We consider an economy populated by CARA investors who trade, accounting for their price impact, multiple risky assets with arbitrary distributed payoffs. We propose a constructive solution method: finding the equilibrium reduces to solving a linear ordinary differential equation. With market power and non-Gaussian payoffs: (i) the equilibrium is nonlinear and the model can speak to key stylized facts regarding asymmetry and nonlinearity of price response to order imbalances, (ii) when risk aversion decreases, there are more liquidity providers and/or there is less uncertainty about future asset payoffs, liquidity can decrease, (iii) cross-section of returns is affected by endogenous illiquidity.
{"title":"Asset Prices and Liquidity with Market Power and Non-Gaussian Payoffs","authors":"Sergei Glebkin, S. Malamud, Alberto M. Teguia","doi":"10.2139/ssrn.3692589","DOIUrl":"https://doi.org/10.2139/ssrn.3692589","url":null,"abstract":"We consider an economy populated by CARA investors who trade, accounting for their price impact, multiple risky assets with arbitrary distributed payoffs. We propose a constructive solution method: finding the equilibrium reduces to solving a linear ordinary differential equation. With market power and non-Gaussian payoffs: (i) the equilibrium is nonlinear and the model can speak to key stylized facts regarding asymmetry and nonlinearity of price response to order imbalances, (ii) when risk aversion decreases, there are more liquidity providers and/or there is less uncertainty about future asset payoffs, liquidity can decrease, (iii) cross-section of returns is affected by endogenous illiquidity.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-02-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132974523","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We consider a market where traders have asymmetric information regarding the distribution of asset return and study price discovery of derivatives. The informed trader has private information regarding arbitrary higher moments of asset return, such as volatility or skewness, and exploits her private information by trading a complete menu of options. The equilibrium trading strategies of the informed agent in our model reflect those used by traders in the market when trying to exploit higher order moment information, such as the volatility straddle.
{"title":"Price Discovery for Options","authors":"S. Malamud, M. Tseng, Yuan Zhang","doi":"10.2139/ssrn.3571382","DOIUrl":"https://doi.org/10.2139/ssrn.3571382","url":null,"abstract":"We consider a market where traders have asymmetric information regarding the distribution of asset return and study price discovery of derivatives. The informed trader has private information regarding arbitrary higher moments of asset return, such as volatility or skewness, and exploits her private information by trading a complete menu of options. The equilibrium trading strategies of the informed agent in our model reflect those used by traders in the market when trying to exploit higher order moment information, such as the volatility straddle.<br>","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125747009","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Vincent Bogousslavsky, P. Collin-Dufresne, Mehmet Saglam
We investigate the impact of an exogenous trading glitch at a high-frequency market-making firm on standard measures of stock liquidity (effective and realized spreads) as well as on institutional trading costs (Implementation Shortfall and VWAP slippage) obtained from a proprietary data set. We find that stocks in which the firm accumulated large positions as a result of the trading glitch become substantially more illiquid on the day of the glitch. Effective spreads revert very quickly suggesting that market liquidity is resilient. Instead, institutional trading costs remain significantly higher for more than one week. We further document that all stocks for which the firm was a designated market maker become more illiquid, even if they were not heavily traded during the glitch, in the two days prior to being reassigned to another market maker. These findings are broadly consistent with 'slow-moving capital' theories and suggest that high-frequency trading 'flash crashes' may be associated with significant costs that are difficult to detect using standard liquidity measures.
{"title":"Slow-Moving Capital and Execution Costs: Evidence from a Major Trading Glitch","authors":"Vincent Bogousslavsky, P. Collin-Dufresne, Mehmet Saglam","doi":"10.2139/ssrn.2613667","DOIUrl":"https://doi.org/10.2139/ssrn.2613667","url":null,"abstract":"We investigate the impact of an exogenous trading glitch at a high-frequency market-making firm on standard measures of stock liquidity (effective and realized spreads) as well as on institutional trading costs (Implementation Shortfall and VWAP slippage) obtained from a proprietary data set. We find that stocks in which the firm accumulated large positions as a result of the trading glitch become substantially more illiquid on the day of the glitch. Effective spreads revert very quickly suggesting that market liquidity is resilient. Instead, institutional trading costs remain significantly higher for more than one week. We further document that all stocks for which the firm was a designated market maker become more illiquid, even if they were not heavily traded during the glitch, in the two days prior to being reassigned to another market maker. These findings are broadly consistent with 'slow-moving capital' theories and suggest that high-frequency trading 'flash crashes' may be associated with significant costs that are difficult to detect using standard liquidity measures.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-01-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129029261","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The paper studies the effect of growing mutual fund and ETF ownership on the commonality in liquidity of underlying bonds. Unpredictable liquidity needs of funds may give rise to correlated trading across underlying illiquid bonds. I document that there is a positive and significant relationship between ETF ownership and liquidity commonality of investment-grade bonds suggesting that ETFs reduce the possibility to diversify liquidity risk. In contrast, and unlike for equities, mutual fund ownership does not affect the co-movement in liquidity of bonds. I show that three channels explain the differential impact of ETFs and mutual funds: flow-driven correlated trading, different investor clienteles, and ETF arbitrage activity.
