Research articles for the 2019-04-18

A Comparative Analysis of Firms’ Financing Decisions in Export and Non-Export Sectors: Evidence from Portugal
Silva, Cátia,Pinto, João
This paper examines the differences in firms’ financing decisions in export and non-export sectors. Using a sample of 43,078 Portuguese non-public firms with data available for the 2011-2016 period, we find that export intensity affects firms’ leverage: export firms have a higher leverage level than non-export firms and firms with higher export sales to total sales ratios use more debt. Our results show that while more profitable export and non-export firms have lower leverage, asset tangibility, firm size, non-debt tax shields and annual inflation rate have a significant positive impact on firms’ leverage level. Finally, we document that firms that produce unique products and have higher growth opportunities have higher debt levels.

A Pyramid Scheme Model Based on "Consumer Rebate" Frauds
Yong Shi,Bo Li,Wen Long

There are various types of pyramid schemes which have inflicted or are inflicting losses on many people in the world. We propose a pyramid scheme model which has the principal characters of many pyramid schemes appeared in recent years: promising high returns, rewarding the participants recruiting the next generation of participants, and the organizer will take all the money away when he finds the money from the new participants is not enough to pay the previous participants interest and rewards. We assume the pyramid scheme carries on in the tree network, ER random network, SW small-world network or BA scale-free network respectively, then give the analytical results of how many generations the pyramid scheme can last in these cases. We also use our model to analyse a pyramid scheme in the real world and we find the connections between participants in the pyramid scheme may constitute a SW small-world network.

Ambiguity Aversion and Portfolio Efficiency Tests
Polkovnichenko, Valery,Wang, Hui
Testing portfolio alpha against a linear factor model can be interpreted as a mean-variance efficiency test of the optimal portfolio of factors. For ambiguity neutral investor, adding active portfolio with statistically significant alpha always implies efficiency gain relative to the optimal portfolio of factors. In contrast, for ambiguity averse investor, the efficiency gain must be above a threshold which depends on the uncertainty about the factors' and active portfolio's expected returns. Building on the theoretical framework developed in Garlappi, Uppal and Wang (2007), we propose a new method to test portfolio efficiency relative to a factor model by using asset exclusion conditions from the optimal portfolio of the ambiguity averse investor. The asset exclusion threshold is an F-statistic that is non-redundant with significance of alpha under the ambiguity-neutral test. Active portfolios with statistically significant alpha but weak efficiency gain may be excluded from the optimal portfolio. We apply this criterion empirically to screen active portfolios ("anomalies'') and find that some anomalies do not pass our exclusion test under statistically reasonable ambiguity about their expected return.

Applications of Gaussian Process Latent Variable Models in Finance
Rajbir-Singh Nirwan,Nils Bertschinger

Estimating covariances between financial assets plays an important role in risk management. In practice, when the sample size is small compared to the number of variables, the empirical estimate is known to be very unstable. Here, we propose a novel covariance estimator based on the Gaussian Process Latent Variable Model (GP-LVM). Our estimator can be considered as a non-linear extension of standard factor models with readily interpretable parameters reminiscent of market betas. Furthermore, our Bayesian treatment naturally shrinks the sample covariance matrix towards a more structured matrix given by the prior and thereby systematically reduces estimation errors. Finally, we discuss some financial applications of the GP-LVM.

Arbitrage-Free Self-Organizing Markets with GARCH Properties: Generating Them in the Lab with a Lattice Model
Dupoyet, Brice V.,Fiebig, Rudolf H,Musgrove, David
We extend our studies of a quantum field model defined on a lattice having the dilation group as a local gauge symmetry. The model is relevant in the cross-disciplinary area of econophysics. A corresponding proposal by Ilinski aimed at gauge modeling in nonequilibrium pricing is realized as a numerical simulation of the one-asset version. The gauge field background enforces minimal arbitrage, yet allows for statistical fluctuations. The new feature added to the model is an updating prescription for the simulation that drives the model market into a self-organized critical state. Taking advantage of some flexibility of the updating prescription, stylized features and dynamical behaviors of real-world markets are reproduced in some detail.

Characterisation of honest times and optional semimartingales of class-($\Sigma$)
Libo Li

Given a finite honest time, we first derive a representation of the additive (the multiplicative) decomposition of its Az\'ema optional supermartingale in terms of the draw-down (the relative draw-down) of some optional supermartingales with continuous running supremum. The multiplicative representation then allows us to give a characterisation of finite honest times using a family of non-negative optional supermartingales with continuous running supremum which converges to zero at infinity. Finally, we extend the notion of semimartingales of class-$(\Sigma)$ to optional semimartingales with jumps in its finite variation part, allowing one to establish formulae similar to the Madan-Roynette-Yor option pricing formula for larger class of processes.

