Research articles for the 2019-03-14

A Term Structure Model for Dividends and Interest Rates
Damir Filipović,Sander Willems

Over the last decade, dividends have become a standalone asset class instead of a mere side product of an equity investment. We introduce a framework based on polynomial jump-diffusions to jointly price the term structures of dividends and interest rates. Prices for dividend futures, bonds, and the dividend paying stock are given in closed form. We present an efficient moment based approximation method for option pricing. In a calibration exercise we show that a parsimonious model specification has a good fit with Euribor interest rate swaps and swaptions, Euro Stoxx 50 index dividend futures and dividend options, and Euro Stoxx 50 index options.

A lending scheme for a system of interconnected banks with probabilistic constraints of failure
Francesco Cordoni,Luca Di Persio,Luca Prezioso

We derive a closed form solution for an optimal control of interbank lending subject to terminal probability constraints on the failure of a bank. The solution can be applied to a network of banks providing a general solution when aforementioned probability constraints are assumed for all the banks in the system. We also show a direct method to compute the systemic relevance of any node within the financial network itself. Such a parameter being the fundamental one in deciding the accepted probability of failure, hence modifying the final optimal strategy adopted by a financial supervisor aiming at controlling the system.

A micro-simulation model of irrigation farms in the southern Murray-Darling Basin
Huong Dinh,Manannan Donoghoe,Neal Hughes,Tim Goesch

This paper presents a farm level irrigation microsimulation model of the southern Murray-Darling Basin. The model leverages detailed ABARES survey data to estimate a series of input demand and output supply equations, derived from a normalised quadratic profit function. The parameters from this estimation are then used to simulate the impact on total cost, revenue and profit of a hypothetical 30 per cent increase in the price of water. The model is still under development, with several potential improvements suggested in the conclusion. This is a working paper, provided for the purpose of receiving feedback on the analytical approach to improve future iterations of the microsimulation model.

Altcoin-Bitcoin Arbitrage
Zura Kakushadze,Willie Yu

We give an algorithm and source code for a cryptoasset statistical arbitrage alpha based on a mean-reversion effect driven by the leading momentum factor in cryptoasset returns discussed in Using empirical data, we identify the cross-section of cryptoassets for which this altcoin-Bitcoin arbitrage alpha is significant and discuss it in the context of liquidity considerations as well as its implications for cryptoasset trading.

Ambiguity and Investor Behavior
Kostopoulos, Dimitrios,Meyer, Steffen
In this paper, we relate time-varying aggregate ambiguity to individual investor trading. We use a unique data set on the trading records of more than 100 thousand individual investors from a large German discount brokerage for the period from March 2010 through December 2015. We present five main findings. First, innovations in ambiguity are associated with increased investor activity. Second, innovations in ambiguity are associated with less risk taking. Third, we find evidence that as investors learn about risks, their trading is less prone to ambiguity shocks. Fourth, we show that psychological biases are increased when ambiguity is high. Fifth, ambiguity averse investors are more prone to ambiguity shocks than the average investor.

Appraiser Independence, Bias and Mortgage Insurance Claims
Park, Kevin A.
This paper examines the shift in how Federal Housing Administration collateral valuations were conducted in the mid-1990s. Moving from assignment of appraisers by Department of Housing and Urban Development field offices to selection by lenders did not increase the speed of valuations. However, the risk of appraisal and confirmation biases (i.e., valuations greater than or equal to the purchase price, respectively) was greater when the valuation was completed by an appraiser on the lender’s staff or selected by the lender. Yet under appraisals are rare, even among valuations completed by appraisers randomly assigned by HUD from a fee panel. “At price” but not over appraisals are associated with an increase in the risk of a mortgage insurance claim and higher rate of loss given claim. Valuations by HUD-assigned appraisers are associated with a lower likelihood of claim but higher loss given claim, but these effects do not appear to be explained by the results of the valuation relative to the purchase price. The mixed results indicate that strict appraiser independence regulations may not fully remedy errors in collateral valuation.

Bank Income Smoothing, Institutions and Corruption
Ozili, Peterson K
This study investigates bank income smoothing, focusing on the effect of corruption on the extent of income smoothing by African banks. I find that banks use loan loss provisions to smooth positive (non-negative) earnings particularly in the post-2008 crisis period and this behaviour is reduced by strong investor protection. Also, I find that banks in highly corrupt environments smooth their positive (non-negative) earnings as opposed to smoothing the entire profit distribution. Finally, cross-country variation in bank income smoothing is observed. The findings have implications.

