Multi-scaling modelling in financial markets

In the recent years, a new wave of interest spurred the involvement of complexity in finance which might provide a guideline to understand the mechanism of financial markets, and researchers with different backgrounds have made increasing contributions introducing new techniques and methodologies. In this paper, Markov-switching multifractal models (MSM) are briefly reviewed and the multi-scaling properties of different financial data are analyzed by computing the scaling exponents by means of the generalized Hurst exponent H(q). In particular we have considered H(q) for price data, absolute returns and squared returns of different empirical financial time series. We have computed H(q) for the simulated data based on the MSM models with Binomial and Lognormal distributions of the volatility components. The results demonstrate the capacity of the multifractal (MF) models to capture the stylized facts in finance, and the ability of the generalized Hurst exponents approach to detect the scaling feature of financial time series.

Three essays on financial markets

This thesis examines stock price behaviour on the New York Stock Exchange.  The thesis develops modelsto show that firms on the stock exchange are different with respect to volatility and changes in calender dates.  Moreover, the thesis shows that firm returns are affected differently by oil prices.

Panel versus GARCH information in unit root testing with an application to financial markets

In a search for more powerful unit root tests, some researchers have recently proposed accounting for the information contained in the GARCH of the innovations. However, while promising, tests with GARCH are difficult to implement, which has made them quite uncommon in the empirical literature. A computationally attractive alternative is to account not for GARCH but the information contained in a panel of multiple time series. The purpose of the current note is to compare the relative power achievable from these two information sources. © 2014 Elsevier B.V.

Latin America major player in the international financial markets, agony and ecstasy

This study deals with the complex relationship between the International Financial Markets (IFMs) and the countries of the Latin America Group, emphasizing the entrance and the exit conditions for these countries in the last two indebtedness cycles - 1967/1982 and 1990/1994. Finally, it makes some considerations about the consequences of these Latin America countries of being linking economic policies to the external financing abtained in the IFMs.

General equilibrium model with restricted participation in financial markets

The paper analyses a general equilibrium model with financiaI markets in which households may face restrictions in trading financiaI assets such as borrowing constraints and collateral (restricted participation model). However, markets are not assumed to be incomplete. We consider a standard general equilibrium model with H > 1 households, 2 periods and S states of nature in the second period. We show that generically the set of equilibrium allocations ia indeterminate, provided the existence of at least one nominal asset and one household for who some restriction is binding. Suppose there are C > 1 commodities in each state of nature and assets pays in units of some commodity. In this case for each household with binding restrictions it is possible to reduce the set of feasible assets trading and obtain a new equilibrium that utility improve alI those households. There is however an upper bound on the number of households to be improved related to the number of states of nature and the number of commodities. In particular, if the number of households ia smaller than the number of states of nature it is possible to Pareto improve any equilibrium by reducing the feasible choice set for each household.

Macroeconomic announcements, price discovery, and order flow efects in the stock market: evidence from incomplete data and multiple financial markets

This paper investigates heterogeneity in the market assessment of public macro- economic announcements by exploring (jointly) two main mechanisms through which macroeconomic news might enter stock prices: instantaneous fundamental news im- pacts consistent with the asset pricing view of symmetric information, and permanent order ow e¤ects consistent with a microstructure view of asymmetric information related to heterogeneous interpretation of public news. Theoretical motivation and empirical evidence for the operation of both mechanisms are presented. Signi cant in- stantaneous news impacts are detected for news related to real activity (including em- ployment), investment, in ation, and monetary policy; however, signi cant order ow e¤ects are also observed on employment announcement days. A multi-market analysis suggests that these asymmetric information e¤ects come from uncertainty about long term interest rates due to heterogeneous assessments of future Fed responses to em- ployment shocks.

How the full opening of the capital account to highly liquid financial markets led Latin America to two and a half cycles of ‘mania, panic and crash’

Latin America has recently experienced three cycles of capital inflows, the first two ending in major financial crises. The first took place between 1973 and the 1982 ‘debt-crisis’. The second took place between the 1989 ‘Brady bonds’ agreement (and the beginning of the economic reforms and financial liberalisation that followed) and the Argentinian 2001/2002 crisis, and ended up with four major crises (as well as the 1997 one in East Asia) — Mexico (1994), Brazil (1999), and two in Argentina (1995 and 2001/2). Finally, the third inflow-cycle began in 2003 as soon as international financial markets felt reassured by the surprisingly neo-liberal orientation of President Lula’s government; this cycle intensified in 2004 with the beginning of a (purely speculative) commodity price-boom, and actually strengthened after a brief interlude following the 2008 global financial crash — and at the time of writing (mid-2011) this cycle is still unfolding, although already showing considerable signs of distress. The main aim of this paper is to analyse the financial crises resulting from this second cycle (both in LA and in East Asia) from the perspective of Keynesian/ Minskyian/ Kindlebergian financial economics. I will attempt to show that no matter how diversely these newly financially liberalised Developing Countries tried to deal with the absorption problem created by the subsequent surges of inflow (and they did follow different routes), they invariably ended up in a major crisis. As a result (and despite the insistence of mainstream analysis), these financial crises took place mostly due to factors that were intrinsic (or inherent) to the workings of over-liquid and under-regulated financial markets — and as such, they were both fully deserved and fairly predictable. Furthermore, these crises point not just to major market failures, but to a systemic market failure: evidence suggests that these crises were the spontaneous outcome of actions by utility-maximising agents, freely operating in friendly (‘light-touch’) regulated, over-liquid financial markets. That is, these crises are clear examples that financial markets can be driven by buyers who take little notice of underlying values — i.e., by investors who have incentives to interpret information in a biased fashion in a systematic way. Thus, ‘fat tails’ also occurred because under these circumstances there is a high likelihood of self-made disastrous events. In other words, markets are not always right — indeed, in the case of financial markets they can be seriously wrong as a whole. Also, as the recent collapse of ‘MF Global’ indicates, the capacity of ‘utility-maximising’ agents operating in (excessively) ‘friendly-regulated’ and over-liquid financial market to learn from previous mistakes seems rather limited.