nep-fmk New Economics Papers
on Financial Markets
Issue of 2022‒05‒23
ten papers chosen by

  1. How do Private Equity Fees vary across Public Pensions? By Juliane Begenau; Emil Siriwardane
  2. Margin procyclicality and the collateral cycle By Benos, Evangelos; Ferrara, Gerardo; Ranaldo, Angelo
  3. Size discount and size penalty: trading costs in bond markets By Pintér, Gábor; Wang, Chaojun; Zou, Junyuan
  4. Sovereign Bond Restructuring: Commitment vs. Flexibility By Jason Roderick Donaldson; Lukas Kremens; Giorgia Piacentino
  5. Can the Government Be an Effective Venture Capital Investor? By Martina Fraschini; Andrea Maino; Luciano Somoza
  6. Trust, social capital, and the bond market benefits of ESG performance By Amiraslani, Hami; Lins, Karl V.; Servaes, Henri; Tamayo, Ane
  7. European Sovereign Bond and Stock Market Granger Causality Dynamics By Gomes, Pedro; Kurter, Zeynep O.; Morita, Rubens
  8. On ESG Investing: Heterogeneous Preferences, Information, and Asset Prices By Itay Goldstein; Alexandr Kopytov; Lin Shen; Haotian Xiang
  9. Modelling Persistence and Non-Linearities in the US Treasury 10-Year Bond Yields By Guglielmo Maria Caporale; Luis A. Gil-Alana; OlaOluwa Simon Yaya
  10. Financial Indicators, Stock Prices and Returns: Evidence from Banks Listed on the Stock Exchange of an Emerging Market (CSE) By Jihane Aayale; Meriem Seffar; James Koutene