Building Credit History with Heterogeneously Informed Lenders
Chatterjee, Satyajit,Eyigungor, Burcu,Zetlin-Jones, Ariel
This paper examines a novel mechanism of credit-history building as a way of aggregating information across multiple lenders. We build a dynamic model with multiple competing lenders, who have heterogeneous private information about a consumer's creditworthiness, and extend credit over multiple stages. Acquiring a loan at an early stage serves as a positive signal | it allows the borrower to convey to other lenders the existence of a positively informed lender (advancing that early loan) | thereby convincing other lenders to extend further credit in future stages. This signaling may be costly to the least risky borrowers for two reasons. First, taking on an early loan may involve cross-subsidization from the least risky borrowers to more risky borrowers. Second, the least risky borrowers may take inefficiently large loans relative to the symmetric-information benchmark. We demonstrate that, despite these two possible costs, the least risky borrowers often prefer these equilibria to those without information aggregation. Our analysis offers an interesting and novel insight into debt dilution. Contrary to the conventional wisdom, repayment of the early loan is more likely when a borrower subsequently takes on a larger rather than a smaller additional loan. This result hinges on a selection effect: larger subsequent loans are only given to the least risky borrowers.

Corporate Governance and Pollution Externalities of Public and Private Firms
Shive, Sophie,Forster, Margaret
The number of U.S. publicly traded firms has halved in 20 years. How will this shift in ownership structure affect the economy's externalities? Using comprehensive data on greenhouse gas emissions from 2007-2016, we find that independent private firms are less likely to pollute and incur EPA penalties than are public firms, and we find no differences between private sponsor-backed firms and public firms, controlling for industry, time, location and a host of firm characteristics. Within public firms, we find a negative association between emissions and mutual fund ownership and board size, suggesting that increased oversight may decrease externalities.

Corporate Governance of Banks, Performance, Market and Capital Structure
Lazarides, Themistokles G.
Many scholars have linked Corporate Governance (CG) and performance or CG, capital structure of banks or market structure. The decision to use the capital market or debt in order to obtain the necessary capital to finance firms’ operations is a critical factor for the formulation of corporate environment, because it contributes to the ownership concentration or diffusion and to corporate risk exposure level.The paper’s goal is to link all these three dimensions and to address the issue of whether performance and capital structure are the decisive factors of good corporate governance or vice versa and whether these dimensions are the drivers of banks’ financial health, strategic robustness and survival effectiveness. Furthermore, the paper is seeking to detect the differences (if any) among banking systems across Europe. To do that a double sample is selected (covering the period from 2004 to 2013). The first sample is comprised by European banks that merged. The second sample is comprised by European banks that survived the last merger & acquisition wave and the systemic shock of the double crises of 2002 and 2008. A combined ratio of performance (ROAA or ROEA) and debt to equity (DE or debt aggravation) is used to determine if there is a connection between capital structure and CG quality of banks. Panel data methodology is used.The econometric results show that there are no significant differences between the strata that are used for this research. There is no common factor or driver between the banking systems of Europe. This is an indication that the convergence theory of corporate governance systems is yet confirmed.

Corporate Governance, External Control, Public Governance, and Environmental Information Transparency: Evidence from Emerging Markets
Jacoby, Gady,Liu, Mingzhi,Wang, Yefeng,Wu, Zhenyu,Zhang, Ying
Using a sample of 4,195 observations from 19 emerging markets, we investigate how internal corporate governance, external monitoring, and legal and business environment jointly affect a firm’s managerial effectiveness in environmental information transparency in an international setting. The empirical results show that in emerging economies, firms with stronger corporate governance mechanisms tend to adopt an external control strategy in order to mitigate owner-manager agency conflicts. Furthermore, internal corporate governance mechanisms are found to directly increase firm transparency concerning environmental damage and to indirectly do so through external control device. The legal and business environments of countries in which firms operate moderate these relationships.

Corporate Risk Disclosure: A Review
Sexena, Achintya Nath,Dube, Indrajit,Mishra, Chandra Sekhar
This paper reviews empirical studies and professional literature on corporate risk disclosures. Empirical studies done from the perspective of economic theory with application of statistical techniques have been growing over the years in the field of corporate disclosures. The very concept of risk and significance of corporate risk disclosures have been discussed in various studies and reports of professional bodies. Studies of corporate risk disclosures from the perspective of information asymmetry, utility as well as the perspective of economic theories of corporate governance have been steadily increasing over the last two decades or so. Associations between various firm characteristics and market behaviour have been sought to be studied by scholars in order to study the possible motivations behind risk disclosures as well as their usefulness to the end users of corporate disclosures viz. the shareholders, current and prospective investors, as well as the regulators. Methodologies from various disciplines like communications studies, econometrics, statistics, computer science etc. have been employed to study the phenomenon of corporate risk disclosure and its interaction with factors within and without the firm. Studies have been conducted for some jurisdictions in North America, Europe, Asia and Africa and scope exists for further study in more jurisdictions. The findings of empirical studies and discussions in professional literature are key aids for law and policy makers and researchers while formulating or proposing regulatory frameworks. This review paper aims to stimulate further research and debate on regulatory approach, policy and frameworks towards corporate risk disclosure based upon the conclusions drawn from empirical studies on corporate risk disclosure.

