Adverse effects of leverage and short-selling constraints in a financial market model with heterogeneous agents

This paper investigates the impact of leverage and short-selling constraints on financial market stability. Investors׳ demand is modelled in a well-known asset pricing model with heterogeneous beliefs. In particular, I generalise the heterogeneous agents model of Brock and Hommes (1998) and Anufriev and Tuinstra (2013) to allow for leverage constraints as well as a short-selling tax. I consider two examples of adaptive belief systems describing the coevolution of prices and investors׳ beliefs. First, if the market is inhabited by fundamentalist and chartist traders, demand constraints have potential adverse effects and may restrict the stabilising fundamentalist strategy such that mispricing and price volatility increase. Second, if the market is inhabited by fundamentalists, optimists and pessimists with fixed beliefs, demand constraints drive down price volatility, but mispricing remains. The results suggest the stabilising effects of demand constraints in financial markets are limited. Only if asset prices are too high compared to fundamentals, policy makers should consider constraining leverage ratios in order to deflate financial bubbles.     

Accounting enlightenment in the age of reason

We scrutinize the role financial reporting for fair values, asset securitizations, derivatives and loan loss provisioning played in the Financial Crisis. Because banks were at the center of the Financial Crisis, we focus our discussion and analysis on the effects of financial reporting by banks. We conclude fair value accounting played little or no role in the Financial Crisis. However, transparency of information associated with asset securitizations and derivatives likely was insufficient for investors to assess properly the values and riskiness of bank assets and liabilities. Although the FASB and IASB have taken laudable steps to improve disclosures relating to asset securitizations, in our view, the approach for accounting for securitizations in the IASB's Exposure Draft that would require banks to recognize whatever assets and liabilities they have after the securitization is executed better reflects the underlying economics of the securitization transaction. Regarding derivatives, we recommend disclosure of more disaggregated information, disclosure of the sensitivity of derivatives' fair values to changes in market risk variables, and implementing a risk-equivalence approach to enable investors to understand better the leverage inherent in derivatives. We also conclude that because the objectives of bank regulation and financial reporting differ, changes in financial reporting needed to improve transparency of information provided to the capital markets likely will not be identical to changes in bank regulations needed to strengthen the stability of the banking sector. We discuss how loan loss provisioning may have contributed to the Financial Crisis through its effects on procyclicality and on the effectiveness of market discipline. Accounting standard setters and bank regulators should find some common ground. However, it is the responsibility of bank regulators, not accounting standard setters, to ensure the stability of the financial system.     

Heterogeneous Traders,the Leverage Effect and Volatility of the Chinese P2P Market

The new financial industry represented by peer-to-peer lending has gradually become a new source of volatility due to the increasing complexity of the Chinese financial market. This volatility leads to greater risk to P2P investors and has become the focus of the regulatory authorities in China. Based on the background data of the P2P platform, Honglingchuangtou, we use the factor analysis method to construct a platform volatility (PV) index and we construct an HAR model to study the heterogeneous traders and leverage effect in the Chinese P2P market. The empirical results show that there are both short-term and long-term heterogeneous traders in the Chinese P2P market and that long-term traders have the greatest impact on market volatility. Similar to traditional financial markets, the volatility of the P2P market also shows a leverage effect, which means that the negative volatility of trader actions should have a negative impact on market fluctuations. With regard to the leverage effect, the LHAR-PV model is superior because of a higher goodness of fit and a lower prediction error.     

Privatization,Financialization and State Restructuring in Eastern Germany: The case of Am südpark

Using a mix of survey data, results from a study on local planning politics and fieldwork, this article discusses the interplay of planning and welfare policies with global financial markets in the ‘making’ of social segregation in Halle‐Neustadt, a borough in the German city of Halle (Saale). Here, different developments come together. First, Halle‐Neustadt has experienced two waves of privatization, leading to a complete change of ownership structures, marked by the rise of financial investors. Second, welfare cuts have put increasing pressure on welfare recipients to live in the cheapest housing available. This has led to the emergence of a ‘Hartz IV business model’ based on low, but state‐subsidized, rents. Third, new planning policies have led to a massive drop in house prices, thus facilitating the use of ‘leverage’ strategies for financial investors. We expand on an already developed debate, providing new insights about relations between planning, state restructuring and financialization in a German context. We demonstrate that a broad array of changes in national regulatory settings, policy change in different sectors and local particularities can all be crucial in enabling financialization. We conclude that research should place greater emphasis on the state in providing explanations and take differences in context more seriously.     

