Research articles for the 2019-03-27

Appendix To 'Public Liquidity and Financial Crises'
Li, Wenhao
This is the Appendix of the paper "Public Liquidity and Financial Crises",

Assessment of Intellectual Capital Influence on Corporate Value as a Field for Further Investigations in Corporate Finance
Feruleva, Natalia,Ivashkovskaya, Irina
In this paper we are going to review both theoretical studies in the field of intellectual capital measurement and empirical research, devoted to analyses of intellectual capital influence on companies’ value and financial performance. As a result, potential areas for further investigations in this field were revealed.Considering groups of intellectual capital measurement methods, we identified that direct intellectual capital methods and scorecard methods are the most appropriate for the purpose of IC components measurement. To obtain objective results of measurement it seems reasonable to develop system of proxy indicators for all intellectual capital components (human, structural and relational capitals) and subcomponents (process and innovation, client and network capitals). Basing on existing literature, we make an attempt to identify and systemize indicators, associated with intellectual capital and reveal that network capital metrics remain under-researched and deserve closer examination. It was also found that investigators should develop the system of intellectual capital indicators, taking into account industry specificity. As for empirical studies, in order to investigate the influence of intellectual capital on corporate value and financial performance, it seems reasonable to elaborate models, which include factors, associated with all intellectual capital components and subcomponents and, what is just as important, their interrelations. Furthermore, it is vital to investigate the relationships between the values of IC components for companies. The models should be adopted for both developed and developing countries. It is also important to analyze the influence of intellectual capital in various industries separately, taking into consideration phase of economic cycle.

Bank Regulatory Reforms and Institutional Equity Holdings
Bowe, Michael,Kolokolova, Olga,Michalski, Marcin
This paper examines the effects of changes in bank regulatory environment on the risk, return, and liquidity characteristics of equity portfolios of U.S. bank holding companies between 1997 and 2016. Using a comprehensive sample of bank and hedge fund holdings data we examine the impact of the repeal of the Glass-Steagall Act, the introduction of the second and third Basel Capital Accords, and the implementation of the Dodd-Frank legislation on institutional portfolios. We document a significant increase in both the idiosyncratic volatility and illiquidity of banks' portfolios during the period of financial deregulation initiated by the formal removal of restrictions prohibiting banks from engaging in securities trading. In contrast, subsequent reforms of the bank capital requirements system and the prohibition of banks from proprietary trading activities lead to reductions in those metrics. Our results suggest that banks' restricted ability to engage in market-making can be offset by the activities of hedge funds, although the consequences of this substitution for long-term market stability remain unclear.

Calidad de la información contable y el acceso al endeudamiento en Bolívar (Accounting Quality and Debt Access in Bolivar)
Gutiérrez Ruiz, Juan
Spanish Abstract: El objetivo de este trabajo es estudiar la relación entre la calidad de la información contable y el acceso al endeudamiento en Bolívar, usando una muestra representativa de empresas no listadas en bolsa. Los resultados del estudio muestran que firmas con mayor calidad contable tienen en promedio mayor endeudamiento, pero esta mayor calidad no se ve reflejada en menores tasas de interés, lo que sugiere problemas de ineficiencia y de selección adversa en el mercado privado de deuda.English Abstract: In this paper we study the relationship between accounting quality and debt using a sample of non-listed companies in Bolivar, Colombia. We predict that companies with higher accounting quality has in average major access to debt, but this quality doesn't result in better interest rates compared with firms with lower accounting quality, suggesting an adverse selection problem in the private debt market.

Capital Structure Choice Under Asymmetric Information and Overconfident Managers
Ji, Xiehua,Miglo, Anton
Traditional pecking-order theory (POT) cannot explain why good-quality firms issue equity: this is often considered to be an empirical puzzle. We build a model of capital structure that has elements of both asymmetric information and behavioral finance. Firms have private information about their expected performance. The model also includes overconfident managers. Our model predicts that high-quality firms may issue equity in equilibrium, which contrasts the results in Fairchild (2005). Unlike in Fairchild (2005), managers are not equally overconfident and no exogenously given bankruptcy costs exist in our model. We test our model using a large set of data from the U.S. market and find strong empirical support.

Derivative of a Conic Problem with a Unique Solution
Enzo Busseti

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.

Determinants of Financial Inclusion: New Evidence from Panel Data Analysis
Chu Khanh, Lan,Nguyen, Minh Phuong ,truong, huong
We find evidence that favorable socioeconomic conditions in terms of income, financial development, institutional quality, population growth rate, and human development foster the development of inclusive finance. There are differences in the determinants of financial inclusion as well as its three dimensions between country groups.

Determining the Demand Elasticity in a Wholesale Electricity Market
Sergei Kulakov,Florian Ziel

The main focus of researchers in energy markets is typically placed on the analysis of the supply side. The demand side, despite its critical importance, still requires a more profound academic investigation. In particular, the number of studies on the demand elasticity in a wholesale market is limited to merely several pieces. In this paper we extend this field of study and propose a new method for determining the demand elasticity. More specifically, we decompose the data observed in the wholesale market into individual supply and demand schedules of the market participants. These schedules are then used to construct a fundamental model of an electricity market. The main feature of our fundamental model is that our demand curve is not perfectly inelastic and is a better approximation of the true demand curve. Hence, our approach allows us to precisely compute the elasticity of the demand curve in an electricity market. Moreover, we obtain a deeper understanding of the bidding behavior of the market participants and hence can make more thorough inferences about the functioning of an electricity market or produce more accurate forecasts.

