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on Financial Markets |
| By: | Lubos Pastor; Taisiya Sikorskaya; Jinrui Wang |
| Abstract: | As stock market concentration has risen, regulatory limits on fund portfolio concentration have become increasingly binding, especially for large-cap growth funds. When funds approach these limits, they trim their largest holdings and reduce equity exposure. Funds perform worse when constrained. A constraint-based ownership measure predicts stock returns, particularly among the largest firms. These findings suggest that high market concentration can distort stock prices by limiting the ability of optimistic investors to scale their positions. Just like short-sale constraints can produce overpricing by limiting pessimistic investors' views, constraints on long positions can generate underpricing by suppressing optimists' views. |
| JEL: | G12 G14 G23 G28 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35007 |
| By: | Philip Z. Maymin |
| Abstract: | I derive a size premium from the constant-product automated market maker used to price Bittensor subnet tokens and test the prediction using daily data on 128 subnets. A small-minus-big factor earns 1.01% daily (Newey-West t = 3.28). The December 2025 halving of token emissions, which the theory predicts should halve the premium, reduces it from 1.17% to 0.51% (p = 0.044). Exact slippage calculations show the premium is implementable only below \$10K in assets under management; at \$100K, transaction costs exceed gross returns. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.29751 |
| By: | Ricardo Crisostomo; Diana Mykhalyuk |
| Abstract: | This paper investigates whether large language models (LLMs) can generate reliable stock market predictions. We evaluate four state-of-the-art models - ChatGPT, Gemini, DeepSeek, and Perplexity - across three prompting strategies: a naive query, a structured approach, and chain-of-thought reasoning. Our results show that LLM-generated recommendations are hindered by recurring reasoning failures, including financial misconceptions, carryover errors, and reliance on outdated or hallucinated information. When appropriately guided and supervised, LLMs demonstrate the capacity to outperform the market, but realizing LLMs' full potential requires substantial human oversight. We also find that grounding stock recommendations in official regulatory filings increases their forecasting accuracy. Overall, our findings underscore the need for robust safeguards and validation when deploying LLMs in financial markets. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.19944 |
| By: | Farina, Tatiana; Franke, Günter; Heider, Florian; Krahnen, Jan Pieter; Subrahmanyam, Marti G. |
| Abstract: | This SAFE White Paper presents a structured economic framework for assessing asset-backed stablecoins in their capacity as privately issued, fiscally anchored monetary instruments. Specifically, we evaluate the implications of stablecoins for financial intermediation, sovereign debt markets, and monetary transmission while devoting particular attention to differences between the United States and European Union. To this end, we characterize the basic economics of stablecoins by comparing their balance-sheet structure to narrow banks, money market funds, commercial banks, and central banks, highlighting that issuers engage in minimal maturity transformation and hold predominantly high-quality liquid assets against par-redeemable digital liabilities. Furthermore, we examine the regulatory design of the US GENIUS Act and the EU's MiCAR framework, showing how differences in reserve composition and supervisory architecture shape incentives for regulatory arbitrage and influence whether stablecoin growth reallocates existing sovereign debt holdings or generates net additional demand. For the euro area, the central question is whether digital liquidity remains anchored in domestic sovereign assets or shifts toward foreign-currency stablecoins, with implications for monetary sovereignty and financial stability. We conclude that Europe requires an active response: advancing a digital euro, strengthening global supervisory coordination, and reinforcing cross-border AML enforcement in public blockchain environments to safeguard monetary sovereignty and financial stability. |
| Keywords: | Stablecoins, treasury markets, digitial currency |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewh:339581 |
| By: | Adele Ravagnani; Mattia Chiappari; Andrea Flori; Piero Mazzarisi; Marco Patacca |
| Abstract: | Shorting for hedging exposes to risk when the market dynamics is uncertain. Managing uncertainty and risk exposure is key in portfolio management practice. This paper develops a robust framework for dynamic minimum-variance hedging that explicitly accounts for forecast uncertainty in volatility estimation to achieve empirical stability and reduced turnover, further improving other standard performance metrics. The approach combines high-frequency realized variance and covariance measures, autoregressive models for multi-step volatility forecasting, and a box-uncertainty robust optimization scheme. We derive a closed-form solution for the robust hedge ratio, which adjusts the standard minimum-variance hedge by incorporating variance forecast uncertainty. Using a diversified sample of equity, bond, and commodity ETFs over 2016-2024, we show that robust hedge ratios are more stable and entail lower turnover than standard dynamic hedges. While overall variance reduction is comparable, the robust approach improves downside protection and risk-adjusted performance, particularly when transaction costs are considered. Bootstrap evidence supports the statistical significance of these gains. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.02126 |
