nep-fmk New Economics Papers
on Financial Markets
Issue of 2021‒03‒29
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The power of ESG ratings on stock markets By Latino, Carmelo; Pelizzon, Loriana; Rzeźnik, Aleksandra
  2. Crowding of International Mutual Funds By Tanja Artiga Gonzalez; Teodor Dyakov; Justus Inhoffen; Evert Wipplinger
  3. The Price and Quantity of Interest Rate Risk By Jennifer N. Carpenter; Fangzhou Lu; Robert F. Whitelaw
  4. Municipal Markets and the Municipal Liquidity Facility By ; Nicholas Fritsch; Shawn Nee
  5. Multi-Period Portfolio Optimization using Model Predictive Control with Mean-Variance and Risk Parity Frameworks By Xiaoyue Li; A. Sinem Uysal; John M. Mulvey
  6. Central bank gold reserves and sovereign credit risk By Rathi, Sawan; Mohapatra, Sanket; Sahay, Arvind
  7. "Vulnerable Funding in the Global Economy". By Helena Chuliá; Ignacio Garrón; Jorge M. Uribe
  8. Original sin in corporate finance: New evidence from Asian bond issuers in onshore and offshore markets By Paul Mizen; Frank Packer; Eli Remolona; Serafeim Tsoukas
  9. The Impact of ECB Corporate Sector Purchases on European Green Bonds By Franziska Bremus; Franziska Schütze; Aleksandar Zaklan
  10. Liquidity in the German corporate bond market: Has the CSPP made a difference? By Boneva, Lena; Islami, Mevlud; Schlepper, Kathi

  1. By: Latino, Carmelo; Pelizzon, Loriana; Rzeźnik, Aleksandra
    Abstract: This paper studies the impact of environmental, social, and governance (ESG) ratings on investors' preferences and stock prices. We exploit a change in ESG rating methodology that non-linearly shifted ESG ratings for firms as a natural experiment. We show that the 'pseudo'-changes in the ESG ratings induced by the change in methodology are unrelated to potential fundamental changes in firm's sustainability. Yet, we find that an exogenous change in a stock's ESG rating exerts a transitory price pressure and alters the composition of stock ownership. Individual investors are especially sensitive to the 'pseudo'-changes in the ESG ratings. They (dis)invest in stocks that they misconceive as ESG (down-) upgraded. Short sellers act as arbitrageurs and take the other side of retail investors' trades. Overall, we find that a one standard deviation quasi-increase in the ESG ratings translates into 1pp drop in stock monthly abnormal return.
    Keywords: Corporate Social Responsibility,ESG Rating Agencies,Sustainable Investments,Socially responsible investing,ESG,Portfolio choice
    JEL: G11 G12 G23 G59 M14 Q5
    Date: 2021
  2. By: Tanja Artiga Gonzalez; Teodor Dyakov; Justus Inhoffen; Evert Wipplinger
    Abstract: We construct a fund-specific measure of crowding using the equity holdings overlap of 17,364 global funds which are actively managed. Funds in the top decile of crowding underperform the passive benchmark by 1.4% per year. The poor performance cannot be attributed to fees and transaction costs alone. When we explore the economics behind crowding, we establish that the diseconomies of crowding are distinct from the ones associated with size. Among several possible mechanisms, we find support for a) a preference for liquid stocks among crowded funds and b) differences in the propagation of price pressure from flows of connected funds. Our findings reveal that the tendency of managers to follow correlated strategies is a major source of diseconomies in the active fund industry.
    Keywords: Mutual funds, crowding, diseconomies of scale
    JEL: G15 G23
    Date: 2021
  3. By: Jennifer N. Carpenter; Fangzhou Lu; Robert F. Whitelaw
    Abstract: Studies of the dynamics of bond risk premia that do not account for the corresponding dynamics of bond risk are hard to interpret. We propose a new approach to modeling bond risk and risk premia. For each of the US and China, we reduce the government bond market to its first two principal-component bond-factor portfolios. For each bond-factor portfolio, we estimate the joint dynamics of its volatility and Sharpe ratio as functions of yield curve variables, and of VIX in the US. We have three main findings. (1) There is an important second factor in bond risk premia. (2) Time variation in bond return volatility is as important as time variation in bond Sharpe ratios. (3) Bond risk premia are solely compensation for bond risk, as no-arbitrage theory predicts. Our approach also allows us to document interesting cyclical and secular time-variation in the term structure of bond risk premia in both the US and China.
