nep-fmk New Economics Papers
on Financial Markets
Issue of 2021‒03‒01
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Mutual Fund Performance and Flows During the COVID-19 Crisis By Lubos Pastor; M. Blair Vorsatz
  2. Shifts in the portfolio holdings of euro area investors in the midst of COVID-19: looking-through investment funds By Carvalho, Daniel; Schmitz, Martin
  3. How the New Fed Municipal Bond Facility Capped Muni-Treasury Yield Spreads in the COVID-19 Recession By Michael D. Bordo; John V. Duca
  4. Momentum Has Its Own Values By Hongwei Chuang
  5. Efficient mean-variance portfolio selection by double regularization By N'Golo Kone
  6. Are Stock Returns and Output Growth Higher Under Democrats? By Ray C. Fair
  7. How Much Does Nominal Share Price Matter? By Hongwei Chuang
  8. How Competitive are U.S. Treasury Repo Markets? By ; Kevin Clark; Adam Copeland; Antoine Martin; Matthew McCormick; Will Riordan; Timothy Wessel
  9. The impact of macroeconomic variables on Stock ‎market in United Kingdom By NEIFAR, MALIKA; Dhouib, Salma ‎; Bouhamed, Jihen ‎; Ben Abdallah, Fatma ‎; Arous, Islem ‎; Ben Braiek, Fatma ‎; Mrabet, Donia ‎
  10. Equity portfolio diversification: how many stocks are enough? Evidence from India By Raju, Rajan; Agarwalla, Sobhesh Kumar

  1. By: Lubos Pastor (University of Chicago - Booth School of Business; NBER; CEPR; National Bank of Slovakia); M. Blair Vorsatz (University of Chicago - Booth School of Business)
    Abstract: We present a comprehensive analysis of the performance and flows of U.S. actively-managed equity mutual funds during the COVID-19 crisis of 2020. We find that most active funds underperform passive benchmarks during the crisis, contradicting a popular hypothesis. Funds with high sustainability ratings perform well, as do funds with high star ratings. Fund outflows surpass pre-crisis trends, but not dramatically. Investors favor funds that apply exclusion criteria and funds with high sustainability ratings, especially environmental ones. Our finding that investors remain focused on sustainability during this major crisis suggests they view sustainability as a necessity rather than a luxury good.
    Date: 2020
  2. By: Carvalho, Daniel; Schmitz, Martin
    Abstract: We study the impact of the COVID-19 shock on the portfolio exposures of euro area investors. The analysis “looks-through” holdings of investment fund shares to first gauge euro area investors' full exposures to global debt securities and listed shares by sector at end-2019 and to subsequently analyse the portfolio shifts in the first and second quarters of 2020. We show important heterogeneous patterns across asset classes and sectors, but also across euro area less and more vulnerable countries. In particular, we find a broad-based rebalancing towards domestic sovereign debt at the expense of extra-euro area sovereigns, consistent with heightened home bias. These patterns were strongly driven by indirect holdings – via investment funds – especially for insurance companies and pension funds, but levelled off in the second quarter. On the contrary, for listed shares we find that euro area investors rebalanced away from domestic towards extra-euro area securities in both the first and the second quarter, which may be associated with better relative foreign stock market performance. Many of these shifts were only due to indirect holdings, corroborating the importance of investment funds in assessing investors' exposures via securities, in particular in times of large shocks. We also confirm the important intermediation role played by investment funds in an analysis focusing on the large-scale portfolio rebalancing observed between 2015 and 2017 during the ECB's Asset Purchase Programme. JEL Classification: F30, F41, G15
    Keywords: bilateral portfolio holdings, COVID-19, cross-border investment, investment funds, sovereign debt
    Date: 2021–02
  3. By: Michael D. Bordo; John V. Duca
    Abstract: For over two centuries, the municipal bond market has been a source of systemic risk, which returned early in the COVID-19 downturn when borrowing from securities markets became costly for many private and public entities, and some found it difficult to borrow at all. Indeed, just before the Fed announced its unprecedented intervention into the municipal (muni) bond market, spreads of muni over Treasury yields rose in line with the unemployment rate and appeared headed to levels not seen since the Great Depression, when real municipal gross investment plunged 35 percent below 1929 levels. To prevent a repeat, the Fed created the Municipal Liquidity Facility (MLF) to purchase newly issued, (near) investment grade state and local government bonds at normal ratings-based interest rate spreads over Treasury bonds plus a fee of 100 basis points, later reduced to 50 basis points. Despite a modest take-up, the MLF has effectively capped muni spreads at near normal levels plus the Fed fee and limited the extent to which interest rate spreads could have amplified the impact of the COVID pandemic. To establish the MLF the Fed needed Treasury indemnification against default losses. There are concerns about whether the creation of the MLF could undermine the efficiency of the bond market if the facility lasts too long and could induce moral hazard among borrowers. How the MLF will be unwound will affect these downside aspects and help answer the question whether the program’s benefits exceed its costs.
    Keywords: state and local governments; municipal finance; central bank policy; credit policy
    JEL: E40 E50 G21
    Date: 2021–01–15
  4. By: Hongwei Chuang (IUJ Research Institutey, International University of University)
    Abstract: We find high momentum stocks with preserving substantial "fundamental value" are more likely to rebound after unexpected financial shocks. The portfolio test show that our proposed investment strategy can inherit more portfolio downside risk, especially the momentum crash during turbulent times.