Consequences of CLO Portfolio Constraints
Loumioti, Maria,Vasvari, Florin P.
We investigate the relation between portfolio constraints (tests) that Collateralized Loan Obligations (CLOs) have to pass monthly, CLO managers’ loan trading choices and CLO equity returns. We find that stringent portfolio constraints are positively associated with the influence of CLO junior noteholders and tight CLO market conditions. We document that CLOs with restrictive tests have higher portfolio turnover, rebalancing and diversification, and hold loans for shorter periods, suggesting that managers of constrained CLOs actively administer loan portfolios to alleviate credit losses and costly test violations. We further show that managers of constrained CLOs respond to borrower news differently by trading loans to avoid reporting credit losses and to comply with the CLO tests rather than to generate profits from trading. Last, we examine the economic effects of restrictive portfolio tests and find that these constraints are associated with lower CLO equity returns. Our evidence supports the argument that portfolio constraints lead to divergent trading choices and ultimately to different levels of CLO performance.

Corporate Social Responsibility and the Term Structure of CDS Spreads
Gao, Feng,Li, Yubin,Wang, Xinjie,Zhong, Zhaodong
This paper examines the role of corporate social performance in the CDS market. We find that strong social performance is negatively associated with the slope of CDS term structure, by reducing the long-term credit risk relative to the short-term credit risk. After controlling for credit ratings in a path analysis, the direct effect of social performance remains significant, suggesting that CDS market participants incorporate this information more fully than credit rating agencies. Furthermore, the effects of social performance are stronger for firms with speculative-grade ratings, smaller size, or less analyst coverage.

Cyberattacks and Impact on Bond Valuation
Iyer, Subramanian R.,Simkins, Betty J.,Wang, Heng (Emily)
We examine the impact of cyberattacks on bondholder wealth. Unlike stockholders, bondholders do not react in the short-term but do experience negative returns in the one-month event window. Compared to similar firms not subject to cyberattacks, we find that bondholders lost approximately 2% of their wealth within a one-month period surrounding the attack (a loss of $3.8 million on average). In this decade of advanced cybersecurity, bondholders still suffer similar losses compared to the last decade. To our knowledge, this is the first study that analyzes the impact of cyberattacks on bondholder wealth.

Geopolitical Risk and Corporate Investment
Dissanayake, Ruchith,Mehrotra, Vikas,Wu, Yanhui
Shocks to geopolitical risk are known to adversely affect real activity, as well as a flight to safety by invested capital. In this study we explore the channels via which this occurs. We find that firms respond to geopolitical risk by cutting back on capital investments. This effect is stronger for firms with more irreversible investments and foreign operations. Geopolitical threats appear to influence investments more than geopolitical acts do, perhaps because acts are perceived as resolving uncertainty. Dividends, another use of cash by firms, are not adversely affected by changes in geopolitical risk, indicating finite half-lives for geopolitical shocks.

How to Measure the Economic Integrity of IBOR Panels? a Behavioural Approach
Mielus, Piotr
IBOR manipulation imposed new benchmark regulations that force the market to enter a path of a reform of existing financial indices and creation of the new ones. The paper describes an evolution of two IBOR panels: one representing a global financial benchmark: LIBOR and the other representing a local PLN benchmark: WIBOR. The paper provides a quantitative analysis of partial quotes of IBOR panellists and suggests that economic integrity measures should be introduced for IBOR panels. The aim of the research is to define a set of tools that provide information regarding efficiency of a process of production of interest rate benchmark. The research is supplemented with a behavioural analysis of banks’ decision-making process that interferes the contribution of IBOR data. The integrity measures can help market users and financial authorities in evaluating the quality of current and past panels and identifying behavioural factors having an impact on partial quotes of contributing banks.

John Maynard Keynes, Man or Myth? The Incident of the Spanish Pesetas
Zagorsky, Jay
John Maynard Keynes was and still is one of the world’s most famous economists. One of the most fascinating stories about Keynes appeared in his obituary in the 1946 Proceedings of the British Academy. The story stated that during World War I with minimal financial resources Keynes broke the Spanish-British foreign exchange market, a manipulation that is illegal today. This research investigates if the story is myth or truth. Archival materials suggest Keynes did manipulate this foreign exchange market in April of 1918 and he potentially earned £8 million on his trades.

