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on Financial Markets |
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Issue of 2023‒12‒11
eight papers chosen by |
| By: | Christian Conrad (Heidelberg University, Department of Economics, Germany; KOF Swiss Economic Institute, Switzerland; Heidelberg Karlsruhe Strategic Partnership, Heidelberg University, Karlsruhe Institute of Technology, Germany; Rimini Centre for Economic Analysis); Julius Theodor Schoelkopf (Heidelberg University, Department of Economics, Germany); Nikoleta Tushteva (European Central Bank) |
| Abstract: | We show that the S&P 500’s instantaneous response to surprises in U.S. macroeconomic announcements depends on the level of long-term stock market volatility. When long-term volatility is high, stock returns are more sensitive to news, and there is a pronounced asymmetry in the response to good and bad news. We explain this by combining the Campbell-Shiller log-linear present value framework with a two-component volatility model for the conditional variance of cash flow news and allowing for volatility feedback. In our model, innovations to the long-term volatility component are the most important driver of discount rate news. Large announcement surprises lead to upward revisions in future required returns, which dampens/amplifies the effect of good/bad news. |
| Keywords: | event study, long- and short-term volatility, macroeconomic announcements, stock market response, time-varying risk premia, volatility feedback effect |
| JEL: | C58 E44 G12 G14 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:23-16&r=fmk |
| By: | George Athanasopoulos; Rob J Hyndman; Raffaele Mattera |
| Abstract: | This paper discusses the use of forecast reconciliation with stock price time series and the corresponding stock index. The individual stock price series may be grouped using known meta-data or other clustering methods. We propose a novel forecasting framework that combines forecast reconciliation and clustering, to lead to better forecasts of both the index and the individual stock price series. The proposed approach is applied to the Dow Jones Industrial Average Index and its component stocks. The results demonstrate empirically that reconciliation improves forecasts of the stock market index and its constituents. |
| Keywords: | financial time series, hierarchical forecasting, clustering, unsupervised learning, prediction, machine learning, finance |
| JEL: | C53 C10 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:msh:ebswps:2023-17&r=fmk |
| By: | Siu Hin Tang; Mathieu Rosenbaum; Chao Zhou |
| Abstract: | We extend the application and test the performance of a recently introduced volatility prediction framework encompassing LSTM and rough volatility. Our asset class of interest is cryptocurrencies, at the beginning of the "crypto-winter" in 2022. We first show that to forecast volatility, a universal LSTM approach trained on a pool of assets outperforms traditional models. We then consider a parsimonious parametric model based on rough volatility and Zumbach effect. We obtain similar prediction performances with only five parameters whose values are non-asset-dependent. Our findings provide further evidence on the universality of the mechanisms underlying the volatility formation process. |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2311.04727&r=fmk |
| By: | Wenxin Du; Alessandro Fontana; Petr Jakubik; Ralph S J Koijen; Hyun Song Shin |
| Abstract: | We study patterns and implications of global asset allocations of European insurers and banks using newly available supervisory data. We show that the total assets of insurance companies and pension funds (ICPF) far exceed the amount of government bonds outstanding in Europe, and that countries with a large ICPF sector tend to have a large corporate bond market. Despite high levels of international investments, the characteristics of domestic financial markets still loom large in insurers’ and banks’ portfolio allocation, with two newly documented international portfolio frictions playing a prominent role. First, when investing abroad, insurers and banks do not offset attributes of the domestic markets (such as the composition of fixed-income markets, interest rates, and sovereign credit risk), which we label “domestic projection bias.” Second, subsidiaries of multinational groups act like local entities, which we label the “going native bias.” We propose a theoretical framework to explain our empirical findings and discuss the broader policy implications for European capital market deepening and integration, monetary policy transmission and financial stability, and a multi-sectoral approach to regulatory design. |
| Keywords: | Banks, insurance companies, pension funds, portfolio choice, fixed income, home bias |
| JEL: | G2 G11 G15 G21 G22 G28 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1137&r=fmk |
| By: | Darrell Duffie; Michael Fleming; Frank Keane; Claire Nelson; Or Shachar; Peter Van Tassel |
| Abstract: | We show a significant loss in US Treasury market functionality when intensive use of dealer balance sheets is needed to intermediate bond markets, as in March 2020. Although yield volatility explains most of the variation in Treasury market liquidity over time, when dealer balance sheet utilization reaches sufficiently high levels, liquidity is much worse than predicted by yield volatility alone. This is consistent with the existence of occasionally binding constraints on the intermediation capacity of bond markets. |
| Keywords: | Treasury market, liquidity, volatility, dealer intermediation, value-at-risk |
| JEL: | G01 G1 G12 G18 E58 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1138&r=fmk |
| By: | Alyssa G. Anderson; Manjola Tase |
| Abstract: | We document the existence of a regulatory premium in the federal funds market related to the implementation of the Liquidity Coverage Ratio (LCR). We use difference-in-differences analysis and confidential bank level data on borrowing in the fed funds and Eurodollar markets to compare the interest rates paid by banks subject to daily reporting of their liquidity profile (daily reporters) relative to other banks. We find that, after the implementation of LCR, daily reporters paid a higher rate compared to other banks when borrowing in the fed funds market given the LCR-favorability of many of the lenders in this market. In addition, on the days that banks borrowed in both the fed funds and Eurodollar markets, daily reporters paid a higher rate than other banks for their borrowing in the fed funds market but not for their borrowing in the Eurodollar market. |
| Keywords: | Eurodollars; Liquidity Coverage Ratio; market segmentation |
| JEL: | E49 E52 G21 G28 |
| Date: | 2023–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-71&r=fmk |
| By: | Andrea Nocera; M. Hashem Pesaran |
| Abstract: | We investigate the short- and long-term impacts of the Federal Reserve's large-scale asset purchases (LSAPs) on non-financial firms' capital structure using a threshold panel ARDL model. To isolate the effects of LSAPs from other macroeconomic conditions, we interact firm- and industry-specific indicators of debt capacity with measures of LSAPs. We find that LSAPs facilitated firms' access to external financing, with both Treasury and MBS purchases having positive effects. Our model also allows us to estimate the time profile of the effects of LSAPs on firm leverage providing robust evidence that they are long-lasting. These effects have a half-life of 4-5 quarters and a mean lag length of about six quarters. Nevertheless, the magnitudes are small, suggesting that LSAPs have contributed only marginally to the rise in U.S. corporate debt ratios of the past decade. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.18638&r=fmk |
| By: | Ajay Shah (xKDR Forum) |
| Abstract: | Indian finance went through a first phase of central planning (1947-1992) and a second phase (1992-2016) with conflicting themes of liberalisation and enhanced state control. In the first phase, the financial system was a handmaiden for state control of the economy, directing resources in harmony with the wishes of the government. State control was achieved through government ownership. In many areas, private financial firms are now important. The full ecosystem of modern finance, with information processing and risk-taking by private persons, blossomed in the equity market. For two decades there was a remarkable policy process that yielded gains in fields such as the equity market, pension reforms, bankruptcy code, etc. But alongside this there was the expansion of 'the administrativestate' in the form of financial regulators. Regulators engage in micromanagement of products and processes. While there is isomorphic mimicry with many things that look like a financial system, officials retain substantial control over how finance works. In a functional perspective, Indian finance today resembles the environment of the 1980s more than meets the eye. |
| JEL: | N25 N45 G38 O53 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:anf:wpaper:25&r=fmk |