Research articles for the 2019-04-24

A geometrical imaging of the real gap between economies of China and the United States
Ali Hosseiny

GDP of China is about 11 trillion dollars and GDP of the United States is about 18 trillion dollars. Suppose that we know for the coming years, economy of the US will experience a real growth rate equal to \%3 and economy of China will experience a real growth as of \%6. Now, the question is how long does it take for economy of China to catch the economy of the United States. The early impression is that the desired time is the answer of the equation $11\times1.06^X=18\times1.03^X$. The correct answer however is quite different. GDP is not a simple number and the gap between two countries can not be addressed simply through their sizes. It is rather a geometrical object. Countries pass different paths in the space of production. The gaps between GDP of different countries depend on the path that each country passes through and local metric. To address distance between economies of China and of the US we need to know their utility preferences and the path that China passes to reach the US size. The true gap then can be found if we calculate local metric along this path. It resembles impressions about measurements in the General Theory of Relativity. Path dependency of aggregate indexes is widely discussed in the Index Number Theory. Our aim is to stick to the geometrical view presented in the General Relativity to provide a visual understanding of the matter. We show that different elements in the general relativity have their own counterparts in economics. We claim that national agencies who provide aggregate data resemble falling observers into a curved space time. It is while the World Bank or international organizations are outside observers. The vision provided here, leaves readers with a clear conclusion. If China keeps its growth rate, then the economy of China should catch the economy of the United States sooner than what we expect.

A neural network-based framework for financial model calibration
Shuaiqiang Liu,Anastasia Borovykh,Lech A. Grzelak,Cornelis W. Oosterlee

A data-driven approach called CaNN (Calibration Neural Network) is proposed to calibrate financial asset price models using an Artificial Neural Network (ANN). Determining optimal values of the model parameters is formulated as training hidden neurons within a machine learning framework, based on available financial option prices. The framework consists of two parts: a forward pass in which we train the weights of the ANN off-line, valuing options under many different asset model parameter settings; and a backward pass, in which we evaluate the trained ANN-solver on-line, aiming to find the weights of the neurons in the input layer. The rapid on-line learning of implied volatility by ANNs, in combination with the use of an adapted parallel global optimization method, tackles the computation bottleneck and provides a fast and reliable technique for calibrating model parameters while avoiding, as much as possible, getting stuck in local minima. Numerical experiments confirm that this machine-learning framework can be employed to calibrate parameters of high-dimensional stochastic volatility models efficiently and accurately.

Algorithm Aversion in Financial Investing
Germann, Maximilian,Merkle, Christoph
The tendency of humans to shy away from using algorithms â€" even when algorithms observably outperform their human counterpart â€" has been referred to as algorithm aversion. We conduct an experiment to test for algorithm aversion in financial decision making. Participants acting as investors can tie their incentives to either a human fund manager or an investment algorithm. We find no sign of algorithm aversion: Investors care about returns, but do not have strong preferences which intermediary obtains these returns. Contrary to what has been suggested, investors are also not quicker to lose confidence in the algorithm after seeing it err. However, we find that investors are unable to fully separate skill and luck when evaluating either intermediary.

Benchmarked Risk Minimizing Hedging Strategies for Life Insurance Policies
Sun, Jin,Platen, Eckhard
Traditional life insurance policies offer no equity investment opportunities for the premium paid, and suffer from low returns over the long insurance terms. Modern equity-linked insurance policies offer equity investment opportunities exposed to equity market risk. To combine the low-risk of traditional policies with the high returns offered by equity-linked policies, we consider insurance policies under the benchmark approach (BA), where the policyholders' funds are invested in the growth-optimal portfolio and the locally risk-free savings account. Under the BA, life insurance policies can be delivered at their minimal costs, lower than the classical actuarial theory predicts. Due to unhedgeable mortality risk, life insurance policies cannot be fully hedged. In this case benchmarked risk-minimization can be applied to obtain hedging strategies with minimally fluctuating pro fit and loss processes, where the fluctuations can further be reduced through diversification.

