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on Financial Markets |
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Issue of 2024‒05‒13
seventeen papers chosen by |
| By: | Agustín Carstens; Nandan Nilekani |
| Abstract: | This paper lays out a vision for the Finternet: multiple financial ecosystems interconnected with each other, much like the internet, designed to empower individuals and businesses by placing them at the centre of their financial lives. It advocates for a user-centric approach that lowers barriers between financial services and systems, thus promoting access for all. The envisioned system leverages innovative technologies such as tokenisation and unified ledgers, underpinned by a robust economic and regulatory framework, to dramatically expand the range and quality of financial services. This integration aims to foster greater participation, offer more personalised services and improve speed and reliability, all while reducing costs for end users. Most of the technology needed to achieve this vision exists and is fast improving, driven by efforts around the world. This paper provides a blueprint for how key technical characteristics like interoperability, verifiability, programmability, immutability, finality, evolvability, modularity, scalability, security and privacy can be incorporated, and how varied governance norms can be embedded. Delivering this vision requires proactive collaboration between public authorities and private sector institutions. The paper serves as a call for action for these entities to establish a strong foundation. This would pave the way for a user-centric, unified and universal financial ecosystem brought into the digital era that is inclusive, innovative, participatory, accessible and affordable, and leaves no one behind. |
| Keywords: | payment systems, financial system, financial intermediaries, financial instruments, currency, digital innovation, unified ledgers, tokenisation |
| JEL: | E42 F33 G21 G23 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1178&r=fmk |
| By: | Nicola Borri; Denis Chetverikov; Yukun Liu; Aleh Tsyvinski |
| Abstract: | We propose a new non-linear single-factor asset pricing model $r_{it}=h(f_{t}\lambda_{i})+\epsilon_{it}$. Despite its parsimony, this model represents exactly any non-linear model with an arbitrary number of factors and loadings -- a consequence of the Kolmogorov-Arnold representation theorem. It features only one pricing component $h(f_{t}\lambda_{I})$, comprising a nonparametric link function of the time-dependent factor and factor loading that we jointly estimate with sieve-based estimators. Using 171 assets across major classes, our model delivers superior cross-sectional performance with a low-dimensional approximation of the link function. Most known finance and macro factors become insignificant controlling for our single-factor. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.08129&r=fmk |
| By: | Thorsten Hens (Department of Finance, University of Zurich, Department of Finance, Norwegian School of Economics, NHH, Institute of Economic Research, Kyoto University); Ester Trutwin (Department of Finance, University of Zurich) |
| Abstract: | Empirical studies investigate various causes and effects of sustainable investments. While some attempts have been made to describe the results found by theoretical models, these are relatively complex and heterogeneous. We relate to existing studies and use a parsimonious Capital Asset Pricing Model (CAPM) in which we model different aspects of sustainable investing. The basic reasoning of the CAPM, that investors need to be compensated for the bad aspects of assets applies so that investors demand higher returns for investments that are harmful from an environmental, social, and governance (ESG) perspective. Moreover, if investors have heterogeneous views on the ESG?characteristics of a company, the market requires higher returns for that company, provided richer investors care more about ESG than poorer investors, which is known as the Environmental Kuznets Curve (EKC). Besides the effect on asset prices, we find that sustainable investing has an impact on a firm's production decision through two channels? the growth and the reform channel. Sustainable investment reduces the size of dirty firms through the growth channel and makes firms cleaner through the reform channel. We illustrate the magnitude of these effects with numerical examples calibrated to real?world data, providing a clear indication of the high economic relevance of the effects. |
| Keywords: | Large Sustainable Investing, ESG rating, CAPM, Growth Channel, Reform Channel, Cost of Capital |
| JEL: | G11 G12 G30 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:1104&r=fmk |
| By: | Dat Mai |
