Recent Financial Market Research Articles

Application of discriminant models in predicting bankruptcy of energy sector companies in Poland

The following research focuses on the use of discriminatory models in predicting bankruptcy of energy companies in Poland. Over the past several years, this sector has faced unforeseen events, such as the COVID-19 pandemic or the conflict in Ukraine. Past studies have shown that foreign discriminatory models should not be used in the context of the Polish market. As a consequence, a T. Maślanka's model adapted for Polish companies was used. The aim of the article was to verify the financial condition (in the context of bankruptcy risk assessment) of companies in the energy sector using multi-criteria discriminant analysis. Statistica 13.3 package was used for calculations. The results of the research proved that discriminant models can be used to assess financial health and bankruptcy risk. Applying them in the empirical research presented in the article proved that the energy companies had varying financial health in 2019-2022, so in the period immediately before, and during the COVID-19 pandemic and the war in Ukraine. Most companies are not at risk of bankruptcy and have coped relatively well with the unstable situation in the global economy, including the commodity markets. Five companies (PGE, ENEA, PEP, ONDE and KOGENERA) obtained a T.Maślanka's model score above the cut-off point throughout the study period, indicating their good financial health. CEZ obtained results indicating a high risk of bankruptcy. The conclusions of the study are the first, known to the authors, researches about energy companies in Poland in the period of recent financial market fluctuations.

Financial Contagion: A Tale of Three Bubbles

The primary purpose of the study is to identify and measure the properties of asset bubbles, volatility clustering, and financial contagion during three recent financial market anomalies that originated in the U.S. and Chinese markets. In particular, we focus on the 2000 DotCom Bubble, the 2008 Housing Crisis, and the 2015 Chinese Bubble. We employ three main empirical methods; the LPPL model to identify asset bubbles, the DCC-GARCH model to measure volatility clustering, and the Diebold-Yilmaz volatility spillover index to measure the level of financial contagion. We provide robust evidence that during the DotCom bubble there was very limited spillover between the S&P 500, the Shanghai, and the Shenzhen Composite Indexes. However, there was significantly more spillover effects in the two more recent crises, i.e., the Housing crisis and the 2015 Chinese Bubble. Together, these results highlight the fact that as financial markets have become more globalized, there are greater levels of volatility transmission and correspondingly fewer potential benefits from international diversification.

MARKET COMPETITION AND FINANCIAL STABILITY: THE CASE FOR TAKAFUL (ISLAMIC INSURANCE) MARKET

The Takaful market has been growing substantially since its initiation and has begun gaining traction across the globe. Nevertheless, recent pressures for consolidation may bring about significant implications upon market competition, as well as economic and financial performances. As such, this study highlights the recent financial market failures and discusses the ambiguous link between competition and stability. Additionally, this study emphasizes the significance of competition in affecting the stability of Takaful operators to reinforce the comprehension of Takaful market behavior. This study provides important policy implications for regulators, investors, and other market participants to promote the progress of the Takaful sector.

Are Prominent Equity Market Anomalies in India Fading Away?

In this study, we revisit prominent equity market anomalies documented for India, namely size, value, volume and momentum. Using data for NSE 500 companies, we test for the persistence of these anomalies for a recent period from July 2005 to June 2016 employing one-factor capital asset pricing model (CAPM) and three-factor Fama–French model as asset pricing benchmarks. We test for the robustness of these anomalies by (a) forming both quintile and decile portfolios and (b) forming univariate and variety of bivariate-sorted portfolios. Corner portfolios based on deciles provide greater return differentials compared to quintile portfolios. Bivariate-sorted portfolios do not seem to outperform univariate-sorted portfolios. The value and momentum anomalies are explained by risk models which is contrary to prior evidence. Size and volume anomalies continue to provide significant returns but seem to have faded substantially over time when compared with the past results. The findings about weakening prominent Indian equity market anomalies shall pose a challenge for portfolio managers who may have to look for other sources of extra-normal profits. Indian market also seems to be informationally more efficient which is in line with recent financial market reforms and growing emphasis on financial inclusion and corporate governance.

