A network based fintech inclusion platform

The paper evaluates, from a sustainable finance viewpoint, a machine learning model implemented in a fintech platform, whose aim is to assign credit ratings. The aim of the model is to learn from both micro economic data and macro economic trends the credit rating of companies that ask for credit. We show that the proposed model is able to reward the companies that have better financial performances with better ratings and, therefore, a higher probability/lower cost of obtaining credit. At the same time, the model correctly takes into account the overall evolution of the economy, favoring financial inclusion for the more penalized economic sectors, particularly during crisis times. The model, its application to credit rating, and its evaluation, are illustrated with reference to more than 100,000 European companies before and during the COVID-19 pandemic crisis. The results shows that, while the impact of the financial variables does not change over time, and particularly during the pandemic, the impact of sectors changes considerably, favoring financial inclusion and resilience.     

Animal Behavior in Capital markets: Herding formation dynamics,trading volume,and the role of COVID-19 pandemic

This paper provides new evidence on herding behavior. Using daily frequency data for 336 US listed firms over a five-year period, we investigate three important elements of financial herding behavior. First, trading volume, representing market interest, as a significant variable in capital markets apart from stock prices. Second, herding dynamics since herding formation is a dynamic process. Third, the reaction of possible financial herding to exogenous events-threats, as we use the pandemic event in order to investigate a market under stress. Even though the benchmark herding model used does not provide evidence of herding behavior, our results verify the significance of the above herding elements. We also find that trading volume and positive changes in trading volume result in increased cross-sectional absolute deviation (CSAD). Most importantly, we find that herding behavior is evident during the COVID-19 pandemic confirming that investors tend to herd during major crisis periods.     

The transmission of US economic policy uncertainty shocks to Asian and global financial markets

This paper proposes a novel approach to investigating the spillover effects of US economic policy uncertainty shocks on the global financial markets. Employing a factor-augmented vector autoregression (FAVAR), we model US economic policy uncertainty jointly with the latent factors extracted from equity prices, exchange rates, and commodity prices. We find that US economic policy uncertainty affects these factors significantly. A country-level analysis shows heterogeneous responses to an increase in US economic policy uncertainty. With regard to equities, US economic policy uncertainty adversely affects equity prices. However, its impact on the Chinese equity market is relatively small. As for foreign exchange markets, while many currencies depreciate in response to an increase in US economic policy uncertainty, the US dollar and the Japanese yen appreciate, reflecting their safe-haven status. The Chinese yuan, whose nominal exchange rate is closely linked to the US dollar, also appreciates in response to uncertainty shocks.     

A score-test on measurement errors in rating transition times

We model credit rating histories as continuous-time discrete-state Markov processes. Infrequent monitoring of the debtors’ solvency will result in erroneous observations of the rating transition times, and consequently in biased parameter estimates. We develop a score test against such measurement errors in the transition data that is independent of the error distribution. We derive the asymptotic χ²${\chi }^2$-distribution for the test statistic under the null by stochastic limit theory. The test is applied to an international corporate portfolio, while accounting for economic and debtor-specific covariates. The test indicates that measurement errors in the transition times are a real problem in practice.     

Costs of short-term credit for small and large firms

Changes in costs of credit for small and large firms respond differently to economic conditions and the markets are segmented. Costs for small firms are less responsive to changing economic conditions. Small firms borrow via credit card loans and from banks. Dynamic models prove the costs of funds are negative functions of quantities borrowed and positive functions of the Fed funds rate. During recessions, the decline in funds’ prices to large firms is greater than the reductions to small firms. Large firms benefit to a greater extent than small firms when prices of credit are changing.     

Role of credit and monetary policy in determining asset prices: Evidence from emerging market economies

We examine the relative dominance of credit and monetary policy shocks in influencing asset prices in emerging markets. Estimates from panel VAR models for 22 EMEs provide evidence of a significant impact of bank credit on house prices in contrast to trivial impact on stock prices, possibly due to prudential regulations on banks’ exposure to stock markets. Contractionary monetary policy triggers sizeable and persistent decline in stock than housing prices as higher interest rates may render the funding of leverage costlier. Global shocks play an important role in explaining fluctuations in domestic stock prices rather than house prices since the latter class of asset is largely non-tradable across countries.     

The multi-state latent factor intensity model for credit rating transitions

A new empirical reduced-form model for credit rating transitions is introduced. It is a parametric intensity-based duration model with multiple states and driven by exogenous covariates and latent dynamic factors. The model has a generalized semi-Markov structure designed to accommodate many of the stylized facts of credit rating migrations. Parameter estimation is based on Monte Carlo maximum likelihood methods for which the details are discussed in this paper. A simulation experiment is carried out to show the effectiveness of the estimation procedure. An empirical application is presented for transitions in a 7 grade rating system. The model includes a common dynamic component that can be interpreted as the credit cycle. Asymmetric effects of this cycle across rating grades and additional semi-Markov dynamics are found to be statistically significant. Finally, we investigate whether the common factor model suffices to capture systematic risk in rating transition data by introducing multiple factors in the model.     

