Negative Price Shocks Research Articles

Stock and Industry Return Characteristics Around Price Shocks

ABSTRACTThe author investigates positive and negative price shocks in individual securities and the degree to which they affect related firms in the same industry. This price contagion effect is significant with initial price shocks leading to substantial long-term abnormal returns across firms in the same industry over time. Price shocks also have predictive value regarding future earnings and revenues for the firm in question and its industry overall. Positive (negative) price shocks that are continued over time are associated with higher (lower) Sharpe ratios suggesting that abnormal returns are not simply a form of compensation for greater expected future volatility.

The Impact of Oil Refinery Market Power on Retail Fuel Prices in the European Union

The present study investigates the degree to which imperfect competition in the oil sector affects end retail prices. Specifically, we test how positive and negative price shocks in the oil market translate to final retail prices for petrol, diesel, and heating oil prices, focusing on the asymmetry of the price changes. We assume that the higher the level of imperfect competition, the more asymmetric the price change between the initial oil and final retail products will be. In addition, we also test the degree to which uncertainty, or oil price volatility, affects the final prices for these same products. We find that our proxy for market power does affect retail price asymmetries and that increasing volatility lowers retail price asymmetries.

Markets, Transportation Infrastructure, and Food Prices in Nepal

AbstractWe study transportation infrastructure and food markets in Nepal over the period 2002 to 2010, combining monthly price data from thirty‐seven local and regional markets, and seven Indian border markets. We use a series of autoregressive models to study price determination, spatial and temporal price transmission, and price variance. We account for district‐level agricultural production, correcting for bi‐directional causality between output and prices using ground station rainfall data. In addition, to test hypotheses regarding the importance of transportation infrastructure we incorporate information on road and bridge density and fuel costs. For both rice and wheat, we find strong evidence of local price intertemporal carryover and very weak evidence of price transmission from regional, central, and border markets to local markets, suggesting very low degrees of market integration. Fuel costs are positively correlated with food prices, and road and bridge density are negatively correlated with prices. We find evidence of asymmetric effects: positive price shocks are correlated with higher subsequent price volatility compared with negative price shocks of similar magnitude. Roads and bridges are important for moderating price levels and price volatility in Nepal's rice and wheat markets, which explains roughly half of the spatial and temporal variation in price mark‐ups between regional and local markets.

The Impact of a People's Republic of China Slowdown on Commodity Prices and Detecting the Asymmetric Responses of Economic Activity in Asian Countries to Commodity Price Shocks

The recent slowdown of the People’s Republic of China (PRC) has led to question to what extent the PRC demand of commodities can have an impact on commodity prices. We take into account the fact that commodity prices are characterized by structural breaks, and to this end we make use of novel econometric procedures incorporating the Flexible Fourier Form when testing for causal relations between the PRC slowdown and commodity prices. We find varying degrees of response of the PRC slowdown on different commodity prices. Further, this study determines whether the economic growth in selected developing and emerging Asian countries that are heavily dependent on commodities respond in an asymmetric manner to positive commodity price shocks as opposed to negative price shocks. Adopting a structural dynamic regression and censoring positive and negative shocks, we find limited evidence of any asymmetric response of economic activity to positive and negative commodity price shocks.

Joint price dynamics of quality differentiated commodities: copula evidence from coffee varieties

The objective of this article is to investigate the intensity and the mode of price linkages for quality differentiated coffee beans. This is pursued using monthly spot prices from 1990 to 2015 and nonparametric copulas. The empirical findings suggest that: (i) The price interrelationships are stronger among the Arabica beans than between the individual Arabica and the Robusta beans; also, price co-movement is higher (lower) where the quality difference is smaller (larger). (ii) There is symmetric price co-movement under positive and negative price shocks; that means, shocks of the same absolute magnitude but of different sign are transmitted from one coffee market to another with the same intensity. The transmission of shocks, however, of the same sign but of different magnitude is asymmetric; in particular, larger (in absolute value) price shocks are transmitted with higher intensity compared with smaller ones.

Stock Returns Following Large Price Changes and News Releases – Evidence from Germany

Abstract/Zusammenfassung We revisit the overreaction hypothesis in the light of information effects. Using a sample period from 2005–2012 covering 2,542 large price changes in the German stock market, our results indicate that information effects can explain both overreaction and underreaction patterns. Specifically, we find that large positive price changes without public information signals are followed by short-term price reversals. In contrast, negative price shocks concurrent with a public announcement are associated by price continuations. The results are robust to size effects and sub-periods. Furthermore, we design a trading strategy to show that the observed return predictability could have been exploited for large negative price changes. Kursreaktionen auf grose Aktienkursanderungen – Eine empirische Untersuchung fur den deutschen Markt unter Berucksichtigung der Informationswirkung von Pressemeldungen In diesem Beitrag wird die Uberreaktionshypothese fur den deutschen Aktienmarkt vor dem Hinter...