Do Mutual Funds Trade on Earnings News? The Information Content of Large Active Trades
Chen, Linda H.,Huang, Wei,Jiang, George J.
Using monthly holdings data, we show that while mutual funds generally trade in the direction of earnings surprises, mutual fund trades in aggregate do not have predictive power for future earnings once we control for past firm performance and stock returns. We identify active trades by mutual funds, i.e., trades not passively driven by fund flows, and find that large active trades by mutual funds contain information on future earnings. Moreover, we show that large active mutual fund trades not only significantly increase market responses to earnings announcements but also help incorporate future earnings information into current stock prices. Furthermore, we show that large active mutual fund trades prior to earnings announcements have superior abnormal returns. Finally, we show evidence that mutual fund managers that actively trade on future earnings news are skilled; the top quintile skilled funds on average outperform those in the bottom quintile by 127 bps in four-factor alpha over the subsequent four quarters.

Does Reputational Capital Affect Credit Rating Agencies?: Empirical Evidence from a Natural Experiment in China
Xu, Wenming,Liu, Yan
The subprime crisis of 2007-2008 has led major economics to reform their credit rating regulation. This paper employs a shock-based difference-in-difference research design and tests an implicit hypothesis of the gatekeeper theory supporting such reforms that reputational capital affects credit rating agencies in the China’s debt market. The first market-oriented evaluation in the inter-bank bond market is chosen as the source of the exogenous reputational shock. Using the Medium Term Notes (MTNs) rated by China Chengxin International Credit Rating as benchmarks, we identify a causal relationship that the average yield spread of MTNs rated by China Lianhe Credit Rating increases for around 0.230%-0.361% due to the decrease in its reputational capital. Our research provides favorable evidence to the recent reform measures that aim at increasing the disciplinary power of reputational capital.

Dynamic Optimal Restructuring Policies Under Debt Renegotiation with Positive Externalities
Tan, Yingxian,Luo, Pengfei,Yang, Jinqiang,Ling, Aifan
This paper develops a debt renegotiation model with positive externalities by using Nash bargaining game and explores dynamic optimal downward debt restructure policies in financial distress. A novel feature of our model is the positive externalities, which imply that liquidation threat offered by the shareholders for renegotiation does not bring about any losses for both creditors and shareholders, and that the two parties always benefit from the debt renegotiation. We derive the closed-form expressions for optimal restructure policies. Moreover, we provide theoretical support for the advantages of debt renegotiation with positive externalites since it not only increases firms' value but also dramatically alleviates and even fully eliminates the inefficiency arising from asset substitution. In addition, our model may explain the violation of the absolute priority rule for firms in financial distress. Finally, we discover that firms with a relatively lower risk and larger leverage ratio are more easier to proceed to debt renegotiation, which are documented by empirical evidences.

Entangled in Cryptoassets’ Legal Nature and Governance: Searching for Clear Boundaries or Working for their Removal?
Zatti, Filippo
The increase in the number of disputes before courts and regulatory authorities requires legal scholars to finally question the legal nature of cryptoassets. The few legislative frameworks already in force show the limits of a state-based regulation addressed both to captivate the FinTech industry through the ‘intangible asset’ of legal certainty and to avoid stifling the development of distributed ledger technology (DLT) and blockchains. However, these aims can conflict with regulatory capital market objectives, especially with market integrity and investor protection. ‘Exchange platforms’ and initial coin offerings can cause fraud and scams. Currently, these concepts affect ‘only’ private and commercial law, but what will happen when public law dimension is also affected? It is likely that the wait to find out will not be long if we consider the emergence of securities tokenization. Thus, the time has come to decide whether to clarify the legal boundaries between cryptoassets and fiat money, securities and commodities or to use this new technology to have more efficient and less costly financial markets by removing the legal border between crypto space and the ‘physical world economy’. Considering this aspect, the involvement of international organizations should be encouraged.

Financial Regulation: Its Objectives and Their Implementation in the European Union
Wymeersch, Eddy
On the basis of an analysis of the objectives of financial regulation, this paper analyses the extent to which these principles are implemented in the European Union, considering the specific legal structure of its financial regulation and the implementation by national competent authorities. The resulting landscape is one of considerable diversity and complexity, creating inefficiencies and distortions. The effect of this diversity on the integration of the financial markets should not been underestimated. The European Supervisory Authorities or ESA make serious efforts to reduce the level of diversity, but more in-depth exercises are needed.

