Research articles for the 2019-05-13

A Critical Investigation of Cryptocurrency Data and Analysis
Alexander, Carol,Dakos, Michael
Market betas of bitcoin relative to a broad crypto market index vary considerably, depending on the data source and the index selected. Even greater differences are found for ether and other cryptocurrencies. An in-depth exploration of the cause of these discrepancies reveals a long-standing incorrect time-stamping of some ranking-site data, and hence also the CRIX market index. Furthermore, individual coin data from some exchanges requires adjusting for unstable prices in the 'stablecoin' tether. Even then, since Bitfinex starting trading the tether-dollar cross on margin their coin prices have de-coupled from prices on other exchanges. Is yet another Bitfinex-tether issue arising? Finally, regarding the risk analysis of coin returns, we argue that this requires highly sophisticated models. But calibrating even the simplest GARCH model is extremely difficult because they are surprisingly sensitive to the data source.

A Nonparametric GMM Series Approach to Solving Multi-equation Asset Pricing Models with Recursive Preferences
Cui, Liyuan,Hong, Yongmiao
In an exchange economy with recursive preferences (Epstein and Zin, 1989), we propose a novel nonparametric generalized method of moment (GMM) series approach to estimate unknown policy functions which are recursively specified in a system of nonlinear conditional expectation models simultaneously as opposed to sequentially, thereby avoiding accumulation of approximation errors. Unlike current numerical solution methods, this new method does not require the imposition of tight auxiliary assumptions on the conditional distributions or matching moments of state variables and thus avoids spurious model conclusions due to mis-specification errors on state dynamics. Because there is an infinite number of moments and parameters due to series approximations, we propose a series continuously updated estimator (CUE) and establish a new result on consistency and asymptotic normality, which further helps facilitate rigorous inference on general equilibrium models in the presence of misspecified state variables or those with unknown dynamics. Three simulation studies are considered, and our new method has been proven to perform reasonably well in the finite sample in comparison with popular numerical solution methods.

A Note on Bayesian Long-Term S&P 500 Factor Investing
Taran Grove,Akram Reshad,Andrey Sarantsev

We fit a dynamic factor model: monthly inflation-adjusted S\&P 500 returns vs 10-year trailing earnings yield (the inverse of Shiller price-to-earnings ratio), 10-year trailing dividend yield, and 10-year real interest rate. We model these three factors as AR(1) in three dimensions. We use long-term data from 1881 compiled by Robert Shiller, available at However, in the short run, fluctuations have heavy tails and do not significantly depend on previous values. We use Bayesian regression with normal residuals. We show significant dependence of long-term returns on the initial factor values.

A Stock Selection Method Based on Earning Yield Forecast Using Sequence Prediction Models
Jessie Sun

Long-term investors, different from short-term traders, focus on examining the underlying forces that affect the well-being of a company. They rely on fundamental analysis which attempts to measure the intrinsic value an equity. Quantitative investment researchers have identified some value factors to determine the cost of investment for a stock and compare different stocks. This paper proposes using sequence prediction models to forecast a value factor-the earning yield (EBIT/EV) of a company for stock selection. Two advanced sequence prediction models-Long Short-term Memory (LSTM) and Gated Recurrent Unit (GRU) networks are studied. These two models can overcome the inherent problems of a standard Recurrent Neural Network, i.e., vanishing and exploding gradients. This paper firstly introduces the theories of the networks. And then elaborates the workflow of stock pool creation, feature selection, data structuring, model setup and model evaluation. The LSTM and GRU models demonstrate superior performance of forecast accuracy over a traditional Feedforward Neural Network model. The GRU model slightly outperformed the LSTM model.

A Three-state Opinion Formation Model for Financial Markets
Bernardo J. Zubillaga,André L. M. Vilela,Chao Wang,Kenric P. Nelson,H. Eugene Stanley

We propose a three-state microscopic opinion formation model for the purpose of simulating the dynamics of financial markets. In order to mimic the heterogeneous composition of the mass of investors in a market, the agent-based model considers two different types of traders: noise traders and contrarians. Agents are represented as nodes in a network of interactions and they can assume any of three distinct possible states (e.g. buy, sell or remain inactive). The time evolution of the state of an agent is dictated by probabilistic dynamics that include both local and global influences. A noise trader is subject to local interactions, tending to assume the majority state of its nearest neighbors, whilst a contrarian is subject to a global interaction with the behavior of the market as a whole, tending to assume the state of the global minority of the market. The model exhibits the typical qualitative and quantitative features of real financial time series, including distributions of returns with heavy tails, volatility clustering and long-time memory for the absolute values of the returns. The distributions of returns are fitted by means of coupled Gaussian distributions, quantitatively revealing transitions between leptokurtic, mesokurtic and platykurtic regimes in terms of a non-linear statistical coupling which describes the complexity of the system.

