nep-fmk New Economics Papers
on Financial Markets
Issue of 2022‒11‒14
six papers chosen by

  1. Who is Afraid of Eurobonds? By Francesco Bianchi; Leonardo Melosi; Anna Rogantini Picco
  2. All-to-All Trading in the U.S. Treasury Market By Alain P. Chaboud; Caren Cox; Michael J. Fleming; Ellen Correia Golay; Yesol Huh; Frank M. Keane; Kyle Lee; Krista B. Schwarz; Clara Vega; Carolyn Windover
  3. ESG Confusion and Stock Returns: Tackling the Problem of Noise By Florian Berg; Julian F. Koelbel; Anna Pavlova; Roberto Rigobon
  4. Optimizing portfolios in the illiquid, unlisted market of SME crowdlending By Bastien Lextrait
  5. Design and Analysis of Optimized Portfolios for Selected Sectors of the Indian Stock Market By Jaydip Sen; Abhishek Dutta
  6. The Role of Terrorist Events in Determining Stock Returns in Pakistan: Covering Most Vibrant Era 2003-2013 By Audi, Marc; Sulehri, Fiaz Ahmad; Ali, Amjad

  1. By: Francesco Bianchi; Leonardo Melosi; Anna Rogantini Picco
    Abstract: The growing asymmetry in the size of fiscal imbalances poses a serious challenge to the macroeconomic stability of the Euro Area (EA). We show that following a contractionary shock, the current monetary and fiscal framework weakens economic growth even in low-debt countries because of the zero lower bound (ZLB) constraint. At the same time, the current framework also exposes the EA to the risk of fiscal stagflation if one country were to refuse to implement the necessary fiscal consolidations. We study a new framework that allows EA policymakers to separate the need for short-run macroeconomic stabilization from the issue of long-run fiscal sustainability. Following a contractionary shock, the central bank tolerates the increase in inflation needed to stabilize the amount of Eurobonds issued in response to a large EA recession. National governments remain responsible to back their country-level debt by fiscal adjustments. The policy acts as an automatic stabilizer that benefits both high-debt and low-debt countries, generating a moderate increase in inflation that mitigates the recession and allows the central bank to move away from the ZLB. At the same time, the proposed policy lowers the risk of fiscal stagflation because it endows EA countries with effective stabilization policies.
    Keywords: Monetary and Fiscal Policy Coordination; Monetary Union; Eurobonds; Zero Lower Bound; Government Debt
    JEL: E50 E62 E30
    Date: 2022–10–03
  2. By: Alain P. Chaboud; Caren Cox; Michael J. Fleming; Ellen Correia Golay; Yesol Huh; Frank M. Keane; Kyle Lee; Krista B. Schwarz; Clara Vega; Carolyn Windover
    Abstract: While the U.S. Treasury market remains the deepest and most liquid securities market in the world, several episodes of abrupt deterioration in market functioning over recent years have brought the market’s resilience into focus. The adoption of all-to-all trading in the Treasury market could be one avenue to strengthen market resilience. Conceptually, all-to-all trading would allow any market participant to trade directly with any other market participant. This could be particularly helpful in times of stress, when the capacity of traditional intermediaries may be tested. In this paper, we discuss what all-to-all trading would mean for the cash secondary Treasury market, the benefits it might bring, and the conditions that might make adoption of the protocol more likely. We also review several trading protocols operating in the Treasury market that widen the field of trading partners and discuss the challenges to broader adoption of such protocols.
    Keywords: Treasury market; market structure; all-to-all
    JEL: D47 G10 G23
    Date: 2022–10–01
  3. By: Florian Berg; Julian F. Koelbel; Anna Pavlova; Roberto Rigobon
    Abstract: How does ESG (environmental, social, and governance) performance affect stock returns? Answering this question is difficult because existing measures of ESG perfor- mance — ESG ratings — are noisy and, therefore, standard regression estimates suffer from attenuation bias. To address the bias, we propose two noise-correction procedures, in which we instrument ESG ratings with ratings of other ESG rating agencies, as in the classical errors-in-variables problem. The corrected estimates demonstrate that the effect of ESG performance on stock returns is stronger than previously estimated: after correcting for attenuation bias, the coefficients increase on average by a factor of 2.6, implying an average noise-to-signal ratio of 61.7%. The attenuation bias is stable across horizons at which stock returns are measured. In simulations, our noise-correction pro- cedures outperform the standard approaches followed by practitioners such as averages or principal component analysis.