Fiscal Multipliers and Foreign Holdings of Public Debt
Broner, Fernando,Clancy, Daragh,Erce, Aitor,Martin, Alberto
This paper explores a natural connection between fiscal multipliers and foreign holdings of public debt. Although fiscal expansions can raise domestic economic activity through various channels, they can also have crowding-out effects if the resources used to acquire public debt reduce domestic consumption and investment. These crowding-out effects are likely to be weaker when governments have access to foreign markets to place their debt, increasing the size of multipliers. We test this hypothesis on (i) post-war US data and (ii) data for a panel of 17 advanced economies from the 1980's to the present. To do so, we assemble a novel database of public debt holdings by domestic and foreign creditors for a large set of advanced economies. We combine this data with standard measures of fiscal policy shocks and show that, indeed, the size of fiscal multipliers is increasing in the share of public debt held by foreigners. In particular, the fiscal multiplier is smaller than one when the foreign share is low, such as in the U.S. in the 1950's and 1960's and Japan today, and larger than one when the foreign share is high, such as in the U.S. and Ireland today.

Forecasting Realized Correlations: A MIDAS Approach
Kostrov, Alexander,Tetereva, Anastasija
Mixed data sampling (MIDAS) regression has received much attention in relation to modeling financial time series due to its flexibility. Previous work has mainly focused on forecasting of realized volatilities and has rarely been used to predict realized correlations. This paper considers a MIDAS approach to forecast realized correlation matrices. A MIDAS model is estimated via nonlinear least squares (NLS) using an analytical gradient-based optimization. Based on the model confidence set (MCS) procedure we discover that the introduced approach is superior compared to the established heterogeneous autoregressive (HAR) model in terms of out-of-sample forecasting accuracy. This preeminence is due to the flexible data-driven origin of the MIDAS model. The latter results in higher economic value with regard to portfolio management applications. The improvement is considerable for longer forecasting horizons both in calm times and during the periods of market turbulence.

Foreign Shareholders and Corporate Governance in Japan
Iida, Hidefusa
Shareholders are one of the most critical players in corporate governance. Contrary to the stereotypical understanding of Japanese companies, widely held equity ownership and foreign investors constituting the largest investor category are commonly observed in large Japanese companies. Given this shareholding structure, foreign shareholders have a potentially significant influence on corporate governance in Japan; however, their role has rarely been analyzed from the perspective of corporate law. This paper argues that the current legal environment is at the halfway point in its attempt to get the most out of their potential influence. The aggressive shareholder activism by foreign investors has faced the skeptical attitude of not only the target company’s management, but also the government and the courts. Although the recent reform in corporate governance led by the government is bringing about a change in the business environment, it is too early to conclude that it will eliminate the resistance against shareholders’ activism. This paper argues that the law should prepare the environment to support mild shareholder engagement by relatively passive investors, such as those encouraging the collaboration among institutional investors.

Foreign and Domestic Loans over the Business Cycle
Forssbæck, Jens,Lundtofte, Frederik,Strieborny, Martin,Vilhelmsson, Anders
During good economic times, domestic firms’ probability of obtaining loans from foreign banks increases in the firm’s opacity. During downturns in the domestic economy, this relation reverses as the probability of obtaining a foreign loan decreases for all firms, but drops disproportionately for opaque borrowers. Firms that are in closer proximity to foreign banks by some measure (such as firms with a higher share of foreign sales) are always more likely to obtain foreign loans due to lower transaction costs. We derive these predictions in a formal theoretical framework and confirm them empirically using a loan-bank-firm level dataset covering forty countries during the 1999â€"2016 period.

Is Too Much Liquidity Harmful to Economic Growth?
Chu Khanh, Lan,Chu, Hung
This paper provides evidence on the relationship between financial liquidity and economic growth. Using a panel data of 136 countries, we find that there exists a threshold above which the marginal effect of financial liquidity on economic growth becomes negative. In particular, the turning points for which domestic credit to private sector and stock market turnover start having negative effect on growth are 104% GDP and 105% respectively. Our results are robust to country income level groups, alternative model specifications, proxies for financial liquidity, and are not driven by macroeconomic volatility, banking crises, stock market crashes.

Large Shareholders and Financial Distress
Opp, Christian C.
I examine large shareholders' externalities on other claim holders when firms are financially distressed. To this end, I develop a tractable dynamic model of the interplay between these blockholders and regular equity holders. Blockholders' information acquisition and investment decisions play a pivotal role in distressed firms' access to finance, affecting both total firm value and its distribution across claims. The impact on distress costs is non-monotone; whereas blockholders' information exacerbates debt overhang for intermediate levels of distress, it increases firms' survival chances in deep distress. These findings reveal that frictions delaying block acquisitions to "last minute" rescue interventions can in fact be efficiency-enhancing.

Loss Streaks and Turnaround in Private Family and Non-Family Firms
Kettunen, Jukka,Martikainen, Minna,Voulgaris, Georgios
This study provides new evidence on family vs. non-family firm long-termism by showing that the loss streaks are longer in family firms compared to non-family firms. Specifically, we study whether family ownership combined with employee retention and patents contributes to the length of loss streaks and on the other hand, successful and sustainable turnaround of declining private firms. Interestingly, we show that this retrenchment strategy helps family firms to achieve a more sustainable turnaround than non-family firms. To test our hypotheses, we use a unique survey-based randomly selected dataset from Finland, an economy with a substantial presence of private family firms. In non-family firms, similar investments do contribute to shorter loss periods, but less sustainable turnaround in non-family firms. Additionally we show that within family firms the long-termism is moderated by ownership concentration. As summary our results are consistent with the notion that family firms are more long-term oriented than non-family firms.

