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on Financial Markets |
| By: | Fernando Broner; Juan J. Cortina; Sergio L. Schmukler; Tomas Williams |
| Abstract: | This paper examines how shifts in investor demand influence firm financing and investment decisions. For identification, the paper exploits a large-scale MSCI methodological reform that mechanically redefined the stock weights in major international equity benchmark indexes, changing the portfolio allocation of 2, 508 firms across 49 countries. Because benchmark-tracking investors closely follow these indexes, the rebalancing constituted a clean shock to equity demand. The results show that portfolio rebalancing by benchmark-tracking investors generated significant capital inflows and outflows at the firm level. Firms experiencing larger inflows increased equity issuance, even more so debt financing, and real investment. The paper complements the empirical analysis with a simple model of firm financing in which a decline in the cost of equity increases the value of equity and relaxes borrowing constraints. Higher equity valuations allow firms to expand borrowing even without issuing substantial new equity, so debt financing responds more strongly than equity issuance. |
| Keywords: | Asset managers, benchmark indexes, corporate debt, equity, investment, institutional investors, issuance activity |
| JEL: | F33 G00 G01 G15 G21 G23 G31 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:upf:upfgen:1938 |
| By: | Müller, Sebastian; Pugachyov, Nikolay; Weigert, Florian |
| Abstract: | We introduce a simple yet powerful method for enhancing mutual fund performance prediction by combining individual predictors into a composite predictor. This composite approach integrates information from 19 well-established return-based and portfolio holdings-based predictors from the literature. It effectively identifies top decile funds that outperform bottom decile funds by a risk-adjusted 4.56% per annum. Furthermore, it achieves statistically significant outperformance for long-only fund investments against the average active and passive fund. Both return-based predictors (e.g., fund alpha and the t-statistic of alpha) and holdings-based predictors (e.g., skill index and active weight) contribute equally to the composite predictor's success. |
| Keywords: | Mutual funds, performance prediction, composite predictor |
| JEL: | G11 G12 G20 G23 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cfrwps:336774 |
| By: | Dohyun Ahn; Agostino Capponi |
| Abstract: | Valuing corporate bonds in systemic economies is challenging due to intricate webs of inter-institutional exposures. When a bank defaults, cascading losses propagate through the network, with payments determined by a system of fixed-point equations lacking closed-form solutions. Standard Monte Carlo methods cannot capture rare yet critical default events, while existing rare-event simulation techniques fail to account for higher-order network effects and scale poorly with network size. To overcome these challenges, we propose a novel approach -- Bi-Level Importance Sampling with Splitting -- and characterize individual bank defaults by decoupling them from the network's complex fixed-point dynamics. This separation enables a two-stage estimation process that directly generates samples from the banks' default events. We demonstrate theoretically that the method is both scalable and asymptotically optimal, and validate its effectiveness through numerical studies on empirically observed networks. |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2602.12770 |
| By: | Konrad Adler; Sebastian Doerr; Sonya Zhu |
| Abstract: | Over the past decades, index funds have amassed substantial ownership stakes in publicly traded firms. Index funds' rapid growth raises questions about their influence on governance and monitoring, as well as the consequences for other stakeholders. This paper examines how banks adjust their loan pricing when firms have a higher share of passive index fund investors as shareholders. Using syndicated loan data, we find that loan spreads increase with passive ownership and provide evidence consistent with higher loan spreads reflecting increased risk due to reduced shareholder oversight. Supporting this interpretation, we find stronger effects among firms in which shareholder oversight has more impact. However, the increase in loan spreads is not fully accounted for by changes in firm risk. Suggestive evidence points towards banks increasing their monitoring efforts in response to changes in shareholder composition, which is costly and reflected in loan spreads. |
| Keywords: | passive ownership, institutional investors, bank monitoring, syndicated loans |
| JEL: | G21 G23 G32 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1330 |
| By: | Murad Farzulla; Andrew Maksakov |
| Abstract: | Cryptocurrency markets have grown to represent over $3 trillion in capitalization, yet no unified index exists to monitor the systemic risks arising from the interconnection between decentralized finance (DeFi) protocols and traditional financial institutions. This paper introduces the Aggregated Systemic Risk Index (ASRI), a composite measure comprising four weighted sub-indices: Stablecoin Concentration Risk (30%), DeFi Liquidity Risk (25%), Contagion Risk (25%), and Regulatory Opacity Risk (20%). We derive theoretical foundations for each component, specify quantitative formulas incorporating data from DeFi Llama, Federal Reserve FRED, and on-chain analytics, and validate the framework against historical crisis events including the Terra/Luna collapse (May 2022), the Celsius/3AC contagion (June 2022), the FTX bankruptcy (November 2022), and the SVB banking crisis (March 2023). Event study analysis detects statistically significant abnormal signals for all four crises (t-statistics 5.47-32.64, all p |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2602.03874 |
| By: | Tatsuru Kikuchi |
