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Working Paper
The Shift from Active to Passive Investing: Potential Risks to Financial Stability?
The past couple of decades have seen a significant shift in assets from active to passive investment strategies. We examine the potential effects of this shift on financial stability through four different channels: (1) effects on investment funds? liquidity transformation and redemption risks; (2) passive strategies that amplify market volatility; (3) increases in asset-management industry concentration; and (4) the effects on valuations, volatility, and comovement of assets that are included in indexes. Overall, the shift from active to passive investment strategies appears to be increasing ...
Working Paper
The Shift from Active to Passive Investing : Potential Risks to Financial Stability?
The past couple of decades have seen a significant shift in assets from active to passive investment strategies. We examine the potential effects of this shift for financial stability through four different channels: (1) effects on investment funds? liquidity transformation and redemption risks; (2) passive strategies that amplify market volatility; (3) increases in asset-management industry concentration; and (4) the effects on valuations, volatility, and comovement of assets that are included in indexes. Overall, the shift from active to passive investment strategies appears to be ...
Working Paper
An Industrial Organization Approach to International Portfolio Diversification: Evidence from the U.S. Mutual Fund Families
Although the lack of international portfolio diversification has long interested the financial economics literature, the role of financial intermediaries in the market for diversified portfolios has rarely been studied. In this paper, I introduce a microeconomic aspect of under-diversification by examining a new data on U.S.-based mutual fund families' global diversification. I document the fund families' investments in global equity markets and explore features of supply and demand in the mutual fund market to explain their limited global diversification. Demand estimation confirms that ...
Working Paper
Post-crisis Signals in Securitization: Evidence from Auto ABS
We find significant evidence of asymmetric information and signaling in post-crisis offerings in the auto asset-backed securities (ABS) market. Using granular regulatory reporting data, we are able to directly measure private information and quantify its effect on signaling and pricing. We show that lenders "self-finance'' unobservably higher-quality loans by holding these loans for longer periods to signal private information. This signal is priced in initial offerings of auto ABS and accurately predicts ex-post loan performance. We also demonstrate that our results are robust to exogenous ...
Working Paper
Climate-related Financial Stability Risks for the United States: Methods and Applications
This report has two objectives: 1. Review the available literature on Climate-Related Financial Stability Risks (CRFSRs) as it pertains to the United States. Specifically, the literature review considers several modeling approaches and aims to 1.1 Identify financial market vulnerabilities (e.g., bank leverage), 1.2 Provide an assessment of those vulnerabilities (high/medium/low) as identified by the current literature, and 1.3 Evaluate the uncertainty surrounding these assessments based on interpretation of the findings and coverage of existing literature (high/low). 2. Identify methodologies ...
Working Paper
Auto Finance in the Electric Vehicle Transition
Financing cost differentials tilt the calculus for households toward electric vehicles (EVs). Using 85 million observations on U.S. auto loans, we study households’ credit risk by engine type, seek to uncover the sources and ask if credit risk differentials are being priced. We find that EV borrowers default 29% less relative to internal combustion engine vehicle (ICEV) borrowers with a back-of-the-envelope value of $1,457 in lender savings. To disentangle selection from expost exposure to differential costs of running an EV, we implement a differential shock exposure by treatment model of ...
Working Paper
Interconnectedness in the Corporate Bond Market
Does interconnectedness improve market quality? Yes.We develop an alternative network structure, the assets network: assets are connected if they are held by the same investors. We use several large datasets to build the assets network for the corporate bond market. Through careful identification strategies based on the COVID-19 shock and “fallen angels,” we find that interconnectedness improves market quality especially during stress periods. Our findings contribute to the debate on the role of interconnectedness in financial markets and show that highly interconnected corporate bonds ...
Discussion Paper
Measuring Mutual Fund Liquidity with N-PORT
Open-end mutual funds play a critical role in financial markets and remain major holders of key securities including corporate, Treasury, and municipal bonds. Past stress episodes have exposed the fragility of liquidity provision by corporate bond mutual funds, which can experience large investor outflows that must be met on demand despite holding relatively illiquid assets.
Discussion Paper
Fire-Sale Vulnerabilities of Banks: Bank-Specific Risks under Stress and Credit Drawdowns
One channel of shock propagation in the financial system is fire-sale-driven spillover that can take place through asset fire sales and the resulting effect of depressed asset prices on the value of firms' assets. Heightened leverage then induces firms to de-lever, triggering another round of asset fire sales.
Discussion Paper
Bank Borrowings by Asset Managers Evidence from U.S. Open-End Mutual Funds and Exchange-Traded Funds
In this note, we look into investment funds' access to and usage of bank credit, based on a new dataset on credit line (and other types of loan) extension by top bank holding companies to open-end mutual funds and ETFs in the United States. We find that the aggregate amount of bank lending to open-end funds and ETFs was small and greatly fluctuated across time. Bank credit, particularly in the form of credit lines, has offered funds a flexible liquidity source from which they can draw down cash in times of excessive fund outflows, such as during the onset of the COVID-19 pandemic outbreak. In ...