{"title":"Do Mutual Funds and ETFs Affect the Commonality in Liquidity of Corporate Bonds?","authors":"Efe Çötelioğlu","doi":"10.2139/ssrn.3495716","DOIUrl":"https://doi.org/10.2139/ssrn.3495716","url":null,"abstract":"The paper studies the effect of growing mutual fund and ETF ownership on the commonality in liquidity of underlying bonds. Unpredictable liquidity needs of funds may give rise to correlated trading across underlying illiquid bonds. I document that there is a positive and significant relationship between ETF ownership and liquidity commonality of investment-grade bonds suggesting that ETFs reduce the possibility to diversify liquidity risk. In contrast, and unlike for equities, mutual fund ownership does not affect the co-movement in liquidity of bonds. I show that three channels explain the differential impact of ETFs and mutual funds: flow-driven correlated trading, different investor clienteles, and ETF arbitrage activity.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-11-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126550573","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We propose new methodology to recover a bound on ex-ante dispersion of beliefs (DBB) consistent with observed asset prices from a set of minimal assumptions. With S&P 500 and VIX derivatives, we show that the recovered DBB crucially depends on market and data incompleteness, and the maximally allowed risk-return trade-off. Empirically, it is related to trading activity, risks in financial markets, investor and consumer surveys, and professional macroeconomic forecasts. DBB may serve to gauge the degree of belief heterogeneity about future states generated by economic models or in empirical data.
{"title":"Dispersion of Beliefs Bounds: Sentimental Recovery","authors":"Altan Pazarbasi, P. Schneider, G. Vilkov","doi":"10.2139/ssrn.3478587","DOIUrl":"https://doi.org/10.2139/ssrn.3478587","url":null,"abstract":"We propose new methodology to recover a bound on ex-ante dispersion of beliefs (DBB) consistent with observed asset prices from a set of minimal assumptions. With S&P 500 and VIX derivatives, we show that the recovered DBB crucially depends on market and data incompleteness, and the maximally allowed risk-return trade-off. Empirically, it is related to trading activity, risks in financial markets, investor and consumer surveys, and professional macroeconomic forecasts. DBB may serve to gauge the degree of belief heterogeneity about future states generated by economic models or in empirical data.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-10-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126210313","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Optimal resolution of debt crises requires bailouts to account for borrowers’ time-inconsistency. We show in a dynamic model of strategic default that myopic borrowers undervalue their option to default by a U-shaped error, which causes excessive leverage, imperfect consumption smoothing, underinvestment in normal times, and risk shifting in crisis times. Optimal bailouts either punish or reward myopia through smaller or larger transfers, leading to procrastinated default and protracted crises or the reverse, depending on whether financial transfers exacerbate or alleviate the borrowers’ misperception of default risk. The model shows that borrowers and lenders ultimately self-inflict debt crises through their strategic interaction, myopic distress can be cheaper to resolve than rational distress, and myopia can benefit stakeholders.
