Research articles for the 2019-04-01

A Research Study on Innovative Strategy Adoption Towards Rising Level of Non-Performing Assets in Banking Industry
Dr. M., Sakthivel Murugan,, S. Ganapathy,Vinayagamurthy, G.
The Indian banking system contributes the majority part for the growth of Indian economy. The growth depends upon the healthy practices adopted by the banks. The best indicator to test the healthy practices of the banks is Non-Performing Assets. NPA is one of the major concerns for the banks in India. Over the years, NPA is considered to be a most alarming issue in the banking sector. The country's lender realized that sourcing of new loans as well as monitoring was key to improving asset quality. Not only has the lender created high entry-level standards for new customers but also ensured financing is done based on cash flow. Therefore, the Government has given more independence for Reserve Bank of India for framing policies and procedures to control NPA. But the question is, how RBI can resolve this major issues happening across all the banking sectors viz., public, private and foreign banks in India. Thus, an attempt has taken to study the NPA performance of banks and to suggest measures for banks to control NPA.

A Study of Adoption of Digital Payment Practices by Retail Shops in Pune Region
Kurode, Tanay
Digitalization of business processes has made very crucial contribution towards industrial as well as economic development. Technological integrations, consumer driven markets and increased competition has forced businesses to remodel the way they have been operating till now. Adoption of digital payment practices being one of such change. Through this study, an attempt is being made towards understanding the adaptation levels of digital payment modes like credit and debit cards, e- wallets, internet banking etc. by the retail shops. A survey was conducted in Pune city area amongst retail shops of varied categories, owners being the respondents. With this study, it can be understood that digital payment practices is the way ahead. This will certainly boost the productivity of businesses along with providing more convenience to the customers.

A Thermodynamic Picture of Financial Market and Model Risk
Yu Feng

By treating the financial market as a thermodynamic system, we establish a one-to-one correspondence between thermodynamic variables and economic quantities. Measured by the expected loss under the worst-case scenario, financial risk caused by model uncertainty is regarded as a result of the interaction between financial market and external information sources. This forms a thermodynamic picture in which a closed system interacts with an external reservoir, reaching its equilibrium at the worst-case scenario. The severity of the worst-case scenario depends on the rate of heat dissipation, caused by information sources reducing the entropy of the system. This thermodynamic picture leads to simple and natural derivation of the characterization rules of the worst-case risk, and gives its Lagrangian and Hamiltonian forms. With its help financial practitioners may evaluate risks utilizing both equilibrium and non-equilibrium thermodynamics.

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 Capital Forbearance
Martynova, Natalya,Perotti, Enrico C.,Suarez, Javier
We analyze the strategic interaction between undercapitalized banks and a supervisor who may intervene by preventive recapitalization. Supervisory forbearance emerges because of a commitment problem, reinforced by fiscal costs and constrained capacity. Private incentives to comply are lower when supervisors have lower credibility, especially for highly levered banks. Less credible supervisors (facing higher cost of intervention) end up intervening more banks, yet producing higher forbearance and systemic costs of bank distress. Importantly, when public intervention capacity is constrained, private recapitalization decisions become strategic complements, leading to equilibria with extremely high forbearance and high systemic costs of bank failure.

Board Diversity and Earnings News Dissemination on Twitter in the UK
El-Helaly, Moataz,Ayman, Ahmed,Shehata, Nermeen F.
We examine corporate adoption of Twitter by UK firms and provide the first empirical evidence on the association between board diversity, as measured by the proportion of foreign and women directors, and the decision to disseminate news in general and earnings news in particular through Twitter. We measure social media dissemination by tracing Twitter posts (tweets) by UK firms between 2013 and 2015. Utilizing the unique data by Spencer and Stuart on board characteristics, we investigate the relationship between diversity and earnings dissemination in top 150 UK companies between 2013 and 2015. We find that our board diversity measures are positively associated with using Twitter to disseminate earnings at least once, with the frequency of using Twitter to disseminate quarterly earnings, and with the number of tweets disseminating financial information. We also provide evidence that the presence of foreign directors is associated with earlier adoption of Twitter as an information dissemination channel. The results are robust to controlling for firm-level characteristics, other board structure variables, and industry and year-fixed effects. Additionally, we show that firms audited by Big Four auditors are more likely to use Twitter to disseminate earnings information. Our findings show the importance of diverse boards in using Twitter as an alternative or additional information dissemination channel.

Characterization of Fully Coupled FBSDE in Terms of Portfolio Optimization
Samuel Drapeau,Peng Luo,Dewen Xiong

We provide a verification and characterization result of optimal maximal sub-solutions of BSDEs in terms of fully coupled forward backward stochastic differential equations. We illustrate the application thereof in utility optimization with random endowment under probability and discounting uncertainty. We show with explicit examples how to quantify the costs of incompleteness when using utility indifference pricing, as well as a way to find optimal solutions for recursive utilities.

Construct Validity in World City Network Research: From Office Location Networks to Inter-Organisational Projects in the Analysis of Intercity Business Flows
Pažitka, Vladimír,Wojcik, Dariusz,Knight, Eric R. W.
The Interlocking World City Network Model (IWCNM) and other office location approaches (OLAs) have become the most widely used empirical models of the world city network (WCN) over the last two decades. Despite numerous methodological improvements, they still rely on Taylor’s (2001) legacy of using data on office locations of firms to indirectly estimate intercity business flows. Notwithstanding criticism from both within the mainstream of the global and world cities research as well as postcolonial and poststructuralist geographers, OLAs maintain their dominant position in recently published research. To advance the dialogue on the appropriateness of OLAs as empirical models of WCN, we consider their construct validity by examining the link between theory and empirical models. We uncover evidence that calls into question the validity of OLAs for empirical modelling of intercity business flows. In the spirit of no deconstruction without reconstruction, we develop a new model based on directly observable business flows, which we call the inter-organisational project approach (IOPA). We deductively argue for IOPA’s construct validity as an empirical model of the WCN and offer empirical evidence for its structural validity. We demonstrate it using a global sample of 161,114 investment bank syndicates in the 2000 â€" 2015 period.

