Macro-Financial Linkages and Perspectives in Economic Development
This paper is a composition of three essays on topics dealing with financial market derivatives, macroeconomic policies using microdata, and the link between macroeconomics and international finance. All three chapters are a cohesive discussion on financial markets, investment analysis of financial derivatives, and economic impacts during COVID-19. We examine capital and resource allocation in a variety of cases across all three chapters: international capital flows on the largest domestically listed firms, investments in option contracts with low likelihoods of being exercised, and the role of domestic policy in distributing social welfare benefits during periods of economic downturns in India. The first chapter analyzes the predictive power of the Black-Scholes Merton (BSM) model by studying a large dataset of all traded options on the SPDR S&P 500 Trust ETF (SPY) from January 2005 to December 2020. Using each day’s complete option chain, we derive a measure to forecast the implied distribution of prices through N ( d 2 ), which we then compare to the realized distribution of SPY prices through the expiration of the option. With the goal of analyzing whether two different distributions come from the same underlying population distribution, we apply goodness of fit measures to assess the similarity of the risk-adjusted probabilities to an empirical distribution of prices. Two such measures include the Kolmogorov–Smirnov and Anderson-Darling tests; which we find to be useful in comparing our results. The resulting comparison gives way to visualizing and testing the ability for the BSM to predict the likelihood of options expiring in the-money. We find that the market expectations as backed out by the BSM tends to overestimate the tails in the implied probability distribution at longer expiration periods, compared to the empirical price path of SPY. The BSM, in most cases, correctly estimates the underlying risk adjusted probabilities only a few days out from expiration, which may be attributed to the uncertainty in traders to foresee market movements until an option is close to expiration. However, this behavior is more pronounced during crisis periods, where the BSM tends to correctly estimate the likelihood of tail events occurring more often than during periods of market normalcy. This second chapter of this work uses microdata from nationally representative household and labor force surveys to study the impact and drivers of poverty and inequality in India during the pandemic. We have three main findings. First, India has made significant progress in reducing poverty in recent decades, but the economic downturn associated with the COVID-19 pandemic is estimated to have temporarily increased poverty and inequality. Second, education and employment status seem to be the main factors associated with poverty and income/consumption changes. Finally, the government’s expansion of food subsidies has likely played a significant role in mitigating the increase in poverty during the pandemic. The third chapter of this work examines the role of capital flows in the development of highly concentrated stock markets that are dominated by a few number of publicly traded firms. Large firms, measured by their market capitalization, attract capital by individual and institutional investors due to their popularity in listing across major exchanges domestically and internationally. In addition to domestic purchases in shares of firms which bids up the price and market capitalization of firms, foreign purchases of these same large firms may contribute to an increase in the overall size of large firms. Using a panel of 52 countries from 1990 to 2022, we explore the channels for which measurements of capital flows may influence stock market concentration. Our results indicate that measurements of capital inflows have varied effects and are dependent on the portion of flows that are channeled to the purchasing of equity in domestically listed firms.
Capital Flows, Financial Economics, Financial Markets, International Finance, Macroeconomics, Stock Market Concentration, Economics
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