Defined Contribution Pension Plans: Who Has Seen the Risk?
Forsyth, Peter,Vetzal, Kenneth R.
The trend towards eliminating defined benefit (DB) pension plans in favor of defined contribution (DC) plans implies that increasing numbers of pension plan participants will bear the risk that final realized portfolio values may be insufficient to fund desired retirement cash flows. We compare the outcomes of various asset allocation strategies for a typical DC plan investor. The strategies considered include constant proportion, linear glide path, and optimal dynamic (multi-period) time consistent quadratic shortfall approaches. The last of these is based on a double exponential jump diffusion model. We determine the parameters of the model using monthly US data over a 90 year sample period. We carry out tests in a synthetic market which is based on the same jump diffusion model and also using bootstrap resampling of historical data. The probability that portfolio values at retirement will be insufficient to provide adequate retirement incomes is relatively high, unless DC investors adopt optimal allocation strategies and raise typical contribution rates. This suggests there is a looming crisis in DC plans, which requires educating DC plan holders in terms of realistic expectations, required contributions, and optimal asset allocation strategies.

Derivative of a Conic Problem with a Unique Solution
Enzo Busseti,Walaa M. Moursi,Stephen Boyd

We view a conic optimization problem that has a unique solution as a map from its data to its solution. If sufficient regularity conditions hold at a solution point, namely that the implicit function theorem applies to the normalized residual function of [Busseti et al, 2018], the problem solution map is differentiable. We obtain the derivative, in the form of an abstract linear operator. This applies to any convex optimization problem in conic form, while a previous result [Amos et al, 2016] studied strictly convex quadratic programs. Such differentiable problems can be used, for example, in machine learning, control, and related areas, as a layer in an end-to-end learning and control procedure, for backpropagation. We accompany this note with a lightweight Python implementation which can handle problems with the cone constraints commonly used in practice.

Discussion of Active Risk Models
Patev, Plamen,Petkov, Kaloyan
Although investment managers and quants have deep understanding for risk, the common investors still have questions on what exactly the risk is: how to estimate it and how to define the sources of risk.The risk theory started with Markowitz, passing though CAPM and developing Multi-factor risk models. However, in a multi-factor setting correlation is always a problem. This problem has been solved in two different ways:First, developing Global Risk Attribute Model (GMFM). GRAM deals with correlation applying the technique called Cascading regressions. This technique basically removes the correlation between factors and allows us to use them directly in the equation.Second, BARRA US E3 categorize exposure to multiple factors as a specific (active) risk. Here total active risk is separated in the risk due to other risk factors (Active systematic risk) and the company-specific risk (Active residual risk).Based on the limitations of previous approaches we develop our own approach to the investment risk by separating it into three components. It is done so that the three main sources of risk are clear and from here the model can be used also for return attribution to any kind of fund. The three components are:Benchmark risk â€" it represents the risk from exposure to the market. It is most used for appraisal of passive funds that sole goal is to track the benchmark. It consist of Passive risk and Market timing risk;Beta risk â€" these are the risk of exposure to other types of systematic factors. For passive managers these betas should be the same as the market, if they are to replicate its performance. This kind of risk also is the base of Smart Beta strategies;Active risk â€" if the goal of active fund manager is to get “pure alpha” all he needs to do is neutralize the exposure to the previous two types of risk, or very often his results will get mixed up with the returns generated by timing the other systematic factors. From here the active risk is deconstructed into pure tracking error and strategy risk.Deconstructing the active risk is very interesting and has some very important nuances. First of all pure tracking error is the “desired risk” especially for active investors. After all you can’t get abnormal return if you do not let your portfolio deviate from the market. On the other hand the “strategy risk” measures what is the risk in your forecasting model. This is undesirable risk, and the main goal of this is to be able to compare strategies on how accurate they are. Such a definition of the active risk is needed in order for active managers to make informed decisions.

Does Bank Stability Promote Economic Resilience?: Evidence From Panel Data
Stewart, Robert,Chowdhury, Murshed
Banking stability continues to receive heightened attention since the Global Financial Crisis, circa 2008. Much of this attention has been focused on the prevention of future systemic crises. Notwithstanding the importance of these preventative efforts, it is important to understand the effectiveness of banking sector stability as a buffer to the real economy, when crises do occur. That is, does banking stability promote economic resilience to crises? Also important is the effect that stability has on economic growth, given the resources being diverted to banking regulation. This work investigates both of these concerns, using a global panel dataset for the period 1995-2015. A dynamic panel model is employed within a system GMM estimation framework, and preliminary results indicate that there are important trade-offs to consider between driving finance induced economic growth, and maintaining banking stability. Despite these trade-offs, the results point to the banking z-score as a tool that both promotes long-run growth, and resilience. The banking z-score has a positive effect on economic growth, and also attenuates the impact of banking crises.