| Abstract: | This paper introduces StockGPT, an autoregressive "number" model pretrained directly on the history of daily U.S. stock returns. Treating each return series as a sequence of tokens, the model excels at understanding and predicting the highly intricate stock return dynamics. Instead of relying on handcrafted trading patterns using historical stock prices, StockGPT automatically learns the hidden representations predictive of future returns via its attention mechanism. On a held-out test sample from 2001 to 2023, a daily rebalanced long-short portfolio formed from StockGPT predictions earns an annual return of 119% with a Sharpe ratio of 6.5. The StockGPT-based portfolio completely explains away momentum and long-/short-term reversals, eliminating the need for manually crafted price-based strategies and also encompasses most leading stock market factors. This highlights the immense promise of generative AI in surpassing human in making complex financial investment decisions and illustrates the efficacy of the attention mechanism of large language models when applied to a completely different domain. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.05101&r=fmk |
| By: | Cole, Brittany M.; Gullett, Nell S. Gullett |
| Abstract: | We study the impact of bond exchange listing in U.S. publicly traded corporate bond markets. We find that listed corporate bonds have lower estimated bid-ask spreads than unlisted corporate bonds. Specifically, we show that listed bonds have estimated spreads of $0.14 lower than unlisted bond spreads. We find that execution venue matters for listed bonds, and that listed bond executions on the NYSE have higher trading costs than listed bond executions off-NYSE. We show that listed bonds are more volatile than unlisted bonds. Last, we study bond trading around earnings announcements and find a slight increase (decrease) in overall (institutional) volume on earnings announcement days compared to non-announcement days. |
| Keywords: | corporate bond, bond market, exchange listing, bid-ask spread, earnings announcement |
| JEL: | A1 G0 |
| Date: | 2024–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120601&r=fmk |
| By: | Kirtac, Kemal; Germano, Guido |
| Abstract: | We analyse the performance of the large language models (LLMs) OPT, BERT, and FinBERT, alongside the traditional Loughran-McDonald dictionary, in the sentiment analysis of 965, 375 U.S. financial news articles from 2010 to 2023. Our findings reveal that the GPT-3-based OPT model significantly outperforms the others, predicting stock market returns with an accuracy of 74.4%. A long-short strategy based on OPT, accounting for 10 basis points (bps) in transaction costs, yields an exceptional Sharpe ratio of 3.05. From August 2021 to July 2023, this strategy produces an impressive 355% gain, outperforming other strategies and traditional market portfolios. This underscores the transformative potential of LLMs in financial market prediction and portfolio management and the necessity of employing sophisticated language models to develop effective investment strategies based on news sentiment. |
| Keywords: | artificial intelligence investment strategies; generative pre-trained transformer (GPT); large language models; machine learning in stock return prediction; natural language processing (NLP) |
| JEL: | C53 G10 G11 G12 G14 |
| Date: | 2024–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:122592&r=fmk |
| By: | David Xiao |
| Abstract: | A Hedge Fund Index is very useful for tracking the performance of hedge fund investments, especially the timing of fund redemption. This paper presents a methodology for constructing a hedge fund index that is more like a quantitative fund of fund, rather than a weighted sum of a number of early replicable market indices, which are re-balanced periodically. The constructed index allows hedge funds to directly hedge their exposures to index-linked products. That is important given that hedge funds are an asset class with reduced transparency, and the returns are traditionally difficult to replicate using liquid instruments. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.15925&r=fmk |
| By: | Luca Gelsomini (Venice School of Management - Department of Management, Ca’ Foscari University of Venice) |
| Abstract: | In this paper, we propose an asset pricing framework wherein the asset price is sensitive to rumors. Unlike extant research, our paper demonstrates that it may be impossible for an amateur analyst to generate trading profits from spreading rumors. This outcome crucially depends on exogenous factors such as the probability that a given rumor may be noise rather than truthful, and the shape of the asset value distribution. |
| Keywords: | rumor profitability |
| JEL: | G00 G10 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2024:06&r=fmk |
| By: | Beverly Hirtle; Anna Kovner |
