Research articles for the 2019-04-15

(НЕ)АÐ"ЕКÐ'АТНОСТ НА ПЕНСИИТЕ Ð' Ð'ЪЛÐ"АРИЯ (Pension (In)adequacy in Bulgaria)
Christoff, Lubomir
Bulgarian Abstract: Оценявам перспективна адекватност на пенсиите в Ð'ългария като пресмятам теоретичната норма на заместване на предпенсионен доход, за:- Пенсия от държавното обществено осигуряване (Ð"ОО) в пълен размер и - Пенсия от Ð"ОО в намален размер плюс пенсия от универсален пенсионен фонд (УПФ).Установявам, че, пенсиите в Ð'ългария ще заместват по-малко от половината от предпенсионния доход. Това е по-ниско от 58% - нормата на заместване в страните-членки на Европейския съюз през 2017 г.Нещо повече, осигуряването в УПФ води до влошаване на адекватността на пенсиите, защото пенсията от УПФ не е достатъчна да замести намалението на пенсията от Ð"ОО на тези, които са се осигурявали и в УПФ. Изключение е непрекъснатото осигуряване върху максимален осигурителен доход, тъй като пенсията от Ð"ОО е ограничена от таван. Условието за това пенсия от УПФ да коменсира напълно намалението на пенсия от Ð"ОО е доходността по партидите на осигурените в УПФ да изпреварва темпа на нарастване на средния осигурителен доход. На практика съотношението е точно обратното. За периода 2001-2018 г. средният осигурителен доход е нараствал с по 4 % годишно (в реален израз), докато реалната доходност по партиди на всички осигурени в УПФ е била 0 %. Това изоставане не може да бъде наваксано до 2042 г. при дългосрочните очаквания за доходността на класовете активи и инвестиционните ограничения, при които се управляват средствата в УПФ. Така две пенсии са по-малко от една и осигуряването в УПФ уврежда интересите на осигурените като намалява пенсионните им доходи.За гарантиране на това, че пенсията от УПФ ще допълва държавната пенсия е необходимо и осигурителната вноска в УПФ да е допълнителна â€" над и свръх задължителната осигурителна вноска в Ð"ОО.English Abstract: I estimate the prospective pension adequacy in Bulgaria by calculating the theoretical replacement rate under two pension insurance strategies: - pension insurance in the state run defined benefit (DB) pension scheme only and - splitting pension insurance contributions between the state pension scheme and a privately operated defined contribution (DC) scheme.The results suggest that under both strategies and various income scenarios pensions in Bulgaria will replace less than half of the pre-retirement income, which is lower than the average in the EU (58 % in 2017).Moreover, splitting the pension insurance between the DB and DC schemes reduces the replacement rate as the DC pension proves insufficient to offset the reduction of the DB pension under the second strategy. This results from the mediocre returns in the DC schemes, both realized and expected. The necessary and sufficient condition for a private pension to fully compensate for the reduction in the state pension is that pension fund returns exceed the growth rate of the average insurable income (the wage growth). In practice the reverse is true: the real average insurable income in Bulgaria grew by 4 % per annum in 2001-2018, while the average real return on pension accounts was 0 % in the same period. Going forward, according to capital market assumptions, the expected returns by asset class suggest that pension funds’ returns won’t catch up, won’t match, let alone exceed the wage growth and, therefore, the DC pension won’t offset the reduction in the DB pension. Two pensions in Bulgaria are less than one. The one exception are those who would have contributed to the DC scheme at the level of the maximum insurable income over their whole career. Their DC pension would indeed be supplementary as their state pension would hit the maximum allowable state pension.To ensure that DC pensions are additional to the state pension, it is necessary that DC contributions become supplementary indeed and not be financed at the expense of the mandatory contributions to the state pension scheme as is currently the case.

A memory-based method to select the number of relevant components in Principal Component Analysis
Anshul Verma,Pierpaolo Vivo,Tiziana Di Matteo

We propose a new data-driven method to select the optimal number of relevant components in Principal Component Analysis (PCA). This new method applies to correlation matrices whose time autocorrelation function decays more slowly than an exponential, giving rise to long memory effects. In comparison with other available methods present in the literature, our procedure does not rely on subjective evaluations and is computationally inexpensive. The underlying basic idea is to use a suitable factor model to analyse the residual memory after sequentially removing more and more components, and stopping the process when the maximum amount of memory has been accounted for by the retained components. We validate our methodology on both synthetic and real financial data, and find in all cases a clear and computationally superior answer entirely compatible with available heuristic criteria, such as cumulative variance and cross-validation.

