Showing papers on "Financial market published in 2014"

Does Stock Liquidity Enhance or Impede Firm Innovation

Abstract: We aim to tackle the longstanding debate on whether stock liquidity enhances or impedes firm innovation This topic is of interest because innovation is crucial for firm- and national-level competitiveness and stock liquidity can be altered by financial market regulations Using a difference-in-differences approach that relies on the exogenous variation in liquidity generated by regulatory changes, we find that an increase in liquidity causes a reduction in future innovation We identify two possible mechanisms through which liquidity impedes innovation: increased exposure to hostile takeovers and higher presence of institutional investors who do not actively gather information or monitor

Product Market Threats, Payouts, and Financial Flexibility

Abstract: We examine how product market threats influence firm payout policy and cash holdings. Using firms' product text descriptions, we develop new measures of competitive threats. Our primary measure, product market fluidity, captures changes in rival firms' products relative to the firm's products. We show that fluidity decreases firm propensity to make payouts via dividends or repurchases and increases the cash held by firms, especially for firms with less access to financial markets. These results are consistent with the hypothesis that firms' financial policies are significantly shaped by product market threats and dynamics.

The Economics of Bitcoin and Similar Private Digital Currencies

Abstract: Recent innovations have made it feasible to transfer private digital currency without the intervention of an institution. A digital currency must prevent users from spending their balances more than once, which is easier said than done with purely digital currencies. Current digital currencies such as Bitcoin use peer-to-peer networks and open-source software to stop double spending and create finality of transactions. This paper explains how the use of these technologies and limitation of the quantity produced can create an equilibrium in which a digital currency has a positive value. This paper also summarizes the rise of 24/7 trading on computerized markets in Bitcoin in which there are no brokers or other agents, a remarkable innovation in financial markets. I conclude that exchanges of foreign currency may be the obvious way in which use of digital currencies can become widespread and that Bitcoin is likely to limit governments’ revenue from inflation.

Review: Text mining for market prediction: A systematic review

Abstract: The quality of the interpretation of the sentiment in the online buzz in the social media and the online news can determine the predictability of financial markets and cause huge gains or losses. That is why a number of researchers have turned their full attention to the different aspects of this problem lately. However, there is no well-rounded theoretical and technical framework for approaching the problem to the best of our knowledge. We believe the existing lack of such clarity on the topic is due to its interdisciplinary nature that involves at its core both behavioral-economic topics as well as artificial intelligence. We dive deeper into the interdisciplinary nature and contribute to the formation of a clear frame of discussion. We review the related works that are about market prediction based on online-text-mining and produce a picture of the generic components that they all have. We, furthermore, compare each system with the rest and identify their main differentiating factors. Our comparative analysis of the systems expands onto the theoretical and technical foundations behind each. This work should help the research community to structure this emerging field and identify the exact aspects which require further research and are of special significance.

Spinning gold: The financial returns to stakeholder engagement

Abstract: We provide direct empirical evidence in support of instrumental stakeholder theory's argument that increasing stakeholder support enhances the financial valuation of a firm, holding constant the objective valuation of the physical assets under its control. We undertake this analysis using panel data on 26 gold mines owned by 19 publicly traded firms over the period 1993�2008. We code over 50,000 stakeholder events from media reports to develop an index of the degree of stakeholder conflict/cooperation for these mines. By incorporating this index in a market capitalization analysis, we reduce the discount placed by financial markets on the net present value of the physical assets controlled by these firms from 72 percent to between 37 and 13 percent.

Corporate Governance and Investors' Perceptions of Foreign IPO Value: An Institutional Perspective

Abstract: We build on sociology-grounded research on financial market behavior and suggest a “nested” legitimacy framework to explore U.S. investor perceptions of foreign IPO value. We draw on a fuzzy-set theoretic approach to demonstrate how different combinations of monitoring and incentive-based corporate governance mechanisms lead to the same level of investor valuations of firms. We also argue that institutional factors related to the minority shareholder protection strength in the foreign IPO’s home country represent a boundary condition that affects the number of governance mechanisms required to achieve U.S. investors’ high value perceptions. Our findings, drawn from a unique, hand-collected dataset of foreign IPOs in the U.S, contribute to the sociological perspective on comparative corporate governance and the inter-dependencies between organizations and institutions.

