How does trading volume affect financial return distributions?

© 2014 Elsevier Inc.All rights reserved. We assess investors' reaction to new information arrivals in financial markets by examining the relationships between trading volume and the higher moments of returns in 18 international equity and currency markets. Our volume-volatility results support extant information theories and further contribute new evidence of cross market relations between volume and volatility. We also find that the direct impact of volume on the level of negative skewness is less significant for more diversified regional portfolios. Furthermore, the negative interaction between volume and kurtosis can be explained by the differences of opinion in financial markets. We observe stronger interdependence among higher moments in reaction to significant events, but the strength is dampened by trading volume. This result is consistent with trading volume being a source of heteroskedasticity in asset returns

Volatility spillovers and carbon price in the Nordic wholesale electricity markets

This paper investigates price volatility and spillovers in the Nordic electricity wholesale markets. We use the Time-Varying Parameter Vector Autoregressive (TVP-VAR), Rolling Window-based VAR (RW-VAR), and high dimensional VAR with common factors (VAR-CF) methods and analyze the integration dynamics among these markets and impact of carbon prices on volatility spillovers. We use 107,352 hourly price data from January 2010 to March 2022. The novelty of this research is four-fold. First, we adopt a connectedness approach to explore volatility interactions among the four Nordic markets, contributing to the scarce literature on volatility in this market. Second, we segment the Norwegian market into southern and northern regions, revealing differences in volatility spillover patterns. Third, we investigate the effect of carbon prices on volatility spillovers and market dynamics. Last, we show significant contribution of covariances to interdependence among markets. We find significant connectedness between the Nordic markets, with an average Total Connectedness Index of between 50% (with a system of variance) and 90% (with a system of both variance and covariance). Sweden is the sole net volatility spillover transmitter, while Denmark experiences the largest shocks from the system. We further find that carbon prices exert a 5% significant impact on the volatility spillover index.fals

Tail risk connectedness between DeFi and Islamic assets and their determinants

This study explores tail risk spillover between DeFi and Islamic assets using a time-frequency domain approach. We also conduct sub-sample analyses to account for the diverse impacts of COVID-19 and the Russian-Ukrainian conflict on financial markets. Recognizing the importance of global factors in financial market interdependencies, this research also assesses their impacts on tail risk connections. Empirical findings reveal varying levels of total connectedness among DeFi assets, sukuk markets, and Islamic equity indexes across different time spans, indicating a moderate but fluctuating degree of integration. DeFi assets generally appear disconnected from sukuk and Islamic stock markets over various periods, with the notable exception of a strong and consistent link between SNX in the DeFi sector and sukuk markets (excluding the Indonesian market) over medium- and long-term durations, suggesting that both DeFi and Islamic assets have hedging capabilities. Additionally, the integration between DeFi and Islamic assets is weaker during the COVID-19 era compared to the Russian-Ukrainian conflict period, with changes in the transmission mechanism. Further analysis identifies several potential predictors of tail risk connectedness between DeFi and Islamic assets. Our findings have significant risk management implications for investors and DeFi companies.fals

Electricity market crisis in Europe and cross border price effects: A quantile return connectedness analysis

As the interconnection of the European electricity markets and integration of renewables progresses, there is little known about interconnectedness across them at times of market turbulence. The electricity crisis of 2021 and 2023 were significant events that can also provide lessons in the behaviour of integrated markets with high renewables under stress. Despite the impacts of the COVID-19 pandemic and the Russia-Ukraine war on the European energy market, little is known about their effects on the transmission of risks between the electricity markets. We employ the quantile connectedness approach to quantify the return connectedness between eleven key European markets, as well as the natural gas and carbon markets. We then examine the effect of the two crises on the interconnectedness. We find significant return interconnectedness, driven by spillover effects, among the markets. Analysis of connectedness across quantiles shows that the spillover effects are much stronger at tail ends of conditional distribution. Moreover, our results reveal opposite effects from crises on market interconnectedness. While the COVID-19 pandemic reduced the interconnectedness, the Russia-Ukraine war intensified the return shock transmission. Finally, we find that the natural gas and carbon markets are net recipients of return shocks across the quantiles.fals

Does the U.S. export inflation? Evidence from the dynamic inflation spillover between the U.S. and EAGLEs

