Financial Market Policy Research Articles

Financial policy regarding the categorization of individual investors in Russia and the area of protecting their interests

Development of modern economy and financial market is impossible without involving the mass investor in investment processes. This is the goal of the state's financial market policy. The need to preserve savings in the face of a reduction in the key rate, and therefore a decrease in interest, encourages individuals to invest more actively in securities. New investors come to the securities market, but they are not always able to adequately assess the risk of investing in securities. To reduce the risks of individual investors, there is used a categorization mechanism, which divides them into qualified and unqualified investors, but requires improvement. Based on the analysis, it is proved that the categorization of investors cannot be limited by the regulation of the criteria for their differentiation and requires specifying the areas of protection of the interests and rights of investors. The study is based on the pragmatic Solow-Williamson methodology and a systematic approach. The indicators of investor activity and indicators characterizing the degree of investor protection in the Russian securities market are analyzed. As a result, the problems of modern categorization of individual investors in the Russian Federation are identified and analyzed. The main areas of protection of investors' interests and rights are identified, including: the choice of a financial instrument; ensuring ownership of financial instruments; transactions with financial instruments; protection from misseling; disclosure of information by issuers and professional subjects of financial markets; illegal actions of professional subjects of financial markets in relation to financial risks and protection tools. Areas of protection of investors' interests and rights are correlated with risks and protection tools. There were defined basic principles of categorization of investors-individuals.

Generalized Autoregressive Conditional Heteroskedastic Model to Examine Silver Price Volatility and Its Macroeconomic Determinant in Ethiopia Market

Like most commodities, the price of silver is driven by supply and demand speculation, which makes the price of silver notoriously volatile due to the smaller market, lower market liquidity, and fluctuations in demand between industrial and store value use. The concern of this article was to model and forecast the silver price volatility dynamics on the Ethiopian market using GARCH family models using data from January 1998 to January 2014. The price return series of silver shows the characteristics of financial time series such as leptokurtic distributions and thus can suitably be modeled using GARCH family models. An empirical investigation was conducted to model price volatility using GARCH family models. Among the GARCH family models considered in this study, ARMA (1, 3)-EGARCH (3, 2) model with the normal distributional assumption of residuals was found to be a better fit for price volatility of silver. Among the exogenous variables considered in this study, saving interest rate and general inflation rate have a statistically significant effect on monthly silver price volatility. In the EGARCH (3, 2) volatility model, the asymmetric term was found to be positive and significant. This is an indication that the unanticipated price increase had a greater impact on price volatility than the unanticipated price decrease in silver. Then, concerned stockholders such as portfolio managers, planners, bankers, and investors should intervene and pay due attention to these factors in the formulation of financial and related market policy.

Integration of African Stock Markets with the Developed Stock Markets: An Analysis of Co-Movements, Volatility and Contagion

ABSTRACTThis paper investigates evidence of integration and contagion between major African stock markets (ASMs) and developed stock markets during the periods of global financial crisis (GFC) and Eurozone sovereign debt crisis (ESDC). Specifically, it examined whether the co-movement between ASMs and developed stock markets during the two crisis periods is related to their level of financial integration or due to contagion. The study finds limited evidence of integration between ASMs and developed markets. However, the analysis of dynamic correlations shows that the conditional correlations are typically positive and higher during the periods of crisis, indicating substantial evidence of contagion. These findings suggest that the observed co-movements between stock markets during the crises were mainly due to contagion. The findings of this paper have several implications with respect to financial market stability, portfolio diversification and policy interventions.

Financial Market Development and Income Distribution Inequality in the Emerging Markets

The disruptive effects of the subprime financial crisis have raised new global concerns toward the increasing income distribution inequality. Nowadays, it has become one of the mainstays of public and scientific discourse around the world. Theoretical financial Kuznets curve suggests that the relationship between financial market development and income distribution inequality follows an inverted U-shaped pattern. However, current literature failed to support this hypothesis. The expansion of the financial market truly provides more relative opportunities for the poor which benefits the equalization. But those advantage opportunities are likely to be captured by some specific groups instead of all population. The majority literature on this academic field focus on developed countries with cross-sectional and panel data analysis that providing controversial results. They emphasize the financial development as a consequence of economic growth without deep analysis of the financial market development as an independent entity in determining the inequality. This study proposes to use a more comprehensive and rigorous method to identify the direct relationship between financial market development and income distribution inequality in 10 most typical emerging markets. Both short-run and long-run impacts of financial market development on income distribution inequality are examined and defined by utilizing time-series data and error-correction modelling technique. By providing a better understanding of the relationship, the findings of the research would make contributions to financial market policy adjustments in developing countries.