Confronting the Problem of Fraud on the Board
Friedlander, Joel Edan
Recent precedents make it difficult to challenge transactions approved by a board of directors and a stockholder majority. When should such cases be filed, proceed beyond the pleading stage, and prevail? My answer is that judicial intervention should remedy and deter tortious misconduct that corrupts board decision-making (i.e., misconduct that the Delaware Supreme Court has called “illicit manipulation of a board’s deliberative processes” or “fraud upon the board”). Commission of fraud on the board is an omnipresent temptation for self-interested controllers, activist stockholders, officers, financial advisors, and their legal counsel. Fraud can be used to put a company in play, steer a sale process toward a favored bidder, suppress the sale price to a controller, or make a favored bid look more attractive. I argue that confronting the problem of fraud on the board has three components. First, successful breach of fiduciary duty actions should be reinterpreted as occasions when courts made tentative or final determinations that a board decision was corrupted by fraud or related tortious misconduct. Second, stockholders should be entitled to examine contemporaneously created books and records in order to detect fraud on the board. Third, fraud on the board should be considered a free-standing tort, without the need to establish that duped directors breached their fiduciary duties. Recognizing a tort of fraud on the board would be consistent with tort principles and a sound stockholder litigation regime.

Deep Q-Learning for Nash Equilibria: Nash-DQN
Philippe Casgrain,Brian Ning,Sebastian Jaimungal

Model-free learning for multi-agent stochastic games is an active area of research. Existing reinforcement learning algorithms, however, are often restricted to zero-sum games, and are applicable only in small state-action spaces or other simplified settings. Here, we develop a new data efficient Deep-Q-learning methodology for model-free learning of Nash equilibria for general-sum stochastic games. The algorithm uses a local linear-quadratic expansion of the stochastic game, which leads to analytically solvable optimal actions. The expansion is parametrized by deep neural networks to give it sufficient flexibility to learn the environment without the need to experience all state-action pairs. We study symmetry properties of the algorithm stemming from label-invariant stochastic games and as a proof of concept, apply our algorithm to learning optimal trading strategies in competitive electronic markets.

Do Distressed Banks Really Gamble for Resurrection?
Ben-David, Itzhak,Palvia, Ajay A.,Stulz, René M.
We explore the actions of financially distressed banks in two distinct periods that include financial crises (1985-1994, 2005-2014) and differ in bank regulations, especially concerning capital requirements and enforcement. In contrast to the widespread belief that distressed banks gamble for resurrection, we document that distressed banks take actions to reduce leverage and risk, such as reducing asset and loan growth, issuing equity, decreasing dividends, and lowering deposit rates. Despite large differences in regulation between periods, the extent of deleveraging is similar, suggesting that economic forces beyond formal regulations incentivize bank managers to deleverage when their banks are in distress.

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 find further evidence for the link between overconfidence and borrowing behavior in a representative survey (GSOEP-IS).

Effect of Stock Price Information on Timing of Share Repurchases
Chong, Chee Meng,Ab Razak, Nazrul Hisyam
Objective â€" This study investigates whether private information newly incorporated into stock price enhances performance in timing share repurchases.Methodology/Technique â€" Cost saving gained in share repurchases is used a proxy for performance of market-timing in share repurchases and firm-specific stock return variation is used to gauge stock price informativeness. A sample of 334 U.S. repurchasing firms are tested using panel data regression.Findings â€" The paper concludes that managers possess better market timing skill by obtaining more cost saving from their share repurchases when private information is reflected in stock price. Stock price informativeness may be the tool for managers to improve their market timing skill to take advantage of the stock market. Furthermore, firms with smaller size and a higher market-to-book ratios, and firms with higher cash-to-assets ratios are found to achieve more cost saving in buying back their shares indicating that these firms are able to time the market in share repurchasing.Novelty â€" Despite numerous previous studies focusing solely on using share repurchases announcement for computing cumulative abnormal returns in testing managerial market timing, this study contributes to the literature in several ways: (i) providing evidence relating stock price informativeness and performance of market-timing in share repurchases; (ii) developing a better timing measure constructed using actual repurchasing data; (iii) adopting a cost saving measure as the timing measure instead of cumulative abnormal return.Type of Paper: Empirical.

