Working Papers Series

Insider Trading in connected Firms during Trading Bans

Insiders are subjected to trading bans or close periods before earnings announcements. Directors who sit on the board of more than one firm can still trade in the shares of their other firms not subject to close periods. We find that when a close period restricts trading by directors in one firm, they leverage insider information about that firm to trade in their other firms. This is supported by positive correlations between stock market reactions in close and traded firms. This correlation is also moderated by the type of relationship between the two firms and the presence of institutional investors. Given this newly documented informational advantage of insiders, policymakers may consider applying the close period to all firms where directors hold board seats.

Working paper no.86 2024

Comparative study of the performance of Spanish and foreign equity and fixed-income collective investment schemes (CIS) distributed in Spain

This study compares the performance of equity and fixed-income collective investment schemes (CIS) domicilies and sold in Spain and those domicilied abroad and distributed in Spain during the period between January 2018 and October 2023.

Equity and fixed income CIS are analysed separately. The equity sample comprises 348,707 monthly data points  corresponding to 5,208 series or classes of 1,621 CIS. The fixed-income sample consists of 279,647 monthly data points, 4,274 classes or series and 1,732 CIS. Three performance measures are analysed: return net of costs, relative return against the benchmark and risk-adjusted return or alpha.

Spanish CIS  and managers of both equities and fixed income are, on average, significantly smaller (in terms of equity), charge a lower expense ratio and require a lower minimun investment than their foreign counterparts.

On average, during the period from January 2018 to October 2023, equity collective investment schemes (CIS) marketed in Spain, both Spanish and foreign, have an alpha or negative risk-adjusted return which is: -0.6 percentage points (pp) per year in the case of Spanish CIS and -1.68 p.p. per year in the case of foreign CIS.

Spanish fixed-income CIS have an alpha of -0.12 p.p per year compared to an alpha of -0.36 p.p. per year for foreign CIS.

However this comparison fails to acknowledge the significant institutional, asset type, and investor differences between Spanish and foreign CIS marketed in Spain.

Spanish CIS - both equities and fixed income - have significantly smaller assets, belong to managers with much lower aggregate assets, charge a lower expense ratio and require a much lower minimum investment than foreign ones.

When adjusting for these characteristics to compare truly similar CIS, it is detemined that there is no statistically significant variance in risk-adjusted returns or alpha between Spanish and foreign equity CIS distributed in Spain.

In the case of fixed-income CIS, the average alpha of Spanish CIS is 0.8 percentage points per year lower than that of comparable foreign CIS after accounting for the characteristics referred to above.

Working paper no.85 2024  

Defining Greenwashing

We propose a definition of greenwhasing in asset management that combines ESG self-labels, ESG ratings, and funds´voting support for ESG proposals. Using this definition, we estimate that 29% of ESG funds in the US engaged in greenwhasing during the 2016-2022 period. This proportion has decreased in more recent periods. Greenwashers are more likely to underperform, tend to belong to larger and younger fund families, and are less likely to be offered by signatories of the United Nations Principles for Responsible investment. Investors, especially within the institutional segment of the market, appear to  be able to dicserrn true-ESG funds.   lang="EN-US">     

Working paper no.84.2024  

Analysis of the implementation of the Spanish Financial Transaction tax in equity markets

This paper evaluates the effect of the introduction of the ITF on Spanish shares in secondary markets, focusing on the potential costs. For this purpose, it considers several dimensions of liquidity (measured through the bid-ask spread and the Amihud ratio).volatility (both intraday and historical) and trading volume of the secondary markets in which Spain shares are traded. The paper uses two models: one based on difference-in-differences and another wich relies on a regression discontinuity design. This approach tries to capture two types of effects: firstly, the impact of the introduction of the tax by comparing the evolution of the variables of Spanish shares subject to the FTT with those of other countries with similar characteristics and not subject to the FTT. Secondly, the evolution of the variables linked to the trading of shares of Spanish companies subject to tax with those that are not.

The paper reveals that the effects of the tax on the trading of Spanish shares have been limited in absolute terms and were mostly temporary. Two opposing effects are detected: on the one hand, the trading of taxed Spanish shares decreased after the introduction of the tax. On the other hand, these shares recovered part of the trading volume that was carried out in OTC markets. With respect to volatility, it increased in the short term, and tended to decrease in the long term.     

Working paper no.83.2023 

e-Corporate governance and transparency in Spanish listed companies: an empirical study

CONTENT: This paper explores how technology, especially the Internet, has driven improvements in the corporate governance and transparency of listed companies. It is partly a response to the interest shown by European and American capital market supervisors in regulating the content and form of online disclosure of corporate governance practices. The paper quantifies three transparency indicators for corporate governance matters and empirically tests which variables explain the disclosure standards attained. Results show that the companies with the highest transparency scores are also those that make most use of Internet for conveying corporate governance information.

Working paper no. 8. 2005

The corporate governance model of Ibex 35 companies: compliance with the Olivencia Code

CONTENT: This paper tests for the existence of a general corporate governance model common to Spanish firms and whether the good governance codes in their regulatory landscape (Olivencia and OECD) have exerted a decisive influence. It concludes that the companies listed on the Ibex 35 exhibit a distinctive brand of corporate governance. In general, it seems that the arrival of good governance codes has had little impact, and while some convergence is apparent in companies´ corporate governance practices, they still fail to comply fully with the associated recommendations.

Working paper no. 7. 2004

Alternative investment schemes

CONTENT: The aim of this paper is to provide an overview of the alternative investment schemes that have seen extraordinary growth in the past decade. It runs through the characteristics ascribed to this kind of scheme and their most commonly used investment strategies, supplemented by a review of the corresponding academic literature. Finally, it considers the challenges they pose for the regulator (with particular reference to systemic risk and investor protection) and the new regulatory directions emerging in some jurisdictions.

Working paper no. 6. 2004

Ownership and defence tactics in Spanish listed firms. 1996-2002

CONTENT: This paper examines the ownership structure and defence measures of Spanish listed companies, to determine the identity and equity stakes of their key shareholders and the extent of their takeover protection. Among its most striking findings is the power exercised by family groups, which at end 2002 controlled 52.7 percent of non financial listed companies. On the defensive front, the study detected a clear trend towards greater use of anti-takeover measures.