Assessing House Prices with Prudential and Valuation Measures
Andrle, Michal
In this paper we provide tools for assessing the house prices and housing valuation. Wedevelop two approaches: (i) borrowing capacity approach, and (ii) intrinsic value approach.The borrowing capacity of households, together with their down payment, implies how muchhousing they can attain. In the intrinsic value approach, property value is viewed as adiscounted present value of adjusted net rental income. Our approach does not involve acomplex econometric model and only widely available data are used. The proposedindicators can guide households, financial markets and macroprudential authorities in theirunderstanding of house prices development. To illustrate the concepts, we analyze thehousing prices in the Czech Republic and assess the degree of market over-and undervaluation.

Averaged Overnight Rate Futures: Convexity Adjustment
Rosen, Jonathan
The convexity adjustment for averaged overnight rate futures, like SOFR 1m futures, is derived including the case where trading occurs during the reference period. These results are more general than previous work that relied solely on the HJM framework, and the results herein can easily incorporate and reuse previous derivations. Numerical results demonstrate that the averaged overnight rate futures convexity adjustment is close to the convexity adjustment for compounded overnight rate futures, which is due to the close proximity of daily compounding to the continuous compounding limit.

Boomerang: Rebounding the Consequences of Reputation Feedback on Crowdsourcing Platforms
Snehalkumar,S. Gaikwad,Durim Morina,Adam Ginzberg,Catherine Mullings,Shirish Goyal,Dilrukshi Gamage,Christopher Diemert,Mathias Burton,Sharon Zhou,Mark Whiting,Karolina Ziulkoski,Alipta Ballav,Aaron Gilbee,Senadhipathige S. Niranga,Vibhor Sehgal,Jasmine Lin,Leonardy Kristianto,Angela Richmond-Fuller,Jeff Regino,Nalin Chhibber,Dinesh Majeti,Sachin Sharma,Kamila Mananova,Dinesh Dhakal,William Dai,Victoria Purynova,Samarth Sandeep,Varshine Chandrakanthan,Tejas Sarma,Sekandar Matin,Ahmed Nasser,Rohit Nistala,Alexander Stolzoff,Kristy Milland,Vinayak Mathur,Rajan Vaish,Michael S. Bernstein

Paid crowdsourcing platforms suffer from low-quality work and unfair rejections, but paradoxically, most workers and requesters have high reputation scores. These inflated scores, which make high-quality work and workers difficult to find, stem from social pressure to avoid giving negative feedback. We introduce Boomerang, a reputation system for crowdsourcing that elicits more accurate feedback by rebounding the consequences of feedback directly back onto the person who gave it. With Boomerang, requesters find that their highly-rated workers gain earliest access to their future tasks, and workers find tasks from their highly-rated requesters at the top of their task feed. Field experiments verify that Boomerang causes both workers and requesters to provide feedback that is more closely aligned with their private opinions. Inspired by a game-theoretic notion of incentive-compatibility, Boomerang opens opportunities for interaction design to incentivize honest reporting over strategic dishonesty.

Chief Risk Officers and Firm Value: Empirical Evidence From the Insurance Industry
da Silva, Aldy Fernandes,Brunassi Silva, Vinicius,Sampaio, Joelson Oliveira,Silva, Juliano
We study the relationship between enterprise risk management and firm value. We analyze how the influence and reporting of the chief risk officer (CRO) and the incentives to compensate him or her contribute to firm value. We use U.S. publicly traded insurers data between 2009 and 2017 and find that the participation of a CRO is insufficient for value creation in insurers. Our results present a negative relationship between a CRO and firm value. However, we find empirical evidence of a positive relationship between firm value and the incentives related to the compensation of the CRO, specifically including the CRO in the compensation committee of the board and providing the CRO with an equity-based compensation plan.