Algorithmic Portfolio Tilting to Harvest Higher Moment Gains
Boudt, Kris,Cornilly, Dries,Van Holle, Frederiek,Willems, Joeri
Many financial portfolios are optimized without taking the higher moments into account. We recommend tilting these portfolios in a direction that increases their estimated mean and third central moment and decreases their variance and fourth central moment. The tilting comes at the cost of deviating from the initial optimality criterion, but it also yields advantages. Here, we show the usefulness of mean-variance-skewness-kurtosis tilting for the equally-weighted, equal-risk-contribution and maximum diversification portfolio in a UCITS-compliant asset allocation setting.

An Endogenous Model of the Stock's Fundamental Value
Negrea, Bogdan
The midquote conjecture states that the fundamental value of a security equals the midpoint of the bid-ask spread. I develop a model which provides theoretical foundation to endogenously estimate the fundamental value. The model derives the endogenous underlying value of stocks as a weighted average of the bid and ask prices. The weights are functions of the price volatility and the risk-free interest rate. As a consequence, I revisit the liquidity-adjusted CAPM and I derive a new estimator of the bid-ask spread.

Analyzing Gold Returns: Indian Perspective
Moradia, Abha,Mehta, Ashish C.
Investors are forever in need of an asset that adds value to the portfolio. Therefore, along with fixed income investments, stocks, gold and other assets are inevitable parts of a balanced portfolio. For Indian investors, gold is not only an investment asset but a commodity with a major importance in the social customs that makes it all the more interesting to study. As an investment asset, it is considered a diversifier asset and a hedging asset. Not only that, it is called a ‘safe-haven’ asset for times of economic distress, meaning that it retains its value when the stock market is giving low or negative returns. In this paper, we analyze the risk-return parameters of both the gold and Sensex for a period from 1992 to 2017 and find out how they perform along with each other. We also do detailed subperiod analysis in terms of Pearson’s correlation coefficient and see how it changes in pre-recession and post-recession period. We analyze whether gold is a diversifier asset, a hedge, a safe haven or all three for Indian investors. It is interesting to note how the exchange rate variability has a great impact on gold’s rate of return.

Asian Miracle, Asian Tiger, or Asian Myth? Financial Sector and Risk Assessment through FSAP Experience: Enhancing Bank Supervision in Thailand
Taskinsoy, John
From free people to a unified Thai kingdom in the mid-14th century (Siam until 1939), and from that to Asian Tiger (or Dragon). Although Thailand saw Japanese’s brief invasion in 1941, it has never been colonized by a European power. Nevertheless, Thailand has witnessed repeated political turmoil and two military coups in this millennium alone; in 2006, Prime Minister THAKSIN Chinnawat was ousted, and in May 2014, YINGLAK was removed from office. When taking these disruptions into account, one can be easily convinced that Thailand’s economic performance amid unimaginable challenges is a remarkable story to tell. The Bank of Thailand as well as regulatory and supervisory authorities have played a pivotal role in achieving financial stability. In May/June, Thailand underwent the Financial System Stability Assessment (FSSA) as part of the Financial Sector Assessment Program (FSAP), the experience has been very positive. The results of stress tests indicate that the BOT’s fiscal, structural, and monetary reforms have strengthened the financial system significantly since the Asian crisis of the late 1990s. In spite of numerous signs of inflationary pressure worldwide, inflation in Thailand is still persistently subdued; however, as an exported dependent nation, Thailand’s economy is always susceptible to imported inflation. To insulate its economy from exogenous as well as cross-border shocks, the BOT along with national regulatory and supervisory agencies must focus on reforms and policies to reduce potential detriments of the boom-and-bust cycles. We caution the Thai government authorities to stand ready to respond because the factors that are supportive of the present low inflation could reverse any time without a warning in the near future.

Asset Pricing with General Transaction Costs: Theory and Numerics
Lukas Gonon,Johannes Muhle-Karbe,Xiaofei Shi

We study risk-sharing equilibria with general convex costs on the agents' trading rates. For an infinite-horizon model with linear state dynamics and exogenous volatilities, the equilibrium returns mean-revert around their frictionless counterparts -- the deviation has Ornstein-Uhlenbeck dynamics for quadratic costs whereas it follows a doubly-reflected Brownian motion if costs are proportional. More general models with arbitrary state dynamics and endogenous volatilities lead to multidimensional systems of nonlinear, fully-coupled forward-backward SDEs. These fall outside the scope of known wellposedness results, but can be solved numerically using the simulation-based deep-learning approach of \cite{}. In a calibration to time series of returns, bid-ask spreads, and trading volume, transaction costs substantially affect equilibrium asset prices. In contrast, the effects of different cost specifications are rather similar, justifying the use of quadratic costs as a proxy for other less tractable specifications.

