nep-fmk New Economics Papers
on Financial Markets
Issue of 2025–04–28
eight papers chosen by
Kwang Soo Cheong, Johns Hopkins University


  1. An Elementary Approach to GPIF Investment Allocation Optimization: A Basic Risk-Return Evaluation Perspective By Jinno, Masatoshi
  2. Sovereign vs. corporate debt and default: More similar than you think By Gopinath, Gita; Meyer, Josefin; Reinhart, Carmen M.; Trebesch, Christoph
  3. Green Bond Returns and the Dynamics of Green and Conventional Financial Markets: An Analysis Using a Thick Pen By Marc Gronwald; Sania Wadud
  4. Climate Policies, Energy Shocks and Spillovers Between Green and Brown Stock Price Indices By Marina Albanese; Guglielmo Maria Caporale; Ida Colella; Nicola Spagnolo
  5. Pension Reform and Stock Market Development By Shujaat Khan; Bo Li; Mr. Yunhui Zhao
  6. "The planet is swimming in discarded plastic": How do circular economy policy statements affect corporate engagement in addressing plastic pollution? By Refk Selmi
  7. Covered Interest Parity in Emerging Markets: Measurement and Drivers By Mai Dao; Pierre-Olivier Gourinchas
  8. Fiscal Determinants of Domestic Sovereign Bond Yields in Emerging Market and Developing Economies By Manabu Nose; Jeta Menkulasi