Corporate Social Responsibility and M&A Uncertainty
Arouri, Mohamed ,Gomes, Mathieu,Pukthuanthong, Kuntara
We contribute to the corporate social responsibility (CSR) literature by investigating whether the CSR of acquirers impacts mergers and acquisitions (M&A) completion uncertainty. Using arbitrage spreads following initial acquisition announcements as a measure of deal uncertainty, we document â€" for an international sample of 726 M&A operations spanning the 2004-2016 period â€" a negative association between arbitrage spreads and acquirers’ CSR. Specifically, we show arbitrage spreads are reduced by 1.10 percentage points for each standard deviation unit-increase in the acquirer’s CSR score. Findings are qualitatively similar when we focus on individual CSR dimensions (environmental, social, and governance). Our results suggest the CSR of acquirers is an important determinant of the way market participants assess the outcome of M&As worldwide.

Covered Interest Parity Arbitrage
Rime, Dagfinn,Schrimpf, Andreas,Syrstad, Olav
We show that it is crucial to account for the heterogeneity in funding costs, both across banks and across currency areas, in order to understand recently documented deviations from Covered Interest Parity (CIP). When CIP arbitrage is implemented accounting for marginal funding costs and realistic risk-free investment instruments, the no-arbitrage relation holds fairly well for the majority of market participants. A narrow set of global high-rated banks, however, does enjoy riskless arbitrage opportunities. Such arbitrage opportunities emerge as an equilibrium outcome as FX swap dealers set prices to avoid inventory imbalances. Low-rated banks find it attractive to turn to the FX swap market to cover their U.S. dollar funding, while swap dealers elicit opposite (arbitrage) flows by high-rated banks. Such arbitrage opportunities are difficult to scale, with funding rates adjusting as soon as arbitrageurs increase their positions.

Deep Learning in Asset Pricing
Luyang Chen,Markus Pelger,Jason Zhu

We estimate a general non-linear asset pricing model with deep neural networks applied to all U.S. equity data combined with a substantial set of macroeconomic and firm-specific information. Our crucial innovation is the use of the no-arbitrage condition as part of the neural network algorithm. We estimate the stochastic discount factor (SDF or pricing kernel) that explains all asset prices from the conditional moment constraints implied by no-arbitrage. For this purpose, we combine three different deep neural network structures in a novel way: A feedforward network to capture non-linearities, a recurrent Long-Short-Term-Memory network to find a small set of economic state processes, and a generative adversarial network to identify the portfolio strategies with the most unexplained pricing information. Our model allows us to understand what are the key factors that drive asset prices, identify mis-pricing of stocks and generate the mean-variance efficient portfolio. Empirically, our approach outperforms out-of-sample all other benchmark approaches: Our optimal portfolio has an annual Sharpe Ratio of 2.1, we explain 8% of the variation in individual stock returns and explain over 90% of average returns for all anomaly sorted portfolios.

Dynamic Contracting Under Soft Information
Roger, Guillaume
A principal delegates the running of a project to an agent subject to moral hazard over an infinite horizon, and cannot observe any of the outcomes. The agent sends reports at each instant t; naturally reports may be manipulated. Eliciting truthful revelation is necessary to the provision of effort, and is achievable by using audits and penalties. It requires that the continuation value of the agent be kept large enough, and the agent be terminated below a threshold; she receives an endogenous information rent. That rent is completely determined by the parameters of the moral hazard problem. The optimal audit trades off the instantaneous audit cost versus the drift of the cash flow process. The contract is implemented in standard financial securities. The effect of the governance problem on the cost of capital is subtle: a positive continuation utility at termination implies some recovery by financiers and so decreases the credit spread. But a deterioration in governance increases that spread sharply.

Dynamic Discrete Mixtures for High Frequency Prices
Catania, Leopoldo,Di Mari, Roberto,Santucci de Magistris, Paolo
The tick structure of the financial markets entails that price changes observed at very high frequency are discrete. Departing from this empirical evidence we develop a new model to describe the dynamic properties of multivariate time-series of high frequency price changes, including the high probability of observing no variations (price staleness). We assume the existence of two independent latent/hidden Markov processes determining the dynamic properties of the price changes and the excess probability of the occurrence of zeros. We study the probabilistic properties of the model that generates a zero-inflated mixture of Skellam distributions and we develop an EM estimation procedure with closed-form M step. In the empirical application, we study the joint distribution of the price changes of four assets traded on NYSE. Particular focus is dedicated to the precision of the univariate and multivariate density forecasts, to the quality of the predictions of quantities like the volatility and correlations across assets, and to the possibility of disentangling the different sources of zero price variation as generated by absence of news, microstructural frictions or by the offsetting positions taken by the traders.

Effective Risk Aversion in Thin Risk-Sharing Markets
Anthropelos, Michail,Kardaras, Constantinos,Vichos, George
We consider thin incomplete financial markets, where traders with heterogeneous preferences and risk exposures have motive to behave strategically regarding the demand schedules they submit, thereby impacting prices and allocations. We argue that traders relatively more exposed to the market portfolio tend to behave in a more risk tolerant manner. Noncompetitive equilibrium prices and allocations result as an outcome of a game among traders. General sufficient conditions for existence and uniqueness of such equilibrium are provided, with extensive analysis of two-trader transactions. Even though strategic behaviour causes inefficient social allocations, traders with sufficiently high risk tolerance and/or high initial exposure to tradeable securities obtain more utility gain in the noncompetitive equilibrium, when compared to the competitive one.

Energy and Investing
Cornell, Bradford
This paper examines some of the investment implications of what is called the "great transformation" by which renewable sources of energy replace the current reliance on carbon-based fuels. To set the stage, the paper begins by presenting detailed data on past, current and forecast future energy usage. The data imply that the great transformation will be very expensive. The paper then turns to the question of how the transformation will be financed. It is argued that the political environment will be an important determinant of the financing form.

Environmental Regulation and the Cost of Bank Loans: International Evidence
Fard, Amirhossein,Javadi, Siamak,Kim, Incheol
Using a sample of 27 countries between 1990 and 2014, we find that banks charge a higher interest rate on their loans when lending to firms that face more stringent environmental regulations. Further, we show that firms facing such regulations maintain lower financial leverage, incur more operating expenses, and have fewer banks participating in their loan syndicate. The results of the subsample analysis suggest that the increase in the cost of bank loans is more pronounced for financially constrained firms, firms in industries with high environmental litigation risk, and those located in bank-based economies. Overall, our results provide evidence that the observed higher loan spread is the result of environmentally sensitive lending practices by banks.

