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on Financial Markets |
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Issue of 2024‒06‒17
thirteen papers chosen by |
| By: | Benjamin Iorio; Dan Li; Lubomir Petrasek |
| Abstract: | Asset managers’ net long positions in Treasury futures have reached their historical highs in recent months, driven in part by mutual funds’ demand for short- and medium-term Treasury futures. Analyzing mutual fund portfolio holdings reports on SEC Form N-PORT, we find that the increase in mutual funds’ futures holdings since 2020 can be attributed to both increased demand for Treasury exposures during a higher interest rate environment and mutual funds’ preference for sourcing these exposures through futures rather than securities. |
| Date: | 2024–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2024-05-10-1&r= |
| By: | Beier Liu; Haiyun Zhu |
| Abstract: | In this study, we utilize the Kalman-Filter analysis to assess market efficiency in major stock markets. The Kalman-Filter operates in two stages, assuming that the data contains a consistent trendline representing the true market value prior to being affected by noise. Unlike traditional methods, it can forecast stock price movements effectively. Our findings reveal significant portfolio returns in emerging markets such as Korea, Vietnam, and Malaysia, as well as positive returns in developed markets like the UK, Europe, Japan, and Hong Kong. This suggests that the Kalman-Filter-based price reversal indicator yields promising results across various market types. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.16449&r= |
| By: | Brown, Zach Y.; Egan, Mark; Jeon, Jihye; Jin, Chuqing; Wu, Alex A. |
| Abstract: | The number of index funds increased drastically from 2000 to 2020, partially fueled by the emergence of exchange-traded funds (ETFs). Despite the growing availability of similar products, price dispersion persists, with many expensive funds still available, indicating significant market power among index funds. One explanation is that investor inertia limits the adoption of new products and interacts with other market frictions to restrict competition. To understand the sources and implications of market power, we develop a tractable quantitative dynamic model of demand for and supply of index funds that accounts for information frictions and heterogeneous preferences, in addition to inertia. These frictions on the demand side create market power for index fund managers, which fund managers can further exploit by price discriminating and charging higher expense ratios to retail investors. We find that inertia is high, with only 13\% of households updating their portfolio at least once yearly. Although inertia is high, its impact on the investment behavior of households is limited because they struggle to optimize investment decisions due to information frictions. Thus, there is an interaction between the two frictions—inertia is more costly for investors when information frictions are low. We show that although the introduction of ETFs lowered expense ratios through both the cost advantage of ETFs and increased competition, demand-side frictions limited product adoption. |
| JEL: | G11 G2 G5 L0 |
| Date: | 2024–05–31 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:129370&r= |
| By: | Taha Choukhmane; Tim de Silva |
| Abstract: | We study the role of risk preferences and frictions in portfolio choice using variation in 401(k) default options. Patterns of active choice in response to different default funds imply that, absent participation frictions, 94% of investors prefer holding stocks, with an equity share of retirement wealth declining with age—patterns markedly different from observed allocations. We use this quasi-experiment to estimate a life cycle model and find a relative risk aversion of 2, EIS of 0.4, and $200 portfolio adjustment cost. Our results suggest that low levels of stock market participation in retirement accounts are due to participation frictions rather than non-standard preferences such as loss aversion. |
| JEL: | D14 D15 G0 G11 G40 G5 G51 J32 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32476&r= |
| By: | Ali Mohammadjafari |
| Abstract: | Prediction of stock prices has been a crucial and challenging task, especially in the case of highly volatile digital currencies such as Bitcoin. This research examineS the potential of using neural network models, namely LSTMs and GRUs, to forecast Bitcoin's price movements. We employ five-fold cross-validation to enhance generalization and utilize L2 regularization to reduce overfitting and noise. Our study demonstrates that the GRUs models offer better accuracy than LSTMs model for predicting Bitcoin's price. Specifically, the GRU model has an MSE of 4.67, while the LSTM model has an MSE of 6.25 when compared to the actual prices in the test set data. This finding indicates that GRU models are better equipped to process sequential data with long-term dependencies, a characteristic of financial time series data such as Bitcoin prices. In summary, our results provide valuable insights into the potential of neural network models for accurate Bitcoin price prediction and emphasize the importance of employing appropriate regularization techniques to enhance model performance. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.08089&r= |
| By: | Wenxin Du; Amy W. Huber |
| Abstract: | We analyze a large number of industry- and company-level filings of global institutional investors to provide the first comprehensive estimate of foreign investors' U.S. dollar (USD) security holdings and currency hedging practices. We document four stylized facts. First, driven by increasing portfolio allocations, foreign investors expanded their USD security holdings six-fold over the past two decades. Second, following the 2007-09 financial crisis, foreign mutual funds, insurers, and pensions raised their USD hedge ratio by an average of 15 percentage points, despite higher hedging costs implied by large and persistent deviations from covered interest-rate parity. The total FX hedging demand from these sector reached $2 trillion in 2019. Third, there is considerable heterogeneity in hedging practice across countries and sectors. Fourth, the global banking sector provides limited dollar hedging on net, underscoring the important role non-banks play in fulfilling the hedging demand of foreign institutional investors. We employ a mean-variance framework to benchmark investors' demand for USD assets and currency hedging practice, emphasizing the influence of expected returns on optimal portfolio construction and the apparent divergence between model predictions and observed hedging behaviors. We show a strong correlation between hedging demand and the cross-section of CIP deviations. |
| JEL: | F3 G11 G20 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32453&r= |
| By: | Massimo Guidolin; Monia Magnani |