A monetary policy prediction model based on deep learning

Applying neural network and error t-value test, this study trains and analyzes 28 interest rate changes of China’s macro-monetary policy and the mutual influences between reserve adjustments and financial markets for 51 times from 2000 to 2018 according to the data correlation between financial market and monetary policy. Through the principal component analysis, the bilateral financial risk system and data set are established, and the data set pre-process and dimensionality reduction are carried out to extract the most informative features. Six training cases are designed with processed features, and then the cases are input to each neural network model for combined prediction. Firstly, based on backpropagation neural network (BP), the forecasting model of monetary policy is established. Then, considering the importance characteristics of financial index data, expert weights based on BP, are introduced to propose weights backpropagation (WBP) model. On the basis of the timing characteristics of financial market, the WBP model is improved and the timing weights backpropagation (TWBP) model is proposed. Experiments show that different training cases bring out various effects. The accuracy rate of interest rate and reserve change value is lower than the original value after training. The mutation after data processing affects the learning of neural network. At the same time, the WBP and TWBP models improve according to the importance and timing characteristics of financial indicators have less errors in results, and the TWBP model has higher accuracy. When the number of hidden layers is 3, good results can be obtained, but in manifold training of the timing cycle, the efficiency of that is not as good as the WBP model.

Rethinking Margin and Volatility

This paper tests whether margin requirements cause asset price volatility. Using novel data on margin requirements and by exploiting exogenous variation from a threshold-based regression discontinuity design, I document that increasing margin causes a persistent decrease in future volatility (negative level effect) and a decline in trading volume. For an average 13.7% increase in margin requirement, I find an average 3.7% decrease in volatility. These results contrast with prior empirical studies that largely find no relationship between volatility and margin and provide support for the efficacy of financial market policies that seek to curb excess market volatility.

Modeling volatility of Indian exchange rates under the impact of regime shifts: A study with economic significance analysis

In this paper, we assess the impact of regime shifts on the long memory properties of the Indian exchange rates. We make use of Sanso, Arago and Carrion (2004) Iterated Cumulative Sum of Squares (hereafter referred as AIT-ICSS) algorithm to detect the points of structural breaks in volatility series. Our findings indicate that incorporating the impact of sudden changes in volatility in the model indeed reduces the magnitude of long memory parameter. In the case of INR/JPY, we observe a shift in characteristics from long memory to mean reversion when the impact of regime shifts is included in the volatility model. Our findings also highlight that incorporating the impact of regime shifts in the model also improves the volatility forecast accuracy. Moreover, we implement a trading strategy based on risk-averse investor and find that the volatility forecasts based on the model which incorporate the impact of structural breaks provide substantial gains in return in comparison to volatility models with no structural breaks. These findings have important policy implications for financial market participants, investors and policy makers.

The impact of interest rate volatility on financial market inclusion: evidence from emerging markets

Interest rate uncertainty adversely affects financial market performance and, eventually, economic growth. This study investigates the relationship between interest rate volatility and financial market inclusion for five selected emerging economies over the period 1980–2015. To do this, we assess the long-run and short-run relationship using Pesaran et al. (J Appl Econ 16:289–326, 2001) bounds testing approach to cointegration and error-correction modeling and Shin et al. (2014) nonlinear cointegration estimation method (NARDAL). The latter method incorporates nonlinearity into the model and enables us to check the asymmetric effects of interest rate variability on financial market inclusion. The findings of our linear models indicate that short-run symmetric effects lead to long-run symmetric effects in four countries (Turkey is the exception) and there is a long-run symmetric effect for the other four countries. On the other hand, estimation of nonlinear models shows the short-run existence of asymmetric effects for all five emerging economies. We found that the long-run effect of interest rate volatility is asymmetric in all countries except for Mexico. We suggest that this group of countries should cautiously pay attention to laws and regulations related to their financial market and interest rate policies. Our estimation results show that interest rate uncertainty significantly affects financial market inclusion and has an important role in financial market development and eventually achieving higher economic growth.

Equity Shares or Mutual Funds What Does Individual Investor Prefer

Savings and investments are vital for economic growth of a nation. Government consistently makes an effort to boost savings and thus capital formation in the economy. Individual Investors play a significant role in this process. Although they purchase a very small amount of financial instrument in the market but since they are the major suppliers of household savings, all financial institutions try to attract them by offering various financial services and instruments so as to meet their investment needs and objectives. The present study aims to understand preference of individual investors between two popular investment avenues – equity and mutual funds. The study also establishes preference given by investors to the selection criterions for choosing investment avenues as well as investment objectives. Today investors are well informed and educated therefore they consider several factors before making an investment decision. Such decisions are also governed by their socioeconomic profile. A study in this regard is significantly important to investment marketers as well as government and regulators. They can market their product and also formulate the financial market policies better if they are aware about investor’s requirements and preferences.