Empirical Similarities and Differences Between the Global Financial Crisis and the Asian Crisis
Park, Ji-woo
The purpose of this article is to provide some empirical evidence about the recent global financial crisis compared to previous crises. First, this comparative analysis is conducted at the financial level by assessing the extent of international contagion among major stock markets during recent episodes of financial turbulence. Secondly, we examine the real impact of the crises, notably by comparing the losses of GDP during the recent crises in the advanced countries. Our results show that the recent financial crisis differs from other crises in the extent of the international contagion and the power with which it hit the real economies of the advanced countries.

Equalization Transfer Optimization and Its Role in Socio-Economic Development of the Territorial Units
Abuselidze, George
In the paper, the budgetary relationships between the center and the region are studied in the aspect of income distribution; the analyzes of the shortcomings are implemented being characterized for revenue distribution and preventing socio-economic equalization of territorial units and their development. The paper substantiates and provides recommendations for improvement of budgetary relationships to strengthen their further financial independence. The objective of the study is the budget formation of territorial units based on the optimization of the revenue distribution and socio-economic development facilitating factors of territorial units.

FinTech Regulation Subject to Human Psychology
Penikas, Henry
Ten years after the global crisis of 2007-09 the financial regulation has being enhanced with the pace of world stock markets growth. Latter ones have hit their historical maximum values being two to three fold higher than on the eve of the crisis. Such prudential tightening incentivizes using financial technologies to create new banking products and optimize regulatory burden. Same time it inflates the stock market bubble leading to greater fragility and increases the probability of another global crisis. Current research shows how human psychology has to be accounted for. This is relevant both for humans managing financial institutions as objects of regulation and humans benefiting from regulation when consuming financial services. It is shown that unconventional policy measure of abandoning both regulation and state deposit insurance enables to enhance financial stability. It implies more conservative behaviour and diminishes risk-appetite for both financiers and their clients.

Full-fledged SABR through Markov Chains
Cui, Zhenyu,Kirkby, Justin,Nguyen, Duy
We present a general purpose technique for the efficient and accurate valuation of options in the shifted Stochastic Alpha Beta Rho (shifted-SABR) model which includes SABR as a special case. The method is based on a novel double-layer continuous-time Markov chain (CTMC) from which closed-form matrix expressions for European options are derived. We also propose a recursive risk-neutral valuation technique for pricing discretely monitored path-dependent options, and use it to price Bermudan and barrier options. In addition, we provide single Laplace transform formula for discretely monitored arithmetic Asian options. Numerical experiments confirm the accuracy and efficiency of the proposed method, which is suitable for practical use.

Governance in the Absence of Regulation: A Study of Initial Coin Offerings
Johnson, William C.,Yi, Sangho
We examine whether the market for ICOs can alleviate asymmetric information and incentive problems through self-imposed governance mechanisms despite the limited regulation in this market. We propose what we call the substitution hypothesis which states that market forces incentivize ICO issuers to voluntarily adopt governance mechanisms which effectively bind their behavior as a substitute for regulatory involvement. The substitution hypothesis also predicts that these voluntarily adopted governance mechanisms lead to lower underpricing, better ex-post performance, higher ICO success and more efficient price discovery in the secondary market. We find comprehensive empirical support for the substitution hypothesis. Our results suggest that these governance mechanisms help to make ICOs a viable and innovative method of financing.

How Much Capital Does a Bank Need: A Few Points Regarding the Basel Accord
Mehedi Nizam, Ahmed
Basel framework for bank's capital adequacy has been criticized for its over reliance on external credit rating agencies. Moreover, implementation of Minimum Capital Requirement (MCR) under Basel-III is often linked to a decrease in economic growth as it requires banks to maintain a higher capital base which raises their cost of fund. In addition to these, here, we criticize the Basel accord for the capital requirement under this framework is not inspired by the essence of the basic accounting equation. Moreover, under Basel framework, capital requirement and liquidity parameters are discussed separately. Here, we argue that the capital requirement should arise as a by-product of the day to day liquidity management and hence both the requirements can be brought together under one umbrella which enables us to view the overall position of a bank from a more holistic point of view. Here, we attain all the above issues and provide a comprehensive framework regarding bank's capital adequacy and liquidity requirements which is claimed to settle all the aforementioned issues and reduces all the extensive paper works needed for the implementation of the Basel accord.