Japan

Our outlook for domestic demand remains reasonably optimistic, notwithstanding recent financial market turmoil. A tight labour market and a pick‐up in wages will bolster consumption and incentivise investment in labour‐saving technology. Meanwhile, firms continue to expand capacity and raise R&D expenditure for new technologies, boosting investment. While growth in 2018 was set back by weather‐related contractions in Q1 and Q3, we expect demand to have rebounded in Q4 and look for GDP to have grown by 0.8% in 2018 as a whole. We expect growth of 1.0% in 2019 but just 0.3% in 2020, with the key drivers being: ▀ Robust labour market to support consumption: as the labour market continues to tighten, we expect household spending to continue to support growth in 2019. We project consumption to accelerate ahead of the scheduled rise of the consumption tax in Q4 2019, before falling back as the tax hike feeds through. However, given the stimulus measures planned by the government to soften the impact of the tax rise, we then expect consumption to show a faster recovery relative to previous consumption tax increases. ▀ Solid investment intentions despite rising uncertainty: business sentiment and investment intentions remain above historical averages and firms continue to expand capacity and increase R&D for new technologies, despite rising uncertainty over the durability of global economic momentum. And although softening recently, machinery orders remain high. Looking ahead, we expect investment growth to lose some momentum as the investment cycle begins to turn and global trade continues to ease. ▀ Low export growth to carry over into 2019: export volume growth has been weak of late, reflecting the softening in external demand. Import volumes have continued to grow at a robust pace, given solid domestic momentum. We expect export growth to remain weak going into 2019, in line with slowing global trade. ▀ Industrial production to continue growing: industrial output has recovered of late, after weather‐related disruption had weighed on growth earlier in 2018, while the PMI has remained stable at 52–53. We expect industrial production to continue growing in line with domestic demand, but slower than in previous years given less buoyant external prospects. ▀ No fiscal consolidation without economic revitalisation: the government is planning measures to support growth after the consumption tax rise in Q4 2019 including a diverse range of policies to incentivise consumption and an expansion of free childcare and education. It has also signalled that it stands ready to provide additional stimulus if needed. ▀ Monetary policy to stay put amid low inflation and falling bond yields: inflation has remained stagnant while 10‐year government bond yields fell into negative territory for the first time in two years, putting an end to speculation about monetary policy tweaks. With the consumption tax rise drawing closer, we do not expect the BoJ to move again any time soon. ▀ Equity sell‐off to prove temporary, but yen strength will persist: we expect current equity weakness to be temporary, but market volatility and more cautious Fed tightening indicate a stronger yen in 2019. Ongoing trade frictions and political attention on the exchange rate will also support the yen, which we see averaging 107 yen per US dollar in 2019.

World Economic Prospects Monthly

Overview: Market falls overstate loss of momentum ▀ Financial market moves in recent months suggest that there is increasing concern about a substantial global growth slowdown or even a recession. But we continue to see this as an over‐reaction to the weakening economic data; while the downside risks to the global GDP growth outlook have clearly risen, our baseline forecast for 2019 is little changed at 2.7%, down from 3% in 2018. ▀ Recent economic news confirms that the Q3 economic soft patch appears to have spilled over into Q4, particularly in the industrial sector which has seen a broad‐based loss of momentum in many economies coinciding with a further slowdown in global trade growth. But while surveys of service sector activity have also moderated, the falls have been rather less abrupt, suggesting that overall global GDP growth is slowing albeit not alarmingly so. ▀ On balance, we think that the weaker data do not provide compelling evidence that global growth is slowing more sharply than our December forecast. Although the financial market sell‐off and associated tightening in financial conditions will impinge on growth, this may at least be partly offset by weaker inflation in response to lower oil prices, now seen at US$61pb in 2019. This, combined with the continued strength of labour markets and the likelihood of further moderate wage growth, points to a further period of solid household spending growth. ▀ Nonetheless, the risk of a sharper slowdown has risen. Cyclical risks have increased over the past couple of years as spare capacity has diminished. And uncertainty over the economic and financial market impact of the unwinding of central balance sheets have added to the risk of policy mistakes. ▀ Although our central view is that the recent financial market correction will not morph into something rather nastier, further sustained weakness (particularly if accompanied by dollar strength) would have more significant implications for activity and could see world growth falling below the 2016 post‐crisis low of 2.4%.

