Research articles for the 2019-05-05

Comprehensively Stress Testing the Economy in Closed Form
Schlossberger, Janelle
SSRN
In response to the global financial crisis of 2008, the Federal Reserve decided to develop and implement stress tests to assess the soundness of the financial system. Each stress test involves crafting a potential real-world scenario and then quantifying the scenario's effect on both financial actors in the economy and the financial system as a whole. There currently exist two weaknesses in the Federal Reserve's stress testing approach. First, the number of stress tests faced by each financial institution is quite small, with many such stress test scenarios mimicking past historical events that are not necessarily reflective of future situations. Second, the Federal Reserve's toolkit is not sufficiently macroprudential in nature, even though the financial crisis did cause many central banks to nominally transition from a microprudential regulatory approach to a macroprudential regulatory approach. In this work, we tackle these two issues. We show how to massively increase the number and types of possible stress tests without increasing the computational burden. To do this, we generate classes of stress tests with potentially very large cardinalities. For each class of stress tests, we then construct in closed form probability distributions that capture the range of possible balance sheet effects both for each individual financial institution and for the entire financial system. The approach that we take towards increasing the number of stress tests is fundamentally macroprudential. We moreover show how the topologies of the bipartite networks linking financial institutions to assets shape stress tests' effects on the financial system.

Continuity of Utility Maximization under Weak Convergence
Erhan Bayraktar,Yan Dolinsky,Jia Guo
arXiv

In this paper we find tight sufficient conditions for the continuity of the value of the utility maximization problem from terminal wealth with respect to the convergence in distribution of the underlying processes. We also establish a weak convergence result for the terminal wealths of the optimal portfolios. Finally, we apply our results to the computation of the minimal expected shortfall (shortfall risk) in the Heston model by building an appropriate lattice approximation.



Fractal Time Series Analysis of Social Network Activities
Lyudmyla Kirichenko,Vitalii Bulakh,Tamara Radivilova
arXiv

In the work, a comparative correlation and fractal analysis of time series of Bitcoin crypto currency rate and community activities in social networks associated with Bitcoin was conducted. A significant correlation between the Bitcoin rate and the community activities was detected. Time series fractal analysis indicated the presence of self-similar and multifractal properties. The results of researches showed that the series having a strong correlation dependence have a similar multifractal structure.



Hedging and Pricing European-type, Early-Exercise and Discrete Barrier Options using Algorithm for the Convolution of Legendre Series
Tat Lung Chan,Nicholas Hale
arXiv

This paper applies an algorithm for the convolution of compactly supported Legendre series (the CONLeg method) (cf. Hale and Townsend 2014a), to pricing/hedging European-type, early-exercise and discrete-monitored barrier options under a Levy process. The paper employs Chebfun (cf. Trefethen et al. 2014) in computational finance and provides a quadrature-free approach by applying the Chebyshev series in financial modelling. A significant advantage of using the CONLeg method is to formulate option pricing and option Greek curves rather than individual prices/values. Moreover, the CONLeg method can yield high accuracy in option pricing and hedging when the risk-free smooth probability density function (PDF) is smooth/non-smooth. Finally, we show that our method can accurately price/hedge options deep in/out of the money and with very long/short maturities. Compared with existing techniques, the CONLeg method performs either favourably or comparably in numerical experiments.



Model-Free Reinforcement Learning for Financial Portfolios: A Brief Survey
Yoshiharu Sato
arXiv

Financial portfolio management is one of the problems that are most frequently encountered in the investment industry. Nevertheless, it is not widely recognized that both Kelly Criterion and Risk Parity collapse into Mean Variance under some conditions, which implies that a universal solution to the portfolio optimization problem could potentially exist. In fact, the process of sequential computation of optimal component weights that maximize the portfolio's expected return subject to a certain risk budget can be reformulated as a discrete-time Markov Decision Process (MDP) and hence as a stochastic optimal control, where the system being controlled is a portfolio consisting of multiple investment components, and the control is its component weights. Consequently, the problem could be solved using model-free Reinforcement Learning (RL) without knowing specific component dynamics. By examining existing methods of both value-based and policy-based model-free RL for the portfolio optimization problem, we identify some of the key unresolved questions and difficulties facing today's portfolio managers of applying model-free RL to their investment portfolios.



