Global imbalances and dynamics of international financial markets

We provide an overview of the special issue “Global Imbalances and dynamics of international financial markets”. This special issue, which is associated with the 7th International Finance Conference, features research papers dealing with the impact of global imbalances, market complexity, and the impact of the recent global financial crisis on the conduct of monetary policies, financial market dynamics, financial stability, and risk management models.     

Risk spillover between Bitcoin and conventional financial markets: An expectile-based approach

In order to challenge the existing literature that points to the detachment of Bitcoin from the global financial system, we use daily data from August 17, 2011–February 14, 2020 and apply a risk spillover approach based on expectiles. Results show reasonable evidence to imply the existence of downside risk spillover between Bitcoin and four assets (equities, bonds, currencies, and commodities), which seems to be time dependent. Our main findings have implications for participants in both the Bitcoin and traditional financial markets for the sake of asset allocation, and risk management. For policy makers, the findings suggest that Bitcoin should be monitored carefully for the sake of financial stability.     

Contagion between real estate and financial markets: A Bayesian quantile-on-quantile approach

We study contagion between Real Estate Investment Trusts (REITs) and the equity market in the U.S. over four sub-samples covering January, 2003 to December, 2017, by using Bayesian nonparametric quantile-on-quantile (QQ) regressions with heteroskedasticity. We find that the spillovers from the REITs on to the equity market has varied over time and quantiles defining the states of these two markets across the four sub-samples, thus providing evidence of shift-contagion. Further, contagion from REITs upon the stock market went up during the global financial crisis particularly, and also over the period corresponding to the European sovereign debt crisis, relative to the pre-crisis period. Our main findings are robust to alternative model specifications of the benchmark Bayesian QQ model, especially when we control for omitted variable bias using the heteroskedastic error structure. Our results have important implications for various agents in the economy namely, academics, investors and policymakers.     

The weighted cross-shareholding complex network: a copula approach to concentration and control in financial markets

Journal of Economic Interaction and Coordination - In this work, we focus on the cross-shareholding structure in financial markets. Specifically, we build ad hoc indices of concentration and...     

Martingale difference hypothesis and financial crisis: Empirical evidence from European emerging foreign exchange markets

This study investigates the effects of the recent global crisis on the relative efficiency of six CEE currency markets, using the generalized spectral test of Escanciano and Velasco (2006) in a rolling window approach. The empirical results show that the global crisis adversely affected the efficiency of most CEE currency markets, with the Turkish lira being hit the hardest, followed by the Russian ruble, Czech koruna, Romanian leu, Polish zloty and Hungarian forint. In the first stage of the crisis, covering the second half of 2008 and the first months of 2009, all foreign exchange markets experienced periods of inefficiency. In the second stage of the crisis, the Hungarian, Polish and Romanian foreign markets recovered market efficiency quickly, while Russia, Turkey and the Czech Republic continue to register a low degree of efficiency.     

Agent-based financial markets and New Keynesian macroeconomics: a synthesis

We combine a simple agent-based model of financial markets and a New Keynesian macroeconomic model with bounded rationality via two straightforward channels. The result is a macroeconomic model that allows for the endogenous development of business cycles and stock price bubbles. We show that market sentiments exert important influence on the macroeconomy: Impulse-response functions of macroeconomic variables become more volatile which makes the effect of a given shock hard to predict. We also analyze the impact of different types of financial transaction taxes that are currently debated among policy makers (FTT, FAT, progressive FAT) and find that such taxes are well suited to stabilize the economy and raise funds from the financial sector as a contribution to the enormous costs created during the recent crisis. Our simulations suggest that the FTT leads to higher tax revenues and better stabilization results then the FAT. However, the FTT might also create huge distortion if set too high, a threat which the FAT does not imply.     

Systemic risk in European financial and energy sectors: Dynamic factor copula approach

We perform an analysis of systemic risk in financial and energy sectors in Europe using daily time series of CDS spreads. We employ the factor copula model with GAS dynamics from Oh and Patton (2018) for the purpose of estimating dependency structures between market participants. Based on the estimated models, we perform Monte Carlo simulations to obtain future values of CDS spreads, and then measure the probability of systemic events at given time points. We conclude that substantially higher systemic risk is present in the financial sector compared to the energy sector. We also find that the most systemically vulnerable financial and energy companies come from Spain.     

Evidence of information transmission across currency futures markets using frequency domain tests

In this article, I examine the returns and volatility spillovers in the currency futures market incorporating the recently developed frequency domain tests. Such analysis allows differentiating between permanent (long-run) and transitory (short-run) linkages among the currency futures markets by investigating the causality dynamics at low and high frequencies respectively. I detect significant informational linkages between USD, EUR, GBP and JPY futures contracts in the Indian currency futures market. Evidence of innovations from USD futures market to other markets is the most significant for returns spillover and for volatility spillover, EUR is found to be the most significant compared to other currency futures contracts. The results would have implications for the market participants and policymakers.     

Dependence structures between Chinese stock markets and the international financial market: Evidence from a wavelet-based quantile regression approach

In this study, we investigate the dependence structures between six Chinese stock markets and the international financial market including possible safe haven assets and global economic factors under different market conditions and investment horizons. The research is conducted by combining a quantile regression approach with a wavelet decomposition analysis. Although we find little or insignificant dependence under short investment horizons, we detect the strong asymmetric dependence of oil prices and the US dollar index on the six Chinese stock markets in the medium and long terms. Moreover, not only is crude oil not a safe haven, it may damage Chinese stock markets as it increases over the long term, even in bull markets. Meanwhile, appreciation of the US dollar (depreciation of RMB) damages (boosts) Chinese stock markets during bull (bear) market conditions under long investment horizons. Moreover, we find that VIX (volatility index)-related derivatives may serve as good risk management tools under any market condition, while gold is a safe haven asset only during crisis periods.     

