nep-fmk New Economics Papers
on Financial Markets
Issue of 2019‒04‒29
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Redemptions and asset liquidations in corporate bond funds By Dötz, Niko; Weth, Mark
  2. Constructing and Using Double-adjusted Alphas to Analyze Mutual Fund Performance By Erik Kole; Reza Brink
  3. Bitcoin's return behaviour: What do We know so far? By Fajardo, José
  4. On the Time-Varying Efficiency of Cryptocurrency Markets By Akihiko Noda
  5. QE in the euro area: Has the PSPP benefited peripheral bonds? By Belke, Ansgar; Gros, Daniel
  6. The Effects of Conventional and Unconventional Monetary Policy on Forecasting the Yield Curve By Eo, Yunjong; Kang, Kyu Ho
  7. Central Bank Intervention in Foreign Exchange Market under Managed Float: A Three Regime Threshold VAR Analysis of Indian Rupee-US Dollar Exchange Rate By Ghosh, Sunandan; Kundu, Srikanta
  8. Inefficiency of the Brazilian Stock Market: the IBOVESPA Future Contracts By Tarcisio M. Rocha Filho; Paulo M. M. Rocha

  1. By: Dötz, Niko; Weth, Mark
    Abstract: Mutual funds' exposure to corporate bonds has brought concerns about risks arising from liquidity transformation back to the fore. With a focus on fund asset liquidity and investors, this paper explores the flow-performance relationship and the liquidity management of funds in the presence of net redemptions. We highlight the response of fund liquidity because the vulnerability to outflows is found to depend on asset liquidity and fund ownership. We construct a unique panel of German corporate bond funds by merging data on asset liquidity with information on fund ownership. First, conditional on underperformance, illiquid funds dominated by retail investors are more exposed to outflows than illiquid funds primarily owned by institutional investors. Large investors are reluctant to withdraw most likely because they internalise the fire-sale-driven loss that a withdrawal inflicts on an illiquid fund. Within institutional-oriented funds, the flow response to bad performance is only significant if fund assets are sufficiently liquid. Second, the way that fund managers liquidate their bonds to meet redemptions is found to differ across ownership structures and depends on the degree of macroeconomic uncertainty: in times of high uncertainty, managers of institutional-oriented funds sell bonds in a liquidity pecking order style, thereby preserving short-term performance. At the same time, retail-based funds do not let portfolio liquidity deteriorate - presumably to attenuate incentives for runs.
    Keywords: Corporate bond funds,Ownership,Portfolio liquidity,Strategic complementarities
    JEL: G11 G23 G32
    Date: 2019
  2. By: Erik Kole (Erasmus Universiteit Rotterdam); Reza Brink (Erasmus Universiteit Rotterdam)
    Abstract: We propose a new approach for estimating mutual fund performance that simultaneously controls for both factor exposure and firm characteristics. This double-adjusted alpha is motivated by the recent findings that traditional Fama-French style factor models do not fully adjust returns for the anomalies related to the factors. We formulate a hierarchical Bayesian model which separates the part of the traditional alpha that can be related to firm and asset characteristics from the true alpha. Our Bayesian approach is straightforward, has theoretical advantages over the traditional two-pass estimation and leads to higher precision. Our double-adjusted alphas produce a different ranking of mutual funds than the traditional alphas. We show that as a consequence, the double-adjusted alphas lead to stronger evidence of persistence of mutual fund performance. On the other hand, we find that the link between selectivity and alpha is driven by the effect of characteristics. Finally, we show that fund flows are mostly driven by the true skill part of the return and hardly by the effect of characteristics. We conclude that good measurement of the true outperformance of mutual funds is crucial for understanding skill.
    Keywords: Mutual fund performance, Double-adjusted performance, Firm characteristics, Hierarchical Bayes
    JEL: C11 G11 G23
  3. By: Fajardo, José
    Abstract: In this paper we study the daily return behavior of Bitcoin digital currency. We propose the use of generalized hyperbolic distributions (GH) to model Bitcoin's return. Our, results show that GH is a very good candidate to model this return.
    Keywords: Bitcoin, Cryptocurrency, Jumps, Generalized Hyperbolic distributions.
    JEL: C01 C02 C58 G0
    Date: 2019–04–03
  4. By: Akihiko Noda
    Abstract: This study examines whether the market efficiencies of major cryptocurrencies (e.g., Bitcoin, Ethereum, and Ripple) change over time based on the adaptive market hypothesis (AMH) of Lo (2004). In particular, we measure the degree of market efficiency using Ito et al.'s (2014, 2016, 2017) generalized least squares-based time-varying model. The empirical results show that (1) the degree of market efficiency varies with time in cryptocurrency markets, (2) the market efficiency level of Bitcoin is higher than that of the other markets over most periods, and (3) the market efficiency of cryptocurrencies has evolved. We conclude that the results support the AMH for the established cryptocurrency market.