Necessity of a Broader Market Definition in the Analysis of Syndicated Loans
Köksal, Emin,Ardiyok, Sahin
SSRN
Market definition is the indispensable part of a competition analysis since it draws the boundaries of the market on two axes; product and geography. As it is accepted in the antitrust economics literature, from a methodological perspective the market definition is an instrument to properly reduce the complexity of market interaction. While a narrow market definition may ignore the products and the geographic areas that may exercise competitive constraints; a broad market definition may fail to discover anticompetitive behaviors properly. The main purpose of this study is to emphasize a proper market definition to assess the multilateral loans, including syndicated and club loans.In the study, to assess the relevant market definition for the multilateral loans, demand-side and supply-side substitutability are used as the main tools which are also mentioned in the guidelines of competition authorities. Based on the relevant economics and finance literature, we put the following findings:• Both on the demand-side and on the supply-side there are financial products that may exercise competitive constraints on corporate multilateral loans. For the borrowers, which might be financial institutions as well as large companies, syndicated loans and corporate bonds are two direct substitutes. Especially, for large companies, availability of substitutes increases through sophisticated debt instruments, such as medium term notes. On the supply-side, bilateral lending seems to be the closest substitute of multilateral lending. • Corporate multilateral loans have significant international characteristics and they cannot be isolated in any national border. While the companies and the financial institutions may borrow from domestic and foreign banks, banks may syndicate a loan to borrowers in any country. As the financial markets, have become more integrated geographically, the share of foreign banks in multilateral deals has increased gradually. Especially for emerging countries, like Turkey, the international multilateral loans have gained a critical importance to finance the domestic investments.Based on the above findings, to assess the investigated case, two main remarks appear that emphasize the necessity of a broader market definition for corporate multilateral loans:• Multilateral loans that includes the syndicated and club loans cannot be defined as a separate market independent from other substitute debt instruments, such as corporate bonds and medium term notes.• Such loans cannot be isolated from foreign markets and foreign lenders. The effective geographic market definition should be at the international level.The Turkish version of this paper can be found at https://ssrn.com/abstract=3366262

PDE models for the valuation of a non callable defaultable coupon bond under an extended JDCEV model
M.C. Calvo-Garrido,S. Diop,A. Pascucci,C. Vázquez
arXiv

We consider a two-factor model for the valuation of a non callable defaultable bond which pays coupons at certain given dates. The model under consideration is the Jump to Default Constant Elasticity of Variance (JDCEV) model. The JDCEV model is an improvement of the reduced form approach, which unifies credit and equity models into a single framework allowing for stochastic and possible negative interest rates. From the mathematical point of view, the valuation involves two partial differential equation (PDE) problems for each coupon. First, we obtain the existence of solution for these PDE problems. In order to solve them, we propose appropriate numerical schemes based on a Crank-Nicolson semi-Lagrangian method for time discretization combined with bi-quadratic Lagrange finite elements for space discretization. Once the numerical solutions of the PDEs are obtained, a post-processing procedure is carried out in order to achieve the value of the bond. This post-processing includes the computation of an integral term which is approximated by using the composite trapezoidal rule. Finally, we present some numerical results for real market bonds issued by different firms in order to illustrate the proper behaviour of the numerical schemes. Moreover, we obtain an agreement between the numerical results from the PDE approach and those ones obtained by applying a Monte Carlo technique and an asymptotic approximation method.



