To explain the contagion mechanism between stock markets, we establish a two markets asset pricing model based on heterogeneous beliefs and exogenous dividends. The results show that as long as traders believe a correlation between the prices of the two markets, even if one impact of COVID-19 only affects noise traders in a single market or subjective covariance, price contagion will occur. Besides, we find that a single market dividend shock does not affect the other market. The empirical results support our analysis of the impact of COVID-19 on the stocks markets of China and the United States.
{"title":"How Can COVID-19 Cause Risk Contagion?","authors":"Yu Yan, Yiming Wang, Yiming Lei","doi":"10.2139/ssrn.3809107","DOIUrl":"https://doi.org/10.2139/ssrn.3809107","url":null,"abstract":"To explain the contagion mechanism between stock markets, we establish a two markets asset pricing model based on heterogeneous beliefs and exogenous dividends. The results show that as long as traders believe a correlation between the prices of the two markets, even if one impact of COVID-19 only affects noise traders in a single market or subjective covariance, price contagion will occur. Besides, we find that a single market dividend shock does not affect the other market. The empirical results support our analysis of the impact of COVID-19 on the stocks markets of China and the United States.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":"52 6","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"72559643","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Sara Cecchetti, Davide Fantino, M. Riggi, A. Notarpietro, A. Tagliabracci, Andrea Tiseno, R. Zizza
This paper illustrates the tools used at Banca d’Italia (BI) to monitor the evolution of inflation expectations. The paper also surveys the analyses conducted at BI to assess how inflation expectations affect agents’ choices and the economy. The first part discusses the measures of inflation expectations derived from the prices of inflation-linked financial instruments and from the surveys of professional forecasters. The second part focuses on the measures of households’ and firms’ inflation expectations collected by BI, along with analyses presenting empirical evidence that expectations do indeed drive agents’ economic choices. The last part analyses the overall effect of exogenous changes of inflation expectations on the real economy, through the lens of the macroeconomic models used at BI.
{"title":"Inflation Expectations in the Euro Area: Indicators, Analyses and Models Used at Banca d’Italia","authors":"Sara Cecchetti, Davide Fantino, M. Riggi, A. Notarpietro, A. Tagliabracci, Andrea Tiseno, R. Zizza","doi":"10.2139/ssrn.3852256","DOIUrl":"https://doi.org/10.2139/ssrn.3852256","url":null,"abstract":"This paper illustrates the tools used at Banca d’Italia (BI) to monitor the evolution of inflation expectations. The paper also surveys the analyses conducted at BI to assess how inflation expectations affect agents’ choices and the economy. The first part discusses the measures of inflation expectations derived from the prices of inflation-linked financial instruments and from the surveys of professional forecasters. The second part focuses on the measures of households’ and firms’ inflation expectations collected by BI, along with analyses presenting empirical evidence that expectations do indeed drive agents’ economic choices. The last part analyses the overall effect of exogenous changes of inflation expectations on the real economy, through the lens of the macroeconomic models used at BI.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89195994","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Blockchain-based decentralized exchanges fall into two broad categories: decentralized limit order books where an order is a smart contract registered on the blockchain, and swap exchanges where prices are set by a deterministic automated market-making rule. The most common form of the latter is the constant product rule where relative prices of crypto assets are determined by iso-liquidity curves. Although this pricing rule is simple, its use is conceptually problematic and gives rise to persistent arbitrage opportunities when there are multiple competing trading systems. It also allows intrinsically profitable front-running opportunities. Traditional market maker pricing, on the other hand, does not suffer from these flaws. Empirically, more than 10% of trades incur an excess cost of 7% or more in less liquid trading pairs.
