|
on Financial Markets |
|
Issue of 2024‒02‒26
eleven papers chosen by |
| By: | Kastiel, Kobi; Nili, Yaron |
| Abstract: | This Article provides the first comprehensive examination of an emerging practice within the private equity sector-continuation funds. Continuation funds break from the traditional private equity model by allowing sponsors to hold on to assets beyond the typical fund term and, instead of selling the assets to third parties, sell them to their own newly established fund. Lauded by the private equity industry as providing "optionality" to investors, by allowing them to cash out or roll over, continuation funds have grown to represent a major segment of investment activity in the United States. Despite their surging popularity among private equity sponsors, they are subject to investor resistance, and, puzzlingly, most existing investors in the original funds decline the option to roll over their stakes into a continuation fund, even though it is run by the same private equity firm with which they have cultivated relationships for years. This Article addresses this puzzle and makes three contributions to the literature. First, we highlight the labyrinth of concerns that cast a shadow on the growing prevalence of continuation funds. Specifically, we show that private equity managers have strong incentives to establish continuation funds and explore the web of conflicts of interest between sponsors and investors and among investors themselves. Second, employing in-depth interviews with market participants from both sides of the aisle- -investors and sponsors--we examine the practical dynamics of continuation funds, exploring the cautionary tale they present to the conventional deference of law and economic theory to private contracting among sophisticated parties. Third, we present two alternative viewpoints regarding continuation funds: the market outcome view and the market failure view, and against this backdrop, we offer several policy recommendations that are particularly timely in light of the SEC's recently adopted rules addressing the issue. |
| Keywords: | Private Equity, Continuation Funds, Corporate Governance, Corporate Law, Securities Law, Reputation, Related Party Transactions, SEC |
| JEL: | K12 K22 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cbscwp:281759&r=fmk |
| By: | William Paul FORSTER; Olivier CHARNOZ |
| Abstract: | In an evolving development landscape, the urgency for Development Finance Institutions (DFIs) to innovate, adapt and deliver is intensifying. In this context, four discussions – focusing on DFIs’ additionality and ability to mobilise to private finance, their risk policies, and their development impacts – have become pivotal. They frame the dominant discourse around DFIs’ identity, purpose and priorities, and have captured the international community’s focus. This paper argues that the advantages and drawbacks of this discourse need greater consideration. Positively, it ensures constant emphasis on the continuous refinement of key operational areas and upholds important discussions on the principles and challenges inherent to the DFI mandate. However, by focusing so intently on these four debates, the discourse overshadows the need to explore fresh meanings and avenues and so limits adaptability. It risks too great an emphasis being placed on optimising existing operations rather than re-evaluating foundational objectives and mandates. While providing a structured, well-established framework for operations, it falls short in suggesting alternative worthwhile pathways for the future. Consequently, DFIs find themselves enmeshed in debates and discussions that impede their flexibility, creativity and explorative capabilities, as well as such possibilities as enhanced coordination in collective action. Essentially, this tunnel vision confines strategic perspectives and has become an impediment.To navigate these challenges, this paper adopts a qualitative approach – an unusual but much needed approach in the study of DFIs. Rather than accepting the structure of the prevailing discourse, it seeks to highlight its limiting effect on the strategic thinking of DFIs and suggests that DFIs should reflect more on their core purpose, essence and direction. To support this process, the paper proposes a ‘strategic compass’ which highlights four cardinal directions: aiding the SDG transition, championing trailblazers in business and finance, fostering a holistic business and finance ecosystem, and embracing digital and environmental transitions. To serve both emerging and in particular challenging ‘frontier’ nations effectively, DFIs must re-envision their overarching aims and strategies. They need to be prepared to be pioneers, to foster collaboration over competition, and gain more robust support for change from their political stakeholders. Complacency or delay, which risk relevance, are not options. |
| JEL: | Q |
| Date: | 2024–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:avg:wpaper:en16428&r=fmk |
| By: | Mr. Selim A Elekdag; Drilona Emrullahu; Sami Ben Naceur |
