nep-fmk New Economics Papers
on Financial Markets
Issue of 2022‒04‒11
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Can Volatility Solve the Naive Portfolio Puzzle? By Michael Curran; Patrick O'Sullivan; Ryan Zalla
  2. Asset pricing with costly short sales By Theodoros Evgeniou; Julien Hugonnier; Rodolfo Prieto
  3. Indexing and the performance-flow relation of actively managed mutual funds By Lesmeister, Simon; Limbach, Peter; Rau, P. Raghavendra; Sonnenburg, Florian
  4. Imperfect Competition in Derivatives Markets By Christina Brinkmann
  5. Back to the roots: Ancestral origin and mutual fund manager portfolio choice By Ammann, Manuel; Cochardt, Alexander Elmar; Straumann, Simon; Weigert, Florian
  6. The Fragility of Market Risk Insurance By Ralph Koijen; Motohiro Yogo
  7. Do financial advisors matter for M&A pre-announcement returns? By Betzer, André; Gider, Jasmin; Limbach, Peter
  8. The impact of ESG ratings on implied and historical volatility By Burger, Eric; Grba, Fabian; Heidorn, Thomas
  9. Failure of Gold, Bitcoin and Ethereum as safe havens during the Ukraine-Russia war By Alhonita YATIE
  10. Time-variation in the effects of push and pull factors on portfolio flows: Evidence from a Bayesian dynamic factor model By Bettendorf, Timo; Karadimitropoulou, Aikaterini

  1. By: Michael Curran (Department of Economics, Villanova School of Business, Villanova University); Patrick O'Sullivan (Schroders Investment Management, 1 London Wall Place, London, UK.); Ryan Zalla (Economics Department, University of Pennsylvania, 133 South 36th Street, Philadelphia, PA 19104, USA.)
    Abstract: We investigate whether sophisticated volatility estimation improves the out-of-sample performance of mean-variance portfolio strategies relative to the naive 1/N strategy. The portfolio strategies rely solely upon second moments. Using a diverse group of portfolios and econometric models across multiple datasets, most models achieve higher Sharpe ratios and lower portfolio volatility that are statistically and economically significant relative to the naive rule, even after controlling for turnover costs. Our results suggest benefits to employing more sophisticated econometric models than the sample covariance matrix, and that mean-variance strategies often out-perform the naive portfolio across multiple datasets and assessment criteria.
    Keywords: mean-variance, naive portfolio, volatility
    JEL: G11 G17
    Date: 2022–02
  2. By: Theodoros Evgeniou (INSEAD); Julien Hugonnier (Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute); Rodolfo Prieto (INSEAD)
    Abstract: We study a dynamic general equilibrium model with costly-to-short stocks and heterogeneous beliefs. The closed-form solution to the model shows that costly short sales drive a wedge between the valuation of assets that promise identical cash flows but are subject to different trading arrangements. Specifically, we show that the price of an asset is given by the risk-adjusted present value of future cash flows which include both dividends and an endogenous lending yield. This pricing formula implies that returns satisfy a modified capital asset pricing model with an adjustment for the lending yield and sheds light on recent findings about the explanatory power of lending fees in the cross-section of returns. In particular, we show empirically that once returns are appropriately adjusted for lending fees, stocks with low and high shorting costs offer similar risk-return tradeoffs.
    Keywords: Shorting fees, Securities lending, Heterogeneous beliefs, Dynamic equilibrium.
    JEL: D51 D52 G11 G12
    Date: 2022–03
  3. By: Lesmeister, Simon; Limbach, Peter; Rau, P. Raghavendra; Sonnenburg, Florian
    Abstract: We exploit the staggered introduction of index funds in different segments and countries to study how increased competition from indexing affects the performance-flow relation and incentives of actively managed equity mutual funds. An increase in the market shares of available country-level index funds in active fund benchmarks is associated with a significantly lower sensitivity of flows to past performance and with a shift from a convex performance-flow relation towards a more linear relation. The increased competition from index funds is also associated with a higher fund performance-liquidation sensitivity, suggesting real economic consequences for active fund managers and fund management companies.
    Keywords: performance-flow relation,performance-liquidation sensitivity,mutual funds,active management,passive management,competition
    JEL: G11 G23 G41
    Date: 2022
  4. By: Christina Brinkmann (University of Bonn)
    Abstract: Since the push towards central clearing in derivatives markets after the global financial crisis, an open question has been how the development has affected competition. This paper models imperfect competition between dealers in derivatives markets. Two risk-neutral dealers offer derivatives to risk-averse clients with a hedging need, and compete in price (fee) and quality (default probability). I find that with such two-dimensional competition, for given default probabilities, an equilibrium in prices exists that is preferred by both dealers. In this equilibrium the dealer with the lower default probability makes larger profits - a feature, that can produce market discipline to keep the own default probability low. If a central counterparty (CCP) is introduced as an innovation that removes the quality dimension of the competition, this market force pushing for higher qualities vanishes.