Avoiding Backtesting Overfitting by Covariance-Penalties: an empirical investigation of the ordinary and total least squares cases
Adriano Koshiyama,Nick Firoozye

Systematic trading strategies are rule-based procedures which choose portfolios and allocate assets. In order to attain certain desired return profiles, quantitative strategists must determine a large array of trading parameters. Backtesting, the attempt to identify the appropriate parameters using historical data available, has been highly criticized due to the abundance of misleading results. Hence, there is an increasing interest in devising procedures for the assessment and comparison of strategies, that is, devising schemes for preventing what is known as backtesting overfitting. So far, many financial researchers have proposed different ways to tackle this problem that can be broadly categorised in three types: Data Snooping, Overestimated Performance, and Cross-Validation Evaluation. In this paper, we propose a new approach to dealing with financial overfitting, a Covariance-Penalty Correction, in which a risk metric is lowered given the number of parameters and data used to underpins a trading strategy. We outlined the foundation and main results behind the Covariance-Penalty correction for trading strategies. After that, we pursue an empirical investigation, comparing its performance with some other approaches in the realm of Covariance-Penalties across more than 1300 assets, using Ordinary and Total Least Squares. Our results suggest that Covariance-Penalties are a suitable procedure to avoid Backtesting Overfitting, and Total Least Squares provides superior performance when compared to Ordinary Least Squares.

Banking Systems and Their Effects on Regional Inequality and Wealth
Burghof, Hans-Peter,Schmidt, Daniel,Gehrung, Marcel
The purpose of our project is to examine how local banking systems impact regional economies. In this project, a unique data set consisting of bank balance sheet information combined with the legal form of banks and economic data on NUTS 2 level is presented to estimate the effect of a diverse banking system. It is demonstrated that the presence of co-operative banks as well as savings banks in the regions has a positive influence on wealth and equality. In addition to that it is found that a regional banking system consisting of smaller banks, and that relies more on credit business, has positive effects on the local economy and reduces inequality significantly.

Banks as Patient Lenders: Evidence from a Tax Reform
Carletti, Elena,De Marco, Filippo,Ioannidou, Vasso,Sette, Enrico
We study how a greater reliance on deposits affects bank lending policies. For identification, we exploit a tax reform in Italy that induced households to substitute bank bonds with deposits. We show that the reform led to larger increases (decreases) in term deposits (bonds) in areas where households held more bonds before the reform. We then find that banks with larger increases in deposits did not change their overall credit supply, but increased credit-lines and the maturity of term-loans. These results are consistent with key theories on the role of deposits as a discipline device and of banks as liquidity providers.

Corruption, Dodd-Frank Whistleblowing, and Corporate Investment
Du, Qingjie,Heo, Yuna
We examine how local political corruption affects corporate investment. We find firms in corrupt states produce significantly less investment. Our results indicate that corruption acts as a barrier to firms’ investment. More importantly, we investigate the effects of whistleblowers on the investment behavior of firms in the context of corruption. We find that the negative impact of corruption on investment disappeared after the Dodd-Frank Whistleblower Provision. This implies that the change of legal environment can help firms partially overcome the problems of a corrupted culture. Overall, our results suggest corruption impedes corporate investment but the better policy can help firms reduce the decline in firms’ investment located in corrupted states.

Do Fundamentals Drive Cryptocurrency Prices?
Bhambhwani, Siddharth,Delikouras, Stefanos,Korniotis, George M.
We test the theoretical prediction that blockchain trustworthiness and transaction benefits determine cryptocurrency prices. Measuring these fundamentals with computing power and adoption levels, we find a significant long-run relationship between them and the prices of five prominent cryptocurrencies. Conducting factor analysis, we find that the returns of the five cryptocurrencies are exposed to aggregate fundamental-based factors related to computing power and adoption levels, even after accounting for Bitcoin returns and cryptocurrency momentum. These factors have positive risk premia and Sharpe ratios comparable to those of the U.S. equity market. They further explain return variation in an out-of-sample set of cryptocurrencies.

ERRATUM: Stochastic evolution equations for large portfolios of stochastic volatility models
Ben Hambly,Nikolaos Kolliopoulos

In the article "Stochastic evolution equations for large portfolios of Stochastic Volatility models" (Arxiv:1701.05640) there is a mistake in the proof of Theorem 3.1. In this erratum we establish a weaker version of this Theorem and then we redevelop the regularity theory for our problem accordingly. This means that most of our regularity results are replaced by slightly weaker ones. We also clarify a point in the proof of a correct result.