Empirical Analysis of Structural Income Changes in Commercial Banks: A Case of Pakistan
Khan, Tahseen
The primary purpose of this study was to conduct an exploratory and explanatory analysis to determine the impact of structural income on performance of the all commercial banks in Pakistan from 2008 to 2015. It aimed to establish the theory on dual impact of income diversification and ownership on bank performance in a developing economy. This population was divided into two categories - ownership mode characterized into conventional and Islamic banks and category mode characterized into five proportions of non-markup and mark up income structures. The divisions were analyzed on the basis of change in assets and equity and gross income, using a non-linear approach. This approach ensured robustness of analysis and clearer outcomes regarding strategic approaches in this sector. Ownership mode finding suggested conventional banks tilt towards non-markup income significantly for asset and gross income base increase and Islamic banks insignificantly towards markup income. Our findings also showed that conventional banks lead Islamic banks, and banks with non-markup income between 30%-40% lead other bank categories in terms of managing profitability. Islamic banks are ahead of conventional banks, and category1 banks with non-markup income above 50% are ahead of all other categories in terms of utilization of funds.

Factor-Based Allocation: Is There a Superior Strategy?
Dichtl, Hubert,Drobetz, Wolfgang,Wendt, Viktoria-Sophie
Factor-based allocation embraces the idea of factors, as opposed to asset classes, as the ultimate building blocks of an investment portfolio. Our study contributes to the literature by addressing the question whether there is a superior way of combining factors in a portfolio. We provide a comprehensive comparison of factor-based allocation strategies within a multiple testing framework. Factor-based allocation is profitable, even when applying the necessary multiple testing corrections. Investment portfolios can be efficiently diversified using factor-based allocation since we find robust economic performance over various market states. Ultimately, we provide guidance for investors on the best method to choose when constructing factor-based portfolios. A naive equal-weighted factor portfolio, albeit simple and costless, cannot be outperformed by more sophisticated allocation strategies.

Fiscal Policy Report Card on America’s Governors 2018
Edwards, Chris
The U.S. economy is in its 10th year of economic expansion, and state government budgets are benefiting from a solid growth in tax revenues. State general fund revenues have grown 40 percent since 2010. Many of the nation’s governors have used the growing revenues to expand spending programs, whereas others have pursued reductions in taxes.That is the backdrop to this year’s 14th biennial fiscal report card on the governors, which examines state budget actions since 2016. It uses statistical data to grade the governors on their taxing and spending records â€" governors who have cut taxes and spending the most receive the highest grades, whereas those who have increased taxes and spending the most receive the lowest grades. This report discusses these fiscal policy developments and examines the tax and spending actions of each governor in detail. The hope is that the report encourages more state policymakers to adopt the fiscal approaches of the top-scoring governors.

Give Credit Where Credit is Due: What Explains Corporate Bond Returns?
Israelov, Roni
This paper explains the risk and returns of US corporate bond indices using a set of economically-motivated factors. In particular, I find that options markets explain a great deal of credit returns. Two particular features of corporate bonds generate option exposure. The first is that, in accordance with the Merton model, a corporate bond is economically equivalent to a short put option on a firm’s assets bundled with a risk-free bond. The second is that many corporate bonds include call provisions, which are basically options granted to the bond issuer. Thus, callable corporate bonds are positively exposed to firm asset values and negatively exposed to interest rates, firm volatility, and bond volatility. Using data spanning 21 years, I find that these identified risk factors explain between 60% and 76% of the return variability of the aggregate US investment grade corporate index, its sub-indices by maturity, and the aggregate US high yield index.I further decompose performance to identify systematic and idiosyncratic exposures. Systematic exposures compensate bond investors via the bond, equity, equity volatility, and bond volatility risk premia. Idiosyncratic exposures, on the other hand, provide risk without reward on average. Finally, I propose a Risk-Efficient Credit strategy that isolates the compensated risk premia by buying bonds and equities and by selling delta-neutralized equity index options and bond options. Risk-Efficient Credit strategies had similar or higher average returns than their corporate bond index counterparts, despite realizing between 15% and 48% lower volatility as well as attenuated drawdowns.