Machine Learning for Pricing American Options in High Dimension
Ludovic Goudenège,Andrea Molent,Antonino Zanette

In this paper we propose an efficient method to compute the price of American basket options, based on Machine Learning and Monte Carlo simulations. Specifically, the options we consider are written on a basket of assets, each of them following a Black-Scholes dynamics. The method we propose is a backward dynamic programming algorithm which considers a finite number of uniformly distributed exercise dates. On these dates, the value of the option is computed as the maximum between the exercise value and the continuation value, which is approximated via Gaussian Process Regression. Specifically, we consider a finite number of points, each of them representing the values reached by the underlying at a certain time. First of all, we compute the continuation value only for these points by means of Monte Carlo simulations and then we employ Gaussian Process Regression to approximate the whole continuation value function. Numerical tests show that the algorithm is fast and reliable and it can handle also American options on very large baskets of assets, overcoming the problem of the curse of dimensionality.

Market Dynamics: On Directional Information Derived From (Time, Execution Price, Shares Traded) Transaction Sequences
Vladislav Gennadievich Malyshkin

A new approach to obtaining market--directional information, based on a non--stationary solution to the dynamic equation "future price tends to the value that maximizes the number of shares traded per unit time" [1] is presented. In our previous work[2], we established that it is the share execution flow ($I=dV/dt$) and not the share trading volume ($V$) that is the driving force of the market, and that asset prices are much more sensitive to the execution flow $I$ (the dynamic impact) than to the traded volume $V$ (the regular impact). In this paper, an important advancement is achieved: we define the "scalp--price" ${\cal P}$ as the sum of only those price moves that are relevant to market dynamics; the criterion of relevance is a high $I$. Thus, only "follow the market" (and not "little bounce") events are included in ${\cal P}$. Changes in the scalp--price defined this way indicate a market trend change --- not a bear market rally or a bull market sell--off. The software calculating the scalp--price given market observations triples (time, execution price, shares traded) is available from the authors.

Opening the Black Box of Capital Investment: The Roles of Capital Expenditure Budget and Execution
Hilary, Gilles,Ma, Mark (Shuai),Yan, Wenjia
In spite of intensive research on capital expenditure efficiency, a firm’s internal investment decision process remains largely a black box. We analyze this process by decomposing it into two stages: budgeting of capital expenditures and execution of the budget. We find that these two stages have different effects on investment efficiency and that accounting quality and board independence affect them differently. Further, while opportunistic managers massively over-execute investment budgets, managers with high ability strategically find a level of execution errors that optimizes their compensation while remaining undetected by boards. These strategic execution deviations entail significant costs for their employers.

Parallel Experimentation in a Competitive Advertising Marketplace
Xiliang Lin,Harikesh S. Nair,Navdeep S. Sahni,Caio Waisman

When multiple firms are simultaneously running experiments on a platform, the treatment effects for one firm may depend on the experimentation policies of others. This paper presents a set of causal estimands that are relevant to such an environment. We also present an experimental design that is suitable for facilitating experimentation across multiple competitors in such an environment. Together, these can be used by a platform to run experiments "as a service," on behalf of its participating firms. We show that the causal estimands we develop are identified nonparametrically by the variation induced by the design, and present two scalable estimators that help measure them in typical high-dimensional situations. We implement the design on the advertising platform of, an eCommerce company, which is also a publisher of digital ads in China. We discuss how the design is engineered within the platform's auction-driven ad-allocation system, which is typical of modern, digital advertising marketplaces. Finally, we present results from a parallel experiment involving 16 advertisers and millions of users. These results showcase the importance of accommodating a role for interactions across experimenters and demonstrates the viability of the framework.

Participation Following Sudden Access
Fuchs-Schundeln, Nicola,Haliassos, Michael
This paper employs the German reunification "experiment" to study how sudden access to previously unavailable financial products, supported by knowledgeable practitioners, influences participation. Findings provide new perspectives on participation and inertia. Controlling for characteristics, East Germans experienced a jump in securities participation to a level comparable to West Germans' participation immediately following reunification, and to an even higher level for consumer debt, while exhibiting inertia in previously accessible products. They showed no signs of subsequent retreat. Lower financial resources are the most important characteristic explaining lower East German participations in all asset classes, while expectations and peer effects are important drivers of the high East German debt participation. Average income among the new peers has had larger effects on East than on West German participation in both securities and consumer debt.

Pecking Order Theory for Government Finance
Miglo, Anton
In this article we argue that asymmetric information can explain why seignorage is an inferior choice to debt for governments. We also argue that the Ricardian equivalence for governments is very similar to what the Modigliani-Miller proposition is for corporations. Our model is based on Bolton and Huang (2018) in that money for governments is similar to what equity is for corporations. In contrast to their model, our model considers rational economic agents.

