nep-fmk New Economics Papers
on Financial Markets
Issue of 2022‒11‒28
twelve papers chosen by

  1. The Unicorn Puzzle By Daria Davydova; Rüdiger Fahlenbrach; Leandro Sanz; René M. Stulz
  2. Shareholder activism around the globe: Hedge funds vs. other professional investors By Jochen Hartmann; Matthias Pelster; Soenke Sievers
  3. Intelligence and Global Bias in the Stock Market By Kazuo Sano
  4. Optimal GDP-indexed Bonds By Yasin Kürsat Önder
  5. Political markets as equity price factors By Auld, T.
  6. Housing Forecasts via Stock Market Indicators By Varun Mittal; Laura P. Schaposnik
  7. Cross impact in derivative markets By Mehdi Tomas; Iacopo Mastromatteo; Michael Benzaquen
  8. Contagion or decoupling? Evidence from emerging stock markets By Ndiweni, Zinzile Lorna; Bonga-Bonga, Lumengo
  9. Sovereign Bond Prices, Haircuts and Maturity By Tamon Asonuma; Dirk Niepelt; Romain Ranciere
  10. Too Complex to Digest ? Federal Tax Bills and Their Processing in US Financial Markets By Hamza Bennani; Matthias Neuenkirch
  11. Bank Risk and Stockholding (1910-1934) By Matthew S. Jaremski
  12. Global Fund Flows and Emerging Market Tail Risk By Anusha Chari; Karlye Dilts Stedman; Christian Lundblad

  1. By: Daria Davydova; Rüdiger Fahlenbrach; Leandro Sanz; René M. Stulz
    Abstract: From 2010 to 2021, 639 US VC-funded firms achieved unicorn status. We investigate why there are so many unicorns and why controlling shareholders give investors privileges to obtain unicorn status. We show that unicorns rely more than other VC-funded firms on organizational capital as well as network effects and the internet. Unicorn status enables startups to access new sources of capital. With this capital, they can invest more in organizational intangible assets with less expropriation risk than if they were public. As a result, they are more likely to capture the economies of scale that make their business model valuable.
    JEL: G24 G32 G34
    Date: 2022–10
  2. By: Jochen Hartmann (University of Paderborn); Matthias Pelster (University of Paderborn); Soenke Sievers (University of Paderborn)
    Abstract: Shareholder activism has sharply increased over the past decade and spread both across countries and among different types of investors. Today, 50% of all engagements occur outside North America, with non-hedge fund investors accounting for one-third of all engagements. We investigate the effects and characteristics of hedge fund and non-hedge fund activism using an international dataset of 2,689 activist engagements across 44 countries between 2008 and 2019. Activist investments in North America, on average, yield the largest immediate positive stock market returns and buy-and-hold returns, followed by engagements in Europe and the Asia-Pacific region. In North America, short-term abnormal returns for hedge funds are at a similar level as those for non-hedge funds, but in Europe and the Asia-Pacific region, they are higher for non-hedge funds. However, globally, hedge funds achieve higher buy-and hold returns and are more successful than non-hedge funds in implementing change in target firms. Over time, our results suggest unfulfilled investor expectations, as announcement returns are increasing but (abnormal) buy-and-hold returns and the impact on performance measures of target firms are decreasing for both hedge funds and non-hedge funds.
    Keywords: Shareholder activism, international evidence, hedge funds, non-hedge fund activism, institutional investors
    JEL: G34 G23 G15
    Date: 2022–10
  3. By: Kazuo Sano
    Abstract: Trade is one of the essential feature of human intelligence. The securities market is the ultimate expression of it. The fundamental indicators of stocks include information as well as the effects of noise and bias on the stock prices; however, identifying the effects of noise and bias is generally difficult. In this article, I present the true fundamentals hypothesis based on rational expectations and detect the global bias components from the actual fundamental indicators by using a log-normal distribution model based on the true fundamentals hypothesis. The analysis results show that biases generally exhibit the same characteristics, strongly supporting the true fundamentals hypothesis. Notably, the positive price-to-cash flows from the investing activities ratio is a proxy for the true fundamentals. Where do these biases come from? The answer is extremely simple: ``Cash is a fact, profit is an opinion.'' Namely, opinions of management and accounting are added to true fundamentals. As a result, Kesten process is realized and the Pareto distribution is to be obtained. This means that the market knows it and represents as a stable global bias in the stock market.