Working paper no. 5. 2004

Use and accounting treatment of derivative financial instruments by Spanish mutual funds

CONTENT: This paper identifies the basic provisions under Spanish law governing the accounting and disclosure system for mutual fund transactions in derivative financial instruments, then goes on to test their effectiveness. Most Spanish mutual funds operate in derivative products, and though the global figures may not be significant, some funds employ derivatives on a major scale. It concludes that current disclosure and accounting rules are working effectively and stand comparison with the most advanced.

Working paper no. 4. 2003

Auction theory and seller reputation

CONTENT: This paper describes the standard types of auctions, reviews the academic literature on the subject and explains how its findings relate to real economic situations. A model is proposed which draws heavily on auction theory but adds certain specificities regarding seller behaviour, to incentivise measures that enhance their credibility.

Working paper no. 3. 2003

Transparency and the best execution principle

CONTENT: This paper examines some of the determining factors for market transparency and efficiency in the light of the changes taking place on European securities markets, particularly the surge in competition between traditional exchanges, the emergence of alternative trading systems that rival with them for business, and the internationalisation of orders under way at investment firms.

Working paper no. 2. 2003

Regulation of market abuse in Europe and the United States

CONTENT: This paper explains the theoretical foundations for market abuse regulations, describing their development history in main European countries and comparing them with both the equivalent rules in the United States and the framework ushered in by the newly enacted European Union Directive.

Working paper no. 1. 2002

Spanish securities issuers and their relationship with climate change

The main objective of this work is to carry out a first estimation on the amount of the greenhouse gas emissions of Spanish issuers of securities. It also carries out an initial exercise on the degree of alignment of their emission reduction goals with the objectives set out in the Paris Agreement and in the European Union. In addition we assess the extent to which the challenges deriving from climate change have been incorporated into business management, particularly in the area of corporate governance, the risks and opportunities identified and specific emission reduction goals set.

This document forms part of the work carried out to fulfil the mandate established in Law 7/2021, of May 20, on climate change and ecological transition ( the "Clima Change Law"). Article 33 establishes that every two years the Bank of Spain, the CNMV and the General Directorate of Insurance must prepare a coordinated report within the AMCESFI (Spanish acronym for "Spain´s Macroprudential Authority Financial Stability Council") on the degree of alignment with the climate goals of the Paris Agreement and with the regulations of the European Union and an assessment of the risk to the financial system deriving from climate change.

Working paper no.82.2023     

Measuring Transition Risk in Investment Funds

We develop a comprehensive framework to measure the impact of the climate transition on investments portfolios. Our analysis is enriched by including geographical, sectoral, company and ISIN-level data to assess transition risk. We find that investment funds suffer a moderate 5.7% loss upon materialization of a high transition risk scenario. However, the risk distribution is significantly left-skewed, with the worst 1% funds experiencing an average loss of 21.3%. In terms of asset classes, equities are the worst performers (-12,7%), followed by corporate bonds (5.6%) and government bonds (-4.8%). We discriminate among financial instruments by considering the carbon footprint of specific counterparties and the credit rating, duration, convexity and volatility of individual exposures. We find that sustainable funds are less exposed to transition risk and perform better than the overall fund sector in the low-carbon transition, validating their choice as green investments.

Working paper no.81.2023

On the behavior of Spanish Capital Market

This paper analyzes the performance of various asset classes trades in the Spanish Capital Market. We compare the relative behavior of stock and corporate bond market risk premia of the IBEX-35 at alternative horizons, We finally discuss the spillover volatility connections between the stock market portfolio, the general indes of corporate bonds, the long-term government bond, and risk-neutral volatility and skewness, In fact, during stressed periods  the return of the government bond have a positive exposure to the market stock return, wich suggests that the Spanish long-term bond is a risky asset rather than being a hedging asset. This fact togeher with the strong counter-cyclical behavior of the expected market risk premium at any horizon, suggests that the Spanish corporations are badly affected during recessions with a negative impact on investment and output growth. It is not surprising how rapidly the Spanish economy deteriorates at the beginning of recessions. Note that the ultimate objective is to learn about the Spanish real economy through the lens of financial markets.    

Working paper no.80.2022   

        

Regulating Liquidity Risk in Mutual Funds

This document analyzes the effect of liquidity risk regulation in a model of investors, mutual funds, and the underlying asset market. Investor redemptions lead mutual funds to sell assets, which may result in fire sales if market liquidity, driven by the anticipation of fire sales, is scarce, Mutual funds optimally choose to pass fire sales of their assets on to investors. Pecuniary externalities make liquidity supply to the underlying asset market inefficiently low. Regulatory policies, liquidity requirements for mutual funds, and redemption gates have adverse effects on liquidity provision to the asset market and may increase the incidence of fire sales.    

Working paper no.79.2022   

Analysis of the behavior of retail investors in the financial markets during the COVID-19 crisis.

This paper describes the development in trading by retail investors in the securities market in 2019 and 2020 to identify possible changes in times of heightened uncentainty of the crisis. This article is the first that the CNMV has carried out focusing on this type of analysis and it highlights the significant increase in trading by natural persons in the context of the crisis. The increase in trading was due to the sharp rise in the number of trades executed of a smaller size, together with an extraordinary increment in the number of new investors. The abrupt movements in equity prices in 2020, together with the easy access to trading on markets deriving from the use of new technologies were the catalyst of this process, The results contained in this article are accompanied by the publication of an interactive web-based dashboard, which can be accessed by all users using any electronic device   

Working paper no.78.2022

Characteristics of sustainable Spanish CISs in 2020.

This paper is an initial attempt to understand the sustainable Spanish CISs registered with the CNMV at the end of 2020 in more depth. At that time, there were very few or these, just 59, divided between investment funds and open-ended collective investment companies (SICAVs), with assets of around 9.5 billion euros. These CISs voluntarily refer to their activity as SRI (socially responsible investment), in accordance with Inverco´s 2014 SRI Circular. The first part of this study shows that sustainable CIS average returns at the end of 2020 exceeded those of the investments funds (IFs) and SICAVs registered with the CNMV (1,8% compared to 0,8%). At the same time, the ratio of expenses was higher for CISs with ESG objectives than for other CISs (1,22% compared to 1,05%). In relation to ESG evaluations of the issuers of the assets belonging to sustainable CIS portfolios, we show that they are invested issuers with an excellent of good ESG rating and a degree of publicly reported ESG data transparency that is high or above average (ratings A and B).   