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

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

Crowdfunding and Social Capital: A Systematic Literature Review
Cai, Wanxiang,Polzin, Friedemann,Stam, Erik
Crowdfunding has been rising rapidly as a new entrepreneurial finance channel. Research on crowdfunding has also been on the rise recently, with social capital theory as one of the most promising theories for understanding crowdfunding. Research on the relationship between social capital and crowdfunding includes many different perspectives and uses a large variety of classifications of social capital. This paper aims to provide a comprehensive review of how social capital affects crowdfunding. This paper classifies social capital into structural, relational and cognitive dimensions and describes elements of each dimension of social capital based on social capital research. Based on this classification, this paper expands the scope of social capital crowdfunding research to studies involving facets of social capital such as trust and identity. This paper conceptually analyses how each facet of social capital affects crowdfunding. Based on this review of research, a synthetic model is built to explain how different facets of social capital develop in virtual communities and how they interplay with each other and finally affect crowdfunding success. We finish this paper with directions for future research.

Crude Awakening: Oil Prices and Bond Returns
Jondeau, Eric,Zhang, Qunzi,Zhu, Xiaoneng
Oil price changes fail to predict asset returns because they are too noisy. We construct an oil trend factor that filters out noise and provide evidence that it predicts bond risk premiums well. This result holds in developed and emerging markets, both in sample and out of sample. Notably, the oil trend factor improves predictions based on current term structure predictors, such as the first three principal components of yields and the Cochrane and Piazzesi (2005) factor. A puzzle emerging from our results is that oil price increases, which are generally thought to precede economic recessions, are in fact associated with subsequent lower bond returns. To solve this puzzle, we demonstrate that not all oil price shocks are alike: Although oil demand and supply shocks have opposite implications for economic activity and bond risk premiums, the oil trend factor is mainly related to demand shocks. Therefore, increases in the oil trend tend to signal a strong economy and lower bond returns.

Cryptocurrency Equilibria Through Game Theoretic Optimization
Carey Caginalp,Gunduz Caginalp

Optimization methods are used to determine equilibria of investment in cryptocurrencies. The basic assumptions involve existence of a core group (the "wealthy") that fears the loss of substantial assets through government seizure. Speculators constitute another group that tends to introduce volatility and risk for the wealthy. The wealthy must divide their assets between the home currency and the cryptocurrency, while the government decides on the probability of seizing a fraction the assets of this group. Under the assumption that each group exhibits risk aversion through a utility function, we establish the existence and uniqueness of Nash equilibrium. Also examined is the more realistic optimization problem in which the government policy cannot be reversed, while the wealthy can adjust their allocation in reaction to the government's designation of probability. The methodology leads to an understanding the equilibrium market capitalization of cryptocurrencies.

Digging Deeper--Evidence on the Effects of Macroprudential Policies from a New Database
Alam, Zohair,Alter, Adrian,Elseman, Jesse,Gelos, Gaston,Kang, Heedon,Narita, Machiko,Nier, Erlend,Wang, Naixi
This paper introduces a new comprehensive database of macroprudential policies, which combines information from various sources and covers 134 countries from January 1990 to December 2016. Using these data, we first confirm that loan-targeted instruments have a significant impact on household credit, and a milder, dampening effect on consumption. Next, we exploit novel numerical information on loan-to-value (LTV) limits using a propensity-score-based method to address endogeneity concerns. The results point to economically significant and nonlinear effects, with a declining impact for larger tightening measures. Moreover, the initial LTV level appears to matter; when LTV limits are already tight, the effects of additional tightening on credit is dampened while those on consumption are strengthened.

Does the Timing of Central Bank Announcements Matter? Trade-Level Data on Hedge Fund Behavior Before Swiss National Bank Meetings
Farrell, Diana,Bhagat, Kanav,Zhao, Chen
Just over three years after enacting a Minimum Exchange Rate policy for the Swiss Franc vs. Euro (EUR/CHF), the Swiss National Bank (SNB) removed it in a surprise announcement on January 15, 2015. The announcement shocked the FX market â€" EUR/CHF dropped 25.5 percent in the minutes that followed the press release. The JPMorgan Chase Institute leveraged a data asset of 395 million de-identified transactions executed by over 44,000 institutional investors to measure hedge fund net flows in EUR/CHF spot and forward transactions during the SNB’s Minimum Exchange Rate policy period. Our analysis uncovers two key findings related to hedge fund trading in EUR/CHF during the Minimum Exchange Rate policy period. First, we observe that after hedge funds executed the long EUR/CHF strategy, they then sold EUR/CHF in the days immediately preceding the next regularly scheduled SNB announcement, reducing their potential losses if the Minimum Exchange Rate policy was removed at that meeting. Second, hedge fund's confidence in the persistence of the SNB's Minimum Exchange Rate policy appears to have peaked in the four weeks before the policy was removed. Taken together, our findings have implications for central banks as they consider how their choices with respect to communicating policy changes might impact financial market stability. When choosing the most appropriate method to communicate policy changes, policymakers can use our results to help weigh market expectations with respect to both the timing of announcements and the policy outcomes in the context of the central bank's desired market impacts.

