nep-fmk New Economics Papers
on Financial Markets
Issue of 2023‒10‒16
six papers chosen by
Kwang Soo Cheong, Johns Hopkins University

  1. The Zero-Beta Interest Rate By Sebastian Di Tella; Benjamin M. Hébert; Pablo Kurlat; Qitong Wang
  2. Margins, debt capacity, and systemic risk By Sirio Aramonte; Andreas Schrimpf; Hyun Song Shin
  3. GPT-InvestAR: Enhancing Stock Investment Strategies through Annual Report Analysis with Large Language Models By Udit Gupta
  4. Banks’ portfolio of government debt and sovereign risk By António Afonso; José Alves; Sofia Monteiro
  5. FinTech-Issued Personal Loans in the U.S. By Jessica N. Flagg; Simona Hannon
  6. The development of the Central and Eastern European venture capital market in Europe By Judit Karsai

  1. By: Sebastian Di Tella; Benjamin M. Hébert; Pablo Kurlat; Qitong Wang
    Abstract: We use equity returns to construct a time-varying measure of the interest rate that we call the zero-beta rate: the expected return of a stock portfolio orthogonal to the stochastic discount factor. The zero-beta rate is high and volatile. In contrast to safe rates, the zero-beta rate fits the aggregate consumption Euler equation remarkably well, both unconditionally and conditional on monetary shocks, and can explain the level and volatility of asset prices. We claim that the zero-beta rate is the correct intertemporal price.
    JEL: E30 E4 G12
    Date: 2023–08
  2. By: Sirio Aramonte; Andreas Schrimpf; Hyun Song Shin
    Abstract: Debt capacity depends on margins. When set in a financial system context with collateralized borrowing, two additional features emerge. The first is the recursive property of leverage whereby higher leverage by one player begets higher leverage overall, reflecting the nature of debt as collateral for others. The second feature is that the "dash for cash" is the mirror image of deleveraging. In any setting where market participants engage in margin budgeting, a generalized increase in margins entails a shift of the overall portfolio away from riskier to safer assets. These findings have important implications for the design of non-bank financial intermediary (NBFI) regulations and of central bank backstops.
    Keywords: financial intermediation, non-banks, market-based finance, market liquidity, systemic risk
    JEL: G22 G23 G28
    Date: 2023–09
  3. By: Udit Gupta
    Abstract: Annual Reports of publicly listed companies contain vital information about their financial health which can help assess the potential impact on Stock price of the firm. These reports are comprehensive in nature, going up to, and sometimes exceeding, 100 pages. Analysing these reports is cumbersome even for a single firm, let alone the whole universe of firms that exist. Over the years, financial experts have become proficient in extracting valuable information from these documents relatively quickly. However, this requires years of practice and experience. This paper aims to simplify the process of assessing Annual Reports of all the firms by leveraging the capabilities of Large Language Models (LLMs). The insights generated by the LLM are compiled in a Quant styled dataset and augmented by historical stock price data. A Machine Learning model is then trained with LLM outputs as features. The walkforward test results show promising outperformance wrt S&P500 returns. This paper intends to provide a framework for future work in this direction. To facilitate this, the code has been released as open source.
    Date: 2023–09
  4. By: António Afonso; José Alves; Sofia Monteiro
    Abstract: We analyze domestic, foreign, and central banks holdings of public debt for 31 countries for the period of 1989-2022, applying panel regressions and quantile analysis. We conclude that an increase in sovereign risk raises the share of domestic banks’ portfolio of public debt and reduces the percentage holdings in the case of central banks. Better sovereign ratings also increase (decrease) the share of commercial (central) banks’ holdings. Furthermore, the effects of an increment in the risk for domestic investors have increased since the 2010 financial crisis.
    Keywords: Banking; Sovereign Debt; Sovereign risk; Financial crisis; Ratings.
    JEL: C21 E58 G24 G32 H63
    Date: 2023–10
  5. By: Jessica N. Flagg; Simona Hannon
    Abstract: The financial technology advances of the past decade brought to prominence a new group of lenders active within the personal loan space—financial technology (FinTech) lenders. Although traditional lenders such as banks, thrifts, credit unions, and finance companies continue to play an important role in providing personal loans to consumers, FinTech lenders gained a notable market share.
    Keywords: fintech; financial technology; personal loans
    Date: 2023–08–30
  6. By: Judit Karsai (Centre for Economic and Regional Studies)
    Abstract: The working paper examines the role and development of the Central and Eastern European venture capital sector in the five years between 2016 and 2020. This period includes both the end of the recovery after the economic crisis in 2008 and the downturn due to the coronavirus crisis in 2019. A statistical analysis of venture capital funds and investments in the CEE region confirms that, while the overall position of the region in Europe did not change over the period under review, the differences between countries in the region increased sharply. The northern part of the region rivals the most developed countries in Europe, the central part is driven by an abundance of public resources, while the venture capital sector in the south is only in its infancy. The size of the venture capital funds in the region is far below the European average, so the start-ups only have a chance to become successful if they are involved in the international flow of venture capital. The role of the government in the funds in the region is extremely high, but the selection between companies is therefore not based solely on market considerations. Rent-seeking behaviour goes against the essence of venture capital. As a result of the deterioration of the global political and economic situation, the entire Central and Eastern European region is losing its ability to attract capital.
    Keywords: Keywords: venture capital; private equity; acquisition; entrepreneurship; startup; innovation
    JEL: G23 G24 G28 L26 M13
    Date: 2023–08

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