Linkages between Indian and US financial markets: impact of global financial crisis and Eurozone debt crisis

This paper examines inter-linkages between Indian and US equity, foreign exchange and money markets using the vector autoregressive-multivariate GARCH-BEKK framework. We investigate the impact of global financial crisis (GFC) and Eurozone debt crisis (EZDC) on the conditional volatility and conditional correlation estimates derived from the multivariate GARCH model for Indian and US financial markets. Our results indicate that there is significant bidirectional causality-in-mean between the Indian stock market returns and the Rs./USD market returns, and significant unidirectional causality-in-mean from the US stock market returns to the Indian stock market returns. As regards volatility spillovers, we find that volatility in the Indian stock market rises in response to domestic as well as US financial market shocks but Indian financial market shocks do not impact the US markets. Further, impact of the recent crisis episodes on the covariance matrix is found to be significant. We find that volatility in the Indian and US financial markets significantly amplified during GFC. The conditional correlations across asset markets were significantly accentuated in the wake of the two crisis episodes. The impact of GFC on cross-market conditional correlations is higher for majority of the asset market pairs in comparison to the EZDC.     

2010年5月国际金融市场运行综述

2010年5月,受欧洲债务危机继续发展、市场避险情绪升温影响,美元、日元走强,欧元、英镑走弱。金融市场流动性趋紧使主要货币短期利率上升。主要国家中长期国债收益率下降。全球主要股指大幅下跌。     

Quantify the quantitative easing: Impact on bonds and corporate debt issuance

This paper studies the impact of the European Central Bank’s (ECB) Corporate Sector Purchase Programme (CSPP) announcement on prices, liquidity, and debt issuance in the European corporate bond market using a data set on bond transactions from Euroclear. I find that the quantitative easing (QE) programme increased prices and liquidity of bonds eligible to be purchased substantially. Bond yields dropped on average by 30 basis points (bps) (8%) after the CSPP announcement. Tri-party repo turnover rose by 8.15 million USD (29%), and bilateral turnover went up by 7.05 million USD (72%). Bid-ask spreads also showed significant liquidity improvement in eligible bonds. QE was successful in boosting corporate debt issuance. Firms issued 2.19 billion EUR (25%) more in QE-eligible debt after the CSPP announcement, compared to other types of debt. Surprisingly, corporates used the attracted funds mostly to increase dividends. These effects were more pronounced for longer-maturity, lower-rated bonds, and for more credit-constrained, lower-rated firms.     

Dynamic spillovers between commodity and currency markets

In this study, we examine the dynamic link between returns and volatility of commodities and currency markets. Based on weekly data over the period from January 6, 1987 to July 22, 2014, we find the following empirical regularities. First, our results suggest that the information contents of gold, silver, platinum, and the CHF/USD and GBP/USD exchange rates can help improve forecast accuracy of returns and volatilities of palladium, crude oil and the EUR/CHF and GBP/USD exchange rates. Second, gold (CHF/USD) is the dominant commodity (currency) transmitter of return and volatility spillovers to the remaining assets in our model. Third, the analysis of dynamic spillovers shows time- and event-specific patterns. For instance, the dynamic spillover effects originating in gold and silver (platinum) returns and volatility intensified (degraded) in the period marked by the global financial crisis. After the global financial crisis, the net transmitting role of gold and silver (platinum) returns shocks weakened (strengthened), while the net transmitting role of gold, silver and platinum volatility shocks remained relatively high. Overall, our findings reveal that, while the static analysis clearly classifies the aforementioned variables into net transmitters and net receivers, the dynamic analysis denotes episodes wherein the role of transmitters and receivers of return (volatility) spillovers can be interrupted or even reversed. Hence, even if certain commonalities prevail in each identified category of commodities, such commonalities are time- and event-dependent.     

