nep-fmk New Economics Papers
on Financial Markets
Issue of 2021‒11‒01
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. When Uncertainty and Volatility Are Disconnected: Implications for Asset Pricing and Portfolio Performance By Yacine Aït-Sahalia; Felix Matthys; Emilio Osambela; Ronnie Sircar
  2. Negative Rates in Bilateral Repo Markets By Samuel Hempel; R. Jay Kahn
  3. A new spin on optimal portfolios and ecological equilibria By Jérôme Garnier-Brun; Michael Benzaquen; Stefano Ciliberti; Jean-Philippe Bouchaud
  4. A Factor Model For Option Returns By Matthias Buechner; Bryan T. Kelly
  5. Blockchain Analysis of the Bitcoin Market By Igor Makarov; Antoinette Schoar
  6. A study of Chinese market efficiency, Shanghai versus Shenzhen: Evidence based on multifractional models By Pierre Bertrand; Marie-Eliette Dury; Bing Xiao

  1. 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.
    Keywords: Risk Aversion; Stochastic Uncertainty; Stochastic Volatility; Uncertainty Aversion; Volatility and Uncertainty Disconnect
    JEL: G11 G12
    Date: 2021–09–30
  2. By: Samuel Hempel (Office of Financial Research); R. Jay Kahn (Office of Financial Research)
    Abstract: Interest rates on repurchase agreements (repo) are crucial indicators of conditions in financial markets. This brief discusses negative rates in bilateral repo markets during 2021, and shows that they stemmed from two key sources: (1) broad factors that pushed down general collateral repo rates, and (2) narrower factors that pushed bilateral repo rates below comparable tri-party general collateral rates. Broad factors include increases in bank reserves and decreases in the supply of close alternatives to repo in early 2021. Narrower factors primarily concern demand for specific collateral in the bilateral market. Finally, the brief examines the effects of negative rates on the Secured Overnight Financing Rate (SOFR) and shows the existing construction of the SOFR successfully limits the impact of specific collateral demand on the reference rate.
    Keywords: Repurchase agreement, repo specials, financial markets, reference rate
    Date: 2021–09–27
  3. By: Jérôme Garnier-Brun (LadHyX - Laboratoire d'hydrodynamique - CNRS - Centre National de la Recherche Scientifique - X - École polytechnique); Michael Benzaquen (LadHyX - Laboratoire d'hydrodynamique - CNRS - Centre National de la Recherche Scientifique - X - École polytechnique); Stefano Ciliberti; Jean-Philippe Bouchaud (X - École polytechnique, Académie des Sciences [Paris])
    Abstract: We consider the classical problem of optimal portfolio construction with the constraint that no short position is allowed, or equivalently the valid equilibria of multispecies Lotka-Volterra equations, in the special case where the interaction matrix is of unit rank, corresponding to a single-resource MacArthur model. We compute the average number of solutions and show that its logarithm grows as N α , where N is the number of assets or species and α ≤ 2 3 depends on the interaction matrix distribution. We conjecture that the most likely number of solutions is much smaller and related to the typical sparsity m(N) of the solutions, which we compute explicitly. We also find that the solution landscape is similar to that of spin-glasses, i.e. very different configurations are quasi-degenerate. Correspondingly, "disorder chaos" is also present in our problem. We discuss the consequence of such a property for portfolio construction and ecologies, and question the meaning of rational decisions when there is a very large number "satisficing" solutions.
    Keywords: Spin-glasses,metastable states,cavity and replica method,quantitative finance,Markowitz portfolios,population dynamics
    Date: 2021
  4. By: Matthias Buechner; Bryan T. Kelly
    Abstract: Due to their short lifespans and migrating moneyness, options are notoriously difficult to study with the factor models commonly used to analyze the risk-return trade-off in other asset classes. Instrumented principal components analysis solves this problem by tracking contracts in terms of their pricing-relevant characteristics via time-varying latent factor loadings. We find that a model with three latent factors prices the cross-section of option returns and explains more than 85% of the variation in a panel of monthly S&P 500 option returns from 1996 to 2017. In particular, we show that the IPCA factors can be rationalized via an economically plausible three-factor model consisting of a level, slope and skew factor. Finally, out-of-sample trading strategies based on insights from the IPCA model have significant alpha over previously studied option strategies.
    JEL: G1 G12
    Date: 2021–10
  5. By: Igor Makarov; Antoinette Schoar
    Abstract: In this paper, we provide detailed analyses of the Bitcoin network and its main participants. We build a novel database using a large number of public and proprietary sources to link Bitcoin addresses to real entities and develop an extensive suite of algorithms to extract information about the behavior of the main market participants. We conduct three major pieces of analysis of the Bitcoin eco-system. First, we analyze the transaction volume and network structure of the main participants on the blockchain. Second, we document the concentration and regional composition of the miners which are the backbone of the verification protocol and ensure the integrity of the blockchain ledger. Finally, we analyze the ownership concentration of the largest holders of Bitcoin.
    JEL: F38 G12 G15
    Date: 2021–10
  6. By: Pierre Bertrand (LAPSCO - Laboratoire de Psychologie Sociale et Cognitive - UCA [2017-2020] - Université Clermont Auvergne [2017-2020] - CNRS - Centre National de la Recherche Scientifique, LMBP - Laboratoire de Mathématiques Blaise Pascal - UCA [2017-2020] - Université Clermont Auvergne [2017-2020] - CNRS - Centre National de la Recherche Scientifique); Marie-Eliette Dury (CERDI - Centre d'Études et de Recherches sur le Développement International - UCA [2017-2020] - Université Clermont Auvergne [2017-2020] - CNRS - Centre National de la Recherche Scientifique); Bing Xiao (CleRMa - Clermont Recherche Management - ESC Clermont-Ferrand - École Supérieure de Commerce (ESC) - Clermont-Ferrand - UCA [2017-2020] - Université Clermont Auvergne [2017-2020])
    Abstract: The Chinese equity market is one of the emerging equity markets which offers an opportunity for international diversification, as a emerging markets, the Chinese stock markets are not mature. Since the 1990s, the reforms in regulations as well as in the attitudes of regulators have rendered the stock market more efficient. The progressive reform process of the stock market has improved the functioning of capital markets and implemented market-based mechanisms. China's stocks pricing mechanism has been pushed toward a more market-oriented approach, in such cases, we expect an alteration in anomalies in the Chinese stock market. In this paper, we examine the daily data from the Shanghai Ashare market, and Shenzhen A-share market over the 2006-2019 period. It would seem that in the Chinese stock market, the seasonal anomalies persist. But at the same time, by employing the Hurst exponent analysis, we find that the Chinese stock markets had a trend of becoming more and more efficient after the reform in October 2011.
    Keywords: Seasonal anomalies,Stock markets,Efficient market hypothesis,Hurst exponent,Multifractional Brownian motion
    Date: 2020–11

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