Working paper no.77.2022

Periodic public information on investment funds and  how it influences investors´ decisions

This article analyzes how the information contained in the public information of investment funds affects the decisions of their participants. One of the goals of this type of regulatory text is to reduce the information asymmetry faced by investors, especially retail investors, when they want to invest in the securities markets. Specifically, two types of texts are analyzed: the first, devoted to describing the fund´s investment policy; the second, known as an explanatory appendix devoted to describing the performance of the fund in the last quarter and the manager´s predictions for the next quarter. From the results obtained, it can be derived that the information contained in these texts could influence the volume of both subscriptions and redemptions. However, the influence would be very limited. At the same time, there is a weak evidence that they could reduce the participations costs of investors when making their decisions to buy and sell funds.   

Working paper no.76.2022   

Financial education and savings and investment decisions: An analysis of the Survey of Financial Competences (ECF)

This paper is based on the results deriving from the Survey of Financial Competences (ECF) in an attempt to contribute to the improvement of financial education policy designs, an it pursues several objectives: (i) to quantify the financial knowledge of individuals, (ii) to relate this knowledge to available  socio-economic characteristics, and (iii) to analyse the effect of financial education on savings and investment decision-making for a  broad set of financial assets. The results reveal that financial education plays a particularly important role in the decision to acquire financial assets such as fixed income and equity securities and investment funds. Financial education determines investment decisions in which the valuation of return, risk and investment term predominate and not the decisions  of saving or acquisition of assets strongly perceived as hedging products. 

Working paper no.75.2021

Deconstructing systemic risk: A reverse stress testing approach

The financial sector faces different systemic events. The early recognition of these events is a key step to monitor and track posible financial crises. Three main questions arise related to systemic risk, and they deal with their quantification, their probability of occurrence and the role of main contributors, This paper proposes a methodology based on a reverse stress test exercise to shed light on these questions. Time series and cross-section information regarding systemic risk are obtained. Further, an assessment of how these results of systemic assessment could change depending on key parameters in a Gaussian framework is undertaken and, finally, a small empirical exercise is performed. 

Working paper no.74.2021

Estimating real world probabilities: a forward looking behavioral framework

This document shows that disentangling sentiment-induced biases from fundamental expectations significantly improves the accuracy and consistency of probabilistic forecasts. Using data from 1994 to 2017, 15 stochastic models and risk-preference combinations are analyzed and in all possible cases a simple behavioral transformation delivers substantial forecast gains. The results are robust across different evaluation methods, risk-preference hypotheses and sentiment calibrations, demonstrating that behavioral effects can be effectively used to forecast asset prices. Further analyses confirm that the real-world densities outperform densities recalibrated to avoid past mistakes and improve predictive models where risk aversion is dynamically estimated from option prices.

Working paper no.73.2020

Gender regulations on board of directors: The moderating role of the Institutional environment

This paper analyses how gender diversity board regulation increases women presence on corporate boards and how formal and informal institutional factors may moderate the relationship. The results show that quotas that are not subject to sanctions do not significantly impact women presence on boards and committees, whereas mandatory quotas lead to highest women representation on boards of directors. The results also show that codes of good governance effectiveness is greater than quotas in regards female representation on board committees. Finally, institutional factors moderate the relationship between regulations and the presence of women on corporate boards. This paper finds rich empirical evidence of the importance of both formal and informal institutions as key instruments in the effectiveness of gender diversity regulation and suggests some factors to consider in the design of future actions and policies.

Working paper no.72.2020

Non alternative collective investment schemes, connectedness and systemic risk

This paper analyses the connectedness among non-alternative collective investment schemes and with their underlying securities markets. The results show that non-alternative collective investment schemes should not be taken as important in terms of propagation of shocks and they may play a limited role from a systemic point view, an outcome that may be confirmed by the second main result of the paper. There is not a long run relationship (cointegration) between the connectedness from non-alternative collective schemes with their underlying markets and the financial systemic risk. On the other hand, in the sort run, the way that a negative shock in the financial systemic risk causes an increase in the level of connectedness is shown although the opposite cannot be said, a negative shock in the level of connectedness does not cause a rise in the measure of the financial systemic risk.

Working paper no.71.2020?

Behavioural economics for investor protection: Practical recommendations for investors, entities and regulators.

This paper analyzes the fundamental premises on which behavioral economics are based and the role that this discipline can have in investor protection. It examines the different investor´s behavioral biases in the different phases of the investment process, and the strategies that can be adopted to mitigate their incidence. Likewise, a series of proposals are included for investors, firms and regulators that facilitate the practical application of behavioral economics to achieve better investor protection.

Working paper no.70.2020

A proposal for the design of energy-related scenario for stock stress test

This article proposes a flexible methodology that captures the asymmetry in the relationship between the stock market and the oil market jointly with potential structural changes. It deals with the challenge of modelling the sharp increase in dependence across markets in stress situations. The study analyses the response of the European stock market to an extreme energy-related scenario. This exercise is of particular significance given the growing interest in the consequences of energy prices for the real economy and the risks of a disruptive transition to a low-carbon economy. 

Working paper no 69. 2018

Rethinking Capital Regulation: The Case for a Dividend Prudential Target

The paper investigates the effectiveness of dividend-based macroprudential rules in complementing capital requirements to promote bank soundness and sustained lending over the cycle. First, some evidence on bank dividends and earnings in the euro area is presented. When shocks hit their profits, banks adjust retained earnings to smooth dividends. This generates bank equity and credit supply volatility. Then, a DSGE model with key financial frictions and a banking sector is developed to assess the virtues of what shall be called dividend prudential targets. Welfare-maximizing dividend-based macroprudential rules are shown to have important properties: (i) they are effective in smoothing the financial cycle by means of less volatile bank retained earnings, (ii) they induce welfare gains associated to a BaselIII-type of capital regulation, (iii) they mainly operate through their cyclical component, ensuring that long-run dividend payouts remain unaffected, (iv) they are flexible enough so as to allow bank managers to optimally deviate from the target, and (v) they act as an insurance scheme for the real economy.