Volatility transmission in emerging European foreign exchange markets

This paper studies the dynamics of volatility transmission between Central European (CE) currencies and the EUR/USD foreign exchange using model-free estimates of daily exchange rate volatility based on intraday data. We formulate a flexible yet parsimonious parametric model in which the daily realized volatility of a given exchange rate depends both on its own lags as well as on the lagged realized volatilities of the other exchange rates. We find evidence of statistically significant intra-regional volatility spillovers among the CE foreign exchange markets. With the exception of the Czech and, prior to the recent turbulent economic events, Polish currencies, we find no significant spillovers running from the EUR/USD to the CE foreign exchange markets. To measure the overall magnitude and evolution of volatility transmission over time, we construct a dynamic version of the Diebold–Yilmaz volatility spillover index and show that volatility spillovers tend to increase in periods characterized by market uncertainty.     

2010年2月国际金融市场运行综述

2010年2月，受欧洲主权债务问题影响，市场避险情绪升温，美元对欧元、英镑走强，对日元走弱。因市场预期欧央行、日本银行和美联储将继续保持较为宽松的货币政策，英国可能率先加息，美元、欧元、日元短期利率基本走平，英镑短期利率微升。美国、英国、德国中长期国债收益率先升后降，日本中长期国债收益率下降。全球主要股指先跌后涨。     

The High‐Frequency Response of the EUR‐USD Exchange Rate to ECB Communication

We investigate the impact of the European Central Bank's monetary policy communication during the press conference held after the monthly Governing Council meeting on the EUR‐USD exchange rate in high frequency. Based on the method of Content Analysis, we construct communication indicators for the introductory statement and find that communication with respect to future price developments is most relevant. In response to statements about increasing risks to price stability the EUR appreciates on impact. To the contrary, communication about economic activity and monetary aggregates does not generate significant exchange rate reactions.     

Transmission of the financial and sovereign debt crises to the EMU: Stock prices,CDS spreads and exchange rates

This paper tests for the transmission of the 2007–2010 financial and sovereign debt crises to fifteen EMU countries. We use daily data from 2003 to 2010 on country financial and non-financial stock market indexes to analyze the stock market returns for three country groups within EMU: North, South and Small. The following results hold for both the North and South European countries, while the smallest countries seem to be relatively isolated from international events. First, we find strong evidence of crisis transmission to European non-financials from US non-financials, but not for financials. Second, in order to test how the sovereign debt crisis affects stock market developments we split the crisis in pre- and post-Lehman sub periods. Results show that financials become significantly more dependent on changes in the difference between the Greek and German CDS spreads after Lehman’s collapse, compared to the pre-Lehman sub period. However, this increase is much smaller for non-financials. Third, before the crisis euro appreciations coincide with European stock market decreases, whereas this relationship reverses during the crisis. Finally, this reversal seems to be triggered by Lehman’s collapse.     

2010年上半年国际金融市场运行综述

2010年上半年,在美国经济持续复苏以及欧洲主权债务危机不断深化等因素影响下,美元持续走强。美元、英镑短期利率上升,欧元短期利率先降后升,日元短期利率下降。主要国家中长期国债收益率下降。各主要股指先升后降。     

Trustee reputation in securitization: When does it matter?

We consider the role of trustees–who are nominated to protect the interests of investors–in securitization pricing and whether investors rely on them to mitigate risks. In particular, we examine the effect of trustee reputation on initial yield spreads of European mortgage‐backed security (MBS) issuances between 1999 and the first half of 2007. We find that engaging reputable trustees led to lower spreads during the credit boom period prior to the 2007–2009 financial crisis. Our findings suggest that trustees’ reputation was considered by investors to be more important when risk assessment became more challenging.     

