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Essays in financial economics

Todorov, Karamfil (2020) Essays in financial economics. PhD thesis, London School of Economics and Political Science.

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In the first paper of my dissertation I study the size and source of exchange-traded funds’ (ETFs) price impact in the most ETF-dominated asset classes: volatility (VIX) and commodities. I show that the introduction of ETFs increased futures prices. To identify ETF-induced price distortions, I propose a model-independent approach to replicate the value of a VIX futures contract. This allows me to isolate a nonfundamental component in VIX futures prices, of 18.5% per year, that is strongly related to the rebalancing of ETFs. To understand the source of that component, I decompose trading demand from ETFs into three main parts: leverage rebalancing, calendar rebalancing, and flow rebalancing. Leverage rebalancing has the largest effects. It amplifies price changes and introduces unhedgeable risks for ETF counterparties. Surprisingly, providing liquidity to leveraged ETFs turns out to be a bet on variance, even in a market with a zero net share of ETFs. Trading against leverage rebalancing delivers large abnormal returns and Sharpe ratios above two across markets. The second paper analyses the impact of the ECB’s Corporate Sector Purchase Programme (CSPP) announcement on prices, liquidity and debt issuance in the European corporate bond market. I find that the quantitative easing (QE) programme increased prices and liquidity of bonds eligible to be purchased substantially. Bond yields dropped on average by 30 bps (8%) after the CSPP announcement. Tri-party repo turnover rose by 8.15 million USD (29%), and bilateral turnover went up by 7.05 million USD (72%). Bid-ask spreads also showed significant liquidity improvement in eligible bonds. QE was successful in boosting corporate debt issuance. Firms issued 2.19 billion EUR (25%) more in QE-eligible debt after the CSPP announcement, compared to other types of debt. Surprisingly, corporates used the attracted funds mostly to increase dividends. These effects were more pronounced for longer-maturity, lower-rated bonds, and for more credit-constrained, lower-rated firms. The third paper (co-authored with Christian Julliard, Zijun Liu, Seyed E. Seyedan and Kathy Yuan) studies the determinants of repo haircuts in the UK market. We find that transaction maturity and collateral quality have first order importance. We also document that counterparties matter in determining haircuts. Hedge funds, as borrowers, receive significantly higher haircuts. Larger borrowers with higher ratings receive lower haircuts, but we find that these effects can be overshadowed by collateral quality. Repeated bilateral relationships also matter and generate lower haircuts. We find evidence supporting an adverse selection explanation of haircuts, but limited evidence in favor of lenders’ liquidity position or default probabilities affecting haircuts.

Item Type: Thesis (PhD)
Additional Information: © 2020 Karamfil Todorov
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Sets: Departments > Finance
Supervisor: Makarov, Igor and Julliard, Christian

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