Asset Returns and Financial Fragility

Financial Fragility , Liquidity , and Asset Prices

We de…ne a …nancial system to be fragile if small shocks have disproportionately large e¤ects. In a model of …nancial intermediation, we show that small shocks to the demand for liquidity cause either high assetprice volatility or bank defaults or both. Furthermore, as the liquidity shocks become vanishingly small, the asset-price volatility is bounded away from zero. In the limit economy, with...

The News in Financial Asset Returns

Federal Reserve Bank of Atlanta E C O N O M I C R E V I E W First Quarter 2004 A re returns on financial markets useful for predicting the future course of the economy? It is widely thought that financial markets’ movements reflect the economy’s future and that finding the message in financial asset returns is one way to discern this future. The message is not always clear, though. For example,...

Asset returns and volatility clustering in financial time series

An analysis of the stylized facts in financial time series is carried out. We find that, instead of the heavy tails in asset return distributions, the slow decay behaviour in autocorrelation functions of absolute returns is actually directly related to the degree of clustering of large fluctuations within the financial time series. We also introduce an index to quantitatively measure the cluste...

Financial Asset Returns, Direction-of-Change Forecasting, and Volatility Dynamics

W consider three sets of phenomena that feature prominently in the financial economics literature: (1) conditional mean dependence (or lack thereof) in asset returns, (2) dependence (and hence forecastability) in asset return signs, and (3) dependence (and hence forecastability) in asset return volatilities. We show that they are very much interrelated and explore the relationships in detail. A...

Governance and Financial Fragility