Linkages between Exchange Traded Funds and EU Stock Market Liquidity
Pedisic, Roko
The paper analyses the impact of Exchange Traded Funds (ETFs) on the liquidity of stock exchanges in the European Union. The liquidity of stock exchanges is a complex phenomenon that is influenced by a number of economic and political factors, and a number of models such as the average daily volumes have been developed to explain the aspect of liquidity. The paper provides more information regarding the economic factors influencing liquidity, by analysing the existing literature and data regarding the stock exchange market in the European Union. The trading volumes and importance of ETFs cannot be understated since the indices of the stock market cannot be traded. The ETFs track, and to some extent, replicate the performance of specific indices in the stock market.

Loss-based risk statistics with set-valued analysis
Fei Sun

Since the portfolio has become a hot topic, we wii introduce a special risk statistics from the perspective of loss. This new risk statistic can be uesd for the quantification of portfolio risk. Representation results are provided. Finally, examples are also given to demonstrate the application prospect of this risk statistic.

Macroeconomic News and Treasury Futures Return Volatility: Do Treasury Auctions Matter?
Smales, Lee A.
Various macroeconomic announcements are known to influence asset price volatility. While contemplating the impact of a variety of macro news surprises, we highlight the importance of Treasury auctions â€" a news event that has ramifications for interest rates across the economy and which are gaining in importance due to ongoing Federal deficits, yet has received little attention to date. Using daily observations for the period 2000 â€" 2017, we demonstrate that Treasury auctions have a statistically significant impact on the Treasury futures market. The occurrence of an auction, which increases supply in the underlying cash market, pushes futures prices lower and volatility higher. Conversely, a higher bid-to-cover ratio, which indicates greater demand for Treasury securities, is associated with increases in the price of Treasury futures. The response is consistent with market participants using futures to manage inventory risk. We identify eight macroeconomic news surprises (Cons_Conf, GDP, Ind_Prod, Init_Jobs, ISM_Manu, ISM_NonM, NFP, Ret_Sales) encapsulating economic output, consumer spending, and employment data as having a significant volatility impact on Treasury futures, and highlight the importance of non farm payrolls. The results are consistent across a set of volatility estimates, and in an alternate conditional volatility framework.

Market Risk Premium and Risk-Free Rate Used for 69 Countries in 2019: A Survey
Fernandez, Pablo,Martinez, Mar,Fernández Acín, Isabel
This paper contains the statistics of a survey about the Risk-Free Rate (RF) and the Market Risk Premium (MRP) used in 2019 for 69 countries. We got answers for 84 countries, but we only report the results for 69 countries with more than 8 answers.Due to “Quantitative Easing”, many respondents use for European countries a RF higher than the yield of the 10-year Government bonds. The coefficient of variation (standard deviation/average) of RF is, on average, 2.75 times higher than the CV of MRP for 24 European countries.For the second time of this survey, 9 respondents provided â€" without being asked for â€" a different MRP for Spain and Catalonia (on average, 6.4% for Spain and 11.5% for Catalonia).

Monte Carlo pathwise sensitivities for barrier options
Thomas Gerstner,Bastian Harrach,Daniel Roth

The Monte Carlo pathwise sensitivities approach is well established for smooth payoff functions. In this work, we present a new Monte Carlo algorithm that is able to calculate the pathwise sensitivities for discontinuous payoff functions. Our main tool is to combine the one-step survival idea of Glasserman and Staum with the stable differentiation approach of Alm, Harrach, Harrach and Keller. As an application we use the derived results for a two-dimensional calibration of a CoCo-Bond, which we model with different types of discretely monitored barrier options.

No-arbitrage with multiple-priors in discrete time
Romain Blanchard,Laurence Carassus

We investigate different notions of arbitrage in a multiple-priors setting in discrete time. We revisit the so-called quasi-sure no-arbitrage condition and prove a geometric and a quantitative version of it. We also study three alternative notions and provide conditions for all these definitions to be equivalent. Finally, we propose two concrete examples illustrating these various concepts.

