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on Financial Markets |
| By: | Ixandra Achitouv |
| Abstract: | Financial stock returns correlations have been studied in the prism of random matrix theory, to distinguish the signal from the "noise". Eigenvalues of the matrix that are above the rescaled Marchenko Pastur distribution can be interpreted as collective modes behavior while the modes under are usually considered as noise. In this analysis we use complex network analysis to simulate the "noise" and the "market" component of the return correlations, by introducing some meaningful correlations in simulated geometric Brownian motion for the stocks. We find that the returns correlation matrix is dominated by stocks with high eigenvector centrality and clustering found in the network. We then use simulated "market" random walks to build an optimal portfolio and find that the overall return performs better than using the historical mean-variance data, up to 50% on short time scale. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.20380 |
| By: | Bidder, Rhys (King’s Business School); Coen, Jamie (Imperial College London); Lepore, Caterina (International Monetary Fund); Silvestri, Laura (Bank of England) |
| Abstract: | Using novel data on bond trading in the UK, we develop a new measure of selling pressure that can be applied to any trader. We identify exogenous selling pressure in a bond using traders’ sales of other, unrelated bonds. The price impact of a sale depends on who is selling: sales by dealers and hedge funds generate significantly larger impacts than equally sized sales by other investors. We rationalise our findings using a model of differentially informed investors. All else equal, our results suggest that more attention should be devoted to risks to financial stability from these impactful sellers. |
| Keywords: | Fire sales; liquidity; fixed income; financial stability |
| JEL: | G10 G12 G21 G23 |
| Date: | 2024–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1088 |
| By: | Coen, Jamie (Imperial College London); Coen, Patrick (Toulouse School of Economics); Hüser, Anne-Caroline (Bank of England) |
| Abstract: | Repo markets are systemically important funding markets, but are also used by firms to obtain the assets provided as collateral. Do these two functions complement each other? We build and estimate a model of repo trade between heterogeneous firms, and find that the answer is no: volumes and gains to trade would both be higher absent collateral demand. This is because on average the firms that need funding are also those that value the collateral to speculate or hedge interest rate risk. These results have implications for policies that affect collateral demand in repo markets, including rules on short selling. |
| Keywords: | Repo; collateral demand; intermediation; financial crises |
| JEL: | G01 G11 G21 G23 L14 |
| Date: | 2024–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1082 |