Have FSRs Got News for You? Evidence from the Impact of Financial Stability Reports on Market Activity
Harris, Richard D. F.,Karadotchev, Veselin,Sowerbutts, Rhiannon,Stoja, Evarist
We investigate the impact that the publication of the Bank of England’s Financial Stability Report (FSR) has on the stock returns and credit default swap spreads of UK financial institutions. Examining a sample of 73 UK-listed banks and other financial institutions, we find that publication of the FSR is, on average, associated with no abnormal returns. We extend our analysis to examine the extent to which policies and the sentiment in the FSR are predictable, which would explain the observed lack of abnormal returns. We find that both sentiment and announced policies are predictable. We also examine the extent to which the release of the FSR reduces information asymmetry in financial markets, but do not find strong evidence.

How to Regulate Bitcoin? Decentralized Regulation for a Decentralized Cryptocurrency
Nabilou, Hossein
Bitcoin is a distributed system. The greatest dilemma it poses to the current legal and regulatory systems is that it is hardly possible to regulate a distributed network in a centralized fashion as decentralized permissionless blockchain-based cryptocurrencies are antithetical to the existing centralized structure of monetary and financial regulation. By shifting the policy debate from whether to regulate bitcoin and other decentralized cryptocurrencies to how to regulate them, this paper proposes a more nuanced policy recommendation for regulatory intervention in the cryptocurrency ecosystem. This policy approach relies on a decentralized regulatory architecture that is built upon the existing regulatory infrastructure and makes use of the existing as well as the emerging middlemen in the industry. It argues that instead of regulating the technology or the cryptocurrencies at the code or protocol layer, which might not be desirable, even if feasible, the regulation should target the applications and use-cases of cryptocurrencies. Such a regulatory strategy can best be implemented through directing the edicts and interdictions of regulation towards the middlemen, and can be enforced by the existing financial market participants and traditional gatekeepers such as banks, payment service providers and exchanges, as well as new emerging participants, such as large and centralized node operators and miners that are likely to replicate the functions of the traditional gatekeepers.

Institutional Consensus: Information or Crowding?
Klein, Olga,Klein, Daniel,Tosun, Onur Kemal
We test the information processing skills of institutional investors after earnings releases. If institutions can better process the implications of announced earnings, their trades should push prices to their fundamental values. In contrast, if institutions simply trade in the news direction without anchoring their demand to the fundamental value, their trading pressure should lead to price overreaction, consistent with the predictions of Stein (2009). Overall, we find that institutions push prices beyond their fundamentals when they trade in the direction of the earnings surprise. Importantly, contrarian trading by institutions positively affects price efficiency, especially when they are buying after bad news.

Institutional Investors, the Dollar, and U.S. Credit Conditions
Niepmann, Friederike,Schmidt-Eisenlohr, Tim
This paper documents that an appreciation of the U.S. dollar is associated with a reduction in the supply of commercial and industrial loans by U.S. banks. An increase in the broad dollar index by 2.5 points (one standard deviation) reduces U.S. banks' corporate loan originations by 10 percent. This decline is driven by a reduction in the demand for loans on the secondary market where prices fall and liquidity worsens when the dollar appreciates, with stronger effects for riskier loans. Today, the main buyers of U.S. corporate loans---and, hence, suppliers of funding for these loans---are institutional investors, in particular mutual funds, which experience outflows when the dollar appreciates. A shift of traditional financial intermediation to these relatively unregulated entities, which are more sensitive to global developments, has led to the emergence of this new channel through which the dollar affects the U.S. economy, which we term the secondary market channel.

