TITLE:
A Theoretical Appraisal of Elaborating a Stock Market Prudential Surveillance System Based on a Conceptual Model of Integration of the Financial Sectors and Market Risk Mitigation
AUTHORS:
Mohamed Miras Marzouki, Hella Guerchi Mehri
KEYWORDS:
Overreaction, Under-Reaction, Volatility, Prudential Regulation, Market Risk, Hedging, Efficiency, Investor Sentiment, Financial Stability, Macroprudential, Microprudential, Collision
JOURNAL NAME:
Modern Economy,
Vol.13 No.12,
December
27,
2022
ABSTRACT: This theoretical research investigates the
integration process between the two most prominent financial sectors the stock
market and the credit market and attempts to engineer an alternative prudential
toolkit shaped for stock market resilience from systemic risk and financial
instability and that complements the basic Basel II and III framework shaped
for the credit market. An analytical study will be conducted for the purpose of
engineering a stock market prudential surveillance system with both micro and
macro-prudential instruments, taking into account the integration constraints
and unveiling thereby the threats ensuing from excessive covariance between
stock returns. It finds evidence of theoretical arguments implying
amplification and offsetting of threats by interaction between prudential
instruments deployed simultaneously across sectors, for instance the credit
sector and the stock market sector and finds solutions to collusion of
interaction within the framework of elaborating instruments related to the
prudential engineering. This research holds that Pareto improvement in the
prevalence of market frictions introduced by prudential surveillance
instruments leaves room for resilience from the onslaught of market risk
entailed by sentiment driven speculation. Prudential surveillance fashioned
like Basel II and III for the scope of mitigating stock market vulnerability to
excessive volatility harbours some highly challengable presumptions regarding
the methodology to be persued for the sake of shaping the best methodological
approach to prudential engineering of instruments. The interaction process
between the proposed prudential scheme and monetary policy highlights one
additional challenging scope for central banking while shaping monetary policy
stance. This complementary prudential framework reinvigorates the Basel II and
III agreements which is specific to the credit sector and might reveal in
shortage of instruments providing surveillance on the sources of systemic
exposure whenever it is stemming from the stock market. This reinvigorating
toolkit thereby reinforces the surveillance instruments aimed at mitigating
financial instability in a more pervasive and comprehensive method.