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Abstract An open market is a subset of a larger equity market, composed of a certain fixed number of top‐capitalization stocks. Though the number of stocks in the open market is fixed, their composition changes over time, as each company's rank by market capitalization fluctuates. When one is allowed to invest also in a money market, an open market resembles the entire “closed” equity market in the sense that the market viability (lack of arbitrage) is equivalent to the existence of a numéraire portfolio (which cannot be outperformed). When access to the money market is prohibited, the class of portfolios shrinks significantly in open markets; in such a setting, we discuss the Capital Asset Pricing Model, how to construct functionally generated portfolios, and the concept of universal portfolio.
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Market Discipline in the Direct Lending Space
Abstract Using the exclusion of business development companies (BDCs) from stock indexes, this paper studies the effectiveness of market discipline in the direct lending space. Amid share sell-offs by institutional investors, a drop in BDCs’ valuations limits their ability to raise new equity capital. Following this funding shock, BDCs do not adjust their capital structure. At the same time, they are reducing the risk exposure of their portfolios. We document a greater reduction in risk for BDCs subject to stronger market discipline from their debtholders. BDCs pass through the capital shock to their portfolio firms by reducing their investment intensity.
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- PAR ID:
- 10495804
- Publisher / Repository:
- Oxford University Press
- Date Published:
- Journal Name:
- The Review of Financial Studies
- Volume:
- 37
- Issue:
- 4
- ISSN:
- 0893-9454
- Format(s):
- Medium: X Size: p. 1190-1264
- Size(s):
- p. 1190-1264
- Sponsoring Org:
- National Science Foundation
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