Earn More Tomorrow: Overconfident Income Expectations and Consumer Indebtedness
Grohmann, Antonia,Menkhoff, Lukas,Merkle, Christoph,Schmacker, Renke
This paper examines whether biased income expectations due to overconfidence lead to higher levels of debt-taking. In a lab experiment, participants can purchase goods by borrowing against their future income. We exogenously manipulate income expectations by letting income depend on relative performance in hard and easy quiz tasks. We successfully generate biased income expectations and show that participants with higher income expectations initially borrow more. Overconfident participants scale back their consumption after feedback. However, at the end of the experiment they remain with higher debt levels, which represent real financial losses. To assess the external validity, we nd further evidence for the link between overcondence and borrowing behavior in a representative survey (GSOEP-IS).

Eliciting Preferences of Ridehailing Users and Drivers: Evidence from the United States
Prateek Bansal,Akanksha Sinha,Rubal Dua,Ricardo Daziano

Transportation Network Companies (TNCs) are changing the transportation ecosystem, but micro-decisions of drivers and users need to be better understood to assess the system-level impacts of TNCs. In this regard, we contribute to the literature by estimating a) individuals' preferences of being a rider, a driver, or a non-user of TNC services; b) preferences of ridehailing users for ridepooling; c) TNC drivers' choice to switch to vehicles with better fuel economy, and also d) the drivers' decision to buy, rent or lease new vehicles with driving for TNCs being a major consideration. Elicitation of drivers' preferences using a unique sample (N=11,902) of the U.S. population residing in TNC-served areas is the key feature of this study. The statistical analysis indicates that ridehailing services are mainly attracting personal vehicle users as riders, without substantially affecting demand for transit. Moreover, around 10% of ridehailing users reported postponing the purchase of a new car due to the availability of TNC services. The model estimation results indicate that the likelihood of being a TNC user increases with the increase in age for someone younger than 44 years, but the pattern is reversed post 44 years. This change in direction of the marginal effect of age is insightful as the previous studies have reported a negative association. We also find that postgraduate drivers who live in metropolitan regions are more likely to switch to fuel-efficient vehicles. These findings would inform transportation planners and TNCs in developing policies to improve the fuel economy of the fleet.

Entry in Banking Markets
Traversa, Marina,Vuillemey, Guillaume
We empirically show that adverse selection is a key determinant of banking market structure. Using newly-constructed panel data on all US bank branches over the 1981-2016 period, we study banks' decisions to expand or contract geographically. First, we show that banks are more likely to expand in counties that are similar, in terms of industry shares, to those in which they already have branches. Second, we show that banks are more likely to contract in more similar areas. These results are consistent with the theory that banks value diversification, but that informational barriers to entry prevent them from achieving optimal scale. These findings have implications for the assessment of banking competition and for the rise of fintech.

Feature Engineering for Mid-Price Prediction with Deep Learning
Adamantios Ntakaris,Giorgio Mirone,Juho Kanniainen,Moncef Gabbouj,Alexandros Iosifidis

Mid-price movement prediction based on limit order book (LOB) data is a challenging task due to the complexity and dynamics of the LOB. So far, there have been very limited attempts for extracting relevant features based on LOB data. In this paper, we address this problem by designing a new set of handcrafted features and performing an extensive experimental evaluation on both liquid and illiquid stocks. More specifically, we implement a new set of econometrical features that capture statistical properties of the underlying securities for the task of mid-price prediction. Moreover, we develop a new experimental protocol for online learning that treats the task as a multi-objective optimization problem and predicts i) the direction of the next price movement and ii) the number of order book events that occur until the change takes place. In order to predict the mid-price movement, the features are fed into nine different deep learning models based on multi-layer perceptrons (MLP), convolutional neural networks (CNN) and long short-term memory (LSTM) neural networks. The performance of the proposed method is then evaluated on liquid and illiquid stocks, which are based on TotalView-ITCH US and Nordic stocks, respectively. For some stocks, results suggest that the correct choice of a feature set and a model can lead to the successful prediction of how long it takes to have a stock price movement.