  1. By: Juliane Begenau; Emil Siriwardane
    Abstract: We study how investment fees vary within private-capital funds. Net-of-fee return clustering suggests that most funds have two tiers of fees, and we decompose differences across tiers into both management and performance-based fees. Managers of venture capital funds and those in high demand are less likely to use multiple fee schedules. Some investors consistently pay lower fees relative to others within their funds. Investor size, experience, and past performance explain some but not all of this effect, suggesting that unobserved traits like negotiation skill or bargaining power materially impact the fees that investors pay to access private markets.
    JEL: G11 G23 G24 H55
    Date: 2022–03
  2. By: Benos, Evangelos (University of Nottingham); Ferrara, Gerardo (Bank of England); Ranaldo, Angelo (University of St. Gallen)
    Abstract: Using supervisory data from UK central counterparties (CCPs), we study a collateral cycle in which market participants raise liquidity in the repo markets to meet CCPs margin calls, before CCPs reinvest the liquidity through reverse repos as well as bond purchases. In the first leg, we find that increases in the cost of repo funding precede increases in CCP cash margin as market participants anticipate increased margin requirements. However, this effect is moderated by the return leg, where cash margin received by CCPs is returned to market participants via the repo and bond markets. The additional cash being recycled by CCPs via the repo markets alongside the increased demand for safe bonds, create counter‑cyclical effects that lower repo rates, especially at times of stress.
    Keywords: Central clearing; margin procyclicality; repo rates
    JEL: G10 G12 G14
    Date: 2022–04–13
  3. By: Pintér, Gábor (Bank of England); Wang, Chaojun (The Wharton School); Zou, Junyuan (INSEAD)
    Abstract: We show that larger trades incur lower trading costs in government bond markets (‘size discount’), but costs increase in trade size after controlling for clients’ identities (‘size penalty’). The size discount is driven by the cross‑client variation of larger traders obtaining better prices, consistent with theories of trading with imperfect competition. The size penalty, driven by the within‑client variation, is larger for corporate bonds, during major macroeconomic surprises and during Covid‑19. These differences are larger among more sophisticated clients, consistent with information‑based theories. The size penalty in US Treasuries is about three times as small as in UK gilts.
    Keywords: Trading costs; trade size; government and corporate bonds; trader identities
    JEL: G12 G14 G24
    Date: 2022–04–08
  4. By: Jason Roderick Donaldson; Lukas Kremens; Giorgia Piacentino
    Abstract: Sovereigns in distress often engage in debt restructuring, typically negotiating with multiple classes of bondholders at once. We use natural experiments to investigate whether sovereign bondholders benefit from committing not to restructure. We find that committing not to restructure one class of bonds is valuable for not only that class, but, in contrast to received theory, for others too. We develop a model to rationalize these cross-bond spillovers. It points to a system of cross-bond equations that, we show, can be exploited to quantify natural experiments and to estimate unobservable elasticities in terms of a few sufficient statistics.
    JEL: G34 H63 K12
    Date: 2022–03
  5. By: Martina Fraschini (University of Lausanne, HEC; Swiss Finance Institute); Andrea Maino (University of Geneva); Luciano Somoza (University of Lausanne, HEC; Swiss Finance Institute)
    Abstract: In recent years, governments have allocated increasing capital to direct startup funding through Government-sponsored Venture Capital funds (GVC). In this paper, we study the role of GVCs in the venture capital market and their relationship with Private Venture Capitalists (PVC). Using European data, we find that GVCs invest consistently with their policy mandates, favoring specific industries, geographical areas, and firms with high innovation potential, but have lower average performances. These findings indicate that GVCs can identify innovative companies and prioritize positive externalities over profit maximization. We build an asset pricing model with heterogeneous preferences to study the role of GVCs in catalyzing PVC investments. We find that PVCs invest less in startups previously funded by GVCs, in line with empirical evidence. At aggregate level, GVC investments can crowd-in private ones if they focus on startups in VC hubs.
    Keywords: venture capital, public investments, crowd-in, subsidy, industrial policy, patent data, innovation.
    JEL: G24 G11 G18 H54 O30
    Date: 2022–04
  6. By: Amiraslani, Hami; Lins, Karl V.; Servaes, Henri; Tamayo, Ane
    Abstract: We investigate whether a firm’s social capital and the trust that it engenders are viewed favorably by bondholders. Using firms’ environmental and social (E&S) performance to proxy for social capital, we find no relation between social capital and bond spreads over the period 2006–2019. However, during the 2008–2009 financial crisis, which represents a shock to trust and default risk, high-social-capital firms benefited from lower bond spreads. These effects are stronger for firms with higher expected agency costs of debt and firms whose E&S efforts are more salient. During the crisis, high-social-capital firms were also able to raise more debt, at lower spreads, and for longer maturities. We find no evidence that the governance element of ESG is related to bond spreads. The gap between E&S performance of firms in the bottom and top E&S terciles has narrowed since the financial crisis, especially in the year prior to accessing the bond market.
    Keywords: ESG; CSR; sustainability; social capital; trust; corporate bonds; bond spreads; agency cost of debt; financial crisis; Springer deal
    JEL: G12 G21 G32 M14
    Date: 2022–04–14
  7. By: Gomes, Pedro (Birkbeck, University of London); Kurter, Zeynep O. (University of Warwick); Morita, Rubens (Birkbeck, University of London)
    Abstract: We investigate the lead-lag relationship between weekly sovereign bond yield changes and stock market returns for eight European countries, and how it changed during the period 2008-2018. We use a Markov-Switching Granger Causality method that determines reversals of causality endogenously. In all countries, there were often changes in the direction of the Granger causality between the two markets that coincided with global and idiosyncratic economic events. Stock returns led changes of sovereign bond yields in all countries, particularly during the financial and the Euro Area crisis. Changes of sovereign bond yields occasionally led stock returns in France, Spain and Portugal. JEL classification: C32 ; C54 ; C61 ; G01 ; G12 ; G15
    Keywords: Sovereign Bond Yields ; Stock Markets ; Vector Autoregression ; Markov-Switching ; Granger Causality
    Date: 2022
  8. By: Itay Goldstein; Alexandr Kopytov; Lin Shen; Haotian Xiang
    Abstract: We study how environmental, social and governance (ESG) investing reshapes information aggregation by prices. We develop a rational expectations equilibrium model in which traditional and green investors are informed about financial and ESG risks but have different preferences over them. Because of the preference heterogeneity, traditional and green investors trade in the opposite directions based on the same information. We show that the equilibrium price may not be uniquely determined. An increase in the fraction of green investors and an improvement in the ESG information quality can reduce price informativeness about the financial payoff and raise the cost of capital.
    JEL: G14 G32
    Date: 2022–04
  9. By: Guglielmo Maria Caporale; Luis A. Gil-Alana; OlaOluwa Simon Yaya
    Abstract: This paper analyses persistence and non-linearities in quarterly and monthly US Treasury 10-year bond yields over the period 1962-2021 using two different fractional integration approaches including Chebyshev polynomials and Fourier functions respectively. The results for both quarterly and monthly data provide evidence of non-linear structures and mean reversion (i.e., of transitory effects of shocks) under the assumption of autocorrelated errors.
    Keywords: non-linearities, Chebyshev polynomials, Fourier functions, persistence, US Treasury, 10-year bond yields
    JEL: C22 E43
    Date: 2022
  10. By: Jihane Aayale (ISCAE - Institut Supérieur de Commerce et d'Administration des Entreprises); Meriem Seffar (GRM - Groupe de Recherche en Management - EA 4711 - UNS - Université Nice Sophia Antipolis (... - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019) - UCA - Université Côte d'Azur); James Koutene (ISCAE - Institut Supérieur de Commerce et d'Administration des Entreprises)
    Abstract: The Moroccan banking sector has undergone major developments following the structural reforms undertaken and which have enabled it to comply with international standards. The implementation of internal control, compliance and risk management systems has significantly improved its profitability. Indeed, Moroccan banks are subject to restrictive regulations and close supervision by the Moroccan Central Bank, Bank Al-Maghrib, to monitor and regulate their growth and exposure to the various risks inherent to their activities, including credit, liquidity, market and operational risks. Among the banks in the sector, six are listed on the Casablanca Stock Exchange, including market-leading banks such as Attijari Wafa bank, Bank of Africa and Banque Centrale Populaire. On the other hand, the Moroccan stock market attracts several local and foreign investors who would be interested in whether the price of shares and their evolution can be predicted by banking and financial ratios. The main objective of this study is to analyze the relationship between share prices and returns of listed banks and indicators of solvency, liquidity, asset quality and profitability. This article runs a multiple linear regression in a panel data analysis using the financial data of commercial banks listed on the Casablanca Stock Exchange from 2011 to 2020. In an efficient financial market, stock prices and their fluctuations should reflect the profitability of banks, alongside with their liquidity, and their solvency, which is a guarantee of the resilience of the banking during financial and economic crises. The results show that stock prices are not impacted by the level of liquidity, asset quality and profitability indicators, raising a much-debated question about the efficiency of the Moroccan stock market. On the other hand, other tests show that the level of profitability of banks, measured by ROA, is linked to the above-mentioned indicators.
    Keywords: Emerging Market,Asset quality,Profitability,Liquidity,Solvency,Stock Market Efficiency,Banks,Share Prices,Stock Returns
    Date: 2022

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