Firm Value in Commonly Uncertain Times: The Divergent Effects of Corporate Governance and CSR
Borghesi, Richard,Chang, Kiyoung,Li, Ying
Economic uncertainty disrupts firms’ ability to create value. Most related literature examines how various organizational characteristics affect value under extreme conditions â€" the global financial crisis. However, recent work in quantifying economic uncertainty now makes it possible to take a more nuanced approach in investigating the conditions under which this value reduction can be mitigated during more ‘commonly uncertain’ periods. In this paper we analyze the effects of corporate governance mechanisms and social responsibility investments on Tobin’s q across 13 years and 40 countries. Evidence suggests that shareholder-centric corporate governance policies restrict board and executive flexibility during uncertain times, and therefore stifle their ability to react effectively to adverse macroeconomic changes. We also find that CSR initiatives serve as insurance in that they preserve value under uncertainty by acting as a reservoir of social capital.

Forecasting the Volatilities of Philippine Stock Exchange Composite Index Using the Generalized Autoregressive Conditional Heteroskedasticity Modeling
Novy Ann M. Etac,Roel F. Ceballos

This study was conducted to find an appropriate statistical model to forecast the volatilities of PSEi using the model Generalized Autoregressive Conditional Heteroskedasticity (GARCH). Using the R software, the log returns of PSEi is modeled using various ARIMA models and with the presence of heteroskedasticity, the log returns was modeled using GARCH. Based on the analysis, GARCH models are the most appropriate to use for the log returns of PSEi. Among the selected GARCH models, GARCH (1,2) has the lowest AIC value and also has the highest LL value implying that GARCH (1,2) is the best model for the log returns of PSEi.

Forward transition rates
K. Buchardt,C. Furrer,M. Steffensen

The idea of forward rates stems from interest rate theory. It has natural connotations to transition rates in multi-state models. The generalization from the forward mortality rate in a survival model to multi-state models is non-trivial and several definitions have been proposed. We establish a theoretical framework for the discussion of forward rates. Furthermore, we provide a novel definition with its own logic and merits and compare it with the proposals in the literature. The definition turns the Kolmogorov forward equations inside out by interchanging the transition probabilities with the transition intensities as the object to be calculated.

Game of Variable Contributions to the Common Good under Uncertainty
H. Dharma Kwon

We consider a stochastic game of contribution to the common good in which the players have continuous control over the degree of contribution, and we examine the gradualism arising from the free rider effect. This game belongs to the class of variable concession games which generalize wars of attrition. Previously known examples of variable concession games in the literature yield equilibria characterized by singular control strategies without any delay of concession. However, these no-delay equilibria are in contrast to mixed strategy equilibria of canonical wars of attrition in which each player delays concession by a randomized time. We find that a variable contribution game with a single state variable, which extends the Nerlove-Arrow model, possesses an equilibrium characterized by regular control strategies that result in a gradual concession. This equilibrium naturally generalizes the mixed strategy equilibria from the canonical wars of attrition. Stochasticity of the problem accentuates the qualitative difference between a singular control solution and a regular control equilibrium solution. We also find that asymmetry between the players can mitigate the inefficiency caused by the gradualism.

Generative Adversarial Networks for Financial Trading Strategies Fine-Tuning and Combination
Adriano Koshiyama,Nick Firoozye,Philip Treleaven

Systematic trading strategies are algorithmic procedures that allocate assets aiming to optimize a certain performance criterion. To obtain an edge in a highly competitive environment, the analyst needs to proper fine-tune its strategy, or discover how to combine weak signals in novel alpha creating manners. Both aspects, namely fine-tuning and combination, have been extensively researched using several methods, but emerging techniques such as Generative Adversarial Networks can have an impact into such aspects. Therefore, our work proposes the use of Conditional Generative Adversarial Networks (cGANs) for trading strategies calibration and aggregation. To this purpose, we provide a full methodology on: (i) the training and selection of a cGAN for time series data; (ii) how each sample is used for strategies calibration; and (iii) how all generated samples can be used for ensemble modelling. To provide evidence that our approach is well grounded, we have designed an experiment with multiple trading strategies, encompassing 579 assets. We compared cGAN with an ensemble scheme and model validation methods, both suited for time series. Our results suggest that cGANs are a suitable alternative for strategies calibration and combination, providing outperformance when the traditional techniques fail to generate any alpha.

Hedge Fund Performance: What Do We Know?
Joenväärä, Juha,Kaupila, Mikko,Kosowski, Robert,Tolonen, Pekka
This paper proposes a novel database merging approach and re-examines the fundamental questions regarding hedge fund performance. Before drawing conclusions about fund performance, we form an aggregate database by exploiting all available information across and within seven commercial databases so that widest possible data coverage is obtained and the effect of data biases is mitigated. Average performance is significantly lower but more persistent when these conclusions are inferred from aggregate database than from some of the individual commercial databases. Although hedge funds deliver performance persistence, an average fund or industry as a whole do not deliver significant risk-adjusted net-of-fee returns while the gross-of-fee returns remain significantly positive. Consistent with previous literature, we find a significant association between fund-characteristics related to share restrictions as well as compensation structure and risk-adjusted returns.

Investor Ideology
Bolton, Patrick,Li, Tao,Ravina, Enrichetta,Rosenthal, Howard
We estimate institutional investor preferences based on their proxy voting records in publicly listed Russell 3000 firms. We employ a spatial model of proxy voting, the W-NOMINATE method for scaling legislatures, and map institutional investors onto a left-right dimension based on their votes for fiscal year 2012. The far-left are socially responsible and the far-right are “money-conscious” investors. Significant ideological differences reflect an absence of shareholder unanimity. The proxy adviser ISS, similar to a political leader, makes voting recommendations that place it in the center; to the left of most mutual funds. Public pension funds and other investors on the left support a more social and environment-friendly orientation of the firm and fewer executive compensation proposals. A second dimension reflects a more traditional governance view, with management disciplinarian investors, with Glass-Lewis among them, pitted against more management friendly ones.