Sendikasyon Kredilerinin Alıcı Gücü Açısından İncelenmesi (Assessing Buyer Power in Syndicated Loans)
Köksal, Emin,Ardiyok, Sahin
SSRN
The English version of this paper can be found at https://ssrn.com/abstract=3365833Turkish Abstract: Bu çalışmanın temel gayesi sendikasyon ve kulüp kredilerini kapsayan çok taraflı kurumsal krediler pazarında borç alanların alıcı gücünün varlığını sorgulamaktır. Rekabet iktisadı literatüründe henüz formel bir tanımlaması olmayan alıcı gücü, alıcıların alışveriÅŸin karşı tarafı üzerinde uyguladığı baskı olarak tanımlanabilir. Bazı pazarlarda satıcılar deÄŸil, alıcılar pazardaki fiyat ve/veya miktar üzerinde daha etkilidir. Çok taraflı kurumsal krediler pazarı da borç talep edenlerin büyük ve finansal açıdan güçlü iÅŸletmeler olması sebebiyle bu pazarlardandır. Çalışmada çok taraflı kurumsal krediler pazarı üzerine yapılan deÄŸerlendirmeler, borç alanların alıcı gücünün kaynaklarına ve borç verenlerin pazar gücünün incelenmesine dayanmaktadır. Bir yanda, çok taraflı kredilerindeki rekabet koÅŸulları ve borç verenlerin pazar gücü ele alınırken, diÄŸer yanda borç alanların alıcı gücünü etkileyen faktörler ortaya koyulmuÅŸtur. Ayrıca çok taraflı kurumsal krediler yoluyla borçlanma potansiyeli olan Türkiye’deki yerleÅŸik iÅŸletmelerin alıcı gücüne dair veriye dayalı bir incelenme de sunulmuÅŸtur. Çalışma, rekabet iktisadı literatürüne ve verilere dayanarak çok taraflı kredilerdeki alıcı gücüne dair aÅŸağıdaki bulguları ortaya koymaktadır:• Ä°ÅŸletmenin sahip olduÄŸu â€"büyüklük, kamuya açık bilgilerin varlığı, yerli/yabancı sahiplik, vb.- nitelikler borçlanma aracı seçimindeki en önemli belirleyicilerdir. Ä°ÅŸletmeler sahip oldukları bu niteliklerin izin verdiÄŸi ölçüde alternatif borçlanma araçlarına eriÅŸebilme imkanına sahiptir.• Bir kısmı “blue-chip” olarak anılan büyük iÅŸletmeler, sahip oldukları kredi kalitesi ve itibar sayesinde uluslararası pazarlara doÄŸrudan eriÅŸim saÄŸlayabilmekte ve çok taraflı kredileri veren bankalar ile pazarlık yapabilmektedir. Bu durum bu iÅŸletmelerin alıcı gücü olduÄŸunu kanıtlar niteliktedir.• Türkiye’de çok taraflı krediler pazarında potansiyel borç alıcı olan iÅŸletmeler özelinde yapılan deÄŸerlendirmeler üç sebeple bu iÅŸletmelerin alıcı gücü olduÄŸunu göstermektedir: (1) Türkiye’deki çok taraflı krediler pazarı sığ ve oldukça yoÄŸunlaÅŸmıştır, (2) bu pazardaki potansiyel alıcıların sayısı uzun dönemde istikrarlıdır, (3) Türkiye’deki iÅŸletmeler borçlanma maliyetlerinin artışına göre alternatif borçlanma araçlarını kullanabilmektedir.Yukardaki bulgular ve verilerin iÅŸaret ettiÄŸi ÅŸekliyle, sendikasyon ve kulüp kredilerini kapsayan çok taraflı kurumsal krediler pazarını deÄŸerlendiren bir rekabet incelmesinin, doÄŸru sonuçlara ulaÅŸabilmesi için pazarda etkili bir rol oynayan alıcı gücü faktörünü mutlaka dikkate alması gerekmektedir.English Abstract: The main purpose of this study is to examine the buyer power of the borrowers at the multilateral loan market including the syndicated and club loans. Although there has not been a formal definition yet for the buyer power concept in the antitrust economics literature, it may be described as the power that is exercised by the buyers on market transactions. In some markets, it is observed that not the sellers but the buyers may exercise their power on market prices and/or quantities. Corporate multilateral loan market is one of those markets, mostly because of the characteristics of the borrowers which are large and financially sound companies. In this study, the analysis done for the multilateral loan market are based on the assessment of the borrowers’ buyer power and the lenders’ market power. While on one side the competitive conditions in the market and market power of lenders have been elaborated, on the other side factors that determine the buyer power of borrowers have been assessed. The study also provides a specific analysis for Turkish companies in multilateral loan market and their buyer power.Through reviewing the relevant scientific literature and based on the data, the study put the following findings concerning the buyer power of borrowers in multilateral (syndicated/club) loans:• Company characteristics -such as, company size, publicly available information and domestic/foreign ownership- are the most important determinants for the choice of debt instruments. Companies and financial institutions may reach alternative borrowing tools based on their characteristics.• Credit quality of some large companies -called blue-chips- enable them to directly access to the international capital markets and gives them bargaining power over lenders in multilateral loan market. This proves the significance buyer power of such companies in multilateral loan market.• Our analysis for the Turkish borrowers in multilateral loan market shows that Turkish companies have considerable buyer power because of the following reasons: (1) In Turkey the demand side of the multilateral loan market is shallow and concentrated, (2) the number of potential buyers for multilateral loans have been stable, (3) Turkish companies may switch to other debt instruments in case of cost increases.Based on the above findings and facts, we argue that a proper competition analysis which assesses the multilateral loan market -including syndicated and club loans- should consider the buyer power of borrowers as a significant factor.

