We introduce a new class of tree-based models, P-Trees, for analyzing (unbalanced) panel of individual asset returns, generalizing high-dimensional sorting with economic guidance and interpretability. Under the mean-variance efficient framework, P-Trees construct test assets that significantly advance the efficient frontier compared to commonly used test assets, with alphas unexplained by benchmark pricing models. P-Tree tangency portfolios also constitute traded factors, recovering the pricing kernel and outperforming popular observable and latent factor models for investments and cross-sectional pricing. Finally, P-Trees capture the complexity of asset returns with sparsity, achieving out-of-sample Sharpe ratios close to those attained only by over-parameterized large models.
Bond mutual funds holding illiquid assets (e.g., corporate bonds) actively manage their positions in Treasuries to buffer redemption shocks. We argue and show supporting evidence that this liquidity management practice can induce fragility in Treasury prices. We find that Treasury pairs commonly held by bond funds exhibit higher return comovement than pairs with little fund common ownership. This effect is more pronounced during downside markets or when funds experience large outflows, but is weak for corporate bond pairs. We address endogeneity concerns by exploiting two plausibly exogenous events: the outbreak of COVID-19 and the 2003 mutual fund scandal.
This paper studies whether investor composition affects the sovereign debt market. We construct a data set of sovereign debt holdings by foreign and domestic bank, nonbank private and official investors for 101 countries across three decades. Compared with other investors, private nonbank investors absorb a disproportionate share of the debt supply, and their demand for emerging market debt is most price responsive. A counterfactual analysis of emerging market sovereigns shows a 10% increase in debt leads to a 5.8% yield increase but an outsized 8.4% increase without nonbank investors. We conclude that sovereigns are vulnerable to the loss of nonbanks.
Using intraday 2015-2019 short sale data from CBOE and FINRA, we examine the intraday time patterns and information content of on-exchange and off-exchange shorting. Midday short sales and those near the open strongly and negatively predict the cross-section of stock returns at daily horizons and up to 12 weeks ahead. Short sales near the close are only informative at next-day horizons. We also connect earnings/analyst news to shorting flows. Shorting near the open reacts strongly to and anticipates bad-news releases. Shorting near the close only anticipates post-close firm news. Our evidence supports both Kyle (1985) and Holden and Subrahmanyam (1992).
We provide robust empirical evidence that uncovers the reason for the observed closer relationship between the bond market versus the equity market and the macroeconomy. Our results indicate that the tight bond market-macroeconomy link is not due to differences in the investor base, but instead to the unique transformations of asset volatility and leverage that credit spreads and equity volatility represent. We focus on the investment channel. Using firm-level data, we find that the sensitivity of investment to equity volatility is highly significant, but changes sign in the cross section of firms depending on their distance to default. This sign change confounds aggregate inference. We rationalize these findings using a simple structural model of credit risk and investment with debt overhang.