Working paper no 68. 2018

Financial density forecasts: A comprehensive comparison of risk-neutral and historical schemes

We investigate the forecasting ability of the most commonly used benchmarks in financial economics. We approach the main methodological caveats of probabilistic forecasts studies –small samples, limited models and non-holistic validations– by performing a comprehensive comparison of 15 predictive schemes during a time period of over 21 years. All densities are evaluated in terms of their statistical consistency, local accuracy and forecasting errors. Through the development of a new indicator, the Integrated Forecast Score (IFS), we show that risk-neutral densities outperform historical-based predictions in terms of information content. We find that the Variance Gamma model generates the highest out-of-sample likelihood of observed prices and the lowest predictive errors, whereas the ARCH-based GJR-FHS delivers the most consistent forecasts across the entire density range. In contrast, lognormal densities, the Heston model or the non-parametric Breeden-Litzenberger formula yield biased predictions and are rejected in statistical tests.

Working paper no 67. 2017

Measuring liquidity of Spanish debt

Assessing liquidity in fixed-income markets is becoming very important in the current context of extremely low interest rates which, in general terms, is encouraging the acquisition of riskier and (potentially) less liquid assets. Although there is the perception that bond market liquidity could have worsened over the last years in international markets, none of the current studies has reached a clear conclusion. In this paper, we propose a liquidity synthetic indicator (LSI) on Spanish debt, applying the methodology that Broto and Lamas (2016) used for US markets. We compute six individual liquidity indicators that represent the elements that characterise a liquid market (tightness, resilience, depth and breadth). We use price and transaction-based indicators for government and corporate debt when data is available for the period 2005-2016. Our LSI shows several episodes of significant worsening in liquidity conditions, related to the Lehman Brothers’ collapse and the European sovereign debt crisis. After a sizeable improvement of liquidity in 2013-2014, the liquidity indicator has deteriorated over the past months as a consequence of lower trading volumes. The current ultralow interest rate environment and more capital demanding regulations could partially explain these results.  

Working paper no 66. 2017

Why is investors´ mutual fund market allocation far from the optimum?

In this paper, It is analyzed the differences between the optimal portfolio of funds that a fully informed investor might select and the current structure of the mutual fund markets as characterized by the funds’ risk profile (conservative or aggressive) and target investor type (retail or wholesale). It is found that the relationship between fund age, market share and change in total net assets –but not fees- and the optimal portfolio of funds depends on the structure of the mutual fund market.

Working paper no 65. 2016

Speed and biases of Fourier-based pricing choices: Analysis of the Bates and Asymmetric Variance Gamma models

This paper compares the CPU effort and numerical biases of six Fourier-based implementations. Our analyses focus on two jump models that can consistently price options with different strikes and maturities: (i) the Bates jump-diffusion model, which combines jumps with stochastic volatility and (ii) the Asymmetric Variance Gamma (AVG) model, a pure-jump process where an infinite number of jumps can occur in any interval of time. We show that both truncation and discretization errors significantly increase as we move away from the diffusive Black-Scholes-Merton dynamics. While most pricing choices converge to the Bates reference values, Attari’s formula is the only Fourier-based method that does not completely blow up in any AVG problematic region. In terms of CPU speed, the strike vector computations proposed by Zhu (2010) significantly improve the computational burden, rendering the use of fast Fourier transforms and plain delta-probability decompositions inefficient.

Working paper no 64. 2016

The Nature of Volatility Spillovers across the International Capital Markets

This paper studies the nature of volatility spillovers across countries from the perspective of network theory and by relying on data of US-listed ETFs. I use a Lasso-related technique to estimate the International Volatility Network (IVN) where the nodes correspond to large-cap international stock markets while the links account for significant volatility lead-lags. Also included in the analysis is the International TradeNetwork (ITN), whose links measure bilateral export-import flows thus, capturing fundamental interconnections between countries. I find that the IVN and the ITN resemble each other closely pointing out that volatility does not disseminate randomly but tends to spread across fundamentally related economies. I also note that the lagged volatility reactions embedded in the IVN are consistent with the notion of gradual diffusion of information across investors who are subject to limited attention and home bias. This hypothesis is formally tested by using as a direct proxy of investors’ attention the aggregate search frequency in Google. The empirical results support this intuition indicating that higher volatility surprises in key foreign markets predict higher domestic attention upon those markets in subsequent days. Once domestic attention is captured by such external shocks, it is contemporaneously transformed into higher domestic volatility.

Working paper no 63. 2016

Managerial ability, risk preferences and the incentives for active management

This paper uses a structural econometric model to assess the managerial ability of Spanish management companies. Traditionally, ability has been mainly measured by the alphas of CAPM models. The model used in this paper allows to disentangle the ability and preferences that are embedded in alphas. The results show that the abilities of Spanish management companies are lower than their peers in the US. This result could be the consequence of the limited competition in the mutual fund market as well as the narrowness of the equity markets that the funds invest in. Moreover, it is shown that the fraction of the funds´ portfolios that is actively managed does not depend on the fees paid and it is negatively correlated to funds´ total assets and whether a fund belongs to a credit institution´s management company.

Working paper no 62. 2016

High yield bond market: features and risks of a growing market

High yield bond markets are increasingly growing in the last years. Assets managers have turn to this market looking for higher yields in a low interest environment and encouraged by the low default rates and the existence of a more dynamic secondary market now than in the past. The question that arises, however, is if investors could not be addressing the high yield bonds risks rightly. The present document reviews the features and the recent evolution of this market, paying special attention to the elements that could prevent the development and consolidation of this market as a financing source for the economy.

Working paper no 61. 2015

A Spanish Financial Market Stress Indicator (FMSI)

This paper introduces a Spanish Financial Market Stress Indicator (FMSI) similar to the “Composite Indicator of Systemic Stress” that Holló, Kremer and Lo Duca (2012) proposed for the euro area as a whole. Supervisors and regulators recognised the need to improve the process of identification, management and mitigation of systemic risk after the economic and financial crisis starting in mid-2007. In this context, this paper presents an indicator which represents a real-time measure of systemic risk and tries to quantify stress in the Spanish financial system. The contribution of each financial market segment (bond market, equity market, money market, financial intermediaries, forex markets and derivatives) to the total stress in the system is also provided. The methodology takes into account time-varying correlations between market segments. The study analyses the ability of the FMSI to identify past periods of high financial stress and presents two econometric approaches with the aim of classifying observations into different stress regimes and of determining if financial stress has a negative impact on the real economy.