Investor Ideology
Bolton, Patrick,Li, Tao,Ravina, Enrichetta,Rosenthal, Howard
We estimate institutional investor preferences based on their proxy voting records in publicly listed Russell 3000 firms. We employ a spatial model of proxy voting, the W-NOMINATE method for scaling legislatures, and map institutional investors onto a left-right dimension based on their votes for fiscal year 2012. The far-left are socially responsible and the far-right are "money conscious" investors. Significant ideological differences reflect an absence of shareholder unanimity. The proxy adviser ISS, similar to a political leader, makes voting recommendations that place it in the center; to the left of most mutual funds. Public pension funds and other investors on the left support a more social and environment-friendly orientation of the firm and fewer executive compensation proposals. A second dimension reflects a more traditional governance view, with management disciplinarian investors, the proxy adviser Glass-Lewis among them, pitted against more management friendly ones.

Investor Learning, Earnings Signals, and Stock Returns
Chiu, Peng-Chia,Haight, Timothy
Prior studies show that investor learning about earnings-based return predictors from academic research erodes return predictability. However, the signaling power of “bottom-line” earnings has declined over time, which complicates assessments of investor learning about profitability signals underlying earnings. We show that modified earnings variables with lower susceptibility to signal weakening exhibit rates of return attenuation that are 30-64% lower than rates for bottom-line earnings variables over our sample period. Notably, return gaps between bottom-line and less susceptible variables are widest in recent years, especially within non-overlapping samples and samples with weak bottom-line signals (e.g., special items, losses, fourth fiscal quarter). Our results hold after controlling for risk factors known to predict returns, they do not appear to be attributable to ex ante earnings volatility, and they are robust to alternative sample selection criteria, sub-period partitions, and portfolio holding windows. Overall, our results suggest that while investor learning is apparent in the data, learning efforts to date have been suboptimal at exploiting profitability signals within firms’ earnings streams.

Managing the Downside of Active and Passive Strategies: Convexity and Fragilities
Douady, Raphael
Question of the day: how to manage a large (or small) portfolio in low interest rate conditions, while equity markets bear significant draw-down risk? More generally, how to build an “antifragile” portfolio that can weather the most extreme market scenarios without impacting long-term performances? Do active strategies systematically create or increase already existing market instabilities?By analyzing in depth markets behavior during speculative bubbles and other past crises, we aim at addressing these questions. Our goal is to describe as faithfully as possible the major mechanisms at stake, avoiding the trap of mapping the complexity of financial markets into a single mathematical model, which would necessarily be wrong at some point. Starting from Minsky’s “Financial Instability Hypothesis”, we try to disentangle the complex relation between dynamics and randomness, including the presence of “fat tails”. We provide methods to monitor the evolving probability of a forthcoming crisis through the measurement of “market instability”. Scalable investment strategies result from the application of these methods.

Mean Field Games with Partial Information for Algorithmic Trading
Philippe Casgrain,Sebastian Jaimungal

Financial markets are often driven by latent factors which traders cannot observe. Here, we address an algorithmic trading problem with collections of heterogeneous agents who aim to perform optimal execution or statistical arbitrage, where all agents filter the latent states of the world, and their trading actions have permanent and temporary price impact. This leads to a large stochastic game with heterogeneous agents. We solve the stochastic game by investigating its mean-field game (MFG) limit, with sub-populations of heterogeneous agents, and, using a convex analysis approach, we show that the solution is characterized by a vector-valued forward-backward stochastic differential equation (FBSDE). We demonstrate that the FBSDE admits a unique solution, obtain it in closed-form, and characterize the optimal behaviour of the agents in the MFG equilibrium. Moreover, we prove the MFG equilibrium provides an $\epsilon$-Nash equilibrium for the finite player game. We conclude by illustrating the behaviour of agents using the optimal MFG strategy through simulated examples.

Mobile Money, Cashless Society and Financial Inclusion: Case Study on Somalia and Kenya
Gas, Sayid
Almost two billion, 40% of world adult population, lack a basic service without which life is difficult in our modern world, and that is financial account (Anders Borg, 2016). Exclusion from formal financial system has been recognized as one of the barriers to reach of “a world without poverty” (WorldBank, 2012). At the same time, mobile subscribers outnumbered financial account holders in many countries and almost half of un-banked people have mobile phones. This opens a window of opportunity for financial inclusion stakeholders including governments, financial institutions and practitioners. In the last decade, mobile money has accelerated financial inclusion for many people in the developing world as evidenced by progress made in Somalia, Kenya and other countries in Africa, Asia, and Latin America. For this reason, it is seen as both “potential” financial inclusive and financial integration tool (Africa Development Bank, 2012). This paper investigates effect of mobile money on financial inclusion. By using Kenya and Somalia as a case study the research found that Mobile Money Services are an effective tool that can be used to tackle financial exclusion in developing countries.

Momentum and liquidity in cryptocurrencies
Stjepan Begušić,Zvonko Kostanjčar

The goal of this paper is to explore the relationship between momentum effects and liquidity in cryptocurrency markets. Portfolios based on momentum-liquidity bivariate sorts are formed and rebalanced on a varying number of cryptocurrencies through time. We find a strong momentum effect in the most liquid cryptocurrencies, which supports the theories of investor herding behavior. Moreover, we propose two profitable long-only strategies: the illiquid losers and liquid winners, which exhibit improved risk adjusted performance over the market capitalization weighted portfolio.

Monetary Transmission through Shadow Banks
Xiao, Kairong
I find that shadow bank money creation significantly expands during monetary tightening cycles. This “shadow banking channel” offsets reductions in commercial bank deposits and dampens the impact of monetary policy. Using a structural model of bank competition, I show that the difference in depositor clientéles between commercial and shadow banks quantitatively explains their different responses to monetary policy. Facing a more yield-sensitive clientéle, shadow banks pass through more rate hikes to depositors, thereby attracting more deposits when the Federal Reserve raises rates. My results suggest that monetary tightening could unintentionally increase financial fragility by driving deposits into the uninsured shadow banking sector.