| Abstract: | This paper evaluates the causal impact of Generative Artificial Intelligence (GenAI) adoption on productivity and systemic risk in the U.S. banking sector. Using a novel dataset linking SEC 10-Q filings to Federal Reserve regulatory data for 809 financial institutions over 2018--2025, we employ two complementary identification strategies: Dynamic Spatial Durbin Models (DSDM) to capture network spillovers and Synthetic Difference-in-Differences (SDID) for causal inference using the November 2022 ChatGPT release as an exogenous shock. Our findings reveal a striking ``Productivity Paradox'': while DSDM estimates show that AI-adopting banks are high performers ($\beta > 0$), the causal SDID analysis documents a significant ``Implementation Tax'' -- adopting banks experience a 428-basis-point decline in ROE as they absorb GenAI integration costs. This tax falls disproportionately on smaller institutions, with bottom-quartile banks suffering a 517-basis-point ROE decline compared to 129 basis points for larger banks, suggesting that economies of scale provide significant advantages in AI implementation. Most critically, our DSDM analysis reveals significant positive spillovers ($\theta = 0.161$ for ROA, $p |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2602.02607 |
| By: | Bali, Turan G.; Goyal, Amit; Mörke, Mathis; Weigert, Florian |
| Abstract: | We uncover momentum and reversal patterns in half-day option returns that persist for up to at least 20 business days, with economic magnitudes of 0.22% to 0.45% per half-day. Specifically, returns show strong momentum within the same period (e.g., intraday-to-intraday) but reverse sharply across opposite periods (e.g., intraday-to- overnight). These patterns increase over time, are robust to various delta-hedging schemes and option selection criteria, and persist across different subsamples. Mo- mentum and reversal strengthen when market makers actively manage capacity constraints during intraday-overnight transitions, indicating supply-side constraints drive predictability. |
| Keywords: | Option return momentum, Option return reversal, Intraday option returns |
| JEL: | G12 G13 G14 G11 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cfrwps:336775 |
| By: | Marc Schmitt |
| Abstract: | Risk forecasts drive trading constraints and capital allocation, yet losses are nonstationary and regime-dependent. This paper studies sequential one-sided VaR control via conformal calibration. I propose regime-weighted conformal risk control (RWC), which calibrates a safety buffer from past forecast errors using exponential time decay and regime-similarity weights from regime features. RWC is model-agnostic and wraps any conditional quantile forecaster to target a desired exceedance rate. Finite-sample coverage is established under weighted exchangeability, and approximation bounds are derived under smoothly drifting regimes. On the CRSP U.S.\ equity portfolio, time-weighted conformal calibration is a strong default under drift, while regime weighting can improve regime-conditional stability in some settings with modest conservativeness changes. |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2602.03903 |
| By: | Heidorn, Thomas; Klaus, Juergen; Mazzalupi, Riccardo |
| Abstract: | The relationship between Credit Default Swaps (CDS) and cash bonds plays a pivotal role in providing market participants with important information which directly affects investment and risk management strategies. Particularly relevant is the CDS-Bond basis, defined as the difference in basis points (bps) between CDS and the reference entity bond spread. Understanding the drivers behind CDS-Bond basis behavior enables more informed decisionmaking that reflects underlying credit market dynamics. This working paper analyzes the CDSBond basis in the European market, focusing on the constituents of the Markit iTraxx Europe index between March 2020 until March 2025. The analysis addresses basis behavior at the aggregate index level and across sectors. At an index level a mean reverting pattern has been identified with a negative basis average over the sample observed. In the sectorial analysis a strong heterogeneity emerges, with Autos featuring a more positive basis compared to Financials in a deeply negative basis territory affected by Credit Suisse shock. Finally, practitioner insights are integrated to contextualize these findings, emphasizing liquidity asymmetries, execution constraints, and differences in information absorption between CDS and cash bond markets offering actionable insights for credit market partecipants, and laying a solid foundation for further research. |
| Keywords: | CDS-Bond basis, Sectorial CDS basis, credit spread, iTraxx Europe basis |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:fsfmwp:336793 |
| By: | Akyildirim, Erdinc; Corbet, Shaen; Muñiz, Jose Antonio; Scrimgeour, Frank |
| Abstract: | Negative ESG‐related reputational events generate significant corporate risks, particularly within sensitive sectors such as the pharmaceutical industry. Using novel reputational data, this research investigates investor perceptions of the consequences of experienced ESG breaches among US pharmaceutical firms. Specifically, we consider the magnitude, timing, and persistence of abnormal returns, testing whether firm‐specific characteristics and event‐related attributes moderate and account for identified market response differentials. Results indicate the presence of significant negative abnormal returns before the identified media release date, suggesting market anticipation or information leakage, followed by a pronounced negative shock upon formal announcement, with firm size the most robust mitigating factor. Market response shows substantial heterogeneity, while environmental incidents generate significant, delayed negative returns, whereas social and governance events show negligible investor response, indicating a lack of market concern. Companies experiencing recurring incidents experience further deterioration of returns than first‐time offenders. Neither the initial news source's reach nor the assessed severity significantly affects the magnitude of market response. These findings highlight the context‐dependent nature of ESG materiality in the pharmaceutical sector. |
| Keywords: | reputational risk; CSR; ESG; abnormal returns; pharmaceutical industry |
| JEL: | G14 G32 L65 M14 Q56 |
| Date: | 2026–02–03 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:137054 |