Press freedom and jumps in stock prices

Press freedom varies substantially across countries. In a free environment, any news immediately becomes public knowledge through mediums including various electronic media and published materials. However, in an unfree environment, (economic) agents would have more discretionary powers to disclose good news immediately, while hiding bad news or releasing bad news slowly. We argue that this discretion affects stock prices and that stock markets in countries with a free press should be better processors of economic information. Using an equilibrium asset-pricing model in an economy under jump diffusion, we decompose the moments of the returns of international stock markets into a diffusive risk and a jump risk part. Using stock market data for a balanced panel of 50 countries, our results suggest that in countries with a free press, the better processing of bad news leads to more frequent negative jumps in stock prices. As a result, stock markets in those countries are characterized by higher volatility, driven by higher jump risk and more negative return asymmetry. The results are robust to the inclusion of various controls for governance and other country- or market-specific characteristics. We interpret these as good stock market characteristics because a free press improves welfare and increases economic growth.     

Write-down bonds,credit risk and imperfect information

A structural model of pricing Write-Down (hereafter WD) bonds under imperfect information has been developed to investigate the effect of WD bonds issuance on credit risk. Information is not only delayed but also asymmetrically distributed between managers and outside investors. We derive analytical solutions for corporate securities prices and find the issuance of WD bonds could significantly improve firm value via reducing bankruptcy cost. Our numerical results further demonstrate that the WD bonds issuance increases corporate risk tolerance and reduces the risk of bankruptcy and credit spreads under imperfect information.     

How tournament incentives affect asset markets: A comparison between winner-take-all tournaments and elimination contests

We investigate the impact of investment managers׳ tournament incentives on investment strategies and market efficiency, distinguishing between winner-take-all tournaments (WTA), where a minority wins, and elimination contests (EC), where a majority wins. Theoretically, we show that investment managers play heterogeneous strategies in WTA and homogeneous strategies in EC, and markets are more prone to mispricing in WTA than in EC. Experimentally, we find that investment managers play more heterogeneous strategies in WTA than in EC, but this does not trigger significant differences in prices. Moreover, prices in WTA and EC do not differ significantly from markets composed of linearly incentivized subjects.     

Volatility spillovers among the U.S. and Asian stock markets: A comparison between the periods of Asian currency crisis and subprime credit crisis

This paper examines the changing nature of volatility spillovers among the U.S. and eight East Asian stock markets between two financial crises: the Asian currency crisis and the U.S. subprime credit crisis. Our empirical results suggest that volatility is not always spilled over from the directly affected markets to surrounding markets in crisis periods. The East Asian markets who directly suffered from the Asian currency crisis are the ones to which volatility is spilled over from other markets during the Asian currency crisis period, whereas uni-directional volatility spillovers from the U.S. market to other markets are observed during both crisis periods. This difference can be explained by a pre-determined hierarchy in which volatility spillovers tend to start from the U.S. market regardless of the geographical origin of the crisis. Furthermore, our results reveal that the markets in three major Asian financial hubs, i.e., Japan, Hong Kong and Singapore, are the markets to which volatility is spilled over uni-directionally from several other countries during the subprime credit crisis period, but not during the Asian currency crisis period. We attribute this difference to crisis-specific (currency or credit crisis), market-specific (credit derivatives market participation and foreign currency reserves), and time-specific (more integrated global market) factors.     

Trading constraints penalizing default: A recursive approach

This paper proves existence of an ergodic Markov equilibrium for a class of general equilibrium economies with infinite horizon, incomplete markets, and default. Agents may choose to deny their liabilities and face trading constraints that depend on the adjusted amount of past default on each asset. These constraints replace the usual utility penalties and explore intertemporal tie-ins that appear in dynamic economies. The equilibrium prices and solvency rates present stationary properties that are usually required in econometric models of credit risk.     

A financial accelerator in the business sector of a macroeconometric model of a small open economy

We have incorporated a financial accelerator mechanism operating through investments in the business sector in a dynamic macroeconometric model of the Norwegian economy. In this new and amended model aggregated credit and equity prices are determined simultaneously in a system characterized by a two-directional contemporaneous causal link, which has been designed and estimated by a new procedure for simultaneous structural model design. Combined with a mechanism where credit and asset prices are mutually influenced by real investments, this creates a financial accelerator amplified by a credit-asset price spiral. Simulations illustrate how the introduction of a financial accelerator significantly reinforces and extends the economic cycles in projections and forecasts, in particular when confronted by a severe shock. Furthermore, monetary policy has a markedly stronger effect in the short and medium term, while the impact of fiscal policy is affected to a relatively small degree as it is more remotely linked to financial markets.     

