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on Financial Markets |
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Issue of 2018‒02‒19
five papers chosen by |
| By: | Martin Lettau; Ananth Madhavan |
| Abstract: | Exchange-traded funds (ETFs) represent one of the most important financial innovations in decades. An ETF is an investment vehicle that trades intraday and seeks to replicate the performance of a specific index. In recent years ETFs have grown substantially in assets, diversity, and market significance. This growth reflects the rise in passive asset management where investors seek to track a benchmark index rather than outperform the market as a whole. As a consequence, there is increased attention by investors, regulators, and academics seeking to assess and understand the implications of this rapid growth. This article explains the key drivers of ETF growth and their implications for economists and policy makers. |
| JEL: | G0 G12 G2 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24250&r=fmk |
| By: | Söhnke M. Bartram; Gregory W. Brown; René M. Stulz |
| Abstract: | Since 1965, average idiosyncratic risk (IR) has never been lower than in recent years. In contrast to the high IR in the late 1990s that has drawn considerable attention in the literature, average market-model IR is 44% lower in 2013-2017 than in 1996-2000. Macroeconomic variables help explain why IR is lower, but using only macroeconomic variables leads to large prediction errors compared to using only firm-level variables. As a result of the dramatic change in the number and composition of listed firms since the late 1990s, listed firms are larger and older. Larger and older firms have lower idiosyncratic risk. Models that use firm characteristics to predict firm-level idiosyncratic risk estimated over 1963-2012 can largely or completely explain why IR is low over 2013-2017. The same changes that bring about historically low IR lead to unusually high market-model R-squareds. |
| JEL: | G10 G11 G12 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24270&r=fmk |
| By: | Dison, Will (Bank of England); Theodoridis, Konstantinos (Bank of England) |
| Abstract: | We investigate the role of macroeconomic shocks in driving equity price dynamics, focusing in particular on the United Kingdom as a small open economy. Using a vector error correction model estimated on 34 macroeconomic and financial time series, we show that shocks to demand, supply, monetary policy and total factor productivity account for a significant proportion of the variation in both UK and US equity prices. In contrast to some of the earlier literature, we find that shocks to total factor productivity play a particularly important role in explaining equity price movements, particularly at longer horizons. Reflecting the international nature of the FTSE All-Share, we find that most of the variation in UK equity prices is accounted for by foreign shocks, even for relatively UK-focused sectors. |
| Keywords: | Asset prices; stock markets; open economy macroeconomics; small open economies; international financial markets; financial forecasting |
| JEL: | E44 F41 G15 G17 |
| Date: | 2017–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0692&r=fmk |
| By: | Dieci, Roberto; Schmitt, Noemi; Westerhoff, Frank H. |
| Abstract: | We develop a model in which investors can participate in stock, bond and housing markets. Investors' market entry decisions are subject to herding effects and depend on the markets' price trends and on their mispricings. The dynamics of our model is governed by a four-dimensional nonlinear map and its unique inner steady state is characterized by standard present-value relations between dividends, rents and the bond rate. Amongst other things, we show that endogenous stock and housing market dynamics emerge, countercyclical to each other, if investors react strongly to the markets' price trends. Such a cross feedback reflects investors' tendency to transfer their enthusiasm from one speculative market to another. |
| Keywords: | stock markets,housing markets,bond markets,bounded rationality,market interactions,nonlinear dynamics |
| JEL: | D84 G12 R21 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bamber:133&r=fmk |
| By: | Antje Berndt; Rohan Douglas; Darrell Duffie; Mark Ferguson |
| Abstract: | We measure credit risk premia - prices for bearing corporate default risk in excess of expected default losses - using Markit CDS and Moody’s Analytics EDF data. We find dramatic variation over time in credit risk premia, with peaks in 2002, during the global financial crisis of 2008-09, and in the second half of 2011. Even after normalizing these premia by expected default losses, median credit risk premia fluctuate over time by more than a factor of ten. Credit risk premia comove with macroeconomic indicators, even after controlling for variation in expected default losses, with higher premia per unit of expected loss during times of market-wide distress. Countercyclical variation of premia-to-expected-loss ratios is more pronounced for investment-grade issuers than for high-yield issuers. |
| JEL: | G12 G13 G22 G24 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24213&r=fmk |