中国银行间市场开创卢布交易业务完善市场功能

1994年人民币汇率形成机制改革以来,中国银行间外汇市场挂牌了美元、欧元、日元、英镑和港币等五种国际储备货币。本轮国际金融危机以来,主要货币汇率波动加大,微观主体出于节约汇兑成本的需要,对人民币与新兴市场货币兑换交易的需求不断上升。为满足经济主体的需求,中国人民银行积极探索在银行间外汇市场挂牌人民币对新兴市场货币交易。2010年11月22日,中国银行间外汇市场挂牌人民币对卢布交易。挂牌以来,中国银行间外汇市场人民币对新兴市场货币交易健康发展,报价日益活跃,成交快速增长。截至2011年9月末,银行间外汇市场人民币对卢布成交53.10亿元人民币,2011年下半年以来的交易量也已超过了人民币对英镑的交易量。在我国银行间市场挂牌人民币对卢布交易一周年之际,本刊特推出四家人民币对卢布做市商相关经验与感想的专题文章,供市场参考。     

Volatility in the federal funds market and money market spreads during the financial crisis

We analyze the role of federal funds rate volatility in affecting risk premium as measured by various money market spreads during the 2007–2009 financial crisis. We find that volatility in the federal funds market contributed to elevated Overnight Index Swap (OIS) spreads of unsecured bank funding rates during the crisis. Using OIS as a proxy for market expectations, we also decompose London Inter-Bank Offered Rate (Libor) into its permanent and transitory components in a dynamic factor framework and show that increased volatility in the federal funds market contributed to substantial transitory movements of Libor away from its long-run trend during the financial crisis.     

The chicken or the egg? A note on the dynamic interrelation between government bond spreads and credit default swaps

This note provides the first empirical assessment of the dynamic interrelation between government bond spreads and their associated credit default swaps (CDS). We use data for the Southern European countries (Greece, Italy, Portugal and Spain) that found themselves with a problematic public sector in the dawn of the recent financial distress. We find that CDS prices Granger-cause government bond spreads after the eruption of the 2007 sub-prime crisis. Feedback causality is detected during periods of financial and economic turmoil, thereby indicating that high risk aversion tends to perplex the transmission mechanism between CDS prices and government bond spreads.     

Modelling and trading the EUR/USD exchange rate at the ECB fixing

The motivation for this paper is to investigate the use of alternative novel neural network (NN) architectures when applied to the task of forecasting and trading the euro/dollar (EUR/USD) exchange rate, using the European Central Bank (ECB) fixing series with only auto-regressive terms as inputs. This is done by benchmarking four different NN designs representing a higher-order neural network (HONN), a Psi Sigma Network and a recurrent neural network with the classic multilayer perception (MLP) and some traditional techniques, either statistical such as an auto-regressive moving average model, or technical such as a moving average convergence/divergence model, plus a naïve strategy. More specifically, the trading performance of all models is investigated in a forecast and trading simulation on the EUR/USD ECB fixing time series over the period 1999–2007 using the last one and half years for out-of-sample testing, an original feature of this paper. We use the EUR/USD daily fixing by the ECB as many financial institutions are ready to trade at this level and it is therefore possible to leave orders with a bank for business to be transacted on that basis. As it turns out, the MLP does remarkably well and outperforms all other models in a simple trading simulation exercise. However, when more sophisticated trading strategies using confirmation filters and leverage are applied, the HONN network produces better results and outperforms all other NN and traditional statistical models in terms of annualized return.     

Bond market investor herding: Evidence from the European financial crisis

During the recent financial crisis, numerous EU officials, market participants and the media suggested that irrational herding was a key factor for the financial turmoil and the soaring yield spreads. In this paper we test for evidence of herd behavior in European government bond prices and, overall, we find no evidence of investor herding either before or after the EU crisis. We do find, however, in an original contribution to the bond market literature, strong evidence that during the EU crisis period, macroeconomic information announcements induced bond market investor herding; a finding that confirms the notion of ‘spurious’ herding proposed by Bikhchandani and Sharma (2001) for bond markets. Further tests reinforce this finding and also indicate the existence of herding spill-over effects.     

Did COVID-19 change spillover patterns between Fintech and other asset classes?