Credit default swaps and sovereign debt markets

This study investigates the link between the price discovery dynamics in sovereign credit default swaps (CDS) and bond markets and the degree of financial integration of emerging markets. Using CDS and sovereign bond spreads, the price discovery mechanism was tested using a vector error correction model. Financial integration is measured using news-based methods. We find that sovereign CDS and bond markets are co-integrated. In five out of seven sovereigns (71%), the bond market leads in price discovery by adjusting to new information regarding credit risk before CDS. In 29% of times, CDS markets are the source of price discovery. We also find a positive correlation of 0.67 between the degree of financial integration and the bond market information share. The evidence suggests that changes in sovereign credit risk and bond yields are significantly influenced by common external (global) factors, while country-specific factors play an insignificant role.     

The daily relationship between U.S. asset prices and stock prices of American countries

The daily transmission of U.S. comprehensive stock indices to foreign stock markets has been studied extensively, but the transmission may just be that the foreign stock prices respond to news underlying the change in the U.S. stock indices. Besides the regularly economic announcements, news relevant for the U.S. economy may include qualitative news and non-economic events. Due the daily nature of the news, there is no appropriate reference as to its impact on the U.S. or foreign economy and the only accessible reference probably is the change in the financial asset prices. But the U.S. stock index is general in nature and cannot be used to offer specific information about the U.S. economy. Some U.S. asset prices other than stock indices may reveal more specific information about the U.S. economy. Looking into the daily relationship between these U.S. asset prices and stock indices of four American countries in two periods with drastically different economic conditions, this study finds that the daily relationship between these U.S. asset prices and foreign stock prices is consistent with the prevailing U.S. economic fundamentals. From the relationship we identify some U.S. economic conditions foreign stock prices respond to. These economic conditions include real economic shocks, monetary policies, and business default risks.     

Should the government directly intervene in stock market during a crisis?

Unlike foreign exchange markets where central banks frequently intervene, the governments strive not to intervene in the stock markets since intervention transmit negative signals and carry market-related side effects. The main reasons often cited in support of intervention are to bring price stability and to restore investors’ confidence. During the recent economic turmoil, opportunities for the governments to intervene in the stock markets were mainly exploited in emerging and developing countries. We study the outcome of the Russian government's intervention in its major stock market between September and October 2008. This intervention was intended to reverse the sudden and swift declining trend in traded security prices by altering the market's expectations. By using a combination of event study and a multivariate GARCH model, our findings does not support direct government intervention in the stock market during a crisis.     

Business,housing, and credit cycles

We use multivariate unobserved components models to estimate trend and cyclical components in gross domestic product (GDP), credit volumes, and house prices for the USA and the five largest European economies. With the exception of Germany, we find large and long cycles in credit and house prices, which are highly correlated with a medium‐term component in GDP cycles. Differences across countries in the length and size of cycles appear to be related to the properties of national housing markets. The precision of pseudo real‐time estimates of credit and house price cycles is roughly comparable to that of GDP cycles.     

债券评级市场向上提升评级行为的理性动力

中国的债券市场虽然在近几年有一定的发展,但整体上离一个成熟的市场还有很大距离,其中,信用评级更是没有展示出其重要的作用。文章试图通过几个简单的模型说明评级机构向上提升评级行为的理性动力,并且即使在非完全垄断时这样的动力也不会消失。     

Modelling Electricity Prices: International Evidence*

This article analyses the evolution of electricity prices in deregulated markets. We present a general class of models that simultaneously takes into account several factors: seasonality, mean reversion, GARCH behaviour and time‐dependent jumps. The models are applied to daily equilibrium spot prices of eight electricity markets. Eight different nested models were estimated to compare the relative importance of each factor in each of the eight markets. We find strong evidence that electricity equilibrium prices are mean‐reverting, with volatility clustering (GARCH) and with jumps of time‐dependent intensity, even after adjusting for seasonality.     

Fiscal Rules and Financial Systems: Complements or Substitutes?

We study the effect of fiscal rules on a country's credit rating and their interaction with financial development. We build a rich set of panel data, which includes a novel index for the strength of fiscal rules. We find a positive and significant effect of fiscal rules on sovereign ratings. We also find that this effect is attenuated in economies with a more developed domestic financial system. Therefore, financial markets act as a substitute for fiscal rules in lowering the default risk assessed by credit rating agencies. This substitution effect between fiscal rules and financial development is mostly triggered through the monitoring and enforcement dimension of fiscal rules.