Climate‐related risks in financial assets

The integrity and credibility of financial statements are sensitive aspects that significantly influence the investors’ confidence in the capital market efficiency. Recent research in the area of (re)establishing effective communication between the auditor and the investors have brought into the attention of audit practitioners the provisions of International Standard on Auditing (ISA) 701 “Communicating Key Audit Matters in the Independent Auditor’s Report.” This approach proves that investors demand more information that accompanies the audit opinion, when forming a decision to buy, hold or sell equity instruments. Our research is focused on identifying, isolating and analyzing the significant changes in financial asset trading prices, as a consequence of publishing the auditor report. Thus, the overall objective is to assess the impact of the modified opinion, expressed by the auditor in accordance with ISA 705 “Modifications to the Opinion in the Independent Auditor’s Report”, upon the prices of financial assets. Subsequently, the specific objectives aim to identify quantifiable adjustments in the financial position of the entities and to analyze its impact on trading prices. Research is focused on a sample that consists of 32 listed entities, of which 25 entities are included in the BET-XT index and seven entities are traded on the alternative trading system AeRO, selected in relation to the liquidity degree measured by the BVB market operator. Our observations upon changes in financial asset prices were focused on 2009-2017 period, while the analized audit reports addressed the reporting periods from 2008 to 2016, included.

The daily relationship between U.S. asset prices and stock prices of American countries

Economic policy touches most facets of corporate decision-making and variations in policy can elicit significant changes in financial performance and asset prices. We utilize the economic policy uncertainty (EPU) measure of Baker et al. to investigate the extent to which policy uncertainty influences Australian financial market returns. Our empirical results demonstrate that both domestic and global uncertainty have a significant negative impact on excess stock returns, changes in bond yields and Australian dollar (AUD) returns. The relationship is concentrated in the left tail of the return distribution and largely driven by increases in policy uncertainty. Although the identified relationship is negative throughout the sample period, the magnitude of the relationship appears to be state dependent and is influenced by periods of high uncertainty, recession and the lead-up to federal elections. The most plausible explanation for our results is that uncertainty about economic policy is channelled to financial markets via the discount rate effect, resulting in a higher risk premium. Our results are important for investors, corporate managers and policy makers wishing to navigate periods of policy uncertainty. JEL Classification: G10, G12, G14, G15

Identifying Uncertainty Shocks Due to Geopolitical Swings in Korea

With goods prices being sticky, monetary impulses are initially transmitted to the real economy via changes in asset prices; and asset price fluctuations can independently affect monetary and real developments. Most empirical models try to incorporate such monetary–asset price interactions by the inclusion of a short‐term interest rate and the exchange rate, but there are good reasons to doubt the sufficiency of this. Here we examine whether the predictive power of a reduced form equation for inflation, including standard explanatory variables, can be improved by adding other asset price variables, i.e. the changes in housing and equity prices and a yield spread. In our cross‐country time series exercise, we find that housing price movements do provide useful extra information on future inflation, with equity prices and the yield spread being somewhat less informative.

We argue that there are sound theoretical reasons for believing that an inflation targeting central bank might improve macroeconomic performance by reacting to asset price misalignments over and above the deviation of, say, a two-year ahead inflation forecast from target. In this paper, we first summarize the arguments for our basic proposition. We then discuss some of the counter-arguments. Specifically, we counter those who argue that reacting to asset prices does not improve macroeconomic performance by claiming that they are attacking the 'straw man' under which central bankers react in the same way to all asset price changes. We continue to emphasize that policy reactions to asset price misalignments must be qualitatively different from reactions to asset prices changes driven by fundamentals. Hence, we stand by our earlier results and conclusions. In practice, we do believe that central bankers can detect large misalignments (e.g. the Nikkei in 1989 or the NASDAQ in early 2000), and that they might be in a better position to react to long-lived bubbles than many market participants. However, we recognize that our proposal may present communication challenges, and it is critically important that policy set to react to asset price misalignments both be explained well and that it be based on a broad consensus. It is also important to emphasize that our proposal is wholly consistent with the remit of most inflation-targeting central banks, as we are recommending that while they might react to asset price misalignments, they must not target them.

Using longitudinal data which include real estate wealth, financial assets as well as consumer durables, changes in the distribution of wealth in Sweden are related to major changes in asset prices and in incentives to hold various assets in the 1980s and the beginning of the 1990s. Our analysis of the mobility of wealth indicates that decile mobility is higher in Sweden than in the U.S., while the analysis of who is gaining and who is loosing shows results similar to those of previous studies.

Household debt, heterogeneity and financial stability: Evidence from Kazakhstan

Movements in the prices of different assets are likely to directly influence one another. This paper develops a model that identifies the contemporaneous interactions between asset prices in U.S. financial markets by relying on the heteroskedasticity in their movements. In particular, we estimate a "structural-form GARCH" model that includes the short-term interest rate, the long-term interest rate, and the stock market. The results indicate that there are strong contemporaneous interactions between these variables. Accounting for this behavior is critical for interpreting daily changes in asset prices and for predicting the future paths of their variances and correlations. We demonstrate the importance of this consideration in a risk-management application.

