financial markets

34 publicly available information on the composition of markets and the behaviour of different traders is in fact very limited. This feature of the data associated with financial markets is, of course, intentional. Modern exchange traded markets are centralised and structured to ensure participants and their dealings are kept anonymous. As a result, empirical data on the behaviour of different participants is restricted and typically relates to either the local and private information held by brokers and dealers, or proprietary data collected by the organised exchanges. As discussed in the following chapter, Wiley and Daigler (1998) analyse data from the Chicago Board of Trade; Kein and Madhavan (1995), Aitken, Alemedia, Harris, and McInish (2007), and Darley and Outkin (2007) analysis data from Australian brokers, the New York Stock Exchange, and the NASDAQ stock market, respectively. Whilst the datasets used by these researchers may be quite detailed, they are typically limited in availability and cover only short periods of time. Fortunately, an alternative source of data on the behaviour of different types of market participants is available. This is found in the Commitment of Traders reports that include information from local sources and also cover a significant multi-decade time-period.

First, Grossman (1977) and Grossman and Stiglitz (1980) eliminate the possibility of fully revealing prices b y introducing a source of noise that is uncorrelated with the return of the risky asset. In this case, prices depend on the realizations of both private signal and noise. Thus, Grossman and Stiglitz s how that there are still incentives to become informed because not all the private information is revealed to the uninformed agents through the price system. There have been several stories that justify the existence of noise in financial markets. We c an associate this noise with a random supply of risky asset or with the random demand for asset made by agents that are

While fulfilment of the conditions regarding governments’ access to the capital markets, the preclusion of a bailout and the provision of adequate fiscal information facilitates the exercise of market discipline on EU governments, it may not be sufficient to generate an adequate response from the financial markets. Market reactions to a continuous deterioration of fiscal sustainability may be subdued within particular ranges of deficit and debt but then sizeable and abrupt in the aftermath of “trigger events” such as a rating agency’s decision to downgrade a country’s debt or a general change in risk attitudes. While higher interest rates after a trigger event help to discipline governments, sudden and sharp changes in financial conditions may entail large macroeconomic costs. Other (private) issuers may be faced with higher financing costs too, as interest rates on government debt set the benchmark interest rate at which corporations can borrow on the capital markets. Furthermore, the government may have to take drastic measures to restore confidence and reverse the unfavourable financing conditions. A more gradual development of interest rates, fully reflecting fiscal sustainability at any given point in time, would provide a more steadily advancing warning signal to the government concerned. This would provide more leeway for quality-enhancing consolidation measures without adverse economic or financial consequences.

This paper presents the measurement of irrationality contained in the continuous pricing of individual stocks. Irrationality is used to extend the concept of historical volatility by decomposing historical stock quotes into frequencies via Fourier transformation. The analysis in the frequency domain enables clustering of the contributions of short and long-term fluctuations to the overall price changes. With the resulting ratio it is possible to rank stocks within an index according to their specific fluctuation profile. The analysis is performed on daily stock quotes over a period of 20 years (1997-01-02 until 2016-12-30). Although the analysis presented here focuses on the stock market, the concept of irrationality is transferable to other financial markets as for bonds, housing prices or derivatives as well as to different time periods.

This dissertation consists of four essays on the macroeconomics of financial markets. Chapter 1 presents a theoretical framework to study the rise of securitization and secondary markets for financial assets. I show that the interplay of banks and the non-bank financial intermediary sector can lead to credit booms that end in financial crises, much like the financial boom and bust observed in the U.S. from 1990 to 2008. In line with empirical evidence, I show that low risk-free interest rates driven by expansionary monetary policy or a large inflow of savings can trigger such booms. I end by proposing regulatory tools to manage the credit cycle. Chapter 2, co-authored with Harold L. Cole and Guillermo Ordonez, is a theoretical study of international sovereign default crises. We propose a framework in which risk-averse investors can spend resources to learn about the default probabilities of sovereign countries. Sovereign bond price volatility increases when some investors acquire information because prices now more closely reflect default probabilities. This force induces other investors to learn, further increasing volatility and raising the specter of a crisis. When investors are exposed to the default risk of multiple countries, these crises events spill over across borders.

Abstract Social investing will be examined as an example of modern institutional innovations with respect to the complexity of financial markets. Social impact bonds will be used as a case study of a particular innovative financial instrument in order to understand the complexity and resulting challenges of these potential market dynamics. The author argues that post-crisis regulatory regime governing US and European markets require substantial work to fully address the challenges derived from financial innovations. In particular, existing regulation, technologies, information asymmetry, agency cost, and innovation pace need to be considered in order to understand the factors which will determine likely outcomes of social impact bonds. Social Investing and the embryonic stage of current development reflect certain 'unknown areas'. This paper addresses the needs of the post-embryonic stage of the theoretical framework of financial market innovations.