Experts in the Crowd and their Influence on Herding in Reward-based Crowdfunding of Cultural Projects
Petit, Aurélien,Wirtz, Peter
The present research investigates certification effects and rational herding in reward based crowdfunding (RBCF) campaigns of cultural projects. The authors analyse data obtained from France’s leading RBCF platform, Ulule, and show that the contributing crowd is heterogeneous in terms of expertise. Testing the impact of different backer categories on (1) campaign success and (2) overall day-by-day funding dynamics, the study provides evidence of the existence of a certification effect and rational herding. Contributions from expert backers are perceived as positive quality signals by potential future backers. Experts hence lead the crowd, and this effect appears to be robust.

Flood Insurance Market Penetration and Expectations of Disaster Assistance
Landry, Craig E.,Petrolia, Daniel R.,Turner, Dylan
Concern over resilience to natural disasters often focuses on moral hazard problems; expectations of disaster assistance may lead households in hazard-prone communities to forego costly insurance and mitigation investments. This phenomenon has been dubbed charity hazard in the literature on natural disasters, though previous research has found mixed results. Employing a dataset for which previous analysis found evidence inconsistent with charity hazard, we re-examine flood insurance market penetration, testing and controlling for endogeneity of survey responses regarding the likelihood of government aid in the wake of a disaster. We instrument for expectations of post disaster aid using data on congressional subcommittee membership and payment history of the Federal Emergency Management Agency public assistance grant program. We find that these instruments are valid in explaining variation in household level expectations of disaster assistance. Results from bivariate probit estimation of flood insurance market penetration indicate that households that exhibit optimistic expectations of disaster assistance are much less likely (almost 23 percent) to hold flood insurance. We offer some policy recommendations.

Impact is not just volatility
Frédéric Bucci,Iacopo Mastromatteo,Michael Benzaquen,Jean-Philippe Bouchaud

The notion of market impact is subtle and sometimes misinterpreted. Here we argue that impact should not be misconstrued as volatility. In particular, the so-called ``square-root impact law'', which states that impact grows as the square-root of traded volume, has nothing to do with price diffusion, i.e. that typical price changes grow as the square-root of time. We rationalise empirical findings on impact and volatility by introducing a simple scaling argument and confronting it to data.

Impacts of Japan's Automobile NOx Law of 1992
Tatsuki Inoue,Nana Nunokawa,Daisuke Kurisu

This study investigates the impacts of the Automobile NOx Law of 1992 on four pollutants in Japan. By utilizing monitoring data between 1897 and 1997, we found that the regulation decreased the level of SO2 by approximately 12.4%. The improving effects on the levels of NOx, Ox, and suspended particulate matter are estimated at 5.8%, 3.1%, and 3.5%, respectively. The result from our flexible specification suggests that, although the regulated areas experienced improvements in concentration, the neighboring effects might have been negligible.

Income Diversification, Funding Strategies: Impact on Risk and Return Evidence From Indian Banks
Kaur, Navneet
This paper analyses the impact of bank’s income diversification and funding strategies on Bank’s Return on Asset and Z score (Proxy for Risk). Based on data from 2005- 2017 on Indian Public and Private sector banks. It has been found that even though the proportion of non-deposit funding is very less but still an important variable to study. It is found that Banks, who have higher proportion of non-deposit funding have higher Z score. For Public sector banks borrowings negatively impact the Return on Asset. Banks who diversify their income from non-interest income have higher non-deposit funding, return on Asset and Z score.

Information Leaks and Voluntary Disclosure
Ebert, Michael,Schäfer, Ulrich,Schneider, Georg Thomas
We study firms’ voluntary disclosures in a world of potential information leaks. We find that managers adapt their disclosure strategy to the likelihood and expected scope of leaks. An increasing likelihood fosters voluntary disclosure if leaks merely expose the manager’s information endowment and impedes disclosure if leaks in addition uncover the content of the manager’s information. We identify a non-monotonic effect on voluntary disclosure if the scope of information leakage is uncertain, i.e., if leaks reveal the information content with positive probability. Our results imply that information leaks are likely to increase voluntary disclosure whenever investors have difficulties interpreting the economic consequences of the leaked information. This is typically the case in industries with complex business models and innovative products. In mature industries, leaked information replaces voluntary disclosure. Our findings may help explaining mixed empirical evidence on voluntary disclosure in different reporting environments.

Introducing the BITIX: The Bitcoin Fear Gauge
Alexander, Carol,Imeraj, Arben
We obtain high-frequency data on bitcoin options from the Deribit cryptocurrency derivatives exchange, every 15 minutes from 13 March to 2 May 2019. We use these traded option prices to construct implied volatility indices for bitcoin following the VIX methodology introduced by the CBOE. We discuss the features of 15-minute BITIX time series with 7, 14, 21 and 28 days to maturity. We also discuss the empirical features of bitcoin variance risk premia, i.e. pay-offs to bitcoin variance swaps, with fair-value swap rate equal to the BITIX.