Political Ties and Capital Raising in Global Markets: Evidence from Yankee Bonds
Ambrocio, Gene,Gu, Xian,Hasan, Iftekhar
This paper examines whether state-to-state political ties help to obtain better terms when raising capital in global capital markets. Focusing on publicly issued Yankee bonds, we observe that firms from countries with close political ties to the US have been successful in reducing borrowing costs. Specifically, a one-standard-deviation improvement in such ties can lead to a 5 to 14 percent reduction in at-issue yield spreads. Such an association is more pronounced for firms located in countries that are highly indebted, in government-related industries, and during home-country recessions. Our study sheds lights on the importance of country-level political relationships in international fund-raising.

Regulating Algorithmic Insurance
Swedloff, Rick
This article addresses emerging gaps in consumer protection. As is true in other industries, insurers are revolutionizing their practices with artificial intelligence and big data. Insurers are finding new ways to price risks and policies, tailor coverage, offer advice to purchasers, identify fraud, and sequence the payment of claims. Regulators are struggling to keep up with these changes and these changes have subverted the protections for consumers built into current regulatory regimes.This is not a niche problem. Insurance regulation is a necessary part of solving complex market failures in this vital industry. Insurance is a critical part of the United States economy, raking in over 1.2 trillion dollars in premiums a year; employing more than 2.5 million people; and undergirding transactions as simple as home purchases and as complex as corporate mergers and acquisitions, the multi-trillion-dollar tort system, and a vast system of private risk management and loss avoidance advice. The market for insurance is, however, surprisingly inefficient. Deep information asymmetries make it difficult for consumers to evaluate the quality of policies and carriers, insurers to price risks properly, and make it possible for both sides to act opportunistically. What’s more, behavioral barriers hamper purchasers, who often buy too little or the wrong insurance. And, in some markets, private insurers might not be willing to supply enough insurance because the underlying risks cannot be adequately spread. Most of the previous legal scholarship about algorithmic justice has been in the context of information platforms, criminal justice, and employment discrimination. This article connects to those discussions and expands them in the specific context of insurance. It does so by providing a taxonomy of the changes in the insurance industry, the potential danger to consumers as a result of those changes, the reasons for regulation, and the ways that regulators must adapt to protect individual consumers and the insurance market.

Stress Testing Household Balance Sheets in Luxembourg
Giordana, Gastón,Ziegelmeyer, Michael
This paper uses representative individual household data from Luxembourg to evaluate how severe economic conditions could affect bank exposure to the household sector. Information on household income, expenses and liquid assets are used to calculate household-specific probabilities of default (PD), aggregate bank exposure at default (EAD) and aggregate bank loss given default (LGD). The exercise is repeated with scenarios combining severe but plausible shocks to real estate prices, bonds and stocks, household income and interest rates. Compared to the no-shock baseline, the LGD rises by a multiple of eight, reaching 4.2% of total bank exposure to the household sector. The high-stress scenario also generates a relatively high percentage of defaults among socio-economically disadvantaged households. Our main conclusion is that bank losses appear to be quite sensitive to financial stress, despite three mitigating factors in Luxembourg: indebted households tend to hold liquid assets that can help smooth shocks, household leverage tends to decline rapidly once mortgages have been serviced several years, and loan-to-value ratios at origination appear not to be excessive.

Stress Testing Networks: The Case of Central Counterparties
Berner, Richard,Cecchetti, Stephen G.,Schoenholtz, Kermit
Stress tests applied to individual institutions are an important tool for evaluating financial resilience. However, financial systems are typically complex, heterogeneous and rapidly changing, raising questions about the adequacy of conventional tests. In this paper, we interpret the current stress test practice from a network perspective, highlighting central counterparties (CCPs) as an example of a critical network hub. Networks that include CCPs involve deep and broad interconnections, making stress testing a challenging task. We propose supplementing both private and supervisory CCP stress tests with a high-frequency indicator constructed from a market-based estimate of the conditional capital shortfall (SRISK) of the CCP's clearing members. Applying our measure to two large CCPs, we analyze how they can transmit and amplify shocks across borders, conditional on the exhaustion of prefunded resources. Our results highlight how the network created by central clearing can act as an important transmission mechanism for shocks emanating from Europe.

