Google Analytics

Thursday, December 15

15th Dec - Back to School

It's Thursday, research compilation time!

Asset Pricing & The Business CycleThe Capital Spectator
· Implied Risk Premium and the Business Cycle: You Can’t Always Get What You Want · Do Mood Swings Drive Business Cycles and is it Rational? · When Credit Bites Back: Leverage, Business Cycles, and Crises · Confidence Matters for Nowcasting GDP: Euro Area and U.S. Evidence from a PMI-Based Model · Skyscraper Height and the Business Cycle: International Time Series Evidence · The behaviour of small cap vs. large cap stocks in recessions and recoveries: Empirical evidence for the United States and Canada

Bond Market Co-movements, Expected Inflation and The Equilibrium Real Exchange RateECB (pdf)
Our findings have two important implications, both for monetary policy. First, we show that some of the observed changes in the real exchange rates can not be solely attributed to changes in inflation rates, but, possibly, also to investors’ behavior. Secondly, we show that the special US dollar status of World reserve currency results into a weaker behavior of the US bond rate on international markets.

News analyticsPortfolio Probe
Some points from a workshop on automatic news analysis

Evidence of market manipulation in the financial crisisarXiv
We provide direct evidence of market manipulation at the beginning of the financial crisis in November 2007. The type of manipulation, a "bear raid," would have been prevented by a regulation that was repealed by the Securities and Exchange Commission in July 2007. The regulation, the uptick rule, was designed to prevent manipulation and promote stability and was in force from 1938 as a key part of the government response to the 1928 market crash and its aftermath. On November 1, 2007, Citigroup experienced an unusual increase in trading volume and decrease in price. Our analysis of financial industry data shows that this decline coincided with an anomalous increase in borrowed shares, the selling of which would be a large fraction of the total trading volume. The selling of borrowed shares cannot be explained by news events as there is no corresponding increase in selling by share owners.

Monthly Bulletin Dec 2011ECB (pdf)

BIS Quarterly Review Dec 2011BIS
Euro area sovereign crisis drives global financial markets · Highlights of the BIS international statistics · FX strategies in periods of distress · Renminbi internationalisation and China's financial development · Assessing global liquidity · The impact of recent central bank asset purchase programmes · Enhanced BIS statistics on credit risk transfer · Simulation of Italian debt service costs · Different causes for recent bank downgrades · Measuring the vulnerability of emerging market economies to sudden capital withdrawals through the banking system · Evaluating the potential impact of deleveraging by euro area banks on emerging market economies · Drivers of carry and currency momentum · The trifurcated renminbi foreign exchange markets: a transactions perspective · US and UK asset purchase programmes

IMF Research Bulletin Vol 12, Number 4 Dec 2011IMF (pdf)
Booms and Busts · Did Export Diversification Soften the Impact of the Global Financial Crisis? ·
Q&A: Seven Questions about Large Fiscal Consolidation Attempts in the Past and Implications for Policymakers Today · IMF Working Papers · Visiting Scholars · Staff Discussion Notes

Proceedings of the IFC Conference on "Initiatives to address data gaps revealed by the financial crisis", Basel, 25-26 August 2010BIS
All the session papers.

The Public Sector Pay Gap in a Selection of Euroa Area CountriesECB (pdf)
The more trouble the country is in now, the higher the public sector pay over the private sector. Causality?

The "Austerity myth": Gain Without Pain?BIS
As governments around the world contemplate slashing budget deficits, the "expansionary fiscal consolidation hypothesis" is back in vogue. I argue that, as a statement about the short run, it should be taken with caution.

Long-term fiscal sustainability in major economies BIS
As the world economy slowly recovers from the very deep and widespread recession of recent years, many countries confront very serious fiscal imbalances. How much time they have to deal with these imbalances is a central question, the salience of which can only have been increased by the ongoing fiscal crisis and bailout in Greece and the immediate fiscal adjustments being discussed or already undertaken in several other countries.

Monetary Policy at the Zero Lower Bound S.F. FED
Conference with pdf of papers and presentations: Flow and Stock Effects of Large-Scale Treasury Purchases · The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment · The Effects of Quantitative Easing on Long-Term Interest Rates · Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minksy-Koo Approach · Optimal Conventional and Unconventional Monetary Policy in the Presence of Collateral Constraints and the Zero Bound · Have We Underestimated the Probability of Hitting the Zero Lower Bound?

Perceptions and misperceptions of fiscal inflationBIS
The Great Recession and worldwide financial crisis have exploded fiscal imbalances and brought fiscal policy and inflation to the forefront of policy concerns. Those concerns will only grow as aging populations increase demands on government expenditures in coming decades. It is widely perceived that fiscal policy is inflationary if and only if it leads the central bank to print new currency to monetize deficits. Monetization can be inflationary. But it is a misperception that this is the only channel for fiscal inflations. Nominal bonds, the predominant form of government debt in advanced economies, derive their value from expected future nominal primary surpluses and money creation; changes in the price level can align the market value of debt to its expected real backing. This introduces a fresh channel, not requiring monetization, through which fiscal deficits directly affect inflation.