Is Volatility Rough ?
Masaaki Fukasawa,Tetsuya Takabatake,Rebecca Westphal

Rough volatility models are continuous time stochastic volatility models where the volatility process is driven by a fractional Brownian motion with the Hurst parameter less than half, and have attracted much attention since a seminal paper titled "Volatility is rough" was posted on SSRN in 2014 claiming that they explain a scaling property of realized variance time series. From our point of view, the analysis is not satisfactory because the estimation error of the latent volatility was not taken into account; we show by simulations that it in fact results in a fake scaling property. Motivated by this preliminary finding, we construct a quasi-likelihood estimator for a fractional stochastic volatility model and apply it to realized variance time series to examine whether the volatility is really rough. Our quasi-likelihood is based on a central limit theorem for the realized volatility estimation error and a Whittle-type approximation to the auto-covariance of the log-volatility process. We prove the consistency of our estimator under high frequency asymptotics, and examine by simulations the finite sample performance of our estimator. Our empirical study suggests that the volatility is indeed rough; actually it is even rougher than considered in the literature.

Is the Inf-convolution of Law-invariant Preferences Law-invariant?
Liu, Peng,Wang, Ruodu,Wei, Linxiao
We analyze the question of whether the inf-convolution of law-invariant risk functionals (preferences) is still law-invariant. In economic terms, this question means if all agents in a risk sharing system only care about the distributions of risks, whether the resulting (after risk redistribution) representative agent also only cares about the distribution of the total risk, regardless of how the total risk is defined as a random variable. We first illustrate with some examples that such an assertion is generally false. Although the answer to the above question seems to be affirmative for many examples of commonly used risk functionals in the literature, the situation becomes delicate without assuming specific forms and properties of the individual functionals. We illustrate with examples the surprising fact that the answer to the main question is generally negative, even in an atomless probability space. Furthermore, we establish a few very weak conditions under which the answer becomes positive. These conditions do not require any specific forms or convexity of the risk functionals, and they are the richness of the underlying probability space, and monotonicity or continuity of one of the risk functionals. We provide several examples and counter-examples to discuss the subtlety of the question on law-invariance.

Liquidity Shocks and Interbank Market Failures: The Role of Deposit Flights, Non-Performing Loans, and Credit Market Competition
Macedo, Demian Nicolás,Troster, Victor Emilio
Banks may be reluctant to remove bad loans from their portfolio during liquidity shortfalls, giving rise to a moral hazard problem in the interbank market. This paper develops a model to analyze how liquidity shortfalls can affect the ability of the interbank market to provide liquidity in a moral hazard setting. We distinguish two types of liquidity shocks that arise due to a deposit flight (a contraction in the deposit supply) or a cash-flow shock (an increase in the non-performing loans). We show that the source of a liquidity shortfall is the main determinant of the decision of banks to stop lending in the interbank market, rather than the extra amount of funds that banks need to cover. An increase in the non-performing loans has more adverse effects on balance sheets than a deposit flight. We also find that credit market competition increases financial instability not only by undermining the role of the interbank market as a liquidity provider but also by exacerbating liquidity shortfalls.

Macro-finance and factor timing: Time-varying factor risk and price of risk premiums
de Oliveira Souza, Thiago
This paper documents empirically that increases in the book-to-market spread predict larger market premiums in sample and larger size, value, and investment premiums (also) out of sample. In addition, increases in the investment (or profitability) spread exclusively predict larger investment (or profitability) premiums. This predictability generates "factor timing" strategies that deliver substantial economic gains out of sample. I argue theoretically that the book-to-market spread is a price of risk proxy, while the investment and profitability spreads are factor risk proxies. The evidence confirms standard theoretical predictions in the macro-finance literature and contradicts the hypothesis of constant factor risks.

Optimal multi-asset trading with linear costs: a mean-field approach
Matt Emschwiller,Benjamin Petit,Jean-Philippe Bouchaud

Optimal multi-asset trading with Markovian predictors is well understood in the case of quadratic transaction costs, but remains intractable when these costs are $L_1$. We present a mean-field approach that reduces the multi-asset problem to a single-asset problem, with an effective predictor that includes a risk averse component. We obtain a simple approximate solution in the case of Ornstein-Uhlenbeck predictors and maximum position constraints. The optimal strategy is of the "bang-bang" type similar to that obtained in [de Lataillade et al., 2012]. When the risk aversion parameter is small, we find that the trading threshold is an affine function of the instantaneous global position, with a slope coefficient that we compute exactly. We provide numerical simulations that support our analytical results.

