Research articles for the 2019-03-04

A Influencia Politica E O Papel Dos Bancos Públicos Comerciais No Crescimento Economico Dos Municipios Brasileiros (The Political Influence and the Role of Commercial Public Banks in the Economic Growth of Brazilian Municipalities)
Otake, Andre
Portuguese Abstract: O papel dos bancos públicos, de acordo com o paradigma existente, é prover investimentos a lugares e projetos onde os bancos privados, por certas restrições, não investem. Porém, vários estudos vêm relatando evidencias de que tais bancos tem provido empréstimos considerando interesses políticos. Neste trabalho, estudamos as atividades de empréstimos de bancos comerciais estatais e privados durante o período de 2000 a 2014. Por meio do método de mínimos quadrados ordinários com efeitos fixos e com dados em painel, verificamos que bancos estatais interferem estatisticamente no crescimento econômico municipal, tendo maior participação em municípios menos desenvolvidos. Também identificamos que o crédito bancário concedido por bancos públicos foi eficiente estatisticamente para o crescimento econômico dos municípios durante a crise de 2008. Porém, há indícios de que o crédito é alterado em períodos de eleição estadual e federal. Assim, os resultados sugerem que, embora os bancos estatais possam emitir empréstimos por razões políticas nos períodos eleitorais, eles também parecem desempenhar um papel importante na economia, especialmente em períodos de crise e nos municípios menos desenvolvidos.English Abstract: The role of public banks, according to the existing paradigm, is to provide investments to places and projects where private banks, for certain restrictions, do not invest. However, several studies have been reporting evidence that such banks have provided loans for political interests. In this work, we study the lending activities of state and private commercial banks during the period from 2000 to 2014. Using the ordinary least squares method with fixed effects and with panel data, we find that state banks interfere statistically in the municipal economic growth, with greater participation in less developed municipalities. We also identified that bank credit granted by public banks was statistically efficient for the economic growth of municipalities during the 2008 crisis. However, there are indications that credit is changed in periods of state and federal election. Thus, the results suggest that while state-owned banks may issue lending for political reasons during election periods, they also appear to play an important role in the economy, especially in times of crisis and in less developed counties.

An alternative quality of life ranking on the basis of remittances
Dóra Gréta Petróczy

Remittances mean an important connection between people working abroad and their home countries. This paper considers them as a measure of preferences revealed by workers, underlying a ranking of countries around the world. We use the World Bank bilateral remittances data between 2010 and 2015 to compare European countries. The database contains international salaries and interpersonal transfers. The suggested least squares method makes the ranking invariant to country sizes and satisfies the property of bridge country independence. Our ranking reveals a crucial aspect of quality of life and may become an alternative to various composite indices.

Artificial Counselor System for Stock Investment
Hadi NekoeiQachkanloo,Benyamin Ghojogh,Ali Saheb Pasand,Mark Crowley

This paper proposes a novel trading system which plays the role of an artificial counselor for stock investment. In this paper, the stock future prices (technical features) are predicted using Support Vector Regression. Thereafter, the predicted prices are used to recommend which portions of the budget an investor should invest in different existing stocks to have an optimum expected profit considering their level of risk tolerance. Two different methods are used for suggesting best portions, which are Markowitz portfolio theory and fuzzy investment counselor. The first approach is an optimization-based method which considers merely technical features, while the second approach is based on Fuzzy Logic taking into account both technical and fundamental features of the stock market. The experimental results on New York Stock Exchange (NYSE) show the effectiveness of the proposed system.

Capital Structure, Agency Cost and Corporate Governance: Theoretical Linkages Under the Operational Framework of a Modern Company
Bragoudakis, Zacharias
The purpose of this paper is to explain the interaction mechanism between the capital structure of a modern company, the implying agency cost that is raised when the company is expanding and the corporate governance system that should be implemented in order to achieve a smoothness of the implied internal friction. The corporate governance experience support that there is a lack of a systemic management at those problems. The above corporate problems reduce the maximization of the company value. It is argued that the failure to maximize the value of the company can be attributed to the endogenous weakness of corporate interconnection. This paper analyses the theory of corporate interconnection between its agents (shareholders, executive managers and bondholders), contributes to a better understanding of those issues and addressing them though a systematical and analytical framework

Conditional Density Estimation with Neural Networks: Best Practices and Benchmarks
Jonas Rothfuss,Fabio Ferreira,Simon Walther,Maxim Ulrich

Given a set of empirical observations, conditional density estimation aims to capture the statistical relationship between a conditional variable $\mathbf{x}$ and a dependent variable $\mathbf{y}$ by modeling their conditional probability $p(\mathbf{y}|\mathbf{x})$. The paper develops best practices for conditional density estimation for finance applications with neural networks, grounded on mathematical insights and empirical evaluations. In particular, we introduce a noise regularization and data normalization scheme, alleviating problems with over-fitting, initialization and hyper-parameter sensitivity of such estimators. We compare our proposed methodology with popular semi- and non-parametric density estimators, underpin its effectiveness in various benchmarks on simulated and Euro Stoxx 50 data and show its superior performance. Our methodology allows to obtain high-quality estimators for statistical expectations of higher moments, quantiles and non-linear return transformations, with very little assumptions about the return dynamic.

