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on Financial Markets |
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Issue of 2020‒09‒07
thirteen papers chosen by |
| By: | Muhammad Rehan; Jahanzaib Alvi; Suleyman Serdar Karaca |
| Abstract: | The main objective of this study is to check short term stress of COVID-19 on the American, European, Asian, and Pacific stock market indices, furthermore, the correlation between all the stock markets during the pandemic. Secondary data of 41 stock exchange from 32 countries have been collected from investing.com website from 1st July 2019 to 14th May 2020 for the stock market and the COVID-19 data has been collected according to the first cases reported in the country, stocks market are classified either developed or emerging economy, further divided according to the subcontinent i.e. America, Europe, and Pacific/Asia, the main focus in the data is the report of first COVID-19 cases. The study reveals that there is volatility in the all the 41 stock market (American, Europe, Asia, and Pacific) after reporting of the first case and volatility increase with the increase of COVID-19 cases, moreover, there is a significant negative relationship between the number of COVID-19 cases and 41 major stock indices of American, Europe, Asia and Pacific, European subcontinent market found more effected from the COVID-19 than another subcontinent, there is Clustering effect of COVID-19 on all the stock market except American's stock market due to smart capital investing. |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2008.06450&r=all |
| By: | D'Orazio, Paola; Dirks, Maximilian W. |
| Abstract: | COVID-19 has quickly emerged as a novel risk, generating feverish behavior among investors, and posing unprecedented challenges for policymakers. The empirical analysis provides evidence for a significant negative effect on stock markets of COVID-19-related measures announced in the Euro Area from January 1st, 2020 to May 17th, 2020. Further negative effects are detected for movements in bond yields, EU volatility index, Google trends, and infection rates. Health measures have, instead, a significant positive effect, while fiscal policy announcements are not significant. |
| Keywords: | Coronavirus,COVID-19,investor behavior,stock market volatility,containment policies,policy announcements,fiscal policy |
| JEL: | E44 G15 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:859&r=all |
| By: | Kraemer-Eis, Helmut; Botsari, Antonia; Lang, Frank; Pal, Kristian; Pavlova, Elitsa; Signore, Simone; Torfs, Wouter |
| Abstract: | This paper provides unique insights into the impact of the COVID-19 crisis on the European private equity (PE) and venture capital (VC) ecosystem. It achieves this purpose in two ways. By exploiting the recent survey wave of EIF's signature BA/VC/PE MM survey series, which was launched just prior to the COVID-19 outbreak in Europe, we are able to gauge how the pandemic changed the sentiment among European fund managers. This qualitative exercise is complemented by the results from a simple time series model that simulates the potential impact of the COVID-19 pandemic on the European PE and VC markets. Our analysis provides evidence that the European PE/VC ecosystem faces unprecedented challenges in the aftermath of the COVID-19 pandemic. A strong policy response in support of the PE/VC markets is imperative, to which EIF will be an indispensable contributor. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:eifwps:202064&r=all |
| By: | Antonio Falato; Itay Goldstein; Ali Hortaçsu |
| Abstract: | In the decade following the financial crisis of 2008, investment funds in corporate bond markets became prominent market players and generated concerns of financial fragility. The COVID-19 crisis provides an opportunity to inspect their resilience in a major stress event. Using daily microdata, we document major outflows in these funds during this period, far greater than anything they experienced in past events. Large outflows were sustained over several weeks and were widespread across funds. Inspecting the role of sources of fragility, we show that both the illiquidity of fund assets and the vulnerability to fire sales were important factors in explaining outflows in this episode. The exposure to sectors most hurt by the COVID-19 crisis was also important. Two policy announcements by the Federal Reserve about extraordinary direct interventions in corporate-bond markets seem to have played an important role in calming down the panic and reversing the outflows. |
| JEL: | G01 G1 G23 G38 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27559&r=all |
| By: | Irem Demirci; Miguel A. Ferreira; Pedro Matos; Clemens Sialm |
| Abstract: | We show that mutual funds worldwide provide substantial international exposure through their domestic holdings of multinationals. An average domestic fund's international exposure increases by 32 percentage points when we consider international corporate diversification. We find that funds with higher indirect international exposure perform better in both the cross section and the time series. This outperformance is more pronounced among small fund families, and funds that invest in small stocks, growth stocks, and less developed capital markets. Our findings support the hypothesis that international diversification from multinationals reduces the transaction and information costs of investing abroad and captures fund manager skill. |
| JEL: | F23 G11 G15 G23 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27648&r=all |
| By: | Eric Benhamou (LAMSADE - Laboratoire d'analyse et modélisation de systèmes pour l'aide à la décision - Université Paris Dauphine-PSL - CNRS - Centre National de la Recherche Scientifique); Beatrice Guez; Nicolas Paris (APHP - Assistance publique - Hôpitaux de Paris (AP-HP)) |
| Abstract: | Omega ratio, defined as the probability-weighted ratio of gains over losses at a given level of expected return, has been advocated as a better performance indicator compared to Sharpe and Sortino ratio as it depends on the full return distribution and hence encapsulates all information about risk and return. We compute Omega ratio for the normal distribution and show that under some distribution symmetry assumptions , the Omega ratio is oversold as it does not provide any additional information compared to Sharpe ratio. Indeed, for returns that have elliptic distributions , we prove that the optimal portfolio according to Omega ratio is the same as the optimal portfolio according to Sharpe ratio. As elliptic distributions are a weak form of symmetric distributions that generalized Gaussian distributions and encompass many fat tail distributions, this reduces tremendously the potential interest for the Omega ratio. |
