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on Financial Markets |
| By: | Brown, Gregory W. (U of North Carolina at Chapel Hill); Goncalves, Andrei S. (Ohio State U); Hu, Wendy (MSCI Inc) |
| Abstract: | The alpha of an investment reflects its ability to increase the Sharpe ratio of a benchmark portfolio allocation based on tradable factors. We argue that, in the context of private capital, the usual approach to estimate alpha is misleading because it ignores the economic realities of investing in private markets. We then combine a large sample of 5, 028 U.S. buyout, venture capital, and real estate funds from 1987 to 2022 to estimate the alphas of private capital asset classes under realistic simulations that account for the illiquidity and underdiversification in private markets as well as the portfolio allocation of typical limited partners. We find that buyout as an asset class provided a positive and statistically significant alpha during our sample period. In contrast, over our sample period, the venture capital alpha was large and positive but statistically unreliable whereas the real estate alpha was very close to zero. |
| JEL: | G10 G11 G12 G20 G23 G24 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:ohidic:2024-20 |
| By: | Ben-David, Itzhak (Ohio State U); Chinco, Alex (Baruch College, CUNY) |
| Abstract: | All of asset-pricing theory currently stems from one key assumption: price equals expected discounted payoff. And much of what we think we know about discount rates comes from studying a particular kind of expected payoff: the earnings forecasts in analyst reports. Researchers typically access these numbers through an easy-to-use database and never read the underlying documents. This is unfortunate because the text of each report contains an explicit description of how the analyst priced their own earnings forecast. We study a sample of 513 reports and find that most analysts use a trailing P/E (price-to-earnings) ratio not a discount rate. Instead of computing the present value of a company’s future earnings, they ask: “How would a firm with similar earnings have been priced last year?†Even if other investors do things differently, it does not make sense to put discount rates at the center of every asset-pricing model if market participants do not always use one. There are other options. Trailing twelve-month P/E ratios account for 91% of the variation in analysts’ price targets.We construct a new kind of asset-pricing model around this fact and show that it explains the market response to earnings surprises. |
| JEL: | G12 G14 G32 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:ohidic:2024-18 |
| By: | Mengyu Wang; Shay B. Cohen; Tiejun Ma |
| Abstract: | The diffusion of financial news into market prices is a complex process, making it challenging to evaluate the connections between news events and market movements. This paper introduces FININ (Financial Interconnected News Influence Network), a novel market prediction model that captures not only the links between news and prices but also the interactions among news items themselves. FININ effectively integrates multi-modal information from both market data and news articles. We conduct extensive experiments on two datasets, encompassing the S&P 500 and NASDAQ 100 indices over a 15-year period and over 2.7 million news articles. The results demonstrate FININ's effectiveness, outperforming advanced market prediction models with an improvement of 0.429 and 0.341 in the daily Sharpe ratio for the two markets respectively. Moreover, our results reveal insights into the financial news, including the delayed market pricing of news, the long memory effect of news, and the limitations of financial sentiment analysis in fully extracting predictive power from news data. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.10614 |
| By: | Couts, Spencer J. (U of Southern California); Goncalves, Andrei S. (Ohio State U); Liu, Yicheng (Ohio State U); Loudis, Johnathan (U of Notre Dame) |
| Abstract: | In this paper, we study the role of subjective risk premia in explaining subjective expected return time variation and disagreement using the long-term Capital Market Assumptions of major asset managers and investment consultants from 1987 to 2022. We find that market risk premia explain most of the expected return time variation, with the rest explained by alphas. The risk premia effect is almost entirely driven by time variation in risk quantities as opposed to risk price. Nevertheless, risk price explains about half of the transitory effect of risk premia on expected returns. Market risk premia also explain most of the expected return disagreement, but in this case alphas have a quantitatively significant effect, and risk price and risk quantities are roughly equally responsible for the risk premia effect. Our results provide benchmark moments that asset pricing models should match to be consistent with institutional investors' beliefs. |
| JEL: | G10 G11 G12 G23 G40 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:ohidic:2024-17 |
| By: | Dirk Broeders; Daniel Dimitrov; Niek Verhoeven |
| Abstract: | Climate-linked bonds, issued by governments and supranational organizations, play a crucial role in achieving a net-zero economy. These bonds adjust their payoffs based on climate variables such as temperature and greenhouse gas levels, offering investors a hedge against long-term climate risks. They also signal government commitment to climate action and incentivize stronger policies. The price differential between climate-linked and nominal bonds reflects market expectations of climate risks. This paper introduces a model of climate hedging and estimates that approximately three percent of government debt in major economies could be converted into climate-linked bonds. |
| Keywords: | climate-linked bonds; climate risk; contingent claims; pricing green finance |
| JEL: | E58 G12 G13 Q54 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:817 |
| By: | Bathusi Gabanatlhong (Institute of Economic Studies, Charles University, Prague, Czech Republic) |
| Abstract: | Country-by-country reporting aims to curb tax avoidance by multinational corporations and increase transparency in the tax system. This paper provides the first evidence of the effect of country-by-country in developing countries, focusing on the market response of the African stock market to this regulation. Using an event study design, the results indicate a significant negative market response for firms subject to CbCR requirements. Tax-aggressive firms show a pronounced significant negative response around the event date, suggesting that investors anticipate increased tax liabilities due to heightened scrutiny of their tax planning practices, potentially reducing future profits. Cross-listed firms exhibit a positive significant market response in foreign markets, while the broader domestic market shows a negative reaction, underscoring the variation in how foreign and domestic investors process similar information. This paper sheds light on how regulatory transparency influences investor sentiment across different markets. |
| Keywords: | country-by-country reporting, developing countries, event study, cross-listed firms, heterogeneous treatment effect, generalised random forest |
| JEL: | F23 H25 H26 G14 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2024_37 |