The Dark Side of Licensing Cryptocurrency Exchanges as Payment Institutions
Nabilou, Hossein
The ultimate objective of cryptocurrencies is to become a payment system substituting, complementing, or competing with the existing conventional fiat-based payment systems. Irrespective of whether such an objective could be accomplished, the functional similarities between certain cryptocurrencies and fiat money has persuaded competent authorities of certain EU Member States to grant payment institution licenses to cryptocurrency exchanges. At first blush, granting such an authorization would seem to be a step forward as it would bring otherwise unregulated cryptocurrency exchanges within the scope of the existing payment regulatory framework. However, such an authorization not only faces major legal challenges related to the definition of a payment institution, but also introduces new lesser-known risks. Aside from the semantic and definitional issues, authorizing cryptocurrency exchanges as payment institutions can bring activities and instruments - with a different risk profile than that of conventional payment instruments - within the scope of payment systems. It appears that such risks embedded in those instruments cannot be fully addressed under the existing payment laws.This paper studies two examples of unattended risks under the cryptocurrency-exchange-as-payment-institution regime. The first risk concerns the use of untethered, non-convertible, illiquid and volatile settlement assets for settlement purposes in cryptocurrency exchanges. The second risk concerns the risks associated with finality of settlements arising from the use of probabilistic finality in some of the most popular cryptocurrency blockchains. Given that in the conventional payment institutions central bank money or commercial bank money is primarily used as the settlement asset, such risks have already been addressed or otherwise taken for granted, however, in cryptocurrency exchanges, the risks involved in the settlement of liabilities with an illiquid and volatile asset relying on probabilistically final settlement mechanism cannot be dealt with by the existing applicable regulations. As the risks cannot be addressed within the current European payment regulation framework, an alternative policy option would be granting a special license to cryptocurrency businesses or introducing ring-fencing mechanism to protect the conventional payment systems from the risks of cryptocurrency payments.

The Effect of Loan Loss Recognition Timeliness in the Banking System on Firms’ Investment Efficiency
Mengistu, Muhabie Mekonnen,Ng, Jeffrey,Saffar, Walid
In this study, we examine whether the timely recognition of loan losses by banks affects firms’ investment efficiency. The timely recognition of loan losses serves as an early warning mechanism of a bank’s problem loans, which, in turn, triggers earlier scrutiny of the banks by various stakeholders. Such scrutiny increases banks’ incentives to closely monitor and advise client firms about their investment decisions. Using data from over 50 countries across 21 years, we document that more timely recognition of loan losses by banks reduces firms’ investment inefficiencies (underinvestment and overinvestment). We further find that the reduction in investment inefficiencies is more pronounced in countries with stringent bank supervision, and in firms that are more opaque and have fewer investment opportunities. Finally, using the establishment of public credit registries as a shock to bank monitoring, we provide further support for a causal link between the timely recognition of loan losses and firms’ investment efficiency. Overall, our study offers new insights by showing that the accounting system used by one party (lenders) can affect the real economic decisions of the other contracting party (borrowers).

The Future of Data-Driven Finance and RegTech: Lessons from EU Big Bang II
Zetzsche, Dirk A.,Arner, Douglas W.,Buckley, Ross P.,Weber, Rolf H.
Europe’s path to digitization and datafication in finance has rested upon four apparently unrelated pillars: (1) extensive reporting requirements imposed after the Global Financial Crisis to control systemic risk and change financial sector behavior; (2) strict data protection rules reflecting European cultural concerns about dominant actors in the data processing field; (3) the facilitation of open banking to enhance competition in banking and particularly payments; and (4) a legislative framework for digital identification imposed to further the European Single Market. The paper analyzes these four pillars and suggests that together they will underpin the future of digital financial services in Europe, and â€" together â€" will drive a Big Bang transition to data-driven finance. These seemingly unrelated pillars together bolster an emerging ecosystem which aims to promote a balance among a range of sometimes conflicting objectives, including systemic risk, data security and privacy, efficiency, and customer protection. Furthermore, we argue Europe’s financial services and data protection regulatory reforms have unintentionally driven the use of regulatory technologies (RegTech) by intermediaries, supervisors and regulators, thereby laying the foundations for the digital transformation of both EU financial services and financial regulation. The experiences of Europe in this process provide insights for other societies in developing regulatory approaches to the intersection of data, finance and technology.

The Impact of Gender Quota Laws on Board Composition, Risk Taking and Performance of Banks: International Evidence
Liao, Rose C.,Loureiro, Gilberto R.,Taboada, Alvaro G.
We exploit the staggered implementation of laws mandating higher female representation on boards of directors to assess their impact on bank risk taking and performance. Using a sample of 444 banks from 39 countries between 2008 and 2017, we identify several stylized facts. First, we show that quota laws lead to a significant increase in female board representation of about 38% of the sample average. Second, post reform, female directors are generally more likely to be independent, have more executive experience, and tend to serve on more outside boards relative to their male counterparts. Third, we find an increase in bank risk taking post reforms for banks without female directors before the law is passed. Finally, we show that the impact of gender quota laws varies greatly across countries; we document positive effects of quota laws (lower risk taking and improved performance) for banks in countries with a larger female labor force, with lower gender gaps in math scores, and with stronger institutional quality, but find opposite effects in countries with smaller female labor force, higher gender gaps, and weaker institutional quality.

The Impact of Terrorist Attacks in G7 Countries on International Stock Markets and the Role of Investor Sentiment
Papakyriakou, Panayiotis,Sakkas, Athanasios,Taoushianis, Zenon
We consider terrorism acts in G7 countries over the period 1998-2017 and examine their impact on a sample of stock market indices from 66 countries. Using an event-study methodology we find that stock markets decline significantly on the event day and on the following trading day. We further consider the investor sentiment following the attacks, based on the content of country-level news stories and social media sources, and find that indices in countries associated with higher declines in the post-event sentiment, exhibit significantly higher economic losses. Our data and results are robust to several settings; these include using samples of events from different studies, excluding the 9/11 terrorist attack from the sample of events, excluding stock market indices of G7 countries from the sample of equity data and utilizing more sophisticated event-study methodologies.

