Final Report Summary - SWF (Sovereign Wealth Funds, Internationalization and Political Connection)
This project focused on the role of sovereign wealth funds (SWF) in the financial markets. First of all, the fellow performed an extensive literature search for all the relevant journal articles, book chapters, and books related to his topic. He especially tried to find information on foreign government and SWF investments into various markets. With the collected information and data, he completed a research paper on the impact of SWF, as politically connected shareholders, on firms from developed countries. He found that the market welcomes foreign government investments in expectation of potential monitoring and internationalisation benefits in the short run. In the long run, the target firms' degree of inter-nationalisation and Tobin's q increase substantially after foreign government investments. The increase in q is directly related to the number of government-related contracts granted by the investing countries. The target companies contribute to the investors' markets by transferring technological know-how, increasing their competitiveness, and providing certification for their markets. The paper was very well-received and has been accepted to be presented in many prestigious finance and economic conferences. The paper has since been published as part of a chapter in the International Finance Review and has won the 2012 Outstanding Author Contribution Award from Emerald Literati Network (Emerald Group Publishing Limited). In addition, the paper has been presented in various international governmental agencies attracting interests from International Monetary Fund, European Central Bank, Bank of International Settlements, World bank and Norges Bank. From these conferences and conversations with fellow academic colleagues, it becomes apparent that it is important to understand the trading activities of these institutions and the associated trading risk.
Together with Dr Roman Kozhan from University of Warwick, the fellow wrote a paper on the execution risk associated with the investment strategies of SWF. The paper was very well-received and has been part of various prestigious conferences like the European Finance Association meeting, European Economic Association Meeting in Barcelona, NYSE Euronext and Tinbergen Institute Workshop on Liquidity and Volatility and Annual Central Bank Workshop on the Microstructure of Financial Markets in Federal Reserve Bank of New York among others. The paper has since been accepted for publication at Management Science, a top management and operation research journal. This paper has motivated the fellow to understand how market microstructure structure and regulations impact information diffusion in financial markets.
He discussed this issue with Johannes Skjeltorp from Norges Bank, who is an expert on institutional investors and market structure, who has recently published in the Journal of Finance (the top journal in finance) on a similar topic. He was very interested in the topic and agreed to work with the fellow. Together with Dr Elvira Sojli from the Rotterdam School of Management (another Marie Curie fellow at Erasmus University), the fellow contacted Nasdaq (the largest stock exchange in the world) to obtain data on trading in its exchange to analyse the impact of several new market instruments and regulations. They obtained the data relatively quickly and have been analysing it ever since.
This led to the paper 'Tapping hidden liquidity: Flash orders at the Nasdaq'. The paper addresses the issue of the impact of the increase in dark pools and their instruments on market quality and the quality of information revealed by trades and prices. Despite the current policy debate, dark pool instruments do not appear to affect market quality. Thus, the rise of these instruments should not be of a concern when looking at the transmission of market information. The fellows have since presented the paper at some of the most prestigious finance conferences in the world, like American Finance Association meeting and European Association Finance meeting. The paper was also invited for presentation at the Sixth Annual Central Bank Workshop on the Microstructure of Financial Markets in the Federal Reserve of New York, the best conference in the field. The paper was very well received by the audience of editors from top journals like: Journal of Finance, Management Science, Review of Financial Studies, etc. and has won the best paper award in the 2012 Midwest Finance Association Meeting. In addition, the fellows were invited to present the paper in Nasdaq itself and Babson College, where the ex chief economist of the Securities and Exchanges Commission (SEC) is currently based. The paper was also covered by the Center for the Study of Financial Regulation, which distributes policy relevant work among policy makers in the United States of America (USA). The work has since been submitted and is currently under review in one of the top three finance journals.
The initial work on the market structure of financial markets has inspired two new papers related to market liquidity and institutional investors. The first focuses on how the liquidity demand of institutions like SWF affects the liquidity provision by the rest of the market. In particular, the authors study how the pricing decision of financial intermediaries like trading venues affect the cost of trading and speed of liquidity provision and demand among trading participants. The paper has since been presented in European Finance Association meeting, 2012 EMG-ESRC Market Microstructure Workshop, 2012 Annual Central Bank Workshop on the Microstructure of Financial Markets in Bank of Canada. The paper is starting to receive attention from the regulators and Prof. Thierry Foucault has used one of the article's insights to provide policy recommendations to the Foresight Driver Review conducted by the United Kingdom Treasury in 2012. The paper is expected to be submitted to a top finance journal by early December 2012.
From the previous work, the fellow observed that market liquidity over long time-series appears to forecast activities in the real economy. This observation motivated him, Dr Kees Bouwman from the Erasmus Econometric Institute and Dr Elvira Sojli to investigate the effect of aggregate stock market illiquidity on US Treasury bond risk premia, given that macroeconomic information is one of the main determinants of bond risk premia. Their results indicate that equity market liquidity significantly affects bond premia. This is not surprising because it is highly likely that investors first pull out from the least liquid stocks during recessions, causing the liquidity gap between the two to increase. They then studied the hypothesis of flight-to-quality by looking at mutual fund flows. We find that changes in liquidity are related to shifts of US mutual fund flows, from equity to money market funds. The paper has been presented in 2011 Annual Central Bank Workshop on the Microstructure of Financial Markets in Stavanger, 2012 Seventh ECB workshop on Forecasting Techniques in Frankfurt, 2012 Fifth Financial Risk International Forum - Systematic Risk in Institut Louis Bachelier and Europlace Institute of Finance, Paris, American University in Washington D.C. 2012 World Finance and Banking Symposium in Shanghai, 2012 Frontier of Finance conference in Warwick. The authors were extremely excited by its acceptance into the 2012 Tau Recanati Finance Conference in Tel Aviv where only 8 out of over 300 submissions have been accepted into the programme. The conference will be attended by editors from the top three finance journals and top finance researchers worldwide on December 2012.