Intermediated Securities Holding Systems Revisited: A View Through the Prism of Transparency
Keijser, Thomas,Mooney, Charles W.
This chapter explains several benefits of adopting transparent information technology systems for intermediated securities holding infrastructures. Such transparent systems could ameliorate various prevailing problems that confront existing tiered, intermediated holding systems, including those related to corporate actions (dividends, voting), claims against issuers and upper-tier intermediaries, loss sharing and set-off in insolvency proceedings, money laundering and terrorist financing, and privacy, data protection, and confidentiality. Moreover, transparent systems could improve the functions of intermediated holding systems even without changes in laws or regulations. They also could provide a catalyst for law reform and a roadmap for substantive content of reforms. Among potential areas of law reform that transparent systems might inspire is the prospect for disintermediation of holding systems through new technologies, including digital ledger technology.

Lezioni di scelta in condizioni di incertezza e asset pricing: Stati di natura discreti e mercati completi. (Choice under Uncertainty and Asset Pricing: Complete Markets)
Miceli, Maria-Augusta
Italian Abstract: In queste note si cerca di evidenziare come l'asset pricing, nel contesto di stati di natura discreti emercati completi, sia un metodo per spostare ricchezza attraverso gli stati di natura, per ottenere un consumo il più possibile omogeneo nei diversi stati di natura. L'obiettivo è costruire il sistema di equazioni da risolvere per le incognite e come meccanizzare il modello in semplici algoritmi risolvibili dal computer. Vengono esposte le due strategie di soluzioni equivalenti: a ritroso (backward) e in avanti (forward, tramite l'equazione di Bellman). I problemi considerati vanno dal caso più semplice di attività finanziarie "pure" ai casi di attività finanziarie "complesse" che danno luogo a rendimenti in più o tutti gli stati di natura.English Abstract: In these lecture notes I try to emphasize how asset pricing in discrete states of nature and complete markets, is a way to move wealth around states of nature in order to smooth consumption. The aim is to construct the system of equation to be solved for unknowns and how to mechanize the model into simple software algorithms. Two solution strategies are presented: backward and forward, through Bellman equation. The problems to be solved start from the easy case of pure assets to the case of complex assets having yields in many or all states of nature.

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.

Nonconcave Robust Optimization with Discrete Strategies under Knightian Uncertainty
Ariel Neufeld,Mario Sikic

We study robust stochastic optimization problems in the quasi-sure setting in discrete-time. The strategies in the multi-period-case are restricted to those taking values in a discrete set. The optimization problems under consideration are not concave. We provide conditions under which a maximizer exists. The class of problems covered by our robust optimization problem includes optimal stopping and semi-static trading under Knightian uncertainty.

Observing Actions in Bayesian Games
Dominik Grafenhofer,Wolfgang Kuhle

We study Bayesian coordination games where agents receive noisy private information over the game's payoff structure, and over each others' actions. If private information over actions is precise, we find that agents can coordinate on multiple equilibria. If private information over actions is of low quality, equilibrium uniqueness obtains like in a standard global games setting. The current model, with its flexible information structure, can thus be used to study phenomena such as bank-runs, currency crises, recessions, riots, and revolutions, where agents rely on information over each others' actions.

Optimization of the post-crisis recovery plans in scale-free networks
Mohammad Bahrami,Narges Chinichian,Ali Hosseiny,Gholamreza Jafari,Marcel Ausloos

General Motors or a local business, which one is better to be stimulated in post-crisis recessions, where government stimulation is meant to overcome recessions? Due to the budget constraints, it is quite relevant to ask how one can increase the chance of economic recovery. One of the key elements to answer this question is to understand metastable features of the economic networks. Ising model has been suggested for studying such features in the literature. In the homogenous networks one needs at least a minimum activation, forcing an Ising network to switch its local equilibria, where such minimum is independent of the nodes characteristics. In the scale free networks however, when one aims to push the network to switch its vacuum, she faces the question of which nodes are better to be stimulated to minimize the cost. In the paper it has been shown that stimulation of the high degree nodes costs less in general. Despite regular networks, in the scale free networks, the stimulation cost depends on the networks features such as assortativity. Though we have utilized the Ising model to tackle a problem in economics, our analysis shed lights on many other problems concerning stimulations of socio-economic systems.