| Abstract: | Motivated by its rapid growth, this paper investigates how FinTech activities influence risk taking by financial intermediaries (FIs). In this context, this paper revisits an ongoing debate on the impact of competition on financial stability: on one side, it is argued that greater competition encourages greater risk taking (competition-fragility hypothesis), while the other side of the debate asserts that more competition can increase financial stability (competition-stability hypothesis). Using a curated databased covering over 10, 000 FIs and global FinTech activities, we find a robust relationship whereby greater FinTech presence is associated with heightened risk taking by FIs, offering support for the competition-fragility hypothesis. However, the inclusion of bank-, industry-, and country-specific characteristics can alter this relationship. Importantly, there is suggestive evidence indicating that in certain cases, greater FinTech presence may be associated with less FI risk taking amid stronger domestic institutions. Notwithstanding the relevance for policy, this paper presents a novel framework that may help reconcile some of the conflicting results in the literature which have found supportive evidence for each of the two competing hypotheses. |
| Keywords: | fintech; bank risk taking; competition |
| Date: | 2024–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/017&r=fmk |
| By: | Nakul Upadhya; Alexander Granzer-Guay |
| Abstract: | This work discusses the benefits of constrained portfolio turnover strategies for small to medium-sized portfolios. We propose a dynamic multi-period model that aims to minimize transaction costs and maximize terminal wealth levels whilst adhering to strict portfolio turnover constraints. Our results demonstrate that using our framework in combination with a reasonable forecast, can lead to higher portfolio values and lower transaction costs on average when compared to a naive, single-period model. Such results were maintained given different problem cases, such as, trading horizon, assets under management, wealth levels, etc. In addition, the proposed model lends itself to a reformulation that makes use of the column generation algorithm which can be strategically leveraged to reduce complexity and solving times. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.13126&r=fmk |
| By: | Moreno, Diego; Takalo, Tuomas |
| Abstract: | We study a competitive banking sector in which banks choose the level of risk of their asset portfolios and, upon the public disclosure of stress test results, raise funding by promising investors a repayment. We show that competition forces banks to choose risky assets so as to promise investors high repayments, and to gamble on favorable stress test results. Increasing stress test precision increases banks' asset riskiness but also improves allocative efficiency. When risk taking is not too sensitive to the precision of information, maximal transparency maximizes both stability and surplus. In contrast, when banks exercise market power assets are less risky, while opacity maximizes banks' stability and, when the social cost of bank failure is sufficiently large, the surplus as well. Our results in overall highlight the need to take into account the structure of banking industry when designing stress tests. |
| Keywords: | financial stability, stress tests, bank transparency, banking regulation, bank competition |
| JEL: | G21 G28 D83 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofrdp:281999&r=fmk |
| By: | Miguel A. Duran |
| Abstract: | This paper analyzes the hypothesis that returns play a risk-compensating role in the market for corporate revolving lines of credit. Specifically, we test whether borrower risk and the expected return on these debt instruments are positively related. Our main findings support this prediction, in contrast to the only previous work that examined this problem two decades ago. Nevertheless, we find evidence of mispricing regarding the risk of deteriorating firms using their facilities more intensively and during the subprime crisis. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.12315&r=fmk |
| By: | Ethan Struby (Carleton College); Michael F. Connolly (Colgate University and Boston College) |
| Abstract: | The U.S. Department of Treasury has announced plans to revive its buyback program after more than two decades. We estimate the effects of the 2000-2002 Treasury Buyback program on Treasury returns and the Federal Reserve's System Open Market Account (SOMA) portfolio. The reduction in supply from the buybacks had significant effects on both the bonds purchased by the buybacks and bonds with similar remaining maturity. Changes in supply contributed about 90 basis points to price returns over the course of the program -- nearly 1/5 of the overall change in prices. At a higher frequency, prices of purchased bonds and their near substitutes tended to change on settlement dates, not auction dates. We find that the Fed's holdings of individual securities were largely unaffected over the course of the buyback program. This is consistent with the Fed attempting to avoid exacerbating supply shortages in Treasury markets. |
| JEL: | E5 E63 G1 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:avv:wpaper:2023-02&r=fmk |
| By: | Andrew Ye; James Xu; Yi Wang; Yifan Yu; Daniel Yan; Ryan Chen; Bosheng Dong; Vipin Chaudhary; Shuai Xu |
