Delegation and the regulation of U.S. financial markets

We analyze the institutional determinants of U.S. financial market regulation with a general model of the policy-making process in which legislators delegate authority to regulate financial risk at both the firm and systemic levels. The model explains changes in U.S. financial regulation leading up to the financial crisis. We test the predictions of the general model with a novel, comprehensive data set of financial regulatory laws enacted specifically between 1950 and 2009. The theoretical and empirical analysis finds that economic and political factors impact Congress’ decision to delegate regulatory authority to executive agencies, which in turn impacts the stringency of financial market regulation, and our estimation results indicate that political factors may have been stronger and resulted in inefficiencies.     

Dynamics of volatility transmission between the U.S. and the Chinese agricultural futures markets

The U.S. and China are two of the biggest players in the world agricultural market. The literature documents that volatility in the U.S. agricultural futures market spills over significantly to that of China. This article provides further insights into the spillovers from China to the U.S. as well as the time horizon and dynamics of the bidirectional spillovers through the application of a multivariate extension of the heterogeneous autoregressive model, in relation to four commodities – soybean, wheat, corn and sugar. The results confirm the existence of significant spillovers from the U.S. to China for four commodities, which are primarily generated by the shorter-term volatility components in the U.S., and provide evidence for the increasing pricing power of the Chinese market. The findings are robust against various specifications and have important investment and policy implications.     

Shocks,financial dependence and efficiency: Evidence from U.S. and Canadian industries

This paper investigates how changes in industries’ funding costs affect total factor productivity (TFP) growth. Based on panel regressions using data for U.S. and Canadian industries and industries’ dependence on external funding as an identification mechanism, we show that increases in the cost of funds affect TFP growth negatively. The effect is non‐monotonic depending on a sector's external finance need. This paper presents a theoretical model that produces the observed non‐monotonic effect of financial shocks on TFP growth and suggests that financial shocks distort the allocation of factors across firms even within an industry, thus reducing TFP growth.     

Spillovers of volatility index: evidence from U.S., European,and Asian stock markets

We investigated the cross-market relations of volatility indexes with U.S. and non-U.S. stock market returns. We found that the pervasive VIX influence at both U.S. and non-U.S. stock markets. The VSTOXX and VKOSPI capture the major shocks to the global economy and show movements similar to the VIX. The empirical findings indicate that volatility index changes are important in explaining stock returns. We also examined spillover effects across volatility indexes. The VIX is a main transmitter, and the VKOSPI the main receiver, of these spillovers. The results point to a leading role for the VIX in the international market.     

Translating financial integration into correlation risk: A weekly reporting's viewpoint for the volatility behavior of stock markets

We apply the multivariate extension of GARCH-type models in order to assess the systematic and systemic risks as well as the joint volatility behaviors of the U.S. and three European financial markets (Andersen et al., 2010). Therefore, we can appraise the co-movements of the four previous financial markets as well as the joint behavior of their respective volatilities (i.e. systemic risk). Moreover, the resulting conditional variance and covariance metrics allow for handling volatility spillovers (i.e. contagion risk in terms of transmitting volatility shocks from one market place to another market place). Indeed, results highlight the unprecedented high systemic risk levels (i.e. joint increased volatility levels) as well as a high contagion risk (i.e. volatility spillover) during the subprime mortgage market crisis. The transmission process of volatility shocks reveals to be simultaneous across financial markets due to a strong arbitrage activity and electronic trading practices among others. Most importantly, the estimated conditional correlations exhibit an upward sloping trend, which underlines an increase in the correlation risk between financial markets in the late nineties or early 2000. Thus, our major findings are twofold. First, we characterize the dynamic correlation risk across financial markets. Second, we also confirm the increasing and nonlinear trend in the correlation risk, which we are able to quantify.     

Policy uncertainty and international financial markets: the case of Brexit

ABSTRACT

This study assesses the impact of the Brexit probability on both the UK and on international financial markets, for the first and the second statistical moments. As financial markets are by nature highly interlinked, one might expect that the uncertainty engendered by Brexit also has an impact on financial markets in several other countries. We first estimate the time-varying interactions between UK policy uncertainty, which to a large extent is attributed to uncertainty about Brexit and UK financial market volatilities. Second, we use two other measures of the perceived probability of Brexit before the referendum, namely daily data released by Betfair and results of polls published by Bloomberg. Based on these data sets, and using both panel and single-country SUR estimation methods, we analyse the Brexit effect on levels of stock returns, sovereign CDS, 10-year interest rates in 19 predominantly European countries, and those of the British pound and the euro. We show that Brexit-induced policy uncertainty will continue to cause instability in key financial markets and has the potential to damage the real economy in both the UK and other European countries. The main losers outside the UK are the ‘GIIPS’ economies: Greece, Ireland, Italy, Portugal and Spain.     