Pricing options and computing implied volatilities using neural networks
Shuaiqiang Liu,Cornelis W. Oosterlee,Sander M.Bohte

This paper proposes a data-driven approach, by means of an Artificial Neural Network (ANN), to value financial options and to calculate implied volatilities with the aim of accelerating the corresponding numerical methods. With ANNs being universal function approximators, this method trains an optimized ANN on a data set generated by a sophisticated financial model, and runs the trained ANN as an agent of the original solver in a fast and efficient way. We test this approach on three different types of solvers, including the analytic solution for the Black-Scholes equation, the COS method for the Heston stochastic volatility model and Brent's iterative root-finding method for the calculation of implied volatilities. The numerical results show that the ANN solver can reduce the computing time significantly.

Public-Sector Cost of Capital: An Empirical Test of Peltzman’s Conjecture
Moszoro, Marian W.
I test whether public-sector ownership reduces conventional measures of risk utilizing an exogenous event to the air transportation industry. I find that government-sponsored enterprises show significantly lower price volatility than non-government sponsored enterprises. The upshot is that the utilities' cash flows under public-sector provision should be discounted at a lower rate than cash flows under private-sector provision.

Risky Assets in Europe and the US: Risk Vulnerability, Risk Aversion and Economic Environment
Bekhtiar, Karim,Fessler, Pirmin,Lindner, Peter
We use cross-country microdata to analyse the risk taking of households in Europe and the US. Concerning the extensive as well as the intensive margin of risky assets, European households differ substantially from US households; but also inside Europe we document substantial differences. Furthermore, average risk aversion is strongly correlated with the share of households holding risky assets across countries. We decompose the observed differences into two parts. A part explainable by household characteristics as well as differences in risk aversion and a remainder. We employ the unexplained part resulting from our microeconometric decomposition analysis together with country-level variables on the economic environment to relate observed differences in risky asset holdings to institutional ones. We find that institutional differences such as shareholder protection are strongly correlated with the unexplainable differences with regard to holdings of risky assets.

Same Firm, Different Betas
Lewis, Ryan
Models of integrated asset markets predict that the debt and equity of the same firm have similar exposure to systematic risk. However, controlling for default probability, firms with a higher proportion of asset level systematic risk do not have commensurately higher spreads on either their vanilla bonds or synthetic bonds derived from option prices. More, the equity and debt of a firm do not share correlated factor exposures or expected returns as predicted in this class of models. In line with extent empirical asset pricing research, systematic risk proportion does explain credit spreads when estimated from a firm’s bond returns. These results do not appear to be driven by differential exposure to volatility shocks and support a segmented markets approach to modeling the firm.

Same, Same but Different: How Preferential Claims Skew Returns of Venture Capital Investments
Kaboth, Julian,Lodowicks, Arnd,Schreiter, Maximilian,Schwetzler, Bernhard
Venture capital often involves complex equity contracts, which affect the allocation of cash flows among shareholdings at an exit liquidation. To facilitate economic impact analysis, we structure exit relevant preferential rights by their economic impact in a two-dimensional framework. Based hereon, we provide a model that allows to assess ex-ante value of such shares. We apply our model to a selected sample of ventures and find an average overvaluation on a share class basis of 22.1% (median 23.9%), where overvaluation is particularly severe for common and early-on investments.

The Benevolence of Time, Sound Macroeconomic Environment and Governance Quality on the Duration of Sovereign Ratings Phases
Agnello, Luca,Castro, Vítor,Sousa, Ricardo
Using long-term sovereign ratings data for a panel of 130 countries over the last three decades, we rely on discrete-time Weibull models to investigate the duration and determinants of sovereign ratings phases. We find that the likelihood of the end of the 'speculative-grade' phase increases as time goes by (i.e. positive duration dependence), but the 'investment-grade' phase is not duration dependent. Thus, for sovereigns rated as speculative, the build-up of reputation as good borrowers is a gradual process, whereas the reputation of investment-grade sovereigns solidifies and remains unchanged as time passes. However, the length of both phases has proven to be significantly dependent on the country's economic conditions and the quality of governance. In particular, lower inflation, better economic performance and sounder fiscal policies shorten (prolong) the speculative- (investment-) grade phase. In addition, a better perception of the quality of public services and the ability of the government to formulate and implement sound policies and regulations help to reduce the duration of speculative-grade phases.