Predicting stock market movements using network science: an information theoretic approach

A stock market is considered as one of the highly complex systems, which consists of many components whose prices move up and down without having a clear pattern. The complex nature of a stock market challenges us on making a reliable prediction of its future movements. In this paper, we aim at building a new method to forecast the future movements of Standard & Poor’s 500 Index (S&P 500) by constructing time-series complex networks of S&P 500 underlying companies by connecting them with links whose weights are given by the mutual information of 60-min price movements of the pairs of the companies with the consecutive 5340 min price records. We showed that the changes in the strength distributions of the networks provide an important information on the network’s future movements. We built several metrics using the strength distributions and network measurements such as centrality, and we combined the best two predictors by performing a linear combination. We found that the combined predictor and the changes in S&P 500 show a quadratic relationship, and it allows us to predict the amplitude of the one step future change in S&P 500. The result showed significant fluctuations in S&P 500 Index when the combined predictor was high. In terms of making the actual index predictions, we built ARIMA models with and without inclusion of network measurements, and compared the predictive power of them. We found that adding the network measurements into the ARIMA models improves the model accuracy. These findings are useful for financial market policy makers as an indicator based on which they can interfere with the markets before the markets make a drastic change, and for quantitative investors to improve their forecasting models.

Dynamics of international spillovers and interaction: Evidence from financial market stress and economic policy uncertainty

This study examines the volatility (stress) spillovers in stock, securitized real estate, bond, and currency markets and the economic policy uncertainty spillovers across seven countries. We find that spillovers are important and account for, respectively, about 72% and 50% of the dynamics of financial market stress and economic policy uncertainty across the seven economies examined. Our results suggest a bulk of financial market stress and policy uncertainty are due to international spillovers. In the multi-country context, we find some evidence of policy uncertainty spillovers lead financial market stress spillovers. Thus, changes in international economic policy uncertainty spillovers may be a short-term predictor of changes in international financial market risk spillovers. Our analysis provides the first evidence regarding the link among the international spillovers in multi-country systematic risks. Policymakers who aim to make effective macroeconomic policies in this interconnected global environment should take these findings into account.

The artificial stock market model based on agent and scale-free network

As a complex giant system, financial market has complexity characteristics with distinctive forms, which shakes theoretical basis of effective market hypothesis to challenge traditional paradigm for financial research. Based on agent-based computational economics, the work established artificial stock market by computer’s high-speed information processing ability and bottom-up modeling method. The real financial markets were highly simulated to guide financial market regulation and policy development. The artificial stock market model in the work realized the simulation of real stock market to a certain extent. This showed that it was effective to improve artificial stock market modeling method based on agent and scale-free network. Therefore, the application value analysis of model has important practical significance.

(The Impact of Population Ageing on Financial Market Structures and Policy Implications)

