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on Financial Markets |
| By: | Ambati, Murari |
| Abstract: | The Fractal Market Hypothesis (FMH) proposes that financial markets have fractal behaviors. Fractal behaviors are patterns that are primarily characterized by self-similarity. Furthermore, there are other methods to characterize fractal behaviors by checking long-range dependencies and for a non-linear structure. Thus, this paper showcases the theoretical and mathematical foundations of FMH. There is a significant focus on FMHs applications to financial markets. Furthermore, this includes focusing on volatility, market crashes, and long-range dependencies. The paper analyzes using fractal geometry, multifractal models, statistical tools, fractal dimension, and power-law distributions to model financial time series. This paper also compares FMH with classical market theories like the Efficient Market Hypothesis (EMH). We then highlight FMH’s capacity to describe real-world market phenomena better. |
| Date: | 2025–02–21 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:rx3vj_v1 |
| By: | Longaric, Pablo Anaya; Cera, Katharina; Georgiadis, Georgios; Kaufmann, Christoph |
| Abstract: | We document that compared to all other investor groups investment funds exhibit a distinctly procyclical behavior when financial-market beliefs about the probability of a euro-related, institutional rare disaster spike. In response to such euro disaster risk shocks, investment funds shed periphery but do not adjust core sovereign debt holdings. The periphery debt shed by investment funds is picked up by investors domiciled in the issuing country, namely banks in the short term and insurance corporations and households in the medium term. JEL Classification: F34, F45, G23 |
| Keywords: | euro disaster risk, investment funds, non-bank financial intermediation, sovereign debt markets |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253029 |
| By: | Yi Li; Sean Tibay; Ashley W. Wang |
| Abstract: | Investor flows in open-end mutual funds, along with their inherent liquidity mismatches and potential fragility risks, can significantly impact the pricing of assets these funds invest in. While much of the existing research has focused on these effects within the secondary markets for equities and bonds, this note, based on a working paper by Li, Tibay, and Wang (2024), provides evidence on how shocks from investor flows in prime money market funds (MMFs) influence the pricing and issuance in the primary markets for commercial paper (CP). |
| Date: | 2025–02–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2025-02-12-2 |
| By: | Abhishek Bhardwaj; Abhinav Gupta; Sabrina T. Howell |
| Abstract: | We study the causal effect of a large increase in firm leverage. Our setting is dividend recapitalizations in private equity (PE), where portfolio companies take on new debt to pay investor returns. After accounting for positive selection into more debt, we show that large leverage increases make firms much riskier, dramatically raising exit and bankruptcy rates but also IPOs. The debt-bankruptcy relationship is in line with Altman-Z model predictions for private firms. Dividend recapitalizations increase deal returns but reduce: (a) wages among surviving firms; (b) pre-existing loan prices; and (c) fund returns, which seems to reflect moral hazard via new fundraising. These results suggest negative implications for employees, pre-existing creditors, and investors. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:cen:wpaper:25-12 |
| By: | Andreea Maura Bobiceanu (Babes-Bolyai University); Simona Nistor (Babes-Bolyai University - Department of Finance); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)) |
| Abstract: | We leverage differences in central bank independence and financial stability sentiment across countries to investigate the variability in banks' stock market reactions to prudential policy announcements during the COVID-19 crisis. Our findings reveal that the relaxation of both macro and micro-prudential policies leads to negative cumulative abnormal returns (CARs), the reaction being attenuated in countries where the central bank is more independent or communicates deteriorations in financial stability. The CARs around the announcement dates are 0.75 percentage points (pp) and 6.89 pp higher in countries with greater versus lesser central bank independence, for macro- and micro-prudential policy announcements. The difference is close to 3.73 pp and 5.65 pp between banks based in countries where the central bank communicates a negative versus a positive sentiment about financial stability. The positive effect of higher degrees of central bank independence and deteriorations in financial stability sentiment on bank market valuation is enhanced for smaller banks, and in countries characterized by greater fiscal flexibility, and a higher prevalence of privately owned banks. |
| Keywords: | stock market reaction, macro-prudential regulation, micro-prudential regulation, central bank independence, financial stability sentiment |
| JEL: | E61 G14 G21 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2511 |
| By: | Jeffery Piao; K. Philip Wang; Diana L. Weng |
| Abstract: | Utilizing confidential microdata from the Census Bureau’s new technology survey (technology module of the Annual Business Survey), we shed light on U.S. banks’ use of artificial intelligence (AI) and its effect on their small business lending. We find that the percentage of banks using AI increases from 14% in 2017 to 43% in 2019. Linking banks’ AI use to their small business lending, we find that banks with greater AI usage lend significantly more to distant borrowers, about whom they have less soft information. Using an instrumental variable based on banks’ proximity to AI vendors, we show that AI’s effect is likely causal. In contrast, we do not find similar effects for cloud systems, other types of software, or hardware surveyed by Census, highlighting AI’s uniqueness. Moreover, AI’s effect on distant lending is more pronounced in poorer areas and areas with less bank presence. Last, we find that banks with greater AI usage experience lower default rates among distant borrowers and charge these borrowers lower interest rates, suggesting that AI helps banks identify creditworthy borrowers at loan origination. Overall, our evidence suggests that AI helps banks reduce information asymmetry with borrowers, thereby enabling them to extend credit over greater distances. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:cen:wpaper:25-07 |
| By: | Francesco D'Ercole (Lum University Giuseppe Degennaro); Kazuo Yamada (GSM, Kyoto University); Alexander F. Wagner (University of Zurich - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swiss Finance Institute) |
| Abstract: | Following the 2023-2024 Tokyo Stock Exchange (TSE) initiatives to improve capital efficiency, investors favored low price-to-book (PBR) firms, particularly those with high return on equity (ROE). Further analysis suggests that investors targeted untapped value rather than responding to mere "shame" effects, though they overlooked leverage differences across high-ROE firms. TSE also required firms to disclose plans to implement value-enhancing actions. Although the information which firms had provided such disclosures was previously known, the publication of a list of non-compliant firms triggered strong market reactions. These findings demonstrate reputation's role in investor behavior while highlighting investors' limitations in processing even easily available financial information. |
| Keywords: | Corporate governance, regulation, social norms, stock price effects, Japanese stock market |
| JEL: | G12 G30 G41 N25 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2519 |