| Abstract: | We investigate the occurrence of greenwashing in the US mutual fund industry. Using panel regression methods, we test whether there exist differences in the portfolio investment behaviours of active equity funds that are self-declared to be driven by ESG motives when compared to all other funds. In particular, we focus on two aspects of funds’ portfolio allocation decisions, i.e., the actual implied average ESG ratings of the stocks a mutual fund invests in and the portfolio share invested in sin stocks. We do not ??ind strong evidence that ESG and non-ESG funds make identical investment choices and hence reject the hypothesis of widespread greenwashing. ESG funds, on average, invest more in companies with higher ESG ratings and avoid sin stocks more than non-ESG funds. Nonetheless, we obtain evidence that some degree of greenwashing may still be occurring. However, over time, the differences between ESG and non-ESG funds in these behaviours seem have declined, suggesting a potential reduction in greenwashing practices |
| Keywords: | greenwashing; US mutual funds; ESG ratings; sustainable investment; sin stocks |
| JEL: | G11 G12 C59 G23 G24 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp24220&r= |
| By: | Yuan, Mingqing |
| Abstract: | This study examines the stock market reactions to the announcements and issuances of 402 ESG bonds from 153 listed Japanese firms, employing an event study methodology. Results show strong positive market reactions to green bonds and transition bonds, while sustainability bonds evoke modest short-term positivity following their announcement. Social and sustainability-linked bonds show minimal to insignificant impact, and transition-linked bonds incurs negative stock reactions. These outcomes offer insights for the market by indicating differentiated investor perceptions of ESG bonds, for issuers by highlighting positively priced green financing instruments, and for policymakers by evaluating the effectiveness of green finance policies. |
| Keywords: | Green bonds, Green finance, Market reactions, Event study |
| JEL: | G14 G3 G32 Q5 Q56 Q57 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120943&r= |
| By: | Ashish Anil Pawar; Vishnureddy Prashant Muskawar; Ritesh Tiku |
| Abstract: | Algorithmic trading or Financial robots have been conquering the stock markets with their ability to fathom complex statistical trading strategies. But with the recent development of deep learning technologies, these strategies are becoming impotent. The DQN and A2C models have previously outperformed eminent humans in game-playing and robotics. In our work, we propose a reinforced portfolio manager offering assistance in the allocation of weights to assets. The environment proffers the manager the freedom to go long and even short on the assets. The weight allocation advisements are restricted to the choice of portfolio assets and tested empirically to knock benchmark indices. The manager performs financial transactions in a postulated liquid market without any transaction charges. This work provides the conclusion that the proposed portfolio manager with actions centered on weight allocations can surpass the risk-adjusted returns of conventional portfolio managers. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.01604&r= |
| By: | Xiaowei Chen; Hong Li; Yufan Lu; Rui Zhou |
| Abstract: | This paper proposes a probabilistic machine learning method to price catastrophe (CAT) bonds in the primary market. The proposed method combines machine-learning-based predictive models with Conformal Prediction, an innovative algorithm that generates distribution-free probabilistic forecasts for CAT bond prices. Using primary market CAT bond transaction records between January 1999 and March 2021, the proposed method is found to be more robust and yields more accurate predictions of the bond spreads than traditional regression-based methods. Furthermore, the proposed method generates more informative prediction intervals than linear regression and identifies important nonlinear relationships between various risk factors and bond spreads, suggesting that linear regressions could misestimate the bond spreads. Overall, this paper demonstrates the potential of machine learning methods in improving the pricing of CAT bonds. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.00697&r= |
| By: | Bingxin Ann Xing; Bruno Feunou; Morvan Nongni-Donfack; Rodrigo Sekkel |
| Abstract: | This paper investigates the importance of U.S. macroeconomic news in driving low-frequency fluctuations in the term structure of interest rates in Canada, Sweden and the United Kingdom. We follow two complementary approaches: First, we apply a regression-based framework that aggregates the impact of daily macroeconomic news on bond yields to a lower quarterly frequency. Next, we estimate a macro-finance affine term structure model linking the daily news to lower-frequency changes in bond yields and their expectations and term premia. Both approaches show that U.S. macroeconomic news is an important source of lower-frequency quarterly fluctuations in bond yields in these small open economies—even more important than the respective countries’ domestic macroeconomic news. Furthermore, the macro-finance model shows that U.S. macroeconomic news is particularly important to explain low-frequency changes in the expectation components of the nominal, real and break-even inflation rates. |
| Keywords: | Central bank research, Econometric and statistical methods |
| JEL: | E43 E44 E47 G14 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-12&r= |
| By: | Yiluan Xing; Chao Yan; Cathy Chang Xie |
| Abstract: | Forecasting stock prices remains a considerable challenge in financial markets, bearing significant implications for investors, traders, and financial institutions. Amid the ongoing AI revolution, NVIDIA has emerged as a key player driving innovation across various sectors. Given its prominence, we chose NVIDIA as the subject of our study. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.08284&r= |
| By: | Eduardo Cavallo (Inter-American Development Bank); Ana Cepeda (International Monetary Fund); Ugo Panizza (Geneva Graduate Institute & CEPR) |
| Abstract: | This paper studies the interplay between environmental performance and financial valuation of firms in Latin America and the Caribbean. We provide insights into how environmental considerations are integrated into financial decision-making and investor behavior by analyz-ing the stock market reaction to environmental news of firms with different levels of carbon emission intensity. We find that high emission intensity firms tend to underperform after the release of environmental damage news. Our baseline estimates indicate that, after the release of such news, firms at the 75th percentile of the distribution of emission intensity experience stock returns that are 17% lower than those of firms at the 25th percentile of the distribution of emission intensity. These results suggest that investors care about and price carbon risk, but only when this risk is salient. |
| Keywords: | Carbon emissions; Climate change; Environmental news; Stock returns |
| JEL: | G12 G14 G18 G32 G38 Q54 |
| Date: | 2024–05–23 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp08-2024&r= |