ABSTRACT We analyze how institutional investors entering commodity futures markets, referred to as the financialization of commodities, affect prices. Institutional care about their performance relative a index. find that all prices, volatilities, and correlations go up with financialization, but more so for index than nonindex futures. The equity‐commodity also increase. demonstrate financial markets transmit shocks not only prices spot inventories. Spot any spill over storable

We consider an economy populated by institutional investors alongside standard retail investors. Institutions care about their performance relative to a certain index. Our framework is tractable, admitting exact closed-form expressions, and produces the following analytical results. find that institutions tilt portfolios towards stocks compose benchmark The resulting price pressure boosts index stocks. By demanding more risky than investors, amplify stock volatilities aggregate market...

We study the implications of introducing demand shocks and trade in goods into an otherwise standard international asset pricing model. Trade gives rise to additional channel propagation—through terms trade—absent traditional single-good models. The inclusion helps overturn many unrealistic existing finance models which productivity are sole source uncertainty. Our model generates a rich set on how stock, bond, foreign exchange markets co-move. solve closed-form, yields system equations that...

Abstract Benchmarking incentivizes fund managers to invest a fraction of their funds’ assets in benchmark indexes, and such demand is inelastic. We construct measure inelastic stock attracts, benchmarking intensity (BMI), computed as its cumulative weight all benchmarks, weighted by following each benchmark. Exploiting the Russell 1000/2000 cutoff, we show that changes stocks’ BMIs instrument for ownership benchmarked investors. The resultant elasticities are low. document both active...

ABSTRACT We document a rapid increase in retail trading options the United States. Facilitated by payment for order flow (PFOF) from wholesalers executing orders, recently reached over 60% of total market volume. Nearly 90% PFOF comes three wholesalers. Exploiting new flags transaction‐level data, we isolate wholesaler trades and build novel measure trading. Our comoves with equity‐based activity proxies drops significantly during U.S. brokerage platform outages restrictions. Retail...

This article investigates a fund manager's risk-taking incentives induced by an increasing and convex relationship of flows to relative performance. In dynamic portfolio choice framework, we show that the ensuing convexities in objective give rise finite risk-shifting range over which she gambles finish ahead her benchmark. Such gambling entails either increase or decrease volatility portfolio, depending on risk tolerance. latter case, manager reduces holdings risky asset despite its...

We study the comovement among stock prices and exchange rates in a three-good, three-country, Centre-Periphery, dynamic equilibrium model which Centre's agents face portfolio constraints. characterize closed form for broad class of constraints, solving prices, terms trade, holdings. show that constraints generate wealth transfers between Periphery countries Centre, increase across Periphery. associate this excess caused by with phenomenon known as contagion. The generates predictions...

How does ESG (environmental, social, and governance) performance affect stock returns? Answering this question is difficult because existing measures of perfor- mance — ratings are noisy and, therefore, standard regression estimates suffer from attenuation bias. To address the bias, we propose two noise-correction procedures, in which instrument with other rating agencies, as classical errors-in-variables problem. The corrected demonstrate that effect on returns stronger than previously...

We propose a tractable model of asset management in which benchmarking arises endogenously, and analyze its welfare consequences. Fund managers' portfolios are not contractible they incur private costs running them. Incentive contracts for fund managers create pecuniary externality through their effect on prices. Benchmarking inflates prices creates crowded trades. The crowding reduces the effectiveness incentive others, investors fail to account for. A social planner, recognizing crowding,...

We document a rapid increase in retail trading options the U.S. Facilitated by payment for order flow (PFOF) from wholesalers executing orders, recently reached over 48% of total market volume. Nearly 90% PFOF comes three wholesalers. Exploiting new flags transaction-level data, we isolate wholesaler trades and build novel measure trading. Our comoves with equity-based activity proxies drops significantly during brokerage platform outages restrictions. Retail investors prefer cheaper, weekly...

A sharp increase in the popularity of commodity investing past decade has triggered an unprecedented inflow institutional funds into futures markets, referred to as financialization commodities. In this paper, we explore effects a model that features investors alongside traditional markets participants. The care about their performance relative index. We find presence prices and volatilities all go up, but more so for index than nonindex ones. correlations amongst well equity-commodity also...

How does ESG (environmental, social, and governance) performance affect stock returns? Answering this question is difficult because existing measures of perfor- mance — ratings are noisy and, therefore, standard regression estimates suffer from attenuation bias. To address the bias, we propose two noise-correction procedures, in which instrument with other rating agencies, as classical errors-in-variables problem. The corrected demonstrate that effect on returns stronger than previously...

Recent evidence on the importance of cross-border equity flows calls for a rethinking standard theory external adjustment. We introduce holdings and portfolio choice into an otherwise conventional open-economy dynamic equilibrium model. Our model is simple it admits exact closed-form solution regardless whether financial markets are complete or incomplete. In this framework, we able to establish interconnections between real side economy, represented by trade balance, current account,...

In this paper we study the implications of introducing demand shocks and trade in goods into an otherwise standard international asset pricing model. Trade gives rise to additional channel propagation - through terms absent traditional single-good models. The inclusion helps overturn many unrealistic existing finance models which productivity are sole source uncertainty. Our model generates a rich set on how stock, bond, foreign exchange markets co-move. We solve closed-form, yields system...

This paper develops a simple two-country, two-good model, in which the real exchange rate, stock and bond prices are jointly determined.The model predicts that market correlated internationally even though their dividend processes independent, providing theoretical argument favor of financial contagion.The foreign serves as propagation channel from one to other.The identifies interconnections between stock, markets characterizes joint dynamics three-factor model.Contemporaneous responses...

This paper investigates a fund manager's risk-taking incentives induced by an increasing and convex fund-flows to relative-performance relationship. In dynamic portfolio choice framework, we show that the ensuing convexities in objective give rise finite risk-shifting range over which she gambles finish ahead of her benchmark. Such gambling entails either increase or decrease volatility portfolio, depending on risk tolerance. latter case, manager reduces holdings risky asset despite its...

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We study the comovement among stock prices and exchange rates in a three-good three-country Center-Periphery dynamic equilibrium model which Center's agents face portfolio constraints. characterize closed form for broad class of constraints, solving prices, terms trade, holdings. show that constraints generate wealth transfers between Periphery countries Center, increase across Periphery. associate this excess caused by with phenomenon known as contagion. The generates predictions consistent...

How strongly does ESG (environmental, social and governance) performance affect stock returns? Answering this question is difficult because existing measures of performance, ratings, are noisy. To tackle the bias, we propose a noise-correction procedure, in which instrument ratings with other rating agencies, as classical errors-in-variables problem. The corrected estimates demonstrate that effect on returns stronger than previously estimated; standard regression ratings' impact biased...