Inferring Term Rates from Sofr Futures Prices
Heitfield, Erik,Park, Yang-Ho
The Alternative Reference Rate Committee, a group of private-sector market participants convened by the Federal Reserve, has recommended that markets transition to the use of the Secured Overnight Financing Rate (SOFR) in financial contracts that currently reference US dollar LIBOR. This paper examines the feasibility of using SOFR futures prices to construct forward-looking term reference rates that are conceptually similar to the term LIBOR rates commonly used in loan contracts. We show that futures-implied term SOFR rates have closely tracked federal funds OIS rates over the eight months since SOFR futures began trading. To examine the performance of our approach over a longer time horizon, we compare term rates derived from federal funds futures with observed overnight rates and OIS rates from 2000 to the present. Consistent with prior research, we find that futures-implied term rates accurately predict realized compounded overnight rates during most periods.

Insurance in the Financial System
Kartasheva, Anastasia V.
The paper reviews the principles of financial intermediation in insurance from the perspective of its functions in the financial system and assesses the effect of financial innovation on insurance functions. Insurance core function is managing risks driven by nature or related to human life. To support it, insurance companies perform the functions of pooling of resources, transferring of resources, and information production and management. Four major financial innovations affected the insurance business: hedging of market risks with derivatives, securitization of underwriting risks, asset management and credit intermediation activities of the shadow banking. While hedging of market risks with derivatives and securitization of underwriting risks enhanced industry effectiveness to perform its core functions, asset management and shadow banking activities introduced new functions of supporting the payment system and asset prices. In performing new functions, insurers compete with other financial intermediaries and markets. The analysis implies that an economic activity rather than a legal entity needs to be the basis of systemic risk regulation framework in insurance. This would also provide a coherent framework to regulate various intermediaries involved in economically equivalent activities.

Mean-field moral hazard for optimal energy demand response management
Romuald Elie,Emma Hubert,Thibaut Mastrolia,Dylan Possamaï

We study the problem of demand response contracts in electricity markets by quantifying the impact of considering a mean-field of consumers, whose consumption is impacted by a common noise. We formulate the problem as a Principal-Agent problem with moral hazard in which the Principal - she - is an electricity producer who observes continuously the consumption of a continuum of risk-averse consumers, and designs contracts in order to reduce her production costs. More precisely, the producer incentivises the consumers to reduce the average and the volatility of their consumption in different usages, without observing the efforts they make. We prove that the producer can benefit from considering the mean-field of consumers by indexing contracts on the consumption of one Agent and aggregate consumption statistics from the distribution of the entire population of consumers. In the case of linear energy valuation, we provide closed-form expression for this new type of optimal contracts that maximises the utility of the producer. In most cases, we show that this new type of contracts allows the Principal to choose the risks she wants to bear, and to reduce the problem at hand to an uncorrelated one.

Mergers Aren't So Black & White
Griffin, Caleb N.
Economic research reveals that merger activity frequently results in price increases. Such price increases often negatively affect consumers and may represent a net harm to society. While economists, antitrust scholars, and regulators have made extraordinary contributions to understanding and mitigating the impact of such price increases on consumers, our understanding of the impact of these price increases on shareholders is comparatively weak. This Article begins to fill that gap. It demonstrates that, in situations where M&A induces price increases, even significantly positive merger premiums and abnormal returns due to the merger may hide concrete harms to a firm’s shareholders. In this sense, the best efforts of the board of directors to maximize share price through a merger may perversely generate negative net wealth effects for a significant number of shareholders.These negative wealth effects arise because the categories of “shareholder” and “consumer” are not mutually exclusive. Rather, a growing number of consumer-shareholders pay for the goods and services of companies in which they invest, either directly or indirectly. This is especially likely with larger companies, which generally have a more sizable customer base; with publicly traded companies, which generally have a much larger number of shareholders; and with ownership of highly diversified funds, which own shares in hundreds, sometimes thousands, of firms. As this Article demonstrates, increases in the price of a firm’s products can produce economically significant impacts for consumer-shareholders. The magnitude of such impacts is frequently significant enough to change a seemingly substantial merger premium into a net loss.This Article uses financial models to demonstrate the impact of product price increases following M&A on shareholders with a variety of characteristics. These models serve as a useful guide for corporate boards to estimate the impact of a merger on shareholders for a range of investment levels, product price increases, and merger gains, as well as for fund managers as they contemplate their fiduciary responsibility to vote in the best interests of the investors in their fund. These models also provide a tool for shareholders as they attempt to discern their own economic interests.The empirical models provided in this Article reveal that mergers often result in net harms for shareholders. Shareholders have a greater interest in the net impact on their wealth than in the nominal share price being offered, particularly when share price gains mask significant, quantifiable losses. Boards, fund managers, and shareholders contemplating a merger ought to consider potential price increases resulting therefrom as an important factor impacting shareholder wealth. Additionally, shareholder awareness of the significant negative impact of price-increasing merger activity may mean that, in the future, corporate boards will have to justify price increases not only to antitrust regulators, but also to their own shareholders.