{"title":"Self-inflicted Debt Crises","authors":"T. Dimopoulos, N. Schürhoff","doi":"10.2139/ssrn.3475419","DOIUrl":"https://doi.org/10.2139/ssrn.3475419","url":null,"abstract":"Optimal resolution of debt crises requires bailouts to account for borrowers’ time-inconsistency. We show in a dynamic model of strategic default that myopic borrowers undervalue their option to default by a U-shaped error, which causes excessive leverage, imperfect consumption smoothing, underinvestment in normal times, and risk shifting in crisis times. Optimal bailouts either punish or reward myopia through smaller or larger transfers, leading to procrastinated default and protracted crises or the reverse, depending on whether financial transfers exacerbate or alleviate the borrowers’ misperception of default risk. The model shows that borrowers and lenders ultimately self-inflict debt crises through their strategic interaction, myopic distress can be cheaper to resolve than rational distress, and myopia can benefit stakeholders.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-10-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126143599","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Covariance matrix forecasts for portfolio optimization have to balance sensitivity to new data points with stability in order to avoid excessive rebalancing. To achieve this, a new robust orthogonal GARCH model for a multivariate set of non-Gaussian asset returns is proposed. The conditional return distribution is multivariate generalized hyperbolic and the dispersion matrix dynamics are driven by the leading factors in a principle component decomposition. Each of these leading factors is endowed with a univariate GARCH structure, while the remaining eigenvalues are kept constant over time. Joint maximum likelihood estimation of all model parameters is performed via an expectation maximization algorithm, and is applicable in high dimensions. The new model generates realistic correlation forecasts even for large asset universes and captures rising pairwise correlations in periods of market distress better than numerous competing models. Moreover, it leads to improved forecasts of an eigenvalue-based financial systemic risk indicator. Crucially, it generates portfolios with much lower turnover and superior risk-adjusted returns net of transaction costs, outperforming the equally weighted strategy even under high transaction fees.
{"title":"A Non-Elliptical Orthogonal GARCH Model for Portfolio Selection under Transaction Costs","authors":"Marc S. Paolella, Pawel Polak, Patrick S. Walker","doi":"10.2139/ssrn.3460049","DOIUrl":"https://doi.org/10.2139/ssrn.3460049","url":null,"abstract":"Covariance matrix forecasts for portfolio optimization have to balance sensitivity to new data points with stability in order to avoid excessive rebalancing. To achieve this, a new robust orthogonal GARCH model for a multivariate set of non-Gaussian asset returns is proposed. The conditional return distribution is multivariate generalized hyperbolic and the dispersion matrix dynamics are driven by the leading factors in a principle component decomposition. Each of these leading factors is endowed with a univariate GARCH structure, while the remaining eigenvalues are kept constant over time. Joint maximum likelihood estimation of all model parameters is performed via an expectation maximization algorithm, and is applicable in high dimensions. The new model generates realistic correlation forecasts even for large asset universes and captures rising pairwise correlations in periods of market distress better than numerous competing models. Moreover, it leads to improved forecasts of an eigenvalue-based financial systemic risk indicator. Crucially, it generates portfolios with much lower turnover and superior risk-adjusted returns net of transaction costs, outperforming the equally weighted strategy even under high transaction fees.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-09-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131045778","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Manuel Rodríguez - López, Pablo de Llano-Monelos, Carlos Piñeiro-Sánchez
Spanish Abstract: Los servicios de pago en el negocio financiero están teniendo un gran impacto en los prestadores de servicios y en los distintos usuarios, por su carácter innovador y disruptivo y por la regulación en materia de protección de los consumidores. El posicionamiento en la prestación de estos servicios cobra especial protagonismo estratégico y operativo, debido a los bajos tipos de interés; tampoco puede obviarse la importancia de la información y vinculación que se obtiene por medio de esta operativa de pagos.
English Abstract: Payment services in the financial business are having a great impact on service providers and different users, for their innovative and disruptive nature and for the regulation of consumer protection. The positioning in the provision of these services takes on special strategic and operational importance, due to the low interest rates; nor can the importance of the information and linkage obtained through this payment operation be ignored.