Sendikasyon Kredilerinin Rekabet İktisadı Açısından İncelenmesi: Bilgi Ekonomisi, Risk Yönetimi ve İşbirliği (Assessing the Syndicated Loans from the Perspective of Competition Economics: Information Economics, Risk Management and Cooperation)
Köksal, Emin,Ardiyok, Sahin
SSRN
Turkish Abstract: Sendikasyon ve kulüp kredileri, verilecek kredi miktarının büyüklüğü ve alınacak risklerin yoğunluğu sebebiyle tek bir banka tarafından finanse edilemeyen çok taraflı kurumsal kredilerdir. Bu çalışma bilgi paylaşımına dayalı bir işbirliğinin bu tür kredi süreçlerindeki belirsizlik ve riske bağlı maliyetleri nasıl etkilendiği ortaya koymayı amaçlamaktadır. Çalışma boyunca özellikle cevaplanmaya çalışılan soru şudur: “Teşebbüslerin ancak ve ancak birlikte gerçekleştirebildikleri, aksi halde gerçekleşmesi mümkün olmayan ekonomik aktiviteler için bilgi paylaşımı ve işbirliğine dair rekabet kuralları nasıl yorumlanmalıdır?” Bu çalışmanın ilgili iktisat ve finans literatürüne dayalı olarak çok taraflı kurumsal krediler özelinde bu soruya sunduğu cevap, bilgi paylaşımını da içeren işbirliği süreçlerinin iki taraflı kredi süreçlerindeki bilgi paylaşımından farklı bir şekilde değerlendirilmesi gerektiğine işaret etmektedir.English Abstract: Syndicated loans are multilateral loans which cannot be financed by a single bank because of the magnitude and the intensity of the risks. This study aims to analyze how a cooperation between banks based on information exchange affects the uncertainty and risk associated costs in a multilateral lending process. During the study the main question to be answered is “How the antitrust rules related with information exchange may be treated for the economic activities that may only be performed jointly?” The study tries to answer this question based on the economics and finance literature. It concludes that information exchange in multilateral lending process should be treated different than the bilateral lending.