Fundamental Capital Valuation for IT Companies: A Real Options Approach
Baek, Chung,Dupoyet, Brice V.,Prakash, Arun J.
This study attempts to estimate the fundamental capital value of a growing firm by combining two separate capital valuation techniques, namely the corporate debt valuation of Merton (1974) and the rational pricing technique of internet companies of Schwartz and Moon (2000). For simplicity, the Black and Scholes (1973) approach is used to infer an estimate of the value of the debt of the firm, while the valuation technique of Schwartz and Moon (2000) has been used to estimate the total value of the firm. Making use of the fact that firm value is a function of the value of debt and equity, we first derive a closed-form solution for the value of the debt and then estimate the implied fundamental equity values for sample firms in the information technology sector, and show how the share prices are either undervalued or overvalued. Inferences on the risk premium on the debt are also provided.

Fundamental and Speculative Demands for Housing
Lian, Weicheng
This paper separates the roles of demand for housing services and belief about future house prices in a house price cycle, by utilizing a feature of user-cost-of-housing that it is sensitive to demand for housing services only. Optimality conditions of producing housing services determine user-cost-of-housing and the elasticity of substitution between land and structures in producing housing services. I find that the impact of demand for housing services on house prices is amplified by a small elasticity of substitution, and demand explained four fifths of the U.S. house price boom in the 2000s.

Liquidity Management Under Fixed Exchange Rate with Open Capital Account
El Hamiani Khatat, Mariam,Veyrune, Romain
This paper introduces a theoretical framework for liquidity management under fixed exchange rate arrangement, derived from the price-specie flow mechanism of David Hume. The framework highlights that the risk of short-term money market rates un-anchoring from the uncovered interest rate parity due to money and foreign exchange market frictions could jeopardize financial stability and market development. The paper then discusses operational solutions that stabilize money market rates close to the level implied by the Uncovered Interest Rate Parity (UIP). Liquidity management under fixed exchange rate with an open capital account presents specific challenges due to: (1) the larger liquidity shocks induced by foreign reserve swings that challenge the development of money markets; and (2) more complicated liquidity forecasts. The theoretical framework is empirically tested based on the estimate of 'offset' coefficients for Denmark and Hong Kong SAR.

Liquidity Risk After 20 Years
Pastor, Lubos,Stambaugh, Robert F.
The Critical Finance Review commissioned Li, Novy-Marx, and Velikov (2017) and Pontiff and Singla (2019) to replicate the results in Pastor and Stambaugh (2003). Both studies successfully replicate our market-wide liquidity measure and find similar estimates of the liquidity risk premium. In the sample period after our study, the liquidity risk premium estimates are even larger, and the liquidity measure displays sharp drops during the 2008 financial crisis. We respond to both replication studies and offer some related thoughts, such as when to use our traded versus non-traded liquidity factors and how to improve the precision of liquidity beta estimates.

Multi-Dimensional Policy Framework for Analyzing and Responding to Global Economic Crises
Moldovan, Octavian,Barnes, David J
This paper builds a Holistic Evaluative Model (or HEM) to analyze crises responses, focusing on multiple narratives (explanations) from fields as varied as economics, political science, finance and public policy. A broader framework equips policymakers with more options to shape responses to crises which routinely occurred during the last 75 years of heightened globalization. A HEM reflects the actual process of policy evaluation by combining data across different fields with a valid approach clear enough to discuss increasing opportunities to ameliorate crisis impacts. Even if they are identified, policymakers may not directly influence the causes of crises, which for 2007-2009 included (a) limited market corrections; (b) regulation deficiencies (c) systemic risks; (d) irrational behaviors; (e) informational complexities and (f) cultural failings (that exacerbated these inefficiencies), but they can focus on developing and implementing adequate policy responses. As such, HEMs increase options over a siloed approach by incorporating multiple theoretical tools, dynamic ripple-effects and diverse stakeholders â€" simultaneously evaluating monetary-fiscal policy, actor rationality, systematic risk and the cultural context.

