Market Fragility Research Articles

Market fragility and international market crashes

We extend the Pukthuanthong and Roll (2009) measure of integration to provide an estimate of systemic risk within international equity markets. Our measure indicates an increasing likelihood of market crashes. The conditional probability of market crashes increases substantially following increases of our risk measure. High levels of our risk measure indicate the probability of a global crash is greater than the probability of a local crash. That is, conditional on high levels of systemic risk, the probability of a severe crash across multiple markets is larger than the probability of a crash within a smaller number of markets.

Surveillance model of going concern in banking

This paper aims to apply the anatomy of bank financial condition in modelling bank going concern status. The anatomic factors are market presence, macro-economic condition, deposit fragility, prudence, earnings quality, market power and capital confidence (Njoku and Inanga, 2010). Discriminant analysis was applied to the anatomic factors to indicate characteristic differences among banks likely to attract going concern opinion and the unlikely ones. The result shows that in banking landscape typified by market presence and deposit mobilisation, bank failure to effectively exploit market power and translate it into earnings is critical in hurting the going concern status. As such, market power, earnings quality, market presence and deposit mobilisation should usefully command focal attention of auditors in reaching going concern opinion.

ON THE IMPACT OF FUNDAMENTALS, LIQUIDITY, AND COORDINATION ON MARKET STABILITY*

We develop a coordination game to model interactions between fundamentals and liquidity during unstable periods in financial markets. We then propose a flexible econometric framework for estimation of the model and analysis of its quantitative implications. The specific empirical application is carry trades in the yen–dollar market, including the turmoil of 1998. We find a generally very deep market, with low information disparities among agents. We observe occasional episodes of market fragility or turmoil with up by the escalator, down by the elevator patterns in prices. The key role of strategic behavior in the econometric model is also confirmed.

Robustness and Fragility of Markets: Research at the Interface of Economics and Computer Science

Market behavior is the central topic of economics. Yet while economists have a good understanding of the behavior of well-functioning markets, we have little to say about market fragility, market resiliency, and market collapse. Research emerging at the frontier between computer science and economics offers new ways of addressing this important issue.

On Market Liquidity and Liquid Balances

Are securities markets more liquid when the economy is more liquid? If so, why? One possibility is that market depth depends on credit constrained intermediaries. This paper offers another explanation, which does not involve frictions or market segmentation. Measuring market illiquidity by the slope of the representative agent's demand curve for a risky asset, I show that this slope is steeper when money-like investments (or liquid balance) represent less of an economy's assets. That is because an exchange of shares for money in such a state induces greater intertemporal substitution than it does when there are more liquid balances. Thus securities' illiquidity fluctuates naturally with the level of real liquidity. This observation has important implication for understanding the causes of market fragility.

Financial Stability of a Small Open Economy under Credit Constraints

Some of the most visible causes for booms and busts in a small, open, financially developing economy include a fragile financial market, exchange rate shocks, and asset price volatility that often result in credit constraints. Because these shocks tend to exaggerate the credit cycles of collateral-based bank lending to the non-tradable sector, an emerging economy experiences a series of financial booms and busts. Further, the fundamental cause of credit frictions is related with market fragility and polarization of industrial bases (NT sector) that are increasingly exposed to various shocks. Shocks interact with fragility to necessitate greater stabilization efforts that often are accompanied by lingering side-effects. Credit flows cannot be dispersed widely since risk cannot be accommodated by investors without implicit government guarantees. The interaction of implicit bailout guarantees and lack of contract enforceability makes market intervention by the authorities a permanent feature of sizable balance sheet effects. Thus, financial market stability in an emerging market context requires extra efforts beyond the usual macro policy framework. For the purpose of securing stability, any serious effort to strengthen the market infrastructures by granting greater access to wider markets must entail rationalization of governance to boost absorptive capacity, which will ease credit constraints.

Risk Avoidance and Market Fragility

Products that promise protection from the risks of investing can contribute to market fragility.

Public and Private Guarantee Funds with Market Fragility

When buyers worry that sellers may not remain in the market long enough to fulfill all contractual obligations, they may be unwilling to purchase and a market failure can result. Bank deposits and pension benefits are examples of contracts for which buyers might lose confidence in sellers, making these markets fragile. This paper studies market fragility created by both fundamental (i.e., costs and demand) and strategic uncertainty (i.e., beliefs). We find a rich interaction between these two sources of uncertainty. The paper also considers the role and design of guarantee funds-some public, some private-created to support trade in many potentially fragile markets.