Does financial market liberalization increase the degree of market efficiency? The case of the Athens stock exchange

In this paper we assess if the financial market liberalization introduced in the beginning of the 1990s in Greece has changed the degree of market development (efficiency) by studying time-varying global Hurst exponents. Our results suggest that changes in financial market liberalization have important positive implications on the degree of development of stock markets. These results have important policy implications for the development of stock markets around the world.     

Settling for efficiency – A framework for the European securities transaction industry

Despite a lot of restructuring and many innovations in recent years, the securities transaction industry in the European Union is still a highly inefficient and inconsistently configured system for cross-border transactions. This paper analyzes the functions performed, the institutions involved and the parameters concerned that shape market and ownership structure in the industry. Of particular interest are microeconomic incentives of the main players that can be in contradiction to social welfare. We develop a framework and analyze three consistent systems for the securities transaction industry in the EU that offer superior efficiency than the current, inefficient arrangement. Some policy advice is given to select the ‘best’ system for the Single European Financial Market.     

The role of the carbon market in relation to the cryptocurrency market: Only diversification or more?

The role of the carbon market in relation to the cryptocurrency market is still unclear. Given the carbon-intensive nature of the cryptocurrency industry, whether the carbon market is able to capture the carbon footprint of the cryptocurrency market (i.e., diversification) or act as a safe haven or a hedge against it remain unexplored issues. To address this issue, this paper employs the generalized autoregressive score-dynamic conditional score-Copula (GAS–DCS–Copula) model, incorporating the asymmetric tail distribution. We identify the asymmetric tail properties of both the carbon and cryptocurrency markets with significant otherness. Further, to account the importance of China in mining the cryptocurrencies, we incorporate Chinese carbon market in our analysis to investigate the difference with the European carbon market. Finally, we provide evidence that the European carbon market provides a safe haven and a hedge against the cryptocurrency market while Chinese carbon market is not. Our findings have implications for both investors and policymakers.     

Has the CDS market influenced the borrowing cost of European countries during the sovereign crisis?

This paper assesses the potential influence of the growing CDS market on the borrowing cost of sovereign states during the European sovereign crisis. We analyze the sovereign debt market to ascertain the pattern of information transmission between the CDS and corresponding bond markets. Our methodological innovation is the use of a non-linear specification rather than the linear VECM specification customarily employed. Using a panel smooth transition model during the 2008–2010 period, we find that: 1) linearity tests clearly reject the null hypothesis of a linear transmission mechanisms between the bond and the CDS markets; 2) market distress alters the mutual influence and 3) the higher the distress the more the CDS market dominates the information transmission between CDS and bond markets.     

Nudging the financial market? A review of the nudge theory

A systematic review of the nudge literature and an examination of its applications across different domains reveals that: (i) a nudge, in the sense of using choice architecture to push people to choose desired results, works well; and (ii) a nudge, in the sense of pushing people to choose desired results so that people will be better off, remains questionable. In financial markets, regulators and financial intermediaries currently use nudge theory to: (i) adjust how investment choices are presented to investors; and (ii) provide information in a selective way. Besides nudging investors, it is also possible for regulators to nudge financial intermediaries towards making more ethical decisions.     

Do environmental variables affect the performance and technical efficiency of the European banking systems? A parametric analysis using the stochastic frontier approach

The paper compares the efficiency of the European banking systems in view of the constitution of the European Monetary Union. Since competition among banks will increase, it is important to identify the most efficient banking system able to play a role in that market. A parametric approach is adopted, based on the estimation of a stochastic cost frontier. This methodology enables one to measure X-inefficiency and to model it as a function of environmental variables which may influence firms' efficiency. By means of this analysis it is possible to identify the most efficient banking systems and to focus on the determinants of deviations from cost minimizing. The analysis highlights significant efficiency gaps among the performances of banks in different countries and of different institutional types. In particular, it is found that the Mittel-European model is the one that operates closest to the efficient frontier. This may indicate that, compared with separated banks, the universal banking system allows for production plans which come closer to the optimal frontier. The analysis suggests that, at the beginning of European Monetary Union, national barriers and regulatory frameworks are still responsible for deviation from the efficient frontiers.     

Crash of '87 — Was it expected?: Aggregate market fears and long-range dependence

We develop a dynamic framework to identify aggregate market fears ahead of a major market crash through the skewness premium of European options. Our methodology is based on measuring the distribution of a skewness premium through a q-Gaussian density and a maximum entropy principle. Our findings indicate that the October 19th, 1987 crash was predictable from the study of the skewness premium of deepest out-of-the-money options about two months prior to the crash.     

The market price of risk and the equity premium: A legacy of the Great Depression?