Corporate Pension Plan Funding Levels and Pension Assumptions
Michaelides, Alexander,Milidonis, Andreas,Papakyriakou, Panayiotis
We use a difference-in-differences approach to examine the causal impact of the funding ratios of U.S. corporate defined benefit (DB) pension plans on the assumption of expected return on pension assets (EROA). We use the arrival of the 2008 global financial crisis as an exogenous shock to the funding ratio of DB pension plans, and the simultaneous implementation of the Pension Protection Act, which emphasized the accountability of underfunded pension plans. We find that DB pension plans making the transition from fully funded to underfunded status over this period significantly revise their EROA assumption upward. The upward revisions in EROA are economically significant and generate obligation-reducing outcomes for corporate plans sponsors: a switch from fully funded to underfunded status generates at least a 40 (and up to a 80) basis point increase in EROA, which, in turn, corresponds to an average annual reduction in pension contributions of $6 (to $11) million.

Cover's Rebalancing Option With Discrete Hindsight Optimization
Alex Garivaltis

We study T. Cover's rebalancing option (Ordentlich and Cover 1998) under discrete hindsight optimization in continuous time. The payoff in question is equal to the final wealth that would have accrued to a $\$1$ deposit into the best of some finite set of (perhaps levered) rebalancing rules determined in hindsight. A rebalancing rule (or fixed-fraction betting scheme) amounts to fixing an asset allocation (i.e. $200\%$ stocks and $-100\%$ bonds) and then continuously executing rebalancing trades to counteract allocation drift. Restricting the hindsight optimization to a small number of rebalancing rules (i.e. 2) has some advantages over the pioneering approach taken by Cover $\&$ Company in their brilliant theory of universal portfolios (1986, 1991, 1996, 1998), where one's on-line trading performance is benchmarked relative to the final wealth of the best unlevered rebalancing rule of any kind in hindsight. Our approach lets practitioners express an a priori view that one of the favored asset allocations ("bets") $b\in\{b_1,...,b_n\}$ will turn out to have performed spectacularly well in hindsight. In limiting our robustness to some discrete set of asset allocations (rather than all possible asset allocations) we reduce the price of the rebalancing option and guarantee to achieve a correspondingly higher percentage of the hindsight-optimized wealth at the end of the planning period. A practitioner who lives to delta-hedge this variant of Cover's rebalancing option through several decades is guaranteed to see the day that his realized compound-annual capital growth rate is very close to that of the best $b_i$ in hindsight. Hence the point of the rock-bottom option price.

Credit and Fiscal Multipliers in China
Chen, Sophia,Ratnovski, Lev,Tsai, Pi-Han
We estimate credit and fiscal multipliers in China, using subnational political cycles as a source of exogenous variation. The tenure of the provincial party secretary, interacted with the credit and fiscal expenditure used in other provinces, instruments for provincial credit and government expenditure growth. We find a fiscal multiplier of 0.75 in 2001-2008, which increased to 1.2 in 2010-2015, consistent with higher multipliers in a slower economy. At the same time, a credit multiplier of 0.2 in 2001-2008 declined to close to zero in 2010-2015, consistent with credit saturation and credit misallocation. Our results suggest that credit expansion cannot further support economic growth in China. The flip side is that lower credit growth is also unlikely to disrupt output growth. Fiscal policy is powerful, and can cushion the macroeconomic adjustment to lower credit intensity.

Cryptocurrency market structure: connecting emotions and economics
Tomaso Aste

We study the dependency and causality structure of the cryptocurrency market investigating collective movements of both prices and social sentiment related to almost two thousand cryptocurrencies traded during the first six months of 2018. This is the first study of the whole cryptocurrency market structure. It introduces several rigorous innovative methodologies applicable to this and to several other complex systems where a large number of variables interact in a non-linear way, which is a distinctive feature of the digital economy. The analysis of the dependency structure reveals that prices are significantly correlated with sentiment. The major, most capitalised cryptocurrencies, such as bitcoin, have a central role in the price correlation network but only a marginal role in the sentiment network and in the network describing the interactions between the two. The study of the causality structure reveals a causality network that is consistently related with the correlation structures and shows that both prices cause sentiment and sentiment cause prices across currencies with the latter being stronger in size but smaller in number of significative interactions. Overall our study uncovers a complex and rich structure of interrelations where prices and sentiment influence each other both instantaneously and with lead-lag causal relations. A major finding is that minor currencies, with small capitalisation, play a crucial role in shaping the overall dependency and causality structure. Despite the high level of noise and the short time-series we verified that these networks are significant with all links statistically validated and with a structural organisation consistently reproduced across all networks.

