Stock exchanges industry consolidation and shock transmission.

Stock exchange industry consolidation is at work since many years and has recently accelerated through competition for order flows, agreements and mergers. However, consolidation may not mean that all shocks are transmitted to every place. Therefore, following Forbes and Rigobon (2002) we distinguish convergence (as interdependence) from contagion. Long run interdependence is analyzed through overlapping rolling cointegration and shocks on correlations through multivariate GARCH models. The models are estimated on daily data from January 1 1994 and April 30 2006. We consider the DAX30, the CAC40, the FTSE100 and the NYSE indexes. We identify stock exchanges convergence between European places. However we mainly witness a leading role of the US market even after the euro area creation. Finally, dynamic correlations still exert local shocks while others are effectively transmitted.Equity market integration ; Cointegration ; Multivariate GARCH models.

Long term vs. short term comovements in stock markets: the use of Markov-switching multifractal models.

Empirical techniques to assess market comovements are numerous from cointegration to dynamic conditional correlations. This paper uses the fractal properties of asset returns and presents estimations of Markov switching multifractal models [as MSM] to give new insights about short and long run dependencies in stock returns. The main advantage of the model is to allow for the derivation of several indicators of comovements on heterogenous lasting horizons. Empirical applications are performed for four stock indices (CAC DAX FTSE NYSE) at daily frequency between 1996 and 2008.Multivariate volatility models ; Markov switching multifractal model transmission, comovements.

Bayesian interpretation of periodograms

The usual nonparametric approach to spectral analysis is revisited within the regularization framework. Both usual and windowed periodograms are obtained as the squared modulus of the minimizer of regularized least squares criteria. Then, particular attention is paid to their interpretation within the Bayesian statistical framework. Finally, the question of unsupervised hyperparameter and window selection is addressed. It is shown that maximum likelihood solution is both formally achievable and practically useful

Risk aversion and Uncertainty in European Sovereign Bond Markets

Risk aversion and uncertainty are often both at play in market price determination, but it is empirically challenging to disentangle one from the other. In this paper we set up a theoretical model particularly suited for opaque over-the-counter markets that is shown to be empirically tractable. Based on high frequency data, we thus propose an evaluation of risk aversion and uncertainty inherent to the government bond markets in the euro area between 2007 and 2011. We particularly examine the impact of the European Central Bank Securities Markets Programme [SMP] implemented in May 2010 and re- activated in August 2011 to ease the pressure on the European sovereign bond markets. We show how this programme has killed market uncertainty but raised risk aversion for all countries except Greece in a risk-pooling mechanism: this can therefore weaken the impact of market interventions over the long-term.MES, systemic risk, tail correlation, balance sheet ratios, panel.

Probability of informed trading: an empirical application to the euro overnight market rate.

This paper presents a microstructure model for the unsecured overnight euro money market, similar to that developed for stock markets by Easley and O'Hara (1992). More specifically, this paper studies the role of heterogeneity in the population of banks participating on this market, and the influence of the institutional framework and market organizational aspects of the overnight deposit market. A first empirical assessment of the functioning of this market is based on the probability of informed trade which measures the ability of traders (banks) to interpret signals on the expected evolution of the overnight rate. This indicator is estimated on real-time data publicly available to market participants. Results show that between 2000 and 2004 a heterogeneous learning process of market mechanisms within participants could be observed. From 2005 onwards, however, heterogeneity in the learning process sharply decreased. Moreover, the empirical evidence show that the March 2004 changes in Eurosystem's operational framework have modified the informational patterns of order flow in the euro area money market: informed trades became even more predominant between the last main refinancing operation and the end of the reserves maintenance period than they were before March 2004.Euro overnight market ; PIN models ; Microstructure, Monetary policy.

The impact of unconventional monetary policy on the market for collateral: The case of the French bond market

We consider the channel consisting in transferring the credit risk associated with refinancing operations between financial institutions to market participants. In particular, we analyze liquidity and volatility premia on the French government debt securities market, since these assets are used as collateral both in the open market operations of the ECB and on the interbank market. In our time-varying transition probability Markov-switching (TVTP-MS) model, we highlight the existence of two regimes. In one of them, which we refer to as the conventional regime, monetary policy neutrality is verified; in the other, which we dub the unconventional regime, monetary policy operations lead to volatility and liquidity premia on the collateral market. The existence of these conventional and unconventional regimes highlights some asymmetries in the conduct of monetary policy.Monetary policy, Collateral, Liquidity, Volatility, French bond market.

Central bank liquidity and market liquidity: the role of collateral provision on the French government debt securities market.

We examine the effects of collateral provision as a potential channel between funding liquidity tensions and the scarcity of market liquidity. This channel consists in transferring the credit risk associated with refinancing operations between financial institutions to market participants that bear new liquidity risk on the market associated with collateral. In particular, we address the issue of the liquidity of the French government debt securities market, since these assets are used as collateral both in the open market operations of the ECB and on the interbank market. We use a time-varying transition probability (TVTP) VAR model considering both the monetary policy cycle and the cycle of French treasury auctions. We highlight the existence of a specific regime in which monetary policy neutrality is not verified on the market for French bonds. Moreover, the existence of conventional and unconventional regimes leads to asymmetries in monetary policy implementation.Monetary policy, collateral, liquidity, volatility, French bond market.

How useful is the Marginal Expected Shortfall for the measurement of systemic exposure? A practical assessment

We explore the practical relevance from a supervisor's perspective of a popular market-based indicator of the exposure of a financial institution to systemic risk, the marginal expected shortfall (MES). The MES of an institution can be defined as its expected equity loss when the market itself is in its left tail. We estimate the dynamic MES recently proposed by Brownlees and Engle (2011) for a panel of 65 large US banks over the last decade and a half. Running panel regressions of the MES on bank characteristics, we first find that the MES can be roughly rationalized in terms of standard balance sheet indicators of bank financial soundness and systemic importance. We then ask whether the cross section of the MES can help to identify ex ante, i.e. before a crisis unfolds, which institutions are the more likely to suffer the most severe losses ex post, i.e. once it has unfolded. Unfortunately, using the recent crisis as a natural experiment, we find that standard balance-sheet metrics like the tier one solvency ratio are better able than the MES to predict equity losses conditionally to a true crisis.MES, systemic risk, tail correlation, balance sheet ratios, panel.

Regularized adaptive long autoregressive spectral analysis

This paper is devoted to adaptive long autoregressive spectral analysis when (i) very few data are available, (ii) information does exist beforehand concerning the spectral smoothness and time continuity of the analyzed signals. The contribution is founded on two papers by Kitagawa and Gersch. The first one deals with spectral smoothness, in the regularization framework, while the second one is devoted to time continuity, in the Kalman formalism. The present paper proposes an original synthesis of the two contributions: a new regularized criterion is introduced that takes both information into account. The criterion is efficiently optimized by a Kalman smoother. One of the major features of the method is that it is entirely unsupervised: the problem of automatically adjusting the hyperparameters that balance data-based versus prior-based information is solved by maximum likelihood. The improvement is quantified in the field of meteorological radar