On the interplay between multiscaling and stocks dependence
R. J. Buonocore,G. Brandi,R. N. Mantegna,T. Di Matteo

We find a nonlinear dependence between an indicator of the degree of multiscaling of log-price time series of a stock and the average correlation of the stock with respect to the other stocks traded in the same market. This result is a robust stylized fact holding for different financial markets. We investigate this result conditional on the stocks' capitalization and on the kurtosis of stocks' log-returns in order to search for possible confounding effects. We show that a linear dependence with the logarithm of the capitalization and the logarithm of kurtosis does not explain the observed stylized fact, which we interpret as being originated from a deeper relationship.

Optimal dividends with partial information and stopping of a degenerate reflecting diffusion
Tiziano De Angelis

We study the optimal dividend problem for a firm's manager who has partial information on the profitability of the firm. The problem is formulated as one of singular stochastic control with partial information on the drift of the underlying process and with absorption. In the Markovian formulation, we have a 2-dimensional degenerate diffusion, whose first component is singularly controlled and it is absorbed as it hits zero. The free boundary problem (FBP) associated to the value function of the control problem is challenging from the analytical point of view due to the interplay of degeneracy and absorption. We find a probabilistic way to show that the value function of the dividend problem is a smooth solution of the FBP and to construct an optimal dividend strategy. Our approach establishes a new link between multidimensional singular stochastic control problems with absorption and problems of optimal stopping with `creation'. One key feature of the stopping problem is that creation occurs at a state-dependent rate of the `local-time' of an auxiliary 2-dimensional reflecting diffusion.

Optimal price management in retail energy markets: an impulse control problem with asymptotic estimates
Matteo Basei

We consider a retailer who buys energy in the wholesale market and resells it to final consumers. The retailer has to decide when to intervene to change the price he asks to his customers, in order to maximize his income. We model the problem as an infinite-horizon stochastic impulse control problem. We characterize an optimal price strategy and provide analytical existence results for the equations involved. We then investigate the dependence on the intervention cost. In particular, we prove that the measure of the continuation region is asymptotic to the fourth root of the cost. Finally, we provide some numerical results and consider a suitable extension of the model.

Optimal stopping for the exponential of a Brownian bridge
Tiziano De Angelis,Alessandro Milazzo

In this paper we study the problem of stopping a Brownian bridge $X$ in order to maximise the expected value of an exponential gain function. In particular, we solve the stopping problem $$\sup_{0\le \tau\le 1}\E[\mathrm{e}^{X_\tau}]$$ which was posed by Ernst and Shepp in their paper [Commun. Stoch. Anal., 9 (3), 2015, pp. 419--423] and was motivated by bond selling with non-negative prices.

Due to the non-linear structure of the exponential gain, we cannot rely on methods used in the literature to find closed-form solutions to other problems involving the Brownian bridge. Instead, we develop techniques that use pathwise properties of the Brownian bridge and martingale methods of optimal stopping theory in order to find the optimal stopping rule and to show regularity of the value function.

Parametric identification of the dynamics of inter-sectoral balance: modelling and forecasting
Olena Kostylenko,Helena Sofia Rodrigues,Delfim F. M. Torres

This work is devoted to modelling and identification of the dynamics of the inter-sectoral balance of a macroeconomic system. An approach to the problem of specification and identification of a weakly formalized dynamical system is developed. A matching procedure for parameters of a linear stationary Cauchy problem with a decomposition of its upshot trend and a periodic component, is proposed. Moreover, an approach for detection of significant harmonic waves, which are inherent to real macroeconomic dynamical systems, is developed.

Performance Evaluation of Selected Mutual Fund Scheme’s In India
Sakharkar, Akshay
Mutual fund plays a crucial role in the Indian economy. Mutual funds are considered to be the vehicle for mobilization and channelization of savings from individual investors to towards the various capital market instruments. Evaluation of the performance of mutual funds particularly is of a great interest to the researcher across the world. The study attempts to evaluate the past performance of selected open-ended equity funds. The study is based on the secondary data restricted for a period of one year i.e. from 1st January 2016 to 31st December 2016. To analyze the performance of selected mutual funds which are open-ended equity funds four conventional or unconditional methods of performance evaluation are used. They are Sharpe’s Ratio, Treynor’s Ratio, Jensen’s Measure and Information Ratio. Investors today’s have a wide range of investment avenues available and choosing one of them is a quite horrifying task for any investor. Every investment has its own characteristics in terms of risk with while choosing a best fund to park the resources is a crucial task for any investor certain predetermined developed and widely accepted models and techniques are available to determine the performance of funds and make decision of investment. The present paper aims at throwing light on such model and helps to analyze funds in terms of risk-return analysis.

Policy Uncertainty and Short-Term Financing: The Case of Trade Credit
D'Mello, Ranjan,Jha, Anand,Toscano, Francesca
We examine the impact of policy uncertainty on trade credit. We document a decline (increase) in accounts payable and receivable during periods of high (low) policy uncertainty. The relation is robust and holds after controlling for endogeneity, economic and political uncertainties, and the Great Recession. Additionally, the impact of policy uncertainty on trade credit is long term, affecting short-term borrowing and lending in the following year as well. The reduction in trade credit during periods of high uncertainty is driven by a decrease in supply; firms that are most likely to lend, reduce credit to customers during these periods. There is no evidence that firms with access to alternative sources of funding reduce their borrowings during periods of high policy uncertainty. For the subset of firms that have limited access to external funds, there is an increase in accounts payable in high uncertainty periods suggesting that these firms view trade credit as a substitute source of financing during difficult times. Finally, industry competitiveness impacts the relation; suppliers (customers) in competitive industries have higher (lower) levels of accounts receivable (payable) during high uncertainty periods.

Price equations with symmetric supply/demand; implications for fat tails
Carey Caginalp,Gunduz Caginalp

Implementing a set of microeconomic criteria, we develop price dynamics equations using a function of demand/supply with key symmetry properties. The function of demand/supply can be linear or nonlinear. The type of function determines the nature of the tail of the distribution based on the randomness in the supply and demand. For example, if supply and demand are normally distributed, and the function is assumed to be linear, then the density of relative price change has behavior $x^{-2}$ for large $x$ (i.e., large deviations). The exponent approaches $-1$ if the function of supply and demand involves a large exponent. The falloff is exponential, i.e., $e^{-x}$, if the function of supply and demand is logarithmic.