Determinants of Wealth Inequality and Mobility in General Equilibrium
Fischer, Thomas
This paper discusses a rich model of wealth inequality and mobility in continuous time. Closed-form solutions quantify both the bottom and the top (Pareto) tail of the distribution. The distribution is especially shaped by bequest motives, demographics, and the asset portfolio composition under idiosyncratic wealth risk. Factors that increase inequality also reduce mobility. The model -- enriched by a realistic income process and non-trivial portfolio constraints -- is solved in general equilibrium and calibrated to match US evidence. A bequest tax is shown to reduce inequality and increase mobility. Several partial-equilibrium intuitions do not carry over into general equilibrium.

Disclosure Incentives When Competing Firms Have Common Ownership
Park, Jihwon,Sani, Jalal,Shroff, Nemit,White, Hal D.
This paper examines whether common ownership â€" i.e., instances where investors simultaneously own significant stakes in competing firms â€" affects voluntary disclosure. We argue that common ownership (i) reduces proprietary cost concerns of disclosure, and (ii) incentivizes firms to “internalize” the externality benefits of their disclosure for co-owned peer firms. Accordingly, we find a positive relation between common ownership and disclosure. Evidence from cross-sectional tests and a quasi-natural experiment based on financial institution mergers help mitigate concerns that our results are explained by an omitted variable bias or reverse causality. Finally, we find that common ownership is associated with increased market liquidity.

Do Cross-Border Mergers and Acquisitions Import More Aggressive Insider Trading?
Guo, Lixiong,Zhang, Sherry
Foreign acquirers own private information about domestic targets in cross-border M&As. Has this led to more aggressive insider trading by foreign insiders on domestic markets due to barriers to cross-border law enforcement? Using a sample of 10,600 M&As around the world between 1990 and 2017, we find that the answer is yes. Abnormal trading in target firm securities before the announcements of cross-border deals, in which foreigners are known to possess insider information, is systematically higher than that before the announcements of domestic deals, in which foreigners are less likely to possess insider information. The difference is mainly driven by cross-border deals in which the acquirer is from a country with high corruption and low social norms, and where the target is in a country with stricter insider trading law enforcement. Using the staggered entering into the Multilateral Memorandum of Understanding (MMoU) of 2002 by securities regulators around the world as a shock to increased coordination among securities regulators, we find that the entering into the MMoU by a country pair significantly reduces abnormal trading before cross-border deals between the country pair relative to other country pairs. Our evidence reveals a dark side of globalization and suggests that maintaining integrity in domestic securities markets cannot be done by a single country in this globalization era.

Does Bankruptcy Risk Increase Value? Puzzles and Diversification
Altieri, Michela,Nicodano, Giovanna
Stock markets price listed firms, while defaulted firms delist. Due to the lower profits of defaulted firms, the average stock price exceeds firm unconditional expected value. Such price-value wedge originates from a survivorship bias. The wedge is higher for those company types with lower survival probability. This bias thus explains the discount on diversified companies which survive to downturns, while the least profitable among focused companies default. This insight finds support in both the excess survival of US diversified firms compared to focused ones and its co-variation with their discount.

Examining the Gender Pay Gap Among Financial Planning Professionals: A Blinder-Oaxaca Decomposition
Tharp, Derek,Lurtz, Meghaan,Mielitz, Kate,Kitces, Michael,Ammerman, D. Allen
The financial planning industry has been identified as having one of the largest gender pay gaps. This study examines whether male and female financial planners receive equal pay for equal work. Using detailed data on the backgrounds and practices of 710 financial planners, an unadjusted pay gap of 19% was observed between male and female financial planners. Blinder-Oaxaca decomposition analysis suggests that 91% of this pay gap can be explained by a model accounting for differences in important individual characteristics including job role, experience, team structure, hours worked, revenue produced, professional designation status, marital status, and psychological factors such as degree of motivation by income potential, performance pay, work-life balance, and stable pay; resulting in an unexplained pay gap of 1.8%. Degree of motivation by performance pay and revenue production explained the largest portions of the pay gap. Implications regarding gender-based discrimination in financial planning are discussed.