Real-Time Data and Fiscal Data Analysis – A Survey of The LiteratureECB (pdf)

Currency Momentum StrategiesBIS (pdf)
We provide a broad empirical investigation of momentum strategies in the foreign exchange market. We find a signficant cross-sectional spread in excess returns of up to 10% p.a. between past winner and loser currencies. This spread in excess returns is not explained by traditional risk factors, it is partially explained by transaction costs and shows behavior consistent with investor under- and over-reaction. Moreover, cross-sectional currency momentum has very different properties from the widely studied carry trade and is not highly correlated with returns of benchmark technical trading rules. However, there seem to be very effective limits to arbitrage which prevent momentum returns from being easily exploitable in currency markets.

Currency Crises and Leading IndicatorsHistorySquared
Variables that receive ample support as useful indicators of currency crises include international reserves, the real exchange rate, credit growth, credit to the public sector, and domestic inflation. The results also provide support for the trade balance, export performance, money growth, M2/international reserves, real GDP growth, and the fiscal deficit. The variables with the best track record within this approach include exports, deviations of the real exchange rate from trend, the ratio of broad money to gross international reserves, output, and equity prices.

The Most General Methodology to Create a Valid Correlation Matrix for Risk Management and Option Pricing PurposesRiccardo Rebonato & Peter Jaeckel  SSRN
We have presented two simple methods to produce a feasible (i.e. real, symmetric, and positivesemidefinite) correlation matrix when the econometric one is either noisy, unavailable, or inappropriate. The first method is to the knowledge of the authors more general than any of the approaches which have been proposed in the literature, and computationally faster. It can actually produce the optimal feasible solution in a sense specified by the user. The second method is, in principle, not as general, but we show that i) it is extremely fast and ii) it produces results very close to those obtained using the general procedure. It can therefore be used in its own right, or as a starting point for the general optimisation procedure, thereby making the latter even faster.

Forecasting with Option Implied InformationSSRN
This chapter surveys the methods available for extracting forward-looking information from option prices. We consider volatility, skewness, kurtosis, and density forecasting. More generally, we discuss how any forecasting object which is a twice differentiable function of the future realization of the underlying risky asset price can utilize option implied information in a well-de…fined manner. Going beyond the univariate option-implied density, we also consider results on option-implied covariance, correlation and beta forecasting as well as the use of option-implied information in cross-sectional forecasting of equity returns.

Optimal posting distance of limit orders: a stochastic algorithm approacharXiv
This paper presents a stochastic recursive procedure under constraints to find the optimal distance at which an agent must post his order to minimize his execution cost. We prove the $a.s.$ convergence of the algorithm under assumptions on the cost function and give some practical criteria on model parameters to ensure that the conditions to use the algorithm are fulfilled (using notably principle of opposite monotony). We illustrate our results with numerical experiments on simulated data but also by using a financial market dataset.

Investing in the Turn-of-the-Year EffectSSRN
The January effect is concerned with high stock returns in January, especially by small cap stocks. Transactions costs, especially price pressures, make it difficult to take advantage of this anomaly. However, these costs are minimal in the futures markets. This paper discusses the results of small minus large capitalized US stocks since futures trading began in 1982. There is some anticipation of the effect and in the futures markets; the anomaly still exists but is now totally in December.

The 52-Week High Strategy and Information UncertaintySSRN
This paper examines the driver of the 52-week high strategy, which is long in stocks close to their 52-week high price and short in stocks with a price far below their one-year high, and tests the hypothesis that this strategy’s profitability can be explained by anchoring - a behavioral bias.

Comparing intraday vs. overnight return distributions (Kurtosis & Skew) for large cap sharesSober Look
Previous studies have shown that liquidity can cause certain differences in distribution shapes, so the result here should not be a surprise.  Practically speaking, because of the extra costs associated with after-hours execution, portfolio managers will only trade if the price moves (or expected price moves) are significant.  That behavior distorts the distribution, "superimposing" low volatility returns (nothing is happening) with high volatility returns (significant news/events.) 

Which Valuation Metric Performs the BestTurnkey Analyst
We compare the investment performance of portfolios sorted on different valuation measures. EBITDA/TEV has historically been the best performing metric and outperforms many investor favorites such as price-to-earnings, free-cash-flow to total enterprise value, and book-to-market.  We also explore the investment potential of long-term valuation ratios, which replace one-year earnings with an average of long-term earnings. In contrast to prior empirical work, we find that long-term ratios add little investment value over standard one-year valuation metrics.