    Keywords: Derivatives, OTC Markets, Central Clearing, Imperfect Competition, Vertical Product Differentiation
    JEL: G12 G23 G28 L13 L15
    Date: 2022–03
  5. By: Ammann, Manuel; Cochardt, Alexander Elmar; Straumann, Simon; Weigert, Florian
    Abstract: We exploit variation in the ancestries of U.S. equity mutual fund managers to show that ancestry affects portfolio decisions. Controlling for fund firm location, we find that funds overweight stocks from their managers' ancestral home countries in their non-U.S. portfolio by 132 bps or 20.34% compared with their peers. Similarly, funds overweight industries that are comparatively large in their manager's ancestral home countries. Stocks linked to managers' ancestry do not outperform stocks in the same countries and industries but held by managers of other ancestries. This supports the notion that ancestry-linked investments are not informed but due to familiarity.
    Keywords: Culture,Home Bias,Mutual Funds,Portfolio Choice,Fund Managers
    JEL: G11 G41
    Date: 2022
  6. By: Ralph Koijen (University of Chicago); Motohiro Yogo (Princeton University)
    Abstract: Variable annuities, which package mutual funds with minimum return guarantees over long horizons, accounted for $1.5 trillion or 35% of U.S. life insurer liabilities in 2015. Sales decreased and fees increased during the global financial crisis, and insurers made guarantees less generous or stopped offering guarantees to reduce risk exposure. These effects persist in the low interest rate environment after the global financial crisis, and variable annuity insurers suffered large equity drawdowns during the COVID-19 crisis. We develop and estimate a model of insurance markets in which financial frictions and market power determine pricing, contract characteristics, and the degree of market completeness.
    Keywords: Insurance, Financial Crisis, Risk
    JEL: G22 G32
    Date: 2022–03
  7. By: Betzer, André; Gider, Jasmin; Limbach, Peter
    Abstract: This study documents economically meaningful and persistent financial advisor fixed effects in target firms' abnormal stock returns shortly prior to takeover announcements.Additional difference-in-differences analyses suggest that advisors are associated with lower pre-bid stock returns after their senior staff were defendants in SEC insider trading enforcement actions. Returns are higher for advisors with more previously advised deals and those located in NYC. The evidence helps explain the prevalent phenomenon of pre-bid stock returns. It contributes to the inconclusive literature on banks' exploitation of private information gained via advisory services, which is limited to disclosed, traceable activities indicative of information leakage.
    Keywords: Financial Advisors,Mergers and Acquisitions,Information Leakage,Target Runups
    JEL: G14 G15 G21 G34 K42
    Date: 2022
  8. By: Burger, Eric; Grba, Fabian; Heidorn, Thomas
    Abstract: The economic and political developments of the past years show an increasing importance of a possible risk-reducing of the company due to good ESG performance. Our work contributes by examining the impact of relatively better ESG performance of companies on their implied and historical share volatility. Our regressions show a clear relationship between the volatilities and the ESG ratings of the market-leading agencies (Bloomberg, Refinitiv, Sustainalytics and MSCI) and our combined score. A better ESG performance measured by the company's ESG rating(s) has a risk-reducing effect in the form of lower stock volatility. However, our combined rating has the strongest impact.
    Keywords: Environmental,Social and Governance (ESG),ESG Ratings,ESG Rating Filter,Equity Volatility,Historical Volatility,Implied Volatility,Company Risk Performance
    JEL: G11 G24 G32 Q56
    Date: 2022
  9. By: Alhonita YATIE
    Abstract: This paper studies the impact of fear, uncertainty and market volatility caused by the Ukraine-Russia war on crypto-assets returns (Bitcoin and Ethereum) and Gold returns. We use the searches on Wikipedia trends as proxies of uncertainty and fear and two volatility indices: S&P500 VIX and the Russian VIX (RVIX). The results show that Bitcoin, Ethereum and Gold failed as safe havens during this war.
    Keywords: War, Russia, Ukraine, crypto-assets, Gold, Safe haven
    JEL: H56 G32 G12 G15
    Date: 2022
  10. By: Bettendorf, Timo; Karadimitropoulou, Aikaterini
    Abstract: The extent to which push and pull factors affect international capital flows is widely debated. We contribute to this strand of literature by estimating the relative importance of push and pull factors for portfolio flows over a time span, encompassing the global financial crisis, the European sovereign debt crisis as well as the beginning of the Covid-19 pandemic. To do so, we extract common and country-specific components from fund flow data using Bayesian dynamic factor models with time-varying coefficients and stochastic volatility. Assuming that the common component represents push factors and the country-specific component pull factors, we show that (i) time-variation matters and (ii) there is a substantial amount of heterogeneity in the importance of factors across regions (advanced versus emerging market economies) and asset classes (equity versus bonds). We find that the relative importance of push factors for flows into advanced economies has on average increased over time, particularly for EU countries. With respect to flows into emerging market economies, we find very heterogeneous results between individual countries. Moreover, we identify risk measures, US stock market returns, US real interest rates, the US real effective exchange rate and the oil price as important push factors. Pull factors seem to covary with domestic stock market returns, in particular.
    Keywords: portfolio flows,push and pull factors,bayesian dynamic factor model,time-variation
    JEL: C32 E52 F32
    Date: 2022

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