nep-fmk New Economics Papers
on Financial Markets
Issue of 2019‒01‒07
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Characteristics of Mutual Fund Portfolios: Where Are the Value Funds? By Lettau, Martin; Ludvigson, Sydney; Manoel, Paulo
  2. How does stock market volatility react to oil shocks? By Andrea Bastianin; Matteo Manera
  3. Equilibrium Prices of the Market Portfolio in the CAPM with Incomplete Financial Markets By Chiaki Hara
  4. Private Information and Client Connections in Government Bond Markets By Peter Kondor; Gabor Pinter
  5. Household Stock Market Participation During the Great Financial Crisis By Jie Zhou
  6. GCC Sovereign Wealth Funds: Why do they Take Control? By Jeanne Amar; Jean-Francois Carpantier; Christelle Lecourt
  7. The impact of sovereign debt ratings on euro area cross-border holdings of euro area sovereign debt By Leo de Haan; Robert Vermeulen

  1. By: Lettau, Martin; Ludvigson, Sydney; Manoel, Paulo
    Abstract: This paper provides a comprehensive analysis of portfolios of active mutual funds, ETFs and hedge funds through the lens of risk (anomaly) factors. We show that that these funds do not systematically tilt their portfolios towards profitable factors, such as high book-to-market (BM) ratios, high momentum, small size, high profitability and low investment growth. Strikingly, there are virtually no high-BM funds in our sample while there are many low-BM "growth" funds. Portfolios of "growth" funds are concentrated in low BM-stocks but "value" funds hold stocks across the entire BM spectrum In fact, most "value" funds hold a higher proportion of their portfolios in low-BM ("growth") stocks than in high-BM ("value") stocks. While there are some micro/small/mid-cap funds, the vast majority of mutual funds hold very large stocks. But the distributions of mutual fund momentum, profitability and investment growth are concentrated around market average with little variation across funds. The characteristics distributions of ETFs and hedge funds do not differ significantly from the those of mutual funds. We conclude that the characteristics of mutual fund portfolios raises a number of questions about why funds do not exploit well-known return premia and how their portfolio choices affects asset prices in equilibrium.
    Date: 2018–12
  2. By: Andrea Bastianin; Matteo Manera
    Abstract: We study the impact of oil price shocks on the U.S. stock market volatility. We jointly analyze three different structural oil market shocks (i.e., aggregate demand, oil supply, and oil-specific demand shocks) and stock market volatility using a structural vector autoregressive model. Identification is achieved by assuming that the price of crude oil reacts to stock market volatility only with delay. This implies that innovations to the price of crude oil are not strictly exogenous, but predetermined with respect to the stock market. We show that volatility responds significantly to oil price shocks caused by unexpected changes in aggregate and oil-specific demand, whereas the impact of supply-side shocks is negligible.
    Date: 2018–11
  3. By: Chiaki Hara (Institute of Economic Research, Kyoto University)
    Abstract: In the Capital Asset Pricing Model, we consider how introducing new assets will affect the prices of the existing ones. We prove that introducing new assets into financial markets increases the relative price of the market portfolio with respect to the risk-free bond if the elasticity of the marginal rates of substitution of the mean for standard deviation with respect to the latter is greater than one for every consumer; the relative price of the market portfolio decreases if the elasticity is less than one; and the relative price is left unchanged if the elasticity is equal to one.
    Keywords: Capital Asset Pricing Model, generalequilibriumtheory, incomplete asset markets, nancialinnovation, expectedutility
    JEL: D51 D52 G11 G12 G13
    Date: 2018–10
  4. By: Peter Kondor (Centre for Economic Policy Research (CEPR); London School of Economics (LSE)); Gabor Pinter (Bank of England; Centre for Macroeconomics (CFM))
    Abstract: In government bond markets the number of dealers with whom clients trade changes through time. Our paper shows that this time-variation in clients’ connections serves as a proxy for time-variation in private information. Using proprietary data covering close to all dealer-client transactions in the UK government bond market, we show that clients have systematically better performance when trading with more dealers, and this effect is stronger during macroeconomic announcements. Most of the effect comes from clients’ increased ability to predict future yield changes (anticipation component) rather than these clients facing tighter bid-ask spreads (transaction component). To explore the nature of this private information, we find that clients with increased dealer connections can better predict the fraction of the aggregate order flow that is intermediated by dealers they regularly trade with. Positive trading performance is concentrated in those periods when clients have more dealer connections than usual.
    Keywords: Government bond market, Private information, Client-dealer Connections
    JEL: G12 G14 G24
    Date: 2018–12
  5. By: Jie Zhou
    Abstract: Using the Panel Study of Income Dynamics, this paper studies American households’ stock market participation in 2007–2009, a period that saw a major stock market downswing. After controlling for standard household characteristics, we estimate that the stock ownership in 2009 dropped 2.9 percentage points – a 5.9% decline – compared to that in 2007. We find evidence that less-educated households, poor households and households with heads belonging to a minority are more likely to drop out of the market after the market crash. We also compare the change in the stock ownership during the crisis period with other 2-year periods over 2003–2013.
    JEL: G01 G11
    Date: 2018–12
  6. By: Jeanne Amar (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - UCA - Université Côte d'Azur - CNRS - Centre National de la Recherche Scientifique); Jean-Francois Carpantier (CERGAM - Centre d'Études et de Recherche en Gestion d'Aix-Marseille - AMU - Aix Marseille Université - UTLN - Université de Toulon); Christelle Lecourt (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In this paper we examine the investment strategy of sovereign wealth funds (SWFs) of the Gulf Cooperation Council (GCC) countries. GCC SWFs are considered as relatively opaque investors and strongly politicized, raising some concerns for perceived political and security risks. We investigate what are the drivers of majority cross- border equity acquisitions made by these institutional investors over the period 2006-2015. Using both Logit and ordered Logit models, we test if the usual determinants of SWFs investments still stand when we look at influential (> 10%) or majority (> 50%) acquisitions made by GCC SWFs. We find that GCC SWFs do not consider financial characteristics of the targeted firms when they acquire large cross-border stakes but rather the characteristics of the country (countries in the European union and/or countries with a high level of shareholders protection), suggesting that their motives may go beyond pure profit maximization. We also find that transparent funds are more likely to take influential or majority stakes and that they do so predominantly in non-strategic sectors. Overall, our results indicate that even if GCC SWFs do not seek only for financial returns, acquiring majority stakes is not a lever for GCC governments to get strategic interests in the target countries.
    Keywords: sovereign wealth funds,cross-border majority acquisitions,ordered logit model,GCC
    Date: 2018–11
  7. By: Leo de Haan; Robert Vermeulen
    Abstract: This paper documents how sovereign debt ratings shape euro area cross-border holdings of euro area sovereign debt, using granular sectoral security holdings statistics for the period 2009Q4 until 2016Q1. Credit risk is the main risk for bond investors when investing in bonds that are issued in the same currency as the currency of the investor's home country. Sovereign debt ratings provided by rating agencies give investors key information on the creditworthiness of governments. The results in this paper show that investors respond differently to credit ratings. In particular, we find that investors from core euro area countries respond more to credit ratings than investors from peripheral euro area countries. The results show that banks, insurance companies, pension funds and investment funds in core countries all significantly increase their bond holdings when credit ratings improve. In peripheral countries we document only a positive effect for pension funds and find no relationship between ratings and bond holdings for the other investor sectors. Finally, we find non-linearities in the relationship between bond holdings and credit ratings.
    Keywords: euro area; asset allocation; sovereign debt; sovereign debt rating
    JEL: F3 G11 G15 G2
    Date: 2018–12

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