    Date: 2022–10
  4. By: Yasin Kürsat Önder (-)
    Abstract: I investigate the introduction of GDP-indexed bonds as an additional source of government borrowing in a quantitative default model. The idea of linking debt payments to developments in GDP resurfaced with the 1980s debt crisis and peaked with the COVID-19 outbreak. I show that the gains from this idea depend on the underlying indexation method and are highest if payments are symmetrically tied to developments in GDP. Optimized indexed debt can eradicate default risk, halve consumption volatility, and increase asset prices while raising the government’s debt balances. These changes occur because an optimally chosen indexation method does a better job at completing the markets.
    Keywords: GDP-indexed bonds, sovereign default, risk sharing, state-contingent assets
    JEL: G11 G23 F34
    Date: 2022–11
  5. By: Auld, T.
    Abstract: There is a gap in the existing literature for models linking prices in prediction markets with those for financial markets. We bridge this gap using a model based on the assumption that a binary political event has a constant effect on the difference of the conditional expectations of financial prices, given that event. This leads to a model where returns can be partitioned into a political factor, driven by changes in the likelihood of an election outcome, and a non-political component. Contrary to the existing literature, this model is based on economic principles and applies in a general setting. This model is naturally extended to equities using the Fama-French 5 factors to model the non-political part of returns variance. We test the model for six elections and referendums from the US and UK. Strong support is found for the theory for four events, and weak evidence for one. The remaining election, the 2017 UK general election, does not appear informative for asset prices. An exploration of the political factor loadings reveals pleasing relationships between firm characteristics and political sensitivity. Internationalisation of revenue, location and nationalisation risk are found to be significant. This is consistent with the existing literature, as well as the idea that firms can diversify away from local political risk using offshore sales.
    Keywords: Elections, Election market, Political risk, Factor model, Pricing of risk
    JEL: C38 C51 D72 G12 G14 G15
    Date: 2022–11–03
  6. By: Varun Mittal; Laura P. Schaposnik
    Abstract: Through the reinterpretation of housing data as candlesticks, we extend Nature Scientific Reports' article by Liang and Unwin [LU22] on stock market indicators for COVID-19 data, and utilize some of the most prominent technical indicators from the stock market to estimate future changes in the housing market, comparing the findings to those one would obtain from studying real estate ETF's. By providing an analysis of MACD, RSI, and Candlestick indicators (Bullish Engulfing, Bearish Engulfing, Hanging Man, and Hammer), we exhibit their statistical significance in making predictions for USA data sets (using Zillow Housing data) and also consider their applications within three different scenarios: a stable housing market, a volatile housing market, and a saturated market. In particular, we show that bearish indicators have a much higher statistical significance then bullish indicators, and we further illustrate how in less stable or more populated countries, bearish trends are only slightly more statistically present compared to bullish trends.
    Date: 2022–10
  7. By: Mehdi Tomas; Iacopo Mastromatteo; Michael Benzaquen (LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We introduce a linear cross-impact framework in a setting in which the price of some given financial instruments (derivatives) is a deterministic function of one or more, possibly tradeable, stochastic factors (underlying). We show that a particular cross-impact model, the multivariate Kyle model, prevents arbitrage and aggregates (potentially non-stationary) traded order flows on derivatives into (roughly stationary) liquidity pools aggregating order flows traded on both derivatives and underlying. Using E-Mini futures and options along with VIX futures, we provide empirical evidence that the price formation process from order flows on derivatives is driven by cross-impact and confirm that the simple Kyle cross-impact model is successful at capturing parsimoniously such empirical phenomenology. Our framework may be used in practice for estimating execution costs, in particular hedging costs.
    Date: 2022
  8. By: Ndiweni, Zinzile Lorna; Bonga-Bonga, Lumengo
    Abstract: With the global interconnectedness among markets, contagion literature has received immeasurable attention from researchers and academics. This study proposes a test to distinguish between interdependence, contagion and the decoupling hypothesis between advanced markets and emerging markets based on entropy theory to expand this pool of literature. The test is applied to time-varying conditional correlations obtained from an asymmetric dynamic conditional correlation generalised autoregressive conditional heteroscedasticity (A-DCC GARCH) model by comparing the extent of correlations over quiet and turmoil periods across financial crises. In this study, the US and EU are identified as advanced economies, and emerging markets are identified by region to uncover whether they are homogenous or heterogenous as receivers of shocks from advanced economies. Our findings present evidence in support of the decoupling hypothesis in the cases of Brazil and Russia during the GFC and Turkey during the ESDC. Furthermore, substantial evidence supporting the existence of contagion effects between advanced and emerging markets is reported, and the presence of interdependence was constantly rejected. The findings of this paper provide valuable insights for policymakers, investors and asset managers.