Investor Flows and the 2008 Boom/Bust in Oil Prices

Abstract: This paper explores the impact of investor flows and financial market conditions on returns in crude oil futures markets. I argue that informational frictions and the associated speculative activity may induce prices to drift away from “fundamental” values, and may result in price booms and busts. Particular attention is given to the interplay between imperfect information about real economic activity, including supply, demand, and inventory accumulation, and speculative activity in oil markets. Furthermore, I present new evidence that there were economically and statistically significant effects of investor flows on futures prices, after controlling for returns in the United States and emerging-economy stock markets, a measure of the balance sheet flexibility of large financial institutions, open interest, the futures/spot basis, and lagged returns on oil futures. The largest impacts on futures prices were from intermediate-term growth rates of index positions and managed-money spread positions. Moreover, my findings suggest that these effects were through risk or informational channels distinct from changes in convenience yield. Finally, the evidence suggests that hedge fund trading in spread positions in futures impacted the shape of term structure of oil futures prices. This paper was accepted by Wei Xiong, finance.

The Media and the Diffusion of Information in Financial Markets: Evidence from Newspaper Strikes

Abstract: The media are increasingly recognized as key players in financial markets. I investigate their causal impact on trading and price formation by examining national newspaper strikes in several countries. Trading volume falls 12% on strike days. The dispersion of stock returns and their intraday volatility are reduced by 7%, while aggregate returns are unaffected. Moreover, analysis of return predictability indicates that newspapers propagate news from the previous day. These findings demonstrate that the media contribute to the efficiency of the stock market by improving the dissemination of information among investors and its incorporation into stock prices.

Tapering talk: the impact of expectations of reduced federal reserve security purchases on emerging markets

Abstract: In May 2013, Federal Reserve officials first began to talk of the possibility of tapering their security purchases. This tapering talk had a sharp negative impact on emerging markets. Different countries, however, were affected very differently. This paper uses data on exchange rates, foreign reserves and equity prices between April and August 2013 to analyze who was hit and why. It finds that emerging markets that allowed the real exchange rate to appreciate and the current account deficit to widen during the prior period of quantitative easing saw the sharpest impact. Better fundamentals (the budget deficit, the public debt, the level of reserves, or the rate of economic growth) did not provide insulation. A more important determinant of the differential impact was the size of the country's financial market: countries with larger markets experienced more pressure on the exchange rate, foreign reserves, and equity prices. This is interpreted as showing that investors are better able to rebalance their portfolios when the target country has a relatively large and liquid financial market.

Physics and Financial Economics (1776-2014): Puzzles, Ising and Agent-Based models

Abstract: This short review presents a selected history of the mutual fertilization between physics and economics, from Isaac Newton and Adam Smith to the present. The fundamentally different perspectives embraced in theories developed in financial economics compared with physics are dissected with the examples of the volatility smile and of the excess volatility puzzle. The role of the Ising model of phase transitions to model social and financial systems is reviewed, with the concepts of random utilities and the logit model as the analog of the Boltzmann factor in statistic physics. Recent extensions in term of quantum decision theory are also covered. A wealth of models are discussed briefly that build on the Ising model and generalize it to account for the many stylized facts of financial markets. A summary of the relevance of the Ising model and its extensions is provided to account for financial bubbles and crashes. The review would be incomplete if it would not cover the dynamical field of agent based models (ABMs), also known as computational economic models, of which the Ising-type models are just special ABM implementations. We formulate the ``Emerging Market Intelligence hypothesis'' to reconcile the pervasive presence of ``noise traders'' with the near efficiency of financial markets. Finally, we note that evolutionary biology, more than physics, is now playing a growing role to inspire models of financial markets.