World Economic Prospects Monthly

Overview: Equity falls unlikely to worsen slowdown ▀ The equity market sell‐off in October may have soured the general mood but we do not think this is the start of a wider market decline and expect the impact on the global economy to be small. We still see world GDP growth slowing from 3.1% this year to 2.8% in 2019 and 2.7% in 2020, the same as last month. ▀ Our estimate of global GDP in Q3 indicates that quarterly growth eased from 0.9% in Q2 to 0.7% in Q3 ‐ the weakest result since Q3 2016. Although we see a rebound in eurozone GDP growth in Q4 after a disappointing Q3, this may be offset by a further loss of momentum in the US. Overall, another quarter of steady but unspectacular global growth appears likely in Q4, a view that is supported by the surveys. ▀ Looking to 2019, the key issue will be the speed at which global growth is likely to slow. The recent equity market sell‐off highlights the risk that financial markets could be the trigger for a further downward leg for global growth. We remain sanguine on the risks of a surge in inflation and the need for aggressive policy action. Partly due to this, we do not see the recent financial market moves as the start of a more substantial correction. Nor do we expect October developments to have a sustained impact on the global economy via confidence or wealth effects. ▀ We believe that growth in the advanced economies will not slow too sharply. With oil prices expected to remain broadly stable, overall inflation should ease in 2019 and the resilience of the labour market is positive for household incomes. With fiscal policy supportive, we still forecast US growth of 2.5% in 2019, down from an expected 2.9% this year, while the eurozone is seen slowing to 1.7% from 2% this year. ▀ We remain cautious about Emerging Markets (EMs). Recent large financial market moves along with tighter policy, receding liquidity and slowing global trade are an unhelpful backdrop. While some slowing is unlikely to be avoided, solid fundamentals should mean that a major slowdown or financial crisis can be avoided.

Leveraged ETFs: Are You Prepared for the Volatility Jumps? Global Perspectives on the Short-Term versus Longer-Term Risk Profiles

Leveraged and inverse ETFs represent one of fast growing areas in the ETF industry, with the global AUM breaking $60 billion. The regulatory bodies in many countries are approving the listing of these products. The recent financial market turmoil in February 2018 has exposed the risk behavior of these ETFs in the time of market stress, which are often misunderstood by investors and can catch them by surprise. In this study, we analyze leveraged ETFs risk profiles in both short-term and long-term periods. As leveraged ETFs and inverse ETFs are often used for short-term trading purposes, understanding the nature of short-term volatility is highly critical. We also survey the landscape of the major markets with listed leveraged ETFs outside the U.S., including Asia Pacific and Canada. We examined the volatility behavior of leveraged products in these markets and came to the same conclusion. The near-term volatility jumps more than what the leverage ratio suggested. We’ve also noticed the degree of jumps vary from market to market. Globally, leveraged and inverse ETFs are growing at a healthy pace, led by a faster growth in Asia in 2016. After Japan, South Korea, and Taiwan, Hong Kong became the latest market, allowing both inverse and leveraged products on Hong Kong and China stock indexes. It is in the great interest of global investors to fully understand the nature of these instruments to use them effectively in portfolio management.

World Economic Prospects Monthly

Overview: Financial turmoil will not derail expansion ▀ The further run of broadly positive economic news has been overshadowed by the recent financial market turmoil. We do not expect the latter to be the catalyst for any notable economic slowdown and have left our world GDP growth forecast for 2018 unchanged at 3.2%, which would be the strongest result since 2011, up from an estimated 3.0% in 2017. ▀ January survey data continued to strike a positive tone. Indeed, the global composite PMI rose to its highest level during the current upswing and points to a further acceleration in global GDP growth. Meanwhile, less timely world trade data showed strong growth in November after a weaker performance in September and October. ▀ Of course, these developments predate recent financial market developments. The key issue is whether the equity market sell‐off triggers significant spillovers to the wider economy. If the market reversal is to have notable repercussions, it will need to morph from a tantrum into a full‐blown crisis. For now, we still expect interest rates generally to edge higher, with three rate hikes still seen in the US this year. ▀ Despite the recent fall, equity prices are still up sharply compared with a few months ago and earnings growth remains solid. Against this backdrop, further weakness would probably require an additional trigger, such as a sustained rise in bond yields in response to a reassessment of the inflation and monetary policy outlook. Although inflation concerns have risen recently, our view remains that price pressures will rise only gradually in the advanced economies and that the upside risks to both inflation and bond yields remain well contained. ▀ The upshot is that recent events have not prompted us to reassess the outlook for this year or beyond. We continue to expect world GDP growth to pick up to 3.2% this year, reflecting strong growth in both the advanced economies and the emerging markets. And our forecast for 2019 is also unchanged at 2.9%. In turn, world trade growth remains quite strong, helped by the weaker US$, but is seen slowing to 5% this year from just over 6% in 2017, with a further modest easing to 4.3% in 2019.

Divergent occupational pensions in Bismarckian countries: the case of Germany and Austria

Pension reforms and the changing public/private pension mix of the last decades are well documented. However, a more detailed look at the design of occupational pensions reveals remarkable differences even in countries that are usually treated as similar in the literature. Germany and Austria share many similarities and are having to cope with similar reform pressure. However, the design of occupational pensions varies substantially. Why? In Germany, trade unions are regularly involved in occupational pension schemes and benefits are calculated on the basis of defined contributions (DC), but with minimum return guarantees preventing losses in times of financial turmoil. By contrast, trade unions rarely participate in Austrian occupational schemes. In Austria, pure DC schemes without guarantees resulted in heavy occupational pension cuts during the recent financial market crises. Following the method of difference, the article explains this difference by trade union structure, unions’ strategic thinking and (lacking) reform threats supported by employers.

