I identify intraday jumps and cojumps in exchange rates controlling for volatility patterns and relate these events to pre-scheduled macroeconomic news and market conditions. Event study results show ...that preceding jump and cojump events, exchange rate quote volume, illiquidity, signed order flow, and informed trades are at heightened levels revealing that jump events are consistent with rational dealer quoting behavior. Following jump and cojump events, quote volume and return variance remain at heightened levels while illiquidity, informed trade, and signed order flow remain at depressed levels providing evidence that order flow following jump events is largely uninformed liquidity provision.
I examine the effect that the precision of securitization has on the market quality of the underlying asset, as well as focus on the market quality of the derivative asset. With securitization, the ...underlying portfolio has improved liquidity, the trading intensity of an informed trader is increased, and the informed trader’s expected profit is increased. When arbitrageurs are discretionary, jumps in illiquidity can occur. The combination of the underlying portfolio and derivative portfolio prices are revealing about the unknown liquidation value of the underlying portfolio and the derivative price is also revealing about the unknown tracking error.
I provide evidence that financial contagion risk is an important source of the equity risk premium. Banks’ contributions to aggregate financial contagion are estimated in a state space framework and ...linked to systemic risk. Greater bank connectedness today leads to increased systemic risk 3–12 months later. More contagious banks earn significantly greater risk-adjusted returns than less contagious ones and the tradable high contagion-minus-low contagion bank portfolio is priced in the cross-section of stock returns. Stocks that co-move more strongly with contagious banks have greater expected returns. These results are robust to factor model specification, test assets, and time period considered.
The slope of the portfolio return and consumption growth cospectrum contains predictive information about future real economic activity, future recession probabilities, the risk aversion coefficient, ...and future expected returns. Commonly used economic variables do not subsume the predictive power of the cospectrum slope and although the interest rate term spread largely fails to predict the financial crisis, the set of cospectrum slopes predicts the crisis with a 75% probability. The cospectrum slope significantly improves the fit of long‐horizon expected return models and contains more significant predictive information than the current dividend yield.
Systemic Risk: Bank Characteristics Matter Mazumder, Sharif; Piccotti, Louis R.
Journal of financial services research,
10/2023, Letnik:
64, Številka:
2
Journal Article
Recenzirano
We systematically examine the relationship between a bank’s characteristics and its exposure to systemic risk. We find that tier 1 requirements are negatively associated with a bank’s exposure, while ...size has a positive association. This association is nonlinear because larger banks contribute more than their smaller competitors. Banks with greater financial constraints are less exposed to systemic risk. We find evidence that geographic distance between banks has a negative relationship with systemic risk and that institutional ownership has a positive one. Finally, we find that the risk-taking attributes of the board and the CEO have a positive association with systemic risk.
ETF Premiums and Liquidity Segmentation Piccotti, Louis R.
The Financial review (Buffalo, N.Y.),
February 2018, 2018-02-00, 20180201, Letnik:
53, Številka:
1
Journal Article
Recenzirano
Exchange traded funds (ETFs) provide a means for investors to access assets indirectly that may be accessible at a high cost otherwise. I show that liquidity segmentation can explain the tendency for ...ETFs to trade at a premium to net asset value (NAV) as well as the life‐cycle pattern in premiums. ETFs with larger NAV tracking error standard deviations (TESDs) tend to trade at higher premiums and the liquidity benefits offered by foreign ETFs and fixed income ETFs are revealed to be the most valuable to investors. Further tests validate that TESD has the desirable properties of a liquidity segmentation measure.
We link the firm's required return on equity to its target debt ratio. We find that a firm's expected return on equity is increasing in the product of the distance between its debt ratio and its ...target debt ratio, its speed of adjustment, and the spread of the tax benefits of its debt over its bankruptcy costs of debt. Our empirical tests validate the testable implications of our model.
We respecify the uncovered interest rate parity (UIP) conditions by inverting the market price of the risk (Sharpe ratio) formula. Our empirical model provides new insight indicating that violations ...to the UIP stem from the existence of a risk premium in the exchange rates and from observed market return differentials being a noisy statistic of the markets’ expected return differentials in our respecified model. Using an integrated macro‐micro structure framework for expected market return differentials improves our model fit and the validity of UIP.
This study investigated whether there is informed trading that takes advantage of data breach events. By analyzing the transactions in the options market, we conjectured that there are two distinct ...informed trading patterns: one that begins approximately 4 months prior and another that begins 8–12 months before the corporate data breach announcements. This is supported by evidence of higher trading volume and open interest for put options, a higher put-to-call volume ratio, a higher put-to-call open interest ratio, and lower spreads prior to such announcements. We also examined the stock reactions following data breach announcements and found significantly negative cumulative abnormal returns of −0.35% within one day. Moreover, a cross-sectional analysis showed that put-call ratios have predictive power for stock returns. Finally, additional evidence, such as trading strategies in the stock and options markets, is provided.
Using several measures of information share, we examine price discovery across the inter-dealer and dealer–customer market tiers in the currencies market. In the spot market, the information share of ...the inter-dealer tier is higher than that of the dealer–customer one for non-financial sector trades and is lower than the dealer–customer tier for foreign investors’ sell trades. In the forward market, the dealer–customer tier generally has the greater information share at the dealer’s buy side. Our results indicate the market where customers’ trades are the most informative and demonstrate how exogenous events affect price discovery across markets and market tiers.
•Information share (IS) derived from inter-dealer spot trades is higher for non-financial sector.•IS of the inter-dealer spot trades is lower for foreign investors’ sell trades.•Dealer-customer forward trades have the greater IS at the dealer’s buy side.•IS transitivity is found across market tiers and across spot/forward markets.•We find that during a period of interest rate gap IS changed regarding market tier and customer types.
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