{"title":"Los servicios de pago en el contexto actual. Un reto estratégico para las entidades financieras (Payment Services in the Current Context. A Strategic Challenge for Financial Institutions)","authors":"Manuel Rodríguez - López, Pablo de Llano-Monelos, Carlos Piñeiro-Sánchez","doi":"10.2139/ssrn.3494203","DOIUrl":"https://doi.org/10.2139/ssrn.3494203","url":null,"abstract":"<b>Spanish Abstract:</b> Los servicios de pago en el negocio financiero están teniendo un gran impacto en los prestadores de servicios y en los distintos usuarios, por su carácter innovador y disruptivo y por la regulación en materia de protección de los consumidores. El posicionamiento en la prestación de estos servicios cobra especial protagonismo estratégico y operativo, debido a los bajos tipos de interés; tampoco puede obviarse la importancia de la información y vinculación que se obtiene por medio de esta operativa de pagos.<br><br><b>English Abstract:</b> Payment services in the financial business are having a great impact on service providers and different users, for their innovative and disruptive nature and for the regulation of consumer protection. The positioning in the provision of these services takes on special strategic and operational importance, due to the low interest rates; nor can the importance of the information and linkage obtained through this payment operation be ignored.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-09-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124189530","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The paper analyzes the equilibrium on the credit market when a bank and a platform compete to offer credit to borrowers. The platform does not manage deposit accounts, but acts as an intermediary between the borrower and the investor, offering a risky contract such that the investor is only reimbursed if the borrower is successful. We first characterize the optimal contracts proposed by the platform, depending on the two-sided structure of the market. Then, we study the impact of bank-platform competition on the average risk of bank loans and the relative level of interest rates. We derive the conditions on the lending and the deposit markets such that the bank accomodates platform entry.
{"title":"Bank-Platform Competition in the Credit Market","authors":"Sara Biancini, Marianne Verdier","doi":"10.2139/ssrn.3446694","DOIUrl":"https://doi.org/10.2139/ssrn.3446694","url":null,"abstract":"The paper analyzes the equilibrium on the credit market when a bank and a platform compete to offer credit to borrowers. The platform does not manage deposit accounts, but acts as an intermediary between the borrower and the investor, offering a risky contract such that the investor is only reimbursed if the borrower is successful. We first characterize the optimal contracts proposed by the platform, depending on the two-sided structure of the market. Then, we study the impact of bank-platform competition on the average risk of bank loans and the relative level of interest rates. We derive the conditions on the lending and the deposit markets such that the bank accomodates platform entry.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-09-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125858788","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Since Fama and French (1993), 502 papers that attempt to identify factors that determine equilibrium asset prices have been published in major finance journals. None of these papers, however, ask the question whether these factors matter to fund managers investment decisions. Our paper attempts to answer this question studying the industry allocation decisions of active US mutual funds and by recovering their implied expected returns. In particular, we take 7 major published asset pricing models and estimate the implied expected factor risk premiums in order to fit fund managers observed asset allocation. Existing models are then compared in terms of their implied mean-variance efficiency (Sharpe ratio) of the observed market portfolio. We find that the traditional macroeconomic risk factor model proposed by Chen et al. (1986) is the only one that can produce a risk-return trade-off that is internally consistent with fund managers risk preferences, as well as, that has explanatory power of the equity risk premium across the business cycle.
自Fama和French(1993)以来，已有502篇试图确定决定均衡资产价格的因素的论文发表在主要金融期刊上。然而，这些论文都没有提出这些因素对基金经理的投资决策是否重要的问题。本文试图通过研究主动型美国共同基金的行业配置决策，并通过恢复其隐含预期收益来回答这个问题。特别地，我们采用了7种主要的资产定价模型，并估计了隐含的预期因子风险溢价，以拟合基金经理观察到的资产配置。然后根据观察到的市场组合的隐含均值方差效率(夏普比率)对现有模型进行比较。我们发现，Chen et al.(1986)提出的传统宏观经济风险因素模型是唯一能够产生与基金经理风险偏好内部一致的风险收益权衡的模型，并且在整个经济周期中对股票风险溢价具有解释力。
{"title":"Microfounding the Fama-MacBeth Regression","authors":"Pablo Castañeda, J. Sabat","doi":"10.2139/ssrn.3435141","DOIUrl":"https://doi.org/10.2139/ssrn.3435141","url":null,"abstract":"Since Fama and French (1993), 502 papers that attempt to identify factors that determine equilibrium asset prices have been published in major finance journals. None of these papers, however, ask the question whether these factors matter to fund managers investment decisions. Our paper attempts to answer this question studying the industry allocation decisions of active US mutual funds and by recovering their implied expected returns. In particular, we take 7 major published asset pricing models and estimate the implied expected factor risk premiums in order to fit fund managers observed asset allocation. Existing models are then compared in terms of their implied mean-variance efficiency (Sharpe ratio) of the observed market portfolio. We find that the traditional macroeconomic risk factor model proposed by Chen et al. (1986) is the only one that can produce a risk-return trade-off that is internally consistent with fund managers risk preferences, as well as, that has explanatory power of the equity risk premium across the business cycle.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-08-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120880013","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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