Quantitative easing represents a variation of trickle-down economics. The presumption is that asset purchases by the Federal Reserve (Fed) benefit everyone. The policy involves increasing the prices of treasury bonds and mortgage-backed assets to stimulate output and employment. Quantitative easing acts on balance sheets. It works through the price system by affecting the structure of prices, and hence wealth. The unemployed, lacking assets, are not directly affected by changes in asset prices. The unemployed are dependent on policies that generate income. While Fed intervention prevented a collapse in asset prices, its effect on the real economy remains tenuous. Data suggests that the policy has exacerbated the inequality in the distribution of wealth and income, has done little to reduce unemployment, and has violated the principles of social justice. The policy contrast sharply with fiscal policy employed during WWII, which promoted greater equality in the distribution of income.

A model representing an asset price change as the sum of several random functions with different correlation properties is proposed. Its adequacy is substantiated and boundaries of its application are described. The random character of deterministic component of asset price set is defined on the basis of empirically established properties of the asset price and the exponential moving average graphs intersection. The function of price changes is presented as a random Markov process. The choice of the model adequacy evaluation method according to this hypothesis is substantiated. The synthesis of nonlinear filter is carried out to separate the deterministic component of the asset price changes function. The results of digital simulation of the synthesized filter algorithm are presented, and conclusion about hypothesis acceptance is made for limited conditions. The main research conclusion looks as follows: in limited time intervals it is possible and expedient to represent the asset price changes function as a sum of several random functions with different correlation properties. In particular, it is proposed to use random Markov process.

I. INTRODUCTION Over the past decade, the policy statements issued by the Federal Open Market Committee (FOMC) after each meeting have become an increasingly important element of monetary policy-making in the United States. These statements provide about the Fed's view on economic outlook, key forces that are likely to shape future developments and potential implications for monetary policy. Therefore, on policy announcement days, market participants monitor closely not only what the Fed does (interest rate decisions), but also what it says (FOMC statements). One striking example is the policy announcement of January 28, 2004, when the Fed kept its target rate unchanged (a move that was widely anticipated by the market), but unexpectedly altered the wording of the statement, causing one of the largest reactions on record in financial markets. Theoretically, central bank communication should not matter to market participants if the central bank is committed to an unchanged policy rule and the public has a perfect understanding of the rule, the objectives, and the thinking of the monetary authority. In reality, the central bank cannot possibly commit to an inflexible policy rule given that the number of contingent states is infinite (Blinder et al. 2008). Consequently, the public needs to estimate the policy function and because the central bank invariably knows more about its future moves, the dissemination of this is important to market participants. It appears that, at least in practice, market participants should pay attention to the content of FOMC statements. However, more does not always translate to greater clarity and ill-conceived statements confuse rather than enlighten. Kahneman (2003) argues that there are limits to how much can be digested effectively and more may reduce common understanding among market participants. Moreover, central bank communication may be welfare reducing if agents place too much weight on policy statements and too little on their own information, thus crowding-out private beliefs which are an important source of for the Fed (Amato, Morris, and Shin 2002; Morris and Shin 2002). In addition, the Fed may increase noise if it communicates on which it has imprecise knowledge--such as on future economic developments rather than the policy path. This paper contributes to a young but rapidly growing literature on central bank communication by evaluating the impact of the content of FOMC statements on the level and volatility of Treasuries and stock returns. To measure the information content, we assess the consensus view about the importance of the statements by collecting stories from three major sources right after a policy meeting. This allows us to group statements into two broad categories, and uninfor-mative, with informative statements delivering important which was not previously anticipated by the consensus. A priori, we expect asset prices to respond asymmetrically to the type of information, with informative statements generating a larger response. Figure 1 seems to confirm this idea: the chart plots changes in S&P 500 and Treasury yields around policy announcements with solid bars representing dates when the statement was informative. As seen, the largest asset price changes typically occur when a statement releases important information, which indicates that markets do react to the content. One reason for this oversized response is that the delivered by these statements creates news in the sense that the content is both important and unexpected. If the relates to future monetary policy, about which the Fed is expected to possess superior knowledge, then it should have a considerable impact on asset prices. However, statements routinely transmit the Fed's economic outlook which may be interpreted as an additional policy signal because this outlook presumably shapes the future course of monetary actions. …

Financial crisis in 2007-2008 have caused losses to life insurance companies issuing variable annuities with guarantees. This is partly due to failure of variable annuity (VA) issuers to anticipate the large variations in asset prices during the financial crisis times in their pricing framework and also setting a higher guaranteed rate. This study aims to investigate the pricing of the guaranteed minimum death and accumulation benefits embedded in flexible premium VA. We compare the prices from calibrated Black-Scholes model to that of calibrated jump-diffusion model. Although both models assume constant volatility, the fact that Black-Scholes model ignores abnormal asset price changes due to jumps is likely to under-price the VA. We also conduct a case study to analyse the impact on guarantee fees for different stock market performance and regional mortality rates.

Stocks, Bonds, Money Markets and Exchange Rates: Measuring International Financial Transmission

We investigate financial market correlations using random matrix theory and principal component analysis. We use random matrix theory to demonstrate that correlation matrices of asset price changes contain structure that is incompatible with uncorrelated random price changes. We then identify the principal components of these correlation matrices and demonstrate that a small number of components accounts for a large proportion of the variability of the markets that we consider. We characterize the time-evolving relationships between the different assets by investigating the correlations between the asset price time series and principal components. Using this approach, we uncover notable changes that occurred in financial markets and identify the assets that were significantly affected by these changes. We show in particular that there was an increase in the strength of the relationships between several different markets following the 2007-2008 credit and liquidity crisis.