations can lead to nonlinear BSM-like equations. Further we show that the Heston stochastic volatility option pricing model can be applied to our approximations and as example derive 3-dimensional BSM-like equation that describes option pricing with stochastic cost volatility and constant volume volatility. Diversity of BSM-like equations with 2-5 or more dimensions emphasizes complexity of option pricing problem. Such variety states the problem of reasonable balance between the accuracy of asset and option price description and the complexity of the equations under consideration. We hope that some of BSM-like equations derived in this paper may be useful for further development of assets and option market modeling. |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2004.13708&r=all |
| By: | Martin Keller-Ressel; Stephanie Nargang |
| Abstract: | Based on data from the European banking stress tests of 2014, 2016 and the transparency exercise of 2018 we demonstrate for the first time that the latent geometry of financial networks can be well-represented by geometry of negative curvature, i.e., by hyperbolic geometry. This allows us to connect the network structure to the popularity-vs-similarity model of Papdopoulos et al., which is based on the Poincar\'e disc model of hyperbolic geometry. We show that the latent dimensions of `popularity' and `similarity' in this model are strongly associated to systemic importance and to geographic subdivisions of the banking system. In a longitudinal analysis over the time span from 2014 to 2018 we find that the systemic importance of individual banks has remained rather stable, while the peripheral community structure exhibits more (but still moderate) variability. |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2005.00399&r=all |
| By: | Ahnert, Lukas; Vogt, Pascal; Vonhoff, Volker; Weigert, Florian |
| Abstract: | This paper investigates the impact of stress testing results on bank's equity and CDS performance using a large sample of twelve tests from the US CCAR and the European EBA regimes in the time period from 2010 to 2018. We find that passing banks experience positive abnormal equity returns and tighter CDS spreads, while failing banks show strong drops in equity prices and widening CDS spreads. We also document strong market reactions at the announcement date of the stress tests. Although the institutional designs between US and European stress tests differ, we generally observe similar capital market consequences for both regimes. We complement existing studies by investigating the predictability of stress test outcomes and evaluating strategic options for affected banks and investors. |
| Keywords: | Banks,Stress Testing,Equity Performance,CDS Performance |
| JEL: | G00 G21 G28 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:2003&r=all |
| By: | Esposito, Federico; Bianconi, Marcelo; Sammon, Marco |
| Abstract: | We examine how trade policy uncertainty is reflected in stock returns. Our identification strategy exploits quasi-experimental variation in exposure to trade policy uncertainty arising from Congressional votes to revoke China's preferential tariff treatment between 1990 and 2001. More exposed industries commanded a risk premium of 6% per year. The risk premium was larger in sectors less protected from globalization, and more reliant on inputs from China. More exposed industries also had a larger drop in stock prices when the uncertainty began, and more volatile returns around key policy dates. Moreover, the effects of policy uncertainty on expected cash-flows, investors' forecast errors, and import competition from China cannot explain our results. |
| Keywords: | Trade policy; uncertainty; risk premium; China shock |
| JEL: | F1 F60 G10 |
| Date: | 2020–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99874&r=all |