Research articles for the 2019-05-24

A Dynamic Equilibrium Q Probability Measure for Poisson Yield Spreads â€" Review of European Corporate Bonds
Thorp, John A,Tabaghdehi, Seyedeh Asieh
This paper presents a new model for term risk, yield curve, and credit risk in spreads in a unified approach. The originality lies in the structuring of the Poisson stochastic of risk in a form suitable for finding the differential equation for the yield curve and its spreads as the Poisson Yield Spread Model (PYSM). A new P to Q change in measure is found for the purpose of parameterizing the stochastic component of the yield curve, based on a frequency specified version of the single event Poisson process. The PYSM determines the behaviour of discount rates and yield spreads over EU debt risk extremes.

An Empirical Examination of the Arbitrage Pricing Theory: Evidence from Jordan
Elshqirat, Dr. Mohammad
Investors in the stock market need a valid and accurate model to predict the expected rate of return on their portfolios which necessitate testing many pricing models and determining which model is the most accurate. The problem is that both single-factor and multi-factor capital asset pricing models (CAPM) are not valid for predicting the expected rate of return. The purpose of this quantitative study was to test the validity of the arbitrage pricing theory (APT) in the Jordanian stock market as an alternative to the CAPM. The study was theoretically based on the arbitrage pricing theory introduced by Stephen Ross. The main focus of the research questions was on examining the relationship between stocks' rate of return calculated using the price index of Amman stock exchange (ASE) and a set of macroeconomic variables. The website of ASE, central bank of Jordan, and department of statistics were used to collect data about ASE price index and the independent macroeconomic variables of unemployment rate, gross domestic product (GDP), industrial producers' price index (IPPI), and exports for the period from 2000 to 2016. Collected data were analyzed using multiple-linear regression. Due to the detected multicollinearity between GDP and exports, GDP was excluded from the proposed model. The results revealed that among three variables tested, only IPPI had a significant negative effect on the stocks' rate of return.

Assessing the Impact of the Basel III Leverage Ratio on the Competitive Landscape of US Derivatives Markets: Evidence from Options
Haynes, Richard,McPhail, Lihong,Zhu, Haoxiang
This policy brief provides evidence that the implementation of the Basel III leverage ratio has had a measurable effect on the competitive landscape of US derivatives markets.Though US banks have long been subject to a leverage ratio that required capital only against on-balance-sheet assets, Basel III requires capital also against off-balance-sheet exposures for derivatives and other businesses. For derivatives, under the new leverage rules, exposures are largely based on the notional value of the positions, with minimal risk adjustment, and do not fully recognize position offsets and risk-mitigating collateral. As of Jan. 2015, large banks have been required to make quarterly public disclosures of their leverage ratio, although the effective dates of full compliance came later.As a result of these changes, market participants argue that the leverage ratio has become the binding constraint for certain, often low-risk derivatives businesses. One area where the leverage ratio appears binding is client clearing. Because banks have provided roughly 8090% of derivatives client clearing services in the US, as measured by customer collateral, the leverage ratio could substantially shift the competitive landscape in US client clearing services.We test this hypothesis using data on S&P 500 E-mini futures options, products where the leverage ratio demands particularly high capital relative to risk. We compare client clearing services prior to the Jan. 2015 disclosure date to those after. Using daily data on the customer and house positions of clearing members from Feb. 2013 to Jan. 2018, we confirm that the market share of clearing intermediation has shifted from firms subject to higher leverage requirements to those subject to lower requirements. For example, before Jan. 2015, 46% of all E-mini futures option positions were held in customer accounts at US banks; after Jan. 2015, this number declines to an average of 36.5%. By contrast, during that same period, customer positions in E-mini futures options cleared through EU banks, which are subject to a lower leverage ratio, increased from 38.6% to 47.9% of the total. The shift in market shares is most evident in low-delta options, which have relatively small risk for a given notional amount. These trends are absent in US Treasury futures options, which are subject to a lower leverage ratio requirement.