Given the crucial role of inflation as a key economic barometer, our paper investigates the dynamic inflation spillover between the U.S. and the nine emerging and growth-leading economies (EAGLEs) between 1991M1 and 2020M2. Employing the recently developed time-varying parameter vector autoregressions (TVP-VAR)-based connectedness approach, we find evidence of a moderate inflation spillover across the sample countries at normal condition. We further point out that inflation spillover effects with the U.S. are more pronounced for the emerging markets with higher openness, the net oil-importing emerging markets, and the emerging markets following free-float exchange rate regimes. More importantly, the inflation spillover index among the system rises dramatically to over 70% under extremely inflationary conditions, implying that the transmission of spiral inflation is very high. Additionally, the time-varying analysis shows that the role of the U.S. in the inflation shock transmission with emerging countries varies between being a net inflation-exporter and inflation-importer over times. Finally, an investigation of the drivers of the inflation spillovers reveals that the U.S. dollar, emerging markets' economic policy uncertainty, and bilateral trade are key determinants of the inflation shock transmission among the system. Our findings justify central banks’ actions in decreasing U.S. dollar reserves to safeguard their domestic currencies.fals

When Hollywood movies steal the show, stock returns dance more with the market!

Hollywood film releases attract U.S. investors' attention away from the financial markets. This is reflected in lower trading activity and abnormal Google search volume for firm names between film and non-film days. The resultant investor inattention leads to a significantly higher stock return comovement with the market on film release days. Interestingly, films with A-list star actors and blockbuster movies exhibit a more pronounced impact than their counterparts. Finally, we show that being aware of this Hollywood film-induced mispricing can yield an annualized abnormal risk-adjusted return of up to 13.5% within five days around the release events.fals

Asymmetric trading responses to credit rating announcements from issuer- versus investor-paid rating agencies

The credit rating industry has traditionally followed the “issuer-pays” principle. Issuer-paid credit rating agencies (CRAs) have faced criticism regarding their untimely release of negative rating adjustments, which is attributed to a conflict of interests in their business model. An alternative model based on the “investor-pays” principle is arguably less subject to the conflict of interest problem. We examine how investors respond to changes in credit ratings issued by these two types of CRAs. We find that investors react asymmetrically: They abnormally sell equity stakes around rating downgrades by investor-paid CRAs, while abnormally buying around rating upgrades by issuer-paid CRAs. Our study suggests that, through their trades, investors capitalize on value-relevant information provided by both types of CRAs, and a dynamic trading strategy taking advantage of this information generates significant abnormal returns

Asymmetric trading responses to credit rating announcements from issuer- versus investor-paid rating agencies

The credit rating industry has traditionally followed the “issuer-pays” principle. Issuer-paid credit rating agencies (CRAs) have faced criticism regarding their untimely release of negative rating adjustments, which is attributed to a conflict of interests in their business model. An alternative model based on the “investor-pays” principle is arguably less subject to the conflict of interest problem. We examine how investors respond to changes in credit ratings issued by these two types of CRAs. We find that investors react asymmetrically: They abnormally sell equity stakes around rating downgrades by investor-paid CRAs, while abnormally buying around rating upgrades by issuer-paid CRAs. Our study suggests that, through their trades, investors capitalize on value-relevant information provided by both types of CRAs, and a dynamic trading strategy taking advantage of this information generates significant abnormal returns.fals

Portfolio's weighted political risk and mutual fund performance: A text-based approach

Using text-based measures of firm-level political risk, we find a negative impact of the portfolio's weighted political risk on U.S. mutual fund performance. This relationship is robust to a wide range of topic-specific political risks at the firm level. We, however, find that national geopolitical risk, the U.S. state-level economic policy uncertainty, and Brexit-induced risk do not affect mutual fund performance. Our results suggest that even though mutual funds are immune from political risk at the macro level, they are significantly exposed to idiosyncratic political risk. We also demonstrate that partisanship matters to mutual fund performance.fals

Dual coding with STDP in a spiking recurrent neural network model of the hippocampus.

The firing rate of single neurons in the mammalian hippocampus has been demonstrated to encode for a range of spatial and non-spatial stimuli. It has also been demonstrated that phase of firing, with respect to the theta oscillation that dominates the hippocampal EEG during stereotype learning behaviour, correlates with an animal's spatial location. These findings have led to the hypothesis that the hippocampus operates using a dual (rate and temporal) coding system. To investigate the phenomenon of dual coding in the hippocampus, we examine a spiking recurrent network model with theta coded neural dynamics and an STDP rule that mediates rate-coded Hebbian learning when pre- and post-synaptic firing is stochastic. We demonstrate that this plasticity rule can generate both symmetric and asymmetric connections between neurons that fire at concurrent or successive theta phase, respectively, and subsequently produce both pattern completion and sequence prediction from partial cues. This unifies previously disparate auto- and hetero-associative network models of hippocampal function and provides them with a firmer basis in modern neurobiology. Furthermore, the encoding and reactivation of activity in mutually exciting Hebbian cell assemblies demonstrated here is believed to represent a fundamental mechanism of cognitive processing in the brain