Predictability of Asset Returns and the Efficient Market Hypothesis

This paper is concerned with empirical and theoretical basis of the Efficient Market Hypothesis (EMH). The paper begins with an overview of the statistical properties of asset returns at different frequencies (daily, weekly and monthly), and considers the evidence on return predictability, risk aversion and market efficiency. The paper then focuses on the theoretical foundation of the EMH, and show that market efficiency could co-exit with heterogeneous beliefs and individual irrationality so long as individual errors are cross sectionally weakly dependent in the sense defined by Chudik, Pesaran, and Tosetti (2010). But at times of market euphoria or gloom these individual errors are likely to become cross sectionally strongly dependent and the collective outcome could display significant departures from market efficiency. Market efficiency could be the norm, but it is likely to be punctuated with episodes of bubbles and crashes. The paper also considers if market inefficiencies (assuming that they exist) can be exploited for profit.forecast averaging, heterogeneity of expectations, predictability, market efficiency, equity premium puzzle

The Opinion Game: Stock price evolution from microscopic market modelling

We propose a class of Markovian agent based models for the time evolution of a share price in an interactive market. The models rely on a microscopic description of a market of buyers and sellers who change their opinion about the stock value in a stochastic way. The actual price is determined in realistic way by matching (clearing) offers until no further transactions can be performed. Some analytic results for a non-interacting model are presented. We also propose basic interaction mechanisms and show in simulations that these already reproduce certain particular features of prices in real stock markets.Comment: 14 pages, 5 figure

A Political Theory of the Chinese Stock Market

The Chinese stock market crash of 2015 attracted much attention from both the media and academia. Yet it was not a unique incident. The Chinese stock market fluctuates more frequently and drastically than most mature stock markets. The purpose of this work is to explain these unusual stock market fluctuations through a political lens. Traditional financial models and behavioral finance cannot sufficiently explain the unusual fluctuations of the Chinese stock market. Traditional financial models find that economic forces cannot explain all fluctuations in China’s stock market. Behavioral finance attributes the fluctuations to investor’s irrational behavior without explaining why investors behave more irrationally than other investors. Other explanations, like financial knowledge and the immature market arguments cannot sufficiently explain the fluctuations of Chinese financial markets. A common characteristic of previous literature is a lack of real political explanations. This work develops a political explanation of the Chinese stock market, with an emphasis on biased financial institutions. Biased financial institution are the result of state-owned enterprises’ interest and political influence, and cause behavioral changes in investors and the market environment. Drastic market fluctuations serve as a channel for market forces to input their interests into political system. In reaction to these unusual market fluctuations, the Chinese government adjusts institutions to make concessions to private capital and to stabilize the market. Market fluctuations are the key force behind the Chinese government’s institutional development. Three case studies will illustrate this theory: non-tradable share reform, circuit-breaker institution, and the international board. These cases demonstrate how Chinese institutional design conforms to the interest of state-owned enterprises, introduces bias, and shows how the government uses the reform process to make concessions

Post-macroeconomics -- reflections on the crisis and strategic directions ahead

For decades, many researchers argued that economics had nothing to fear from enriching itself with lessons and advances from other disciplines. Unfortunately, these suggestions were either neglected or dismissed upfront in what was then arbitrarily considered mainstream economics. The global crisis has led even Nobel Prize winners to acknowledge that the problem facing economists and policy makers today is mostly intellectual - it is the need to confront the systematic failure of thinking, especially on the part of macroeconomists. Despite its unprecedented magnitude and heavy financial, human, and intellectual cost, the crisis certainly does not invalidate everything that has been learned about macroeconomics. However, the costs highlight some of mistakes of the dominant intellectual macroeconomic framework. Post-macroeconomics should not be understood as another metanarrative of the end of metanarratives. The use of the prefix post here suggests and emphasizes much more than temporal posterity. Post-macroeconomics should follow from macroeconomics more than it follows after macroeconomics. The theorizing of post-macroeconomics is therefore neither systematically oppositional nor hegemonic. It does not advocate a - dialectic opposition - between macroeconomics and post-macroeconomics. Rather, it suggests that the latter builds on the former and goes beyond it.Economic Theory&Research,Debt Markets,,Banks&Banking Reform,Access to Finance

"A Perspective on Minsky Moments--The Core of the Financial Instability Hypothesis in Light of the Subprime Crisis"

This paper aims to help bridge the gap between theory and fact regarding the so-called "Minsky moments" by revisiting the "financial instability hypothesis" (FIH). We limit the analysis to the core of FIH--that is, to its strictly financial part. Our contribution builds on a reexamination of Minsky's contributions in light of the subprime financial crisis. We start from a constructive criticism of the well-known Minskyan taxonomy o f financial units (hedge, speculative, and Ponzi) and suggest a different approach that allows a continuous measure of the unit's financial conditions. We use this alternative approach to account for the cyclical fluctuations of financial conditions that endogenously generate instability and fragility. We may thus suggest a precise definition of the "Minsky moment" as the starting point of a Minskyan process--the phase of a financial cycle when many financial units suffer from both liquidity and solvency problems. Although the outlined approach is very simple and has to be further developed in many directions, we may draw from it a few policy insights on ways of stabilizing the financial cycle.Financial Instability; Financial Fragility; Financial Fluctuations; Subprime Crisis; Minsky Moments; Minsky Meltdown; Speculative Units; Hedge Units; Ponzi Units

Cryptocurrencies: the future of money or just a speculative investment?