Asset Prices and 'The Devil(s) You Know'
Hollstein, Fabian,Nguyen, Duc Binh Benno,Prokopczuk, Marcel
In this paper, we study the asset pricing implications of persistence in the risk-neutral return distribution's central moments. We detect a both economically and statistically significant premium of stocks with low over stocks with high such persistence. Annual value-weighted excess (risk-adjusted) returns are 4.38% (3.06%). These results cannot be explained by factors and characteristics documented in the previous literature. Furthermore, it is not the persistence of only one of the individual distributional moments but rather the joint persistence in all central moments of the risk-neutral distribution that is priced.

Board Composition Paradox: Are Board Insiders Valued Advisers or Harbingers of Agency-Cost?
Mukherjee, Shibashish,Bonestroo, Jelle
Employing ‘aggregate earnings shock’ as a novel identification strategy to sort countries into treatment sample which experienced significant macroeconomic uncertainty we study the relevance of board insiders to firms and to investors. Our first result shows that treatment firms appoints greater proportions of board insiders, ceteris paribus. Our second set of results shows that board insiders are associated with loss of firm value, higher debt-cost, greater CEO entrenchment, cash-heavy CEO compensation, lower dividends and investments. Finally, the disciplining signal of board gender reforms has reversed some negativity associated with board insiders by increasing firm value and restraining CEO cash compensation.

Consistency Between Principal and Agent With Differing Time Horizons: Computing Incentives Under Risk
Schosser, Josef
In a parsimonious model, we analyze how to obtain consistent incentives when both principal and agent are risk-averse and when a setting prevails in which the agent may have a shorter time horizon than the principal. Intertemporal dependencies in risky cash flows are taken into account. Building on the fundamental results produced by Rogerson (Journal of Political Economy 105(4):770â€"795, 1997) and Reichelstein (Review of Accounting Studies 2(2):157â€"180, 1997), we establish a new risk allocation scheme, which enables consistent incentives to be achieved. Thereby, we demonstrate that the resulting performance measures correspond to an affine transformation of previous and current residual incomes or, alternatively, cash flows in such a way that information asymmetry between principal and agent is still possible. The risk allocation technique developed may prove useful in other contexts.

Credit Rating Industry in Sri Lanka
Rajapakse, R. P. C. R.,Mayakaduwa, Nelkani
An efficient financial system facilitates the optimal allocation of resources towards economic development of a country by allocating resources efficiently. Markets which are a part of the financial system, support efficient allocation of funds, thus development of capital markets play a vital role in economic development of a country. Information asymmetry and lack of information can fear away investors, while a “credit rating” assigned by an independent party can attract investors to markets. The purpose of this study is to identify the current trend of the credit rating industry in Sri Lanka (SL). Data were obtained mainly from interviews and other secondary sources such as annual reports of SEC, and rating reports etc. Quantitative data were analyzed using; ratio analysis and percentage calculations, while qualitative data were analyzed using content analysis. The study revealed that underdeveloped capital markets and low financial literacy hinder the use of credit ratings in SL influencing negatively on investments.

Cross-Border Effects of Prudential Regulation: Evidence from the Euro Area
Franch, Fabio,Nocciola, Luca,Żochowski, Dawid
We analyse the cross-border propagation of prudential regulation in the euro area. Using the Prudential Instruments Database (Cerutti et al., 2017b) and a unique confidential database on balance sheets items of euro-area financial institutions we estimate panel models for 248 banks from 16 euro-area countries. We find that domestic banks reduce lending after the tightening of capital requirements in other countries, while they increase lending when loan-to-value (LTV) limits or reserve requirements are tightened abroad. We also find that foreign affiliates increase lending following the tightening of sector-specific capital buffers in the countries where their parent banks reside and that bank size and liquidity play a role in determining the magnitude of cross-border spillovers.