    Keywords: Momentum; Financial Crisis; Fama-French Factors; Systemic Risk
    JEL: G11 G12 G14
    Date: 2021–02
  5. By: N'Golo Kone
    Abstract: This paper addresses the estimation issue that exists when estimating the traditional mean-variance portfolio. More precisely, the efficient mean-variance is estimated by a double regularization. These regularization techniques namely the ridge, the spectral cut-off, and Landweber-Fridman involve a regularization parameter or penalty term whose optimal value needs to be selected efficiently. A data-driven method has been proposed to select the tuning parameter. We show that the double regularized portfolio guarantees to investors the maximum expected return with the lowest risk. In empirical and Monte Carlo experiments, our double regularized rules are compared to several strategies, such as the traditional regularized portfolios, the new Lasso strategy of Ao et al. (2019), and the naive 1/N strategy in terms of in-sample and out-of-sample Sharpe ratio performance, and it is shown that our method yields significant Sharpe ratio improvements and a reduction in the expected utility loss.
    Keywords: Portfolio selection, efficient mean-variance analysis, double regularization
    JEL: C52 C58 G11
    Date: 2021–02
  6. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: Recent literature suggests that both stock returns and economic growth are signiï¬ cantly higher under Democratic presidential administrations. This is a puzzle in that persistent differences in stock returns seem unlikely in efficient markets, and it is not obvious why Democrats should do better. Often these kinds of results go away upon further analysis or more data, and this appears to be true in the present case. In this paper the sample is extended to 27 administrations, from Wilson-1 through Trump. While the mean stock return under the Democrats is generally higher, none of the differences in means are signiï¬ cant at conventional signiï¬ cance levels. There is considerable variation in the mean return across administrations, which results in lack of signiï¬ cance. Similarly, while the mean output growth rate under the Democrats is larger, the difference is not signiï¬ cant. Again, there is considerable variation in output growth across administrations. Results are also presented with the ten administrations between Grant-2 and Taft added, a total of 37 administrations. While the added data are likely not as good, the conclusion is the same—no signiï¬ cant differences.
    Keywords: Stock returns, Output growth, Political parties
    JEL: G01
    Date: 2021–02
  7. By: Hongwei Chuang (IUJ Research Institutey, International University of University)
    Abstract: The paper examines the relation between nominal share price and price momentum, explicitly controlling for nominal share price levels. The results show that very high/low nominal share price stocks lack price momentum and utilize more systemic risk which remains even controlling for stock splits. While splitting a stock allows firm managers to keep the nominal share price constant, thereby increasing firm value and attracting more investors, it also increases the likelihood of uninformed trading by those with limited budgets and risk share capacity. As a result, splitting a stock causes stock information to diffuse more slowly, leading to higher price momentum.
    Keywords: Price Risk; Momentum Crash; Stock Split/Dividend
    JEL: G11 G12 G14
    Date: 2021–02
  8. By: ; Kevin Clark; Adam Copeland; Antoine Martin; Matthew McCormick; Will Riordan; Timothy Wessel
    Abstract: The Treasury repo market is at the center of the U.S. financial system, serving as a source of secured funding as well as providing liquidity for Treasuries in the secondary market. Recently, results published by the Bank for International Settlements (BIS) raised concerns that the repo market may be dominated by as few as four banks. In this post, we show that the secured funding portion of the repo market is competitive by demonstrating that trading is not concentrated overall and explaining how the pricing of inter-dealer repo trades is available to a wide range of market participants. By extension, rate-indexes based on repo trades, such as SOFR, reflect a deep market with a broad set of participants.
    Keywords: repo; concentration; competitiveness
    JEL: G1
    Date: 2021–02–18
  9. By: NEIFAR, MALIKA; Dhouib, Salma ‎; Bouhamed, Jihen ‎; Ben Abdallah, Fatma ‎; Arous, Islem ‎; Ben Braiek, Fatma ‎; Mrabet, Donia ‎
    Abstract: The key objective of this study is to shed light on the relationship between the stock market ‎and macroeconomic factors (Interest rate, Consumer Price Index, Exchange rate) in United ‎Kingdom for the period Pre Global Financial Crisis 2008 (GFC); from January 1999 to ‎December 2007. The finding of Johansen Cointegration, and Granger and Toda Yamamoto ‎‎(TY) Causality tests show respectively that there is no co-integration between variables, no ‎causal relation is detected from macro factors to stock return, and a unidirectional causal ‎relation is depicted from exchange rate to stock price. While from VAR Granger non ‎Causality/Block Exogeneity Wald Tests results, both inflation (INF) and exchange rate ‎growth (EXCG) Granger cause the UK stock market Return. Moreover, the ARDL ‎specification show a stable long run effect of all considered macroeconomic factors on the ‎UK stock price. Precisely, the results of the ECM show that all considered macroeconomic ‎factors drives UK stock price toward long-run equilibrium at a fast speed.‎
    Keywords: UK Stock market, Macroeconomic variables, Causality, ECM, Cointegration, ARDL model, ‎F_PSSTest
    JEL: C32 E44 G14
    Date: 2021–02–23
  10. By: Raju, Rajan; Agarwalla, Sobhesh Kumar
    Abstract: How many stocks are required to reduce unsystematic risk significantly is an important question for investors. While there is a large body of research on the subject in the United States, there is little formal work on this question in India. We show that a 15-20 stock portfolio, the traditional market rule-of-thumb for a diversified portfolio, is likely inadequate to minimise unsystematic risk. We show that an investor could target to reduce diversifiable risk by 90% with a 90% confidence with a portfolio of 40-50 stocks. We build a practical framework that serves as a baseline for investors to target a specific reduction in diversifiable unsystematic risk at a chosen confidence level.
    Date: 2021–02–23

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