nep-fmk New Economics Papers
on Financial Markets
Issue of 2021‒06‒14
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Did the COVID-19 Shock Impair the Stock Performance of Companies with Older CEOs? By Giovanni Ferri; Raffaele Lagravinese; Giuliano Resce
  2. Is Corporate Social Responsibility investing a free lunch? The relationship between ESG, tail risk, and upside potential of stocks before and during the COVID-19 crisis By Lööf, Hans; Sahamkhadam, Maziar; Stephan, Andreas
  3. Euro area sovereign bond risk premia during the Covid-19 pandemic By Corradin, Stefano; Grimm, Niklas; Schwaab, Bernd
  4. Keeping Up with the Joneses and the Real Effects of S&P 500 Inclusion By Bennett, Benjamin; Stulz, Rene M.; Wang, Zexi
  5. The Overnight Drift in U.S. Equity Returns By Nina Boyarchenko; Lars C. Larsen; Paul Whelan
  6. U.S. Treasury Auctions: A High Frequency Identification of Supply Shocks By Maxime Phillot
  7. Discount Rate Risk in Private Equity: Evidence from Secondary Market Transactions By Boyer, Brian; Nadauld, Taylor D.; Vorkink, Keith P.; Weisbach, Michael S.
  8. Downside Systematic Risk in Pakistani Stock Market: Role of Corporate Governance, Financial Liberalization and Investor Sentiment By Hussain, Shahzad; Akbar, Muhammad; Malik, Qaisar; Ahmad, Tanveer; Abbas, Nasir
  9. A Sentiment-based Risk Indicator for the Mexican Financial Sector By Caterina Rho; Raúl Fernández; Brenda Palma

  1. By: Giovanni Ferri (Università di Roma LUMSA); Raffaele Lagravinese (Università degli Studi di Bari "Aldo Moro"); Giuliano Resce (Università degli Studi del Molise)
    Abstract: Since its lethality increases exponentially with age, the early 2020 COVID-19 shock unexpectedly raised the risk of corporate disruption at companies led by older CEOs. While normally unprepared successions might be beneficial by replacing entrenched CEOs, this systemic shock projected a possible crowding of older CEOs' successions, with disruption costs dominating changeover benefits. Within this natural experiment, we find that stock returns and volatility worsened at S&P 500 listed companies with older CEOs when the COVID-19 lethal risk emerged. Our results resist various robustness checks. This advises companies to adopt contingency strategies of top managers’ replacement against possibly recurring pandemics.
    Keywords: COVID-19; Stock Performance; CEO’s Age; S&P 500
    JEL: C23 G12 G32 M12
    Date: 2021–06
  2. By: Lööf, Hans (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Sahamkhadam, Maziar (Linnaeus University); Stephan, Andreas (Jönköping International Business School and CESIS, KTH)
    Abstract: Did Corporate Social Responsibility investing benefit shareholders during the COVID-19 pandemic crisis? Distinguishing between downside tail risk and upside reward potential of stock returns, we provide evidence from 5,073 stocks listed on stock markets in ten countries. The findings suggests that better ESG ratings are associated with lower downside risk, but also with lower upside return potential. Thus, ESG ratings help investors to reduce their risk exposure to the market turmoil caused by the pandemic, while maintaining the fundamental trade-off between risk and reward.
    Keywords: ESG; COVID 19; downside risk; upside potential; Sustainalytics; financial markets
    JEL: D22 G11 G14 G32
    Date: 2021–05–27
  3. By: Corradin, Stefano; Grimm, Niklas; Schwaab, Bernd
    Abstract: We decompose euro area sovereign bond yields into five distinct components: i) expected future short-term risk-free rates and a term premium, ii) default risk premium, iii) redenomination risk premium, iv) liquidity risk premium, and a v) segmentation (convenience) premium. Identification is achieved by considering sovereign bond yields jointly with other rates, including sovereign credit default swap spreads with and without redenomination as a credit event feature. We apply our framework to study the impact of European Central Bank (ECB) monetary policy and European Union (E.U.) fiscal policy announcements during the Covid-19 pandemic recession. We find that both monetary and fiscal policy announcements had a pronounced effect on yields, mostly through default, redenomination, and segmentation premia. While the ECB's unconventional monetary policy announcements benefited some (vulnerable) countries more than others, owing to unprecedented flexibility in implementing bond purchases, the E.U.’s fiscal policy announcements lowered yields more uniformly. JEL Classification: C22, G11
    Keywords: ECB, event study, Kalman filter, sovereign bond yields
    Date: 2021–05
  4. By: Bennett, Benjamin (Tulane U); Stulz, Rene M. (Ohio State U and ECGI); Wang, Zexi (Lancaster U)
    Abstract: Firms added to the S&P 500 index join a prestigious and exclusive club. They want to fit in the club, which creates a "keeping up with the Joneses" effect. Firms pay more attention to their index peers after inclusion and their investment, external financing, and payouts co-move more with their index peers. These effects do not appear to result from the increased coordination among investors posited by the common ownership literature as inclusion does not cause a decrease in competition. Since index inclusion does not increase shareholder wealth permanently, these peer effects do not appear to benefit shareholders.