On the (Im)Possibility of Estimating Expected Return from Risk-Neutral Variance
Polkovnichenko, Valery
Linear equations for expected return on a stock in terms of risk-neutral variance of return form a continuum with indeterminate coefficients. The equations can be identified by setting arbitrary slope or intercept. Risk-neutral variance is a sufficient statistic for expected return under the additional strong restrictions on the cross-section and time-variation of certain second moments of returns. Empirical tests strongly reject an integral component of these restrictions as well as their direct implication of stock-specific constant intercepts, casting doubt on general feasibility of estimating expected returns solely from risk-neutral variances. For some stocks, risk-neutral variance determines upper or lower bound on expected return, independently of the risk aversion in the underlying economy. Combining moments under the risk-neutral and physical distribution, rather than relying on one type exclusively, appears to be a promising path forward.

On the Performance of Volatility-Managed Portfolios
Cederburg, Scott,O'Doherty, Michael S.,Wang, Feifei,Yan, Xuemin Sterling
Using a comprehensive set of 103 equity strategies, we analyze the value of volatility-managed portfolios for real-time investors. Volatility-managed portfolios do not systematically outperform their corresponding unmanaged portfolios in direct comparisons. Consistent with Moreira and Muir (2017), volatility-managed portfolios tend to exhibit significantly positive alphas in spanning regressions. However, the trading strategies implied by these regressions are not implementable in real time, and reasonable out-of-sample versions generally earn lower certainty equivalent returns and Sharpe ratios than do simple investments in the original, unmanaged portfolios. This poor out-of-sample performance for volatility-managed portfolios stems primarily from structural instability in the underlying spanning regressions.

Option Pricing with Heavy-Tailed Distributions of Logarithmic Returns
Lasko Basnarkov,Viktor Stojkoski,Zoran Utkovski,Ljupco Kocarev

A growing body of literature suggests that heavy tailed distributions represent an adequate model for the observations of log returns of stocks. Motivated by these findings, here we develop a discrete time framework for pricing of European options. Probability density functions of log returns for different periods are conveniently taken to be convolutions of the Student's t-distribution with three degrees of freedom. The supports of these distributions are truncated in order to obtain finite values for the options. Within this framework, options with different strikes and maturities for one stock rely on a single parameter -- the standard deviation of the Student's t-distribution for unit period. We provide a study which shows that the distribution support width has weak influence on the option prices for certain range of values of the width. It is furthermore shown that such family of truncated distributions approximately satisfies the no-arbitrage principle and the put-call parity. The relevance of the pricing procedure is empirically verified by obtaining remarkably good match of the numerically computed values by our scheme to real market data.

Paying for Market Liquidity: Competition and Incentives
Bellia, Mario,Pelizzon, Loriana,Subrahmanyam, Marti G.,Uno, Jun,Yuferova, Darya
Do competition and incentives offered to designated market makers (DMMs) improve market liquidity? Using data from NYSE Euronext Paris, we show that an exogenous increase in competition among DMMs leads to a significant decrease in quoted and effective spreads, mainly through a reduction in adverse selection costs. In contrast, changes in incentives, through small changes in rebates and requirements for DMMs, do not have any tangible effect on market liquidity. Our results are of relevance for designing optimal contracts between exchanges and DMMs and for regulatory market oversight.

Pricing Tokens on Industrial Production
Kassibrakis, Serge,Malamud, Semyon
We develop a model for pricing tokens that can be used to get access to industrial production. Our model accounts for the possibility of multiple product lines and the evolution of industrial demand. We apply our model to pricing the ICO of a Swiss startup.

Quantum Blockchain using entanglement in time
Del Rajan,Matt Visser

We propose a conceptual design for a quantum blockchain. Our method involves encoding the blockchain into a temporal GHZ (Greenberger-Horne-Zeilinger) state of photons that do not simultaneously coexist. It is shown that the entanglement in time, as opposed to an entanglement in space, provides the crucial quantum advantage. All the subcomponents of this system have already been shown to be experimentally realized. Furthermore, our encoding procedure can be interpreted as nonclassically influencing the past.

Sharp Bounds for the Marginal Treatment Effect with Sample Selection
Vitor Possebom

I analyze treatment effects in situations when agents endogenously select into the treatment group and into the observed sample. As a theoretical contribution, I propose pointwise sharp bounds for the marginal treatment effect (MTE) of interest within the always-observed subpopulation under monotonicity assumptions. Moreover, I impose an extra mean dominance assumption to tighten the previous bounds. I further discuss how to identify those bounds when the support of the propensity score is either continuous or discrete. Using these results, I estimate bounds for the MTE of the Job Corps Training Program on hourly wages for the always-employed subpopulation and find that it is decreasing in the likelihood of attending the program within the Non-Hispanic group. For example, the Average Treatment Effect on the Treated is between \$.33 and \$.99 while the Average Treatment Effect on the Untreated is between \$.71 and \$3.00.