    JEL: C26 G12 Q56
    Date: 2022–10
  4. By: Bastien Lextrait
    Abstract: Portfolio construction for SME crowdloans is challenging. This market is illiquid, unlisted and with scarce historical data of asset development. Consequently, traditional portfolio optimization techniques cannot be applied as is since risks can only be assessed individually and covariance matrices are not available. We propose a new portfolio optimization framework based on estimated risk clustering rather than asset variance-covariance matrix. We first establish risk profiles for each company through SHAP-decomposing its estimated risk. We use correlation-like metrics to compare risk profiles to one another and group similar risk profiles together using hierarchical clustering. We then apply quadratic optimization on the generated groups to minimize risk variance. We simulate investments using real data to quantify our strategy’s return, based on the SMEs market share neglected by banks. Our method overperforms traditional mean-variance optimization adapted at best on our sample, as well as 1/N naive investment strategy which has regularly proven its efficiency. Our method rewards any risk-averse investor profile with higher returns.
    Keywords: Portfolio optimization, crowdlending, SMEs, SHAP values, hierarchical clustering
    JEL: G11 G23 C38
    Date: 2022
  5. By: Jaydip Sen; Abhishek Dutta
    Abstract: Portfolio optimization is a challenging problem that has attracted considerable attention and effort from researchers. The optimization of stock portfolios is a particularly hard problem since the stock prices are volatile and estimation of their future volatilities and values, in most cases, is very difficult, if not impossible. This work uses three ratios, the Sharpe ratio, the Sortino ratio, and the Calmar ratio, for designing the mean-variance optimized portfolios for six important sectors listed in the National Stock Exchange (NSE) of India. Three portfolios are designed for each sector maximizing the ratios based on the historical prices of the ten most important stocks of each sector from Jan 1, 2017, to Dec 31, 2020. The evaluation of the portfolios is done based on their cumulative returns over the test period from Jan 1, 2021, to Dec 31, 2021. The ratio that yields the maximum cumulative returns for both the training and the test periods for the majority of the sectors is identified. The sectors that exhibit the maximum cumulative returns for the same ratio are also identified. The results provide useful insights for investors in the stock market in making their investment decisions based on the current return and risks associated with the six sectors and their stocks.
    Date: 2022–10
  6. By: Audi, Marc; Sulehri, Fiaz Ahmad; Ali, Amjad
    Abstract: This study explains the relationship and significance of terrorism attacks and Pakistan Stock Exchange behavior. This study uses standard event study methodology and data relating to the stock market index was collected from the website of the Pakistan Stock Exchange and data relating to terrorist events was collected from the newspapers of Business Recorder and DAWN. A total of 277 terrorist events have been considered in this study. The first-day abnormal return, five-day cumulative abnormal return, and ten-day cumulative return were calculated for all of the events. Terrorist events have been analyzed year-wise and also on the bases of their category like events related to foreigners, military, politics, and general terrorist events. This study finds evidence that terrorist events affect the stock market in Pakistan. But their impact is different considering the economic and political implications of these events. Terrorist events yield mixed results where the significance of the events differed considerably in their impact on the stock market. Moreover, the abundance of terrorist events also hindered the estimation as rare events bring the element of surprise and the market adjusts to more frequent events inappropriate manner. However, terrorist events relating to politics and foreigners yield more consistent results as these events were distributed across time with longer intervals. Overall, this study lays the foundation to make further explorations into the phenomenon of uncertainty caused by terrorist events in relevance to the stock market in Pakistan. Implications and directions for future research are also provided at the end of the study.
    Keywords: Terrorism Events, Stock Market, Abnormal Returns
    JEL: H54 P16
    Date: 2022

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