    JEL: G11 G14 G23 G31 G32 G35
    Date: 2021–05
  5. By: Nina Boyarchenko; Lars C. Larsen; Paul Whelan
    Abstract: Since the advent of electronic trading in the late 1990s, S&P 500 futures have traded close to 24 hours a day. In this post, which draws on our recent Staff Report, we document that holding U.S. equity futures overnight has earned a large positive return during the opening hours of European markets. The largest positive returns in the 1998–2019 sample have accrued between 2 a.m. and 3 a.m. U.S. Eastern time—the opening of European stock markets—and averaged 3.6 percent on an annualized basis, a phenomenon we call the overnight drift.
    Keywords: overnight drift; inventory risk management; daylight savings time (DST)
    JEL: G1
    Date: 2021–05–26
  6. By: Maxime Phillot
    Abstract: We present a novel identification strategy of U.S. Treasury supply shocks based on auction data. We interpret changes in Treasury futures prices around public announcements by the Treasury as shocks to the expected supply of debt securities by the U.S. government. After describing the theoretical mechanism between futures prices and expected debt supply, we isolate the component of price variation in futures pertaining to Treasury announcements between 1998 and 2020. We then study how Treasury supply affects financial markets by means of local projections, using our series of shocks as instrumental variables. We show that surprise increases in Treasury supply have sizable and significant dynamic causal effects on financial markets, as they cause an upward shift of the yield curve, fuelled in part by an increase in the term premium. While stock prices go up and volatility goes down, corporate bond yields increase. As a result, the equity premium rises,the risk premium falls, inflation expectations soar and the liquidity premium decreases.
    Keywords: Treasury supply, high frequency identification, local projections, liquidity premium
    JEL: E44 E62 H63
    Date: 2021–05
  7. By: Boyer, Brian (Brigham Young U); Nadauld, Taylor D. (Brigham Young U); Vorkink, Keith P. (Brigham Young U); Weisbach, Michael S. (Ohio State U and ECGI)
    Abstract: Standard measures of PE performance based on cash flows overlook discount rate risk. An index constructed from prices paid in secondary market transactions indicates that PE discount rates vary considerably. While the standard alpha for our index is zero, measures of performance based on cash flow data for funds in our index are large and positive. To illustrate that results are not driven by idiosyncrasies of PE secondary markets, we obtain similar results using cash flows and returns of synthetic funds that invest in small cap stocks. Ignoring variation in PE discount rates can lead to a misallocation of capital.
    JEL: G11 G23 G24
    Date: 2021–04
  8. By: Hussain, Shahzad; Akbar, Muhammad; Malik, Qaisar; Ahmad, Tanveer; Abbas, Nasir
    Abstract: Purpose –We examine the impact of corporate governance, investor sentiment and financial liberalization on downside systematic risk and the interplay of socio-political turbulence on this relationship through static and dynamic panel estimation models.Design/methodology/approach – Our evidence is based on a sample of 230 publicly listed non-financial firms from Pakistan Stock Exchange (PSX) over the period 2008-2018. Furthermore, we analyze the data through Blundell and Bond (1998) technique in full sample as well sub-samples (Big & Small Firms). Findings –We document that corporate governance mechanism reduces the downside risk, whereas, investor sentiment and financial liberalization increase the investors’ exposure toward downside risk. Particularly, the results provide some new insights that the socio-political turbulence as a moderator weakens the impact of corporate governance and strengthens the effect of investor sentiment and financial liberalization on downside risk. Consistent with prior studies, the analysis of sub-samples reveal some statistical variations in large and small-size sampled firms. Theoretically, the findings mainly support agency theory, noise trader theory and the Keynesians hypothesis.Originality/value –Stock market volatility has become a prime area of concern for investors, policy makers and regulators in emerging economies. Primarily, the existence of market volatility is attributed to weak governance, irrational behavior of market participants, liberation of financial policies and sociopolitical turbulence. Therefore, the present study provides simultaneous empirical evidence to determine whether corporate governance, investor sentiment and financial liberalization hinder or spur downside risk in an emerging economy. Furthermore, our work relates to a small number of studies that examine the role of socio-political turbulence as a moderator on the relationship of corporate governance, investor sentiment and financial liberalization with downside systematic risk.
    Date: 2021–05–27
  9. By: Caterina Rho; Raúl Fernández; Brenda Palma
    Abstract: We apply text analysis to Twitter messages in Spanish to build a sentiment- based risk index for the financial sector in Mexico. We classify a sample of tweets for the period 2006-2019 to identify messages in response to positive or negative shocks to the Mexican financial sector. We use a voting classifier to aggregate three different classifiers: one based on word polarities from a pre-defined dictionary; one based on a support vector machine; and one based on neural networks. Next, we compare our Twitter sentiment index with existing indicators of financial stress. We find that this novel index captures the impact of sources of financial stress not explicitly encompassed in quantitative risk measures. Finally, we show that a shock in our Twitter sentiment index correlates positively with an increase in financial market risk, stock market volatility, sovereign risk, and foreign exchange rate volatility.
    JEL: G1 G21 G41
    Date: 2021–05

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