Stock Forecasting using M-Band Wavelet-Based SVR and RNN-LSTMs Models
Hieu Quang Nguyen,Abdul Hasib Rahimyar,Xiaodi Wang

The task of predicting future stock values has always been one that is heavily desired albeit very difficult. This difficulty arises from stocks with non-stationary behavior, and without any explicit form. Hence, predictions are best made through analysis of financial stock data. To handle big data sets, current convention involves the use of the Moving Average. However, by utilizing the Wavelet Transform in place of the Moving Average to denoise stock signals, financial data can be smoothened and more accurately broken down. This newly transformed, denoised, and more stable stock data can be followed up by non-parametric statistical methods, such as Support Vector Regression (SVR) and Recurrent Neural Network (RNN) based Long Short-Term Memory (LSTM) networks to predict future stock prices. Through the implementation of these methods, one is left with a more accurate stock forecast, and in turn, increased profits.

Stock Return Autocorrelations and the Cross Section of Option Returns
Jeon, Yoontae,Kan, Raymond,Li, Gang
We present a new finding between the cross-section of average returns of equity option and the return autocorrelations of underlying stocks. Extended Black-Scholes model incorporating the presence of stock return autocorrelation suggests that expected returns of both call and put options are increasing in return autocorrelation coefficient of the underlying stock. Consistent with this insight, we find strong empirical support in the cross-section of average returns of equity options. Average returns of calls and puts as well as average returns of straddles all show monotonically increasing relationship with the degree of underlying stock's return autocorrelation coefficient. Additional equity option portfolio analysis shows that the information on stock return autocorrelation helps investors to significantly improve the out-of-sample performance of their portfolios.

Sustainable Factor Investing: Where Doing Well Meets Doing Good
Fan, John Hua,Michalski, Lachlan
This paper investigates the impact of ESG integration on systematic factors in Australia. Whilst negative screening leads to inferior factor performance, simultaneously exploiting ESG scores with quality, momentum and size characteristics outperforms standard factor strategies. The outperformance is more pronounced during adverse market conditions such as periods of recession, high inflation, credit risk and market volatility. Furthermore, integrating E, S or G ratings individually into factors only leads to improved risk-adjusted performance in quality and momentum strategies. Finally, we find that forcing portfolio diversification across sectors leads to inferior factor performance. Since ESG integration increases portfolio tilts to higher scoring industries, managers should clearly communicate the opportunity costs arising from mandated sector diversification. Overall, our findings suggest that sustainable factor investing not only allows asset-owners to include their ethical preferences while offering strong potential for wealth generation, but also provides asset managers with the opportunity to mitigate risk, whilst improving societal welfare.

The Effects of the Appointment of Independent Directors Professionally Affiliated with Their Predecessors: Evidence from China
Li, Yanlin,Tian, Gary Gang,Wang, Xin
The function of independent directors has been extensively documented, but the general question of how they are appointed remains insufficiently explored. We find that the likelihood of the appointment of candidates is higher when those candidates are professionally affiliated with departing independent directors, and this is more pronounced when there are personal ties between predecessors and insiders, an entirely compliant record of voting on the part of candidates or predecessors, and particularly in firms with higher-concentrated ownership and that are located in areas with a weak market environment. Moreover, the appointment of independent directors affiliated with their predecessors results in fewer dissenting votes, more related-party transactions, and a higher incidence and greater severity of violations. Our research shows that predecessorâ€"candidate affiliation helps construct a reciprocity norm between successors and insiders, leading to weak board independence.

The Role of Mutual Funds in Corporate Social Responsibility
Li, Zhichuan Frank,Patel, Saurin,Ramani, Srikanth
This paper examines the role of mutual funds in corporate social responsibility (CSR). Using a fund level holdings-based CSR score, we find that a mutual fund’s CSR score is positively related to a firm’s future CSR standings. This relationship is not just driven by high-CSR funds selecting high-CSR firms (initial selection effect), but also by improving their CSR standings afterwards (subsequent improvement effect). The effects of mutual funds on firm CSR are more pronounced for firms with higher mutual fund ownership and stronger corporate governance. Furthermore, we find that high-CSR funds are more likely to vote in favor of implementing CSR proposals, and that firms owned by high-CSR funds are more likely to link their CEO compensation to CSR outcomes. These results suggest that the social commitment of mutual funds is an important determinant of a firm’s social performance.

