contagion as a wealth effect financial contagion is described as a wealth effect in a continuous time model with two risky assets and three types of traders noise traders trade randomly in one market long term investors provide liquidity using a linear rule based on fundamentals convergence traders with logarithmic utility trade optimally in both markets asset price dynamics are endogenously determined numerically as functions of endogenous wealth and exogenous noise when convergence traders lose money they liquidate positions in both markets this creates contagion in that returns become more volatile and more correlated contagion reduces benefits from portfolio diversification and raises issues for risk management during the f inancial panic associated with the default of the russian government in august 1998 and the subsequent collapse of the hedge fund long term capital management numerous hedge funds banks and securities firms tried simultaneously to reduce exposures to a variety of financial instruments such as russian bonds brazilian stocks u s mortgages spreads between on therun and off the run government securities and spreads between swaps and u s treasuries although the fundamental values of these positions would appear to have little correlation during this financial crisis the asset prices in these markets exhibited the following common empirical pattern 1 financial intermediaries suffered losses as prices moved against their positions 2 market depth and liquidity decreased simultaneously in several markets 3 the volatility of prices increased simultaneously in several markets and

imperfect competition information heterogeneity and financial contagion this study examines how heterogeneity of private information may induce financial contagion using a model of multi asset trading in which the three main channels of contagion through financial linkages in the literature correlated information correlated liquidity and portfolio rebalancing are ruled out by construction i show that financial contagion can still be an equilibrium outcome when speculators receive heterogeneous fundamental information risk neutral speculators trade strategically across many assets to mask their information advantage about one asset asymmetric sharing of information among them prevents rational market makers from learning about their individual signals and trades with sufficient accuracy incorrect cross inference about terminal payoffs and contagion ensue when used to analyze the transmission of shocks across countries my model suggests that the process of generation and disclosure of information in emerging markets may explain their vulnerability to financial contagion jel d82 g14 g15

price formation and liquidity in the u s treasury market the response to public information the arrival of public information in the u s treasury market sets off a two stage adjustment process for prices trading volume and bid ask spreads in a brief first stage the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume demonstrating that price reactions to public information do not require trading the spread widens dramatically at announcement evidently driven by inventory control concerns in a prolonged second stage trading volume surges price volatility persists and spreads remain moderately wide as investors trade to reconcile residual differences in their private views how do financial markets form prices and provide liquidity when information arrives efforts to address this issue have led to an extensive microstructure literature on equity markets and to a lesser extent on the foreign exchange fx market relatively little work has focused on the u s treasury market however in spite of its importance in its own right and the advantages it offers as an alternative testing ground for microstructure hypotheses

price discovery in the u s treasury market the impact of orderflow and liquidity on the yield curve we examine the role of price discovery in the u s treasury market through the empirical relationship between orderflow liquidity and the yield curve we find that orderflow imbalances excess buying or selling pressure can account for as much as 26 percent of the day to day variation in yields on days without major macroeconomic announcements the effect of orderflow on yields is permanent and strongest when liquidity is low all of the evidence points toward an important role of price discovery in understanding the behavior of the yield curve

the dynamic interrelation between external finance and bank credit abstractthis article studies the interrelation among the volumes of bonds and stocks issued by non financial firms and levels of industrial loans outstanding in the united states these aggregates are co integrated and characterized by asymmetric volatility their co movements are driven by financial indicators such as the yield spread size of loan market and market volatility bond and stock issuance are positively correlated and even more so during the expansionary phase of the cycle loans outstanding and bond issuance are negatively correlated and their substitutability increases in periods of economic downturn highlighting the importance of bond markets to mitigate credit crunches

volatility spillovers and the effect of news announcements we examine the effect of us and european news announcements on the spillover of volatility across us and european stock markets using synchronously observed international implied volatility indices at a daily frequency we find significant spillovers of implied volatility between us and european markets as well as within european markets we observe a stark contrast in the effect of scheduled versus unscheduled news releases scheduled unscheduled news releases resolve create information uncertainty leading to a decrease increase in implied volatility nevertheless news announcements do not fully explain the volatility spillovers although they do affect the magnitude of volatility spillovers our results are robust to extreme market events such as the recent financial crisis and provide evidence of volatility contagion across markets

