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on Financial Markets |
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Issue of 2024‒05‒20
six papers chosen by |
| By: | Graziano, Marco; Habib, Maurizio Michael |
| Abstract: | This paper investigates the sensitivity of the demand for safe government debt to currency unhedged and hedged excess returns in a sample of US mutual funds. We find evidence of active rebalancing towards government bonds that offer relatively higher returns on an unhedged basis, in particular euro denominated securities. The size of the effect is large, leading to a change in portfolio share by around one percentage point on average in response to a change by one percentage point in the currency-specific excess return. Interestingly, mutual funds rebalance their portfolio towards currencies, such as the Japanese yen, that display large deviations in the covered interest parity and offer higher returns than US Treasuries on an hedged basis. Finally, when global financial risk is on the rise, US mutual fund managers repatriate their investments towards US government debt securities, mainly at the expenses of euro-denominated ones. Our results imply that deviations in pricing conditions like uncovered and covered interest parity for sovereign bonds affect capital flows from the United States towards other major currency areas. JEL Classification: F3, G11, G12, G15, G23 |
| Keywords: | covered interest parity, government bonds, mutual funds, safe assets, search for yield |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242931&r=fmk |
| By: | Matías Moretti (University of Rochester); Lorenzo Pandolfi (Università di Napoli Federico II and CSEF); Sergio L. Schmukler (World Bank); Germán Villegas Bauer (International Monetary Fund); Tomás Williams (George Washington University) |
| Abstract: | We present evidence of inelastic demand in the market for risky sovereign bonds and examine its interplay with government policies. Our methodology combines bond-level evidence with a structural model featuring endogenous bond issuances and default risk. Empirically, we exploit monthly changes in the composition of a major bond index to identify flow shocks that shift the available bond supply and are unrelated to country fundamentals. We find that a 1 percentage point reduction in the available supply increases bond prices by 33 basis points. Although exogenous, these shocks might influence government policies and expected bond payoffs. We identify a structural demand elasticity by feeding the estimated price reactions into a sovereign debt model that allows us to isolate endogenous government responses. We find that these responses account for a third of the estimated price reactions. By penalizing additional borrowing, inelastic demand acts as a commitment device that reduces default risk. |
| Keywords: | emerging markets bond index, inelastic financial markets, institutional investors, international capital markets, small open economies, sovereign debt |
| JEL: | F34 F41 G11 G15 |
| Date: | 2024–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:713&r=fmk |
| By: | Yifan He; Abootaleb Shirvani; Barret Shao; Svetlozar Rachev; Frank Fabozzi |
| Abstract: | This study introduces novel concepts in the analysis of limit order books (LOBs) with a focus on unveiling strategic insights into spread prediction and understanding the global mid-price (GMP) phenomenon. We define and analyze the total market order book bid--ask spread (TMOBBAS) and GMP, showcasing their significance in providing a deeper understanding of market dynamics beyond traditional LOB models. Employing high-frequency data, we comprehensively examine these concepts through various methodological lenses, including tail behavior analysis, dynamics of log-returns, and risk--return performance evaluation. Our findings reveal the intricate behavior of TMOBBAS and GMP under different market conditions, offering new perspectives on the liquidity, volatility, and efficiency of markets. This paper not only contributes to the academic discourse on financial markets but also presents practical implications for traders, risk managers, and policymakers seeking to navigate the complexities of modern financial systems. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.11722&r=fmk |
| By: | Javier Gil-Bazo; Raffaele Santioni |
| Abstract: | Exploiting the Securities Holdings Statistics from the Eurosystem, we study the relation between shareholder country concentration and flow risk for euro area mutual funds. We find that funds with a more geographically dispersed investor base experience more volatile flows. The link between shareholder country concentration and flow risk is a widespread phenomenon: It holds for funds investing in different asset classes and in different regions. However, we find no difference in net performance between funds with more and less concentrated shareholders, which suggests that any potential costs of investors’ geographic dispersion are offset by either enhanced liquidity management or superior performance. Additional tests reveal that investors in funds with higher geographic shareholder dispersion are more sensitive to fund performance, consistently with a clientele effect driving our findings. Finally, we show that the positive association between geographic investor dispersion and flow risk holds for different measures of flow risk and is not driven by institutional investors, non-euro area investors, or the COVID-19 episode. |
| Keywords: | geographic shareholder dispersion, mutual-fund flow risk, mutual fund fragility, cross-border funds |
| JEL: | G23 G11 G17 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1440&r=fmk |
| By: | Ferdinand Fichtner; Heike Joebges |
| Abstract: | The existing econometric evidence on the relationship between stock indices and real economic activity is inconclusive despite theoretical arguments suggesting a long-term relationship. Previous studies indicate that the link between stock prices and growth became weaker in the 1980s. In this paper, we revisit this issue for the period between 1991 and 2019, and address potential explanations for the decoupling. Specifically, we examine the asymmetric effects of stock index increases and decreases, consider the impact of foreign demand on the relationship, control for changes in factor income distribution, and incorporate long-term interest rates as a proxy for changes in discount rates. Our analysis suggests that the relationship between stock prices and GDP remains fairly unstable, with stronger evidence for a link in more recent periods of our sample. All in all, we find the long-run effect of a permanent one-percent change of stock prices on GDP to be around 0.2 percent. The effect mostly materializes within two to three years. Effects tend to be less pronounced and are slower to materialize for non-Anglo-Saxon economies and in the case of stock price decreases. |
| Keywords: | macroeconomic fluctuations; financial markets; stock prices; ARDL bounds test; asymmetric cointegration |
| JEL: | C53 E44 E47 G12 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:imk:studie:90-2024&r=fmk |
| By: | Irene Monasterolo (Utrecht University and SUERF.); Antonia Pacelli (Toulouse School of Economics and INRAE); Marco Pagano (University of Naples Federico II, CSEF, EIEF, and CEPR.); Carmine Russo (University of Naples Federico II) |
| Abstract: | The European Union faces a large climate investment gap. To fill it, we propose the joint issuance of EU climate bonds. These bonds would be funded by the sale of emission allowances, traded on the EU Emissions Trading System and extended to cover all sectors. Access to the resulting funds would be conditional on countries’ performance on the implementation of climate investments. EU climate bonds would meet global demand for a safe and liquid asset, while increasing the speed and efficiency of EU climate investing, its resilience to sovereign crises, and the greening of investors’ portfolios and monetary policy. |
| Keywords: | climate finance, green investment, EU safe asset, emission allowances, ETS. |
| JEL: | D62 E61 H23 H27 P18 Q51 Q52 Q53 Q54 Q58 |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:702&r=fmk |