Nicht auf Deutsch verfügbar.
Danilo Vassallo
- 16 September 2024
- WORKING PAPER SERIES - No. 2982Details
- Abstract
- This paper presents an event-study methodology that combines market data and survey-based probabilities to infer the full effect of a policy decision, as seen through the lens of financial markets. The market reaction to an event’s outcome reflects its surprise or announcement effect, and generally not its full effect. However, under certain conditions, the unobserved full effect can be derived from the observed surprise effect. Most importantly, the ex-ante probabilities of different outcomes must be known. We apply this methodology to a real-world example: the European Central Bank’s announcement of its third series of targeted longer-term refinancing operations (TLTROIII). The introduction of TLTROIII was highly anticipated, and therefore partially priced in, as market participants feared a “cliff effect” with the preceding operations under TLTROII coming due. We estimate the announcement’s full effect, focusing on its impact on a set of asset prices, as compared to a baseline wherein TLTROIII would not have been introduced. The full market impact surpasses the surprise effect by a factor of fifteen. We also find that the announcement had a highly heterogeneous impact on euro area sovereign bond yields.
- JEL Code
- G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G13 : Financial Economics→General Financial Markets→Contingent Pricing, Futures Pricing
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
- 30 March 2023
- WORKING PAPER SERIES - No. 2803Details
- Abstract
- We study the effects of low short-term interest rates on the optimal portfolio allocation in Markowitz portfolios and Risk parity portfolios. We propose a measure of Portfolio Instabil-ity, gauging the amount of optimal portfolio shifts needed to respond to exogenous shocks to the expected risk and return of the risky portfolio assets. Portfolio Instability, i.e. the selling pressure on riskier asset holdings, is found to be stronger the lower the risk-free interest rate. Heightened portfolio instability in the presence of low rates is found to emerge through two channels both of which incentivise the build-up of large and leveraged risky asset shares during calm periods which need to be unwound in the event of higher market volatility: first, low rates (mechanically) augment the excess return to be gained by investing in riskier assets and second, they are found to dampen volatility of riskier assets in the portfolio. The inverse relationship between portfolio instability and the risk-free rates is found to increase the closer the risk-free rate approaches the effective lower bound. Counterfactual analyses of the behaviour of optimal multi-asset portfolios demonstrate that the sell-off in riskier asset classes during the Covid crisis in March 2020 was more severe than would have been in the presence of higher short-term interest rates.
- JEL Code
- C58 : Mathematical and Quantitative Methods→Econometric Modeling→Financial Econometrics
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
- 19 May 2021
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2021Details
- Abstract
- US equity market prices have surged over the last year, prompting concerns about stretched valuations and the potential risk of market corrections. For example, US equity prices could decline substantially if US Treasury yields increased on expectations of tighter monetary policy without significantly stronger real growth. In view of these developments, this box examines the implications of a possible correction in US stock prices for euro area financial conditions and financial stability. The results show that spillovers to euro area equity and corporate bond markets could be substantial, implying a broader tightening effect on euro area financial conditions.
- JEL Code
- G10 : Financial Economics→General Financial Markets→General
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G15 : Financial Economics→General Financial Markets→International Financial Markets
- 26 May 2020
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2020Details
- Abstract
- Private equity (PE) funding, and buyout funds in particular, have grown rapidly as a form of corporate financing in recent years, as the search for yield intensified. The outstanding amount of PE managed by global funds amounted to close to USD 8 trillion in December 2019, of which buyout funds accounted for around a third. Buyout funds have grown faster than any other PE strategy over recent years, even as their managers have diversified their activities. Institutional investors’ demand for access to PE buyout funds has been reflected in increasing rates of oversubscription of buyout funds in the primary market (see Chart A, left panel). This box provides an overview of the main developments in the PE buyout market and assesses potential financial stability risks to both investors in PE funds and the overall financial system.
- 25 May 2020
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2020Details
- Abstract
- Low financial market volatility in the years prior to the coronavirus outbreak increased the popularity of investment strategies based on targeting volatility. Low volatility across major asset classes and regions had been a key feature of global asset price developments until recently. Investments following strategies which are reliant on low market volatility have grown over recent years, with varying estimates. Globally, there may be funds with assets under management worth up to USD 2 trillion invested in some form of volatility strategies , with USD 300 billion invested in some 300 risk parity funds, a well-known hedge fund strategy for multi-asset funds. Additional leverage deployed in these funds raises their market-moving capacity.