{"title":"The Conceptual Flaws of Constant Product Automated Market Making","authors":"A. Park","doi":"10.2139/ssrn.3805750","DOIUrl":"https://doi.org/10.2139/ssrn.3805750","url":null,"abstract":"Blockchain-based decentralized exchanges fall into two broad categories: decentralized limit order books where an order is a smart contract registered on the blockchain, and swap exchanges where prices are set by a deterministic automated market-making rule. The most common form of the latter is the constant product rule where relative prices of crypto assets are determined by iso-liquidity curves. Although this pricing rule is simple, its use is conceptually problematic and gives rise to persistent arbitrage opportunities when there are multiple competing trading systems. \u0000It also allows intrinsically profitable front-running opportunities. Traditional market maker pricing, on the other hand, does not suffer from these flaws. Empirically, more than 10% of trades incur an excess cost of 7% or more in less liquid trading pairs.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":"17 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90408445","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the problem of jump detection for ultra-high-frequency tick-by-tick data. We propose a novel easy-to-implement procedure that can separate the contribution of microstructure noise and that of finite activity price jumps from the price process, which may have interesting implications on asset pricing and forecasting problems. We provide theoretical grounds of our approach, and suggests practical guidelines for determining the tuning parameter. Making a comparison with the “star performers” in a recent comprehensive review for jump detection methods by Maneesoonthorn et al. (2020) as well as a test based on Christensen et al. (2014) on tick data, we show that our method performs admirably well via extensive simulation and rich empirical illustration.
{"title":"Separate Noise and Jumps From Tick Data: An Endogenous Thresholding Approach","authors":"Xiaolu Zhao, Seok Young Hong, O. Linton","doi":"10.2139/ssrn.3789398","DOIUrl":"https://doi.org/10.2139/ssrn.3789398","url":null,"abstract":"We study the problem of jump detection for ultra-high-frequency tick-by-tick data. We propose a novel easy-to-implement procedure that can separate the contribution of microstructure noise and that of finite activity price jumps from the price process, which may have interesting implications on asset pricing and forecasting problems. We provide theoretical grounds of our approach, and suggests practical guidelines for determining the tuning parameter. Making a comparison with the “star performers” in a recent comprehensive review for jump detection methods by Maneesoonthorn et al. (2020) as well as a test based on Christensen et al. (2014) on tick data, we show that our method performs admirably well via extensive simulation and rich empirical illustration.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":"8 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-02-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79466227","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper revisits the canonical assumption of nonconvex capital adjustment costs in lumpy investment models as in Khan and Thomas [(2008) Econometrica 76(2), 395–436], which are assumed to follow a uniform distribution from zero to an upper bound, without distinguishing between the mean and the variance of the distribution. Unlike the usual claim that the upper bound stands for the size (represented by the mean) of a nonconvex cost, I show that in order to generate an empirically consistent interest elasticity of aggregate investment, both a sizable mean and a sizable variance are necessary. The mean governs the importance of the extensive margin in aggregate investment dynamics, while the variance governs how sensitive the extensive margin is to changes in the real interest rate. As a result, both the mean and the variance are quantitatively important for aggregate investment dynamics.
{"title":"A Note on Nonconvex Adjustment Costs in Lumpy Investment Models: Mean versus Variance","authors":"Min Fang","doi":"10.2139/ssrn.3782181","DOIUrl":"https://doi.org/10.2139/ssrn.3782181","url":null,"abstract":"\u0000 This paper revisits the canonical assumption of nonconvex capital adjustment costs in lumpy investment models as in Khan and Thomas [(2008) Econometrica 76(2), 395–436], which are assumed to follow a uniform distribution from zero to an upper bound, without distinguishing between the mean and the variance of the distribution. Unlike the usual claim that the upper bound stands for the size (represented by the mean) of a nonconvex cost, I show that in order to generate an empirically consistent interest elasticity of aggregate investment, both a sizable mean and a sizable variance are necessary. The mean governs the importance of the extensive margin in aggregate investment dynamics, while the variance governs how sensitive the extensive margin is to changes in the real interest rate. As a result, both the mean and the variance are quantitatively important for aggregate investment dynamics.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":"390 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-02-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78065316","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study options market participants’ trading behavior before and after an options multiplier increases. Using unique account-level data, we show that local retail and local institutional investors who trade in both options and futures markets trade more after the change in the multiplier. After the options multiplier increases, the options market becomes more efficient, and investors trade lottery stocks more actively.