Game-Theoretic Vaccination Against Networked SIS Epidemics and Impacts of Human Decision-Making
Ashish R. Hota,Shreyas Sundaram

We study decentralized protection strategies against Susceptible-Infected-Susceptible (SIS) epidemics on networks. We consider a population game framework where nodes choose whether or not to vaccinate themselves, and the epidemic risk is defined as the infection probability at the endemic state of the epidemic under a degree-based mean-field approximation. Motivated by studies in behavioral economics showing that humans perceive probabilities and risks in a nonlinear fashion, we specifically examine the impacts of such misperceptions on the Nash equilibrium protection strategies. We first establish the existence and uniqueness of a threshold equilibrium where nodes with degrees larger than a certain threshold vaccinate. When the vaccination cost is sufficiently high, we show that behavioral biases cause fewer players to vaccinate, and vice versa. We quantify this effect for a class of networks with power-law degree distributions by proving tight bounds on the ratio of equilibrium thresholds under behavioral and true perceptions of probabilities. We further characterize the socially optimal vaccination policy and investigate the inefficiency of Nash equilibrium.

Impact of IAS 39 Reclassification on Income Smoothing by European Banks
Ozili, Peterson K
We examine the impact of the reclassification of IAS 39 on income smoothing using loan loss provisions among European banks. We predict that the strict recognition and re-classification requirements of IAS 139 reduced banks' ability to smooth income using bank securities and derivatives, motivating them to rely more on loan loss provisions to smooth income. Our findings do not support the prediction for income smoothing through loan loss provisions. Also, there is no evidence for income smoothing in the pre- and post-IAS 39 reclassification period. The implication of the findings is that: (i) European banks did not use loan loss provisions to smooth income during the period examined, and rather rely on other accounting numbers to smooth income; (ii) the IASB’s strict disclosure regulation improved the reliability and informativeness of loan loss provision estimates among European banks during the period of analysis.

Impactos Do Crédito Bancário No Crescimento Economico Dos Municípios Brasileiros (Impacts of Bank Credit on the Economic Growth of Brazilian Municipalities)
Otake, Andre
Portuguese Abstract: Este artigo analisa a relação entre crédito bancário e crescimento econômico. A pesquisa pretende aferir a participação de bancos públicos e privados comerciais no crescimento econômico considerando o crescimento econômico setorial, a crise econômico-financeira de 2008 e a capilaridade desss instituições financeiras no Brasil. Utilizando uma amostra composta por 5570 municípios brasileiros com dados compreendidos entre 2005 e 2013, os resultados sugerem que: (i) o volume de crédito total disponível na economia tem relação positiva com o crescimento econômico local medido pelo PIB per capita; (ii) o volume de crédito proveniente dos bancos públicos possui relação positiva com o crescimento econômico dos setores agropecuário e industrial; (iii) o crescimento econômico do setor de serviços está positivamente relacionado ao crédito proveniente dos bancos privados; (iv) o crédito proveniente dos bancos públicos possui relação positiva com o crescimento econômico antes, durante e após a crise econômico-financeira de 2008 e; (v) o crescimento econômico possui relação com a quantidade de agências bancárias nos municípios.English Abstract: This article analyzes the relationship between bank credit and economic growth. The research intends to assess the participation of public and private commercial banks in economic growth, considering sectoral economic growth, the economic-financial crisis of 2008 and the capillarity of financial institutions in Brazil. Using a sample composed of 5570 Brazilian municipalities with data between 2005 and 2013, the results suggest that: (i) the total available credit volume in the economy has a positive relation with the local economic growth measured by GDP per capita; (ii) the volume of credit coming from public banks is positively related to the economic growth of the agricultural and industrial sectors; (iii) the economic growth of the services sector is positively related to credit coming from private banks; (iv) credit from public banks is positively related to economic growth before, during and after the economic and financial crisis of 2008; (v) economic growth is related to the number of bank branches in municipalities.

Information Cascades and Threshold Implementation
Cong, Lin William,Xiao, Yizhou
Economic activities such as crowdfunding often involve sequential interactions, observational learning, and project implementation contingent on achieving certain thresholds of support. We incorporate endogenous all-or-nothing thresholds in a classic model of information cascade. We find that early supporters tap the wisdom of a later "gate-keeper" and effectively delegate their decisions, leading to uni-directional cascades and preventing agents' herding on rejections. Consequently, entrepreneurs or project proposers can charge supporters higher fees, and proposal feasibility, project selection, and information production all improve, even when agents have the option to wait. Novel to the literature, equilibrium outcomes depend on the crowd size, and in the limit, efficient project implementation and full information aggregation ensue.