Dual Holders: Valuation, Default Policy, and Capital Structure
Lindset, Snorre,Nygård, Guttorm,Persson, Svein-Arne
Dual holders own debt and equity in the same firm. By maximizing the total value of the dual holders' assets, we derive optimal default policies and show that dual holdership reduces default risk. We analyze the two most common priority structures: 1) Dual holders' private debt rank junior to external debt, typically found in small and medium sized companies. 2) Private debt ranks pari-passu to external debt, typically the case for publicly traded debt. The reduction in default probability is larger for the junior-senior case. We calculate the value of debt and other claims, and by the standard approach of trading off tax benefits from debt with bankruptcy costs, we analyze firms' optimal capital structure. Total firm value in the pari-passu case is lower or equal to total firm value in the junior-senior case. Private debt displaces equity financing and equity values can be negative. Any negative equity values are more than offset by positive values of private debt. Without exogenous restrictions, dual holders always prefer to increase private debt. For fixed, sufficiently high levels of private debt, the optimal use of external debt is proportional to the use of private debt. This case illustrates an odd, non-sustainable economic situation for high levels of private debt. Tax benefits from debt decrease the total cost of financing and removes default risk. In this case, the bankruptcy cost is zero, so there is no cost of including debt in the capital structure. All debt is therefore risk-free and credit spreads vanish. In addition, any differences between the two priority structures disappear in this case.

Dynamic Asset Allocation with Relative Wealth Concerns in Incomplete Markets
Kraft, Holger,Meyer-Wehmann, Andre,Seifried, Frank Thomas
In dynamic portfolio choice problems, stochastic state variables such as stochastic volatility lead to adjustments of the optimal stock demand referred to as hedge terms or Merton-Breeden terms. By deriving an explicit solution in a multi-agent framework with a stochastic opportunity set, we how that relative wealth concerns give rise to new hedge terms beyond the ordinary ones. This is ecause the agents hedge against both exogenous changes in the state variable and endogenous decisions of the other agent. Depending on the parametrization of the model, these new terms can significantly change the investors' hedging demands. We also show that both heterogeneity in risk aversion or relative wealth concerns can have similar effects on the heterogeneity in portfolio decisions. Formally, we study a non-cooperative, non-zero sum stochastic differential game for which we prove a verification theorem in a setting with an unspanned state variable.

Export and Inventory: Evidence from Chinese Firms
Chen, Xiaoping,Zhao, Xiaotao
This paper investigates the effect of export on firm inventory using Chinese firm data. We find that exporting increases firms’ inventory stocks. And exporting to more distant destinations is associated with less frequent and more concentrated export transactions.

Financial Performance Measurement of Hungarian Retail Food Companies
Fenyves, Veronika,Bács, Zoltán,Karnai, Laura,Nagy, Adrian,Tarnoczi, Tibor
The comparison of company performances, i.e., benchmarking, is becoming more and more critical. Presently, companies mostly use traditional financial ratios to evaluate their financial performance. We also use financial ratios to measure and compare company performances, from which we create complex efficiency coefficients using Data Envelopment Analysis. Using Data Envelopment Analysis, we analyzed the efficiency of retail food companies in Hungary’s Northern Great Plain region from 2009 to 2014 using their financial reports. To improve the result of the performance measurement, we used the bootstrap method, the Hamiltonian Monte Carlo simulation, and Bayesian statistics. We transformed the primarily deterministic DEA method into a stochastic DEA model. The primary target of this extension is to enhance statistical inference in DEA and to integrate it with a stochastic mechanism of Bayesian techniques. To develop the stochastic DEA model, we use Stan Stochastic Modelling Language within the framework of the R Statistics. Analyzing the results, we can state that the DEA method can be used for analyzing efficiency, and the additions shown can make the evaluation much more accurate. We can conclude that the best results were produced by the combined method, during a simultaneous application of the input orientation.

Forecasting Realized Volatility of Russian Stocks using Google Trends and Implied Volatility
Bazhenov, Timofey,Fantazzini, Dean
This work proposes to forecast the Realized Volatility (RV) and the Value-at-Risk (VaR) of the most liquid Russian stocks using GARCH, ARFIMA and HAR models, including both the implied volatility computed from options prices and Google Trends data. The in-sample analysis showed that only the implied volatility had a significant effect on the realized volatility across most stocks and estimated models, whereas Google Trends did not have any significant effect. The out-of-sample analysis highlighted that models including the implied volatility improved their forecasting performances, whereas models including internet search activity worsened their performances in several cases. Moreover, simple HAR and ARFIMA models without additional regressors often reported the best forecasts for the daily realized volatility and for the daily Value-at-Risk at the 1 % probability level, thus showing that efficiency gains more than compensate any possible model misspecifications and parameters biases. Our empirical evidence shows that, in the case of Russian stocks, Google Trends does not capture any additional information already included in the implied volatility.

