Stock market indices play a central role in portfolio management and academic research. This paper reviews and discusses the main issues in index construction, especially on thinly traded stock markets and in a historical setting with deficiency of information. The main methods to deal with missing price observations are studied. As a case in point, a newly collected historical database for the Finnish stock market that covers the period from the establishment of the Helsinki Stock Exchange (HSE) in October 1912 forward is used. The HSE suffered from severe thin trading with only approximately 20% of the stocks having a daily transaction in the early part of the sample. Overall, the results show that index construction methodology have a major impact on the index as well as its statistical properties. The results also highlight the impact of corporate actions, the hardest information to obtain, on the market index performance.
{"title":"Revisiting Index Methodology for Thinly Traded Stock Market. Case: Helsinki Stock Exchange","authors":"M. Vaihekoski","doi":"10.2139/ssrn.3716682","DOIUrl":"https://doi.org/10.2139/ssrn.3716682","url":null,"abstract":"Stock market indices play a central role in portfolio management and academic research. This paper reviews and discusses the main issues in index construction, especially on thinly traded stock markets and in a historical setting with deficiency of information. The main methods to deal with missing price observations are studied. As a case in point, a newly collected historical database for the Finnish stock market that covers the period from the establishment of the Helsinki Stock Exchange (HSE) in October 1912 forward is used. The HSE suffered from severe thin trading with only approximately 20% of the stocks having a daily transaction in the early part of the sample. Overall, the results show that index construction methodology have a major impact on the index as well as its statistical properties. The results also highlight the impact of corporate actions, the hardest information to obtain, on the market index performance.","PeriodicalId":341097,"journal":{"name":"ERN: Europe (Developed Markets) (Topic)","volume":"78 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129407412","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 study how investor’s persistent preference to invest more in the home market — “home bias” — is affecting investor’s efforts to mitigate risks associated with climate change. When investors have a tendency to tilt their portfolio towards domestic assets, the carbon intensity in the home market may well affect the carbon exposures of their portfolios and hence climate risk. This paper analyzes the carbon exposure and home bias of stock portfolios across a wide range of different investors from the euro area using a unique stock-level holdings data. We find that at the stock-level, carbon-intensive firms have higher ownership when the stocks are from the EU-home market. At the portfolio level, higher carbon footprints of euro area investors are related to home bias. The bias to invest more in carbon-intensive firms from the domestic and EU-home market is associated with higher stocks returns.
{"title":"Carbon Home Bias of European Investors","authors":"Martijn Adriaan Boermans, Rients Galema","doi":"10.2139/ssrn.3632723","DOIUrl":"https://doi.org/10.2139/ssrn.3632723","url":null,"abstract":"We study how investor’s persistent preference to invest more in the home market — “home bias” — is affecting investor’s efforts to mitigate risks associated with climate change. When investors have a tendency to tilt their portfolio towards domestic assets, the carbon intensity in the home market may well affect the carbon exposures of their portfolios and hence climate risk. This paper analyzes the carbon exposure and home bias of stock portfolios across a wide range of different investors from the euro area using a unique stock-level holdings data. We find that at the stock-level, carbon-intensive firms have higher ownership when the stocks are from the EU-home market. At the portfolio level, higher carbon footprints of euro area investors are related to home bias. The bias to invest more in carbon-intensive firms from the domestic and EU-home market is associated with higher stocks returns.","PeriodicalId":341097,"journal":{"name":"ERN: Europe (Developed Markets) (Topic)","volume":"50 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-06-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117279354","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 build a framework to simulate stress dynamics in the UK corporate bond market. This quantifies how the behaviours and interactions of major market participants, including open-ended funds, dealers, and institutional investors, can amplify different types of shocks to corporate bond prices. We model market participants’ incentives to buy or sell corporate bonds in response to initial price falls, the constraints under which they operate (including those arising due to regulation), and how the resulting behaviour may amplify initial falls in price and impact market functioning. We find that the magnitude of amplification depends on the cause of the initial reduction in price and is larger in the case of shocks to credit risk or risk-free interest rates, than in the case of a perceived deterioration in corporate bond market liquidity. Amplification also depends on agents’ proximity to their regulatory constraints. We further find that long-term institutional investors (eg pension funds) only partially mitigate the amplification due to their slower-moving nature. Finally, we find that shocks to corporate bond spreads, similar in magnitude to the largest weekly moves observed in the past, could trigger asset sales that may test the capacity of dealers to absorb them.