LDC participation in international financial markets: Debt and reserves

This paper analyzes LDC borrowing and reserve-holding behavior as part of a general equilibrium portfolio problem. Estimates of LDC debt and reserve demand and credit supply suggest that debt, along with reserves, serves a transactions role. Another finding is that most LDC borrowers are credit constrained. An analysis of LDC export behavior suggests that defaults are likely to be independent, uncorrelated phenomena.     

The term structure of interest rates,the expectations hypothesis and international financial integration: Evidence from Asian economies

The validity of the expectations hypothesis of the term structure is examined for a sample of Asian countries. A panel stationarity testing procedure is employed that addresses both structural breaks and cross-sectional dependence. Asian term structures are found to be stationary and supportive of the expectations hypothesis. Further analysis suggests that international financial integration is associated with interdependencies between domestic and foreign term structures insofar as cross-term structures based on differentials between domestic (foreign) short- and foreign (domestic) long-rates are also stationary.     

Speculative and hedging interaction model in oil and U.S. dollar markets with financial transaction taxes

Our article develops a game theory model of interaction between speculative and hedging behaviors in the oil and US dollar markets, in the presence of a severe taxation on speculative financial transactions. From this microeconomic analysis, we derive a regulatory policy. This policy has two consequences at the macro level: on one hand, it has a certain stabilizing effects on oil and US dollar markets, limiting the number of speculative transactions and their size; on the other hand, it induces the speculators to find agreements with real economic agents, which are profitable for both parts. Moreover, we propose that the tax is mostly re-directed to support the real economy. So, the aim of this paper appears twofold: by using Game Theory, we suggest to a pair of economic agents a way to gain in a market, also in presence of a hard taxation on the financial transactions, proposing, at the same time, to normative authority, a method to limit the instability of oil and U.S. Dollar markets and to help real economy. Our idea, at the micro-economic level, is to exploit the hedging actions to obtain a profit, limiting, at the same time, at a macro-level, the speculative attacks on oil and U.S. Dollar markets. These goals are reached by the introduction of well designed financial transactions tax. In particular, we focus on a real economic subject (Multinational Air) and on an investment bank (Bank). The solutions collectively efficient are determined, at a micro-level, by certain agreements between the two economic subjects. Specifically, after an agreement which allows to obtain the maximum collective profit of the interaction, we propose and analyze four different possible fair divisions of this gain, by adopting the Kalai–Smorodinsky method.     

International stock markets comovements: the role of economic and financial integration

The contribution of economic and financial integration to international stock markets comovements are investigated by means of a large scale macroeconometric model, set in the factor vector autoregressive framework (F-VAR). The findings point to a relevant role for both economic and financial integration in explaining international stock markets comovements for the G-7 countries. While economic integration would exercise its effects through the common response of stock markets to global economic shocks, financial integration would operate through financial shocks spillovers, particularly at the regional level.      

Electoral uncertainty and financial volatility: Evidence from two‐round presidential races in emerging markets

We study how the predictability and the decisiveness of electoral outcomes affect financial volatility. We argue that traders’ optimal investment strategies depend on their ability to make accurate electoral forecasts and the prospective losses associated with placing a bet on the wrong candidate. Using a triple difference‐in‐difference approach and data from two‐round presidential elections in five Latin American countries between 1999 and 2018, we find that financial volatility is greatest in the days immediately following unpredictable, decisive, elections. Postelectoral volatility also occurs following predictable, indecisive elections. The effect of learning the identity of the winning candidate on financial volatility is null when the election is unpredictable and indecisive, as well as when the election is decisive, but the outcome is predictable. These findings offer insights into investors seeking to hedge price risk around elections. They also have important implications regarding the relationship between public opinion polls and postelectoral financial volatility.     