pre announcement effects news effects and volatility monetary policy and the stock market abstract i examine pre announcement and news effects on the stock market in the context of public disclosure of monetary policy decisions the results suggest that the stock market tends to be relatively quiet conditional volatility is abnormally low on days preceding regularly scheduled policy announcements although this calming effect is routinely reported in anecdotal press accounts it is statistically significant only over the past four to five years a result that i attribute to changes in the federal reserve s disclosure practices in early 1994 the paper also looks at how the actual interest rate decisions of policy makers affect stock market volatility the element of surprise in such decisions tends to boost stock market volatility significantly in the short run and positive surprises higher than expected values of the target federal funds rate tend to have a larger effect on volatility than negative surprises the implications of the results for broader issues in the finance and economics literatures are also discussed

the value of medical and pharmaceutical interventions for reducing obesity this paper attempts to quantify the social private and public finance values of reducing obesity through pharmaceutical and medical interventions we find that the total social value of bariatric surgery is large for treated patients with incremental social cost effectiveness ratios typically under 10 000 per life year saved on the other hand pharmaceutical interventions against obesity yield much less social value with incremental social cost effectiveness ratios around 50 000 our approach accounts for competing risks to life expectancy health care costs and a variety of non medical economic consequences pensions disability insurance taxes and earnings which account for 20 of the total social cost of these treatments on balance bariatric surgery generates substantial private value for those treated in the form of health and other economic consequences the net public fiscal effects are modest primarily because the size of the population eligible for treatment is small the net social effect is large once improvements in life expectancy are taken into account

the effects of inflation and money supply announcements on interest rates this paper examines the impact of the money supply and inflation rate announcements on interest rates survey data on expectations of the money supply and consumer and producer price indexes are used to distinguish anticipated and unanticipated components of the announcements this distinction is used to test for the efficiency of the financial market response to the announcements of new information the results indicate that the unanticipated components of the announced changes in the producers price index and in the money supply have an immediate positive effect on short term interest rates the consumer price index announcement has no apparent effect there is no evidence of a delayed announcement effect however there is some indication of a liquidity effect of the money supply change on interest rates this takes place when reserves are changing and several weeks prior to the information announcement the effect of money supply announcements on interest rates has attracted considerable attention in both the academic literature and the financial press in the last few years it has been firmly established that unanticipated increases in the money supply lead to immediate increases in interest rates however there are several competing explanations for this phenomenon in the literature in this paper we present some additional empirical evidence which helps to distinguish between two of these hypotheses the policy anticipations and inflationary expectations hypotheses by examining the effect of money supply and inflation announcements on interest rates the positive effect on interest rates of announcements of unanticipated increases in the money supply was demonstrated by urich and wachtel 9 grossman 3 and roley 5 the announcement effect was interpreted in our earlier paper as a policy anticipations effect and has been interpreted by others e g cornell 1 as an inflationary expectations effect since both effects are in the same direction it is difficult to distinguish between them without additional evidence the policy anticipations effect is simply that an unanticipated increase in the money supply causes financial market participants to expect that the federal reserve will tighten the monetary reins in order to offset the increase in anticipation of future tightening there is a tendency for interest rates to increase the inflationary expectations effect is that an unanticipated increase

futures prices as risk adjusted forecasts of monetary policy many researchers have used federal funds futures rates as measures of financial markets expectations of future monetary policy however to the extent that federal funds futures reflect risk premia these measures require some adjustment in this paper we document that excess returns on federal funds futures have been positive on average and strongly countercyclical in particular excess returns are surprisingly well predicted by macroeconomic indicators such as employment growth and financial business cycle indicators such as treasury yield spreads and corporate bond spreads excess returns on eurodollar futures display similar patterns we document that simply ignoring these risk premia significantly biases forecasts of the future path of monetary policy we also show that risk premia matter for some futures based measures of monetary policy shocks used in the literature

the likelihood ratio test statistic of mean variance efficiency without a riskless asset abstract the question whether a given porfolio is mean variance efficient is a basic problem of investment analysis mean variance efficiency is also the basis of the capital asset pricing model this paper presents the explicit form of the likelihood ratio test of the hypothesis that a given portfolio or a particular market index is ex ante mean variance efficient in the case where there is no riskless asset geometric relations are illustrated to provide intuition about the constrained maximum likelihood estimators and the test statistic and two simple economic interpretations of the test are given

