Completely revised working paper

Today, I uploaded a completely revised version of my working paper with Fabio Trojani and Christian Wiehenkamp on SSRN. The new title is "Ambigutiy and Reality". Abstract: Model builders face ambiguity about the true data generating process. Consequently, they need to deal with ambiguity attitudes (inside uncertainty) and ambiguous financial reality (outside uncertainty) when developing and estimating financial models. We introduce a novel approach for systematically dealing with outside uncertainty in addition to inside uncertainty in a tractable way. By bounding the effects of ambiguous data features, we avoid the adverse consequences of outside uncertainty, such as strongly biased equity premiums and investment policies. In a real data application, we show that asset managers can be more reliably evaluated using our bounded-influence approach. You can download the full paper on SSRN. ...
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Updated version of working paper on “The Euro Interbank Repo Market”

A new version of our repo paper on "The Euro Interbank Repo Market" is available. Abstract: The search for a market design that ensures stable bank funding is at the top of regulators' policy agenda. This paper empirically shows that an important part of the European money market features this quality, namely the central counterparty (CCP)-based euro interbank repo market. Using a unique and comprehensive data set, we provide the first systematic study of this market and show that it functions well, even during crisis episodes. CCP-based repos secured with high-quality collateral even act as a shock absorber, in the sense that repo lending increases with risk, while spreads, maturities, and haircuts remain stable. You can download the full paper on SSRN....
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New version of the paper “Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums”

A new version of the paper “Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums” is available on SSRN. We have rewritten the abstract, introduction, conclusion, and various sections of the paper. In the new version, we focus on the main, more surprising findings on liquidity and their implications for asset managers and central banks. In particular we highlight the novel economic mechanism through which liquidity risk impacts carry trade returns that emerges from our analysis. Moreover, we have extended the analysis of the link between FX liquidity and equity liquidity. We now also compare FX liquidity measures to market-wide liquidity measures of the corporate bond market and 10-year U.S. Treasury bonds. Liquidities across all markets appear to comove significantly, suggesting that liquidity risk is indeed a global phenomenon across asset classes. We have performed various additional robustness checks which confirm the results reported in the paper. We have collected additional findings in the separate appendix and streamlined the paper...
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