Experiments on Electronic Double Auctions and Abnormal Trades

The flash crash experienced by U.S. markets in May 2010 provided stark evidence that a large trade can have a powerful influence. We explore the impact of an unusual trade on behavior in experimental bubbles markets. We chose the experimental design proposed by Smith, Suchanek, and Williams (1988) because replication shows it produces markets prone to mispricing. After several rounds of trading, our markets receive a large quantity order at an extreme price. In a standard double auction bubble market, pricing is unaffected by an abnormal order. However, with increased uncertainty about the underlying economic value of the asset, over-pricing weakens on arrival of a negative price shock.

Dynamic Fuel Price Pass-Through: Evidence from a New Global Retail Fuel Price Database

This paper assesses the dynamic pass-through of crude oil price shocks to retail fuel prices using a novel database on monthly retail fuel prices for 162 countries. The impulse response functions suggest that on average, a one cent increase in crude oil prices per liter translates into a 1.2 cent increase in the retail gasoline price at peak level six months after the shock. However, the estimates vary significantly across country groups, ranging from about 0.5 cent in MENA countries to two cents in advanced economies. The results also show that positive oil price shocks have a larger impact than negative price shocks on the retail gasoline price. Finally, the paper underscores the importance of the new dataset in refining estimates of the fiscal cost of incomplete pass-through.

Dynamic Fuel Price Pass-Through: Evidence from a New Global Retail Fuel Price Database

This paper assesses the dynamic pass-through of crude oil price shocks to retail fuel prices using a novel database on monthly retail fuel prices for 162 countries. The impulse response functions suggest that on average, a one cent increase in crude oil prices per liter translates into a 1.2 cent increase in the retail gasoline price at peak level six months after the shock. However, the estimates vary significantly across country groups, ranging from about 0.5 cent in MENA countries to two cents in advanced economies. The results also show that positive oil price shocks have a larger impact than negative price shocks on the retail gasoline price. Finally, the paper underscores the importance of the new dataset in refining estimates of the fiscal cost of incomplete pass-through.

Commodity Price Shocks and Financial Sector Fragility

This paper investigates the impact of commodity price shocks on financial sector fragility. Using a large sample of 71 commodity exporters among emerging and developing economies, it shows that negative shocks to commodity prices tend to weaken the financial sector, with larger shocks having more pronounced impacts. More specifically, negative commodity price shocks are associated with higher non-performing loans, bank costs and banking crises, while they reduce bank profits, liquidity, and provisions to nonperforming loans. These adverse effects tend to occur in countries with poor quality of governance, weak fiscal space, as well as those that do not have a sovereign wealth fund, do not implement macro-prudential policies and do not have a diversified export base. These findings are robust to a battery of robustness checks.

Commodity Price Shocks and Financial Sector Fragility

This paper investigates the impact of commodity price shocks on financial sector fragility. Using a large sample of 71 commodity exporters among emerging and developing economies, it shows that negative shocks to commodity prices tend to weaken the financial sector, with larger shocks having more pronounced impacts. More specifically, negative commodity price shocks are associated with higher non-performing loans, bank costs and banking crises, while they reduce bank profits, liquidity, and provisions to nonperforming loans. These adverse effects tend to occur in countries with poor quality of governance, weak fiscal space, as well as those that do not have a sovereign wealth fund, do not implement macro-prudential policies and do not have a diversified export base. These findings are robust to a battery of robustness checks.

The Crowding-Out Effects of Real Estate Shocks Evidence from China

We investigate the impacts of real estate price changes on firms’ investment and financing using detailed real estate transaction data in China. China witnessed the real estate prices rise for more than a decade and recent housing purchase restriction policies enforced in 46 cities generated negative price shocks. Using both IV and DID approaches, we document that the rising real estate price causes land-holding firms to borrow more and invest more while the policy shocks work in the opposite direction. Further decomposition of investment into land and non-land investments shows that the rising real estate prices cause firms to only increase investment in land, especially commercial land, while decrease non-land investment. We next focus on a sub-sample of non-land owners and show that these firms borrow less and invest less if they are affected more by real estate price rise and the effects are reversed due to policy shocks. The results are consistent with the existence of a crowding-out effect. First, rising real estate price fosters more investment into the real estate sectors, which crowds out non-real estate investment. Second, rising real estate price enlarges the financial constraint gaps between firms with land and firms without land, which cause resource misallocation. To understand the aggregate effect, we investigate investment efficiency changes. We show that the increased investment associated with land price rises in fact reduces investment efficiency while policy shocks improve investment efficiency. The evidence showing that net effect would be negative calls for caution in the policy debate that advocates for investment stimulation through real estate boom.