Sendikasyon Kredilerinin İncelenmesinde Daha Geniş Bir Pazar Tanımının Gerekliliği (Necessity of a Broader Market Definition in the Analysis of Syndicated Loans)
Köksal, Emin,Ardiyok, Sahin
SSRN
The English version of this paper can be found at https://ssrn.com/abstract=3365828Turkish Abstract: Pazar tanımı, yapılacak değerlendirmelerin ürün ve coğrafya ekseninde sınırlarını belirlemesi sebebiyle, bir rekabet analizinin vazgeçilmez unsurlarından biridir. İlgili rekabet iktisadı literatüründe kabul gördüğü haliyle pazar tanımı, metodolojik açıdan pazardaki etkileşimin karmaşıklığını doğru şekilde azaltan bir araçtır. Olması gerekenden daha dar bir pazar tanımı rekabetçi baskı uygulayan ürün ve coğrafyaları ihmal ederken, olması gerekenden daha geniş bir pazar tanımı ise rekabete aykırı davranışların belirlenmesini engellemektedir. Bu çalışmanın amacı, sendikasyon ve kulüp kredilerini kapsayan çok taraflı kurumsal kredilerin rekabet boyutunun incelenmesinde doğru bir pazar tanımının gerekliliğini vurgulamaktadır.Çalışmada çok taraflı kurumsal krediler için pazar tanımı değerlendirilmesinde, hem rekabet iktisadı literatüründe hem de rekabet otoritelerinin kılavuzlarında yer alan, talep ve arz ikamesi temel araçlar olarak kullanılmıştır. Çalışma boyunca ilgili bilimsel literatüre dayalı bir şekilde aşağıdaki bulgular ortaya koyulmuştur: • Hem arz tarafı hem de talep tarafı açısından, çok taraflı kurumsal krediler üzerinde rekabetçi baskı yaratacak finansal ürünler bulunmaktadır. Örneğin, kredi talep eden işletmeler için sendikasyon kredileri ve şirket bonoları doğrudan ikame niteliğindedir. Özelikle büyük işletmeler için ikame edilebilirlik orta vadeli senetler gibi sofistike borç araçları ile çok daha yüksektir. Arz tarafında ise, iki taraflı kurumsal kredi verme faaliyetleri sendikasyon ve kulüp kredilerinin yakın ikameleri olarak karşımıza çıkmaktadır.• Çok taraflı kurumsal krediler, uluslararası niteliklere sahip ve ulusal hudutlar ile sınırlanamayacak türde borçlanma araçlarıdır. İşletmeler veya finansal kurumlar yerli ve yabancı bankalara kredi talebinde bulunabilirken, talepte bulunulan bu bankalar da birçok ülkede kredi verebilmektedir. Finansal piyasaların coğrafi entegrasyonuyla birlikte, çok taraflı kredilerdeki yabancı varlığı kademeli bir artış göstermiştir. Özellikle Türkiye gibi gelişen ülkeler için uluslararası çok taraflı krediler, yatırımların finansmanı için kritik bir önem sahiptir.Çalışmanın sunduğu bu bulgular eldeki soruşturmayı değerlendirmek için ise iki eksende -ürün ve coğrafya- pazarın nasıl doğru bir şekilde tanımlanmasına dair tespitlere dikkat çekmektedir:• Sendikasyon ve kulüp kredilerini kapsayan çok taraflı kurumsal krediler, şirket bonoları ve orta vadeli senetler gibi yakın ikamelerinden ayrı bir bağımsız pazar olarak tanımlanmamalıdır. • Bu tür krediler yabancı bankalardan ve yabancı piyasalardan yalıtılamaz. Etkin bir coğrafi pazar tanımı mutlaka uluslararası düzeyde hatta küresel seviyede olmalıdır.English Abstract: Market definition is the indispensable part of a competition analysis since it draws the boundaries of the market on two axes; product and geography. As it is accepted in the antitrust economics literature, from a methodological perspective the market definition is an instrument to properly reduce the complexity of market interaction. While a narrow market definition may ignore the products and the geographic areas that may exercise competitive constraints; a broad market definition may fail to discover anticompetitive behaviors properly. The main purpose of this study is to emphasize a proper market definition to assess the multilateral loans, including syndicated and club loans.In the study, to assess the relevant market definition for the multilateral loans, demand-side and supply-side substitutability are used as the main tools which are also mentioned in the guidelines of competition authorities. Based on the relevant economics and finance literature, we put the following findings:• Both on the demand-side and on the supply-side there are financial products that may exercise competitive constraints on corporate multilateral loans. For the borrowers, which might be financial institutions as well as large companies, syndicated loans and corporate bonds are two direct substitutes. Especially, for large companies, availability of substitutes increases through sophisticated debt instruments, such as medium term notes. On the supply-side, bilateral lending seems to be the closest substitute of multilateral lending. • Corporate multilateral loans have significant international characteristics and they cannot be isolated in any national border. While the companies and the financial institutions may borrow from domestic and foreign banks, banks may syndicate a loan to borrowers in any country. As the financial markets, have become more integrated geographically, the share of foreign banks in multilateral deals has increased gradually. Especially for emerging countries, like Turkey, the international multilateral loans have gained a critical importance to finance the domestic investments.Based on the above findings, to assess the investigated case, two main remarks appear that emphasize the necessity of a broader market definition for corporate multilateral loans:• Multilateral loans that includes the syndicated and club loans cannot be defined as a separate market independent from other substitute debt instruments, such as corporate bonds and medium term notes.• Such loans cannot be isolated from foreign markets and foreign lenders. The effective geographic market definition should be at the international level.