| Keywords: | Omega ratio,Sharpe ratio,normal distribution,elliptical distribution |
| Date: | 2020–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02886481&r=all |
| By: | Sanghyun Hong (University of Canterbury) |
| Abstract: | Campbell and Cochrane's (1999b) habit formation model is able to resolve the equity premium and riskless interest rate puzzles, but only for high values of relative risk aversion. In this paper, I incorporate transactions costs in the Campbell and Cochrane model and find that the required level of relative risk aversion at the steady state reduces from 35 to 15. Thus, transactions costs seem able to reduce, but not completely solve, the remaining puzzle. |
| Keywords: | Transaction Costs; Equity Premium Puzzle |
| JEL: | G00 G12 |
| Date: | 2020–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:20/16&r=all |
| By: | Glenn Boyle (University of Canterbury); Sanghyun Hong (University of Canterbury) |
| Abstract: | This paper examines the β4 liquidity risk premium documented in Acharya and Pedersen (2005). We decompose this premium into two components: the covariation of liquidity costs with (i) market dividend growth shocks and (ii) shocks to the variance of market returns. In 1963-2017 US stock market data, the former is approximately three times larger than the latter. Liquidity volatility is primarily incorporated in stock prices via its common variation with business, rather than financial, shocks. |
| Keywords: | Liquidity Risk; Asset Pricing |
| JEL: | G00 G12 |
| Date: | 2020–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:20/15&r=all |
| By: | Albert S. Kyle (University of Maryland); Anna A. Obizhaeva (New Economic School) |
| Abstract: | For five stock market crashes, we compare price declines with predictions from market microstructure invariance. During the 1987 crash and the 2008 sales by Société Générale, prices fell by magnitudes similar to predictions from invariance. Larger-than-predicted temporary price declines during 1987 and 2010 flash crashes suggest rapid selling exacerbates transitory price impact. Smaller-than-predicted price declines for the 1929 crash suggest slower selling stabilized prices and less integration made markets more resilient. Quantities sold in the three largest crashes indicate fatter tails or larger variance than the log-normal distribution estimated from portfolio transitions data. |
| Keywords: | Finance, market microstructure, invariance, crashes, liquidity, price impact, market depth, systemic risk |
| JEL: | G01 G28 N22 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:abo:neswpt:w0269&r=all |
| By: | Richard Sias; Laura Starks; Harry J. Turtle |
| Abstract: | We show that molecular variation in DNA related to cognition, personality, health, and body shape, predicts an individual’s equity market participation and risk aversion. Moreover, the molecular genetic endowments predict individuals’ return perceptions, most of which we find to be strikingly biased. The genetic endowments also strongly associate with many of the investor characteristics (e.g., trust, sociability, wealth) shown to explain heterogeneity in equity market participation. Our analysis helps elucidate why financial choices are heritable and how genetic endowments can help explain the links between financial choices, risk aversion, beliefs, and other variables known to explain stock market participation. |
| JEL: | D87 G11 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27638&r=all |
| By: | Torben G. Andersen (Kellogg School of Management); Oleg Bondarenko (University of Illinois at Chicago); Albert S. Kyle (University of Maryland); Anna A. Obizhaeva (New Economic School) |
| Abstract: | The trading activity in the E-mini S&P 500 futures contract between January 2008 and September 2011 is consistent with the following high-frequency invariance relationship: The return variation per transaction is log-linearly related to trade size, with a slope coeffcient of -2. This association applies both in the time series and across a pronounced intraday pattern. The documented factor of proportionality deviates sharply from prior hypotheses relating volatility to trading intensity. High-frequency trading invariance is motivated a priori by the intuition that market microstructure invariance, introduced by Kyle and Obizhaeva (2016a) to explain bets at low frequencies, also applies to transactions over short intraday intervals. It raises the prospect of identifying periods of market stress in real time and poses intriguing challenges for market microstructure research. |
| Keywords: | market microstructure, invariance, high-frequency trading, liquidity, volatility, volume, time series, intraday patterns |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:abo:neswpt:w0272&r=all |
| By: | Anusha Chari; Karlye Dilts Stedman; Christian T. Lundblad |
| Abstract: | This paper characterizes the implications of risk-on/risk-off shocks for emerging market capital flows and returns. We document that these shocks have important implications not only for the median of emerging markets flows and returns but also for the left tail. Further, while there are some differences in the effects across bond vs. equity markets and flows vs. asset returns, the effects associated with the worst realizations are generally larger than on the median realization. We apply our methodology to the COVID-19 shock to examine the pattern of flow and return realizations: the sizable risk-off nature of this shock engenders reactions that reside deep in the left tail of most relevant emerging market quantities. |
| Keywords: | Capital flows; Emerging markets; risk-on/risk-off; COVID-19; Tail risk; Quantile regression |
| JEL: | F32 G15 G23 |
| Date: | 2020–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:88624&r=all |
| By: | Söhnke M. Bartram; Mark Grinblatt; Yoshio Nozawa |
| Abstract: | We study the role played by “bond book-to-market” ratios in U.S. corporate bond pricing. Controlling for numerous risk factors tied to default and priced asset risk, including yield-to-maturity, we find that the ratio of a corporate bond’s book value to its market price strongly predicts the bond’s future return. The quintile of bonds with the highest book-to-market ratios outperforms the quintile with the lowest ratios by more than 3% per year, other things equal. Additional evidence on signal delay, scope of signal efficacy, and factor risk rejects the thesis that the corporate bond market is perfectly informationally efficient, although significant positive alpha spreads are erased by transaction costs. |
| JEL: | G1 G11 G12 G14 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27655&r=all |