Optimally Solving Banks' Legacy Problems
Segura, Anatoli,Suarez, Javier
We characterize policy interventions directed to minimize the cost to the deposit guarantee scheme and the taxpayers of banks with legacy problems. Non-performing loans (NPLs) with low and risky returns create a debt overhang that induces bank owners to forego profitable lending opportunities. NPL disposal requirements can restore the incentives to undertake new lending but, as they force bank owners to absorb losses, can also make them prefer the bank being resolved. For severe legacy problems, combining NPL disposal requirements with positive transfers is optimal and involves no conflict between minimizing the cost to the authority and maximizing overall surplus.

Ownership Structure, Size and Interest Income Substitution by Banks: An Exploratory Study in Indian Context
Kaur, Navneet,Kaur, Parneet
This study explored that how emerging economy banks are rebalancing their interest income and non-interest income to ensure stability. We set our study in Indian during the period 2015 to 2017. Interetsingly, we observe that time series correlation of Interest Income growth and Non-interest income growth for public sector banks as well as private banks is on the negative side. By applying panel VAR and GMM methodology, it has been found that when bank interest income falls, they try to increase their non-interest income to offset their losses to a certain extent and trend is increasing. Public sector banks are overall substituting non-interest income for a reduction in the margin, and there is an increasing trend for this substitution. When comparison of large and small banks is made, it has been found that change in non-interest income in the subsequent year due to change in interest income in the previous year is there for large banks, whereas no such significant change has been found in case of small banks.

Portfolio Selection with Inflation-linked Bonds and Indexation Lags
Li, Kai
We derive the price of inflation-indexed bonds of which the payments are linked to a lagged price index, and solve for the optimal bond portfolio under both inflation and indexation lags in closed form. We show that indexation lags increase the number of state variables characterizing both the bond prices and the optimal portfolio. The lag-induced state variables affect the future investment opportunity and hence further arm investors with the tools for hedging inflation risk that is, however, unhedgeable if there is no indexation lag. We find that the optimal portfolio accounts for the indexation lags by also exploring the historical information and increases investors' welfare. Therefore, we document a positive effect of the indexation lags that are typically considered as a type of market friction.

Price Discovery and Efficiency in Bitcoin Markets
Alexander, Carol,Heck, Daniel F.
We use high-frequency data on CME and CBOE futures to analyse their role in leading bitcoin price formation. Their position risk is too large to be useful hedging instruments -- this role is largely fulfilled by BitMEX futures -- and instead we examine their speculative role. The CBOE contracts have recently been withdrawn, but they appear to have led some significant spot price falls on 14 November 2018. Besides hedging on BitMEX futures, efficiency in bitcoin markets is promoted by high-frequency arbitrage between spot prices on different centralised exchanges. We implement standard pairs-trading strategies on price spreads between the five largest exchanges showing that, after transactions costs, profits from 10-minute trading signals were driven down to almost zero by the end of 2018. We conclude that bitcoin spot markets are now highly efficient and it now requires algorithms for ultra-high-frequency trading to make any significant arbitrage returns.

Reciprocal Lending Relationships Between Financial Conglomerates: Evidence from the Mexican Repo Market
Cañón, Carlos,Florez-Acosta, Jorge,Gomez, Karoll
Reciprocal lending (RL) between financial institutions from the same financial conglomerate (FC) is not allowed in the Mexican repo market, so that it appears that rival financial conglomerates have incentives to establish strong ties that guarantee stable funding at money markets. This paper uses transaction-level data from the Mexican Repo market to show that RL between FCs exists, in part to guarantee cheaper and stable short-term funding, and because financial institutions involved benefit in terms of market power and centrality within the financial network. Interestingly, RL does not necessarily deteriorate financial stability.

Responsibilities within the Governance Space: A Study of the Role of the Company Secretary on Contemporary Boards
McKenzie, Robyn,Law Chapple, Larelle,Sinnewe, Elisabeth,Osborne, Sarah
Purpose - The purpose of this study is to investigate the role including the formal and informal activities of company secretaries on contemporary Australian boards, which has expanded with the increased liability of company secretaries. Design/methodology/approach - This study utilizes eleven in-depth semi-structured interviews with company secretaries of organizations in the public, private, and not-for-profit sectors to examine the importance of organizational dynamics, boundary spanning capabilities, and skills necessary in the role construction of company secretaries as senior officers. Findings - The company secretary accommodates the expansion of responsibilities from administrator to strategic advisor by using informal activities and developed social skills. Dual-role company secretaries (those combining the legal counsel or chief finance officer function in non-profit and government organizations) are acutely aware of setting the boundaries of responsibilities. The use of informal working spaces opens up the possibility for the company secretary to provide further influence as the organization’s gatekeeper.Research limitations/implications â€" The number of interviews possibly limits this study; however, in the eleven interviews totaling over eight hours of data, participants made profound reflections on their particular role with their overall experiences well reflected in the commentary.Practical implications â€" Participants discussed the expanded skill set required to effectively support individual board members, specifically dealing with the chair and CEO. Company secretaries also require higher order social skills of emotional intelligence and diplomacy attributes for their roles. Given the increased responsibility space of company secretaries, regulatory requirements for a formal corporate governance officer qualification may be needed. Originality/value â€" This study expands the spatial-behavioural dynamics framework by McNulty & Stewart (2015) by examining role construction differences across sectors and the major internal and external influences that shape the company secretary role construction.