Recalibrating the Debate on MIFID’S Private Enforceability: Why the EU Charter of Fundamental Rights is the Elephant in the Room
Callens, Evariest
The genesis of MiFID I initiated a fierce scholarly debate on the following question: does MiFID dictate private enforceability of the rules embedded in the directive? More specifically, under general reference to the effet utile doctrine, certain authors have argued that MiFID requires member states to provide private law remedies for infringements of certain (investor protecting) MiFID-provisions. However, another strand in legal scholarship has sternly denounced this idea. In their reading, member states might equally achieve an effet utile in light of the investor protection objective by solely providing administrative enforcement mechanisms. According to this vision, it is thus for the member states to decide whether, and if so under what conditions, private law remedies are made available. This debate has never resulted in a widely endorsed consensus and persists in the MiFID II era. My thesis, somewhat provocatively, is the following: legal scholarship has erroneously overlooked the EU Charter of Fundamental Rights when assessing the private enforceability of MiFID. As the Charter requires effective judicial remedies for violations of rights conferred upon individuals by EU law, I contend that its omission in the debate on MiFID’s private enforceability has led to serious misconceptions about the enforcement of MiFID. Furthermore, in light of my paper’s central thesis, I extend existing scholarship on MiFID II’s controversial paragraph about remedial action in a new direction. More specifically, I present two fresh textual arguments that might shed light on the meaning of this paragraph. The arguments, which â€" to the best of my knowledge â€" have not been advanced in legal scholarship before, draw upon an integrated and coherent reading of the text of MiFID II. More precisely, the novel arguments are based on the relation between the contested paragraph and the structure and wording of MiFID II as a whole.

Review of Applicability of Artificial Intelligence in Various Financial Services in India
Kurode, Tanay
This paper discusses how artificial intelligence can be applicable in various financial services like banking, insurance, credit rating etc. Researcher has elaborated on his observations regarding which areas and functions can make the use of artificial intelligence and while doing so what challenges will be faced by banking and financial services industry. Lastly this paper also enlists the advantages and disadvantages of AI implementation. By referring to secondary data author has made an attempt to explore possibility of AI applicability and provide a reference point for further research.

Risk Reduction Using Trailing Stop-Loss Rules
Dai, Bochuan,Marshall, Ben R.,Nguyen, Nhut (Nick) Hoang,Visaltanachoti, Nuttawat
We consider the effectiveness of trailing stop-loss rules which, unlike traditional stop-loss rules, involve the sell trigger price being moved higher to protect profits as prices rise. Our results indicate that while these rules have inferior mean returns to a simple buy-and-hold strategy, they do a good job of stopping losses. They generate superior risk-adjusted returns for investors with normal levels of risk aversion and perform particularly well at reducing downside risk. These results hold in all U.S. stocks and are particular strong for stocks that end up being delisted.

Russia’s Financial Market 2018: Investment Risks
Abramov, Alexander E.,Lavrisheva, A
The Russian equity market in 2018 came to be more profitable and stable than many other emerging markets, but it continued to lag behind competitors in terms of returns to investors and investment risk indicators. There were more problems that came from non-residents outflow.

State-Dependent Stock Liquidity Premium: The Case of the Warsaw Stock Exchange
Stereńczak, Szymon
The effect of stock liquidity on stock returns is well documented on the developed capital markets, while similar studies on emerging markets are still scarce and their results ambiguous. This paper aims to answer the question whether there exists stock liquidity premium on the Polish capital market, and if so, whether this premium increases during the periods of market downturn. Polish capital market may serve as a benchmark for other emerging markets in the region of Central and Eastern Europe, hence the results of this research should be of great interest for investors and policy makers in Poland and other post-communist European countries. In the empirical study a unique empirical methodology has been applied, which guarantees the uniqueness of the results obtained. The results obtained suggest that on the Polish stock market exists stock liquidity premium, which is statistically significant, but only slightly economically relevant. It also does not increase during the periods of bearish market, what results from the lengthening of average holding period when market liquidity decreases.

Strength of Words: Donald Trump's Tweets and Russia's Ruble
Afanasyev, Dmitriy O.,Fedorova, Elena,Ledyaeva, Svetlana
The recent geopolitical tensions between Russia and the West re-established the debate on the consequences of political conflicts and sanctions. In this paper we elaborate some of the issues of this debate by empirically testing if the US President Donald Trump`s rhetoric towards Russia (measured by the sentiment of his Russia-related tweets) affects Russian ruble exchange rate. Treating Trump`s tweets as public information we refer to the theories on the role of public information arrival for exchange rate. In evaluating tweets` sentiment, we suggest to use several lexicons instead of one as was adopted in previous research. In our empirical analysis, we utilize elastic net regression and Markov regime-switching model and find that though there is firm evidence of the impact of Trump`s tweets on ruble exchange rate, it tends to be episodic and short-term. More specifically, according to our results, particularly essential toughening of Trump`s Twitter negative rhetoric towards Russia can lead to ruble`s sharp depreciation in short-term periods (around 3 days). Moreover, we reveal that these periods tend to coincide with the implementation or announcement of new US sanctions that points to a broader conclusion that Western sanctions indeed have negative effects on the Russian economy.

Tax Avoidance, Uncertainty, and Firm Risk
Hutchens, Michelle,Rego, Sonja O.,Williams, Brian
While tax avoidance strategies result in greater after-tax cash flows, they can involve uncertain future outcomes, which can impose significant costs on firms. Thus, the extent to which tax avoidance increases firm risk is unclear. This paper re-examines the relation between tax avoidance and firm risk using latent class mixture models, which identify sub-samples of firms with differing relations between variables of interest. We provide evidence that 19 percent of our sample exhibits a positive association between tax avoidance and firm risk, 43 percent exhibits a negative association, and 38 percent does not exhibit a statistically significant relation. Our analyses suggest striking differences in firm characteristics across the latent classes, including differences in the use of common tax shields such as net operating loss carryforwards, interest expense, and capital expenditures; variation in tax planning as reflected in effective tax rates, settlements with tax authorities, and foreign income; firm size and profitability; operating volatility and information environments; and managerial compensation incentives and stock ownership. Our findings increase our understanding of the circumstances in which tax avoidance is positively, negatively, or not significantly related to firm risk.