    JEL: G12 G15
    Date: 2021–02
  4. By: ; Nicholas Fritsch; Shawn Nee
    Abstract: Municipal bond markets experienced a significant amount of strain in response to the COVID-19 crisis, creating liquidity and credit concerns among market participants. During the economic shutdown resulting from the pandemic, income tax revenues were deferred and sales tax revenues decreased beginning in spring 2020, while the cost of borrowing significantly increased for municipal issuers. To aid municipal borrowing needs, the Federal Reserve implemented the Municipal Liquidity Facility (MLF) on April 9, 2020. In this analysis we describe the municipal market conditions as they evolved during 2020, we document the response by the Federal Reserve to municipal market distress with a focus on the MLF, and we conduct an event study to examine MLF-related impacts on market index yield spreads. We detail two case studies that compare yield spreads for two issuers that had sold debt to the MLF and find that yield spreads in secondary market transactions for these two issuers were notably reduced after a public announcement of intent to sell debt to the MLF. Our results present additional evidence that the MLF had a positive impact on municipal market functioning during the pandemic period.
    Keywords: onetary Policy; Policy Effects; Stabilization; Bond Market; Security Markets; Government Bonds; Local Government Bonds
    JEL: E50 G51 H74
    Date: 2021–03–22
  5. By: Xiaoyue Li; A. Sinem Uysal; John M. Mulvey
    Abstract: We employ model predictive control for a multi-period portfolio optimization problem. In addition to the mean-variance objective, we construct a portfolio whose allocation is given by model predictive control with a risk-parity objective, and provide a successive convex program algorithm that provides 30 times faster and robust solutions in the experiments. Computational results on the multi-asset universe show that multi-period models perform better than their single period counterparts in out-of-sample period, 2006-2020. The out-of-sample risk-adjusted performance of both mean-variance and risk-parity formulations beat the fix-mix benchmark, and achieve Sharpe ratio of 0.64 and 0.97, respectively.
    Date: 2021–03
  6. By: Rathi, Sawan; Mohapatra, Sanket; Sahay, Arvind
    Abstract: Gold holdings with central banks are often considered to play a stabilizing role in times of crisis. This paper performs a cross-country panel data analysis of developed and developing countries to determine whether gold holdings of central banks contribute to sovereign creditworthiness. Our analysis confirms that an increase in central bank gold reserves reduces the credit default swap (CDS) spreads of a country. We also observe that during global crisis and country-specific crisis episodes, the role of central bank gold becomes even more important. In robustness tests, we account for potential endogeneity of central bank gold reserves using a Generalized Method of Moments (GMM) approach. The findings highlight the importance of gold in central bank reserves and indicate a positive role of gold in mitigating a nation's external vulnerabilities in an uncertain global economic environment.
    Date: 2021–03–22
  7. By: Helena Chuliá (Riskcenter- IREA and Department of Econometrics, University of Barcelona, Av.Diagonal, 690, 08034. Barcelona, Spain.); Ignacio Garrón (University of Barcelona, Av.Diagonal, 690, 08034. Barcelona, Spain.); Jorge M. Uribe (Riskcenter, University of Barcelona, Faculty of Economics and Business, Open University of Catalonia, Barcelona, Spain.)