The Long-Run Determinants of Indian Government Bond Yields
Akram, Tanweer,Das, Anupam
This paper investigates the long-term determinants of the nominal yields of Indian government bonds (IGBs). It examines whether John Maynard Keynes’ supposition that the short-term interest rate is the key driver of the long-term government bond yield holds over the long run, after controlling for key economic factors. It also appraises if the government fiscal variable has an adverse effect on government bond yields over the long run. The models estimated in this paper show that in India the short-term interest rate is the key driver of the long-term government bond yield over the long run. However, the government debt ratio does not have any discernible adverse effect on IGB yields over the long run. These findings will help policy makers to (i) use information on the current trend of the short-term interest rate and other key macro variables to form their long-term outlook about IGB yields, and (ii) understand the policy implications of the government’s fiscal stance.

The Procyclicality of Banking: Evidence from the Euro Area
Huizinga, Harry,Laeven, Luc
Loan loss provisions in the euro area are negatively related to GDP growth, i.e., they are procyclical. Loan loss provisions tend to be more procyclical at larger and better capitalized banks. The procyclicality of loan loss provisions can explain about two-thirds of the variation of bank capitalization over the business cycle. We estimate that provisioning procyclicality in the euro area is about twice as large as in other advanced economies. This difference reflects a larger procyclicality of provisioning in euro area countries already prior to euro adoption, and the divergent growth experiences of euro area countries following the global financial crisis.

The Total Risk Premium Puzzle
Jorda, Oscar,Schularick, Moritz,Taylor, Alan M.
The risk premium puzzle is worse than you think. Using a new database for the U.S. and 15 other advanced economies from 1870 to the present that includes housing as well as equity returns (to capture the full risky capital portfolio of the representative agent), standard calculations using returns to total wealth and consumption show that: housing returns in the long run are comparable to those of equities, and yet housing returns have lower volatility and lower covariance with consumption growth than equities. The same applies to a weighted total-wealth portfolio, and over a range of horizons. As a result, the implied risk aversion parameters for housing wealth and total wealth are even larger than those for equities, often by a factor of 2 or more. We find that more exotic models cannot resolve these even bigger puzzles, and we see little role for limited participation, idiosyncratic housing risk, transaction costs, or liquidity premiums.

Token Offerings: A Revolution in Corporate Finance?
Momtaz, Paul P.,Rennertseder, Kathrin,Schröder, Henning
Token offerings or initial coin offerings (ICOs) are smart contracts based on blockchain technology designed to raise external finance without an intermediary. The new technology might herald a revolution in entrepreneurial and corporate finance, with soaring market growth rates over the last two years. This paper surveys the market evolution, offering mechanisms, and token types. Stylized facts on the pricing and long-term performance of ICOs are presented, and practical implications for this young market to thrive are discussed.

Towards hybrid price discrimination via neighbours properties in network-driven economy
Jacopo Arpetti,Antonio Iovanella

Increased data gathering capacity, together with the spreading of data analytics techniques, has allowed an unprecedented concentration of information related to the individuals' preferences in the hands of a few gatekeepers. In such context, the traditional economic literature has been attempting to frame all the data-driven economy features. Such features, although being able to bring about a more efficient matching of people and relevant purchase opportunities, also result into distortions and disequilibria, up to market failures. Data-economy market disequilibria can be decrypted by leveraging on some of the known network properties, thus obtaining general results suitable for building a new theoretical framework for economic phenomena. Starting from the hypothesis that a digital company can always benefit from an underlying network of consumers or items related to its market, their representation can indeed provide significant competitive advantages, also enhancing the platforms' capacity to implement discriminatory practices by means of an increased ability to estimate individuals' preferences. In the present paper, we propose a measure called Information Patrimony, considering the amount of information available within the system and we look into how platforms may exploit data stemming from connected profiles within a network, with a view to obtaining competitive advantages. Such information flow may eventually allow to envisage the emergence of a new hybrid price discrimination pattern, through which platforms may influence and steer individuals' purchase choices, as well as to apply different prices to different customers.

Trade Duration Risk in Subdiffusive Financial Models
Torricelli, Lorenzo
Subdiffusive processes can be used in finance to explicitly accommodate the presence of random waiting times between trades or ''duration'', which in turn allows the modelling of price staleness effects. Option pricing models based on subdiffusions are incomplete, as they naturally account for the presence of a market risk of trade duration. However, when it comes to pricing this risk matters are quite subtle, since the subdiffusive Levy structure is not maintained under equivalent martingale measure changes unless the price of this risk is set to zero. We argue that this shortcoming can be resolved by introducing the broader class of tempered subdiffusive models. We highlight some additional features of tempered models that are consistent with economic stylized facts, and in particular explain the role of the stability and tempering parameters in capturing the time multiscaling properties of equity prices. Finally, we show that option pricing can be performed using standard integral representations.