| Abstract: | We propose the integration of sentiment analysis and deep-reinforcement learning ensemble algorithms for stock trading, and design a strategy capable of dynamically altering its employed agent given concurrent market sentiment. In particular, we create a simple-yet-effective method for extracting news sentiment and combine this with general improvements upon existing works, resulting in automated trading agents that effectively consider both qualitative market factors and quantitative stock data. We show that our approach results in a strategy that is profitable, robust, and risk-minimal -- outperforming the traditional ensemble strategy as well as single agent algorithms and market metrics. Our findings determine that the conventional practice of switching ensemble agents every fixed-number of months is sub-optimal, and that a dynamic sentiment-based framework greatly unlocks additional performance within these agents. Furthermore, as we have designed our algorithm with simplicity and efficiency in mind, we hypothesize that the transition of our method from historical evaluation towards real-time trading with live data should be relatively simple. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.01441&r=fmk |
| By: | Bonga-Bonga, Lumengo; Montshioa, Keitumetse |
| Abstract: | This paper contributes to the literature on portfolio allocation by assessing how assets from emerging and developed stock markets can be allocated efficiently during crisis periods. Towards this end, the paper proposes an approach to portfolio allocation that combines traditional portfolio theory with extreme value theory (EVT) based on Generalised Pareto Distributions (GPDs) and Generalised Extreme Values (GEVs). The results of the empirical analysis show that for the mean-variance portfolio constructed from GPD, the emerging market portfolio outperforms both the international portfolio, the combination of emerging and developed market assets, and the developed market portfolio. However, the developed market portfolio outperforms the emerging market portfolio for the mean-variance portfolio constructed from GEV distribution. The paper attributes these different outcomes to the intended objectives of these extreme-value approaches in the context of portfolio selection. These results offer essential guidance for investors and asset managers during the construction of portfolios in times of crisis. They highlight that the effectiveness of a portfolio is significantly influenced by its predefined objectives. Ultimately, these objectives are crucial in deciding the most suitable approach for portfolio construction. |
| Keywords: | Extreme Value Theory; General Pareto Distribution; Emerging and developed markets; portfolio optimisation; mean-variance. |
| JEL: | C58 G11 G15 |
| Date: | 2024–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119910&r=fmk |
| By: | Bats, Joost Victor; Bua, Giovanna; Kapp, Daniel |
| Abstract: | The European Union plays a prominent role in climate regulations initiatives, this commitment likely implies that climate risk premiums look different in Europe compared to the rest of the world. This paper examines the pricing implications of climate risks in euro area corporate bond markets, focusing on physical and transition risk. Using climate news as a gauge for systematic climate risk, we find a significant pricing effect of physical risk in long-term bonds, with investors demanding higher returns on bonds exposed to physical risk shocks. The estimated physical risk premium is 34 basis points, indicating increased awareness and hedging demand after the Paris Agreement. Transition risk premiums are smaller and less significant, reflecting the ongoing transition to a low-carbon economy. Our findings contribute to understanding climate risk pricing in the European bond markets, highlighting the importance of physical risk and the evolving nature of investor demand for climate-resilient assets. JEL Classification: G12, G14, G28, Q51, Q54 |
| Keywords: | climate physical risk, climate transition risk, corporate bonds, intertemporal hedging demand, news index |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242899&r=fmk |
| By: | Hamza Bodor; Laurent Carlier |
| Abstract: | This paper presents an in-depth analysis of stylized facts in the context of futures on German bonds. The study examines four futures contracts on German bonds: Schatz, Bobl, Bund and Buxl, using tick-by-tick limit order book datasets. It uncovers a range of stylized facts and empirical observations, including the distribution of order sizes, patterns of order flow, and inter-arrival times of orders. The findings reveal both commonalities and unique characteristics across the different futures, thereby enriching our understanding of these markets. Furthermore, the paper introduces insightful realism metrics that can be used to benchmark market simulators. The study contributes to the literature on financial stylized facts by extending empirical observations to this class of assets, which has been relatively underexplored in existing research. This work provides valuable guidance for the development of more accurate and realistic market simulators. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.10722&r=fmk |