Financial market activity under capital controls: Lessons from extreme events

Financial market activity under capital controls: Lessons from extreme events

Konstantinos Gkillas Patras University Article on capital controls

This post presents a recent article by Gkillas and Longin published in Economics Letters (2018). In this article we investigate the relation between extreme return and transaction volume under the restrictions on transactions. We use bivariate extreme value theory to model the tail dependence structure. We show that restrictions on transactions have an impact on the activity of market participants.

The market activity and, therefore, the behavior of market participants is measured by the transaction volume. The stylized fact assumes a positive correlation between returns and volumes. However, contradictory results are obtained considering extremely volatile periods.

Such periods in combination with a financial crisis of a domestic origin, like the Greek crisis, can lead to strict intervention policies such as capital controls. The sovereign debt crisis in Greece led to the use of a financial support rescue mechanism by the European Monetary Union and the International Monetary Fund early in 2010. The domestic authorities imposed several restrictions on transactions. The Athens Stock Exchange stopped trading for more than two months and then opened to a dramatic decline. Greece became one of the few cases of a Eurozone country implementing such austerity policies.

In our work, we show that these long-term restrictions can be avoided. To this end, we apply bivariate extreme value theory. We show that capital controls have a significant negative impact on the activity of market participants. Therefore, we propose an automatic intra-day circuit-breaker mechanism when the market moves downwards and exceeds a specific threshold, in order to avoid not only the panic selling but long-term distortions for closing of the market.

Gkillas K. and F. Longin (2018) “Financial market activity under capital controls: lessons from extreme events” Economics Letters, 171C, 10-13.

You can download this paper via the following link: https://authors.elsevier.com/c/1XLFobZedijjr

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Mathematics for Industry: Blockchain & Cryptocurrencies Conference

Mathematics for Industry: Blockchain & Cryptocurrencies Conference

A one-day conference Mathematics for Industry: Blockchain and Cryptocurrencies is due to be held in the School of Mathematics at the University of Manchester, UK, on 8th September 2018.

The aim of the workshop is to strengthen the ties and bridge the gap between academics and industry, and also enthusiasts. This will provide an opportunity to promote and share recent research and developments in the relatively new area of blockchain and cryptocurrencies. The workshop will feature invited talks from academics and those in industry, in addition to contributed talks and a poster session.

This conference will allow us to learn about how these two key tools are being used by both sides, and how academic research can support work in industry. The meeting will also strengthen and promote mathematics for industry regionally, in the UK, across the EU, and also in the Middle East.

Conference Blockchain Cryptocurrencies

Prof. François Longin
ESSEC Business School

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Congratulations to Shashwat Gangwal for his best award paper

Congratulations to Shashwat Gangwal for his best award paper

Prof. François Longin

It seems that Bitcoin is a hot topic these days. In fact, many of my students at ESSEC Business School have invested (real) money in cryptocurrencies. When I started to do research on the behavior of Bitcoin prices, especially extreme price movements, the topic was not so trendy…

Research paper

Since the introduction of Bitcoin in 2010, Bitcoin prices have shown dramatic volatility. It is associated with impressive booms and crashes. I’ve written a research paper on the subject with Shashwat Gangwal. Shashwat is an extremely bright undergraduate student at Indian Institute of Technology Kharagpur. In our paper, we use extreme value theory to investigate the statistical distribution of extreme price movements. We also compute risk measures commonly used in both risk and asset management by financial institutions. We also draw some conclusions about the status of Bitcoin as a currency or a speculative asset and how governments should deal with it.

Best award paper

I am extremely pleased to announce that Shashwat received the “Best Paper Award” at the International Conference on Finance and Economics Research in Prague 2018. It was conferred on Shashwat by Professor Jiří Strouhal, who’s been a President of Association of Czech Professional Accountants since 2011.

Congratulations to Shashwat for this astonishing performance!

Financial markets

Prof. François Longin
ESSEC Business School

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