Working paper no 60. 2015

Network-based Measures as Leading Indicators of Market Instability: The case of the Spanish Stock

This paper studies the undirected partial-correlation stock network for the Spanish market that considers the constituents of IBEX-35 as nodes and their partial correlations of returns as links. I propose a novel methodology that combines a recently developed variable selection method, Graphical Lasso, with Monte Carlo simulations as fundamental ingredients for the estimation recipe. Three major results come from this study. First, in topological terms, the network shows features that are not consistent with random arrangements and it also presents a high level of stability over time. International comparison between major European stock markets extends that conclusion beyond the Spanish context. Second, the systemic importance of the banking sector, relative to the other sectors in the economy, is quantitatively uncovered by means of its network centrality. Particularly interesting is the case of the two major banks that occupy the places of the most systemic players. Finally, the empirical evidence indicates that some network-based measures are leading indicators of distress for the Spanish stock market.

Working paper no 59. 2015

An analisys of the Heston Stochastic Volatility Model: Implementation and Calibration using Matlab

This paper analyses the implementation and calibration of the Heston Stochastic Volatility Model. We first explain how characteristic functions can be used to estimate option prices. Then we consider the implementation of the Heston model,showing that relatively simple solutions can lead to fast and accurate vanilla option prices. We also perform several calibration tests, using both local and global optimization.Our analyses show that straightforward setups deliver good calibration results. All calculations are carried out in Matlab and numerical examples are included in the paper to facilitate the understanding of mathematical concepts.

Working paper no 58. 2014

Analysis of the Spanish securitisation funds: characteristics at the time of their creation and performance during the recession

This job describes the principal features of the Spanish securitisation and tries to assess the extension of its involvement in the bad practices identifies in securitisation. The analysis of the Spanish securitisation funds’ performance during recent years allows us to conclude that these financial structures have been remarkably strong in the present adverse economic conditions. Even though securitisation could have contributed to the monetary credit expansion before the recession, the securitised loan portfolios default rates are below the levels observed in each asset class. Neither does Spanish securitisation seem to have transferred significant risks to the bond investors.

Working paper no 57. 2014

Evidence from purchases and redemptions in the Spanish equity fund market

This article analyses the relationship between investment flows (subscriptions and redemptions) and the performance of Spanish equity investment funds. Empirical analysis reveals how investors in equity investment funds increase their subscriptions to high performing funds, while reducing their participation in funds that perform poorly. The main new element introduced by this study is an analysis of the relationship between investment flows and the performance of equity investment funds on retail and wholesale financial markets. One of the main conclusions from this analysis is that the sensitivity of retail investors to the performance of the poorest funds is less than for funds that have greater visibility. This finding could indicate that the managers of these funds are exercising a certain market power over their clients.

Working paper no 56. 2013

Exchange-traded funds: features and recent developments

This Working Paper analyses de main features of exchange-traded funds (ETFs), which have grown significantly during the last years and show evident advantages for investors that should however be checked against the potential risks linked to the different structures of each ETF, as many international organizations have recently emphasized. A number of recommendations for risk management and control, applicable to securities lending and investment in derivatives by ETFs, are provided.

Working paper no 55. 2012

Competition and structure of the mutual fund industry in Spain: the role of credit institutions

The aim of this Working Paper is to provide evidence of the possibility that investors in investment funds may highly prefer to centralise their financial operations in one single entity, in line with the universal banking model predominant in Spain. This preference seems to be more intense in the retail segment of the industry and helps explain the growth in the number of mutual funds between 1995 and 2010 and the fact that the management fees charged and the level of concentration of UCITS managers are bigger in the retail segment than in the wholesale market.

Working paper no 54. 2012

Credit-valuation in the sovereing CDS and bonds markets: Evidence from the euro area crisis

This paper analyses the extent to which prices in the sovereign credit default swap (CDS) and bond markets reflect the same information on credit risk in the context of the European Monetary Union. We first test and find evidence in favour of the existence of persistent deviations between both spreads during the crisis but not before. Such deviations are found to be related to some market frictions, like counterparty risk, the degree of market liquidity and funding costs. We also find evidence suggesting that the price-discovery process is state-dependent. Specifically, the levels of counterparty and global risk, funding costs, market liquidity, the volume of sovereign debt purchases by the European Central Bank in the secondary market, and the private banks’ announcement to accept losses on their holdings of Greek bonds are found to be significant factors in determining which market leads price discovery.

Working paper no. 53. 2012

Access of SMEs with growth potential to the capital markets

The main aim of this paper is to contribute towards the debate on how to boost the funding of newly created companies and those with high growth potential through the market and other external sources other than bank credit. The debate currently revolves around four key issues: how to ensure a sufficiently wide investor base, how to overcome possible barriers which hinder companies accessing the market, the design of markets for small and medium capitalisation securities and the role of regulation. As is to be expected, the reflections on the use of tax incentives play a significant role with regard to the first two issues. In the third issue, the debate focuses above all on how to resolve the problems of visibility which affect the markets for small and medium capitalisation securities and whether or not an exclusively national framework is sufficient for guaranteeing growth in these markets. With regard to the role of regulation, the discussion focuses on whether it would be beneficial to adapt the requirements to an “SME scale” and the impact this would have on investor protection.

Working paper no. 52. 2011

Towards a common European Monetary Union risk free rate

This paper presents an estimation of the interest rate of a hypothetical common bond for the European Monetary Union (EMU) countries. This estimation is done using a series of variables which are motivated by a theoretical portfolio selection model for the period 2004-2010. In a first stage, the paper analyses the determinants of EMU sovereign yield spreads and finds significant ef­fects of variables related to credit quality factors, the macroeconomic situation, and other factors indicative of the correlation between the sovereign yield spreads and the bonds liquidity. On the basis of the determinants of the yield spreads, the hypothetical common risk free rate is estimated. This common rate would imply on average for the period under study savings in borrowing costs for all the EMU coun­tries although under extreme market circumstances, some countries may suffer increased borrowing costs.

Working paper no. 51. 2011

Recent developments in secondary stock markets´ microstructure

This paper analyses some of the deep changes that have transformed the secondary stock markets in the last years, boosted both by the private and the public sector in order to promote competition among the different trading alternatives (regulated markets, MTFs and dark pools) and by new technological possibilities such as high frequency trading.