Accounting and capital markets: a survey of the European evidence

The relationship between accounting information and capital markets has been the subject of numerous studies, especially in the US. The purpose of this article is to examine the corresponding evidence in Europe. This review classifies the European literature into three groups: studies of the market reaction to newly released accounting information; studies of the long-term association between stock returns and accounting numbers; studies devoted to the use of accounting data by investors and to the impact of market pressure on accounting choices. The paper reviews and summarizes the main results related to each of these topics. It also addresses some methodological issues and provides suggestions for future research.     

A road to assimilation: immigrants and financial markets

This paper compares the financial market participation of immigrants and native-born Americans. Financial asset ownership is examined after controlling for the immigrants’ country of origin using a nationally representative National Longitudinal Survey (NLSY79) data set. The determinants of preference for financial asset ownership and the amount of financial equity held by households are estimated using a two-stage procedure. The results indicate that immigrants are less likely to own financial assets and more likely to have lower financial equity than native-born residents. Income uncertainty and risk tolerance of immigrants are associated with their preference for financial investments. Immigrants’ years of residence in the United States also increase their financial asset ownership. A discussion of the implications of these findings for policy makers, immigration researchers, and scholars of household savings behavior is also included.     

Self-organized criticality in a herd behavior model of financial markets

This paper explains the fat-tail distribution of asset transaction volumes and prices by a model of rational herd behavior of traders. Each trader decides whether to buy an asset by observing private information and other traders’ actions. A trader’s buying action reveals his positive private information and affects the other traders’ beliefs in favor of buying, leading to strategic complementarity. A power-law distribution emerges for the number of buying actions in a static Nash equilibrium. This model provides an economic reason as to why the stock market has to exhibit a criticality in the connectivity of the traders’ actions. I am benefited by comments from the seminar participants at University of Tokyo and the Econophysics Colloquium 2006 at International Christian University, the editors of the special issue, and particularly an anonymous referee.     

One-dimensional maps with two discontinuity points and three linear branches: mathematical lessons for understanding the dynamics of financial markets

We develop a simple financial market model with heterogeneous interacting speculators. The dynamics of our model is driven by a one-dimensional discontinuous piecewise linear map, having two discontinuity points and three linear branches. On the one hand, we study this map analytically and numerically to advance our knowledge about such dynamical systems. In particular, not much is known about discontinuous maps involving three branches. On the other hand, we seek to improve our understanding of the functioning of financial markets. We find, for instance, that such maps can generate complex bull and bear market dynamics.     

Information versus imitation in a real-time agent-based model of financial markets

This paper presents an agent based model of a financial market with a real-time engine, whose operation replicates the official time schedule of Borsa Italiana S.p.A. Simulated time series are compared with empirical data at different time scales (ticks, 1 s, 1 min, 5 min) in order to check the compliance of the model with some stylized facts. The modeled market structure is a dynamic multiplex with two layers: the first one is a star network, whose hub is the market maker (i.e., the owner of the venue holding the order book), where transactions are executed; the second one is designed according to different topologies, representing social interactions, where investors decide their behavior according to informative flows. The effect of imitation on market stability is discussed and some policy implications are provided.

     

Matching in local labor markets: a stochastic frontier approach

This paper investigates the technical efficiency of labor market matching from a stochastic frontier approach. The true fixed-effects model (Greene J Prod Anal 23:7–32, 2005a; J Econom 126:269–303, 2005b) is utilised in order to separate cross-sectional heterogeneity from inefficiency, and inefficiency terms are modelled following Battese and Coelli (Empir Econ 20:325–332, 1995). The data set consists of almost 17,000 observations from Local Labor Offices (LLOs) in Finland. According to the results, there are notable differences in matching efficiency between regions, and these differences contribute significantly to the number of filled vacancies. If all regions were as efficient as the most efficient one, the number of total matches per month would increase by over 23%. The heterogeneity of the job-seeker stock is an important determinant of matching efficiency: the weight of the composition of the job-seeker stock in the inefficiency terms is on average 85%.

Self-organization and the persistence of noise in financial markets

A dynamic model of financial markets with learning is demonstrated to produce a self-organized system that displays critical behavior. The price contains private information that traders learn to extract and employ to forecast future value. Since the price reflects the beliefs of the traders, the learning process is self-referencing. As the market learns to correctly extract information from the price, the market deemphasizes private information. Despite the convergence of the model towards the parameters producing efficiency, pricing deviations remain constant due to the increased sensitivity of the price to small errors in information extraction produced by the model's own convergence.     

Budgeting for research and development: a dynamic financial simulation approach

The research and development (R&D) budgeting decision is crucial for at least two reasons: if too much is spent, short-term financial stability is at risk, while, if the budget is too small, long-term competitiveness is threatened. Nevertheless, many enterprises simply extrapolate the past without further reflection.This paper presents a computer-based dynamic stochastic simulation model that allows one to assess the impact of alternative R&D budgeting policies on corporate development. The core decisions to be evaluated concern timing and funding of investments in R&D. Our approach substantially expands earlier work by Brockhoff (R&D Manage. 19 (1989) 265). In particular, it distinguishes between product and process innovation, considers market dynamics related to technical progress via a modifiable S-curve, integrates marketing, and takes into account essential financial aspects. As a result, our model is closer to reality than previous ones. A sample application with real company data illustrates its potential usage.     

Cross-section instability in financial markets: impatience,extrapolation, and switching

Decisions in Economics and Finance - This paper presents a stylized model of interaction among boundedly rational heterogeneous agents in a multi-asset financial market to examine how agents’...