By positing learning and a pessimistic initial prior, we build a model that disconnects a representative consumer's subjective attitudes toward risk from the high price of risk that a rational-expectations econometrician would deduce from financial market data. We follow Friedman and Schwartz [1963. A Monetary History of the United States, 1857-1960. Princeton University Press, Princeton, NJ] in hypothesizing that the Great Depression heightened fears of economic instability. We use a robustness calculation to elicit a pessimistic prior for a representative consumer and let him update beliefs via Bayes’ law. Learning eventually erases pessimism, but while it persists, pessimism contributes a volatile multiplicative component to the stochastic discount factor that a rational-expectation econometrician would detect. With sufficient initial pessimism, the model generates substantial values for the market price of risk and equity premium and predicts high Sharpe ratios and forecastable excess stock returns.     

The long memory of the forward premium during the 1920s’ float: evidence from the European foreign exchange market

This paper investigates the fractional dynamics of the foreign exchange forward premium during the floating period of the 1920s. We apply weekly exchange rates of the currencies from Belgium, France, Germany, Holland, Italy and the USA against the British pound from February 1921 to May 1925 and employ two different definitions of the forward premium. The German data are for the period ranging from February 1921 to December 1922. This period includes the German hyperinflation era. The empirical investigation is conducted by means of two different fractional integration methods: the Geweke and Porter-Hudak and the Robinson tests. The results provide some evidence of long memory, mostly in the case of Belgium, Holland and Italy. Many of the forward premiums during the 1920s may have become non-stationary as markets began to anticipate the UK's return to gold at its pre-war parity. In the case of Germany, it may have been due to market failure. The varying results presented could be due to the wide differences in the microeconomic and macroeconomic fundamentals and political setups of the countries during the 1920s.     

“Swimming Ducks Forecast the Coming of Spring”—The predictability of aggregate insider trading on future market returns in the Chinese market

This study systematically examines the ability of aggregate insider trading to predict future market returns in the Chinese A-share market. After controlling for the contrarian investment strategy, aggregate executive(large shareholder)trading conducted over the past six months can predict 66%(72.7%) of market returns twelve months in advance. Aggregate insider trading predicts future market returns very accurately and is stronger for insiders who have a greater information advantage(e.g., executives and controlling shareholders).Corporate governance also affects the predictability of insider trading. The predictability of executive trading is weakest in central state-owned companies,probably because the "quasi-official" status of the executives in those companies effectively curbs their incentives to benefit from insider trading.The predictive power of large shareholder trading in private-owned companies is higher than that in state-owned companies, probably due to their stronger profit motivation and higher involvement in business operations. This study complements the literature by examining an emerging market and investigating how the institutional context and corporate governance affect insider trading.     

“Rookies to the stock market: A portrait of new shareholders”

This study examines individuals entering the stock market, “rookies.” The study uses unique ownership data, containing investor holdings of all listed Swedish firms over the sample period from 2004 to 2010, to examine rookies’ stock portfolios. In addition, this study explores investor sophistication among rookies, based on individual characteristics and portfolio composition. Although the average shareholder is aging and leaving the stock market, this study shows there are signs of rejuvenation, with rookies entering the stock market. The results show that the majority of rookies hold under-diversified stock portfolios and choose one large firm as their first stock market investment. Rookie characteristics display gender differences, in which the average female rookie has lower income, is older, but holds a larger stock portfolio than her male counterpart.     

What is the risk of European sovereign debt defaults? Fiscal space,CDS spreads and market pricing of risk

We estimate the pricing of sovereign risk for fifty countries based on fiscal space (debt/tax; deficits/tax) and other economic fundamentals over 2005–10. We focus in particular on five countries in the South-West Eurozone Periphery, Greece, Ireland, Italy, Portugal and Spain. Dynamic panel estimates show that fiscal space and other macroeconomic factors are statistically and economically important determinants of sovereign risk. However, risk-pricing of the Eurozone Periphery countries is not predicted accurately either in-sample or out-of-sample: unpredicted high spreads are evident during global crisis period, especially in 2010 when the sovereign debt crisis swept over the periphery area. We match the periphery group with five middle income countries outside Europe that were closest in terms of fiscal space during the European fiscal crisis. Eurozone Periphery default risk is priced much higher than the matched countries in 2010, even allowing for differences in fundamentals. One interpretation is that these economies switched to a “pessimistic” self-fulfilling expectational equilibrium. An alternative interpretation is that the market prices not on current but future fundamentals, expecting adjustment challenges in the Eurozone periphery to be more difficult for than the matched group of middle-income countries because of exchange rate and monetary constraints.     

A nonparametric approach to measuring the sensitivity of an asset’s return to the market

In the market model the return on an asset is modeled as a linear function of the return on a market index with slope parameter beta. The coefficient beta is often used as a measure of the sensitivity of the asset’s return to the market and to measure the component of the variance of the return that is explained by the market. However, both of these interpretations require the additional assumption that the error term in the market model has mean 0 conditional on the return on the market index, an assumption that is often difficult to verify in practice. In this paper, a nonparametric version of the market model is proposed that does not require such an assumption. This nonparametric model replaces the beta coefficient of the market model with a “beta curve” describing the relationship between the asset’s return and that of the market locally near a given value of the market return. The proposed model is applied to stock returns, as well as to returns on mutual funds. Corresponding tests of the market model are given and it is shown that the nonparametric model often provides an improvement over the standard parametric market model.     