Working paper no. 50. 2011

Securitisation in Europe during the crisis

This paper summarizes the main proposals of the industry and the regulators aiming at correcting the mistakes and excesses detected in the field of securitization during the crisis and at establishing a more demanding legal framework for the development of this activity.

Working paper no. 49. 2011

Spanish Mutual Funds Yield: An Analysis of its Determinants

This Working Paper analyses the Spanish mutual funds yield during the period 2000-2009 according to the specific features of these institutions. The model offered is estimated by the generalized method of moments (GMM) applied to panel data. The results of such estimate do not allow to conclude whether ther is a systematic persistence in mutual funds yield. Moreover, we obtain that funds with greater management and deposit fees do not offer a greater yield and that the greater the market share of the fund management company, the lower the yield of the fund.

Working paper no. 48. 2011

A New Test of Statistical Arbitrage with Applications to Credit Derivatives Markets

This paper presents a new statistical arbitrage test which has lower Type I error and selects arbitrage opportunities with lower downside risk than existing alternatives. The test is applied to credit derivatives markets using strategies combining Credit Default Swaps and Asset Swaps. We find persistent mispricings before and during the current financial crisis. However, after considering funding and trading costs, these mispricings are unlikely to provide profitable arbitrage opportunities.

Working paper no. 47. 2011

Interest Rates and Credit Risk

This paper explores the effects of shifts in interest rates on corporate leverage and default. We develop a dynamic model in which the relationship between firms and their outside financiers is affected by a moral hazard problem and entrepreneurs´ initial wealth is scarce. The endogenous link between leverage and default risk comes from the lower incentives of overindebted entrepreneurs to guarantee the survival of their firms. The dynamic response of leverage and default to cuts and rises in interest rates is both asymmetric and heterogeneously distributed across firms.

Working paper no. 46. 2011

Investment by Spanish Households: A Comparison with the US and Italy

This Working Paper aims at establishing the differences and similarities of households´ investment behaviour in Spain, the US and Italy. It particularly analyses the investment decisions of households in the various assets, with a special interest in financial assets, according to their socio-demographic features. To this end, the Spanish Survey of Household Finances and its US and Italian equivalents are used.

Working paper no. 45. 2011

Are all Credit Default Swap Databases Equal?

This paper compares the six major sources of corporate CDS prices (GFI, Fenics, Reuters EOD, CMA, Markit and JP Morgan) using the most liquid single name 5-year CDS of the components of the leading market indexes, iTraxx and CDX, for the period 2004-2010. We find systematic differences between the data sets implying that deviations from the common trend among prices in the different databases are not purely random but are explained by idiosyncratic factors as well as liquidity, global risk and other trading factors. The lower is the amount of transaction prices available the higher is the deviation among databases. The results suggest that the CMA database quotes lead the price discovery process in comparison with the quotes provided by other databases.

Working paper no. 44. 2010

The financial institutions incentives when they place financial assets with credit risk to retail investors

This paper analyzes the conflict of interest that exists when a financial institution issues and places a financial asset with credit risk among retail investors. Four regulatory measures are presented and analyzed in order to improve retail investors protection. It is shown that in this type of issues the most effective regulatory measure is that the supervisor sets a price cap. A close approach to this measure would be that the supervisor asks for independent valuations of the financial assets to provide investors and the supervisor itself with a well-founded opinion about the price of the issue.

Working paper no. 43. 2010

The Credit Default Swaps market: areas of vulnerability and regulatory responses

This Working Paper analyses the Credit Default Swaps market with emphasis on the main problems affecting the running of this market as well as on the different regulatory initiatives recently set up. In this context the proposals to amend regulation in the US and in Europe are analysed and the advisability and effectiveness of restricting short-selling of CDSs are evaluated.

Working paper no. 42. 2010

The Effects of Liquidity on the Price Discovery Process in Credit Derivatives Markets in Times of Financial Distress

This paper analyses the role of liquidity in the price discovery process. Specifically, it focuses on the credit derivatives markets in the context of the subprime crisis. It presents a theoretical price discovery model for the ASP, bond and CDS markets and then it tests the model with data from 2005 to 2009 on Euro-denominated non-financial firms. The empirical results show that the ASP market clearly leads the bond market in the price discovery process in all cases, while the leadership between ASPs and CDSs is very sensitive to the appearence of the subprime crisis. Before the crisis the CDS market leads the ASP market but during the crisis the ASP market leads the CDS market.

Working paper no. 41. 2010

Investment profile of Spanish households: Analysis of the EFF

From the data obtained by the Bank of Spain through the Encuesta Financiera de las Familias (EFF, Survey of Household Finances) this working paper aims at defining the investment profile of the Spanish households owning listed shares, unlisted shares and other holdings in companies, fixed-income securities, and mutual funds in order to establish which characteristics of the Spanish households have a greater influence in their decision making.

Working paper no. 40. 2010

Consolidation process or market infrastructures

This paper aims at analysing the consolidation processes that stock exchanges and clearing companies have undergone.

Working Paper no. 39. 2010

On the role of transparency in the ABS secondary market

The aim of this paper is to provide an answer about the appropriateness of promoting transparency in the ABS secondary market. In particular, what will be investigated is the impact of introducing market transparency in the competition among market makers as well as the impact that transparency has on the welfare of investors.

Working Paper no. 38. 2010

Could regulation of the ABS secondary market improve social welfare?

This paper examines a model of market making in the ABS market with heterogeneous investors and a lack of price transparency. It is shown that in a world with no price transparency, allowing free entry of market makers might not be a social optimum. Social welfare would be improved by a regulation to restrict the number of market makers in the ABS market to the extent that price competition is guaranteed.

Working paper no. 37. 2009

Characteristics of money-market funds in diverse jurisdictions

Many money-market funds have suffered the knock-on effects of liquidity shortages in the course of the financial crisis. This paper explores the reasons for this situation by reference to the definition of money-market funds and their main characteristics in diverse European jurisdictions and the United States.

Working paper no. 36. 2009

Organisation of derivatives markets and central counterparties

The aim of this paper is to describe the situation and outlook of derivatives markets (regulated and over the counter, OTC) and the central counterparties (CCP) providing a settlement infrastructure for derivative contracts, in a setting marked by international financial turmoil.

