nep-fmk New Economics Papers
on Financial Markets
Issue of 2018‒09‒24
seven papers chosen by

  1. Optimal fund menus By Cvitanic, Jaksa; Hugonnier, Julien
  2. Determinants of the Performance of Microfinance Institutions: A Systematic Review By Niels Hermes; Marek Hudon
  3. Have Capital Market Anomalies Worldwide Attenuated in the Recent Era of High Liquidity and Trading Activity? By Benjamin R. Auer; Horst Rottmann
  4. Stock price crashes: Role of slow-moving capital By Getmansky, Mila; Jagannathan, Ravi; Pelizzon, Loriana; Schaumburg, Ernst; Yuferova, Darya
  5. Monetary Policy after the Crisis: Threat or Opportunity to Hedge Funds' Alphas? By Alexander Berglund; Massimo Guidolin; Manuela Pedio
  6. Spurious Cross-Sectional Dependence in Credit Spread Changes By Jaskowski, M.; McAleer, M.J.
  7. Portfolio similarity and asset liquidation in the insurance industry By Girardi, Giulio; Hanley, Kathleen Weiss; Nikolova, Stanislava; Pelizzon, Loriana; Getmansky, Mila

  1. By: Cvitanic, Jaksa; Hugonnier, Julien
    Abstract: We study the optimal design of a menu of funds by a manager who is required to use linear pricing and does not observe the preferences of investors regarding one of the risky assets. The optimal menu involves bundling of assets and is explicitly constructed from the solution to a calculus of variations problem that optimizes over the indirect utilities that each type of investor receives. We show that the need to maintain incentive compatibility leads the manager to behave as a closet indexer by offering funds that are inefficiently tilted towards the asset not subject to the information friction.
    Keywords: closet indexing.; linear pricing; Mutual fund menus; screening
    JEL: C62 C71 D42 D82 G11
    Date: 2018–08
  2. By: Niels Hermes; Marek Hudon
    Abstract: Microfinance institutions (MFIs) generally aim at improving the access of the poor to financial services while at the same time being financially sustainable. But what do we know about how MFIs reach and combine these two goals? We carry out a systematic review of close to 170 articles discussing the determinants of the financial and social performance of MFIs. The review shows that the most important determinants addressed in the literature are MFI characteristics (size, age, type of organization), their funding sources, the quality of organizational governance and the MFIs’ external context such as macroeconomic, institutional and political conditions. The evidence on these issues is rather mixed. Moreover, the direction of the relationship between these drivers and MFI performance depends on the context, particularly the country-specific context. Finally, there is a lack of consensus in the literature on the measurement of financial and social performance. Due to the complexity of the concept, we argue that social performance should only be assessed by using a multidimensional perspective. This can be done either by applying recent and holistic social performance measures such as the SPI4, or at least by using a combination of proxies, such as outreach, gender and rural measures.
    Keywords: microfinance; performance; social performance; governance; microcredit
    JEL: B00 O16 Q14
    Date: 2018–06–25
  3. By: Benjamin R. Auer; Horst Rottmann
    Abstract: We revisit and extend the study by Chordia et al. (2014) which documents that, in recent years, increased liquidity has significantly decreased exploitable returns of capital market anomalies in the US. Using a novel international dataset of arbitrage portfolio returns for four well-known anomalies (size, value, momentum and beta) in 21 developed stock markets and more advanced statistical methodology (quantile regressions, Markov regime-switching models, panel estimation procedures), we arrive at two important findings. First, the US evidence in the above study is not fully robust. Second, while markets worldwide are characterised by positive trends in liquidity, there is no persuasive time-series and cross-sectional evidence for a negative link between anomalies in market returns and liquidity. Thus, this proxy of arbitrage activity does not appear to be a key factor in explaining the dynamics of anomalous returns.
    Keywords: capital market anomalies, attenuation, liquidity, quantile regression, Markov regime-switching, panel analysis
    JEL: G14 G15
    Date: 2018
  4. By: Getmansky, Mila; Jagannathan, Ravi; Pelizzon, Loriana; Schaumburg, Ernst; Yuferova, Darya