Stocks for the long run : the definitive guide to financial market returns & long-term investment strategies

Abstract: This is the stock-investing classic - updated to help you win in today's chaotic global economy Much has changed since the last edition of Stocks for the Long Run The financial crisis, the deepest bear market since the Great Depression, and the continued growth of the emerging markets are just some of the contingencies directly affecting every portfolio in the world To help you navigate markets and make the best investment decisions, Jeremy Siegel has updated his bestselling guide to stock market investing This new edition of Stocks for the Long Run answers all the important questions of today: How did the crisis alter the financial markets and the future of stock returns? What are the sources of long-term economic growth? How does the Fed really impact investing decisions? Should you hedge against currency instability? Stocks for the Long Run, Fifth Edition, includes brand-new coverage of: the financial crisis - Siegel provides an expert's analysis of the most important factors behind the crisis; the state of current stability/instability of the financial system and where the stock market fits in; and the viability of value investing as a long-term strategy; China and India - The economies of these nations are more than one-third larger than they were before the 2008 financial crisis; you'll get the information you need to earn long-term profits in this new environment Global markets - Learn all there is to know about the nature, size, and role of diversification in today's global economy; Siegel extends his projections of the global economy until the end of this century; market valuation - Can stocks still provide 6 to 7 percent per year after inflation? This edition forecasts future stock returns and shows how to determine whether the market is overvalued or not Essential reading for every investor and advisor who wants to fully understand the forces that move today's markets, Stocks for the Long Run provides the most complete summary available of historical trends that will help you develop a sound and profitable long-term portfolio Praise for Stocks for the Long Run: "Jeremy Siegel is one of the great ones" (Jim Cramer, CNBC's Mad Money) "[Jeremy Siegel's] contributions to finance and investing are of such significance as to change the direction of the profession" (The Financial Analyst Institute) "A simply great book" (Forbes) "One of the top ten business books of the year" (Businessweek) "Should command a central place on the desk of any 'amateur' investor or beginning professional" (Barron's) "Siegel's case for stocks is unbridled and compelling" (USA Today) "A clearly written, neatly organized, highly persuasive exposition that lifts the veil of mystery from investing" (John C Bogle, founder and former Chairman, The Vanguard Group) "A book that all investors-nervous Nellies in particular-should read" (Investingcom)

Physics and financial economics (1776–2014): puzzles, Ising and agent-based models

Abstract: This short review presents a selected history of the mutual fertilization between physics and economics—from Isaac Newton and Adam Smith to the present. The fundamentally different perspectives embraced in theories developed in financial economics compared with physics are dissected with the examples of the volatility smile and of the excess volatility puzzle. The role of the Ising model of phase transitions to model social and financial systems is reviewed, with the concepts of random utilities and the logit model as the analog of the Boltzmann factor in statistical physics. Recent extensions in terms of quantum decision theory are also covered. A wealth of models are discussed briefly that build on the Ising model and generalize it to account for the many stylized facts of financial markets. A summary of the relevance of the Ising model and its extensions is provided to account for financial bubbles and crashes. The review would be incomplete if it did not cover the dynamical field of agent-based models (ABMs), also known as computational economic models, of which the Ising-type models are just special ABM implementations. We formulate the ‘Emerging Intelligence Market Hypothesis’ to reconcile the pervasive presence of ‘noise traders’ with the near efficiency of financial markets. Finally, we note that evolutionary biology, more than physics, is now playing a growing role to inspire models of financial markets.

Uncertainty, Financial Frictions, and Investment Dynamics

Abstract: The canonical framework used to price risky debt implies that the payoff structure of levered equity resembles the payoff of a call option, while the bondholders face a payoff structure that is equivalent to that of an investor writing a put option. As a result, an increase in the payoff uncertainty benefits equity holders at the expense of bondholders, a feature of the debt contract with two potentially important implications for real economic activity: First, to the extent that firms face significant frictions in financial markets, an increase in the default-risk premium implies a higher cost of capital and hence a decrease in investment. Second, a reduction in the supply of credit stemming from an increase in uncertainty hampers the efficient reallocation of capital and causes an endogenous decline in the total factor productivity (TFP) that amplifies the economic downturn. This paper analyzes---both empirically and theoretically---how fluctuations in uncertainty interact with financial market imperfections in determining economic outcomes. Using both aggregate time-series and firm-level data, we find strong evidence supporting the notion that financial frictions play a major role in shaping the uncertainty-investment nexus. We then develop a tractable general equilibrium model in which individual firms face time-varying uncertainty and imperfect capital markets when issuing risky bonds and equity to finance investment projects. We calibrate the uncertainty process using micro-level estimates of shocks to the firms' profits and show that the combination of uncertainty shocks and financial frictions can generate fluctuations in economic activity that are observationally equivalent to the TFP-driven business cycles.