    Keywords: Contagion, interdependence, decoupling, A DCC GARCH, entropy test, emerging markets, advanced markets.
    JEL: C5 G15
    Date: 2022
  9. By: Tamon Asonuma; Dirk Niepelt; Romain Ranciere
    Abstract: We document that creditor losses (“haircuts”) during sovereign debt restructurings vary across debt maturity. In our novel dataset on instrument-specific haircuts suffered by private creditors in 1999?2020 we find larger losses on short- than long-term debt, independently of the specific haircut measure we use. A standard asset pricing model rationalizes our findings under two assumptions, both of which are satisfied in the data: increasing short-run restructuring risk in the run-up to a restructuring, and high exit yields. We relate our findings to the policy debate on restructuring procedures.
    Keywords: Sovereign Debt; Sovereign Default; Debt Restructuring; Bond Prices; Haircuts; Maturity; Restructuring Probability.
    JEL: F34 F41 H63
    Date: 2022–11
  10. By: Hamza Bennani (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Nantes Univ - IAE Nantes - Nantes Université - Institut d'Administration des Entreprises - Nantes - Nantes Université - pôle Sociétés - Nantes Univ - Nantes Université - IUML - FR 3473 Institut universitaire Mer et Littoral - UM - Le Mans Université - UA - Université d'Angers - UBS - Université de Bretagne Sud - IFREMER - Institut Français de Recherche pour l'Exploitation de la Mer - CNRS - Centre National de la Recherche Scientifique - Nantes Université - pôle Sciences et technologie - Nantes Univ - Nantes Université - Nantes Univ - ECN - Nantes Université - École Centrale de Nantes - Nantes Univ - Nantes Université); Matthias Neuenkirch (CESifo - CESifo, Universität Trier)
    Abstract: In this paper, we analyze whether the complexity of tax bills affects financial markets. Based on the Flesch-Kincaid grade level of the 32 tax bills identified by Romer and Romer (2010) in the period 1962-2003, we assess the relationship between tax bills' complexity and financial markets using an event study approach. Our results show a negative (positive) and significant relationship between the present value of tax bills and changes in the 10-year government bond yields (S&P 500 returns). The magnitude of this relationship increases over time, suggesting that market participants underreact at first and need a couple of days to digest the information contained in the tax bills. This delay can be explained by the textual characteristics of the bills in the case of the 10-year yields as a lower readability partly offsets the negative relationship for up to three days after the signing of a tax bill, but not thereafter. In the case of the stock market, we find similar offsetting evidence, but only for a part of the readability measures employed in this paper.
    Keywords: Complexity,Event Study,Financial Markets,Readability,Tax Bills
    Date: 2022–10–26
  11. By: Matthew S. Jaremski
    Abstract: The massive rise in U.S. stockholding during the early twentieth century resulted in the deepening of securities markets, the spread of investment banks, and the expansion of publicly held corporations. This paper makes use of a unique panel database of South Dakota bank stockholders from 1910-1934 to study bank stockholder growth as well as its effect on bank composition and risk. Overall, the average number of stockholders in a bank rose from 8 to 21 over the period with much of the rise occurring after 1924, but many banks remained highly concentrated. The new stockholders are associated with a subsequent increase in a bank’s proportion of loans-to-assets, but no direct effect on bank closure outside of this balance sheet effect. The data thus illustrate the start of a movement towards more diffuse bank stockholding and its potential consequences for the industry.
    JEL: G21 G3 N22
    Date: 2022–11
  12. By: Anusha Chari; Karlye Dilts Stedman; Christian Lundblad
    Abstract: Global risk and risk aversion shocks have distinct distributional impacts on emerging market capital flows and returns. In particular, we find salient consequences of these different global shocks for tail risk in emerging markets. Open-end mutual fund trading provides a key mechanism linking shocks facing global investors to extreme capital flow and return realizations. The effects are heterogeneous across asset classes and fund types. The limited discretion and higher conformity of passive fund investments linked to benchmarking amplify pass-through effects that engender abnormal co-movements in emerging market flows and returns.
    JEL: F3 F32 G11 G15
    Date: 2022–10

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