| Abstract: | In March of 2023, the U.S. banking industry experienced a period of significant turmoil involving runs on several banks and heightened concerns about contagion. While many factors contributed to these events—including poor risk management, lapses in firm governance, outsized exposures to interest rate risk, and unrecognized vulnerabilities from interconnected depositor bases, the role of bank supervisors came under particular scrutiny. Questions were raised about why supervisors did not intervene more forcefully before problems arose. In response, supervisory agencies, including the Federal Reserve and Federal Deposit Insurance Corporation, commissioned reviews that examined how supervisors’ actions might have contributed to, or mitigated, the failures. The reviews highlighted the important role that bank supervisors can play in fostering a stable banking system. In this post, we draw on our recent paper providing a critical review and summary of the empirical and theoretical literature on bank supervision to highlight what that literature tells us about the impact of supervision on supervised banks, on the banking industry and on the broader economy. |
| Keywords: | bank supervision; banking; bank regulation |
| JEL: | G21 G28 |
| Date: | 2024–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:98099&r=fmk |
| By: | Fan Yang (Charles University, Prague); Tomas Havranek (Charles University, Prague & Centre for Economic Policy Research, London & Meta-Research Innovation Center, Stanford); Zuzana Irsova (Charles University, Prague); Jiri Novak (Charles University, Prague) |
| Abstract: | We examine the factors influencing published estimates of hedge fund performance. Using a sample of 1, 019 intercept terms from regressions of hedge fund returns on risk factors (the “alphas†) collected from 74 studies, we document a strong downward trend in the reported alphas. The trend persists even after controlling for heterogeneity in hedge fund characteristics and research design choices in the underlying studies. Estimates of current performance implied by best practice methodology are close to zero across all common hedge fund strategies. Additionally, our data allow us to estimate the mean management and performance fees charged by hedge funds. We also document how reported performance estimates vary with hedge fund and study characteristics. Overall, our findings indicate that, while hedge funds historically generated positive value for investors, their ability to do so has diminished substantially. |
| Keywords: | hedge funds, alpha, fees, meta-analysis, model uncertainty |
| JEL: | J23 J24 J31 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2024_15&r=fmk |
| By: | Onur Polat (Department of Public Finance, Bilecik Seyh Edebali University, Bilecik, Turkiye); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Oguzhan Cepni (Copenhagen Business School, Department of Economics, Porcelænshaven 16A, Frederiksberg DK-2000, Denmark; Ostim Technical University, Ankara, Turkiye); Qiang Ji (Institutes of Science and Development, Chinese Academy of Sciences, Beijing, China; School of Public Policy and Management, University of Chinese Academy of Sciences, Beijing, China) |
| Abstract: | Using daily data on municipal bonds and equity returns from the 50 US states over the period from May 2, 2006, to February 9, 2024, we find that barring extreme periods of financial, macroeconomic, and health crises, the underlying conditional correlation between these two assets is negative, as derived from the Asymmetric Dynamic Conditional Correlations (ADCC)-Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model. When we utilize the Quantile-on-Quantile (QQ) regression model to capture the effect of climate risk quantiles on the entire conditional distribution of the underlying time-varying stock-bond correlation, we generally observe a negative impact at different levels of climate risks, although this could turn positive in the event of extreme climate disasters. In summary, the role of municipal bonds as a hedge against climate risks cannot be denied, carrying important portfolio allocation implications for investors. |
| Keywords: | Stocks and bonds returns, Time-varying conditional correlation, ADCC-GARCH, Climate risks, QQ regressions, US states |
| JEL: | C22 C32 G10 G12 Q54 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:202419&r=fmk |
| By: | Vassilios Babalos (Department of Accounting and Finance, University of Peloponnese, Antikalamos, 24100 Kalamata, Greece); Elie Bouri (School of Business, Lebanese American University, Lebanon); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | This paper provides first empirical evidence on whether the introduction of US spot Bitcoin ETFs affected the returns and volatility of major cryptocurrencies. Using data from December 18, 2017 to March 15, 2024 and applying various Generalized Autoregressive Conditional Heteroskedasticity (GARCH) with exogenous predictors (X), i.e., GARCH-X models, the main results show that the volatility of major cryptocurrencies, namely Ethereum, Ripple, and Litecoin, decreased following the SEC approval, which supports the stabilization hypothesis. No impact is noticed for the Bitcoin spot market, whereas the returns of Grayscale Bitcoin Trust (which represents the first publicly-traded Bitcoin fund in the US) increased following the introduction of Bitcoin ETFs. Further analysis on the returns and volatility of Bitcoin futures and Ethereum futures indicate an insignificant impact by the launch of US spot Bitcoin ETFs. Our findings enhance the limited understanding on the price discovery and functioning of the cryptocurrency markets, which could be useful for investors, regulators, and policymakers. |
