nep-fmk New Economics Papers
on Financial Markets
Issue of 2016‒09‒04
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Dynamic Leverage Asset Pricing By Adrian, Tobias; Moench, Emanuel; Shin, Hyun Song
  2. Investor-Stock Decoupling in Mutual Funds By Ferreira, Miguel; Massa, Massimo; Matos, Pedro Pinto
  3. The Complexity of Liquidity: The Extraordinary Case of Sovereign Bonds By Jacob Boudoukh; Jordan Brooks; Matthew Richardson; Zhikai Xu

  1. By: Adrian, Tobias; Moench, Emanuel; Shin, Hyun Song
    Abstract: We empirically investigate predictions from alternative intermediary asset pricing theories. The theories distinguish themselves in their use of intermediary equity or leverage as pricing factors or forecasting variables. We find strong support for a parsimonious dynamic pricing model based on broker-dealer leverage as the return forecasting variable and shocks to broker-dealer leverage as a cross-sectional pricing factor. The model performs well in comparison to other intermediary asset pricing models as well as benchmark pricing models in linear and nonlinear specifications. We find little empirical support for pricing models using intermediary equity as state variable.
    Keywords: intermediary asset pricing; Leverage Cycles; Macro-Finance
    JEL: G10 G12
    Date: 2016–08
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:11466&r=fmk
  2. By: Ferreira, Miguel; Massa, Massimo; Matos, Pedro Pinto
    Abstract: We investigate whether mutual funds whose investors and stocks are decoupled (i.e., investor location does not coincide with that of the stock holdings) benefit from a natural hedge as they have fewer outflows during market downturns and fewer inflows during upturns. Using a sample of equity mutual funds from 26 countries, we find that funds with higher investor-stock decoupling exhibit higher performance and this is more pronounced during the 2007-2008 financial crisis. We also find that decoupling allows fund managers to take less risk, be more active, and tilt their portfolios toward smaller and less liquid stocks.
    Keywords: Fund flows; Limits to Arbitrage; Mutual funds; Performance; Risk Taking
    JEL: G20 G23
    Date: 2016–08
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:11476&r=fmk
  3. By: Jacob Boudoukh; Jordan Brooks; Matthew Richardson; Zhikai Xu
    Abstract: It is well-documented that government bonds with almost identical cash flows can trade at different prices. The explanation is that due to higher liquidity the most recently issued bond tends to trade at a premium to previously issued bonds. This paper analyzes the cross-section of bond spreads across developed countries over a 17-year time period. Indeed, liquidity has commonality across countries in the expected direction. However, the paper documents a novel finding that questions the standard view of liquidity. Under certain conditions, especially related to credit deterioration and flight to quality, new issue bond spreads tighten and can be negative. In other words, the liquid bonds become cheaper, not more expensive, relative to their less liquid counterparts. We offer an explanation based on price pressure and provide empirical support using data on net flows of investors in sovereign bonds. Of some interest, we are able to reconcile the differential behavior of bond spreads of the U.S. and Germany versus Belgium, Spain and Italy during the Eurozone crisis period.
    JEL: F3 G1 G12 G15
    Date: 2016–08
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:22576&r=fmk

This nep-fmk issue is ©2016 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at http://nep.repec.org. For comments please write to the director of NEP, Marco Novarese at <director@nep.repec.org>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.