How Do Natural Gas Prices Affect Electricity Consumers and the Environment?

Between 2008 and 2012, the delivered price of natural gas to the U.S. power sector fell 60 percent. This paper addresses, in theory and in practice, the effects of this negative price shock on electricity consumers and the environment. We demonstrate with a simple model that the larger the effects of gas prices on consumer welfare, the smaller the effects on pollution emissions and the smaller the increase in profits of existing natural gas-fired generators. Using detailed data on electricity prices, fuel consumption, and fuel prices from 2001 to 2012, we confirm this hypothesis. Regions that experience greater reductions in pollution emissions experience smaller reductions in electricity prices and consumer welfare.

The dynamics of the leverage cycle

We present a simple agent-based model of a financial system composed of leveraged investors such as banks that invest in stocks and manage their risk using a Value-at-Risk constraint, based on historical observations of asset prices. The Value-at-Risk constraint implies that when perceived risk is low, leverage is high and vice versa; a phenomenon that has been dubbed pro-cyclical leverage. We show that this leads to endogenous irregular oscillations, in which gradual increases in stock prices and leverage are followed by drastic market collapses, i.e. a leverage cycle. This phenomenon is studied using simplified models that give a deeper understanding of the dynamics and the nature of the feedback loops and instabilities underlying the leverage cycle. We introduce a flexible leverage regulation policy in which it is possible to continuously tune from pro-cyclical to countercyclical leverage. When the policy is sufficiently countercyclical and bank risk is sufficiently low the endogenous oscillation disappears and prices go to a fixed point. While there is always a leverage ceiling above which the dynamics are unstable, countercyclical leverage policies can be used to raise the ceiling. We also study the impact on leverage cycles of direct, temporal control of the bank׳s riskiness via the bank׳s required Value-at-Risk quantile. Under such a rule the regulator relaxes the Value-at-Risk quantile following a negative stock price shock and tightens it following a positive shock. While such a policy rule can reduce the amplitude of leverage cycles, its effectiveness is highly dependent on the choice of parameters. Finally, we investigate fixed limits on leverage and show how they can control the leverage cycle.

The Dynamics of the Leverage Cycle

We present a simple agent-based model of a financial system composed of leveraged investors such as banks that invest in stocks and manage their risk using a Value-at-Risk constraint, based on historical observations of asset prices. The Value-at-Risk constraint implies that when perceived risk is low, leverage is high and vice versa, a phenomenon that has been dubbed pro-cyclical leverage. We show that this leads to endogenous irregular oscillations, in which gradual increases in stock prices and leverage are followed by drastic market collapses, i.e. a leverage cycle. This phenomenon is studied using simplified models that give a deeper understanding of the dynamics and the nature of the feedback loops and instabilities underlying the leverage cycle. We introduce a flexible leverage regulation policy in which it is possible to continuously tune from pro-cyclical to countercyclical leverage. When the policy is sufficiently countercyclical and bank risk is sufficiently low the endogenous oscillation disappears and prices go to a fixed point. While there is always a leverage ceiling above which the dynamics are unstable, countercyclical leverage can be used to raise the ceiling. We also study the impact on leverage cycles of direct, temporal control of the bank's riskiness via the bank's required Value-at-Risk quantile. Under such a rule the regulator relaxes the Value-at-Risk quantile following a negative stock price shock and tightens it following a positive shock. While such a policy rule can reduce the amplitude of leverage cycles, its effectiveness is highly dependent on the choice of parameters. Finally, we investigate fixed limits on leverage and show how they can control the leverage cycle.

Human development effects of large changes in food prices: Does openness policy matter?

This paper analyses the effects of food price shocks on selected disaggregated human development indicators and investigates the role of openness policy in mitigating the adverse effects of large changes in food prices. Using a panel of 74 developing countries from 1980 to 2012, I find that positive food price shocks reduce life expectancy at birth both in the fixed-effect model and in the dynamic panel model while negative food price shocks do not seem to matter for this human development indicator in the static model but adversely affect it in the dynamic model. I also find that both positive and negative shocks have no effect on youth literacy rate; this probably means that households do not react to food price shocks by taking children out of school. Analysing the role of commercial openness, I find that openness policy enhances countries’ capacity to manage the adverse effects of food price shocks on life expectancy at birth. This suggests that the tempting policy option of reducing openness to trade during food price shocks is not an efficient choice as regards the human development. Countries must therefore set institutional arrangements that could prevent policy-makers from taking this inefficient policy option.