Machine Learning for Stock Selection
Rasekhschaffe, Keywan,Jones, Robert
Machine learning is an increasingly important and controversial topic in quantitative finance. A lively debate persists as to whether machine learning techniques can be practical investment tools. Although machine learning algorithms can uncover subtle, contextual and non-linear relationships, overfitting poses a major challenge when trying to extract signals from noisy historical data. In this article, we describe some of the basic concepts surrounding machine leaning and provide a simple example of how investors can use machine learning techniques to forecast the cross-section of stock returns while limiting the risk of overfitting.

Mall Performance: Corporate, Retail, Restaurants and E-Commerce Effects
Joseph, Elisee
Using continuous data from 2005-2016, the original purpose of this comprehensive research is to examine the relationships between mall-level sales per square foot and corporate performance. Through the use of discrete data, the alternative purpose of this research is to measure the overall performance of malls against the overall performance of individual stores, restaurants and e-commerce companies through the component of sales revenue, store productivity, real estate, and social media presence. Additionally, this researcher also implements a scoring model that can measure the performance of many individual retail institutions, e-commerce business, and restaurants. The results in this study suggest that mall performance is not correlated to corporate financial performance. However, this study generally shows a positive relationship between mall level performance and the overall performance of individual retail stores, restaurants and e-commerce businesses.

Mixing LSMC and PDE Methods to Price Bermudan Options
David Farahany,Kenneth Jackson,Sebastian Jaimungal

We develop a mixed least squares Monte Carlo-partial differential equation (LSMC-PDE) method for pricing Bermudan style options on assets whose volatility is stochastic. The algorithm is formulated for an arbitrary number of assets and volatility processes and we prove the algorithm converges almost surely for a class of models. We also discuss two methods to improve the algorithm's computational complexity. Our numerical examples focus on the single ($2d$) and multi-dimensional ($4d$) Heston models and we compare our hybrid algorithm with classical LSMC approaches. In each case, we find that the hybrid algorithm outperforms standard LSMC in terms of estimating prices and optimal exercise boundaries.

Model Risk Measurement under Wasserstein Distance
Yu Feng,Erik Schlögl

The paper proposes a new approach to model risk measurement based on the Wasserstein distance between two probability measures. It formulates the theoretical motivation resulting from the interpretation of fictitious adversary of robust risk management. The proposed approach accounts for equivalent and non-equivalent probability measures and incorporates the economic reality of the fictitious adversary. It provides practically feasible results that overcome the restriction of considering only models implying probability measures equivalent to the reference model. The Wasserstein approach suits for various types of model risk problems, ranging from the single-asset hedging risk problem to the multi-asset allocation problem. The robust capital market line, accounting for the correlation risk, is not achievable with other non-parametric approaches.

New fat-tail normality test based on conditional second moments with applications to finance
Damian Jelito,Marcin Pitera

In this paper we introduce an efficient fat-tail measurement framework that is based on conditional second moments. We construct goodness-of-fit statistic that has a direct financial interpretation and can be used to assess the impact of fat-tails on central data normality assumption. Next, we show how to use our framework to construct a powerful statistical normality test. In particular, we compare our methodology to various popular normality statistical tests, including the Jarque--Bera test that is based on third and fourth moments, and show that in most considered cases our framework outperforms all others, both on simulated and market-stock data. Finally, we derive asymptotic distributions for conditional mean and variance estimators, and use this to show asymptotic normality of the proposed test statistic.

Non-Parametric Robust Model Risk Measurement with Path-Dependent Loss Functions
Yu Feng

Understanding and measuring model risk is important to financial practitioners. However, there lacks a non-parametric approach to model risk quantification in a dynamic setting and with path-dependent losses. We propose a complete theory generalizing the relative-entropic approach by Glasserman and Xu to the dynamic case under any $f$-divergence. It provides an unified treatment for measuring both the worst-case risk and the $f$-divergence budget that originate from the model uncertainty of an underlying state process.

On the monotonicity of the eigenvector method
László Csató,Dóra Gréta Petróczy

Pairwise comparisons are used in a wide variety of decision situations when the importance of different alternatives should be measured by numerical weights. One popular method to derive these priorities is based on the right eigenvector of a multiplicative pairwise comparison matrix. We introduce an axiom called monotonicity: increasing an arbitrary entry of a pairwise comparison matrix should increase the weight of the favoured alternative (which is in the corresponding row) by the greatest factor and should decrease the weight of the favoured alternative (which is in the corresponding column) by the greatest factor. It is proved that the eigenvector method violates this natural requirement. We also investigate the relationship between non-monotonicity and the Saaty inconsistency index. It turns out that the violation of monotonicity is not a problem in the case of nearly consistent matrices. On the other hand, the eigenvector method remains a dubious choice for inherently inconsistent large matrices such as the ones that emerge in sports applications.