Nash Bargaining Over Margin Loans to Kelly Gamblers
Alex Garivaltis

I derive practical formulas for optimal arrangements between sophisticated stock market investors (namely, continuous-time Kelly gamblers) and the brokers who lend them cash for leveraged bets on a high Sharpe asset (i.e. the market portfolio). Rather than, say, the broker posting a monopoly price for margin loans, the gambler agrees to use a greater quantity of margin debt than he otherwise would in exchange for an interest rate that is lower than the broker would otherwise post. The gambler thereby attains a higher asymptotic capital growth rate and the broker enjoys a greater rate of intermediation profit than would obtain under non-cooperation. If the threat point represents a vicious breakdown of negotiations (resulting in zero margin loans), then we get an elegant rule of thumb: $r_L^*=(3/4)r+(1/4)(\nu-\sigma^2/2)$, where $r$ is the broker's cost of funds, $\nu$ is the compound-annual growth rate of the market index, and $\sigma$ is the annual volatility. We show that, regardless of the particular threat point, the gambler will negotiate to size his bets as if he himself could borrow at the broker's call rate.

Nomad Reputation and Earnings Management around IPOs: The Experience of the UK Alternative Investment Market
Alhadab, Mohammad
This paper investigates whether the reputation of the Nominated Advisor (Nomad) impacts accrual and real earnings management of Initial Public Offering (IPO) firms on the Alternative Investment Market (AIM) of the London Stock Exchange in the UK. While role of Nomads on AIM market is a significant determinant to ensure to the integrity of the financial reporting quality of their advisee firms, to date, there has been no analysis of the impact of Nomads on such reporting activities. This paper finds evidence that more reputable Nomads on the AIM market play a significant role to constrain the use of accrual-based and real-based earnings management during the IPO year by their advisee IPO firms. This evidence is robust, controlling for endogeneity and selection issue. In addition, the results show that IPO firms with more reputable Nomads experience a better long-run stock return performance and a lower failure rate in the following periods.

Price Setting on a Network
Toomas Hinnosaar

Most products are produced and sold by supply chain networks, where an interconnected network of producers and intermediaries set prices to maximize their profits. I show that there exists a unique equilibrium in a price-setting game on a network. The key distortion reducing both total profits and social welfare is multiple-marginalization, which is magnified by strategic interactions. Individual profits are proportional to influentiality, which is a new measure of network centrality defined by the equilibrium characterization. The results emphasize the importance of the network structure when considering policy questions such as mergers or trade tariffs.

Public Attention to Gender Equality and the Demand for Female Directors
Giannetti, Mariassunta,Wang, Tracy Yue
We show that public attention to gender equality has different effects on the implicit attitudes towards career women of individuals with different ex ante preferences and beliefs. On this basis, we conjecture that public attention to gender equality should affect differently the demand for female directors of firms with different ex ante culture. We find that public attention is associated with an increase in female board representation, especially in firms whose ex ante culture is more sympathetic to gender equality. There is no evidence that the effects of public attention to gender equality are limited by the supply of eligible directors. Public attention to gender equality changes the way female directors are recruited. First, the pool of female directors broadens without any obvious compromises on quality. Second, public attention to gender equality reduces the probability that connected men are appointed, leading to higher female board representation.

Rational Inattention and Retirement Puzzles
Jamie Hentall MacCuish

I present evidence incorporating costly thought solves three puzzles in the retirement literature. The first puzzle is, given incentives, the extent of bunching of labour market exits at legislated state pension ages (SPA) seems incompatible with rational expectations. Adding to the evidence for this puzzle, I include an empirical analysis focusing on whether liquidity constraints can explain this bunching and find they cannot. The nature of this puzzle is clarified by exploring a life-cycle model with rational agents that matches aggregate profiles. This model succeeds in matching aggregates by overestimating the impact of the SPA on poorer individuals whilst underestimating its impact on wealthier people. The second puzzle is people are often mistaken about their own pension provisions. Concerning the second puzzle, I incorporate rational inattention to the SPA into the aforementioned life-cycle model, allowing for mistaken beliefs. To the best of my knowledge, this paper is the first not only to incorporate rational inattention into a life-cycle model but also to assess a rationally inattentive model against non-experimental individual choice data. This facilitates another important contribution: discipling the cost of attention with subjective belief data. Preliminary results indicate rational inattention improves the aggregate fit and better matches the response of participation to the SPA across the wealth distribution, hence offering a resolution to the first puzzle. The third puzzle is despite actuarially advantageous options to defer receipt of pension benefits, take up is extremely low. An extension of the model generates an explanation of this last puzzle: the actuarial calculations implying deferral is preferable ignore the utility cost of tracking your pension which can be avoided by claiming. These puzzles are researched in the context of the reform to the UK female SPA.