Financial Crisis, Unconventional Monetary Policy and International Spillovers

Abstract: This paper studies the effects of unconventional monetary policies in the major advanced economies. We first examine the cross-border financial market impact of central bank announcements of asset purchase programmes based on event studies. We find marked effects, as expansionary balance sheet policies influence the prices of a broad range of emerging market assets, raising equity prices, lowering government and corporate bond yields and compressing CDS spreads.We then study the economic impact of US quantitative easing on both emerging and advanced economies, based on an estimated global vector error-correcting macroeconomic (VECM) model, which takes into account trade and financial linkages. We focus on the effects of reductions in US term and corporate spreads, and in US market volatility. The estimated effects are sizeable and differ across economies. First, US QE measures which help to lower market volatility and reduce corporate spreads appear to have had far greater impact than lowering term spreads, as Blinder (2012) suggested. Second, such measures have prevented a prolonged recession and severe deflation in the advanced economies. Third, the impact on emerging economies has varied but is generally stronger than in the US and other advanced economies. US QE measures contributed to overheating in Brazil, China and other emerging economies in 2010 and 2011, but supported recovery in 2009 and 2012. The sign and size of QE effects differ across economies, implying that their costs and benefits are unevenly distributed.

Smart Money? The Effect of Education on Financial Outcomes

Abstract: Household financial decisions are important for household welfare, economic growth, and financial stability. Yet our understanding of the determinants of financial decision making is limited. Exploiting exogenous variation in state compulsory schooling laws in both standard and two-sample instrumental variable strategies, we show that education increases financial market participation, measured by investment income and equities ownership, while dramatically reducing the probability that an individual declares bankruptcy, experiences a foreclosure, or is delinquent on a loan. Further results and a simple calibration suggest that the result is driven by changes in savings or investment behavior, rather than simply increased labor earnings.

The Business Cycle, Investor Sentiment, and Costly External Finance

Abstract: The recent financial crisis shows that financial markets can impact the real economy. We investigate whether access to finance typically time-varies and, if so, what are the real effects. Consistent with time-varying external finance costs, both investment and employment are less sensitive to Tobin's q and more sensitive to cash flow during recessions and low investor sentiment periods. Share issuance plays a bigger role than debt issuance in causing these effects. Alternative tests that do not rely on q and cash flow sensitivities suggest that recessions and low sentiment increase external finance costs, thereby limiting investment and employment.

What are the Macroeconomic Effects of Asset Purchases

Abstract: We examine the impact of large-scale asset purchases of government bonds on real GDP and the CPI in the United Kingdom and the United States with a Bayesian VAR, estimated on monthly data from 2009 M3 to 2013 M5. We identify an asset purchase shock with sign and zero restrictions. In contrast to the impulse response analysis in previous work, the reactions of real GDP and CPI are left unrestricted, so as formally to test whether these variables are affected by asset purchases. We then explore the transmission channels to the domestic economy and emerging markets. Our results suggest that asset purchases have a statistically significant effect on real GDP with a purchase of 1% of GDP leading to a .36% (.18%) rise in real GDP and a .38% (.3%) rise in CPI for the United States (United Kingdom). In the United States, this policy lowers yields on long-term government bonds and the real exchange rate. In the United Kingdom, on other hand, interest rate futures and measures of financial market uncertainty are more affected. There is also some evidence that emerging market sovereign bond and corporate bond spreads decline, with industrial production rising in response a positive asset purchase shock in either country.

The Dynamics of Bank Spreads and Financial Structure

Abstract: This paper investigates the effect of within banking sector competition and competition from financial markets on the dynamics of the transmission from monetary policy rates to retail bank interest rates in the euro area. We use a new dataset that permits analysis for disaggregated bank products. Using a difference-in-difference approach, we test whether development of financial markets and financial innovation speed up the pass through. We find that more developed markets for equity and corporate bonds result in a faster pass-through for those retail bank products directly competing with these markets. More developed markets for securitized assets and for interest rate derivatives also speed up the transmission. Further, we find relatively strong effects of competition within the banking sector across two different measures of competition. Overall, the evidence supports the idea that developed financial markets and competitive banking systems increase the effectiveness of monetary policy.