When Investors Call for Climate Responsibility, How Do Mutual Funds Respond?
Ceccarelli, Marco,Ramelli, Stefano,Wagner, Alexander F.
In April 2018, the investment platform and financial advisor Morningstar introduced a new eco-label for mutual funds, the Low Carbon Designation (LCD). The unexpected release of this label induced responses by (1) investors and (2) mutual funds. First, investors flocked to funds labeled as Low Carbon. Through the end of 2018, such funds enjoyed a 3.1% increase in assets compared to otherwise similar funds. This effect was distinct from that of more generic sustainability ratings ("Globes"), and it reversed for funds that lost the label in August or November 2018. Second, managers of just-missing funds adjusted their holdings towards lower carbon risk and lower fossil fuel involvement, the two criteria used to assign the LCD. Both the rewards-for-LCD and the moving-towards-LCD effects are stronger for European funds, retail funds, funds with weak financial performance, and low-sustainability funds. Overall, the findings suggest that as investors become more sensitive to the topic of climate change, financial intermediaries also use existing investment vehicles to respond to the increasing demand for climate-conscious investment products.

Who Pays a Visit to Brussels? Cross-Border Firm Value Effects of Meetings with European Commissioners
Biguri, Kizkitza,Stahl, Jörg
Analyzing novel data on meetings of U.S. company representatives with European Commission officials in Brussels from end 2014 to mid 2018, we find that meetings with European Commissioners are associated with substantial positive abnormal equity returns. We provide insights on the characteristics and lobbying efforts of U.S. companies that seek political access at the European Commission. Our results suggest that access to policy makers at the European Union’s executive branch is highly valuable for firms. We identify a channel that can explain the positive value effects. Compiling a novel data set on decisions of merger cases at the European Commission, we show that U.S. firms with Commission meetings are significantly more likely to receive a favorable decision than their peers without political access. In addition, we find that U.S. firms with political access disproportionately locate their European subsidiaries in countries that can be considered tax havens. This suggests that these firms have a strong interest in maintaining the current EU tax environment, which benefits multinationals. Our study contributes to the scant literature on political access to the executive branch, and it presents novel evidence on the value of political access in a cross-border setting.

Why Member Firms Hold More Cash When They Have Access to the Business Group’s Finance Company? Empirical Evidence of Tunneling from China
Peng, Hao,Liu, Hong,Jiang, Yuxiang
In China, firms within a business group may be able to access funds provided by a parent-owned finance company within the business group. We provide direct evidence of ‘tunneling’: where the parent of the business group requires member firms to increase their cash holdings through deposits in the group’s finance company and invest the collected deposits in the interbank market or other financial institutions, instead of lending to business group members. The parent of the business group reaps most, if not all, the profits from the finance company, at the expense of member firms’ increased holding in cash. We use the Shenzhen 2007 Anti-tunneling Guidance as the exogenous shock to identify the main results. Our results cannot be explained by the alternative hypotheses that member firms hold more cash holdings as a result of reduced bank monitoring or the parent’s incentive to reallocate capital more efficiently.

Why understanding multiplex social network structuring processes will help us better understand the evolution of human behavior
Curtis Atkisson,Piotr J. Górski,Matthew O. Jackson,Janusz A. Hołyst,Raissa M. D'Souza

Anthropologists have long appreciated that single-layer networks are insufficient descriptions of human interactions---individuals are embedded in complex networks with dependencies. One debate explicitly about this surrounds food sharing. Some argue that failing to find reciprocal food sharing means that some process other than reciprocity must be occurring, whereas others argue for models that allow reciprocity to span domains. The analysis of multi-dimensional social networks has recently garnered the attention of the mathematics and physics communities. Multilayer networks are ubiquitous and have consequences, so processes giving rise to them are important social phenomena. Recent models of these processes show how ignoring layer interdependencies can lead one to miss why a layer formed the way it did, and/or draw erroneous conclusions. Understanding the structuring processes that underlie multiplex networks will help understand increasingly rich datasets, which give better, richer, and more accurate pictures of social interactions.

Zero-Debt Policy under Asymmetric Information, Flexibility and Free Cash Flow Considerations
Miglo, Anton
We build a model of debt for firms with investment projects for which flexibility and free cash flow problems are important issues. We focus on the factors that lead the firm to select the zero-debt policy. Our model provides an explanation of the so-called "zero-leverage puzzle" (Strebulaev and Yang (2013)). It also helps to explain why zero-debt firms often pay higher dividends compared to other firms. In addition, the model generates new empirical predictions that have not yet been tested. For example, it predicts that firms with zero-debt policy should be influenced by free cash flow considerations more than by bankruptcy cost considerations. Also the choice of zero-debt policy can be used by high-quality firms to signal their quality. This is in contrast to most traditional signalling literature such as Leland and Pyle (1977), for example, where debt serves as a signal of quality. The model can explain why the probability of selecting the zero-debt policy is positively correlated with profitability and investment size and negatively correlated with the tax rate. It also predicts that firms that are farther away from their target capital structures are less likely to select the zero-debt policy compared to firms that are close to their target levels.