Together with Dr Roman Kozhan from University of Warwick, the fellow wrote a paper on the execution risk associated with the investment strategies of SWF. The paper was very well-received and has been part of various prestigious conferences like the European Finance Association meeting, European Economic Association Meeting in Barcelona, NYSE Euronext and Tinbergen Institute Workshop on Liquidity and Volatility and Annual Central Bank Workshop on the Microstructure of Financial Markets in Federal Reserve Bank of New York among others. The paper has since been accepted for publication at Management Science, a top management and operation research journal. This paper has motivated the fellow to understand how market microstructure structure and regulations impact information diffusion in financial markets.
He discussed this issue with Johannes Skjeltorp from Norges Bank, who is an expert on institutional investors and market structure, who has recently published in the Journal of Finance (the top journal in finance) on a similar topic. He was very interested in the topic and agreed to work with the fellow. Together with Dr Elvira Sojli from the Rotterdam School of Management (another Marie Curie fellow at Erasmus University), the fellow contacted Nasdaq (the largest stock exchange in the world) to obtain data on trading in its exchange to analyse the impact of several new market instruments and regulations. They obtained the data relatively quickly and have been analysing it ever since.
This led to the paper 'Tapping hidden liquidity: Flash orders at the Nasdaq'. The paper addresses the issue of the impact of the increase in dark pools and their instruments on market quality and the quality of information revealed by trades and prices. Despite the current policy debate, dark pool instruments do not appear to affect market quality. Thus, the rise of these instruments should not be of a concern when looking at the transmission of market information. The fellows have since presented the paper at some of the most prestigious finance conferences in the world, like American Finance Association meeting and European Association Finance meeting. The paper was also invited for presentation at the Sixth Annual Central Bank Workshop on the Microstructure of Financial Markets in the Federal Reserve of New York, the best conference in the field. The paper was very well received by the audience of editors from top journals like: Journal of Finance, Management Science, Review of Financial Studies, etc. and has won the best paper award in the 2012 Midwest Finance Association Meeting. In addition, the fellows were invited to present the paper in Nasdaq itself and Babson College, where the ex chief economist of the Securities and Exchanges Commission (SEC) is currently based. The paper was also covered by the Center for the Study of Financial Regulation, which distributes policy relevant work among policy makers in the United States of America (USA). The work has since been submitted and is currently under review in one of the top three finance journals.
The initial work on the market structure of financial markets has inspired two new papers related to market liquidity and institutional investors. The first focuses on how the liquidity demand of institutions like SWF affects the liquidity provision by the rest of the market. In particular, the authors study how the pricing decision of financial intermediaries like trading venues affect the cost of trading and speed of liquidity provision and demand among trading participants. The paper has since been presented in European Finance Association meeting, 2012 EMG-ESRC Market Microstructure Workshop, 2012 Annual Central Bank Workshop on the Microstructure of Financial Markets in Bank of Canada. The paper is starting to receive attention from the regulators and Prof. Thierry Foucault has used one of the article's insights to provide policy recommendations to the Foresight Driver Review conducted by the United Kingdom Treasury in 2012. The paper is expected to be submitted to a top finance journal by early December 2012.
From the previous work, the fellow observed that market liquidity over long time-series appears to forecast activities in the real economy. This observation motivated him, Dr Kees Bouwman from the Erasmus Econometric Institute and Dr Elvira Sojli to investigate the effect of aggregate stock market illiquidity on US Treasury bond risk premia, given that macroeconomic information is one of the main determinants of bond risk premia. Their results indicate that equity market liquidity significantly affects bond premia. This is not surprising because it is highly likely that investors first pull out from the least liquid stocks during recessions, causing the liquidity gap between the two to increase. They then studied the hypothesis of flight-to-quality by looking at mutual fund flows. We find that changes in liquidity are related to shifts of US mutual fund flows, from equity to money market funds. The paper has been presented in 2011 Annual Central Bank Workshop on the Microstructure of Financial Markets in Stavanger, 2012 Seventh ECB workshop on Forecasting Techniques in Frankfurt, 2012 Fifth Financial Risk International Forum - Systematic Risk in Institut Louis Bachelier and Europlace Institute of Finance, Paris, American University in Washington D.C. 2012 World Finance and Banking Symposium in Shanghai, 2012 Frontier of Finance conference in Warwick. The authors were extremely excited by its acceptance into the 2012 Tau Recanati Finance Conference in Tel Aviv where only 8 out of over 300 submissions have been accepted into the programme. The conference will be attended by editors from the top three finance journals and top finance researchers worldwide on December 2012.