{"title":"Contract Size Changes in the Options Market: Effects on Market Efficiency and Investor Behavior","authors":"S. Park, Doojin Ryu","doi":"10.2139/ssrn.3781273","DOIUrl":"https://doi.org/10.2139/ssrn.3781273","url":null,"abstract":"We study options market participants’ trading behavior before and after an options multiplier increases. Using unique account-level data, we show that local retail and local institutional investors who trade in both options and futures markets trade more after the change in the multiplier. After the options multiplier increases, the options market becomes more efficient, and investors trade lottery stocks more actively.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":"40 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-02-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73844332","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper investigates the existence of unique equilibrium in two-good economies where agents have preferences with the same relative risk aversion and different utility weights. Aggregate demand behavior is characterized in terms of both macrolevel and micro-level information inherent in the economy. At the macro level, the economy makes it possible to build two representative-agent economies that provide a lower and upper bound of the price range for potential equilibrium prices. Information at the micro level is inferred by elucidating the global structure of individual demand function. When relative risk aversion is greater than 1, the price effect over the price domain is single-peaked at the inflection price that represents the maximal dominance of the income effect over the substitution effect. Based on the analysis of the first-order and second-order price effects, two sufficient conditions are presented for the uniqueness of equilibrium. The result of the paper sheds a light on the Sonnenschein-Mantel-Debreu theory that has negative implications for systematically studying the uniqueness of equilibrium.
{"title":"A New Approach to the Uniqueness of Equilibrium in Two-Good Economies","authors":"D. Won","doi":"10.2139/ssrn.3879811","DOIUrl":"https://doi.org/10.2139/ssrn.3879811","url":null,"abstract":"This paper investigates the existence of unique equilibrium in two-good economies where agents have preferences with the same relative risk aversion and different utility weights. Aggregate demand behavior is characterized in terms of both macrolevel and micro-level information inherent in the economy. At the macro level, the economy makes it possible to build two representative-agent economies that provide a lower and upper bound of the price range for potential equilibrium prices. Information at the micro level is inferred by elucidating the global structure of individual demand function. When relative risk aversion is greater than 1, the price effect over the price domain is single-peaked at the inflection price that represents the maximal dominance of the income effect over the substitution effect. Based on the analysis of the first-order and second-order price effects, two sufficient conditions are presented for the uniqueness of equilibrium. The result of the paper sheds a light on the Sonnenschein-Mantel-Debreu theory that has negative implications for systematically studying the uniqueness of equilibrium.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":"49 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-01-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88955212","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper evaluates the macroeconomic effects of a monetary and fiscal policy mix implemented in a two-region monetary union in response to the COVID-19 shock. The pandemic is modelled as a mix of recessionary demand and supply shocks affecting both regions simultaneously and symmetrically, under two assumptions: the effective lower bound (ELB) constrains the monetary policy rate;and a fraction of households, labelled ‘hand-to-mouth’ (HTM), consume all their available income in every period. The main results are the following: first, higher lump-sum targeted fiscal transfers to HTM households and public consumption spending in one region, financed by issuing public debt, reduce the recessionary effects both domestically and abroad (via the trade channel). Second, the monetary union-wide recession is mitigated more effectively if both regions implement a fiscal expansion and the central bank limits the increase in long-term rates by purchasing sovereign bonds. Third, fiscal measures are less effective if sovereign bond yields increase relatively more in one region because investors perceive its bonds as risky. Effectiveness can be regained if a supranational fiscal authority issues a safe bond.