    Abstract: We study the role of various trader types in providing liquidity in spot and futures markets based on complete order-book and transactions data as well as cross-market trader identifiers from the National Stock Exchange of India for a single large stock. During normal times, short-term traders who carry little inventory overnight are the primary intermediaries in both spot and futures markets, and changes in futures prices Granger-cause changes in spot prices. However, during two days of fast crashes, Granger-causality ran both ways. Both crashes were due to large-scale selling by foreign institutional investors in the spot market. Buying by short-term traders and cross-market traders was insufficient to stop the crashes. Mutual funds, patient traders with better trade-execution quality who were initially slow to move in, eventually bought sufficient quantities leading to price recovery in both markets. Our findings suggest that market stability requires the presence of well-capitalized standby liquidity providers.
    Keywords: Liquidity Provision,Market Fragility,Flash Crash,Slow-Moving Capital
    JEL: G12 G14
    Date: 2018
  5. By: Alexander Berglund; Massimo Guidolin; Manuela Pedio
    Abstract: We examine the effects of U.S. monetary policy announcements during and after the Great Financial Crisis on the average abnormal returns (the “alpha”) of the hedge fund industry as a whole and of a range of hedge strategy indices. We apply a variety of tests of increasing sophistication including simple event studies, formal tests for breaks, and Markov switching models. The event studies show that both the overall index and longshort equity and fixed income arbitrage hedge strategies were systematically affected by unexpected monetary policy announcements while other strategies appear to have been less impacted. Formal break point tests show that for all but one strategies as well as the overall index, there is evidence of five breakpoints. For the overall index and most of the sub-indices many of the endogenously determined breaks closely match a list of policy surprise dates that have been already singled out because they had strongly affected financial markets in general. Especially for the long-short equity, fixed income arbitrage, dedicated short-bias, and global macro hedge funds, there is a significant tendency for estimated alphas decline over time, following policy surprises.
    Keywords: monetary policy announcements, hedge fund alpha, abnormal returns, financial crisis
    Date: 2018
  6. By: Jaskowski, M.; McAleer, M.J.
    Abstract: In order to understand the lingering credit risk puzzle and the apparent segmentation of the stock market from credit markets, we need to be able to assess the strength of the cross-sectional dependence in credit spreads. This turns out to be a non-trivial task due to the extreme data sparsity that is typical for any panel of credit spreads that is extracted from corporate bond transactions. The problem of data sparsity has led to some erroneous conclusions in the literature, including inferences that have been drawn from spurious cross-sectional dependence in credit spread changes. Understanding the pitfalls leads to a new and improved estimator of the latent factor in credit spread changes and its characteristics.
    Keywords: Credit spread puzzle, Market segmentation, Latent factors, Spurious cross-sectional dependence
    JEL: G12 G13 G17 E43
    Date: 2018–08–01
  7. By: Girardi, Giulio; Hanley, Kathleen Weiss; Nikolova, Stanislava; Pelizzon, Loriana; Getmansky, Mila
    Abstract: An important assumption underlying the designation of some insurers as systemically important is that their overlapping portfolio holdings can result in common selling. We measure the overlap in holdings using cosine similarity, and show that insurers with more similar portfolios have larger subsequent common sales. This relationship can be magnified for some insurers when they are regulatory capital constrained or markets are under stress. When faced with an exogenous liquidity shock, insurers with greater portfolio similarity have even larger common sales that impact prices. Our measure can be used by regulators to predict which institutions may contribute most to financial instability through the asset liquidation channel of risk transmission.
    Keywords: Interconnectedness,Asset Liquidation,Similarity,Financial Stability,Insurance Companies,SIFI
    JEL: G11 G18 G2
    Date: 2018

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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.