Optimal Investment-Consumption-Insurance with Durable and Perishable Consumption Goods in a Jump Diffusion Market
Jin Sun,Ryle S. Perera,Pavel V. Shevchenko

We investigate an optimal investment-consumption and optimal level of insurance on durable consumption goods with a positive loading in a continuous-time economy. We assume that the economic agent invests in the financial market and in durable as well as perishable consumption goods to derive utilities from consumption over time in a jump-diffusion market. Assuming that the financial assets and durable consumption goods can be traded without transaction costs, we provide a semi-explicit solution for the optimal insurance coverage for durable goods and financial asset. With transaction costs for trading the durable good proportional to the total value of the durable good, we formulate the agent's optimization problem as a combined stochastic and impulse control problem, with an implicit intervention value function. We solve this problem numerically using stopping time iteration, and analyze the numerical results using illustrative examples.

Piketty's second fundamental law of capitalism as an emergent property in a kinetic wealth-exchange model of economic growth
D. S. Quevedo,C. J. Quimbay

We propose in this work a kinetic wealth-exchange model of economic growth by introducing saving as a non consumed fraction of production. In this new model, which starts also from microeconomic arguments, it is found that economic transactions between pairs of agents leads the system to a macroscopic behavior where total wealth is not conserved and it is possible to have an economic growth which is assumed as the increasing of total production in time. This last macroeconomic result, that we find both numerically through a Monte Carlo based simulation method and analytically in the framework of a mean field approximation, corresponds to the economic growth scenario described by the well known Solow model developed in the economic neoclassical theory. If additionally to the income related with production due to return on individual capital, it is also included the individual labor income in the model, then the Thomas Piketty's second fundamental law of capitalism is found as a emergent property of the system. We consider that the results obtained in this paper shows how Econophysics can help to understand the connection between macroeconomics and microeconomics.

Pricing foreign exchange options under stochastic volatility and interest rates using an RBF--FD method
Fazlollah Soleymani,Andrey Itkin

This paper proposes a numerical method for pricing foreign exchange (FX) options in a model which deals with stochastic interest rates and stochastic volatility of the FX rate. The model considers four stochastic drivers, each represented by an It\^{o}'s diffusion with time--dependent drift, and with a full matrix of correlations. It is known that prices of FX options in this model can be found by solving an associated backward partial differential equation (PDE). However, it contains non--affine terms, which makes its difficult to solve it analytically. Also, a standard approach of solving it numerically by using traditional finite--difference (FD) or finite elements (FE) methods suffers from the high computational burden. Therefore, in this paper a flavor of a localized radial basis functions (RBFs) method, RBF--FD, is developed which allows for a good accuracy at a relatively low computational cost. Results of numerical simulations are presented which demonstrate efficiency of such an approach in terms of both performance and accuracy for pricing FX options and computation of the associated Greeks.

Resolution Regimes in the Financial Sector: In Need of Cross-Sectoral Regulation?
Binder, Jens-Hinrich
Conceptually, the ‘resolution‘ of financial intermediaries does not merely refer to instruments and procedures for the management of insolvencies in the financial sector generally. Rather, ‘resolution’ is conceived as a functional alternative to, and substitute for, traditional means of insolvency management (in particular, liquidation procedures), to be applied specifically in cases where such traditional means cannot be activated in view of potentially disastrous implications for professional counter-parties, depositors, market infrastructures â€" in short, for systemic stability. While the scope of these legal instruments is not expressly restricted to systemically relevant institutions, care has been taken to restrict the use of the innovative toolbox to cases where the public interest in the prevention of contagious effects, in light of the size of the institution in question, its market share, complexity and/or connectedness with other parties, outweighs the disadvantages (e.g., the detrimental effects on creditors, as well as potentially higher costs of resolution compared with traditional insolvency liquidation). Although it is now widely agreed that systemic relevance is not a phenomenon confined to any particular type of financial institution but depends on factors such as size, market share, and interconnection with other market participants, the emergence of resolution regimes has thus far been characterised by the traditional boundaries between banks, investment firms, insurance companies, and financial market infrastructures. Against the backdrop of a growing body of international standards and European legislation on resolution frameworks, most of which have been sectoral in scope and content so far, the present Chapter analyses the rationale of, and perspectives for, a move towards cross-sectoral regulation in the area of financial institutions’ insolvency management.

