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Politics, Policy and Asset Prices

Paper Session

Sunday, Jan. 7, 2018 1:00 PM - 3:00 PM

Loews Philadelphia, Commonwealth Hall A2
Hosted By: American Finance Association
  • Chair: Russ Wermers, University of Maryland

Political Cycles and Stock Returns

Lubos Pastor
,
University of Chicago
Pietro Veronesi
,
University of Chicago

Abstract

We develop a model of political cycles driven by time-varying risk aversion. Heterogeneous agents make two choices: whether to work in the public or private sector and which of two political parties to vote for. The model implies that when risk aversion is high, agents are more likely to elect the party promising more fiscal redistribution. The model predicts higher average stock market returns under Democratic than Republican presidencies, explaining the well-known ``presidential puzzle." Under sufficient complementarity between the public and private sectors, the model also predicts faster economic growth under Democratic presidencies, which is observed in the data.

Quantitative Easing in the Euro Area: The Impact on Risk Exposures and Asset Prices

Ralph Koijen
,
New York University
Francois Koulischer
,
Central Bank of Luxembourg
Motohiro Yogo
,
Princeton University

Abstract

We use new data on security-level portfolio holdings of institutional investors and households in the euro area to understand the impact of the ongoing asset purchase programme of the European Central Bank (ECB) on the dynamics of risk exposures and on asset prices. We develop a tractable measurement framework to quantify the dynamics of euro-area duration, sovereign and corporate credit, and equity risk exposures as the programme evolves. We propose an instrumental-variables estimator to identify the impact of central bank purchases on sovereign bonds on sovereign bond yields. Our results suggest that the foreign sector sells most in response to the programme, followed by banks and mutual funds, while the purchases of insurance companies and pension funds are positively related to purchases by the ECB.

Following the Money: Evidence for Portfolio Balance Channel of Quantitative Easing

Itay Goldstein
,
University of Pennsylvania
Jonathan Witmer
,
Bank of Canada
Jing Yang
,
Bank of Canada

Abstract

Recent research suggests that quantitative easing (QE) may affect a broad range of asset prices through a portfolio balance channel. Using novel security-level holding data of individual US mutual funds, we establish strong evidence that portfolio rebalancing occurred both within funds and across funds around Federal Reserve QE purchases. We find that mutual funds replaced QE securities with other government bonds that have similar characteristics; intriguingly, the shift was mainly into newly-issued government bonds. Such within-fund portfolio rebalancing is material. For every $100 in QE bonds sold, mutual funds replenished their portfolios with about $50 to $60 of newly-issued government bonds. In comparison, portfolio rebalancing by fund managers into risker assets is much smaller in magnitude. Instead, the portfolio rebalancing into risker assets such as corporate bonds did occur but mainly through the end investors. We find a significant shift into corporate bond funds initiated by the end investors of mutual funds instead of fund managers Such across-fund portfolio shift is sizable. Corporate bond funds received more than $50 billion of additional assets in inflows during the QE period, relative to government bond funds.

Regulating Information

Andrew Bird
,
Carnegie Mellon University
Stephen Karolyi
,
Carnegie Mellon University
Thomas Ruchti
,
Carnegie Mellon University

Abstract

The SEC regulates and standardizes information production in financial markets through financial reporting standards. With a novel dataset exploiting institutional features of the standard setting process. On average, standards increase aggregate market value by 0.93%, although discord among market participants moderates this positive effect. We construct a firm-level measure of ex ante sensitivity to information regulation and find that the information content of subsequent information events is higher for sensitive firms. Increased information content comes from negative news, consistent with regulation constraining discretionary disclosure. Information regulation improves capital allocation by reducing asymmetric information in financial markets.
Discussant(s)
Anna Pavlova
,
London Business School
Christian Lundblad
,
University of North Carolina
Russ Wermers
,
University of Maryland
Laura Veldkamp
,
New York University
JEL Classifications
  • G1 - General Financial Markets