nep-fmk New Economics Papers
on Financial Markets
Issue of 2023‒11‒20
six papers chosen by
Kwang Soo Cheong, Johns Hopkins University

  1. Big techs in finance By Sebastian Doerr; Jon Frost; Leonardo Gambacorta; Vatsala Shreeti
  2. Dynamic Realized Minimum Variance Portfolio Models By Donggyu Kim; Minseog Oh
  3. The cumulant risk premium By Albert S. (Pete); Karamfil Todorov
  4. Banks’ Portfolio of Government Debt and Sovereign Risk By António Afonso; José Alves; Sofia Monteiro
  5. Black-Litterman Asset Allocation under Hidden Truncation Distribution By Jungjun Park; Andrew L. Nguyen
  6. A Portfolio Rebalancing Approach for the Indian Stock Market By Jaydip Sen; Arup Dasgupta; Subhasis Dasgupta; Sayantani Roychoudhury

  1. By: Sebastian Doerr; Jon Frost; Leonardo Gambacorta; Vatsala Shreeti
    Abstract: The entry of big tech companies into the financial services sector can bring significant benefits in terms of efficiency and financial inclusion. Yet big techs can also quickly dominate markets, engage in discriminatory behaviour, and harm data privacy. This leads to the emergence of new trade-offs between policy goals such as financial stability, competition and privacy. Regulators, both domestically and internationally, are actively working to address these trade-offs. This paper provides an overview over the state of the literature and the policy debate.
    Keywords: big techs, financial inclusion, competition, financial stability, data privacy
    JEL: E51 G23 O31
    Date: 2023–10
  2. By: Donggyu Kim; Minseog Oh
    Abstract: This paper introduces a dynamic minimum variance portfolio (MVP) model using nonlinear volatility dynamic models, based on high-frequency financial data. Specifically, we impose an autoregressive dynamic structure on MVP processes, which helps capture the MVP dynamics directly. To evaluate the dynamic MVP model, we estimate the inverse volatility matrix using the constrained $\ell_1$-minimization for inverse matrix estimation (CLIME) and calculate daily realized non-normalized MVP weights. Based on the realized non-normalized MVP weight estimator, we propose the dynamic MVP model, which we call the dynamic realized minimum variance portfolio (DR-MVP) model. To estimate a large number of parameters, we employ the least absolute shrinkage and selection operator (LASSO) and predict the future MVP and establish its asymptotic properties. Using high-frequency trading data, we apply the proposed method to MVP prediction.
    Date: 2023–10
  3. By: Albert S. (Pete); Karamfil Todorov
    Abstract: We develop a novel methodology to measure the risk premium of higher-order cumulants (closely related to the moments of a distribution) based on leveraged ETFs. We show that the risk premium on these ETFs reflects the difference between physical and risk-neutral cumulants, which we call the cumulant risk premium (CRP). We show that the CRP is different from zero across asset classes (equities, bonds, commodities, currencies, and volatility) and is large in times of stress. We illustrate that highly leveraged strategies are extremely exposed to higher-order cumulants. Our results have implications for hedge funds, factor models, momentum strategies, and options.
    Keywords: cumulants, leverage, ETF, factor models, VIX, momentum, options
    JEL: G1 G12 G13 G23
    Date: 2023–10
  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
  5. By: Jungjun Park; Andrew L. Nguyen
    Abstract: In this paper, we study the Black-Litterman (BL) asset allocation model (Black and Litterman, 1990) under the hidden truncation skew-normal distribution (Arnold and Beaver, 2000). In particular, when returns are assumed to follow this skew normal distribution, we show that the posterior returns, after incorporating views, are also skew normal. By using Simaan three moments risk model (Simaan, 1993), we could then obtain the optimal portfolio. Empirical data show that the optimal portfolio obtained this way has less risk compared to an optimal portfolio of the classical BL model and that they become more negatively skewed as the expected returns of portfolios increase, which suggests that the investors trade a negative skewness for a higher expected return. We also observe a negative relation between portfolio volatility and portfolio skewness. This observation suggests that investors may be making a trade-off, opting for lower volatility in exchange for higher skewness, or vice versa. This trade-off indicates that stocks with significant price declines tend to exhibit increased volatility.
    Date: 2023–10
  6. By: Jaydip Sen; Arup Dasgupta; Subhasis Dasgupta; Sayantani Roychoudhury
    Abstract: This chapter presents a calendar rebalancing approach to portfolios of stocks in the Indian stock market. Ten important sectors of the Indian economy are first selected. For each of these sectors, the top ten stocks are identified based on their free-float market capitalization values. Using the ten stocks in each sector, a sector-specific portfolio is designed. In this study, the historical stock prices are used from January 4, 2021, to September 20, 2023 (NSE Website). The portfolios are designed based on the training data from January 4, 2021 to June 30, 2022. The performances of the portfolios are tested over the period from July 1, 2022, to September 20, 2023. The calendar rebalancing approach presented in the chapter is based on a yearly rebalancing method. However, the method presented is perfectly flexible and can be adapted for weekly or monthly rebalancing. The rebalanced portfolios for the ten sectors are analyzed in detail for their performances. The performance results are not only indicative of the relative performances of the sectors over the training (i.e., in-sample) data and test (out-of-sample) data, but they also reflect the overall effectiveness of the proposed portfolio rebalancing approach.
    Date: 2023–10

This nep-fmk issue is ©2023 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.