  1. By: Jinno, Masatoshi
    Abstract: This report examines a portfolio optimization methodology based on the investment allocation approach adopted by the Government Pension Investment Fund (GPIF). Employing quadratic programming, we derive optimal investment allocations for Japan, developed countries (excluding Japan), and emerging markets by incorporating market growth rates and variances. The analysis offers valuable insights into enhancing portfolio performance through a balanced approach to expected returns and risk management.
    Keywords: GPIF (Government Pension Investment Fund), Portfolio Optimization, Demographic Aging
    JEL: G11 G23 J14
    Date: 2025–03–25
    URL: https://d.repec.org/n?u=RePEc:pra:mprapa:124093
  2. By: Gopinath, Gita; Meyer, Josefin; Reinhart, Carmen M.; Trebesch, Christoph
    Abstract: Theory suggests that corporate and sovereign bonds are fundamentally different, also because sovereign debt has no bankruptcy mechanism and is hard to enforce. We show empirically that the two assets are more similar than you think, at least when it comes to high-yield bonds over the past 20 years. We use rich new data to compare high-yield US corporate ("junk") bonds to high-yield emerging market sovereign bonds 2002-2021. Investor experiences in these two asset classes were surprisingly aligned, with (i) similar average excess returns, (ii) similar average risk-return patterns (Sharpe ratios), (iii) similar default frequency, and (iv) comparable haircuts. A notable difference is that the average default duration is higher for sovereigns. Moreover, the two markets co-move differently with domestic and global factors. US "junk" bond yields are more closely linked to US market conditions such as US stock returns, US stock price volatility (VIX), or US monetary policy.
    Keywords: Sovereign debt and default, default risk, corporate bonds, corporate default, junk
    JEL: F3 G1 F4
    Date: 2025
    URL: https://d.repec.org/n?u=RePEc:zbw:ifwkwp:315469
  3. By: Marc Gronwald; Sania Wadud
    Abstract: This paper explores the relationship between green bond markets and both green and conventional financial markets, while also evaluating their effectiveness as a climate finance instrument. Using the Thick Pen Measure of Association — a visually interpretable tool for analysing co-movement across different time scales — we identify several key findings. First, the relationship between green bonds and other markets evolves over time, influenced by major events such as COVID-19, the Ukraine war, and earlier structural changes. Second, green bonds show the strongest co-movement with benchmark bond markets, indicating they are driven by similar fundamental factors. In contrast, their connection to stock markets is weaker and, in some cases, declining, reinforcing their potential as a diversification tool. However, short-term movements in the green bond market remain closely linked to the long-term stock market environment, particularly during periods of market stress.
    Keywords: green bonds, financial markets, co-movement, Thick Pen Measure of Association, data science
    JEL: C14 C32 C46 G12 Q56
    Date: 2025
    URL: https://d.repec.org/n?u=RePEc:ces:ceswps:_11773
  4. By: Marina Albanese; Guglielmo Maria Caporale; Ida Colella; Nicola Spagnolo
    Abstract: This paper examines the effects of climate policies and energy shocks on mean and volatility spillovers between green and brown stock price indices in five countries (Canada, India, Japan, the UK and the US). More specifically, bivariate GARCH-BEKK models including dummy variables controlling for these shocks are estimated using weekly series with start dates ranging from 13 March 2009 to 24 August 2012 (depending on data availability for the green index) and an end date of 29 December 2023. Significant dynamic linkages between green and brown indices are found when climate policy and oil shocks are considered jointly. Some common patterns emerge, such as shifts in spillover dynamics between green and brown assets, but also country-specific effects of the climate policy shocks which reflect differences in regulatory frameworks and policies. By contrast, energy shocks tend to have a more uniform impact. Further, the interaction between climate policy and energy shocks weakens cross-market linkages, enhancing portfolio diversification opportunities for green investors. The conditional correlation analysis confirms this finding, suggesting that green stocks can be used as an effective hedge. These results highlight the benefits of incorporating green assets into diversified portfolios, particularly in financial centers where, in recent years, they have offered higher returns and lower volatility.
    Keywords: brown stocks, green stocks, VAR, GARCH-BEKK, climate policy shocks, energy shocks, spillovers
    JEL: C33 G12 G18
    Date: 2025
    URL: https://d.repec.org/n?u=RePEc:ces:ceswps:_11747
  5. By: Shujaat Khan; Bo Li; Mr. Yunhui Zhao
    Abstract: We highlight the strong connection between developing fully-funded, individually-owned, collectively-managed, mandatory/incentivized (FICMI) pension schemes and the development of domestic stock markets. We do so by building a stylized model and complementing the analysis with cross-country empirical analysis and case studies. We also highlight the challenges of individual impatience, network externalities, and coordination failure in long-term equity investments, which are crucial for stock market development and technological innovation. We find that FICMI pension schemes—when sufficiently wide in coverage and large in size—can serve as coordination devices to support long-term equity investments. Such investments will not only promote domestic stock market development and make it easier for firms to raise long-term equity capital, therefore supporting long-term economic growth, but also enhance financial inclusion and enable more households to benefit from the overall economic development, therefore contributing to inclusive growth. Moreover, we find that the introduction of FICMI pension schemes can impact household savings in two ways: first, FICMI pension can increase household savings through “forced/incentivized” savings channel, where households save too little without FICMI pension (such as in many EMDEs); and second, FICMI pension can decrease household savings and increase household consumption by reducing non-pension savings and decreasing precautionary savings, where households save too much without FICMI pension (such as in China). In both cases, FICMI pension schemes can help move the economy closer to the optimal level of household savings, and may also help improve the structure of such savings. Finally, we discuss the enabling conditions (such as a strong political commitment to the reform and a well-designed fiscal strategy for financing the transition) and policy design for FICMI pension schemes.
    Keywords: Pension Reforms; Stock Market Development; Equity Financing; Innovation' Financial Inclusion; Intertemporal Optimization; Public Pensions; Funded and Private Pensions
    Date: 2025–02–28
    URL: https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/049
  6. By: Refk Selmi (Éklore-Ed School Of Management)
    Abstract: With the global economy only 7.2% circular, strong collaboration among diverse stakeholders becomes increasingly required to tackle plastic pollution. Aware of the role of businesses as key stakeholders in designing new forms of resource use, this study seeks to answer how publicly announced circular economy (CE) policies affect the businesses' engagement against plastic waste. For this purpose, an event study methodology is used to evaluate differences in abnormal returns of large, mid and small-cap securities across 23 developed markets and 24 emerging markets -considered aligned with the overall objective of managing plastic waste and promoting circularity. The findings reveal that all companies react positively to CE policy announcements though with varying extent. Specifically, the plastic transition index appears more responsive to the CE Action Plans incorporating the product's whole life cycle into the waste management system (in particular, Australia, Danemark, France, Germany, South Africa). It is also shown that the European Union's initiatives introducing both legislative and non-legislative measures targeting areas have led to a decline in systematic risk for the plastic transition index. Overall, the results highlight that public awareness and support are pivotal factors in changing businesses' behaviour and thus can be crucial for the success of CE and waste policies.
    Keywords: Circular economy policy announcements, Plastic transition Index, Abnormal returns, Systematic risk, Event-study methodology
    Date: 2025
    URL: https://d.repec.org/n?u=RePEc:hal:journl:hal-04994846
  7. By: Mai Dao; Pierre-Olivier Gourinchas
    Abstract: We study the behavior of Covered Interest Parity (CIP) deviations – aka the CIP basis - in Emerging Markets (EM). A major challenge in computing the CIP basis in EM’s lies in measuring local currency interest rates which are free of local credit risk. To do so, we construct a ‘purified’ CIP basis for eight major EM currencies using supranational bonds issued in EM local currencies and US dollar going back twenty years. We show that this ‘purified’ CIP basis aligns well with theory-implied predictions. In the cross-section and the timeseries, the basis correlates with fundamental forces driving supply and demand for dollar forwards. Shocks to global dollar funding costs, global intermediary’s balance sheet capacity, and the demand for dollar safe assets interact with currency-specific dollar hedging and funding needs in moving the CIP basis in EM’s.
    Keywords: Covered Interest Parity; intermediation frictions; emerging markets; forward exchange rates
    Date: 2025–03–28
    URL: https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/057
  8. By: Manabu Nose; Jeta Menkulasi
    Abstract: Domestic sovereign bonds have become a growing source of government financing in Emerging Market and Developing Economies (EMDEs). This paper investigates the role of fiscal policies in determining domestic bond yields, and how this relationship varies depending on the debt structure. Specifically, the analysis highlights the interaction of fiscal policy with banking sector leverage and foreign investor holdings for government debt. A 1 percentage point increase in expected primary deficits results in a persistent increase in 10-year domestic bond yield by around 36 basis points over 2.5 years, with larger effects observed during the COVID-19 pandemic. This contrasts with external bond spreads which are more sensitive to external and global risk factors. The greater the reliance on domestic banks for deficit financing, the stronger the impact of loose fiscal policy on domestic bond yields. The shift in domestic debt financing towards domestic banks after the pandemic implies that sovereign yields have been increasingly interlinked with domestic banks’ investment behavior implying potential financial sector risks in major EMDEs.
    Keywords: Domestic bond yield; Fiscal discipline; Sovereign-bank nexus; Doom-loop; Debt holder composition
    Date: 2025–03–28
    URL: https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/059

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