A model of protecting financial service clients in the UK

Aim: The purpose of the paper is to describe changes occurring in the UK in consequence of the financial crisis with regard to protecting financial service customers, which prompts towards the answer to the question about the optimum protection model when it comes to protecting financial market customers. The author analyses whether regulations in use in the UK are sufficient to ensure cohesion between the public supervision of the financial market and customer protection. In practice, these value may be in opposition. Design / Research methods: The basic research method used in the paper is analysing sources of law and the literature of the subject. Conclusions: The most recent financial market crises undermined the assumption that public and legal supervision is a sufficient tool preventing market turbulences. The financial market supervision should expand beyond professional financial service providers. At the same time, it is also necessary to ensure customer protection. Having conducted the research, the Author recognises that the model used to supervise the financial market and protect financial service customers adopted in the UK deserves to be multiplied on the basis of Polish law, with a particular focus on transferring the supervisory function to the central bank. Originality / value of the article: The topic is pertinent and important as, in the EU member states, adaptation of new legal solutions in the area of financial supervision is considered. However, the problem tackled in the paper has not received any wider coverage in the literature of the subject. The UK regulations may and, according to the author - should serve as a model for the Polish legislator who is planning to challenge the issue of organising supervision over the Polish financial market in the near future.

Privatisierung und Vermarktlichung der Altersvorsorge: Eingetrübte Aussichten des deutschen Mehrsäulenmodells

WSI-Mitteilungen , Seite 468 - 475

A Modified Risk Parity Method for Asset Allocation

We propose a return based modification of the portfolio variance matrix for asset allocation using risk parity. The modification is based upon a single scalar parameter which can be tuned to tailor the allocation for desired expected risk and/or return. The present work contributes a new twist on risk parity. While classical risk parity methods are based exclusively on volatility, the new solution (Modified Risk Parity) considers both historical returns and their variance in the construction of an optimal, diversified investment portfolio. We present two examples for periods including the recent financial market crises. The results suggest that the modification may lead to significantly improved risk adjusted returns over those realized by the conventional risk parity method.

Investor Overconfidence, Margin Trade and Market Efficiency: Evidence Based on a Recent Financial Market Crash

We investigate the effect of investor overconfidence and margin trades on market efficiency around a market crash. We find that the price delay in a pre-crash period is about twice the price delay in a post-crash period. After a market crash, investors become more sensitive to market movements, resulting in small price delay and high price synchronicity. Margin traders not only trade on market trends but also put additional force on it, escalating the pyramiding and de-pyramiding effects caused by the shift in market sentiment. Finally, our results show that negative information travels slowly only when investors are overconfident.

The World Economy: Forecast Summary

Global economic growth is forecast to pick up from 3.0 per cent in 2016 to 3.1 per cent in 2017 and 3.5 per cent in 2018 – a slightly weaker acceleration than projected last November.The unexpected result of the US presidential election has dominated recent financial market developments, with hikes in bond yields, a further appreciation of the US dollar, and rises in stock market prices reflecting expectations of US tax cuts, infrastructure spending, deregulation and trade measures.Our forecast assumes established policies. Potential policy changes in the US and any response in the rest of the world therefore pose significant risks to our projections.

Dependence between Extreme Risk Factor Movements of Euro Area Sovereign Bonds

This paper is the first which studies extreme risk factor movements of Euro Area sovereign bonds, whose prices are largely determined by risk factors representing interest rate risk, credit risk and market liquidity risk. Starting model independently from fundamental no-arbitrage relationships, we disentangle the government bonds' yields into a risk-free rate, the government's credit spread as well as its country - or even instrument-specific market liquidity spread for bonds with five years to maturity. At first, univariate extreme value theory (EVT) is applied to each member state individually to examine the distributional characteristics of extreme risk factor returns (tail risk) during the recent financial market crises between 2008 and 2016. Furthermore, the paper analyzes multivariate risk factor dependencies for each member state. We calculate joint exceedance probabilities for high quantiles for each of the three bivariate risk factor combinations and estimate dependence parameters of various, mainly extreme-value copulas for increasing thresholds to study tail dependence. Finally, we test the goodness-of-fit of the estimated parametric copulas and conclude which copula works best in modelling extremal dependence between interest rate risk, credit risk, and market liquidity risk factor changes during severe financial market turmoil.