Advances in formal regional financial cooperation have been very limited among the Latin American countries. Aside from NAFTA, where agreements are in place to proceed with the integration of the financial markets of Canada, Mexico and the US there has not been much progress in regional financial service liberalization beyond approval of protocols. However, some initiatives are worth noting, such as certain efforts to integrate stock markets, as well as the creation of sub-regional development banks in Central America (BCIE), the Andean area (CAF), the Southern Cone (FONPLATA) and CARICOM (CDB). In recent months MERCOSUR countries have also announce their intention to establish a new development bank, but no details are yet known about the initiative. Some CARICOM countries have moved toward a regional stock market with cross-listing and trading in securities on existing stock exchanges. The small islands of the Association of Eastern Caribbean States have a long-functioning common currency and a common central bank. Meanwhile, at a regional level, ALADI developed a reciprocal payments system to finance trade among members in 1966. The system, designed to overcome foreign exchange obstacles to trade, is currently facilitating only a small proportion of total regional trade. One of the areas in which the issue of financial integration is attracting attention is the Central American Common Market. While some efforts have been made in Central America, efforts are needed to move towards consolidated regulation with common standards across countries.

There are significant trends in the financial system over the past four decades. These are the financial liberalization that is freeing the local financial markets for investments and access to capital, financial integration in the context of globalization, and financial deepening. With these attempts, financial markets have been mainly expanded and became complex compared with the previous period. In the meanwhile, financial development giving the chance to create new instruments and investment opportunities for changing the composition of the financial markets. Financial markets with the new instruments are now more sophisticated and profound. Moreover, also after the liberalization, countries are integrated. That is are also creating a discussion of the contagion effect of the financial instability period across the countries.

Our data is daily and spans the period beginning on January 1, 1997 through August 31, 1999. Because of the daily frequency of the data, the variables we analyze are confined to financial markets. Specifically, these variables are: the domestic overnight interbank interest rates (whenever possible); the daily return on equities in the local currency taken from local bourse indices; 9 the percent change in the daily exchange rate versus the dollar or versus the deutschemark (DM); 10 and, the interest rate spreads on bonds that capture the Αpricing of risk≅. For the industrial countries, the interest rate spread is between corporate and sovereign bonds, while for emerging markets the spread is between a sovereign bond and a comparable United States Treasury security. As regards sovereign bonds, we have tried to use the most liquid of these, since bonds that are infrequently traded are not likely to reflect short term shifts in market sentiment. The particulars for all the data used for the thirty-five countries in our sample are provided, along with their respective sources, in the Data Appendix.

Agricultural commodities and financial markets Modena, Matteo Università Cattolica del Sacro Cuore, Milano.[r]

Investigations on the Theory of Argumentation TA with specific applications in Colombia are relatively low (Estrada, 2005, 2007, 2008) and in the general literature there are few studies that have been developed (Dascal, 2003). Although early are intuitive nature Tullock (1967). Posner (1995) makes a distinction between persuasion and information from the classical tradition. Recent analysis hatred (Glaeser, 2005), mass media (Mullinathan, Shleifer 2005). Shapiro studied persuasion in politics (2005), especially in the presentation of models in marketing and advertising campaigns. Laibson (2005) extends the analysis to the links between consumer products and key psychological effects. Undoubtedly, the analysis of financial markets requires an extension notice the advantages of analysis proposed by the Theory of

Informational asymmetries in financial markets regarding to the valuation of a firm’s assets have direct effects on the risk inherent in the firm’s debt and equity. Prior literature documents a positive and significant relation between measures of adverse selection in equity- markets and the trade behavior exhibited by market participants when information is uncertain. 16 In the presence of informational asymmetries, Copeland and Galai (1983) model this process as it pertains to the bid-ask spreads of market makers when dealing with two different types of traders who trade with distinct motives, i.e., those possessing special information and those trading for liquidity purposes. Using a framework wherein the cost of supplying quotes is viewed as writing a put and call option to an informed trader, they show that the bid-ask spread is a positive function of asset volatility and a negative function of market depth, or liquidity. In other words, the bid-ask spread accounts for the fact that the marker maker loses when trading to an information-motivated trader. The challenge for the market maker then becomes identifying one type from another, or, protecting herself from losses arising from trading with informed traders. The challenge for broader market efficiency is to alleviate (at least to the extent possible) the informational asymmetries that exist.

French and Roll (1986, p.5) suggest that noise trading is also important; they state that, “asset prices are much more volatile during exchange trading hours than during non-trading hours.” They provide two explanations for this phenomenon: (1) information arrives more frequently during the business day; (2) the process of trading itself introduces noise into price. Therefore, large price changes at the market closing might be mostly due to trading noise. Black (1986) states that people who trade on noise think noise is information and are willing to trade on noise even though they would be better off not trading. DeLong, Shleifer, Summers and Waldmann (1990) state that the presence of noise traders in financial markets can cause prices and risk levels to diverge from expected levels even if all other traders are rational. That is, from the theoretical point of view, trading by not fully rational noise traders can drive prices away from fundamental values.