The Two-Pillar Policy for the RMB
Jermann, Urban J.,Wei, Bin,Yue, Zhanwei
We document stylized facts about China's recent exchange rate policy for its currency, the Renminbi (RMB). Our empirical findings suggest that a "two-pillar policy" is in place, aiming to balance RMB index stability and exchange rate flexibility. We then develop a tractable no-arbitrage model of the RMB under the two-pillar policy. Using derivatives data on the RMB and the US dollar index, we estimate the model to assess financial markets' views about the fundamental exchange rate and sustainability of the policy. Our model is able to predict the modification of the two-pillar policy in May 2017 when a discretion-based "countercyclical factor" was introduced for the first time. We also examine the model's ability to forecast RMB movements.

The fair reward problem: the illusion of success and how to solve it
Didier Sornette,Spencer Wheatley,Peter Cauwels

Humanity has been fascinated by the pursuit of fortune since time immemorial, and many successful outcomes benefit from strokes of luck. But success is subject to complexity, uncertainty, and change - and at times becoming increasingly unequally distributed. This leads to tension and confusion over to what extent people actually get what they deserve (i.e., fairness/meritocracy). Moreover, in many fields, humans are over-confident and pervasively confuse luck for skill (I win, it's skill; I lose, it's bad luck). In some fields, there is too much risk taking; in others, not enough. Where success derives in large part from luck - and especially where bailouts skew the incentives (heads, I win; tails, you lose) - it follows that luck is rewarded too much. This incentivizes a culture of gambling, while downplaying the importance of productive effort. And, short term success is often rewarded, irrespective, and potentially at the detriment, of the long-term system fitness. However, much success is truly meritocratic, and the problem is to discern and reward based on merit. We call this the fair reward problem. To address this, we propose three different measures to assess merit: (i) raw outcome; (ii) risk adjusted outcome, and (iii) prospective. We emphasize the need, in many cases, for the deductive prospective approach, which considers the potential of a system to adapt and mutate in novel futures. This is formalized within an evolutionary system, comprised of five processes, inter alia handling the exploration-exploitation trade-off. Several human endeavors - including finance, politics, and science -are analyzed through these lenses, and concrete solutions are proposed to support a prosperous and meritocratic society.

Venture Capital and Method of Payment in Mergers and Acquisitions
Pham, Viet Hung ,Nguyen, Giang
We examine the relationship between venture capital (VC) backing and the choice of payment in mergers and acquisitions. We find that VC-backed targets receive a significantly higher fraction of stock and greater likelihood of all-stock offers than non-VC-backed targets, even after controlling for self-selection bias, differences between VC-backed and non-VC-backed transactions, and VC bridge-building between targets and acquirers. In addition, the stock fraction in transactions with a VC-backed target increases significantly when the acquirer is young and small, risky, has large investment, and demands VC expertise. Independent VCs like private equity funds prefer stock payment, while corporate VCs have no preference for the choice of stock or cash. We also document that the short-term and long-term performance of acquirers is significantly improved when VC-backed targets choose stock payment. Altogether, the evidence suggests that VCs tend to choose stock as the method of payment and as a result, contribute to acquirers’ performance.

Who Limits Arbitrage?
Foley-Fisher, Nathan,Narajabad, Borghan,Verani, Stephane
This paper proposes and tests a theory of endogenous limits of arbitrage. We incorporate short-sale restrictions and an imperfectly competitive securities lending market into a model of securities traders with private information. The cost of short selling a security is an equilibrium outcome of the demand for short positions and the willingness of buy-and-hold institutional investors to supply their securities to short sellers. Securities lenders with greater risk tolerance are more willing to lend their securities, lowering the cost of taking short positions, which increases price informativeness in the spot trading market. We provide compelling evidence that the corporate bonds held by more risk tolerant insurance companies with securities lending programs tend to have greater spot market trade volume and more price informativeness. Controlling for each individual bond's demand, we identify the mechanism proposed by the model. Insurance companies with more risky cash collateral reinvestment portfolios are more willing to lend corporate bonds that are otherwise costly for short sellers to borrow. Our results suggest a new connection between liability-driven investment and asset pricing.

Why Has Idiosyncratic Volatility Increased?
Safdar, Irfan
This study examines the previously documented trend in idiosyncratic volatility and explores empirical reasons why this trend may have transpired. The study highlights the increasing role of younger firms that go public at earlier stages in driving average idiosyncratic volatility up.