Horizon-unbiased Investment with Ambiguity
Lin, Qian,Sun, Xianming,Zhou, Chao
In the presence of ambiguity on the driving force of market randomness, we consider the dynamic portfolio choice without any predetermined investment horizon. The investment criteria is formulated as a robust forward performance process, reflecting an investor's dynamic preference. We show that the market risk premium and the utility risk premium jointly determine the investors' trading direction and the worst-case scenarios of the risky asset's mean return and volatility. The closed-form formulas for the optimal investment strategies are given in the special settings of the CRRA preference.

How the Risk Measures Play Important Roles for Tail Risk Management and Diversification
Higashide, Takuo
In the world of investment, the subject of building a portfolio concerning tail risk is still one of the frequently discussed subjects and unquestionably vital for investors. This paper seeks to examine how the risk measures, lower tail-dependence based on the copulas approach and Conditional Value-at-Risk (CVaR), affect the portfolio strategies and play important roles for tail risk management and diversify the portfolio. By using these two risk measures mentioned above, two different types of risk-based portfolios are proposed that consider for the tail risks: 1) Minimum-lower tail-dependence portfolio (RMTP) and 2) Risk Parity Portfolio based on Conditional Value-at-Risk (CRPP). The simulation results showed how those two risk-based portfolios, RMTP and CRPP, work effectively in multi-asset allocation framework with 6 assets: stocks and sovereign bonds of Japan, United States and Germany, based on the monthly rebalance rule, using 2004-2018 sample period. One of the key findings were that both RMTP and CRPP strategies delivered better performances compared with the traditional portfolio strategies in terms of sharp ratio: 1) RMTP yielded 0.92 and 2) CRPP yielded 0.99 (by adding an appropriate risk reduction to this portfolio, the sharp ratio went up to 1.76). In addition, both of these two strategies also worked effectively in terms of the average of maximum monthly drawdown related to the effect of the tail risk: 1) RMTP by 1.80% and 2) CRPP by 1.74% (by adding an appropriate risk reduction to this portfolio, maximum drawdown decreased to 0.78%). Furthermore, this paper also studies an enhancement strategy based on Risk Parity Portfolios (RPP) focusing on and using co-integration relationship (co-integration approach). According to the simulation result, this proposed enhancement strategy has a potential to yield roughly 4.5% return. Finally, this paper presents the explicit derivation of lower tail-dependence and co-integration approach.

Implicit Benefits and Financing
Allen, Franklin,Qian, Meijun,Xie, Jing
Family, social and business connections create implicit benefits between borrowers and lenders. We model how these benefits influence credit allocation, cost, and renegotiation between the borrower and the lender in case of delinquency. The optimal solution illustrates that financing with implicit benefits achieves lower financing costs, higher managerial effort, and better economic outcomes for both the borrower and the lender in a competitive market or in a monopoly market where the lender maximises profit. The results reconcile the empirical evidence that financing through family, social and business networks is prevalent and often associated with good economic results even though it can be destructive in some scenarios. The model also demonstrates that, since a non-contractual, non-legal-based environment can trigger ex-post non-pecuniary costs on the borrower and lender, only politically connected (or other powerful) players survive when these costs are large. Finally, informational and financial disadvantage due to the growing size and complexity of projects, and the breakdown of relationships in modern society may explain the decline of financing in social networks despite the advantages arising from implicit benefits.

Institutional Trading in Volatile Markets: The Case of Chinese Stock Markets
Darby, Julia,Zhang, Hai,Zhang, Jinkai
We investigate all listed firms in Shanghai and Shenzhen stock Exchanges on extreme market movement days over 2010 to 2017, and highlight the important role of price limit on post extreme day stock returns. Utilising daily cash flow data of the largest trading group as a proxy of institutional investors trading behaviour, we identify institutional investors’ consistently destabilizing effects on extreme days across two markets. We further show the upper (lower) price limit hitting stocks continue to increase (decrease) for at least two subsequent days, and find evidence of long run price reversal for lower hitting stocks. Finally we find the greater net buy by large traders the higher abnormal return in three subsequent days of the upper price limit hitting regular stocks, while the net sell on extreme days tend to predict the positive subsequent abnormal returns.

