nep-fmk New Economics Papers
on Financial Markets
Issue of 2021‒09‒06
two papers chosen by

  1. The Industrial Organization of Financial Markets By Robert Clark; Jean-François Houde; Jakub Kastl
  2. When Uncertainty and Volatility Are Disconnected: Implications for Asset Pricing and Portfolio Performance By Yacine Aït-Sahalia; Felix Matthys; Emilio Osambela; Ronnie Sircar

  1. By: Robert Clark; Jean-François Houde; Jakub Kastl
    Abstract: This chapter discusses recent developments in the literature involving applications of industrial organization methods to finance. We structure our discussion around a simple model of a financial intermediary that concentrates its attention either on (i) the retail market and hence engages in a traditional maturity transformation business by accepting funds that can be used to invest in risky projects (loans), or (ii) the investment business, financing its operations on the “wholesale” market and making markets or investing in higher return riskier projects. Our discussion is centered around the analysis of market structure and competition in each of these markets, focusing in turn on (i) primary and secondary markets for government and corporate debt, (ii) interbank loans, (iii) markets for retail funding, and (iv) credit markets, including mortgages.
    JEL: G2 L1 L51
    Date: 2021–08
  2. By: Yacine Aït-Sahalia; Felix Matthys; Emilio Osambela; Ronnie Sircar
    Abstract: We analyze an environment where the uncertainty in the equity market return and its volatility are both stochastic, and may be potentially disconnected. We solve a representative investor's optimal asset allocation and derive the resulting conditional equity premium and risk-free rate in equilibrium. Our empirical analysis shows that the equity premium appears to be earned for facing uncertainty, especially high uncertainty that is disconnected from lower volatility, rather than for facing volatility as traditionally assumed. Incorporating the possibility of a disconnect between volatility and uncertainty significantly improves portfolio performance, over and above the performance obtained by conditioning on volatility only.
    JEL: G11 G12
    Date: 2021–08

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