Do Announcements of WTO Dispute Resolution Cases Matter? Evidence from the Rare Earth Elements Market

Rare earth elements (REEs) have gained increasing attention recently for several key reasons: 1) they are vital to many strategic industries, 2) they are relatively scarce, 3) they frequently exhibit high price fluctuations, 4) China holds a quasi-monopoly on their mining, and 5) China’s REE policy, which was overly restrictive and led to a formal complaint from the U.S., Japan, and the EU at the World Trade Organization (WTO) in 2012. This paper investigates whether the announcement of a WTO dispute resolution case has the power to fundamentally change market dynamics. We find empirical support for this notion because REE prices exhibit a structural break around the announcement of the WTO dispute, and show lower variance ratios for all tested REEs afterward. This indicates a tendency toward efficiency, although REE prices still do not follow a random walk. Similarly, we find that stock price informativeness of companies in the REE industry increases after the announcement, reflecting more firm-specific than marketwide information and less governmental influence. Finally, we show that model uncertainty for option pricing models decreases, which we measure by the lower pricing differences among them

The economic importance of rare earth elements volatility forecasts

We compare the suitability of short-memory models (ARMA), long-memory models (ARFIMA), and a GARCH model to describe the volatility of rare earth elements (REEs). We find strong support for the existence of long-memory effects. A simple long-memory ARFIMA (0, d, 0) baseline model shows generally superior accuracy both in- and out-of-sample, and is robust for various subsamples and estimation windows. Volatility forecasts produced by the baseline model also convey material forward-looking information for companies in the REEs industry. Thus, an active trading strategy based on REE volatility forecasts for these companies significantly outperforms a passive buy-and-hold strategy on both an absolute and a risk-adjusted return basis

DO INSTITUTIONAL INVESTORS CARE ABOUT THE AMBIGUITY OF THEIR ASSETS? EVIDENCE FROM PORTFOLIO HOLDINGS IN ALTERNATIVE INVESTMENTS

In this paper, we analyze whether model risk/asset-specific ambiguity is an issue for institutional investors. For this purpose, we first show how model risk (which turns out to be equivalent to special cases of ambiguity) affects optimal portfolio allocation. Using average portfolio holdings for traditional and alternative asset classes of 119 institutional investors, we then calibrate our model to implicitly determine the ambiguity factors of different asset classes. We find that institutional investors are strongly ambiguity-averse, as documented by a Sharpe ratio that is only 60 percent that of an (unambiguous) efficient portfolio. In line with intuition, we document that equity and bond portfolios have a rather low ambiguity, while alternative investments such as real estate, private equity, and hedge fund investments exhibit a very high ambiguity. These results are robust with regard to the size of the expected returns supposed by the investors.Ambiguity aversion, alternative investments, portfolio allocation, institutional investors

Hidden champions or black sheep? The role of underpricing in the German mini-bond market

Governments around the world have set up fund-of-fund programs to increase the supply of venture capital financing to young growth-oriented firms. In these programs, a government fund-of-fund acts as limited partner in a venture capital fund. The venture capital investment process is hereby delegated to external investors, which were selected by the government fund-of-fund. We investigate employment growth in 108 portfolio companies that benefited from the ARKimedes fund-of-fund in Flanders. Accounting for the heterogeneity in the types of venture capital investors managing hybrid funds, and the associated goal diversity and resource endowments, we find that portfolio companies backed by hybrid independent venture capital funds show greater employment growth than those backed by hybrid captive or hybrid government venture capital funds. This finding is relevant because it indicates that the financial objectives of hybrid independent venture capital funds are highly compatible with the government’s objective of employment growth, as providing companies with superior monitoring and value adding services with the objective of realizing a successful exit creates employment in the process