Is bitcoin a safe haven or a hedging asset? Evidence from China

Based on daily data about Bitcoin and six other major financial assets (stocks, commodity futures (commodities), gold, foreign exchange (FX), monetary assets, and bonds) in China from 2013 to 2017, we use a VAR-GARCH-BEKK model to investigate mean and volatility spillover effects between Bitcoin and other major assets and explore whether Bitcoin can be used either as a hedging asset or a safe haven. Our empirical results show that (i) only the monetary market, i.e., the Shanghai Interbank Offered Rate (SHIIBOR) has a mean spillover effect on Bitcoin and (ii) gold, monetary, and bond markets have volatility spillover effects on Bitcoin, while Bitcoin has a volatility spillover effect only on the gold market. We further find that Bitcoin can be hedged against stocks, bonds and SHIBOR and is a safe haven when extreme price changes occur in the monetary market. Our findings provide useful information for investors and portfolio risk managers who have invested or hedged with Bitcoin.     

The no-arbitrage condition and financial markets with heterogeneous information

This paper examines the role of the no-arbitrage condition in financial markets with heterogeneous expectations. We consider a single-period, state-contingent claims model, withM risky securities andS states. There exist two types of heterogeneously informed investors, where the information heterogeneity is defined with respect to either the security payoff matrix, the state probability vector, or state partitions. When the information heterogeneity is defined with respect to either the security payoff matrix or state partitions, the no-arbitrage condition imposes a constraint on the dispersion of information between informed and uninformed investors. Further, the no-arbitrage condition is useful in ascertaining the patterns of heterogeneity among investors that are consistent with equilibrium. However, when the information heterogeneity is defined with respect to state probabilities, the role of the no-arbitrage condition is severely restricted. Finally, the no-arbitrage condition may have important implications for the (necessary and sufficient) conditions for the existence of an equilibrium price vector in financial markets with heterogeneous expectations.     

企业应用财务杠杆的利弊分析

财务杠杆作为企业调节权益收益的手段,对其利用的程度和方法不同,所产生的效果也会很不同。企业选择融资结构策略时必须权衡财务杠杆利益和财务风险,以便投资者以尽量低的风险取得尽可能大的利益。     

Aggregation of heterogeneous beliefs

This paper is a generalization of [Calvet, L., Grandmont, J.-M., Lemaire, I., 2002. Aggregation of heterogenous beliefs and asset pricing in complete financial markets. Working paper] to a dynamic setting. We propose a method to aggregate heterogeneous individual probability beliefs, in dynamic and complete asset markets, into a single consensus probability belief. This consensus probability belief, if commonly shared by all investors, generates the same equilibrium prices as well as the same individual marginal valuation as in the original heterogeneous probability beliefs setting. As in [Calvet, L., Grandmont, J.-M., Lemaire, I., 2002. Aggregation of heterogenous beliefs and asset pricing in complete financial markets. Working paper], the construction stands on a fictitious adjustment of the market portfolio. The adjustment process reflects the aggregation bias due to the diversity of beliefs. In this setting, the construction of a representative agent is shown to be also valid.     

Cross-region risk spillover between the stock and stock index futures markets under exogenous shocks

By integrating the stock and futures markets of mainland China and Hong Kong into the same financial system, we explore the cross-region risk spillovers between the stock market and stock index futures market under the impact of exogenous events. We find evidence of significant risk spillovers between the two stock markets, and confirm that exogenous shocks, including the adjustments of regulatory policies of mainland China and 2019 Hong Kong Protest, can significantly affect the volatility spillover across assets and markets. Our findings can potentially help regulators and investors understand the cross-region risk conduction and assess portfolio risk after exogenous event.     

Stock market linkages and financial contagion: A cobreaking analysis

Financial crises have shown that dramatic movements in one financial market can have a powerful impact on other markets. This paper proposes to use cobreaking to model comovements between stock markets during crises and to test for contagion. We find evidence of cobreaking between developed stock markets. In emerging stock markets, the evidence of cobreaking is mainly due to the non-financial event of the World Trade Center terrorist attacks in 2001. We find evidence of short-term linkages during times of crisis but not contagion. These short-term linkages have important implications for investors, risk managers and regulators.     