Risk Aversion, Prudence and Temperance: It Is a Matter of Gap Between Moments
Colasante, Annarita,Riccetti, Luca
Higher order risk preferences are important determinants of choices under uncertainty. After clarifying some terminological and methodological issues, we are able to confirm, by using data collected by a questionnaire, the well established result of the preference of the majority of the respondents for higher odd and lower even moments of the expected return distribution. We highlight three features: (i) the importance of the gap between the values of the corresponding moments of the two choices, (ii) the behavioral change in presence of a positive/zero/negative expected value, (iii) the huge heterogeneity in behaviors, also due to the complexity of the choice as an important driver of the propensity to switch from choosing on the basis of preferences to choosing randomly. We further analyse the relationship between risk attitudes in monetary and non-monetary contexts, showing that they are correlated, but correlation is far from 1, with a larger risk aversion in fields like health. Interestingly, the propensity to perform illegal activities could be a good indicator of financial risk propensity, and age and geographical location are important determinants of risk propensity.

Strategies for Long Term Investment by Non-Life Insurance Companies in India
Ashraf, S. Husain,Kumari, nikita
The aim of this paper is to study major determinants of long-term investment of the non-life insurance industry of India. The annual financial statements of nineteen non-life insurance companies covering a period of 5 years (2011-2015) were sampled and analyzed through panel regression. The findings indicate that, as expected, highly liquid, highly profitable and large size insurance companies have invested more in long term than lowly liquid, lowly profitable and small size companies. The researcher also find that insurance companies with higher risk retention ratio and higher leveraged ratio have invested less in long term than insurance companies with lower risk retention ratio and lower leveraged ratio.

Tail probabilities of random linear functions of regularly varying random vectors
Bikramjit Das,Vicky Fasen-Hartmann,Claudia Klüppelberg

We provide a new extension of Breiman's Theorem on computing tail probabilities of a product of random variables to a multivariate setting. In particular, we give a complete characterization of regular variation on cones in $[0,\infty)^d$ under random linear transformations. This allows us to compute probabilities of a variety of tail events, which classical multivariate regularly varying models would report to be asymptotically negligible. We illustrate our findings with applications to risk assessment in financial systems and reinsurance markets under a bipartite network structure.

Ten Years After: The Spector Presumption of Insider Dealing in MAD, MAR and MAD II
Kinander, Morten
The 10-year-old Spector Photo Group decision from the European Court of Justice has been the subject of considerable debate in EU insider dealing theory. Since the decision, the EU has drafted and implemented a new regulation, the Market Abuse Regulation (MAR), as well as a separate Directive on criminal sanctions for insider dealing, (MAD II). This article examines and analyses the use-presumption, developed in the case, with special attention to the distinctions between primary and secondary insiders as well as between criminal and administrative procedural contexts. It argues that the Spector-presumption was designed to be applied to primary insiders exposed to an administrative sanction only, but its scope is both more uncertain and broader than that, especially after MAR. The article also argues that the presumption does not make much sense within the MAD II regime. It ends in a concluding section asking whether the Spector-presumption plays an important role in today’s modern, traceable and well-documented trading world.

The Benefits and Costs of Adjusting Bank Capitalisation: Evidence From Euro Area Countries
Budnik, Katarzyna Barbara,Affinito, Massimiliano,Barbic, Gaia,Ben Hadj, Saifeddine,Chretien, Edouard,Dewachter, Hans,Gonzalez, Clara I.,Hu, Jenny,Jantunen, Lauri,Jimborean, Ramona,Manninen, Otso,Martinho, Ricardo,Mencia, Javier,Mousarri, Elena,Naruševičius, Laurynas,Nicoletti, Giulio,O'Grady, Michael,Ozsahin, Selcuk,Pereira, Ana Regina,Rivera-Rozo, Jairo,Trikoupis, Constantinos,Venditti, Fabrizio,Velasco, Sofia
The paper proposes a framework for assessing the impact of system-wide and bank-level capital buffers. The assessment rests on a factor-augmented vector autoregression (FAVAR) model that relates individual bank adjustments to macroeconomic dynamics. We estimate FAVAR models individually for eleven euro area economies and identify structural shocks, which allow us to diagnose key vulnerabilities of national banking systems and estimate short-run economic costs of increasing banks’ capitalisation. On this basis, we run a fully-fledged cost-benefit assessment of an increase in capital buffers. The benefits are related to an increase in bank resilience to adverse shocks. Higher capitalisation allows banks to withstand negative shocks and moderates the reduction of credit to the real economy that ensues in adverse circumstances. The costs relate to transitory credit and output losses that are assessed both on an aggregate and bank level. An increase in capital ratios is shown to have a sharply different impact on credit and economic activity depending on the way banks adjust, i.e. via changes in assets or equity.