Cryptocurrencies have been in vogue ever since Bitcoin first appeared in 2008. From that moment on, a new potential market started evolving and is nowadays a daily topic for everyone involved in the financial and monetary markets. Cryptocurrencies presented themselves as a viable alternative to traditional currencies, with a lot of new interesting features, but also several aspects that split the opinions between those who understand it as a great alternative for the future and the more skeptical ones who still question its legality and use. Nowadays, cryptocurrency is one of the most interesting topics in the financial markets due to all the controversy associated, as well as the public acceptance, responsible for the huge prices that these coins have been reaching. In this dissertation, we aim to analyze every aspect concerning cryptocurrencies. With the intention to clarify the most important details about this new market, all these details have been scrutinized, from the several different types of cryptocurrencies and its behavior, to the factors that have an impact in cryptocurrencies prices. Cryptocurrency is still a trendy and unknown subject to many people, and that was the motivation and the main objective of this dissertation, to clarify everyone about this topic before thinking of investing in any of these new cryptocurrencies.As cripto moedas tem estado em moda desde que a Bitcoin apareceu em 2008. A partir desse momento, começou-se a verificar o aparecimento de um novo mercado, que é, atualmente, um assunto diário para todos os envolvidos nos mercados financeiros e monetários. As cripto moedas têm-se apresentado como uma alternativa viável às moedas tradicionais, com várias características interessantes, mas também alguns aspetos que têm dividido as opiniões entre aqueles que as consideram como uma excelente alternativa de futuro e os mais céticos, que ainda questionam a sua legalidade e utilização. Atualmente, as cripto moedas são um dos tópicos mais interessantes dos mercados financeiros devido a toda a controvérsia associada, bem como a aceitação por parte do público, responsável pelos preços elevados que estas moedas têm atingido. Nesta dissertação, a intenção foi analisar todos os aspetos relacionados com as cripto moedas. Com a intenção de clarificar os detalhes mais importantes deste novo mercado, todos estes detalhes foram examinados, desde os diversos tipos de cripto moedas e o seu comportamento, aos fatores que podem ter impacto nos preços das cripto moedas. As cripto moedas continuam a ser um tópico atual e desconhecido para muitas pessoas, e essa foi a motivação e o objetivo principal desta dissertação, clarificar todas as pessoas sobre este tópico antes de pensarem em investir em qualquer uma destas cripto moedas

Cryptocurrency volatility, volatility spillovers and the effect of global investor sentiment.

Masters Degree. University of KwaZulu-Natal, Durban.Cryptocurrencies continue to enjoy attention from investors and policymakers and their growing usage has fortified this attention. However, it is their volatility and the volatility spillovers among the cryptocurrencies have been most intriguing. Various factors such as susceptibility to speculative pressures, uncertainty regarding their valuation, and the lack of regulation have been forwarded as possible explanations. However, these factors have not fully explained cryptocurrency volatility and volatility spillovers, suggesting that there could be other salient factors. In this study, investor sentiment, described as the noise-driven investors' perception of the risk and cash flows of an asset, was forwarded as one of those salient factors. Specifically, this study sought to examine the nature of volatility and volatility spillovers among currencies and their subjectivity to global investor sentiment. Bitcoin, Ethereum and Ripple and an investor sentiment index constructed from a set of five proxies over a period spanning February 2018 to August 2021 were employed. For the analysis, the study employed GARCH models to examine the nature of cryptocurrency volatility, the ADCC-GARCH framework and the Diebold-Yilmaz spillover index to examine the nature of cryptocurrency volatility spillovers, and the Toda-Yamamoto model to examine the causality between cryptocurrencies and investor sentiment. The study found evidence of significant sentiment effects in both mean and variance equations of the cryptocurrencies. Similarly, the analysis of comovements and spillovers showed that there were significant sentiment effects on the phenomena. Failure to account for investor sentiment could, therefore, lead to poor estimation of volatility and volatility spillovers. The results have implications for investors, speculators, and policymakers alike. The results obtained provided an insight on the effect of investor sentiment on cryptocurrency volatility and showed how the market reacts to the investors' behaviour where their actions influence volatility. The investors and speculators may then use the insight on sentiment to determine the market volatility to earn returns accordingly. Further, policymakers can use this to determine the optimal regulations to prevent excessive volatility in this market. The study, therefore contributes to the debate on the drivers of cryptocurrency volatility. It also contributes to literature by introducing a measure of investor sentiment

“Bit Standard”- Bitcoin between reality and risks of a “halfway-money”

This work provides an explanation of the market underlying the evolution due to modern technologies and technical advances, especially in transactions. In this regard, the authors specify the aspect related to the creation of virtual currencies like bitcoin that can circulate thanks to the Blockchain system through miners\u2019 work. The authors consider areas related to the warnings on the use and exchange of virtual currencies. The aim is to conceptualize in a graphical way the current operational transaction in bitcoin through the existing exchange platforms. The authors try to attest the fickleness of the disintermediation ideal founding Bitcoin. The analysis purposed could be interesting and useful to provide a kind of interpretation of the phenomenon and a general overview about Bitcoin system