government intervention and strategic trading in the u s treasury market we study the impact of permanent open market operations pomos by the federal reserve on u s treasury market liquidity using a parsimonious model of speculative trading we conjecture that i this form of government intervention improves market liquidity contrary to conclusions drawn by existing literature and ii the extent of this improvement depends on the market s information environment evidence from a novel sample of federal reserve pomos during the 2000s indicates that bid ask spreads of on the run treasury securities decline when pomos are executed by an amount increasing in proxies for information heterogeneity among speculators fundamental volatility and pomo policy uncertainty consistent with our model

impact of interest rate surprises on islamic and conventional stocks and bonds abstract this paper studies the impact of interest rate news surprises on islamic and conventional stock and bond indices using a dataset which covers interest rate announcements and forecasts as well as stock and bond indices in three islamic and eight non islamic countris we find that interest rate surprises tend to have a smaller impact on the returns and volatility of islamic than conventional bonds because islamic bonds are structured to avoid explicit interest rates however interest rate surprises have about the same or bigger impact on the returns and volatility of islamic relative to conventional stocks despite the low amounts of cash and debt holdings of firms comprising islamic stock indices

is information assimilated at announcements in the european carbon market abstract we examine the high frequency new information impact on prices volatility trading volume and illiquidity at scheduled macroeconomic and verified emissions announcements for the european carbon futures market verified emissions united states non farm payroll and german new factory order macroeconomic announcements impact carbon prices swiftly within 5 min we show that a one standard deviation surprise increase in verified emission announcements is associated with an approximate ten percentage point 9 96 increase in carbon futures returns a wait and see stylized trading behavior is evident at announcements in volatility and trading volumes market illiquidity increases at announcements in relation to united states non farm payroll albeit there is no evidence of an increase in illiquidity prior to announcements the development of new information impact over time occurs mainly in the at announcement 5 minute time interval

the effect of public information and competition on trading volume and price volatility in a one period model of market making with many exogenously informed traders we first show that the variance of prices and expected trading volume depend on the public information released at the start of trading this is accomplished by representing beliefs with elliptically countoured distributions for which the form of optimal decision rules does not depend on the specific distribution used second if the model is altered so that the decision to become informed is made endogenous then the decision rules of the market maker and infomed traders depend on the public information third in a multiperiod model with many informed traders and long lived private information recursion formulas similar to those of kyle 1985 hold for all elliptically contoured distributions trading volume is autocorrelated and unless per period liquidity trading is bounded away from zero as new trading periods are added informed traders profits vanish article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

on the volatility and comovement of u s financial markets around macroeconomic news announcements the objective of this paper is to provide a deeper insight into the links between financial markets and the real economy to that end we study the short term anticipation and response of u s stock treasury and corporate bond markets to the first release of surprise u s macroeconomic information specifically we focus on the impact of these announcements not only on the level but also on the volatility and comovement of those assets returns we do so by estimating several extensions of the parsimonious multivariate garch dcc model of engle 2002 for the excess holding period returns on seven portfolios of these asset classes we find that both the process of price formation in each of those financial markets and their interaction appear to be driven by fundamentals yet our analysis reveals a statistically and economically significant dichotomy between the reaction of the stock and bond markets to the arrival of unexpected fundamental information we also show that the conditional mean volatility and comovement among stock treasury and corporate bond returns react asymmetrically to the information content of these surprise announcements overall the above results shed new light on the mechanismsbywhichnewinformationisincorporatedintopriceswithinandacrossu s financial markets

monetary policy surprises and interest rates evidence from the fed funds futures market abstract this paper estimates the impact of monetary policy actions on bill note and bond yields using data from the futures market for federal funds to separate changes in the target funds rate into anticipated and unanticipated components interest rates response to anticipated target rate changes is small while their response to unanticipated changes is large and highly significant these responses are generally consistent with the expectations hypothesis of the term structure surprise target rate changes have little effect on expectations of future actions however which helps to explain the lack of empirical support for the expectations hypothesis at the short end of the yield curve