Financial forecasting using ANFIS networks with Quantum-behaved Particle Swarm Optimization

Abstract: To be successful in financial market trading it is necessary to correctly predict future market trends. Most professional traders use technical analysis to forecast future market prices. In this paper, we present a new hybrid intelligent method to forecast financial time series, especially for the Foreign Exchange Market (FX). To emulate the way real traders make predictions, this method uses both historical market data and chart patterns to forecast market trends. First, wavelet full decomposition of time series analysis was used as an Adaptive Network-based Fuzzy Inference System (ANFIS) input data for forecasting future market prices. Also, Quantum-behaved Particle Swarm Optimization (QPSO) for tuning the ANFIS membership functions has been used. The second part of this paper proposes a novel hybrid Dynamic Time Warping (DTW)-Wavelet Transform (WT) method for automatic pattern extraction. The results indicate that the presented hybrid method is a very useful and effective one for financial price forecasting and financial pattern extraction.

Uncertainty, risk, and the financial crisis of 2008

Abstract: The distinction between uncertainty and risk, originally drawn by Frank Knight and John Maynard Keynes in the 1920s, remains fundamentally important today. In the presence of uncertainty, market actors and economic policy-makers substitute other methods of decision making for rational calculation�specifically, actors' decisions are rooted in social conventions. Drawing from innovations in financial markets and deliberations among top American monetary authorities in the years before the 2008 crisis, we show how economic actors and policy-makers live in worlds of risk and uncertainty. In that world social conventions deserve much greater attention than conventional IPE analyses accords them. Such conventions must be part of our toolkit as we seek to understand the preferences and strategies of economic and political actors.

Banks, Government Bonds, and Default: What Do the Data Say?

Abstract: We analyze holdings of public bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Banks hold many public bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, banks increase their exposure to public bonds, especially large banks and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults. This correlation is mostly due to bonds acquired in pre-default years. These findings shed light on alternative theories of the sovereign default-banking crisis nexus.

Beyond Market Failures: The Market Creating and Shaping Roles of State Investment Banks

Abstract: Recent work has highlighted the need for innovation investments to be understood through a mission oriented approach rather than a market failure one (Foray et al. 2012). However, this work has only focused on state agencies, such as DARPA, overlooking the role of public financial institutions such as state investment banks. Indeed, with the increasingly short-term nature of private financial markets, the role of public financial institutions has become increasingly important, and yet they continue to be analysed and evaluated through the market failure framework. Beginning with the importance of SIBs today in the emerging green economy, the paper develops a conceptual typology of the different roles that SIBs play in the economy which together show the market creation/shaping process of SIBs, rather than their mere ‘market fixing’ roles. The paper discusses four types of investments, both theoretically and empirically: countercyclical; developmental; venture capitalist role; and challenge-led. To develop the typology, we first discuss how standard market failure theory (MFT) justifies the roles of SIBs, the diagnostics and evaluation toolbox associated with it, and resulting criticisms centred on notions of ‘government failures’. We then show the limitations of this approach based on insights from Keynes, Schumpeter, Minsky and Polanyi, and other authors from the evolutionary economics tradition, which help us move towards a framework for public investments that is more about market creating/shaping rather than market fixing. As frameworks lead to evaluation tools, we use this new lens to both discuss the increasingly targeted investments that SIBs are making, and to provide a new light on the usual criticisms that are made about such directed activity (e.g. crowding out and picking winners).

The Transmission of Federal Reserve Tapering News to Emerging Financial Markets

Abstract: This paper evaluates the impact of tapering “news” announcements by Fed senior policy makers on financial markets in emerging economies. We apply a panel framework using daily data, and find that emerging market asset prices respond most to statements by Fed Chairman Bernanke, and much less to other Fed officials. We group emerging markets into those with “robust” fundamentals (current account surpluses, high international reserves and low external debt) and those with “fragile” fundamentals and, intriguingly, find that the exchange rates of the robust group (and lesser extend equity prices and CDS spreads) were more adversely affected to tapering news than the fragile group. The cumulative effects of tapering announcements after a month, however, appear to be quite similar for both robust and fragile emerging markets. We also show that more financially developed economies are more impacted by tapering news and a plausible interpretation is that more financially developed economies are more exposed, at least in the short-term, to external news announcements.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.