The External Balance Assessment Methodology: 2018 Update
Cubeddu, Luis,Krogstrup, Signe,Adler, Gustavo,Rabanal, Pau,Dao, Mai Chi,Ahmed Hannan, Swarnali,Juvenal, Luciana,Osorio Buitron, Carolina,Rebillard, Cyril,Garcia-Macia, Daniel,Jones, Callum,Rodriguez, Jair,Chang, Kyun Suk,Gautam, Deepali,Wang, Zijiao
The assessment of external positions and exchange rates is a key mandate of the IMF. This paperpresents the updated External Balance Assessment (EBA) framework-a key input in the conduct ofmultilaterally-consistent external sector assessments of 49 advanced and emerging marketeconomies-following the two rounds of refinements adopted since the framework was introduced in2012 (as described in Phillips et al., 2013). It also presents new complementary tools for shedding lighton the role of structural factors in explaining external imbalances and assessing potential biases in themeasurement of external positions. Remaining challenges and areas of future work are also discussed.

The Impact of Monetary Policy on Housing Prices in China
Chen, Shen,Wei, Wan,Huang, Peng
This paper examines the impact of monetary policy on housing prices in China with a VAR model. Granger causality tests, impulse response functions, and variance decompositions are used to analyze the impacts of two monetary policy variables, market-based short-term interest rates and money supply, on housing prices. The results show that a contractionary monetary policy will cause the growth rate of housing prices to decline in China. In particular, a positive shock to market-based interest rates measured by the 7-day interbank offered rate has a significant and negative effect on housing prices in a range from five months to one and a half years after the shock takes place. However, our paper finds no evidence that supports the significant impact from money supply on housing prices. The results of our paper imply that the market-based short-term interest rates are effective monetary policy instruments for the central bank in China to conduct its policy to affect housing prices.

Two-Sided Market, R&D and Payments System Evolution
Li, Bin (Grace),McAndrews, James,Wang, Zhu
It takes many years for more efficient electronic payments to be widely used, and the fees thatmerchants (consumers) pay for using those services are increasing (decreasing) over time. Weaddress these puzzles by studying payments system evolution with a dynamic model in a twosidedmarket setting. We calibrate the model to the U.S. payment card data, and conduct welfareand policy analysis. Our analysis shows that the market power of electronic payment networksplays important roles in explaining the slow adoption and asymmetric price changes, and thewelfare impact of regulations may vary significantly through the endogenous R&D channel.

Variance Risk Premium Components and International Stock Return Predictability
Londono, Juan M.,Xu, Nancy R.
In this paper, we document and explain the distinct behaviors of U.S. downside and upside variance risk premiums (DVP and UVP, respectively) and their international stock return predictability patterns. DVP, the compensation for bearing downside variance risk, is positive, highly correlated with the total variance premium, and countercyclical, whereas UVP is, on average, borderline positive and procyclical with large negative spikes around episodes of market turmoil. We then provide robust evidence that decomposing VP into its downside and upside components significantly improves domestic and international stock return predictability. DVP is a robust predictor at four to six months and exhibits a hump-shaped pattern, whereas UVP performs the best at very short horizons. These stylized facts highlight the importance of acknowledging asymmetry in equity risk premiums. Hence, in the second part of the paper, we rationalize the economic sources of DVP and UVP in an international dynamic asset pricing model featuring asymmetric and time-varying risk aversion and economic uncertainty in a partially integrated world economy. We show that DVP is mostly driven by the upside movements of risk aversion, whereas UVP loads significantly and negatively on downside economic uncertainty. Moreover, we find that DVP (UVP) transmits to international markets mostly through financial integration (real economic integration).