Korean Abstract: 본 연구에서는 우리나라의 고령화가 야기하게될 금융시장관련 변화를 실증연구와 해외사례를 바탕으로 분석하였다. 연구결과는 고령화가 금융정책의 유효성을 약화시키고 저성장, 저물가, 저투자를 야기하게될 것임을 확인하고 있다. 사례연구에서는 고령화 대책은 경기적 대응보다 노동시장적 대응이 더 효과적이며 노령층에 주안한 연금상품의 개발과 도입을 지원하는 정책적 노력이 필요한 것으로 나타났다. 특히 한국의 낮은 연금수령비중과 사회조장체제 수준을 고려할 때 조속하고 포괄적인 정책대응이 요구된다. English Abstract: Korea is aging at a rapid pace, causing concern about the resulting socio-economic impacts. This study analyzes the expected changes in the financial markets resulting from aging and seeks possible policy measures to mitigate the negative impacts of aging stemming from these changes. Chapter 2 reviews the current status of Korea's aging process. Even though the country remains yet at the stage of an aging society, it is expected to become an aged society in 2017 and then a super-aged society in 2026, a mere nine years later. The aging of the Korean population is proceeding at an unprecedented pace. The fundamental reason for this fast pace of aging is the rapid drop in birth rate and growing life expectancy. However, Korea's socio-economic systems are not well prepared to absorb the shocks for aged people. More and more aged people are facing poverty and the rate of suicide is highest among the elderly. Rent beneficiaries occupy just a part of the old population. The social security system does not guarantee a stable livelihood for old people. This problem will become more serious in the near future because the baby boom generation has started to retire recently. The aging problem will lead to low growth, low inflation and low investment throughout the whole Korean economy, making structural changes inevitable in the financial market. Chapter 3 undertakes empirical analysis to examine whether monetary policies can maintain their effectiveness even after aging has proceeded further. We performed a panel-VAR analysis using the OECD data for 25 member countries for 20 years, from 1995 to 2014. The empirical analysis showed that monetary policies lose their effectiveness considerably in an aged society. This result implies a possible change in the effectiveness of Korea’s monetary policies, especially if the aging of Korea’s population proceeds further. As of yet aging has not progressed significantly in Korea. However, the Bank of Korea should restructure its monetary policies in the long term, considering the change of policy effectiveness according to the progress of aging. The government may utilize fiscal policies to a more intensive extent to respond to cyclical depression while it sets monetary policies to manage the financial market and inflation pressure. For instance, if the government employs monetary policies to control cyclical changes, they would have to apply greater and faster interest rate changes than before to achieve the same effect. Research on the relation between aging and monetary policy has only begun to be discussed recently. However, it may become one of the main research topics in the near future due to its importance. Further and more detailed studies will be needed to allow adjustment of monetary policies in an aged society. Chapter 4 reviews the theories regarding the relation between aging and the financial market and undertakes case studies with Japan, Germany and the U.S. In addition to a theoretical review, the countries' money flow charts and international investment position tables were analyzed to discover the impacts of aging on the financial market. Japan has shown macroeconomic and financial changes very close to theoretical predictions. However, Germany is not showing considerable changes in its financial market due to active labor market reforms. The U.S. as well does not reveal the characteristics of an aged society because aging in the U.S. is still at an initial stage and the financial market functions as a global market rather than a domestic market. Even though the countries show different levels of change, they all have introduced some policy measures focused on aging. Examples of successful policies include the Japanese current account policies and NISA, German labor market reform and competition policies, and the U.S.' introduction of annuities such as its 401(k) plan. Chapter 5 draws policy implications based on the analyses above. The recommended policy directions are as follows: explore new roles for monetary policies, use labor market approaches and financial market approaches to respond to aging, and employ strategies using the income account to maintain current account balance, etc. Finally, this study emphasizes the need for fast and comprehensive countermeasures against the negative macroeconomic and financial impacts of ageing.

The Impact Of Interest Rate Volatility On Stock Market Development: Evidence From Emerging Markets

Interest rate uncertainty has adverse effects on stock market performance. Despite the considerable studies on the relationship between interest rate and stock market return, the relationship between interest rate volatility and stock market development still is enigma. This paper investigates the effect of interest rate uncertainty on stock market development. We examine the long-run and short-run relationship between these variables using Pesaran et al (2001) bounds testing approach to cointegration and error-correction modeling for 12 emerging economies over the period 1980-2011. This methodology has two main advantages over other cointegration methods which have made it unique: first there is no need to do pre-unit root resting, which is an essential requirement in other methods, and second, we are able to distinguish short -run effects from its long- run effect. Diagnostic statistics applied in this study indicate that our models are stable, well specified and normally distributed residual free of autocorrelation. The estimated results here show a significant short-run effect of interest rate uncertainty on stock market developing in all of 12 emerging economies under study. Furthermore, our results indicate that in 9 out of 12 countries the short-run effects have been seen in the long-run as well, and the cointegration relationship is confirmed in almost all of the models by either the F-test results or negative sign of error correction term. Also, the long run real income estimated elasticity is significantly positive in all countries (except for Brazil, Chile and Thailand) which would be a major long-run factor affecting stock market development in most of emerging economies in this study. Moreover, we found a mixed long- run effect of interest rate on stock market development. The results obtained in this paper suggest that emerging economies need to be cautious in implementing financial market and interest rate policies. A well-developed financial system improves capital formation and the efficiency of resource allocation, enhancing investment, and therefore economic growth. Interest rate uncertainty significantly affects stock market development. Therefore, a sound monetary policy creates a safer investment environment and stock market development. The role of stock market development towards achieving economic growth is crucial.