| Keywords: | US spot Bitcoin ETFs introduction, SEC approval, Cryptocurrency spot returns and volatility, GARCH-X models |
| JEL: | C32 G00 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:202416&r=fmk |
| By: | Baptiste Lefort; Eric Benhamou; Jean-Jacques Ohana; David Saltiel; Beatrice Guez; Thomas Jacquot |
| Abstract: | This paper introduces a new risk-on risk-off strategy for the stock market, which combines a financial stress indicator with a sentiment analysis done by ChatGPT reading and interpreting Bloomberg daily market summaries. Forecasts of market stress derived from volatility and credit spreads are enhanced when combined with the financial news sentiment derived from GPT-4. As a result, the strategy shows improved performance, evidenced by higher Sharpe ratio and reduced maximum drawdowns. The improved performance is consistent across the NASDAQ, the S&P 500 and the six major equity markets, indicating that the method generalises across equities markets. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.00012&r=fmk |
| By: | Benjamin A. Jansen |
| Abstract: | This paper shows that theories focused solely on risk, and investors more generally, as the driver of asset returns may not be sufficiently reflecting relevant asset price inputs. This conclusion largely stems from prevalent asset pricing theories ignoring the firm side supply of value into their financial securities. |
| Keywords: | Asset Pricing, Cash Flow, Firms, Risk |
| JEL: | G12 G19 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:mts:wpaper:202401&r=fmk |
| By: | Cañon, Carlos (Bank of England); Gerba, Eddie (Bank of England); Pambira, Alberto (Bank of England); Stoja, Evarist (University of Bristol) |
| Abstract: | We examine how the tail risk of currency returns of nine countries, from 2000 to 2020, were impacted by central bank monetary and liquidity measures across the globe with an original and unique dataset that we make publicly available. Using a standard factor model, we derive theoretical measures of tail risks of currency returns which we then relate to the various policy instruments employed by central banks. We find empirical evidence for the existence of a cross-border transmission channel of central bank policy through the FX market. The tail impact is particularly sizeable for asset purchases and swap lines. The effects last for up to one month, and are proportionally higher in a hypothetical joint QE action scenario. This cross-border source of tail risk is largely undiversifiable, even after controlling for the US dollar dominance and the effects of its own monetary policy stance. |
| Keywords: | Unconventional and conventional monetary policy; liquidity measures; currency tail risk; systematic and idiosyncratic components of tail risk |
| JEL: | E44 E52 G12 G15 |
| Date: | 2024–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:1068&r=fmk |
| By: | Peng Liu |
| Abstract: | The correlation-based financial networks, constructed with the correlation relationships among the time series of fluctuations of daily logarithmic prices of stocks, are intensively studied. However, these studies ignore the importance of negative correlations. This paper is the first time to consider the negative and positive correlations separately, and accordingly to construct weighted temporal antinetwork and network among stocks listed in the Shanghai and Shenzhen stock exchanges. For (anti)networks during the first 24 years of the 21st century, the node's degree and strength, the assortativity coefficient, the average local clustering coefficient, and the average shortest path length are analyzed systematically. This paper unveils some essential differences in these topological measurements between antinetwork and network. The findings of the differences between antinetwork and network have an important role in understanding the dynamics of a financial complex system. The observation of antinetwork is of great importance in optimizing investment portfolios and risk management. More importantly, this paper proposes a new direction for studying complex systems, namely the correlation-based antinetwork. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.00028&r=fmk |
| By: | Serena Merrino; Ilias Chondrogiannis |
| Abstract: | We examine the effect of post-2010 banking regulation in South Africa on financial stability, macroeconomic variables and bank performance. We focus on risk spillovers and increased network and tail connectedness between banks, using a sample of nine listed South African banks in 20082023. The implementation of Basel III regulation, particularly capital adequacy ratios, has reduced connectedness-related risks but there is weak evidence of an effect of regulation on bank performance. |
| Date: | 2024–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:11060&r=fmk |