Working paper no. 35. 2009

Rating agencies: towards a new regulation

The subprime mortgage crisis has cast serious doubts on the quality of credit ratings and the agencies that issue them. This has led a number of international organisations, among them IOSCO, SEC, CESR and the European Commission, to put forward regulatory reforms affecting their operation. This paper explores the reasons why agencies fell short of the standards required for reliable ratings and proposes some regulatory solutions.

Working paper no. 34. 2009

Contagion and interdependence between stock markets. Mechanisms and evidence

This paper sets out to analyse the interdependencies or links between eleven world securities markets and their respective performances in the period from 1988 to September 2007. It also provides a commentary on the internationalisation process that has gathered force in securities markets.

Working paper no. 33. 2008

Liquidity in financial markets: repercussions of the credit crunch

The high-risk mortgage crisis in the United States stands out for the intense fall-out caused in a number of capital markets. One result has been a sharp contraction in trading driven by waning confidence and growing uncertainties about the valuation of certain financial products. This, in turn, has brought to light shortcomings in the operation of the global financial system. Recent recommendations issued by international organisations provide a starting point to address and mitigate the problems detected.

Working paper no. 32. 2008

The subprime crisis: some lessons for financial supervisors

The recent market turmoil following the crisis of sub-prime mortgages in the US has provided rich evidence of serious deficiencies in the world financial system. This paper provides some elements for reflection on how to address them. The issues analysed in the paper are classified around four key words: transparency, credit rating agencies, liquidity and supervisory arrangements.

Working paper no. 31. 2008

Listing requirements in regulated equity markets

CONTENT: This paper offers a run-through of EU regulations regarding stock-exchange admission and listing, comparing the approaches adopted by the main European countries, Spain among them, in transposing such regulations into national law.

Working paper no. 30. 2008

Persistent abnormal returns: an exercise with electronic market data for January-September 2006

CONTENT: The aim of this paper is to estimate the frequency of persistent rises or falls in share prices that have no apparent tie-in with the market trendline or information publicly available on the issuing companies. The author proposes an exercise based on the analysis of abnormal returns generated by a simple statistical market model for three sub-samples representative of the electronic share market: the Ibex 35, the Ibex Small Cap and the Ibex Medium Cap. He then goes on to analyse abnormal returns for the January-September 2006 period in the light of three possible scenarios: non disclosure of relevant information, pre-disclosure leaks and post-disclosure performance.

Working paper no. 29. 2007

Commentary on the new hedge fund regulations. Contents and omissions

CONTENT: An examination of the legal framework ushered in by Royal Decree 362/2007 of 16 March, amending collective investment scheme provisions in relation to hedge funds and funds of hedge funds, which the author compares point-by-point with the preceding legislation.

Working paper no. 28. 2007

Socially responsible investment and corporate social responsibility in financial markets: application to investment management companies in Spain

CONTENT: This paper sounds CIS managers operating in the Spanish financial market for their attitudes to the issues raised by Socially Responsible Investment and Corporate Social Responsibility. Using the logistical regression method, it explores how Spanish investment management companies view the implementation of Corporate Social Responsibility policies in management and decision-making processes and what directions they see for Socially Responsible Investment.

Working paper no. 27. 2007

Mutual funds: performance and persistence

CONTENT: The paper analyses a sample of 622 Spanish equity funds and their performance over 2000-2006 for evidence of persistent returns, using risk-adjusted return measures such as Jensen´s alpha and Sharpe´s ratio and on the basis of pure returns.

Working paper no. 26. 2007

Activism and financial engineering: implications for corporate governance and the interests of shareholders

CONTENT: Financial engineering enables investors to separate the voting rights carried by a share from its economic ownership. But a new type of investor has emerged in the last few years, dubbed the activist investor. These investors pursue an economic return by influencing the decisions taken by the investee company, and their presence can have advantages and drawbacks for other shareholders. When activists´ interests diverge from the rest, it is clear that the pressure they exert on decision-making bodies may be prejudicial for remaining investors. However, when their interests coincide, they can catalyze value-enhancing changes by cutting through the traditional problem of agency existing between the directors and shareholders. Only by increasing market transparency can we know the true extent of activists´ activities and their repercussions for the rest of the investor public. This can best be achieved, in the author´s view, by modifying the rules for the list of significant shareholders and the quarterly statements that collective investment schemes sent their unitholders and shareholders. If the resulting information suggests their activities may be harming the interests of other investors, a number of measures are set forth for the regulator´s consideration.

Working paper no. 25. 2007

Preference share returns

CONTENT: The aim of this paper is to estimate the returns earned by preference share issues registered with the CNMV, and check whether their placement went through under market conditions by comparing the returns against those earned by risk-free assets. Among its conclusions is that spreads vs. government bonds were consistently low over the period analysed, and actually narrowed at the point when a growing spectrum of Spanish financial institutions began issuing this kind of instrument.

Working paper no. 24. 2007

Analysis of price movements in the lead-up to takeover bid announcements

CONTENT: This paper examines movements in the share price of offeree companies in the trading sessions prior to the bid announcement. By means of a comparative study over the 1992-2006 period it seeks to verify whether the Market Surveillance Unit created in February 1997 and the Financial Law enacted in November 2002 did anything to curtail the use of non disclosed information prior to the bid announcement. Abnormal movements were evident throughout in the run-up to the news release. This were increasingly bunched in the immediately preceding sessions but the volumes involved were also greater. The main conclusion drawn is that non disclosed information is still being used by some investors, despite tighter surveillance of insider trading, although there are no firm grounds for considering that such use constitutes an illegal act.

Working paper no. 23. 2007

A decade of anti-takeover tactics in Spain. 1996-2005

CONTENT: This working paper looks at the anti-takeover clauses included in the bylaws of Spanish non financial listed companies over the ten-year period 1996-2005. In Spain, the ownership of listed companies tends to be concentrated in the hands of relatively few shareholders, so good corporate governance is of vital concern to safeguard investors´ interests. Corporate governance rules underwent a radical change in the reference period as a result of the publication of various codes and recommendations along the lines followed in other countries. Other milestones in Spain were Law 26/2003 and CNMV Circular 1/2004, aimed at enhancing the transparency and accountability of the governing bodies of listed companies. The analysis carried out shows a decade-long reduction in the percentage of companies with anti-takeover clauses, most markedly as of the year 2003.