Exploring governance of the new European Banking Authority—A case for harmonization?

In the context of the proposed EU financial supervisory reforms, this paper focuses on the governance of the network of national supervisory banking agencies and the newly established Community supervisor (European Banking Authority, EBA). We assess to what extent lack of governance convergence nationally and with EBA could undermine the incentives for cooperation among supervisors. Convergence should particularly focus on (i) the issue of the presence of politicians on decision-making bodies; (ii) the need for clearly defining dismissal procedures of heads of supervision; (iii) autonomy from government in regulatory matters; (iv) supervisory autonomy in matters of licensing and withdrawing licenses; (iv) mechanisms for judicial accountability; (v) legal protection for supervisors handling in good faith. In the absence of full centralization of prudential supervision, early harmonization of national governance arrangements towards best practice would better align supervisors’ incentive structures and, hence, be beneficial for the effectiveness of European supervision.     

The European Central Bank and green finance: How would the green quantitative easing affect the investors' behavior during times of crisis?

In July 2021, the European central bank (ECB) announced the application of new environmental criteria to purchase private assets as part of its Quantitative Easing (QE) program. Using a Bayesian VAR model with time varying parameters and stochastic volatility (TVP-BVAR-SV), we investigate the transmission of Green bond shocks to the stock market during the pre-and-post COVID-19 pandemic. We document a nonlinear relation between the green bonds and the green equities. Our findings suggest that the ECB's Green QE can drive investors towards green investment in the stock market through the green bond market during the non-crisis period. However, we show that the proper transmission of Green QE shocks to the stock market depends on the economic conditions and could not be effective during the crisis period. Our results also support previous findings that state the growing demand for sustainable investing after COVID-19. These findings have important implications for investment professionals, policymakers, and environmentally concerned actors.     

On the exposure of insurance companies to sovereign risk—Portfolio investments and market forces

A sovereign debt crisis can have significant knock-on effects in the financial markets and put financial stability at risk. This paper focuses on the transmission of sovereign risk to insurance companies as some of the largest institutional investors in the sovereign bond market. We use a firm level panel dataset that covers large insurance companies, banks and non-financial firms from nine countries over the time period from 1 January 2008–1 May 2013. We find significant and robust transmission effects from sovereign risk to domestic insurers. The impact on insurers is not significantly different from that on banks but larger than for non-financial firms. We find that systemically important insurers are more closely linked to the domestic sovereign. Based on European data, we show that risks in sovereign bond portfolios are an important driver of insurer risk, which is not reflected in current insurance regulation (incl. Solvency II in Europe).     

Foreclosure of Securitized Commercial Mortgages—A Model of the Special Servicer

The decision to foreclose on a CMBS mortgage is made by the special servicer. A mortgage loan is in special servicing when it is either delinquent or in a state of imminent default. A special servicer should represent the interests of the underlying CMBS bondholders by returning the highest possible value to the investors. In this paper, we show that a special servicer’s compensation structure results in an incentive for her to extend a loan beyond the time desired by its bondholders. We develop a model and demonstrate how compensation incentives interact and influence a special servicer’s foreclosure decisions. Our model takes into consideration the dynamic nature of such a decision by viewing is as a dynamic programming problem whereby foreclosure represents a discrete terminal state of an optimal stopping problem. This model thus captures the trade-off between continuation of a loan and termination and we use this model to determine how the stopping rule changes under various compensation structures.     

Can fintech improve the efficiency of commercial banks? —An analysis based on big data

This paper assess the potential impact of Fintech on the banking industry. Results suggest that, for commercial banks, development of Fintech leads to increased profitability, financial innovation, and improved control of risk. Overall, by using financial technology, commercial banks can improve their traditional business model by reducing bank operating costs, improving service efficiency, strengthening risk control capabilities, and creating enhanced customer-oriented business models for customers; thereby improving comprehensive competitiveness. We also find that levels of such outcomes vary with levels of respective bank’s use of technological innovation.     

An evaluation of conditional multi-factor models in active asset allocation strategies: an empirical study for the German stock market

This paper examines the out-of-sample performance of asset allocation strategies that use conditional multi-factor models to forecast expected returns and estimate the future variance and covariance. We find that strategies based on conditional multi-factor models outperform strategies based on unconditional multi-factor models, and do better than a passive buy-and-hold strategy. However, a strategy that uses the sample mean as a return forecast is superior. We also find that the estimation of the covariance matrices based on the conditional and unconditional multi-factor models does not improve the performance of the active asset allocation strategy relative to the incorporation of the historical covariance matrices. These results are fairly robust to different estimation approaches, as well as to the impact of transaction costs and the consideration of upper and lower bounds for the portfolio weights.