Modeling Frailty Correlated Defaults With Multivariate Latent Factors
Christoffersen, Benjamin,Matin, Rastin
Firm-level default models are important for modeling the default risk of corporate debt portfolios. These models typically rely on several assumptions, notably a linear effect of covariates on the log-hazard scale, no interactions, and the assumption of a single additive latent factor. Using a sample of US corporate firms, we provide evidence that these assumptions are too strict and, most importantly, provide evidence of a time-varying effect of the relative firm size to total market size. We propose a frailty model to account for such effects.

Modern tontine with bequest: innovation in pooled annuity products
Thomas Bernhardt,Catherine Donnelly

We introduce a new pension product that offers retirees the opportunity for a lifelong income and a bequest for their estate. Based on a tontine mechanism, the product divides pension savings between a tontine account and a bequest account. The tontine account is given up to a tontine pool upon death while the bequest account value is paid to the retiree's estate. The values of these two accounts are continuously re-balanced to the same proportion, which is the key feature of our new product. Our main research question about the new product is what proportion of pension savings should a retiree allocate to the tontine account. Under a power utility function, we show that more risk averse retirees allocate a fairly stable proportion of their pension savings to the tontine account, regardless of the strength of their bequest motive. The proportion declines as the retiree becomes less risk averse for a while. However, for the least risk averse retirees, a high proportion of their pension savings is optimally allocated to the tontine account. This surprising result is explained by the least risk averse retirees seeking the potentially high value of the bequest account at very old ages.

Multi-Period Mean CVAR Asset Allocation: Is it Advantageous to be Time Consistent?
Forsyth, Peter
We formulate the multi-period, time consistent mean-CVAR (Conditional Value at Risk) asset allocation problem in a form amenable to numerical computation. Our numerical algorithm can impose realistic constraints such as: no shorting, no-leverage, and discrete rebalancing. We focus on long term (i.e. 30 year) strategies, which would be typical of an investor in a Defined Contribution (DC) pension plan. A comparison with pre-commitment mean-CVAR strategies shows that adding the time consistent constraint compares unfavourably with the pure pre-commitment strategy. Since the pre-commitment strategy computed at time zero is identical to a time consistent strategy based on an alternative objective function, the pre-commitment mean-CVAR strategy is implementable in this case. Hence it would seem that there is little to be gained from enforcing time consistency.

Oil Price Shocks and the Equity Market: Evidence for the S&P 500 Sectoral Indices
Sakaki, Hamid
Using monthly returns of ten S&P 500 sectoral indices from January 1990 to January 2015, we examine the impact of demand and supply shocks of oil on the stock market. We confirm that positive shocks to U.S. production of oil and economic activity have a significant and positive influence on stock returns. Moreover, the negative and persistent effect of real oil price shocks on all sectoral indices except energy and utility found by this study. We also examine the impact of oil price volatility on stock returns. Oil price volatility has a negative and significant effect on all industries, even oil-related and oil substitutes. In addition, we get the VAR estimations for the crisis period and find that there is a substantial increase in the role of oil price shocks in the decomposition of stock returns of all sectors. Furthermore, stock returns are better explained by U.S. oil production shocks than other shocks in most sectors over the financial crisis time period. In addition, we find the asymmetric effects of oil shocks are applicable to only two out of ten sectors, implying the effect of oil price return on equity returns only in the energy and utility sectors are not asymmetric.

Price Effects of Common Ownership in the Seed Sector
Torshizi, Mohammad,Clapp, Jennifer
We evaluate the effects of the rise of common ownership in the U.S. seed sector. Using a simple theoretical model, we illustrate how common ownership changes the nature of competition among firms. Our empirical analysis shows that, even when taking measures to fully separate the effects of market concentration and common ownership, approximately 15% of the increase in soy, corn and cotton seed prices over the 1997-2017 period are due to the rise of common ownership. These findings contribute to the current literature regarding the anticompetitive effects of common ownership and confirm the result of studies performed in other sectors, such as airlines.

Revisiting Fundamental Indexation: A Deep Dive into Revenue
Cohen, Lauren,Haghbin, Mo,Malloy, Christopher J.,Schilling, Matthew
The capital shift to passive investing is among the most important evolutions in investment management in the last four decades. Striking in its magnitude and relative speed of adoption, the significance for asset management, and investors more broadly, is still not well understood. Those switching to passive investing have predominantly turned to indexing, with broad-based market and asset class indices seeing the vast majority of these inflows. Moreover, indexing has been dominated by a simple market-capitalization weighting mechanism. In this study, we bring new evidence to bear on the optimal weighting of indexing strategies for those wanting broad-based exposure to equities in both the U.S. and abroad. In particular, we document three main findings: (1) along with several other methodologies, revenue weighting has outperformed market-capitalization weighting in both absolute returns and return per-unit-risk over the past 40 years in the U.S., (2) revenue weighting provides more stable exposures to industries over this period, and (3) while the international evidence is more mixed, in developed markets and in the largest emerging market economies, revenue weighting appears to dominate market-cap weighting in terms of return and return per-unit-risk over the recent history through present-day. Given the totality of evidence, revenue weighting appears to be a fitting alternative when considering an allocation to broad indexation approaches.