The Effect of U.S. Public-to-Private Leveraged Buyouts on Innovation
Ayash, Brian,Egan, Edward J
With a large sample of public-to-private leveraged buyouts from 1980 to 2006, we find that LBO targets are equally likely to hold patents as other publicly-traded firms. Using a difference-in-differences approach, we find that LBOs reduce patent flows by one third. This reduction results from a 23% decline in new grants and 7% fewer purchases. Around one fifth of patent-holding LBO targets sell patents immediately after their buyout, liquidating an average of 45% of their portfolio. After an LBO, patents are granted at a reduced rate, receive the same level of citations, and make 16% more citations.

The Endowment Effect on Entrepreneurs: A Risky Attachment
Echeverry, Isabela,Reyes, Santiago
This paper presents evidence on the role of the endowment effect in shaping the risk-taking behavior of entrepreneurs, and how the potential of losing their firms lead them to take higher risks. This study uses an experimental design with 466 entrepreneurs in Cali, Colombia. Results show that entrepreneurs are more likely to accept riskier bets when those are related to the possession of their companies than in non-framed lotteries. The data shows that the existence of the endowment effect increases the certainty equivalent of a lottery, for the median entrepreneur, by 36.5%. This could explain why many entrepreneurs prefer to continue operating their underperforming firms, as well as why many entrepreneurs overvalue their firms during investment processes. This paper presents an alternate view on the drivers behind entrepreneurs’ risk-taking behavior and opens a door for future research on the role of biases on entrepreneurs’ decision-making processes.

The Exploratory Mindset and Corporate Innovation
He, Zhaozhao,Hirshleifer, David A.
We propose that CEOs with an exploratory mindset, proxied by having a PhD degree, are patient at managing innovation, possibly owing to their long-term orientation and strong intrinsic motivation. Firms with PhD CEOs produce more exploratory patents with greater novelty, generality and originality. PhD CEOs engage less in management for short-term results, invest more in R&D and strategic alliances, generate greater value of patents, and experience more positive market reactions to R&D alliances. They tend to be hired by firms with strong research opportunities but poor financial performance. Evidence from managerial incentive shocks and likely-exogenous CEO turnovers suggest that our results are not solely driven by CEO-firm matching. PhD firms are on average undervalued and subsequently achieve positive abnormal returns and superior long-run operating performance.

The Maturity of Sovereign Debt Issuance in the Euro Area
Beetsma, Roel M. W. J.,Giuliodori, Massimo,Hanson, Jesper,de Jong, Frank
We use information on new sovereign debt issues in the euro area to explore the drivers behind the debt maturity decisions of governments. We set up a theoretical model for the maturity structure that trades off preference for liquidity services of short-term debt, roll-over risk and price risk. The average debt maturity is negatively related to both the level and the slope of the yield curve. A panel VAR analysis shows that positive shocks to risk aversion, the probability of non-repayment and the demand for the liquidity services of short-term debt all have a positive effect on the yield curve level and slope, and a negative effect on the average maturity of new debt issues. These results are partially in line with our theory. A forecast error variance decomposition suggests that changes in non-repayment risk as captured by credit default spreads are the most important source of shocks.

The Resolution of Long-Run Risk
Pidkuyko, Myroslav,Rossi, Raffaele,Schenk-Hoppé, Klaus Reiner
Long-run risk models, a cornerstone in the macro-finance literature for their ability to capture key asset price phenomena, are known to entail implausibly high levels of timing and risk premia. Our paper resolves this puzzle by considering consumption of durable goods in addition to that of non-durable goods. In our estimated model, the timing premium is 11 percent and the risk premium is 16 percent of lifetime consumption. These values are about a third of the previously implied premia and are more consistent with empirical and experimental evidence.

The Role of Hurdle Rate in Divisional Performance Evaluation and New Product Development with Alternative Opportunities
Mazda, Yasuhiro
This paper investigates the role of hurdle rate in new product development in the situation where the divisional manager is delegated to manage such projects.I show hurdle rate basically helps control the manager's behaviors regarding risk taking decision and labor intensive expenditures.I analyze several modified cases and show that there exist cases where such a role of hurdle rate does not function due to the existence of withdrawal opportunities from new product development projects.