Robust calibration and arbitrage-free interpolation of SSVI slices
Pierre Cohort,Jacopo Corbetta,Claude Martini,Ismail Laachir

We describe a robust calibration algorithm of a set of SSVI slices (i.e. a set of 3 SSVI parameters $\theta, \rho, \varphi$ attached to each option maturity available on the market), which grants that these slices are free of Butterfly and Calendar-Spread arbitrage. Given such a set of consistent SSVI parameters, we show that the most natural interpolation/extrapolation of the parameters provides a full continuous volatility surface free of arbitrage. The numerical implementation is straightforward, robust and quick, yielding an effective, parsimonious solution to the smile problem, which has the potential to become a benchmark one.

The Cross-Section of Returns in Frontier Equity Markets: Integrated or Segmented Pricing?
Zaremba, Adam,Maydybura, Alina
Is asset pricing segmented or integrated in frontier equity markets? To answer this question, we examine the returns on more than 4,500 stocks from 22 frontier countries for the years 1997â€"2018. We evaluate the performance of a few major asset pricing models. We document strong value and momentum effects but find no consistent evidence regarding size, investment, and profitability premia. The recent six-factor model of Fama and French (2018) outperforms other models and best explains the cross-sectional and time-series variation in returns. Our results point to low integration of frontier equities, even after the global financial crisis. Local risk factors explain the behavior of prices much better than their global counterparts do. The low correlation of these risk factors allows augmenting the efficient frontier of an international investor.

The Effects of Information Systems Compatibility on Firm Performance Following Mergers and Acquisitions
Murthy, Uday S.,Smith, Thomas Joseph,Whitworth, James,Zhang, Yiyang
This study investigates the consequences of information systems compatibility between the target and acquirer firms in the context of mergers and acquisitions (M&A). We posit that the degree of information systems compatibility impacts post-M&A operating efficiency and audit efficiency. Using a unique data set of ERP implementations, we find that acquirers using the same ERP vendor as their targets exhibit shorter post-merger operating cycles and shorter post-merger audit delays relative to acquirers with different ERP vendors than their targets. We suggest that our operating cycle finding is likely due to higher systems compatibility fostering post-merger operating efficiency to a greater degree than mergers involving incompatible systems. The audit efficiency finding we document is consistent with acquirers with the same ERP vendor as their target realizing more efficient financial reporting and accounting close processes relative to mergers involving different ERP vendors. In supplemental analysis, we find evidence that acquirers with the same ERP vendor as their target also exhibit more accurate management forecast guidance following the acquisition. Taken together, the findings of this study should be of interest to capital market participants and managers involved in M&A activity by providing evidence about how the degree of compatibility between acquirer and target ERP systems impacts post-merger activities across different economically significant functional areas.

The Financing of Local Government in China: Stimulus Loan Wanes and Shadow Banking Waxes
Chen, Zhuo,He, Zhiguo,Liu, Chun
China’s four-trillion-yuan stimulus package fueled by bank loans in 2009 has led to the rapid growth of shadow banking activities after 2012. Local governments financed the stimulus through bank loans in 2009, and resorted to non-bank debt financing after 2012 given the rollover pressure from bank debt coming due, a manifestation of the stimulus-loan-hangover effect. Cross-sectionally, provinces with greater bank loan growth in 2009 experienced more Municipal Corporate Bonds issuance during 2012-2015, together with more shadow banking activities including Entrusted loans and Wealth Management Products. We highlight the market forces behind the regulation changes on local government debt post 2012.

The Global Financial Crisis’ Impact on the Eurozone: So Far, A Lost Decade
Gechev, Vasil
The Global Financial Crisis of 2007â€"2008 ranks among the biggest disruptions of the world economy in decades. The scope and severity of its impact are testified by the fact that 10 years after the crisis none of the world’s major economies â€" Japan, Brazil, USA, Eurozone, Russia, China â€" have managed to overcome the consequences completely. However, the degree to which the GFC’s impact has been neutralized varies considerably, and the comparison between the eurozone and the two other developed countries â€" Japan and USA, reveals the deeper economic problems in Europe. The most appropriate illustration is unemployment â€" by the fourth quarter of 2018 the unemployment rate in the eurozone was more that 3 times higher than Japan’s rate and more than 2 times higher than the U.S. rate.Along with unemployment, this paper examines the GDP dynamics (incl. GDP per capita), budget deficit, and government debt in the eurozone. On the basis of the conducted analyses, the 10 years after 2007 can be defined as ‘the eurozone’s lost decade’.

