Applied Finance Letters (E-Journal - Auckland Centre for Financial Research)
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149 research outputs found
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SOCIAL NETWORK AND THE DIFFUSION OF INVESTMENT BELIEFS: THEORETICAL EXPERIMENT AND THE CASES OF GAMESTOP SAGA
Full text linkIt is critical to understand how investment beliefs are transmitted across a community and affect individuals' investment decisions, given the proliferation of online social networks. This study proposes a novel approach to capture the cognitive effects (dissonance and exposure), which outperforms previous social contagion models in terms of expressive power. The cognitive model was analyzed across a variety of network topologies and communications patterns. It is found that the cognitive diffusion models that account for the difference in belief scores between previous and new beliefs performed as expected. This study establishes a framework under which researchers studying financial behaviors and social contagion in finance could collaborate to better understand individual investments' decisions
CREDIT DEFAULT SWAPS AND BANK SAFETY
Full text linkIn this analysis we find evidence that credit default swap (CDS) purchasesincrease bank safety. Specifically, we show banks which were net buyers ofCDS had smaller increases in loan loss reserves in response to the COVID-19crisis. Previous research had speculated that bank CDS purchases causedincreased risk-taking by banks which offset the effect of the hedge. This anal-ysis contributes to this literature on the effect of hedging on bank risk takingand capital structure. Moreover, since our results are consistent with CDSbeing effectively used to hedge, our results have implications for systemicrisk
MARKETWIDE LIQUIDITY AND OPTIONS MARKET
Full text linkIn this paper, we study the relationship between marketwide liquidity and options market. Using the Chicago Board Options Exchange (CBOE) Volatility Index, VIX as a measure of overall value of the S&P 500 (SPX) options, and the CBOE SKEW Index as a measure of market crash risk premium in the options market, we study the relation among marketwide liquidity, VIX and SKEW. Empirical results show that higher the marketwide liquidity, less expensive the options and the less likely options traders anticipate a market crash
MISPRICINGS IN GLOBAL ENERGY MARKETS
Full text linkFinancial market participants can benefit from understanding how shocks affect equity mispricings.Energy corporates have been exposed to multiple structural changes over the past decades.This paper applies the pairs trading algorithm of Figuerola-Ferretti et al. (2018) (Journal of FuturesMarkets, 2018) to analyze mean reversion of cointegrated stocks in global energy equity markets.Using daily data covering the US, Europe and Asia we report positive risk adjusted returns thatsupersede their corresponding equity index counterparts. Pairs trading profitability is enhancedwhen filtering stocks with the measure of capital expenditure (CAPEX)
LIQUIDITY OF FUTURES MARKETS OVER THE LAST QUARTER OF A CENTURY: TECHNOLOGY & MARKET STRUCTURE VERSUS ECONOMIC INFLUENCES
Full text linkThis study examines the major technological and market forces that have acted on the liquidity of futures markets over almost the last quarter of a century – equivalent to Professor Robert Webb’s tenor as Editor-in-Chief at the Journal of Futures Markets. We examine the impact of electronic trading replacing open outcry, the impact of high-frequency trading and co-located trading, compare the liquidity impacts of these developments with the impact of major economic events, including the Global Financial Crisis and Covid-19 Pandemic. Using a stock index futures contract traded on Australian futures exchanges as an example, we find that technological advances have had a statistically significant but almost imperceptible influence on measures of liquidity of Australian futures contracts. In contrast, economic crises, and crashes such as the Global Financial Crash and the Covid-19 crash have had a massive and sustained impact on the liquidity of futures markets. Our results suggest that liquidity effects from technological innovations, while important, remain dwarfed by those from extreme outlier events
INFORMATIONAL EFFICIENCY OF THE US MARKETS FOR IMPLIED VOLATILITY BEFORE AND AFTER THE COVID-19 PANDEMIC
Full text linkThe objective of this work is to assess informational efficiency in four US markets for implied volatility. This has been pursued using daily data over 2015 to 2021 and a composite index that accounts for three possible sources of inefficiency associated with long-range dependence, short-range dependence, and entropy. The dominant pattern of long-range dependence has been that of anti-persistence both before and during the pandemic. The same applies for short-range dependence, especially before the pandemic. The presence of anti-persistence is an indication of investors’ over-reaction to incoming information and implies that oscillatory trading strategies have been probably more successful that trend-following ones. During the Covid-19 pandemic, the entropy decreased in all cases suggesting that the four implied volatility series became more predictable; the intensity, however, of long-range and short-range dependence remained largely unaffected. As a result of these developments, the informational efficiency in at least two markets (those related to stock and to crude oil) fell
THE GLOBAL MARKET FOR EXCHANGE-TRADED DERIVATIVES: 21ST CENTURY TRENDS, INNOVATION AND FAILURE
Full text linkUtilizing a comprehensive database spanning 110 exchanges in five geographic regions, we examine trends in trade activity and contract innovation of exchange-traded futures and options over the period 2002–2021. We find that global volume has experienced a ten-fold increase driven by significant increases at Asian and North American exchanges, and primarily in the equity, interest rate and currency asset classes. New contract innovation has been greatest in North America and in the energy and equity asset classes. Further, volume and open interest attributable to new contract innovation have now surpassed those of legacy contracts. Turnover showed a significant increase driven largely by trade activity in Asian markets. Finally, new contract failure rates have been highest at North American exchanges as well as in the interest rate and energy asset classes
GPU PRICES AND CRYPTOCURRENCY RETURNS
Full text linkWe look at the association between the price of a cryptocurrency and the secondary market prices of the hardware used to mine it. We find the prices of the most efficient Graphical Processing Units (GPUs) for Ethereum mining are significantly positively correlated with the daily price returns to that cryptocurrency
IS THE BLACK–SCHOLES MODEL GOOD ENOUGH FOR RETAIL INVESTORS IN CHINA?
Full text linkThis study answers a simple question for Chinese investors, especially Chinese retail investors: Is the Black–Scholes model good enough for them to make investment decisions? Using the absolute out-of-sample error as a measure of model efficiency, I find that the volume-weighted mean absolute out-of-sample error is 12.03% of the option premium and investors have to tolerate more than 1% absolute error in almost all subsample groups. The significant out-of-sample error indicates that using the Black–Scholes model solely in the decision-making process may have a negative impact on the investments’ performance
IMPACT OF COVID-19 ON CRYPTOCURRENCIES: EVIDENCE ON INFORMATION TRANSMISSION THROUGH ECONOMIC AND FINANCIAL MARKET SENTIMENTS
Full text linkThis paper investigates the relationship between the COVID-19 crisis and the two leading cryptocurrencies, Bitcoin and Ethereum, from 31 December 2019 to 18 August 2020. We also use an economic news sentiment index and financial market sentiment index to explore the possible mechanisms through which COVID-19 impacts cryptocurrency. We employ a VAR Granger Causality framework and Wavelet Coherence Analysis and find the cryptocurrency market was impacted in the early phase of the sample period through economic news and financial market sentiments, but this effect diminished after June 2020.