    Abstract: We study the international propagation of financial conditions from the United States to global financial markets. The impact is highly heterogeneous alongside the quantiles of the distribution of the two major funding sources, credit and equity. Indeed, it is greater on the lower quantiles, which means that analogous to vulnerable growth episodes, examined by the past literature, there exist as well vulnerable funding periods of a global scale, originated from financial weakness in the US. These episodes are related to downside risk in terms of credit creation and firms’ market value around the world. Our estimates differentiate between first and second moment (i.e. uncertainty) shocks to financial conditions. This distinction proves to be relevant as it uncovers a complex propagation of shocks via different economic channels. On the one hand, credit growth largely responds to first moment shocks of US financial conditions four quarters after their occurrence, which is consistent with a credit view explanation of the transmission. On the other hand, stock markets react more sensitively and rapidly (mainly within a quarter) to second moment shocks, which can be theoretically associated with a portfolio channel underlying the shocks spread. We also document a heterogeneous impact across countries. In the case of credit growth this heterogeneity is better explained by the size or depth of the markets, while in the case of stock markets, the explanation is rooted on the strength of the financial connectedness with the US.
    Keywords: Financial conditions, Financial uncertainty, Quantile regression, Credit growth, Stock market. JEL classification: E44, F34, F37, F44, G15.
    Date: 2021–03
  8. By: Paul Mizen; Frank Packer; Eli Remolona; Serafeim Tsoukas
    Abstract: In this paper, we focus on the surprising phenomenon in which firms face difficulty issuing in domestic currency even in the home market, especially in emerging markets. Could this be due to "original sin" which has been familiar to sovereign bond issuance? In its new incarnation, original sin refers to the difficulty firms in many emerging markets have in borrowing domestically long-term, even in the local currency. We infer the nature of original sin from 5,901 financing decisions by firms in seven Asian emerging markets over a period of 20 years. Our sample period covers an episode when bond issuers had a choice between a less developed but growing onshore market, which varied across countries in the level of development, and a deep and liquid offshore market. We find that even in countries with onshore markets, it is often easier for unseasoned firms to issue offshore (in foreign currency) than to issue onshore, but changes in market development reverses this effect. In addition, once such a firm becomes a seasoned issuer, it is absolved from domestic original sin and is then able to act opportunistically and go to the market favored by interest differentials.
    Keywords: bond financing, offshore markets, emerging markets, market depth, global credit
    JEL: C23 E44 F32 F34 G32 O16
    Date: 2021–03
  9. By: Franziska Bremus; Franziska Schütze; Aleksandar Zaklan
    Abstract: This papers analyzes the effect of the ECB’s Corporate Sector Purchase Programme (CSPP) and the recent Pandemic Emergency Purchase Programme (PEPP) on the yields of eligible green bonds, a new but rapidly growing segment of the corporate bond market. We exploit these policy changes using a difference-in-differences strategy, with ineligible corporate green bonds is- sued in euro, U.S. dollars and Swedish crowns as comparison groups. We find that both programs significantly improve financing conditions for eligible green bonds, thereby increasing the attractiveness of these instruments to issuers and of the euro area as a location of issuance. The effects of the CSPP and PEPP are heterogeneous, both in terms of average impact and persistence of the effects. Yield differences between eligible and ineligible green bonds can last for more than six months. Our analysis informs the debate about new financing options for firms as well as about effects of asset purchase programs on the transition towards a less carbon-intensive economy.
    Keywords: green bonds, bond yields, monetary policy, corporate sector purchase programme (CSPP), pandemic emergency purchase programme (PEPP)
    JEL: E52 E58 G12 G18 Q54
    Date: 2021
  10. By: Boneva, Lena; Islami, Mevlud; Schlepper, Kathi
    Abstract: The Eurosystem purchased €178 billion of corporate bonds between June 2016 and December 2018 under the Corporate Sector Purchase Programme (CSPP). Did these purchases lead to a deterioration of liquidity conditions in the corporate bond market, thus raising concerns about unintended consequences of large-scale asset purchases? To answer this question, we combine the Bundesbank's detailed CSPP purchase records with a range of liquidity indicators for both purchased and nonpurchased bonds. We find that while the flow of purchases supported secondary market liquidity, liquidity conditions deteriorated in the long-run as the Bundesbank reduced the stock of corporate bonds available for trading in the secondary market.
    Keywords: Corporate Bond Market,Central Bank Asset Purchases,Market Liquidity
    JEL: E52 F30 G12
    Date: 2021

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