Our theory is based on a premise that buy-side investors form a non-binding long-term trading relationship with sell-side dealers to obtain liquidity (immediacy). Relationship es- tablishment among market participants is common in financial markets due to their repeated interactions. 4 Because OTC markets are search-based markets which involve investors searching for a dealer (or vice versa) who is willing to trade at the best price, an ability to maintain contact with customers is valuable for dealers. 5 One competitive strategy of dealers is to form a non-binding long-term relationship with investors by offering special benefits, such as price discount or inside information, to the investors who frequently trade with them. 6 This paper considers a type of long-term relationship in which dealers offer liquidity insurance – a promise to execute trade orders on the spot at an affordable price (i.e. immediacy provision) during illiquid periods – to their loyal clients. We will show that investors might strategically choose periphery dealers, because they expect to receive higher future benefits from trading with the periphery dealers than trading with core dealers.

The trading of financial assets (such as stocks or bonds) by investors in international financial markets has a major impact on MNCs. First, this type of trading can influence the level of interest rates in a specific country (and therefore the cost of debt to an MNC) because it affects the amount of funds available there. Second, it can affect the price of an MNC’s stock (and therefore the cost of equity to an MNC) because it influences the demand for the MNC’s stock. Third, it enables MNCs to sell securities in foreign markets. So, even though international investing in financial assets is not the most crucial activity of MNCs, international investing by individ- ual and institutional investors can indirectly affect the actions and performance of an MNC. Consequently, an understanding of the motives and methods of inter- national investing is necessary to anticipate how the international flow of funds may change in the future and how that change may affect MNCs.

Our paper contributes to a small literature on the optimal allocation of talent to the financial industry. An early theory by Murphy, Shleifer and Vishny (1991) (see also Baumol, 1990) builds on the idea of increasing returns to ability and rent seeking in a two-sector model to show that there may be inefficient equilibrium occupational outcomes, where too much talent enters one market since the marginal private returns from talent could exceed the social returns. More recently, Philippon (2008) has proposed an occupational choice model where agents can choose to become workers, financiers or entrepreneurs. The latter originate projects which have a higher social than private value, and need to obtain funding from financiers. In general, as social and private returns from investment diverge it is optimal in his model to subsidize entrepreneurship. Neither the Murphy et al. (1991) nor the Philippon (2008) models distinguish between organized exchanges and OTC markets in the financial sector, nor do they allow for excessive informational rent extraction through cream-skimming. In independent work Glode, Green and Lowery (2010) also model the idea of excessive investment in information as a way of strengthening a party’s bargaining power. However, Glode et al. (2010) do not consider the occupational choice question of whether too much young talent is attracted towards the financial industry. Finally, our paper relates to the small but burgeoning literature on OTC markets, which, to a large extent, has focused on the issue of financial intermediation in the context of search models. 6 These papers have some common elements to ours, in particular the emphasis on bilateral bargaining when thinking about OTC markets, but their focus is on the liquidity of these markets and they do not address issues of cream- skimming or occupational choice.

This paper reviews some of the phenomenological models which have been intro- duced to incorporate the scaling properties of financial data. It also illustrates a mi- croscopic model, based on heterogeneous interacting agents, which provides a possible explanation for the complex dynamics of markets’ returns. Scaling and multi-scaling analysis performed on the simulated data is in good quantitative agreement with the empirical results.

several important ways: a longer time series of data is used; the break p~int in the data is determined endogenously; and the analysis focuses on the degree to which common trends have e[r]

This paper aims to explore the relevance of the Theory of Argumentation TA in the complex area of financial reporting. Specifically, we investigated the scope of the phenomenon of persuasion in advertising. It examines advertisements in publications notable economic movement in Colombia. The financial communication is important to distinguish how to run the models of behavior based on beliefs of agents. Consequently, investors' beliefs can also change systematically with changes in market prices. This paper is the first part and its purpose is to prepare from the Theory of Argumentation TA an application to the financial sector in Colombia.

In  the  paper:  “  The  benign  neglect  of  the  individual  households’  equity  crisis”  it   was   suggested   to   transform   some   funds   accumulated   in   pension   funds   for   a   national  “economic  easing”  solution.  The  Netherlands  and  Sweden  may  be  cases   in  point.  For  most  Southern  European  countries  within  the  Eurozone,  it  could  be   a   task   for   the   European   Central   Bank.   The   latter   could   borrow   Euros   in   the   financial   markets   and   transfer   such   funds   to   individual   households   in   the   Southern   European   countries   via   their   national   central   banks.   Funds   could   be   distributed  with  an  equal  amount  paid  per  individual  household,  which  helps  the   young,   the   unemployed   and   the   lower   wage   earners   more   than   the   better   off.   However   the   formers’   propensity   to   spend   the   extra   incomes   on   goods   and   services  is  much  higher  than  for  the  richer  classes.  If  governments  agree  to  have   such  amounts  to  be  transferred  free  of  tax,  than  the  impact  is  multiplied.