Tails Curtailed: Accounting for Nonlinear Dependence in Pricing Margin Insurance for Dairy Farmers

Livestock Gross Margin Insurance for Dairy Cattle (LGM‐Dairy) is a risk management tool for protecting milk income over feed cost margins. In this article, we examine the assumptions underpinning the method used to determine LGM‐Dairy premiums. Analysis of the milk–feed dependence structure is conducted using copula methods, a rich set of tools that allow modelers to capture nonlinearities in dependence among variables of interest. We find a significant relationship between milk and feed prices that increases with time‐to‐maturity and severity of negative price shocks. Extremal, or tail, dependence is the propensity of dependence to concentrate in the tails of a distribution. A common theme in financial and actuarial applications and in agricultural crop revenue insurance is that tail dependence increases the risk to the underwriter and results in higher insurance premiums. We present, to our knowledge, the first case in which tail dependence may actually reduce actuarially fair premiums for an agricultural risk insurance product. We examine hedging effectiveness with LGM‐Dairy and show that, even in the absence of basis or production risk, hedging horizon plays an important role in the ability of this tool to smooth farm income over feed cost margins over time. Rating methodology that accounts for tail dependence between milk and feed prices extends the optimal hedging horizon and increases hedging effectiveness of the LGM‐Dairy program.

The silence at the stands: agony in the Portuguese market for taxis

Os táxis não podem ser baratos. Decorre de ser conduzido por um profissional com toda a flexibilidade dos carros, menos vários inconvenientes. E, no entanto, ... por que não? Os Taxistas reclamam sobre o preço proibitivo do gasóleo, que não cobre tarifas medíocres. A raiz e a verdade da questão encontram‑se no serviço: clientes, quilómetros ... e na falta deles. O mercado pode ser descrito como um cartel de entrada livre – gerido por associações do setor, toleradas pelo regulador – capturado, onde nem a entrada nem a saída fazem mover o preço. Para os consumidores, é péssimo. Enquanto isso, lucros de monopólio são desperdiçados entre o máximo de remediados, que mal conseguem sobreviver.Melhor seria se a regulação evoluísse da captura por organizações dos motoristas para um conjunto de licenças e preços definidos de acordo com os níveis de tráfego, após um choque de preço negativo, que apressaria a eliminação do excesso de oferta.Será que isso importa? Os táxis podem ser preciosos para fazer a ponte entre os transportes públicos e o ambientalmente frágil e caro transporte de carro.

Time Preferences, Mortgage Choice and Mortgage Default

The recent financial crisis has led to calls for a better understanding of the reasons behind the increase in mortgage defaults and the foreclosures that followed. Previous studies using option-based mortgage default models predicted that borrowers should immediately exercise the default option when the market value of their mortgage exceeds the value of the underlying property. However, empirical evidence shows that a substantial number of borrowers are unlikely to default as 'ruthlessly' as the option theory predicts. This indicates that mortgage borrowers are a heterogeneous group. In this paper, borrowers’ time preferences across mortgage choices are hypothesized as being heterogeneous. Borrowers can either have a present-biased preference (overvaluing immediate outcomes), or a time-consistent preference (standard exponential discounting). Borrowers with a present-biased preference are more likely to accept back-loaded mortgages that minimize up-front costs, even though this increases their risk of going underwater and entering default when negative home price shocks occur.

Price Shocks, News Disclosures, and Asymmetric Drifts

ABSTRACTMotivated by investor disagreement and corporate disclosure literatures, we examine how stock price shocks affect future stock returns. We find that both large short-term price drops and hikes are followed by negative abnormal returns over the subsequent year, consistent with the conjecture that price shocks are useful indicators of intertemporal spikes in investor disagreement and investor opinion converges gradually. The asymmetric drifts involve return continuation for negative price shocks versus return reversal for positive price shocks, and are in sharp contrast to the general findings of symmetric drifts in corporate event studies. Moreover, price shocks associated with public news events are followed by significantly weaker downward drifts, suggesting that news disclosures mitigate disagreement-induced overpricing. Examining the dynamics of a disagreement proxy during and after price shocks, we provide further evidence for the disagreement hypothesis. The economic significance of the price shock effect is illustrated with a revised momentum strategy that generates an annualized abnormal return of 16.92 percent.