The Effects of Rural-Urban Migration on Corporate Innovation: Evidence from a Natural Experiment in China
Chen, Deqiu,Gao, Huasheng,Luo, Jiang,Ma, Yujing
We show that the migration of low-skilled, rural workers to urban centers has a negative causal effect on innovation of firms in such urban centers. Our tests exploit the staggered relaxation of city-level household registration system in China, which facilitates rural residents to migrate to cities. We find a significant decrease in innovation for firms headquartered in cities that have adopted such policies relative to firms headquartered in cities that have not. Overall, our results support the view that an abundant supply of low-skilled workers increases the benefit of using existing low-skilled technology and thus reduces firms’ incentive to innovate.

The Geography of Information Acquisition
Chen, Honghui,Qu, Yuanyu,Shen, Tao,Wang, Qinghai
Using detailed data on Chinese mutual fund company visits, we provide direct evidence on mutual fund information acquisition activities and the consequent informational advantages mutual funds establish in local firms. Mutual funds are more likely to visit local and near-by firms, though ease of travel between fund and firm locations alleviates the geographic distance constraints. Mutual fund company visits are related to both fund trading activities and fund trading performance. The relation between mutual fund company visits and trading performance is particularly strong in the newly initiated stock positions. Consistent with this result, we find evidence of intensive information acquisition by mutual funds in stocks not in their current portfolios. Our results suggest that mutual fund local preference in portfolio choice is at least partly driven by geographic constraints of information acquisition and the ensuing information asymmetry.

The Jones Act: A Burden America Can No Longer Bear
Grabow, Colin,Manak, Inu,Ikenson, Daniel J.
This paper provides an overview of the Jones Act by examining its history and the various burdens it imposes on consumers and businesses alike. While the law’s most direct consequence is to raise transportation costs, which are passed down through supply chains and ultimately reflected in higher retail prices, it generates enormous collateral damage through excessive wear and tear on the country’s infrastructure, time wasted in traffic congestion, and the accumulated health and environmental toll caused by unnecessary carbon emissions and hazardous material spills from trucks and trains. Meanwhile, closer scrutiny finds the law’s national security justification to be unmoored from modern military and technological realities. This paper examines how such an archaic, burdensome law has been able to withstand scrutiny and persist for almost a century. Lastly, this paper presents a series of options for reforming this archaic law and reducing its costly burdens.

The Limits to Partial Banking Unions: A Political Economy Approach
Foarta, Dana
This paper studies the welfare effects of a “partial banking union” in which cross-country transfers for bailouts are set at the supranational level, but policymakers in member countries decide the distribution of funds. This allows the self-interested policymakers to extract rents in the bailout process. In equilibrium, such a banking union can actually lower the welfare of citizens in the country receiving transfers compared to the autarky case, as the receiving country must increase its share of the overall burden of the bailout, in order to compensate for the rent-seeking distortion. Supranational fiscal rules are ineffective at reversing this result.

Traditional and Shadow Banks
Chretien, Edouard,Lyonnet, Victor
We propose a theory of the coexistence of traditional and shadow banks. In our model, shadow banks escape the costly regulation traditional banks must comply with, but forgo deposit insurance, which traditional banks can rely upon. In a crisis, shadow banks repay their creditors by selling assets at fire-sale prices to traditional banks, which fund these purchases with insured deposits. Our model is consistent with several facts from the 2007 financial crisis. The analysis implies an increase in traditional banks' debt capacity leads to an increase in the relative size of the shadow banking sector.