金融资产配置、金融杠杆与现金流风险

金融资产会计安排是企业执行金融工具准则的重要环节,具有显著的经济后果。基于实体企业金融化现象,研究金融资产配置与现金流风险关系,分析金融杠杆的调节功能,探讨非效率资本配置的传导作用,研究发现：金融资产配置与现金流风险之间存在U型关系;金融杠杆能够调节金融资产配置与现金流风险的关系,使关系曲线拐点右移与扁平化。区分金融资产配置类型后发现：交易类金融资产与现金流风险呈U型关系;委托贷款等新兴金融资产负向影响现金流风险;投资性房地产和长期金融股权投资未显著影响现金流风险。考虑企业生命周期后发现,成长期与衰退期企业金融资产配置与现金流风险呈U型关系,成熟期企业金融资产配置负向影响现金流风险;按照产权性质分组检验发现,金融资产配置与现金流风险的关系以及金融杠杆的调节效应在非国有企业中更显著;机制检验发现,非效率资本配置在金融资产配置影响现金流风险的过程中发挥中介作用。     

Modelling stock price behaviour by financial ratios

The main purpose of this study is to find out which economic dimensions of the firm are reflected in stock price behaviour in the Finnish stock market. Based on the previous theoretical articles, four economic dimensions are chosen: profitability, financial leverage, operating leverage and corporate growth. Twelve (12) financial ratios are then selected to represent these four dimensions. All the Finnish firms common series listed for the whole 1974–1986 period are included in the empirical analysis.All of the four expected dimensions above are found in the empirical classification pattern of ratios. On the cross-sectional level, profitability and financial leverate are reported as determinants of stock price behaviour. Corporation growth is merely connected to the risk of the common stock. Somewhat weaker results concerning the association between stock price behaviour and operating leverage factor may be due to difficulties measuring operating leverage on an empirical level.When studying the intra-year explanatory power of financial ratios, it is reported that the explanatory power of financial ratios tends to increase when the reporting day approaches, and starts to decrease after that releasing day of financial statement numbers. Empirical evidence strongly indicates that financial ratios represent pricing relationships in a substantive manner.The financial support by the Academy of Finland as well as the helpful comments and suggestions of an anonymous referee are gratefully acknowledged.     

基于多元化竞争战略探讨我国中小企业的资本结构问题

本文创新性地从竞争战略的视角来研究中小企业资本结构问题,建立了中小企业多元化经营回归模型,设置了多元化变量、财务杠杆变量、国家补贴变量和收益性变量,并根据深圳证券交易创业板所提供的实际数据,运用相关性分析的方法进行了实证研究,结果表明:中小企业的多元化经营与资产负债率指标之间并不显著相关;财务杠杆系数对企业资产负债率呈显著正相关;国家财政补贴扶持对中小企业的效果显著。     

Prices,debt and market structure in an agent-based model of the financial market

We develop an agent-based model in which heterogeneous and boundedly rational agents interact by trading a risky asset at an endogenously set price. Agents are endowed with balance sheets comprising the risky asset as well as cash on the asset side and equity capital as well as debt on the liabilities side. A number of findings emerge when simulating the model: we find that the empirically observable log-normal distribution of bank balance sheet size naturally emerges and that higher levels of leverage lead to a greater inequality among agents. Furthermore, greater leverage increases the frequency of bankruptcies and systemic events. Credit frictions, which we define as the stickiness of debt adjustments, are able to explain a key difference in the relation between leverage and assets observed for different bank types. Lowering credit frictions leads to an increasingly procyclical behavior of leverage, which is typical for investment banks. Nevertheless, the impact of credit frictions on the fragility of the model financial system is complex. Lower frictions do increase the stability of the system most of the time, while systemic events become more probable. In particular, we observe an increasing frequency of severe liquidity crises that can lead to the collapse of the entire model financial system.     

Endogenous incompleteness of financial markets: The role of ambiguity and ambiguity aversion

Incompleteness of financial markets has been widely questioned in the literature, but traditional research has been mainly focused on the role of transaction costs and asymmetric information in determining such incompleteness. This paper, instead, focuses on agents’ preferences, showing that the introduction of ambiguity and ambiguity aversion may induce investors to restrict their trading to a simpler set of assets, relative to which they are less likely to make errors.     