Barriers to Eco-Innovation in the LED Sector: A Multilevel Perspective

The aim of this paper is to analyse barriers to eco-innovation in the LED sector and to formulate strategy and policy recommendations to overcome them. It is based on case studies of European LED firms, and uses the multi-level perspective (MLP) to formulate these recommendations. The results are relevant for both LED companies and policy makers. We identified 18 major barriers to LED eco-innovation at regime level that pertain to four categories (LED market, Labour market, Financial market, and Public policies). At niche level, 8 major barriers have been identified pertaining to three categories (Technological resources, Human resources, and Financial resources). The interactions between regime-level barriers on niche-level ones are presented in appendices. Suggestions to overcome these barriers include both demand-pull and policy-push instruments. This paper is the first one to use the MLP to analyse and suggest solutions to overcome barriers to eco-innovation in the LED sector.

Financial Depth and Exchange Rate Volatility

It is empirically well established that financial depth increases the power of the financial system and helps both government and the private sector to have access to adequate funds without a noticeable change in asset prices and exchange rates. Exchange rate uncertainty is considered one of the many factors that affect financial market performance. In this study, we try to determine the short-run and long-run effects of exchange rate volatility on financial depth in 26 selected countries, classified as developed, developing, and emerging economies over the period 1980-2011. Our findings indicate that exchange rate volatility has short-run and long-run effects in the majority of countries in this study. We found for 16 countries out of 26, financial depth responds significantly to exchange rate volatility (nine positive, seven negative). Furthermore, using the bounds testing approach shows that exchange rate volatility has significant impact on financial deepening in 20 out of 26 countries in the short run. The results show that despite similar classification and grouping, the estimated results could be very country specific depending on each country’s particular characteristics. We suggest that for every country, it is crucial to choose and implement appropriate financial market and exchange rate policies.

Foreign Debt in EU Periphery, Roots and Remedies: A New Strategy

This paper investigates the determinants of external debt in EU periphery. The goal is to contribute to the ongoing debate on the determinants of external debt and to subdue it by adopting the right policy reform. To answer this question the study implements a quantitative research methodology using econometric techniques with monetary, financial, fiscal, trade, and labor market policy variables with time-series data over the period of 1980 to 2013. The estimated econometric results with OLS technique suggest that while fiscal policy variables such as budget deficit and corporate tax rate are the most important factors in shaping external debt in Italy and Spain; monetary, financial, and trade policy variables are more important for Greece and Portugal. Interestingly, none of the labor market variables have a statistically significant impact on the foreign debt of EU peripheral countries. The policy implication is straight forward; contrary to what has been proposed by international institutions to reform the labor market, Greece and Portugal need to focus on trade and monetary policy reforms, while Italy and Spain should put more emphasis on fiscal policy reforms, particularly tax reform.

Do global financial distress and uncertainties impact GCC and global sukuk return dynamics?

We investigate the dynamics of the co-movement and causal relationship of the GCC sukuk (Islamic bond) returns with global financial distress and various uncertainty factors (including financial and commodity market and economic policy uncertainty indices), using the quantile regression analysis. The empirical results demonstrate that these global financial, economic policy and oil uncertainties have negative impacts and causality effects on the GCC sukuk returns, which is limited to the lower quantiles (bearish GCC markets). The global financial distress has a negative impact and a causality effect on GCC sukuk but only for the upper quantiles (when the sukuk returns are high). Interestingly, the GCC sukuk returns are not affected by the conventional bond market and gold market uncertainties. For comparison purpose, we examine the impacts of global financial distress and uncertainty factors on the global sukuk index, which is much wider than the GCC index, and find that this index is mainly affected by the global conventional bond market uncertainty. The results show also that the GCC sukuk are more sensitive to the global uncertainty factor, mainly in the tail distributions, than the global sukuk, offering investors different investment alternatives and portfolio diversification opportunities.

The UK Economy

Economy to grow 2.3 per cent in 2016 and 2.7 per cent in 2017.Inflation rate of just 0.3 per cent this year and 1.3 per cent in 2017, reaching 2.1 per cent in 2018.Bank Rate now expected to remain ½ per cent until the second half of 2016.Chancellor forecast to miss the primary target of the Fiscal Mandate by a slim margin.Productivity performance the largest domestic risk, but emerging market slowdowns, financial market volatility and policy missteps also represent risks.

The Impact of Population Aging on Financial Market Structures and Policy Implications

Korea is aging at a rapid pace, causing concern about the resulting socio-economic impacts. This study analyzes the expected changes in the financial markets and macroeconomic changes resulting from aging and seeks possible policy measures to mitigate the negative impacts of these changes. The estimated changes will be useful information for all market players to prepare for the future socio-economic changes. The policy implications based on the analyses are as follows: First, explore new roles for monetary policies. Second, use labor market approaches and financial market approaches together to respond to aging. Third, employ strategies using the income account to maintain current account balance.