{"title":"Simulating Stress in the UK Corporate Bond Market: Investor Behaviour and Asset Fire-Sales","authors":"","doi":"10.2139/ssrn.3404234","DOIUrl":"https://doi.org/10.2139/ssrn.3404234","url":null,"abstract":"We build a framework to simulate stress dynamics in the UK corporate bond market. This quantifies how the behaviours and interactions of major market participants, including open-ended funds, dealers, and institutional investors, can amplify different types of shocks to corporate bond prices. We model market participants’ incentives to buy or sell corporate bonds in response to initial price falls, the constraints under which they operate (including those arising due to regulation), and how the resulting behaviour may amplify initial falls in price and impact market functioning. We find that the magnitude of amplification depends on the cause of the initial reduction in price and is larger in the case of shocks to credit risk or risk-free interest rates, than in the case of a perceived deterioration in corporate bond market liquidity. Amplification also depends on agents’ proximity to their regulatory constraints. We further find that long-term institutional investors (eg pension funds) only partially mitigate the amplification due to their slower-moving nature. Finally, we find that shocks to corporate bond spreads, similar in magnitude to the largest weekly moves observed in the past, could trigger asset sales that may test the capacity of dealers to absorb them.","PeriodicalId":341097,"journal":{"name":"ERN: Europe (Developed Markets) (Topic)","volume":"144 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-06-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123778064","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}
Andrea Barletta, Paolo Santucci de Magistris, D. Sloth
We propose a novel non-structural method for hedging European options, relying on two model-independent results: First, under suitable regularity conditions, an option price can be disentangled into a linear combination of risk-neutral moments. Second, there exists an explicit approximate functional form linking the risk-neutral moments to the futures price of the underlying asset and the related variance swap contracts. We show that S{&}P 500 call prices are mainly explained by two factors that are related to level and volatility of the underlying index. We empirically compare the performance of two strategies where the vega exposure is adjusted either by a direct position in a variance swap contract or, indirectly, through an at-the-money call. While both strategies ensure effective immunization in periods of market turmoil, taking direct exposure on variance swaps is not optimal during extended periods of subdued volatility.
{"title":"It Only Takes a Few Moments to Hedge","authors":"Andrea Barletta, Paolo Santucci de Magistris, D. Sloth","doi":"10.2139/ssrn.3086538","DOIUrl":"https://doi.org/10.2139/ssrn.3086538","url":null,"abstract":"We propose a novel non-structural method for hedging European options, relying on two model-independent results: First, under suitable regularity conditions, an option price can be disentangled into a linear combination of risk-neutral moments. Second, there exists an explicit approximate functional form linking the risk-neutral moments to the futures price of the underlying asset and the related variance swap contracts. We show that S{&}P 500 call prices are mainly explained by two factors that are related to level and volatility of the underlying index. We empirically compare the performance of two strategies where the vega exposure is adjusted either by a direct position in a variance swap contract or, indirectly, through an at-the-money call. While both strategies ensure effective immunization in periods of market turmoil, taking direct exposure on variance swaps is not optimal during extended periods of subdued volatility.","PeriodicalId":341097,"journal":{"name":"ERN: Europe (Developed Markets) (Topic)","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-09-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123679588","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 analyze the behavior of an array of financial assets around European Central Bank (ECB) monetary policy decisions. We document that European and U.S. equities accumulate sizeable excess returns in the week ahead of an announcement. Pre-ECB announcement returns are stronger from the introduction of euro cash currency up to and including the 2008-2009 peak of the global financial crisis. They fade away afterwards. We generally observe no comparable phenomenon in select currency pairs, government bonds and commodities. We also discover that, in line with existing findings for equities, non-equity assets display no abnormal close-to close returns on announcement day.
{"title":"Financial Markets Behaviour Around ECB Announcements","authors":"R. Bandelli, Meng. Guo","doi":"10.2139/ssrn.3171266","DOIUrl":"https://doi.org/10.2139/ssrn.3171266","url":null,"abstract":"We analyze the behavior of an array of financial assets around European Central Bank (ECB) monetary policy decisions. We document that European and U.S. equities accumulate sizeable excess returns in the week ahead of an announcement. Pre-ECB announcement returns are stronger from the introduction of euro cash currency up to and including the 2008-2009 peak of the global financial crisis. They fade away afterwards. We generally observe no comparable phenomenon in select currency pairs, government bonds and commodities. We also discover that, in line with existing findings for equities, non-equity assets display no abnormal close-to close returns on announcement day.","PeriodicalId":341097,"journal":{"name":"ERN: Europe (Developed Markets) (Topic)","volume":"31 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129487004","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 use a unique security-level data set to analyze correlations in bond trading of banks, their respective retail customers and their affiliated mutual funds. Matching banks' proprietary holdings with the holdings of their funds and their retail customers for the period 2009-2016 at the security level, we find evidence that banks sold off risky euro-area sovereign bonds to both their retail customers and their affiliated mutual funds (particularly their public funds) during the European sovereign debt crisis. Overall, this enabled banks with affiliated mutual funds to sell off larger amounts of their risky sovereign bond holdings, while bank-affiliated mutual funds acquired more risky sovereign bonds compared to their unaffiliated peers. The larger the risky sovereign bond position a fund acquired from its parent bank, the lower are the fund's short-term raw returns controlling for the risky bonds the fund overall acquired. Our findings show that banks use their customers portfolio and their affiliated funds as liquidity provider when they sell off their risk bonds without paying the funds the adequate liquidity premium. On the one hand, this points to a severe conflict of interest between banks' own account trading and their asset and wealth management services. On the other hand, it highlights that the severity of fire-sale contagion depends on the organizational structure of the financial sector.
