|
on Financial Markets |
|
Issue of 2024‒07‒15
eight papers chosen by |
| By: | Daniel Barth; R. Jay Kahn; Phillip J. Monin; Oleg Sokolinskiy |
| Abstract: | We show substantial variation in mutual funds' use of Treasury futures, both over time and across funds. This variation from mutual funds drives much of the time series variation in aggregate Treasury futures open interest, including over 60% of the recent rise in Treasury futures positions. We provide evidence these Treasury futures positions are largely attributable to mutual funds “reaching for duration†in order to track the duration of a benchmark index with high cash Treasury exposure. Specifically, we show mutual funds use futures to fill the gap between their portfolio and the index that results when they tilt their cash positions towardhigher return but lower duration assets, such as mortgage-backed securities and equities, and away from cash Treasuries. Treasury futures positions are more common in mutual funds which indicate a focus on dual objectives of duration management and total return whose style has a higher allocation to Treasuries. Reaching for duration allows funds to track their index better at lower cost, but increases leverage in the Treasury market both through mutual funds long Treasury futures positions and through the leverage of hedge funds who take thecorresponding short positions in Treasury futures. |
| Keywords: | Treasury markets; Mutual funds; Duration; Indexing; Futures; Mortgage-backed securities |
| JEL: | G11 G12 G13 G23 |
| Date: | 2024–06–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-39&r= |
| By: | Wei Wang; Haibo Wang |
| Abstract: | This study uses data from the BRICS stock market index, cryptocurrencies, and investor sentiment indicators from January 6, 2015, to June 29, 2023. BRICS nations emerge as pivotal representatives of emerging economies. This study employs a time-varying parameter vector autoregression model to unravel the intricate interdependence between traditional stock assets and the evolving landscape of cryptocurrencies. The analysis investigates spillover effects between BRICS stock markets and cryptocurrencies, revealing increasing interconnectedness during highly uncertain events like COVID-19, but no significant impact on major US stock market indices. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.07641&r= |
| By: | William N. Goetzmann; Akiko Watanabe; Masahiro Watanabe |
| Abstract: | We find that procyclical stocks, whose returns comove with business cycles, earn higher average returns than countercyclical stocks. We use almost a three-quarter century of real GDP growth expectations from economists’ surveys to determine forecasted economic states. This approach largely avoids the confounding effects of econometric forecasting model error. The loading on the expected real GDP growth rate is a priced risk measure. A fully tradable, ex-ante portfolio formed on this loading generates a procyclicality premium that is statistically significant, economically large, long-lasting over a few years, and independent of the size, book-to-market, and momentum effects. |
| JEL: | E32 E44 G12 G14 G17 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32509&r= |
| By: | Serge Darolles (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique); Yuyi He; Gaëlle Le Fol (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | In this paper, we investigate the impact of ESG scores on stock returns and examinethe channels, if any, through which ESG information is transmitted. The literature onthe ESG transmission mechanism has essentially identified two channels (the "investordemand channel" and the "fundamentals or profitability channel"), but these channelsare empirically difficult to identify and quantify. We then use a causal mediationmodel to address this issue, analysing whether ESG scores can predict future returnsand identifying which channels are at play. Our results show that current ESG scoreshave a negative real effect on future stock returns and that the transmission channelsare not the same depending on the pillar - either E, S, G, we focus on. The "investordemand channel" explains a significant part of the effect we observe empirically. Thedirect -or fundamental- channel, which we would expect to be positive, is negative, except for G, leading in general to a negative impact of ESG scores on future stockreturns. Such results prove that ESG scores do indeed contain information that canbe exploited by asset managers in their portfolio choices. |
| Keywords: | ESG performance, Investment decisions, Sustainable investing, Mediationanalysis, Transmission channels, Institutional investors |
| Date: | 2024–03 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04594004&r= |
| By: | Kerssenfischer, Mark; Helmus, Caspar |
| Abstract: | We use outages as natural experiments to study sovereign bond market functioning. When the euro area futures market goes down, trading activity on the cash market declines, liquidity evaporates, and transaction prices deviate from fundamental values. Tracing back this macrolevel market breakdown to the micro-level, we show that particularly dealers withdraw from the cash market during outages. While most of their remaining trades remain fairly priced, dealer’s capacity to intermediate trades on the cash market is reduced, forcing more clients to trade directly with each other, leading to substantial mispricing. Lastly, outages on cash trading venues barely affect the futures market, suggesting that price formation and liquidity provision is a one-way street, and outages on the US and euro area futures market barely affect each other, in stark contrast to the significant price spillovers. Our results reveal the trade-offs between a (de)centralized market structure, they support cross-asset learning models to explain the link between liquidity and arbitrage, and they demonstrate how financial intermediaries can impose important limits to arbitrage. JEL Classification: G12, G14, G23 |
| Keywords: | market microstructure, natural experiment, yield curve |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242944&r= |
| By: | Todd A. Gormley; Manish Jha |
| Abstract: | Institutional investors conduct more governance research and are less likely to follow proxy advisor vote recommendations when a company’s bonds comprise a larger share of their assets. These findings are driven by bond holdings, shareholder proposals, and companies where fixed-income managers are more likely to be attentive and share an interest with equity investors in improving governance. The findings do not concentrate on companies or shareholder proposals where creditor-shareholder conflicts are likely. Overall, the findings suggest that corporate bond holdings influence how actively institutions monitor their equity positions and contribute to institutions’ overall incentive to be engaged stewards. |
| JEL: | G23 G30 G32 G34 K22 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32530&r= |
| By: | Neil Bhutta; Andreas Fuster; Aurel Hizmo |
| Abstract: | Comparing mortgage rates that borrowers obtain to rates that lenders could offer for the same loan, we find that many homeowners significantly overpay for their mortgage, with overpayment varying across borrower types and with market interest rates. Survey data reveal that borrowers’ mortgage knowledge and shopping behavior strongly correlate with the rates they secure. We also document substantial variation in how expensive and profitable lenders are, without any evidence that expensive loans are associated with a better borrower experience. Despite many lenders operating in the US mortgage market, limited borrower sophistication may provide lenders with market power. |
| Keywords: | Mortgage; price dispersion; consumer search; financial literacy; interest rates |
| JEL: | G21 G53 D14 D18 D83 E43 |
| Date: | 2024–06–18 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:98395&r= |
| By: | Tobias Adrian; Gaston Gelos; Nora Lamersdorf; Emanuel Moench |
| Abstract: | We document that U.S. monetary policy shocks have highly persistent but asymmetric effects on U.S. Treasury and global bond yields, with a clear break around the Great Financial Crisis (GFC). Prior to the GFC, tightening shocks used to lead to a pronounced hump-shaped increase of Treasury yields across maturities. Yields used to respond little to easing shocks as term premiums would rise strongly, offsetting the associated decline of expected policy rates. Since the GFC, term premiums have been declining persistently following both tightening and easing shocks. As a result, post-GFC tightening shocks only have transitory positive effects on yields, which reverse later. The response of advanced-economy and emerging market sovereign yields essentially mimics the pattern observed for Treasury yields. Consistent with recent work by Kekre et al. (2022) we find that changes in the duration of primary dealer Treasury portfolios pre- and post-GFC are highly informative about the sign of the term premium response to policy shocks, but cannot explain the full picture. The observed puzzling persistence of returns is likely to stem at least in part from slow and persistent mutual fund flows following monetary policy surprises. |
| Keywords: | spillovers, monetary policy, yield curve, capital flows |
| JEL: | F32 E43 E52 G12 G15 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1195&r= |