The Undesirability of Mandatory Time-Based Sunsets in Dual Class Share Structures: A Reply to Bebchuk and Kastiel
Sharfman, Bernard S.
In a 2017 Virginia Law Review article, "The Untenable Case for Perpetual Dual-Class Stock," Lucian Bebchuk and Kobi Kastiel made the argument that time-based sunset provisions (a forced unification of shares into one share structure with equal voting rights after a certain period of time) should be a mandatory feature of dual class share structures (classes of common stock with unequal voting rights). Their article has recently been used as authority by the Council of Institutional Investors’ (“CII”) in its petitions to the NASDAQ Stock Market (“NASDAQ”) and the New York Stock Exchange (“NYSE”) to amend their listing standards. The requested amendments would require companies seeking to go public with dual class shares to include in their certificates of incorporation a time-based sunset provision that must go into effect no more than seven years after the initial public offering (IPO) unless minority shareholders vote to extend up to an additional seven years. This delayed unification based on a shareholder vote is incorporated in Bebchuk and Kastiel’s argument. This Article, which is based on comment letters I sent in response to the CII’s petitions, argues that such a mandatory provision would be extremely unwise and harmful to our most important public companies and their shareholders, current as well as future. As a creation of private ordering, the absence of time-based sunset provisions in dual class share structures serves a significant value enhancing purpose. It prevents the risk that a premature and therefore sub-optimal unification of shares may occur. This risk has so far been ignored by those advocating for the implementation of a mandatory time-based sunset provision. As subsequently discussed, this risk has been ignored because of an oversight in their analysis. This oversight being a lack of appreciation for how the positive skewness in stock market returns negatively impacts the value of mandatory time-based sunset provisions.

The equivalence of two tax processes
Dalal Al Ghanim,Ronnie Loeffen,Alex Watson

We introduce two models of taxation, the latent and natural tax processes, which have both been used to represent loss-carry-forward taxation on the capital of an insurance company. In the natural tax process, the tax rate is a function of the current level of capital, whereas in the latent tax process, the tax rate is a function of the capital that would have resulted if no tax had been paid. Whereas up to now these two types of tax processes have been treated separately, we show that, in fact, they are essentially equivalent. This allows a unified treatment, translating results from one model to the other. Significantly, we solve the question of existence and uniqueness for the natural tax process, which is defined via an integral equation. Our results clarify the existing literature on processes with tax.

The role of pawnshops in risk coping in early twentieth-century Japan
Tatsuki Inoue

This study examines the role of pawnshops as a risk-coping strategy in Japan in the prewar period when poor people were highly vulnerable. Using data on pawnshop loans in more than 250 municipalities and the 1918--1920 influenza pandemic as a natural experiment, we find that the total loan amount increased because of the pandemic shock. Our results suggest that those who regularly relied on pawnshops borrowed from them more money than usual to cope with the adverse health shock, whereas others did not take out pawnshop loans. In addition, further analyses reveal that loans from pawnshops prevented an increase in the unemployment rate due to the pandemic. Pawnshops thus served as an informal social insurance mechanism in early twentieth-century Japan.

Thinking Outside the Box - Eliminating the Perniciousness of Box-Ticking in the New Corporate Governance Code
Reddy, Bobby
On 16 July 2018, a new corporate governance code was published. As with previous iterations, it applies on a ‘comply-or-explain’ basis, whereby companies are required to either comply with provisions or explain reasons for non-compliance. However, the new code substantially simplified the previous version of the code in an attempt to attenuate the process of ‘box-ticking’. Box-ticking manifests itself in two ways: firstly, by companies complying with the letter rather than the spirit of the provisions, and, second, by companies not utilising the inherent flexibility to implement the optimum firm-specific governance structures by explaining rather than complying. This article will elucidate the history of box-ticking, and the reasons why companies succumb thereto, since Adrian Cadbury pioneered the concept of ‘comply-or-explain’ in 1992, before proposing an exclusively principles-driven approach to the corporate governance code which would alleviate box-ticking and fulfill the original aspirations of Cadbury over a quarter of a century ago.

When Investor Incentives and Consumer Interests Diverge: Private Equity in Higher Education
Eaton, Charlie,Howell, Sabrina,Yannelis, Constantine
This paper studies how private equity buyouts create value in higher education, a sector with opaque product quality and intense government subsidy. With novel data on 88 private equity deals involving 994 schools, we show that buyouts lead to higher tuition and per-student debt. Exploiting loan limit increases, we find that private equity-owned schools better capture government aid. After buyouts, we observe lower education inputs, graduation rates, loan repayment rates, and earnings among graduates. Neither school selection nor student body changes fully explain the results. The results indicate that in a subsidized industry maximizing value may not improve consumer outcomes.