Short-Term Momentum (Almost) Everywhere
Zaremba, Adam,Karathanasopoulos, Andreas,Long, Huaigang
Is there a short-term reversal effect outside the universe of individual stocks? To answer this, we investigate a comprehensive dataset of more than two centuries of returns on five major asset classes: equity indices, government bonds, treasury bills, commodities, and currencies. Contrary to stock-level evidence, we find a striking short-term momentum pattern: the most recent month’s return positively predicts future performance. The effect is not explained by established return predictors â€" including the standard momentum â€" and is robust to many considerations. The short-term momentum is strongest among assets of high idiosyncratic volatility and in periods of elevated return dispersion. Also, the strategy payoffs display partial commonality across different asset classes.

Stakeholder Orientation and Managerial Incentives: Evidence From a Natural Experiment
Petit-Romec, Arthur
This paper analyzes the influence of stakeholder orientation on the design of managerial incentives. Our tests exploit the quasi-natural experiment provided by the staggered adoption of directors’ duties laws (i.e., state-level laws that explicitly expand board members’ duties to act in the best interests of all stakeholders). We find that the enactment of these laws results in a significant decrease in the sensitivity of CEO wealth to the stock price, or delta. The decrease in the delta of CEO compensation is more pronounced for firms with higher board independence and with stronger relationships with stakeholders. Our results suggest that the decrease in the sensitivity of CEO compensation to the stock price is an important channel used by boards to internalize stakeholder orientation.

The Cost of Banking Crises: Does the Policy Framework Matter?
Levieuge, Grégory,Lucotte, Yannick,Pradines-Jobet, Florian
This paper empirically investigates how the stringency of macroeconomic policy frameworks impacts the unconditional cost of banking crises. We consider monetary, fiscal and exchange rate policies. A restrictive policy framework may promote stronger banking stability, by enhancing discipline and credibility, and by giving financial room to policymakers. At the same time though, tying the hands of policymakers may be counterproductive and procyclical, especially if it prevents them from responding properly to financial imbalances and crises. Our analysis considers a sample of 146 countries over the period 1970-2013, and reveals that extremely restrictive policy frameworks are likely to increase the expected cost of banking crises. By contrast, by combining discipline and flexibility, some policy arrangements such as budget balance rules with an easing clause, intermediate exchange rate regimes or an inflation targeting framework may significantly contain the cost of banking crises. As such, we provide evidence on the benefits of “constrained discretion” for the real impact of banking crises.

The Direct Effects of Equity Markets on Innovation
Mace, Chris
I examine the influence of equity markets on investments in innovation using drug development data. I find that market downturns following phase I clinical trial announcements lead to a 50% reduction in the likelihood of continued development, even though these downturns are unlikely to affect underlying project value. I also show that these investment distortions have positive spillover effects onto competing firms, as investment into drug classes most affected by market downturns increases dramatically over the next two years. My results show that market cyclicality can result in capital constraints that have widespread effects on innovation.

The Firm Size and Leverage Relationship and its Implications for Entry and Concentration in a Low Interest Rate World
Chatterjee, Satyajit,Eyigungor, Burcu
Larger firms (by sales or employment) have higher leverage. This pattern is explained using a model in which firms produce multiple varieties and borrow with the option to default against their future cash ow. A variety can die with a constant probability, implying that bigger firms (those with more varieties) have lower coefficient of variation of sales and higher leverage. A lower risk-free rate benefits bigger firms more as they are able to lever more and existing firms buy more of the new varieties arriving into the economy. This leads to lower startup rates and greater concentration of sales.

The Transition from Barter Trade to Impediments of the Dollar System: One Nation, One Currency, One Monopoly
Taskinsoy, John
Before the invention of money (coin or paper) there was barter trading, a form of exchange without the use of a monetary medium such as coinage, paper money, or electronic cash (i.e. Bitcoin); Adam Smith (1776) described barter trade as primitive in his seminal “The Wealth of Nations” book. Since the 2008 global financial crisis, there has been an increase in barter trade by various countries that are; i) heavily indebted with insufficient foreign reserves; ii) imposed sanctions by the U.S. (i.e. Iran, North Korea, Russia, etc.); attempting to avoid the use of dollars in local, regional and international trade; iv) interested in reducing current account and trade deficits. With growing resistance to using US dollar in international trade by China, Russia, Turkey, Venezuela, Iran, North Korea, and Cuba; the question is how much longer can the US dollar keep its “kingpin” currency status? According to economist Jim O'Neill, not very long. The quick rise of Chinese economy and constant threat of Russia will challenge the dollar dominance, and maybe the latest theatrical trade war between the United States and China is the best or only response the U.S. was able to come up with.