This study examines the spillover effect between financial technology (Fintech) stocks and other financial assets (gold, Bitcoin, a global equity index, crude oil, and the US Dollar) during the COVID-19 crisis. Employing daily data from June 2019 to August 2020, our empirical analysis shows that the outbreak of COVID-19 exacerbated volatility transmission across asset classes, while subsequent decreases in new confirmed cases globally reduced the intensity of these spillovers. The evidence for the USD and gold supports their safe haven properties during catastrophic events, while innovative technology products as represented by a financial technology index (KFTX) and Bitcoin were highly susceptible to external shocks. These results show that when push comes to shove, the buck stops with the USD and gold and that the exorbitant privilege enjoyed by the USD prevailed during the COVID-19 pandemic.     

Investor induced contagion during the banking and European sovereign debt crisis of 2007–2012: Wealth effect or portfolio rebalancing?

This study investigates the way a crisis spreads within a country and across borders by testing the investor induced contagion hypothesis through the liquidity channel on stock-bond relationships of the US and five European countries before and during the global banking and European sovereign debt crisis of 2007–2012. We provide evidence consistent with the wealth effect as a source of contagion for the majority of countries. Nevertheless, we uncover evidence of investor induced contagion sourced by the portfolio rebalancing effect for correlations involving Spanish and Italian bonds during the debt crisis. Further, we find that tight (narrow) credit spreads reduce (magnify) the wealth and portfolio rebalancing effects, which are offset by the opposite effects of risk aversion amongst investors, a dynamic that is not restricted to crisis periods.     

Understanding liquidity and credit risks in the financial crisis

This paper develops a structured dynamic factor model for the spreads between London Interbank Offered Rate (LIBOR) and overnight index swap (OIS) rates for a panel of banks. Our model involves latent factors which reflect liquidity and credit risk. Our empirical results show that surges in the short term LIBOR-OIS spreads during the 2007-2009 financial crisis were largely driven by liquidity risk. However, credit risk played a more significant role in the longer term (twelve-month) LIBOR-OIS spread. The liquidity risk factors are more volatile than the credit risk factor. Most of the familiar events in the financial crisis are linked more to movements in liquidity risk than credit risk.     

Does sovereign risk matter? New evidence from eurozone corporate bond ratings and zero-volatility spreads

In this paper, we empirically examine if sovereign risk matters for corporate bonds in developed economies. Using a unique panel data sample of 897 corporate bonds from eleven countries within the Economic and Monetary Union (EMU), we investigate sovereign and corporate ratings as well as zero-volatility spreads (z-spreads). In the time period from March 2006 to June 2012, we find sovereign risk to be a significant driver of corporate risk. The effect is stronger for companies with domestic revenue structure, for companies that are (partly) owned by the government, and companies active in the utility and transportation sector. Interestingly, the impact of sovereign risk on corporate risk during the acute European sovereign debt crisis period decreases if ratings are examined, but increases if z-spreads are utilized. Rating agencies seem to take a more differentiated view on individual company risk during the sovereign debt crisis, while institutional investors might want to reduce their exposure to a country in financial distress as a whole, regardless of whether sovereign or corporate bonds are held.     

Disentangling contagion among sovereign CDS spreads during the European debt crisis

During the last crisis, developed economies' sovereign credit default swap (hereafter CDS) premia have gained in importance as a tool for approximating credit risk. In this paper, we fit a dynamic factor model to decompose the sovereign CDS spreads of ten OECD economies into three components: a common factor, a second factor driven by European peripheral countries and an idiosyncratic component. We use this decomposition to propose a novel methodology based on the real-time estimates of the model to characterize contagion among the ten series. Our procedure allows the country that triggers contagion in each period, which can be any peripheral economy, to be disentangled. According to our findings, since the onset of the sovereign debt crisis, contagion has played a non-negligible role in the European peripheral countries, which confirms the existence of significant financial linkages between these economies.