Is Non-State Money Possible? (Czy pieniądz niepaństwowy jest możliwy?)
, CASE,Selgin, George
English Abstract: Depending on how one interprets the question that forms the topic of my talk, one can argue that the answer is obvious, or one can argue just the opposite. In one sense of course, it’s obvious that non-state money is possible. That’s the sense in which we ask only whether some kinds of non-state money are possible. And of course, the answer is yes. The vast majority of payments today, in Poland as elsewhere, are made with privately produced forms of money â€" that is, with bank deposits of various kinds â€" transferable by cheque or using debit cards. And there is nothing surprising about that.But of course, my assigned question can also be understood in a different and more interesting way. The interesting question is not whether some kinds of non-state â€" supplied money are possible. It is a different question, or rather two different questions. One of these is whether non-state circulating monies, or currencies, are possible. Can we rely on the private sector to supply hand-to-hand circulating means of payment? The other even more fundamental question is whether we can have a complete monetary system in which all forms of money supplied privately, and the state plays no substantial regulatory role.In fact, I intend to argue that non-state supplied currencies are also possible, and that completely private monetary systems, in which the state plays no important part, are possible as well. Indeed, I will argue, not only that these things are possible, but that history offers examples of them. That is, they are not just hypothetically possible. I plan to spend much of my time talking to you about these historical examples of privately produced currencies and private or mostly private monetary systems. I wish not merely to make it clear that private currencies and mostly private monetary systems really have existed in the past, but to point out to you that these private currencies and monetary systems have often been entirely or at least highly successful. We might even envy them today, given the performance of our own relatively heavily regulated monetary systems.Polish Abstract: Zależnie od tego, jak zinterpretuje siÄ™ pytanie, które jest tytuÅ‚em mojego wystÄ…pienia, można z powodzeniem argumentować, że odpowiedź jest oczy­wista i można też mówić, że jest odwrotnie. W pewnym sensie bowiem, oczywistym jest, że niepaÅ„stwowy pie­niÄ…dz jest możliwy. Mam tu na myÅ›li pytanie o to, czy jakieÅ› rodzaje niepaÅ„stwowego pieniÄ…dza sÄ… możliwe. I na to py­tanie odpowiedź jest oczywiÅ›cie twierdzÄ…ca. WiÄ™kszość dokonywanych dziÅ› w Polsce i na Å›wiecie pÅ‚atnoÅ›ci odbywa siÄ™ przy użyciu prywatnie produkowanych form pieniÄ…dza â€" czyli depozytów bankowych różnego typu â€" transfero­wanych za poÅ›rednictwem czeków lub poprzez użycie kart debetowych. I nie ma w tym nic zaskakujÄ…cego.Jednak do tytuÅ‚owego pytania można podejść w inny, o wiele bardziej interesujÄ…cy sposób. Ciekawym pytaniem jest nie to, czy mogÄ… istnieć jakieÅ› rodzaje niepaÅ„stwowe­go pieniÄ…dza. InteresujÄ…ca jest inna kwestia, a w zasadzie dwie, odrÄ™bne kwestie. PierwszÄ… z nich jest czy możliwe jest istnienie w obiegu prywatnego pieniÄ…dza, czy walut. Czy możemy polegać na sektorze prywatnym, że dostar­czy nam Å›rodków pÅ‚atniczych, które bÄ™dÄ… w obiegu? In­nym, i istotniejszym pytaniem, jest to, czy możemy mieć kompletny system monetarny, w którym wszystkie ro­dzaje pieniÄ…dza sÄ… dostarczane przez sektor prywatny, a paÅ„stwo nie odgrywa istotnej roli regulacyjnej.Moim zamiarem jest obrona tezy, że jest możliwe istnie­nie prywatnie produkowanych pieniÄ™dzy, ale także że jest możliwe funkcjonowanie w peÅ‚ni prywatnych systemów monetarnych, w których paÅ„stwo nie odgrywa istotnej roli. BÄ™dÄ™ dowodziÅ‚, że takie rozwiÄ…zania sÄ… nie tylko moż­liwe, ale że historia dostarcza nam przykÅ‚adów ich funk­cjonowania. Oznacza to, że nie sÄ… one możliwe jedynie hi­potetycznie. Zamierzam poÅ›wiÄ™cić znacznÄ… część swojego wystÄ…pienia na omówienie tych historycznych przykÅ‚adów prywatnej produkcji pieniÄ…dza i prywatnych albo prawie prywatnych systemów monetarnych. Mam zamiar nie tylko pokazać, że te prywatne waluty i w wiÄ™k­szoÅ›ci prywatne systemy monetarne rzeczywiÅ›cie istniaÅ‚y, ale także zwrócić uwagÄ™, że owe prywatne waluty i sys­temy pieniężne funkcjonowaÅ‚y z peÅ‚nym lub co najmniej dużym powodzeniem. MoglibyÅ›my im nawet pozazdroÅ›cić tego powodzenia, biorÄ…c pod uwagÄ™ kondycjÄ™ naszych współczesnych, stosunkowo silnie regulowanych syste­mów monetarnych.