金融行业间的资产风险外溢影响

银行业、保险业和证券业因投资业务而构建起联系，并基于金融资产价格而具有了传染渠道。随着投资活动愈发频繁，金融行业中各行业内部的资产风险可能外溢至其他行业。本文首先从理论上分析金融行业资产风险通过投资资产外溢的过程，通过搭建资产抛售模型模拟资产风险的传染机制，从机构层面和行业层面分析资产风险的生成与传递。其次，基于金融机构实际数据的模拟分析结果显示，四大国有商业银行和中国平安具有外溢风险的能力，首先影响银行和保险公司，随后再扩散到整个金融行业，而证券业则相对较为独立。银行业的外溢影响最大，其次是保险业和证券业。但事实上很难发生足以对外部造成显著影响的损失事件。资产、投资比例、杠杆和监管要求水平在资产风险外溢的过程中具有一定的影响。     

The impact of systemic and illiquidity risk on financing with risky collateral

Repurchase agreements (repos) are one of the most important sources of funding liquidity for many financial investors and intermediaries. In a repo, some assets are given by a borrower as collateral in exchange of funding. The capital given to the borrower is the market value of the collateral, reduced by an amount termed as haircut (or margin). The haircut protects the capital lender from loss of value of the collateral contingent on the borrower׳s default. For this reason, the haircut is typically calculated with a simple Value at Risk estimation of the collateral for the purpose of preventing the risk associated to volatility. However, other risk factors should be included in the haircut and a severe undervaluation of them could result in a significant loss of value of the collateral if the borrower defaults. In this paper we present a stylized model of the financial system, which allows us to compute the haircut incorporating the liquidity risk of the collateral and, most important, possible systemic effects. These are mainly due to the similarity of bank portfolios, excessive leverage of financial institutions, and illiquidity of assets. The model is analytically solvable under some simplifying assumptions and robust to the relaxation of these assumptions, as shown through Monte Carlo simulations. We also show which are the most critical model parameters for the determination of haircuts.     

Stocks,bonds, money markets and exchange rates: measuring international financial transmission

Understanding the complexity of the financial transmission process across various assets—domestically as well as within and across asset classes—requires the simultaneous modeling of the various transmission channels in a single, comprehensive empirical framework. The paper estimates the financial transmission between money, bond and equity markets and exchange rates within and between the USA and the euro area. We find that asset prices react strongest to other domestic asset price shocks, but that there are also substantial international spillovers, both within and across asset classes. The results underline the dominance of US markets as the main driver of global financial markets: US financial markets explain, on average, around 30% of movements in euro area financial markets, whereas euro area markets account only for about 6% of US asset price changes. Moreover, the methodology allows us to identify indirect spillovers through other asset prices, which are found to increase substantially the international transmission of shocks within asset classes. Copyright © 2010 John Wiley & Sons, Ltd.     

Structural breaks in the correlations between Asian and US stock markets

The study explores the structural breaks in the correlations between nine Asian stock markets and the US stock market. This study employs the EGARCH-DCC model to obtain the daily correlations between Asian and the US stock markets, and use the method of Carrion-i-Silvestre (2005) to detect the structural breaks. The empirical results indicate there are multiple breaks in the correlations and imply that both 2001 Dot-com bubble and 2008 financial crisis have impacts on the correlations between Asian and the US markets. These results bring the crucial insights for the portfolio strategy of international investors.     

Islamic equity market integration and volatility spillover between emerging and US stock markets

The purpose of this paper is to study the conditional correlations across the US market and a sample of five Islamic emerging markets, namely Turkey, Indonesia, Pakistan, Qatar, and Malaysia. The empirical design uses MSCI (Morgan Stanley Capital International) Islamic equity index since it applies stringent restrictions to include companies. Indeed, two main restrictions must be met: (i) the business activity must be compliant with Shari’ah (i.e., Islamic law) guidelines and (ii) interest-bearing investments and leverage ratios should not exceed upper limits. Three models are used: multivariate GARCH BEKK, CCC, and DCC. The estimation results of the three models show that the US and Islamic emerging equity markets are weakly correlated over time. No sheer evidence supports that the US market spills over into the Islamic emerging equity markets. Besides interpreting the results in terms of weak market integration, the peculiar specificities of the Islamic finance industry and the admittance conditions to the MSCI Islamic equity index contribute to explaining them. Indeed, Islamic finance bans interest-bearing investments and imposes some rules, such as asset-backing, which has sizeable impacts on volatility spillover and shocks transmissions, alongside with the close linkage between real and financial sectors. These findings suggest that investors should take caution when investing in the Islamic emerging equity markets and diversifying their portfolios in order to minimize risk.