The fractional and mixed-fractional CEV model
Axel A. Araneda

The continuous observation of the financial markets has identified some 'stylized facts' which challenge the conventional assumptions, promoting the born of new approaches. On one hand, the long range dependence has been faced replacing the traditional Gauss-Wiener process (Brownian motion), characterized by their stationary independent increments, by a fractional version. On the other hand, the local volatility CEV model, is an efficient formulation which address the 'Leverage effect' and the smile-skew phenomena. In this paper, these two insights are merge and the fractional and mixed-fractional extension of the Constant Elasticity of Variance model are developed. Using the fractional versions of both the Ito's calculus and the Fokker-Planck equation, the transition probability density function of the asset price is obtained as a solution of a non-stationary Feller process with time-varying coefficients; and the analytical valuation formula for the European Call Option is provided. Besides, the greeks are computed and compared with the standard case.

Three Dilemmas for Creating a Long-term Board
Fromer Babcock, Ariel,Eccles, Robert G.,Williamson, Sarah Keohane
Arguably among a company’s biggest untapped strategic assets, a well-functioning corporate board of directors wields the power to meaningfully influence the purpose, culture, and direction of an organization. While many boards may display good corporate governance principles, the most effective boards at leading companies for long-term value creation are truly long-term boards. These long-term boards may look different around the world, but they share a few key characteristics:Time spent on Strategy â€" Long-term boards prioritize the future of the business, including spending significant time on strategy, business model, risks, and the company’s value creation proposition. Directors as Owners â€" Long-term boards build and perpetuate an effective board over time by acting like owners, aligning the board’s interests with shareholders, often via stock ownership.Board level Engagement with Shareholders â€" Long-term boards possess a strong understanding of the objectives of long-term shareholders and regularly engage with them on topics of strategic importance.However, achieving this combination of characteristics presents the board with three meaningful dilemmas:Should boards devote more time to strategy by spending less time on routine matters or do they need to spend more time on board work overall?Can board members be meaningful owners of the companies they serve without getting caught up in the short-term pressures caused by gyrations in market valuation and volatility?How do board members engage with shareholders without distracting or undermining management?Through a series of in-depth interviews with institutional investors, senior directors, and board consultants we gathered perspectives on how leading boards have tackled these challenges and found that getting these things right often creates a virtuous cycle that entrenches a long-term approach to value creation at the board level.

Trade Policy Uncertainty and Stock Returns
Bianconi, Marcelo,Esposito, Federico,Sammon, Marco
This paper documents new stylized facts on the effects of trade policy uncertainty on stock returns. We exploit quasi-exogenous variation in exposure to policy uncertainty arising from annual votes by US Congress to revoke China's MFN tariff rates between 1990 and 2000. Before the uncertainty was resolved by granting China permanent MFN rates, US manufacturing industries highly exposed to trade policy uncertainty had stock returns 10.4% higher per year than less exposed sectors. We argue that this difference in average returns is a risk premium for exposure to trade policy uncertainty. Indirect exposure to trade policy uncertainty through Input-Output linkages also commands a substantial risk premium.

What Do Mutual Fund Investors Really Care About?
Ben-David, Itzhak,Li, Jiacui,Rossi, Andrea,Song, Yang
Rational investors should account for risk factor exposure when allocating capital to mutual funds. Two recent influential studies use mutual fund flows to test whether investors distinguish between performance driven by managers' skill and systematic risk factors. Both studies found that investors use the Capital Asset Pricing Model (CAPM), and one concluded that the CAPM is the "closest to the true asset pricing model." We re-examine these results and show that, in fact, fund flow data are most consistent with investors relying blindly on fund rankings (specifically, Morningstar ratings) and chasing recent returns. We find no evidence that investors account for any of the common systematic risk factors when allocating capital among mutual funds.

Who Values Access to College?
Athreya, Kartik,Ionescu, Felicia,Neelakantan, Urvi,Vidangos, Ivan
A first glance at US data suggests that college -- given its mean returns and sharply subsidized cost for all enrollees -- could be of great value to most. Using an empirically-disciplined human capital model that allows for variation in college readiness, we show otherwise. While the top decile of valuations is indeed large (40 percent of consumption), nearly half of high school completers place zero value on access to college. Subsidies to college currently flow to those already best positioned to succeed and least sensitive to them. Even modestly targeted alternatives may therefore improve welfare. As proof of principle, we show that redirecting subsidies away from those who would nonetheless enroll -- towards a stock index retirement fund for those who do not even when college is subsidized -- increases ex-ante welfare by 1 percent of mean consumption, while preserving aggregate enrollment and being budget neutral.