Working paper no. 22. 2007

Amount and determinants of mutual fund management and custody fees

CONTENT: International research into the costs borne by the mutual fund industry shows them to be sizeably higher in Europe than the United States and concludes that there is ample margin for further cuts. In Spain, mutual fund fees have come down in the past few years, though the difference may seem little in comparative terms. This paper tracks Spanish funds´ management and custody fees in 2000, 2004 and 2005 and finds some interesting parallels between their amount and (i) the size of the fund or management company, (ii) the age of the fund, (iii) the size of unitholder contributions, (iv) the financial group the manager belongs to and (v) the type of unitholder. It also considers the factors driving the downtrend in mutual fund fees and those tending to block it; primarily the configuration of the Spanish financial system and possible shortcomings in information provision.

Working paper no. 21. 2007

The regulation of takeover bids: economic theory, European regulation and takeovers of Spanish companies

CONTENT: The paper takes an in-depth look at the regulation of takeover bids. It first explains the economic theory behind the rules, before going on to examine how they affect the behaviour and economic well-being of interested parties. Space is also devoted to a technical assessment of the Takeover Bids Directive and its transposition by Member States. The author concludes with an analysis of the shareholder returns generated in takeovers of Spanish companies during 1999-2006.

Working paper no. 20. 2007

Switching to a temporary call auction in times of high uncertainty

CONTENT: In this paper, the properties of the switching mechanism proposed by Madhavan in 1992 are tested using data from the Spanish Stock Exchange (SSE). The SSE implements rule-based call auctions to stabilise prices. On the positive side, the authors find there is price learning during the auction. On the negative side, they conclude rule-based auctions do not calm the market and do not reduce information asymmetries, except for small caps. The findings suggest the switching mechanism performs better with thinly traded stocks.

Working paper no. 19. 2007

Securitisation structures: CDO valuation models

CONTENT: The paper presents and develops a series of methods for pricing synthetic CDOs, which then serve as a basis for the valuation of CDO cashflows. The standard valuation tool for synthetic CDOs is the Vasicek of Gaussian Copula method. However, it is not flexible enough to fit all tranches of the structure. Failing a method that can adjust valuations to the market-observed spreads of each tranche, a useful alternative might be to exploit the possibility of valuing each issue tranche using the model closest to market prices.

Working paper no. 18. 2006

Realisation value of the private fixed-income assets held by mutual funds

CONTENT: This paper deals with the valuation models available to mutual funds for pricing less liquid assets such as corporate bonds. The choices involved are basically which method to use for estimating the zero coupon curve, and which risk premium offers the best fit for the solvency features of the asset being valued. As well as reviewing the relevant Spanish and international regulations, it presents comparative results for the diverse valuation models.

Working paper no. 17. 2006

The activity of venture capital entities in Spain

CONTENT: The paper examines the recent activity in Spain of venture capital providers, set against the experiences of the European and North American markets. The idea is to give an overview of the entities operating in this financial sub-sector, analysing the funds at their disposal, the companies they mainly invest in and their methods for realising the value created.

Working paper no. 16. 2006

Relationship between the value of companies and their ownership structure

CONTENT: This paper discusses the relationship between company´s value and its ownership structure from the perspective of agency theory, focusing on non financial companies trading on the Spanish electronic market in the period 1995-2004. It also tries to determine whether these relations denote improvement in the Spanish institutional system over the closing sample years, and whether shareholders´ legal personality has an influence on business value.

Working paper no. 15. 2006

Securitisation structures: characteristics and implications for the financial system

CONTENT: This paper describes and analyses the different securitisation structures on the market, along with their implications for the financial system. The first part is devoted to a review of the securitisation structures currently used on international financial markets, and a discussion of why companies choose this kind of product as a financing vehicle and the role played by each of the agents involved in their design and sale. The second focuses on the Spanish securitisation market, which as well as one of Europe´s largest is also strongly dominated by mortgage-backed securities. This last fact has two main causes: the recent growth spurt of the Spanish real estate market and weak legislation that bars credit institutions from using synthetic forms of securitisation.

Working paper no. 14. 2006

The effectiveness of trading suspensions: empirical evidence with CNMV data for the 2000-2005 period

CONTENT: This paper analyses the effectiveness of regulator-imposed suspensions of trading in facilitating or ensuring the dissemination of significant information. Using event study techniques, the author examines price and volume movements around the time of the suspension period, with suspensions grouped by motive.

Working paper no. 13. 2006

Stock exchange delistings in Spain and venture capital

CONTENT: In 2005, some of the biggest delistings from the Spanish electronic market were prompted by venture capital investors. This kind of transaction has experienced something of a boom in recent times, driving down the number of listed companies. One explanation is that venture capitalists are pursuing attractive medium-term returns in today´s setting via the leveraged buy-out of listed companies that they see as undervalued.

Working paper no. 12. 2006

Profit manipulation and the long-term returns of Spanish stock market launches

CONTENT: This paper examines the reasons for the abnormally low returns earned by shares in the years following their market flotation. It finds that the issuing companies use accounting discretion to overstate their profits in the year of the share offering, and also that those making the deepest discretionary adjustments are those with the worst returns post-launch.

Working paper no. 11. 2006

Replicating index options: empirical evidence for the Spanish market

CONTENT: A discussion of the possibilities of building replicating portfolios or deploying hedging strategies based on neutral delta. The paper also looks at the arbitrage opportunities conferred by replicating portfolios, including the transaction costs, and the applicable volatility compared to that set by the actual issuers; analyses and proposes a system of alerts for the management of market risk; and, finally, tests its performance under working conditions. It also offers empirical evidence of potential use to those operating daily in the Spanish market.

Working paper no. 10. 2005

Risk aversion in the Spanish equity market and its determinants

CONTENT: The aim of this paper is to construct a risk aversion indicator representative of the Spanish equity market. Any increase in investors´ risk aversion has knock-on effects on their portfolio decisions and, thereby, the price of securities, so its accurate measurement can provide useful insights on the markets. The author finds that risk aversion has been steadily abating since the second quarter of 2003. The pattern exhibited by the Spanish market mirrors that of the North American, British and German markets over the 1999-2004 period, with peaks emerging after the Twin Towers attack and in the run-up to the invasion of Iraq. However these indicators show that risk aversion performed against expectations in the periods before and after the rupture of the dotcom bubble and in the wake of the 2004 bombings in Madrid.

Working paper no. 9. 2005