The Government Risk Premium Puzzle
Jiang, Zhengyang,Lustig, Hanno N.,Van Nieuwerburgh, Stijn,Xiaolan, Mindy Z.
The market value of outstanding government debt reflects the expected present discounted value of current and future primary surpluses. When the discount rate is consistent with the term structure of interest rates and equity prices and government spending growth dynamics are estimated from the data, a government risk premium puzzle emerges. Since tax revenues are pro-cyclical while government spending is counter-cyclical, the tax revenue claim has a higher risk premium and a lower value than the spending claim. This makes the value of the surplus claim negative, and implies that the U.S. government should be a creditor rather than a debtor. We resolve this puzzle by postulating a small but persistent component in expected spending growth, and infer it from the market value of the outstanding government bond portfolio. This component offsets the pro-cyclical movements in current surpluses, reducing its risk and increasing its value. The resulting model is used to study the optimal maturity structure of government debt, and to quantify deviations of the observed portfolio from the optimal one.

The Impact of Derivatives on the Volatility of Turkish Stock Market
Cimen, Aysegul
The interaction among futures and spot markets has been one of the most important issues of the financial markets since the launch of stock index futures by Kansas City Board of Trade in 1982. The main characteristics of derivatives such as having lower transaction costs, higher leverage, higher liquidity and higher flexibility compared to spot markets make them attractive for investors. Besides, derivatives trading are crucial for financial system participants in order to diversify portfolio and minimise risks. The aim of this paper is to emphasize the importance of derivative securities by providing evidence from an emerging stock market, Turkey. In order to emphasize the need for derivatives in the Turkish market, the impact of introduction of index futures and index options trading on the underlying spot market volatility are empirically analysed. Conditional and unconditional volatility of Borsa Istanbul 30 Index is examined using GARCH model starting from its first trade day of January 2, 1997.

The Impact of QE on Liquidity: Evidence from the UK Corporate Bond Purchase Scheme
Boneva, Lena,Elliott, David,Kaminska, Iryna,Linton, Oliver B.,McLaren, Nick,Morley, Ben
In August 2016, the Bank of England (BoE) announced a Corporate Bond Purchase Scheme (CBPS) to purchase up to £10 billion of sterling corporate bonds. To investigate the impact of these purchases on liquidity, we create a novel dataset that combines transaction-level data from the secondary corporate bond market with proprietary offer-level data from the BoE’s CBPS auctions. Identifying the impact of central bank asset purchases on liquidity is potentially impacted by reverse causality, because liquidity considerations might impact purchases. But the offer-level data allow us to construct proxy measures for the BoE’s demand for bonds and auction participants’ supply of bonds, meaning that we can control for the impact of liquidity on purchases. Across a range of liquidity measures, we find that CBPS purchases improved the liquidity of purchased bonds.

The Indirect Effects of Trading Restrictions: Evidence from a Quasi-Natural Experiment
Wang, Shujing,Yan, Hongjun,Zhong, Ninghua,Tang, Yizhou
Stock market trading restrictions directly affect stock prices and liquidity via constraints on investors’ transactions. They also have indirect effects by altering the information environment. We isolate these indirect effects by analyzing the effect of stock market restrictions on the corporate bond market. Using the staggered relaxation of the restrictions on margin trading and short selling in the Chinese stock market as a quasi-natural experiment, we find that the relaxation of these restrictions on a firm’s stock reduces the credit spread of its corporate bond. This effect is more pronounced for firms with more opaque information or lower credit ratings.

The Speed With Which Analysts Incorporate Firm-Specific and Industry Information in Their Forecasts: Evidence and Implications
Keskek, Sami,Tse, Senyo Y.
We separate analyst forecast revisions into components representing industry-wide and firm-specific news. Using the relation between analyst forecast revisions and upcoming news to estimate how completely analysts incorporate their private information in their forecasts, we show that analysts incorporate a smaller proportion of industry-wide news than firm-specific news in their forecasts, particularly when the underlying news is bad. Post-forecast-revision drift is strongly associated with the private industry-wide information that analysts withhold from their forecast revisions. Furthermore, analysts’ information withholding varies predictably with their incentives. Unlike prior research that attributes post-forecast revision drift to delayed market response to news in forecast revisions, our findings suggest that the drift arises because investors are unable to anticipate the news that analysts withhold from their forecast revisions. Our study sheds light on analysts’ role in conveying firm-specific and industry-wide news to investors and on the implications for post-forecast-revision drift.

Using Artificial Intelligence to Recapture Norms: Did #metoo change gender norms in Sweden?
Sara Moricz

Norms are challenging to define and measure, but this paper takes advantage of text data and the recent development in machine learning to create an encompassing measure of norms. An LSTM neural network is trained to detect gendered language. The network functions as a tool to create a measure on how gender norms changes in relation to the Metoo movement on Swedish Twitter. This paper shows that gender norms on average are less salient half a year after the date of the first appearance of the hashtag #Metoo. Previous literature suggests that gender norms change over generations, but the current result suggests that norms can change in the short run.