{"title":"The COVID-19 Shock and a Fiscal-Monetary Policy Mix in a Monetary Union","authors":"A. Bartocci, A. Notarpietro, M. Pisani","doi":"10.2139/ssrn.3826421","DOIUrl":"https://doi.org/10.2139/ssrn.3826421","url":null,"abstract":"This paper evaluates the macroeconomic effects of a monetary and fiscal policy mix implemented in a two-region monetary union in response to the COVID-19 shock. The pandemic is modelled as a mix of recessionary demand and supply shocks affecting both regions simultaneously and symmetrically, under two assumptions: the effective lower bound (ELB) constrains the monetary policy rate;and a fraction of households, labelled ‘hand-to-mouth’ (HTM), consume all their available income in every period. The main results are the following: first, higher lump-sum targeted fiscal transfers to HTM households and public consumption spending in one region, financed by issuing public debt, reduce the recessionary effects both domestically and abroad (via the trade channel). Second, the monetary union-wide recession is mitigated more effectively if both regions implement a fiscal expansion and the central bank limits the increase in long-term rates by purchasing sovereign bonds. Third, fiscal measures are less effective if sovereign bond yields increase relatively more in one region because investors perceive its bonds as risky. Effectiveness can be regained if a supranational fiscal authority issues a safe bond.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":"118 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-12-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88397443","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I study how financial constraints affect liquidity provision and welfare under different structures of the arbitrage industry. In competitive markets, financial constraints may impair arbitrageurs’ ability to provide liquidity, thereby reducing other investors’ welfare. Instead, in imperfectly competitive markets, I characterize situations in which imposing constraints on arbitrageurs leads to a Pareto improvement relative to a noconstraint case. Further, unlike the competitive case, a drop in arbitrage capital does not always lead to a reduction in market liquidity. A subtle interaction between financial constraints and arbitrageurs’ market power generates these Pareto improvment and novel comparative statics.
{"title":"Arbitrage with Financial Constraints and Market Power","authors":"Vincent Fardeau","doi":"10.2139/ssrn.3630914","DOIUrl":"https://doi.org/10.2139/ssrn.3630914","url":null,"abstract":"I study how financial constraints affect liquidity provision and welfare under different structures of the arbitrage industry. In competitive markets, financial constraints may impair arbitrageurs’ ability to provide liquidity, thereby reducing other investors’ welfare. Instead, in imperfectly competitive markets, I characterize situations in which imposing constraints on arbitrageurs leads to a Pareto improvement relative to a noconstraint case. Further, unlike the competitive case, a drop in arbitrage capital does not always lead to a reduction in market liquidity. A subtle interaction between financial constraints and arbitrageurs’ market power generates these Pareto improvment \u0000and novel comparative statics.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":"46 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-12-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85319582","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We prove existence of time consistent equilibria in a wide class of dynamic models with recursive payoffs and generalized discounting involving both behavioral and normative applications. Our generalized Bellman equation method identifies and separates both: recursive and strategic aspects of the equilibrium problem and allows to precisely determine the sufficient assumptions on preferences and stochastic transition to establish existence. In particular we show existence of minimal state space stationary Markov equilibrium (a time-consistent solution) in a deterministic model of consumption-saving with beta-delta discounting and its generalized versions involving magnitude effects, non-additive payoffs, semi-hyperbolic or hyperbolic discounting (over possibly unbounded state and unbounded above reward space). We also provide an equilibrium approximation method for a hyperbolic discounting model.
{"title":"Time Consistent Equilibria in Dynamic Models With Recursive Payoffs and Behavioral Discounting","authors":"Lukasz Balbus, K. Reffett, L. Wozny","doi":"10.2139/ssrn.3722808","DOIUrl":"https://doi.org/10.2139/ssrn.3722808","url":null,"abstract":"We prove existence of time consistent equilibria in a wide class of dynamic models with recursive payoffs and generalized discounting involving both behavioral and normative applications. Our generalized Bellman equation method identifies and separates both: recursive and strategic aspects of the equilibrium problem and allows to precisely determine the sufficient assumptions on preferences and stochastic transition to establish existence. In particular we show existence of minimal state space stationary Markov equilibrium (a time-consistent solution) in a deterministic model of consumption-saving with beta-delta discounting and its generalized versions involving magnitude effects, non-additive payoffs, semi-hyperbolic or hyperbolic discounting (over possibly unbounded state and unbounded above reward space). We also provide an equilibrium approximation method for a hyperbolic discounting model.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":"110 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77642300","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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