{"title":"The Fire-Sale Channels of Universal Banks in the European Sovereign Debt Crisis","authors":"Giulio Bagattini, Falko Fecht, P. Weber","doi":"10.2139/ssrn.3208722","DOIUrl":"https://doi.org/10.2139/ssrn.3208722","url":null,"abstract":"We use a unique security-level data set to analyze correlations in bond trading of banks, their respective retail customers and their affiliated mutual funds. Matching banks' proprietary holdings with the holdings of their funds and their retail customers for the period 2009-2016 at the security level, we find evidence that banks sold off risky euro-area sovereign bonds to both their retail customers and their affiliated mutual funds (particularly their public funds) during the European sovereign debt crisis. Overall, this enabled banks with affiliated mutual funds to sell off larger amounts of their risky sovereign bond holdings, while bank-affiliated mutual funds acquired more risky sovereign bonds compared to their unaffiliated peers. The larger the risky sovereign bond position a fund acquired from its parent bank, the lower are the fund's short-term raw returns controlling for the risky bonds the fund overall acquired. Our findings show that banks use their customers portfolio and their affiliated funds as liquidity provider when they sell off their risk bonds without paying the funds the adequate liquidity premium. On the one hand, this points to a severe conflict of interest between banks' own account trading and their asset and wealth management services. On the other hand, it highlights that the severity of fire-sale contagion depends on the organizational structure of the financial sector.","PeriodicalId":341097,"journal":{"name":"ERN: Europe (Developed Markets) (Topic)","volume":"94 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-05-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133598449","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}
Lukasz K. Langer, Piotr Langer, Paulina Roszkowska
We exploit a quasi-experiment arising from the government-forced changes to the assets under management and investment policy of the Polish pension funds. We test whether this new regulation and its resultant demand shock on the investors’ side, leads to changes in the IPO pricing and the subsequent stock’s performance. We report material and a statistically significant decrease in the IPO proceeds (IPO size) in the post-treatment period equal to over 107 million PLN (34 million USD). We find no empirical evidence that the treatment had a significant effect on the first-day IPO underpricing or on the long-term underperformance. We conclude that the demand shock resulting from the pension system reform that primarily aimed at solving fiscal problems effectively eliminated the so-called ‘pension premium’ of higher IPO valuations. Thus, it indirectly impaired companies’ power of raising money in the public stock market. Furthermore, we report a decrease in the average first-day IPO returns among big issuers that is consistent with the book building literature.
{"title":"Pension Funds and IPO Pricing. Evidence from a Quasi-Experiment.","authors":"Lukasz K. Langer, Piotr Langer, Paulina Roszkowska","doi":"10.2139/ssrn.3152562","DOIUrl":"https://doi.org/10.2139/ssrn.3152562","url":null,"abstract":"We exploit a quasi-experiment arising from the government-forced changes to the assets under management and investment policy of the Polish pension funds. We test whether this new regulation and its resultant demand shock on the investors’ side, leads to changes in the IPO pricing and the subsequent stock’s performance. We report material and a statistically significant decrease in the IPO proceeds (IPO size) in the post-treatment period equal to over 107 million PLN (34 million USD). We find no empirical evidence that the treatment had a significant effect on the first-day IPO underpricing or on the long-term underperformance. We conclude that the demand shock resulting from the pension system reform that primarily aimed at solving fiscal problems effectively eliminated the so-called ‘pension premium’ of higher IPO valuations. Thus, it indirectly impaired companies’ power of raising money in the public stock market. Furthermore, we report a decrease in the average first-day IPO returns among big issuers that is consistent with the book building literature.","PeriodicalId":341097,"journal":{"name":"ERN: Europe (Developed Markets) (Topic)","volume":"189 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-04-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115155094","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}
This note illustrates a simple but important insight for financial investment. In a heterogeneous agent-based evolutionary finance market model with long-lived assets, markets are stable if clients of fundamental ('value') investment funds are more patient than clients of other funds.
