2. Universidad Cardenal Herrera-CEU

This paper analyzes the performance of various asset classes traded in the Spanish Capital Market. We compare the relative behavior of stock and corporate bond market indices, risk factors, and option-based expected market risk premia of the IBEX-35 at alternative horizons. We finally discuss the spillover volatility connections between the stock market portfolio, the general index of corporate bonds, the long-term government bond, and risk-neutral volatility and skewness. The stock market index is a net sender of volatility to the rest of asset classes, especially during the Great Recession and the Eurozone debt crises. The government bond is a net sender of volatility to corporate bonds and risk-neutral volatility and skewness. In fact, during stressed periods, the returns of the government bond have a positive exposure to the market stock return, which suggests that the Spanish long-term bond is a risky asset rather than being a hedging asset. This fact, together 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

This analysis addressed the potential systemic effects of guarantee requirements by central counterparties. Using data from the Spanish BME and German Eurex central clearing counterparties and controlling for tail risk and monetary and real activity variables, we found a significant, positive, and robust relationship between the guarantees required and the spillover or total connectedness effects among nine financial assets in the Spanish, United States, and German capital markets. Bad economic times also had a significant incremental effect on the relationship between guarantees and connectedness. These findings are robust across central clearing corporations and futures contracts in the IBEX 35, DAX 30, and EURO STOXX 50. In addition, an event study indicated that global spillover effects tend to increase before central counterparty institutions raise their guarantees. The implication of the findings is that European clearing institutions react to rather than cause bad economic times.

Macro-finance asset pricing models provide a rationale for connectedness dynamics between equity and Treasury risk-neutral volatilities. In this paper, we study the total and directional connectedness, in the sense of spillover effects, between risk-neutral volatilities from the equity and Treasurymarkets. In addition, we analyze the economic and monetary drivers of connectedness dynamics. Most of the time, but especially during bad economic times, we find significant net spillovers from Treasury to equity risk-neutral volatility. The spillover channel between risk-neutral volatilities arises mainly through the government fixed income market.

Institutional investors often have to decide which strategy to use across international business cycles. This is especially important during economic and financial crises. The exogenous nature of the outbreak of the dramatic COVID-19 crisis represents a unique opportunity to understand the performance of risk factors during severe economic times across international stock markets. Even more important is to analyze how these factors behave across very different economic crises, such as the COVID-19 pandemic and the Great Recession. Although, the overall results show that the momentum and quality factors are the winners, with the value factor as the loser, this research also reports different responses of factors across crises and countries. The size, value, and defensive factors tend to perform worse during the health crisis relative to the Great Recession, while the momentum factor shows a poor performance during the financial crisis, but a positive one during the outbreak of COVID-19. The quality factor is an extraordinary defensive factor in both crises. Similarly, this paper reports heterogeneous responses of option-implied expected market risk premia across alternative stock market indices, and between the Great Recession and the COVID-19 crisis.

This research analyzes the causes of the quality premium, one of the most intriguing and successful investment strategies in equity markets. While previous research has argued that psychological biases explain the performance of the quality minus junk factor, our paper analyzes a leverage constraint explanation within a rational risk-based framework. The quality factor is multidimensional in nature, which suggests that a combination of risk, frictions, and behavioral biases is a reasonable explanation. Once we incorporate margin requirements and liquidity restrictions, we find that tighter conditions result in a higher intercept and a lower slope for the empirically implemented capital asset pricing model when using 10 quality-sorted portfolios. Our paper shows that, indeed, not only behavioral biases explain quality, but also market frictions account for its performance.

This paper analyzes the factor structure and cross-sectional variability of a set of expected excess returns extracted from option prices and a non-parametric and out-of-sample stochastic discount factor. We argue that the existing potential segmentation between the equity and option markets makes advisable to avoid using only option prices to extract expected equity risk premia. This set of expected risk premia forecast significantly future realized returns, and the first two principal components explain 94.1% of the variability of expected returns. A multi-factor model with the market, quality, funding illiquidity, the default premium and the market-wide variance risk premium as factors explain significantly the cross-sectional variability of expected excess returns. The (asymptotically) different from zero adjusted cross-sectional R-squared statistic is 83.6%.

This paper studies the joint behavior of equity (VIX) and Treasury (MOVE) risk-neutral volatilities to understand the total and directional connectedness between both option-based implied volatilities, as well as their economic and monetary drivers. Moreover, we analyze whether risk aversion and financial, macroeconomic and policy uncertainty affect connectedness dynamics. Most of the time, but especially during bad economic times, we find significant net spillovers from Treasury to equity risk-neutral volatility. Future and contemporaneous good times increase the spillovers from VIX to MOVE, while bad economic times increase the directional connectedness from MOVE to VIX.