The Risk Tolerance of International Investors

Investor confidence and risk tolerance are important concepts that investors are constantly trying to gauge. Yet these concepts are notoriously hard to measure in practice. Most attempts rely on price or return data, but these run into trouble when trying to disentangle whether an observed price change is attributable to a shift in investor confidence or a change in fundamental value. In this paper, we take an alternative approach by looking at the world-wide holdings and trading of risky assets. We model global capital markets as the interaction between large global institutional investors and smaller domestic investors from each country. This permits separation of global price changes into two components, one that reflects changes in demand and fundamentals perceived by all investors, and a second that reflects changes in the relative risk tolerance of institutional investors over and above that of domestics. The latter component, changes in relative risk tolerance of global institutions, is driven by the willingness of these investors to acquire additional assets in each country in proportion to their current holdings. Using our model, we show how data on asset holdings and flows across countries can be used to identify changes in risk tolerance. We then apply this identification scheme to recent data on the global portfolio holdings of institutional investors. The resulting measure of risk tolerance impressionistically accords well with periods of market turbulence and quiescence. It also accounts for a considerable portion of the variation in portfolio holdings and is informative about future returns.

Global Integration of Central and Eastern European Financial Markets: The Role of Economic Sentiments

This paper examines the importance of different economic sentiments, e.g. consumer moods, for the Central and Eastern European countries (CEECs) during the transition process. We first analyze the importance of economic confidence with respect to the CEEC's financial markets. Since the integration of formerly strongly regulated markets into global markets can also lead to an increase of the dependence of the CEECs' domestic market performance from global sentiments, we also investigate the relationship between global economic sentiments and domestic income and share prices. Finally, we test whether the impact of global sentiments and stock prices on domestic variables increases proportionally with the degree of integration. For these purposes, we apply a structural cointegrating VAR (CVAR) framework based upon a restricted autoregressive model which allows us to distinguish between the long-run and the short-run dynamics. For the long run we find evidence supporting relationships between sentiments, income and share prices in case of the Czech Republic. Our results for the short run suggest that economic sentiments in general are strongly influenced by share prices and income but also offer some predictive power with respect to the latter. What is more, global sentiments play an important role in particular for the CEECs' share prices and income. The significance of this link increases with economic integration.Cointegration, European integration, financial markets, restricted autoregressive model, sentiments

Financial panic and emerging market funds

This article studies equity investment of emerging-market funds based on the 2003–2009 weekly data and compares the dynamics of flow and return between tranquil period and financial panic based on the experience of the latest 2008–2009 global financial crisis. First, we find that the well-documented positive feedback trading is a tranquil-period phenomenon such that it is more difficult in general for emerging-market funds to attract new investment in financial panic. Second, the predictive power of flow on return is driven by a combination of price pressure and information effects in tranquil period, while the information effect dominates in financial panic. Third, the underlying co-movements or contagion of flow across the emerging-market funds influence the association between flow and return. Overall, the findings highlight the importance of accounting for state-dependent dynamics as well as cross-regional co-movements in the analysis of flow and return

The economics of currency crises and contagion: an introduction

Two theories of the causes of currency crises prevail in the economic literature. The first traces currency instability to countries' structural imbalances and weak policies; the second identifies arbitrary shifts in market expectations as the principal source of instability. The authors of this article contend that only a synthesis of these theories can capture the complexity of the 1997-98 Asian currency crisis. In their view, the crisis resulted from the interaction of structural weaknesses and volatile international capital markets. The authors also cite two other factors that contributed to the severity of the Asia crisis: inadequate supervision of the banking and financial sectors and the rapid transmission of the crisis across countries linked by trade and common credit sources.Financial crises ; Financial crises - Asia ; Asia

International capital flows and transmission of financial crises

This paper proposes a model encompassing alternative views of contagion by highlighting the different channels of transmission of financial crises in an unifying framework. We study investor behaviour when they are affected by external habit formation. It is shown how international portfolio choice in frictionless financial markets with habit formation is in itself a channel of contagion. The possible stabilization effects of capital controls and Tobin tax on the international transmission of financial crises are also discussedCurrency crises; contagion; habit formation; portfolio rebalancing; capital controls; Tobin tax

Mutual-Excitation of Cryptocurrency Market Returns and Social Media Topics

Cryptocurrencies have recently experienced a new wave of price volatility and interest; activity within social media communities relating to cryptocurrencies has increased significantly. There is currently limited documented knowledge of factors which could indicate future price movements. This paper aims to decipher relationships between cryptocurrency price changes and topic discussion on social media to provide, among other things, an understanding of which topics are indicative of future price movements. To achieve this a well-known dynamic topic modelling approach is applied to social media communication to retrieve information about the temporal occurrence of various topics. A Hawkes model is then applied to find interactions between topics and cryptocurrency prices. The results show particular topics tend to precede certain types of price movements, for example the discussion of 'risk and investment vs trading' being indicative of price falls, the discussion of 'substantial price movements' being indicative of volatility, and the discussion of 'fundamental cryptocurrency value' by technical communities being indicative of price rises. The knowledge of topic relationships gained here could be built into a real-time system, providing trading or alerting signals.Comment: 3rd International Conference on Knowledge Engineering and Applications (ICKEA 2018) - Moscow, Russia (June 25-27 2018

High Frequency Contagion of Currency Crises in Asia

Using daily data during the period of Asian Currency Crises, this paper examines high-frequency contagion effects among Asian six countries. By identifying the origin' (of exchange rate depreciation, or decline in stock prices) and the affected' (currencies, or stock prices) in spillover relationship, Indonesia and Korea are found to be the two main origin countries, affecting exchange rates and stock prices of other countries. Evidence of high-frequency crisis spillover from Thailand to other countries was weak at best. A positive relationship between trade link indices and the contagion coefficients is found, implying that the bilateral trade linkage is an important factor for currency market participants to expect which currency should be affected within days of an original a shock in the exchange rate of a particular country.

Do changes in sovereign credit ratings contribute to financial contagion in emerging market crises?

Credit rating changes for long-term foreign currency debt may act as a wake-up call with upgrades and downgrades in one country affecting other financial markets within and across national borders. Such a potential (contagious) rating effect is likely to be stronger in emerging market economies, where institutional investors' problems of asymmetric information are more present. This empirical study complements earlier research by explicitly examining cross-security and cross-country contagious rating effects of credit rating agencies' sovereign risk assessments. In particular, the specific impact of sovereign rating changes during the financial turmoil in emerging markets in the latter half of the 1990s has been examined. The results indicate that sovereign rating changes in a ground-zero country have a (statistically) significant impact on the financial markets of other emerging market economies although the spillover effects tend to be regional

Investigating the Determinants of Banking Coexceedances in Europe in the Summer of 2008

We examine the nature, extent and possible causes of bank contagion in a high frequency setting. Looking at six major European banks in the summer and autumn of 2008, we model the lower coexceedances of these banks returns. We find that market microstructure, volatility (measured by range based measures) and limited general market conditions are key determinants of these coexceedances. We find some evidence that herding occurred.