Bank panics and scale economies

A bank panic is an expectation-driven redemption event that results in a self-fulfilling prophecy of losses on demand deposits. From the standpoint of theory in the tradition of Diamond and Dybvig (1983) and Green and Lin (2003), it is surprisingly difficult to generate bank panic equilibria if one allows for a plausible degree of contractual flexibility. A common assumption employed in the standard banking model is that returns are linear in the scale of investment. Instead, we assume the existence of a fixed investment cost, so that a higher risk-adjusted rate of return is available only if investment exceeds a minimum scale requirement. With this simple and empirically-plausible modification to the standard model, we find that bank panic equilibria emerge easily and naturally, even under highly flexible contractual arrangements. While bank panics can be eliminated through an appropriate policy, it is not always desirable to do so. We use our model to examine a number of issues, including the likely effectiveness of recent financial market regulations. Our model also lends some support for the claim that low-interest rate policy induces a “reach-for-yield” phenomenon resulting in a more panic-prone financial system.

Brexit and world growth – what are the risks?

The initial global market reaction to the UK Brexit vote was very negative and in our view overdone. Nevertheless, we expect the uncertainty to linger for a while, with the vote having refocused investors on existing vulnerabilities in the world economy. Our new forecasts see the main negative impacts on growth being in the UK, the Eurozone and Japan. Risks to our new forecasts remain skewed to the downside, with a significant danger of world growth dropping below 2% this year. Our new forecasts see UK growth dropping to 1.4% a year in 2017–18, down from 2.2–2.3% a year before. In the Eurozone, growth will be around 0.2% a year weaker in 2017–18 and Japan is also a loser as a result of the risk aversion‐driven stronger yen, with growth at just 0.3% in 2017 from 0.5%. The size of the initial global market sell‐off makes no sense in the context of the likely impact from a weaker UK. In part, it seems to have reflected the pricing in of very negative scenarios in the Eurozone. But investors may also be worrying about other global problems glossed over in recent months. One risk to our forecast is that confidence effects on businesses and consumers are larger than we expect – but such effects are often overstated. Another danger is that more of the recent financial market weakness will ‘stick’ than our new baseline forecasts assume. Our world recession indicator is already at elevated levels and suggests a significant danger of world growth slipping below 2% this year; not a recession, but it might feel like one. Global policymakers need to act quickly to head off the risks.

What does money and credit tell us about real activity in the United States?

We analyse the forecasting power of different monetary aggregates and credit variables for US GDP. Special attention is paid to the influence of the recent financial market crisis. For that purpose, in the first step we use a three-variable single-equation framework with real GDP, an interest rate spread and a monetary or credit variable, in forecasting horizons of one to eight quarters. This first stage thus serves to pre-select the variables with the highest forecasting content. In a second step, we use the selected monetary and credit variables within different VAR models, and compare their forecasting properties against a benchmark VAR model with GDP and the term spread (and univariate AR models). Our findings suggest that narrow monetary aggregates, as well as different credit variables, comprise useful predictive information for economic dynamics beyond that contained in the term spread. However, this finding only holds true in a sample that includes the most recent financial crisis. Looking forward, an open question is whether this change in the relationship between money, credit, the term spread and economic activity has been the result of a permanent structural break or whether we might return to the previous relationships.

Volatility transmission in African foreign exchange markets

Purpose – The concept of volatility transmission and co-movement has witnessed a resurgence in the international finance literature in recent years after the black swan events which gave evidence of financial market linkages. The purpose of this paper is to examine the dynamic sources of volatility transmission in the foreign exchange market in recent financial market integration in Africa. Design/methodology/approach – A conceptual framework was adapted from the extant literature and was used as the basis of modeling exchange rate volatility transmission. This paper adopts a quantitative research approach and opts for augmented DCC model to empirically unearth the sources of exchange rate volatility transmission. Findings – The key findings of the study are that, the African market is more prone to shock from outside than in the region. Macroeconomic news surprises influence volatility transmission and co-movements. Robust support is found for trade balance, interest rate and gross domestic product. These findings clearly demonstrate the low level of financial development and challenges that sometimes exist in exchange rate-policy implementation by policy makers. Research limitations/implications – Interested academics and practitioners working in the area might incorporate bilateral investment into the model of exchange rate correlation in future research. Originality/value – Unilaterally considering exchange rate volatility transmission and subsequent augmentation of the DCC model, this study makes a modest contribution to the examination of exchange rate correlations in Africa. This study makes an important contribution in not only addressing this imbalance, but more importantly improving the relative literature on exchange rate volatility transmission.