the on the run liquidity phenomenon abstract we test the implications of a model of multi asset speculative trading in which liquidity differentials between on the run and off the run u s treasury bonds ensue from endowment shocks in the presence of two realistic market frictions information heterogeneity and imperfect competition among informed traders and a public signal our evidence suggests that i off on the run liquidity differentials are economically and statistically significant even after controlling for several of the bonds intrinsic characteristics such as duration convexity repo rates or term premiums and ii off on the run liquidity differentials are smaller immediately following bond auction dates and larger when the uncertainty surrounding the ensuing auction allocations is high when the dispersion of beliefs across informed traders is high and when macroeconomic announcements are noisy consistent with our model

what drives international equity correlations volatility or market direction abstract we consider impulse response functions to study the impact of both return and volatility on the correlation between international equity markets using data on the us as the reference country canada the uk and france equity indices empirical evidence shows that without taking into account the effect of return there is an asymmetric effect of volatility on correlation the volatility seems to have an impact on correlation especially during downturn periods however once we introduce the effect of return the impact of volatility on correlation disappears these observations suggest that the relation between volatility and correlation is an association rather than a causality the strong increase in the correlation is driven by the past of the return and the market direction rather than the volatility

multimarket trading and market liquidity when a security trades at multiple locations simultaneously an informed trader has several avenues in which to exploit his private information the greater the proportion of liquidity trading by large traders who can split their trades across markets the larger is the correlation between volume in different markets and the smaller is the informativeness of prices we show that one of the markets emerges as the dominant location for trading in that security when informed traders can use their information for more than one trading period the timely release of price information by market makers at one location adversely affects the profits informed traders expect to make subsequently at other locations market makers competing to offer the lowest cost of trading at their location consequently deter informed trading be voluntarily making the price information public and by cracking down on insider trading article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

why do markets move together an investigation of u s japan stock return comovements this article explores the fundamental factors that affect cross country stock return correlations using transactions data from 1988 to 1992 we construct overnight and intraday returns for a portfolio of japanese stocks using their nyse traded american depository receipts adrs and a matched sample portfolio of u s stocks we find that u s macroeconomic announcements shocks to the yen dollar foreign exchange rate and treasury bill returns and industry effects have no measurable influence on u s and japanese return correlations however large shocks to broadbased market indices nikkei stock average and standard and poor s 500 stock index positively impact both the magnitude and persistence of the return correlations stock return cross country covariances play a key role in international finance changes in these covariances affect the volatility of portfolios and asset prices as these covariances increase one expects that a fewer domestic risks are internationally diversifiable so portfolio volatility increases b the risk premium on the world market portfolio increases 1 c the cost of capital increases for individual firms and d the domestic version of the capm becomes increasingly inadequate 2 despite the important economic consequences of changes in cross country covariances the determinants of the levels and dynamics of these covariances have been little studied from an academic

modeling asymmetric comovements of asset returns existing time varying covariance models usually impose strong restrictions on how past shocks affect the forecasted covariance matrix in this article we compare the restrictions imposed by the four most popular multivariate garch models and introduce a set of robust conditional moment tests to detect misspecification we demonstrate that the choice of a multivariate volatility model can lead to substantially different conclusions in any application that involves forecasting dynamic covariance matrices like estimating the optimal hedge ratio or deriving the risk minimizing portfolio we therefore introduce a general model which nests these four models and their natural asymmetric extensions the new model is applied to study the dynamic relation between large and small firm returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

do markets respond more to more reliable labor market data a test of market rationality since 1979 the bureau of labor statistics bls has nearly quadrupled the size of the sample used to estimate monthly employment changes although first reported employment estimates are still noisy the magnitude of sampling variability has declined in proportion to the increase in the sample size a model of rational bayesian updating predicts that investors would assign more weight to the bls employment survey as it became more precise however a regression analysis of changes in interest rates on the day the employment data are released finds no evidence that the bond market s reaction to employment news intensified in the late 1980s or early 1990s for the time period as a whole an unexpected increase of 200 000 jobs is associated with an 8 basis point increase in the interest rate on 30 year treasury bonds and a 9 basis point increase in the interest rate on 3 month bills all else equal additionally announced hourly wage increases are associated with higher long tern interest rates while announced changes in the unemployment rate and revisions to past months employment estimates have a statistically insignificant effect on long term interest rates