Tax Collection from Realized Capital Gains on Equity
Ehling, Paul,Tompaidis, Stathis,Yang, Chunyu
The tax rate on capital gains of equity securities has varied substantially over time and correlates negatively with realized capital gains and collected taxes. Our model shows that investors who anticipate the dynamics of the capital gains tax rate in their bond-equity mix, realize more gains the higher the realized return on equity, the lower the capital gain tax rate, and the higher the capital loss carried over. Simulating the behavior of a calibrated population of investors at an annual frequency, yields a correlation between the model-based aggregate capital gains taxes paid and the data of at least forty-one percent.

The Accumulation of Value Over Time
Sentilles, Dennis
We introduce a purely mathematical measure, Î", of the accumulation of asset value over time that robustly measures cumulative return against market movement under whatever investment strategy is employed in buying into any given market over any period of time. Requiring no underlying assumptions about price behavior, the purely mathematical factor Î" captures the qualitative and quantitative structural elements of wealth accumulation. In direct application Î" accurately reveals the computational role and influence of volatility and mean price movement in the popular strategy of Dollar Cost Averaging. At the last Î" suggests a proportional Buy&Hold strategy that is generally more successful.

The Beliefs’ Heterogeneity of Investors in Tunisian Stock Market
Nabiha, Nefzi
The beliefs’ heterogeneity of investors reflects the disagreement on the information interpretation. This article proposes to explain and appreciate the potential contribution of the beliefs’ heterogeneity concept to the assimilation of the information interpretation process by investors.The article especially examines if the investors have a heterogeneous beliefs through the study of their behavior biases. It is the presence of different biases correlated with each other, which leads to the beliefs’ heterogeneity of investor. The separated study of the different behavioral biases does not conduct to the understanding of the complexity and the diversity of beliefs.In fact, the paper tries to explain if the behavioral anomalies that characterize the investors in their decision-making on the stock market constitute the determinants of the heterogeneity of the beliefs of the investor and concretize his irrationality. Through a typological analysis, it was shown that investors do not make a homogenous group and that in the majority of the cases, they show irrationality in their investment decisions.

The Impact of Monetary Conditions on Bank Lending to Households
Gyöngyösi, Győző,Ongena, Steven,Schindele, Ibolya
We study the impact of monetary conditions on the supply of mortgage credit by banks to households. Using comprehensive credit register data from Hungary, we first establish a "bank-lending-to-households" channel by showing that monetary conditions affect the supply of mortgage credit in volume. We then study the impact of monetary conditions on the composition of mortgage credit along its currency denomination and borrower risk. We find that expansionary domestic monetary conditions increase the supply of mortgage credit to all households in the domestic currency and to risky households in the foreign currency. Because most households are unhedged, bank lending in multiple currencies may involve additional risk taking. Changes in foreign monetary conditions affect lending in the foreign currency more than in the domestic currency, and also differ in their compositional impact along firm risk.

The Stock Exchange as Multi-sided Platform and the Future of the National Market System
McNamara, Steven R.
Since Regulation National Market System (Regulation NMS) came into force a decade ago, computer technology has transformed the stock markets. While Regulation NMS benefited investors by lowering stated transaction costs, it also created today’s complex and fragmented trading system. An increasing amount of trading now occurs off-exchange in dark pools and other “non-lit” venues, and hidden costs proliferate. In addition to the profits taken by high-frequency traders, these include the defensive costs of the technological arms race, the possibility of another “Flash Crash,” public suspicions of “rigged” stock markets, reduced allocative efficiency, and rising proprietary data fees paid by stockbrokers and institutional investors. In prioritizing the goal of competition, Regulation NMS failed to take into account the stock exchange’s inherent economic nature as a multi-sided platform and the negative effects of setting the existing exchanges into competition with one another. Furthermore, digital technology undermines a number of Regulation NMS’s grounding assumptions. Given the nature of modern stock exchange as a digital multi-sided platform, it is time to reconsider the central limit order book (CLOB) proposals made in the 1970s through the early 2000s. An updated proposal for a “virtual CLOB” would allow the current exchanges to remain in existence, thereby avoiding a single monopoly exchange, while eliminating or mitigating many of the most pressing problems of the current system.

The U.S. Term Structure and Return Volatility in Emerging Stock Markets
Demirer, Riza,Yuksel, Asli,Yuksel, Sadettin Aydin
This paper examines the predictive power of the U.S. term structure over return volatility in emerging stock markets. Decomposing the term structure of U.S. Treasury yields into two components, the expectations factor and the maturity premium, we show that the U.S. term structure indeed contains predictive information over emerging stock market volatility, even after controlling for country specific factors including turnover and market size. While we observe heterogeneous patterns across emerging markets in terms of their predictability with respect to the U.S. term structure, we find that the market’s expectation of future short term rates, implied by the expectations factor, serves as a stronger predictor of stock market volatility compared to the maturity premium component of the yield spread. We also find that the U.S. term structure has gained further predictive value following the global financial crisis, particularly for the BRICS nations of China, Russia, and S. Africa. Overall, our findings suggest that policymakers and investors can utilize interest rate signals from the U.S. Treasury yields to make projections over stock market volatility in their local markets, however, distinguishing between the two components of the yield curve could provide additional forecasting power depending on the country of focus.

What Drives Banks' Geographic Expansion? The Role of Locally Non-Diversifiable Risk
Gropp, Reint,Noth, Felix,Schüwer, Ulrich
We show that banks that are facing relatively high locally non-diversifiable risks in their home region expand more across states than banks that do not face such risks following branching deregulation in the 1990s and 2000s. These banks with high locally non-diversifiable risks also benefit relatively more from deregulation in terms of higher bank stability. Further, these banks expand more into counties where risks are relatively high and positively correlated with risks in their home region, suggesting that they do not only diversify but also build on their expertise in local risks when they expand into new regions.

ÖZEL ÇEKME HAKLARI KAVRAMI (Special Drawing Rights Concept of International Monetary Fund)
Gursel, Haluk Ferden
Turkish Abstract: 'Özel Çekme Hakları' deyimi baslıca iki şeyi ifade etmektedir: Birinci olarak bir 'hesap birimini' simgelemektedir. Öte yandan bir 'açık kredi' anlamına gelmektedir. Özel Çekme Hakları Para Fonu'nun bir hesap standardı olarak görülmelidir. Bunların 'kağıt altın' ya da 'rezerv varlıkları' oldukları yolundaki görüşler hatalıdır.English Abstract: 'Special Drawing Rights' (SDRs) essentially refer to two things: First this concept symbolizes an 'accounting unit'. In other uses, it is an 'open credit'. Special Drawing Rights should be seen as an accounting standard of the International Monetary Fund (IMF). The interpretations of those SDRs are 'paper gold' or 'reserve assets' are incorrect.

