Large current account deficits, and the corresponding reliance on capital flows from abroad, can increase a country's vulnerability to periods of heightened risk and uncertainty. This paper develops a framework to evaluate such vulnerabilities. It highlights the central importance of two...

While the positive return differential of the United States has attracted a lot of attention in the literature, the factors underlying the dynamics of the investment income balance have so far not been systematically investigated. Here, we propose a novel decomposition framework that accounts...

Extant literature consistently documents that investors tilt their domestic equity portfolios towards regionally close stocks (local bias). We hypothesize that individual investors’ local bias is not limited to the domestic sphere but instead also determines their international investment...

During the global financial crisis, stressed market conditions led to skyrocketing corporate bond spreads that could not be explained by conventional modeling approaches. This paper builds on this observation and sheds light on time-variations in the relationship between systematic risk factors...

This study focuses on the diversification benefits of the most developed equity markets of Central and Eastern Europe (CEE). To evaluate these benefits of diversification we use so-called spanning tests based on a stochastic discount factor approach and estimated by General Methods of Moments...

Using microdata on stock-level lending positions from German mutual funds, we show that active funds use the equity lending market to obtain information about short sale demand. Funds reduce long positions in response to these demand signals, which allows fund managers to front-run public...

For the DAX index market, this paper analyses the development of return differences between exchange traded funds (ETFs) and the DAX index from the perspective of long-term investors. The newly introduced methodology provides the opportunity to continuously identify long-term costs of passively...

Many assets derive their value not only from future cash flows but also from their ability to serve as collateral. In this paper, we investigate this collateral value and its impact on asset returns in an infinite-horizon general equilibrium model with heterogeneous agents facing collateral...

This paper proposes a new perspective on international capital flows and countries' long-run external asset position. Cross-sectional evidence for 84 developing countries shows that over the last three decades countries that have had on average higher volatility of output growth (1) accumulated...

A sovereign debt crisis can have significant knock-on effects in the financial markets and put financial stability at risk. This paper focuses on the transmission of sovereign risk to insurance companies as some of the largest institutional investors in the sovereign bond market. We use a firm...