{"title":"Patience is a Virtue - In Value Investing","authors":"T. Hens, K. Schenk-Hoppé","doi":"10.2139/ssrn.3146848","DOIUrl":"https://doi.org/10.2139/ssrn.3146848","url":null,"abstract":"This note illustrates a simple but important insight for financial investment. In a heterogeneous agent-based evolutionary finance market model with long-lived assets, markets are stable if clients of fundamental ('value') investment funds are more patient than clients of other funds.","PeriodicalId":341097,"journal":{"name":"ERN: Europe (Developed Markets) (Topic)","volume":"310 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-03-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128652349","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}
This paper explores the extent to which financial liberalization in the euro area had a differentiated impact on members’ private consumption patterns and in turn on their current account positions as a function of who got indebted in the first place. Theoretically, it builds on an inter-temporal consumption model augmented with household heterogeneity. Low/middle income groups are impatient and credit-constrained, whilst high-income groups are patient and under no constraint. Increased access to credit in previously financially repressed countries implies a relaxation of collateral constraints specifically for low-income groups, who differently from high-income agents borrow to finance current consumption. It follows that financial liberalization is associated with deteriorating external positions there where initial levels of financial openness and inclusion are lowest and the share of the low/middle-income group largest.
{"title":"Current Account Imbalances, Household Consumption and Debt in the Euro Area: A Tale of Two Financial Liberalizations","authors":"B. Marzinotto","doi":"10.2139/ssrn.3157557","DOIUrl":"https://doi.org/10.2139/ssrn.3157557","url":null,"abstract":"This paper explores the extent to which financial liberalization in the euro area had a differentiated impact on members’ private consumption patterns and in turn on their current account positions as a function of who got indebted in the first place. Theoretically, it builds on an inter-temporal consumption model augmented with household heterogeneity. Low/middle income groups are impatient and credit-constrained, whilst high-income groups are patient and under no constraint. Increased access to credit in previously financially repressed countries implies a relaxation of collateral constraints specifically for low-income groups, who differently from high-income agents borrow to finance current consumption. It follows that financial liberalization is associated with deteriorating external positions there where initial levels of financial openness and inclusion are lowest and the share of the low/middle-income group largest.","PeriodicalId":341097,"journal":{"name":"ERN: Europe (Developed Markets) (Topic)","volume":"73 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125983013","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 implementation of the MiFID Directive in November 2007 results in the end of monopolies of European stock exchanges. Thus it introduces trades fragmentation: listed securities are no longer solely traded in the market which first listed them, but also in other stock exchanges or trading platforms. We propose an empirical study of the relationship between trades fragmentation and the intraday volatilities of the stocks of the CAC40 index, using a network analysis. The relationships between the volatilities of the stocks are measured by topological indicators from the econophysics literature, with three superiods: prior to the introduction of competition (2000/01-2007/11), during the transitory period of rising fragmentation (2007/12-2010/01), and after the stabilization (2010/02-2015/06). Fragmentation is measured by the reference index of FIDESSA. In accordance with the market microstructure literature stating that fragmentation affects volatility at the individual stock level, we show that fragmentation also affects the structure of the system. In particular, the intraday volatilities of the stocks of the CAC40 are all the more connected to the rest of the network that their level of fragmentation is high and stable. In addition, financial stocks volatilites show both an increasing intra-sectoral integration and a decreasing inter-sectoral integration, which does not allow for straightforward bail-in recommendations as regards policy choices in the context of crises resolution.
{"title":"MIFID, French Equity Markets Fragmentation and Intraday Volatilities: A Network Analysis","authors":"Cécile Bastidon","doi":"10.2139/ssrn.3113142","DOIUrl":"https://doi.org/10.2139/ssrn.3113142","url":null,"abstract":"The implementation of the MiFID Directive in November 2007 results in the end of monopolies of European stock exchanges. Thus it introduces trades fragmentation: listed securities are no longer solely traded in the market which first listed them, but also in other stock exchanges or trading platforms. We propose an empirical study of the relationship between trades fragmentation and the intraday volatilities of the stocks of the CAC40 index, using a network analysis. The relationships between the volatilities of the stocks are measured by topological indicators from the econophysics literature, with three superiods: prior to the introduction of competition (2000/01-2007/11), during the transitory period of rising fragmentation (2007/12-2010/01), and after the stabilization (2010/02-2015/06). Fragmentation is measured by the reference index of FIDESSA. In accordance with the market microstructure literature stating that fragmentation affects volatility at the individual stock level, we show that fragmentation also affects the structure of the system. In particular, the intraday volatilities of the stocks of the CAC40 are all the more connected to the rest of the network that their level of fragmentation is high and stable. In addition, financial stocks volatilites show both an increasing intra-sectoral integration and a decreasing inter-sectoral integration, which does not allow for straightforward bail-in recommendations as regards policy choices in the context of crises resolution.","PeriodicalId":341097,"journal":{"name":"ERN: Europe (Developed Markets) (Topic)","volume":"43 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-01-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122548521","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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