    Date: 2019–04
  5. By: Belke, Ansgar; Gros, Daniel
    Abstract: The asset purchase programme of the euro area, active between 2015 and 2018, constitutes an interesting special case of Quantitative Easing (QE) because the ECB's Public Sector Purchase Programme (PSPP) involved the purchase of peripheral euro area government bonds, which were clearly not riskless. Moreover, these purchases were undertaken by national central banks at their own risk. Intuition suggests, and a simple model confirms, that, ceteris paribus, large purchases by a national central bank of the bonds of their own sovereign should increase the risk for the remaining private bond holders. This might seem incompatible with the observation that risk spreads on peripheral bonds fell when QE in the euro area was announced. However, the initial fall in risk premiums may have been due to expectations of the bond purchases proving effective in lowering risk-free rates. When these expectations were disappointed, risk premiums returned to their initial level. Formal statistical tests confirm that indeed risk premiums on peripheral bonds did not follow a random walk (contrary to what is assumed in event studies). Nor did the announcements of bond buying change the stochastics of these premiums. There is thus no reason to consider the impact effect to have been permanent.
    Keywords: European Central Bank,quantitative easing,unconventional monetary policies,spreads,structural breaks,time series econometrics
    JEL: E43 E58 G12 G15
    Date: 2019
  6. By: Eo, Yunjong; Kang, Kyu Ho
    Abstract: The period of unconventional monetary policy in the low-interest rate environment since the Great Recession has suggested that unconventional policy has a different transmission mechanism to the term structure of interest rates from that of conventional policy. We study how conventional and unconventional monetary policies affect forecasting performance of individual yield curve models and their mixtures. The individual models considered here are the dynamic Nelson-Siegel model, the arbitrage-free Nelson-Siegel model, and the random-walk model. Out-of-sample forecasts for U.S. bond yields show that the arbitrage-free Nelson-Siegel model and its mixtures with other models perform well in the period of conventional monetary policy, whereas the random-walk model outperforms all the other models in the period of unconventional monetary policy. We show that the tightly constrained cross-equation restrictions of the no-arbitrage condition are associated with high correlations of bond yields across different maturities. The diminishing role of the no-arbitrage restriction in forecasting the yield curve since 2009 can be attributed to unconventional monetary policy, which involved direct purchases of long-term bonds while the short-term interest rates were stuck near zero. This policy resulted in low correlations between short- and long-term bond yields and little variation in the short-term bond yields. The random-walk model performs well when the yields are less correlated and exhibit little variation over time. During the period of the maturity extension program (“Operation Twist”) in 2011-2012, which moved short- and long-term bond yields in opposite directions, the superiority of the random-walk forecasts is more pronounced; these results reinforce our finding that the monetary policy framework affects yield curve forecasts.
    Keywords: Quantitative Easing; Operation Twist; Dynamic Nelson-Siegel model; Arbitrage-free term structure model; Random-walk model; Markov-switching mixture;
    Date: 2019–04
  7. By: Ghosh, Sunandan; Kundu, Srikanta
    Abstract: We try to comprehensively analyze the nuances of Central Bank’s intervention in the foreign exchange market under a managed float exchange rate regime. We employ a three regime threshold VAR model and identify two endogenously determined threshold values of exchange rate cycle beyond which the Reserve Bank of India (RBI) intervenes in the Indian Rupee–US Dollar (Re/$) exchange rate market. We find that, as FIIs flow in, RBI’s interventions, mainly through open market operations, are successful in bringing the Re/$ exchange rate within the desired band. Within the band, the RBI tries only to mitigate domestic inflationary conditions.
    Keywords: Central bank intervention, Foreign exchange market, Managed float, Threshold VAR
    JEL: E58 F31
    Date: 2019–04–23
  8. By: Tarcisio M. Rocha Filho; Paulo M. M. Rocha
    Abstract: We present some indications of inefficiency of the Brazilian stock market based on the existence of strong long-time cross-correlations with foreign markets and indices. Our results show a strong dependence on foreign markets indices as the S\&P 500 and CAC 40, but not to the Shanghai SSE 180, indicating an intricate interdependence. We also show that the distribution of log-returns of the Brazilian BOVESPA index has a discrete fat tail in the time scale of a day, which is also a deviation of what is expected of an efficient equilibrated market. As a final argument of the inefficiency of the Brazilian stock market, we use a neural network approach to forecast the direction of movement of the value of the IBOVESPA future contracts, with an accuracy allowing financial returns over passive strategies.
    Date: 2019–04

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