Картографирование сельскохозяйственных угодий средствами Ð"ИС для мониторинга использования природных ресурсов (Mapping Agricultural Land by Means of GiS for Monitoring the Use of Natural Resources (a Case Study of Landscapes of South-Western Hungary)) (Presentation Slides)
Lemenkova, Polina
Russian Abstract: Ð' результате работы распределены ареалы сельскохозяйственных ландшафтов и различных культур посевных в предгорьях холмов Мечек в 1992 и 2006 гг. Типы растительного покрова были интерпретированы на основе ассоциации пикселей в различные тематические классы: растительность, различные категории сельскохозяйственных земель аграрного назначения и антропогенных территорий. Ð"етализируя технические аспекты картографического отображения почвенно-растительного покрова, в частности распознавания различных посевных культур по спутниковым снимкам (пшеница, ячмень, маис, подсолнечник, сахарная свекла, картофель), это работа вносит вклад в развитие сельскохозяйственного экологического мониторинга.English Abstract: The work focuses on the application of the GIS and image analysis for agricultural mapping. Study area is located in Mechek hills, Hungary, Central Europe. As a result of the work, various areas of the agricultural landscapes and different crop types located on the foothills of the Mechek hills were distinguished on the satellite images. The crope types include: wheat, barley, maize, sunflower, sugar beet, potatoes. The images were taken for years 1992 and 2006. The types of vegetation coverage were interpreted on the basis of the association of the raster pixels into different thematic classes: vegetation, different categories of agricultural lands and anthropogenic territories. This work contributes to the development of agricultural environmental monitoring by detailing the technical aspects of the land cover mapping. In particular the work details recognition of the different crop types on the Landsat TM satellite images.

及时性自适åº"高维经济基本面建模与汇率预测分析 (Real Time High Dimensional Adaptive Economic Basics Modeling with Application in Exchange Rate Forecasting)
Li, Xinjue
Chinese Abstract: 在人æ°'币国际化不断推进、人æ°'币汇率双å'波动加强的背景下,构建具有优良预测能力的汇率预测模型愈å'重要。æˆ'们å'现参数模型对汇率预测的能力不仅取决于模型设定是否正确,还取决于模型一方面能否迅速探测模型参数的ç»"构性变化以使ç"¨æœ€ä½³ä¿¡æ¯ä¼°è®¡æ¨¡åž‹å‚数,另一方面能否及时识别模型解释变量以实ç"¨æœ€ä½³å‚变量对汇率进行预测。该算法不仅能实时检测模型参数的ç»"构性变化,探测参数的同质区间,同时还能对变量进行实时识别以选择最为合适的模型解释变量以提高模型的预测能力。在样本外å'前1至24个月的汇率预测运ç"¨ä¸­ï¼Œè‡ªé€‚åº"变元算法能显è'—超越随机游走、马å°"ç§'夫机制转换模型、误差修正模型与其他经济基本面模型包括:弹性货币模型、购买力平价模型、利率平价模型、泰å‹'规则模型、偏移泰å‹'规则模型及其,在美元å…'人æ°'币汇率中长期(1至24个月)预测中。从变量选择的ç»"果中æˆ'们可以看到,“811”汇æ"¹ä»¥åŽï¼Œç¾Žå…ƒåœ¨äººæ°'币汇率走势中的绝对性作ç"¨è¢«æ‰"破,欧元的重要性逐渐显现出来,经济基本面因素决定了人æ°'币汇率走势,中国与其他å'达经济ä½"包括欧元区、日本与英国的经济基本面差异则同样能够决定美元å…'人æ°'币汇率的走å'。从æ"¿ç­–è§'度来看,稳定人æ°'币汇率预期,首先需要稳定利差、æ"¶å…¥å·®ä¸Žè´§å¸ä¾›ç»™å·®å¼‚。另外,自“811”汇æ"¹ä¹‹åŽï¼Œäººæ°'币汇率预期相æ¯"于“811”汇æ"¹ä¹‹å‰æ›´æ˜"受到外部冲击的影å"ï¼Œåˆç†çš„人æ°'币汇率预期ç›'管依然需要依赖于实行有管理的浮动汇率制度,防止汇率风险。English Abstract:To develop an outstanding Renminbi exchange rate forecasting model based on the background of Renminbi internationalization and the increased two-way volatility becomes much more important. The forecasting ability of a parameter model depends not only on whether it is correctly specified but also on one hand the efficiency of whether it can detect the structure changes and using the effective observations to estimate the parameters and on the other hand on the ability of selecting the proper covariates that can be used in forecasting. In order to solve these required problems, we developed the penalize adaptive method with can adaptively select the covariates and detect the structure changes. The developed model can outperform the multiplier adaptive method and the other methods that mentioned above in exchange rate predictions. In the USD against RMB exchange rate regime, we find out that the newly developed methods can manage of increasing the forecasting accuracy in MAE arrange from 30% to 50% compared with the second-best model. We also find that after the “811” exchange rate reform, the economic fundamentals will be significantly improved in determining the exchange rate expectation. By constructing the longest homogeneous intervals, we can find that before the “811” exchange rate reform, investors care more about the middle and the long run risk, but after “811” exchange rate reform, investors care more about the short-term risk. Which can also be concluded as that after the “811” exchange rate reform, RMB are become more sensitive to the exogenous sharks. Among these fundamentals the difference between interest rate plays the most important role in shifting the exchange rate. To stabilize the RMB exchange rate, government should focus on stabilizing the interest rate, the real income of the whole country, and also to stabilize the inflation of the country. Moreover, after 2011, the exchange rate of USD against RMB itself does not decide alone by itself. It is also decided heavily (nearly 37%) by the other currencies’ exchange rates such as JPY, GBP and JPY against RMB. The manageable floating exchange rate system is also crucial in preventing the exchange rate risk.