Corporate environmental disclosure, financial markets and the media: An international perspective

In this study, we analyze the information dynamics between corporate environmental disclosure, financial markets (as proxied by financial analysts' earnings forecasts) and public pressures (as proxied by a firm's media exposure). We adopt a comprehensive view of disclosure that encompasses environmental information that is both print-based as well as web-based. The sample comprises firms from both continental Europe (Belgium, France, Germany, and Netherlands) as well as North America (Canada and the United States). Relying on a system of equations that controls for endogeneity between environmental disclosure determination and financial analysts' work, we show that enhanced environmental disclosure translates into more precise earnings forecasts by analysts. Such effect is reduced for firms with extensive analyst following and in environmentally sensitive industries. However, these relationships are shown to be starker in Europe than in North America, i.e., environmental disclosure has a greater impact on analysts' forecasts but is also more greatly attenuated by analyst following and membership in an environmentally sensitive industry. Most observed relationships hold for either print- or web-based disclosure, except for North America in which web-based disclosure seems to have no impact on analysts' forecasting work.     

El Niño and La Niña induced volatility spillover effects in the U.S. soybean and water equity markets

This paper examined links between U.S. soybean prices and the Dow Jones U.S. Water Index (DJUSWU). We particularly studied the impact of El Niño and La Niña events on price risk spillovers. Results showed that La Niña significantly increases the linkages between soybean and water equity markets. Based on this, we identified a new soybean hedge strategy that would be possible if a futures contract for the DJUSWU existed. This new strategy improves on the effectiveness of both a conventional naïve soybean market hedge, and a traditional time-varying hedge. The findings can be used to assist soybean agents in managing increased market risks associated with extreme weather events.     

Exchange rate volatility and the demand for money in the U.S.

This paper examines the effect of changes in the level and volatility of exchange rates on the demand for money. It hypothesizes that exchange rate volatility exerts a negative influence on money demand separate from the effect of the level of exchange rates. Using U.S. data covering the period from 1974.1 to 1990.4, it is found that, regardless of whether the adjustment process is modeled as an error-correction or a partial-adjustment model, exchange rate volatility is negatively related to the demand for real M2 balances. This relationship is found to be more pronounced when exchange rates are expressed in real terms. The results imply that money demand responds to both the volatility of domestic prices relative to foreign prices and to the volatility of nominal exchange rates. Little evidence is found in support of the hypothesis that the level of exchange rates exerts a significant influence on money demand.     

Breaks and outliers when modelling the volatility of the U.S. stock market

This study analyses volatility persistence of the U.S. stock market, after taking into account the role of breaks and outliers. By employing a wavelet-based algorithm, it identifies several outliers which are comfortably associated with major events such as the ‘Black Monday’ and the Asian crisis. There is also evidence of clustering of breaks and a substantial variation in the properties of the identified segments.     

Prediction of volatility based on realized-GARCH-kernel-type models: Evidence from China and the U.S.

We propose three Realized-GARCH-Kernel-type models which do not make the distribution assumptions on the return disturbance terms. We use this type of model to predict the return volatilities of the 50ETF in China and the S&P500 index in the U.S. The semiparametric kernel density estimator of our models, which captures the skewness, asymmetry and fat-tail of financial assets, performs well both statistically and economically. Our models have more predictive power than other eight comparable volatility models that need to pre-specify the distribution of the disturbance terms. Our results are robust to eight measures of realized volatility. Using option straddle strategies, we show that our models generate larger trading profits and greater Sharpe ratios than the other competing models.     

The legal theory of finance and the financial instability hypothesis: Convergences and possible integration

This article presents the legal theory of finance (LTF) and compares it with the financial instability hypothesis (FIH), identifying points of convergence and divergence. The study aims to contribute to the literature by connecting these theories and provides the following main conclusions. First, the LTF incorporates aspects of the FIH, as the theories share several key elements, particularly the presence of fundamental uncertainty, the constraint of liquidity, and the necessity for governments to act as lenders of last resort. Second, the liquidity concept used in the LTF can be better comprehended with the use of Keynesian and post Keynesian literature on the topic. Third, the LTF aims to advance and update certain aspects of Minsky’s theory, particularly with regard to the globalization of markets, power relations, and the interdependencies of the political economy of finance. The study concludes that the theories are more complementary than divergent and future studies should create an analytical framework that integrates the theories’ most insightful aspects.     

Uncovering the interrelationship between the U.S. stock and housing markets: a bootstrap rolling window Granger causality approach

The purpose of this study is to investigate the time-varying interrelationship between the housing market and the stock market in the U.S. during the period of 1890–2013, by employing a rolling window subsample with a bootstrap Granger causality test. The rolling window allows for structural changes in the economy over time. Whereas previous studies have not identified a causal relationship between the U.S. housing price index and the SP500 stock price index, this new analysis is the first to identify certain periods wherein either the wealth effect or the investment effect can be observed.