Market Efficient Portfolios in a Systemic Economy

Diversification vs. Diversity – How is the Efficiency of Markets Affected? Prices aggregate information that is dispersed in the economy; they thereby facilitate the allocation of scarce resources. Inefficiencies may arise from deviations of market prices from their fundamental values. In “Market Efficient Portfolios in a Systemic Economy”, Awiszus, Capponi, and Weber investigate the impact of the trade-off between diversity and diversification on inefficiencies in secondary markets due to asset illiquidity and leverage constraints of financial institutions. The authors identify two key determining factors. These are the systemic significance of the banks and the statistical properties of the fundamental asset shocks. Systemic significance is driven by the banks’ target leverage, their trading strategies, and the illiquidity characteristics of the assets. The paper demonstrates that portfolio diversification is typically not efficient. In fact, efficient portfolio holdings may strongly deviate from this standard paradigm, especially if the banks have similar characteristics.

Investor Tastes, Corporate Behavior, and Stock Returns: An Analysis of Corporate Social Responsibility

We classify institutions into socially responsible investors (SRI) and not socially responsible investors using the value weighted corporate social responsibility (CSR) scores of their portfolio holdings. We find that firms that exhibit increases in SRI ownership tend to increase future CSR scores. Our analysis of stock price responses to the revelation of SRI ownership changes indicates that the revelation of higher SRI ownership is associated with negative stock returns. These effects are particularly strong when we focus on SRI-activists, who tend to target firms with low CSR scores and lobby to increase them over time. These observations are consistent with the hypothesis that anticipated increases in CSR activities reduce firm values. This paper was accepted by David Simchi-Levi, finance.

Regulatory Forbearance in the U.S. Insurance Industry: The Effects of Removing Capital Requirements for an Asset Class

We analyze the effects of a reform of capital regulation for U.S. insurance companies in 2009. The reform eliminates capital buffers against unexpected losses associated with portfolio holdings of MBS, but not for other fixed-income assets. After the reform, insurance companies are much more likely to retain downgraded MBS compared to other downgraded assets. This pattern is more pronounced for financially constrained insurers. Exploiting discontinuities in the reform’s implementation, we can identify the relevance of the capital requirements channel. We also document that the insurance industry crowds outs other investors in the new issuance of (high-yield) MBS.

Can Cross-Border Funding Frictions Explain Financial Integration Reversals?

We show that constraints on using leverage for foreign positions can act as an international investment barrier. Guided by an international CAPM with leverage constraints, we use observed stock prices to measure the variation in the magnitude and the implicit cost of such cross-border funding barriers. Our measure helps explain the dynamics of global market integration and, in particular, its reversals documented in the literature, but not explained by other international investment barriers. We confirm our results using alternative financial integration measures, international capital flows, and institutional portfolio holdings.

Luxembourg Fund Data Repository

In this paper, we introduce the Luxembourg Fund Data Repository, a novel database of investment funds available for academic research that was created at the Department of Finance of the University of Luxembourg. The database contains the population of Undertakings for Collective Investment in Transferable Securities funds domiciled in Luxembourg from the starting month of their existence (March 1988) to October 2016. The fund characteristics are organized in a comprehensive database architecture encompassing static and dynamic data over the entire life of the funds. The characteristics include fund identifiers, official name, status information, management company and other service providers, daily and monthly performance time-series, portfolio holdings, classification of investment objective, fees, dividends, and cash flows. The database was constructed after collecting and assembling complementary historical information from three data providers. Importantly, funds no longer in existence due to liquidation or mergers are included in the database, preventing survivorship bias. The database has been constructed to serve as a research dataset of high accuracy due to the maximization of population coverage, the maximization of historical coverage, and validation by using information acquired from the supervisory authority of the financial sector of Luxembourg. License currently available to researchers of the Department of Finance of the University of Luxembourg. Future plans for extending accessibility to the global academic community.

Come together: trust, sociability and individual investors' stock-portfolio returns

PurposePrevious studies have found that trusting and sociable individuals are more likely to participate in the stock market and hold risky assets. The purpose of this paper is to explore if trust and sociability also are related to individual investors' stock-portfolio returns.Design/methodology/approachThe authors study the questions in the paper by linking survey measures of trust and sociability to investors' actual stock portfolios.FindingsThe authors find that trusting investors acquire higher raw and risk-adjusted stock-portfolio returns, but that the returns do not differ depending on how sociable investors are. These results suggest that trust is important for investors' stock-portfolio decisions, and that trusting investors tend to perform better in the stock market than less-trusting investors.Originality/valueThis is, to the best of the authors’ knowledge, the first paper that relates survey measures of trust and sociability to investors' actual stock-portfolio holdings. This is important to increase the understanding for how trust and sociability are related to the financial decisions individuals makes.