| By: | Hardhik Mohanty; Bhaskar Krishnamachari |
| Abstract: | Daily probability changes in Kalshi macro prediction markets forecast cryptocurrency realized volatility through two distinct channels. The monetary policy channel, measured by Fed rate repricing on KXFED contracts, predicts Bitcoin volatility in sample with t = 3.63 and p |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.01431 |
| By: | Iñaki Aldasoro; Paula Beltrán; Federico Grinberg |
| Abstract: | Using data on four USD-pegged stablecoins and 27 fiat currencies, this paper documents spillovers from stablecoin-based foreign exchange (FX) to traditional FXmarkets. We document a gap between the cost of acquiring dollars via stablecoins and via the spot FX market (parity deviations). To establish a causal link between stablecoin flows and FX markets, we use a granular instrumental variable that exploits idiosyncratic shocks to stablecoin net inflows in other currencies. Our estimates indicate that a 1% exogenous increase in net stablecoin inflows raises parity deviations by 40 basis points, depreciates the local currency, and widens the dollar premium in synthetic funding markets (covered interest parity (CIP) deviations). A model of constrained arbitrage rationalizes these findings and provides structural foundations for the identification strategy. Counterfactual simulations show that halving cross-market frictions would attenuate CIP spillovers by roughly one-half and cut exchange rate effects by nearly one-third. A dynamic extension that closely matches the empirical impulse responses shows that spillovers grow disproportionately when intermediaries suffer losses, as depleted capital reduces their capacity to absorb further shocks. Our results establish stablecoins as an emerging segment of global currency markets with direct implications for financial stability. |
| Keywords: | stablecoins, foreign exchange, market segmentation, capital flows, arbitrage |
| JEL: | F31 G15 G12 G23 F38 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1340 |
| By: | Wendy Currie (Audencia Business School); Jonathan Seddon (Audencia Business School) |
| Abstract: | This paper explores the narratives of the evolution of the first digital asset, Bitcoin. Emerging as an unregulated, decentralized digital asset, it was developed as an alternative to fiat currency. Using primary and secondary data sources, the discussion is framed around four key themes that influence adoption: cryptographic technology, trust, decentralized finance, and regulation. Each focal theme extends the dialectical debates on Bitcoin, revealing competing narratives on digital responsibility and oversight of the nascent digital asset market. A nuanced understanding of the trajectory and scope of digital currencies to repurpose financial markets is presented. This study aligns with this special issue through its analysis of positive anda negative crypto-asset contributions and the digital responsibilities that develop from transformation and adoption. A major contribution is that decentralized finance is not empirically confirmed, as centralized financial institutions are now offering digital assets as part of their regulated client portfolios. |
| Keywords: | Crypto-asset technology, Trust, Regulation, Bitcoin, Ethereum |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05563837 |
| By: | Shayan Eskandari; Leid Zejnilovic; Jeremy Clark |
| Abstract: | Blockchain technology introduces asset types and custody mechanisms that fundamentally break traditional financial auditing paradigms. This paper presents an autoethnographic analysis of cryptoasset auditing challenges, build on top of prior research on a comprehensive framework addressing existence, ownership, valuation, and internal control verification. Drawing from lived experience implementing blockchain systems as an engineer, smart contract auditor, and CTO of a publicly traded cryptoasset firm, we demonstrate how autoethnographic methodology becomes necessary for understanding technical complexities that external analysis cannot capture. Through detailed examination of token airdrops, multi-signature smart contracts, and real-time on-chain reporting, we provide experimental approaches and common scenarios that auditing firms can analyze to address blockchain innovations currently considered technically insurmountable. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.26361 |
| By: | Akitada Kasahara (Graduate School of Economics, the University of Osaka); Masahiro Yamada (School of Management, Tokyo University of Science) |
| Abstract: | We estimate the causal effect of single-stock trading pauses on market quality using tick-by-tick order book data from the Tokyo Stock Exchange (TSE). Our instrumental variable exploits the TSE’s fixed yen-denominated triggering thresholds, which generate plausibly exogenous variation in the percentage distance to a trading pause across stocks with different price levels. Trading pauses significantly reduce post-event volatility, narrow quoted bid–ask spreads, and facilitate price discovery. Orderlevel analysis reveals the mechanism: during pauses, liquidity providers submit opposite-direction limit orders at aggressively priced levels that push the matching price toward reversal, generating the observed improvements. These effects are strongest for less frequently traded stocks, where incremental liquidity has the largest impact. However, the benefits are attenuated for highly volatile stocks with recent negative returns, particularly during broad market downturns. |
| Keywords: | Trading pauses, Circuit breakers, Volatility, Liquidity, Price discovery |
| JEL: | G12 G14 G18 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:osk:wpaper:2603 |