Is the Behavior of Sellers with Expected Gains and Losses Relevant to Cycles in House Prices?
Clapp, John M.,Zhou, Tingyu,Lu-Andrews, Ran
We examine anchoring to the price paid at purchase during each phase of an important cycle in the Connecticut housing market, 2000-2017, using a repeat sales model that allows the negotiated prices of sellers with expected gains to differ from those with expected losses. We exploit differences between actual and counterfactual house price indices by analyzing negotiated premiums and discounts multiplied by the magnitudes of those quantities and by the proportion of sales with expected losses and gains. Results suggest that anchoring was associated with reductions in observed changes in house prices during the boom (2004-2006) as sellers with gains dominate with their price discounts, and with reduced price declines during the bust (2007-2012) when the behavior of those with losses becomes important; losses bargained for substantial premiums per dollar loss. This paper extends the anchoring literature which has focused on individual behavior, and it supports new stylized facts associated with housing market cycles.

JPY/BTC Trading Behaviour: A Reflection of the Japanese Economy or Due to the Construction of the Bitcoin Price Index
Johnson, Jackie
Japan has a long history with Bitcoin from it supposed creator, Satoshi Nakamoto, to the rise and fall of the Japanese Bitcoin Exchange, Mt Gox, to its wide acceptance by the Japanese retail sector, yet an analysis of the yen/bitcoin market, which is now the dominant trading pair, indicates that this is still very much a domestic market, developed under the auspices of Japan’s Financial Services Agency who saw the potential in bitcoin and its blockchain technology. Yet, the yen/bitcoin market has not developed into a global trading alternative, but rather remains a well sponsored domestic market with trading responding to the economic situation in Japan. There are two surprising outcomes: one, trading in yen/bitcoin across exchanges is highly correlated unlike the US dollar/bitcoin market where prices vary across exchanges; and two, around 60% of trades are at a price below the recognised global bitcoin price indicator, Coindesk’s Bitcoin Price Index.

La Banque Centrale Européenne face aux cryptomonnaies, défis et opportunité? (The European Central Bank Facing Cryptocurrencies: Challenges and Opportunity?)
Prüm, André
French Abstract: La présente contribution étudie, dans une perspective avant tout juridique, les défais que les crypto-monnaies sont susceptibles de poser à la Banque Centrale Européenne dans l'accomplissement de son mandat. Elle soulève également la question si l'émission d'une monnaie digitale par la B.C.E. pourrait être une réponse adéquate au développement des crypto-monnaies.Tout commentaire critique est apprécié.English Abstract: This paper explores, essentially from a legal perspective, the challenges which cryptocurrencies raise for fulfilment by the European Central Bank of its mandate and briefly addresses the question whether the issuance of a digital euro by the ECB would be an appropriate response to the potential rise of cryptocurrencies.

Limited Attention and Overnight Return Puzzle in Chinese Stock Markets
Su, Fei,Xu, Feng
In this paper, we investigate an interesting puzzle that the average overnight return on market portfolio is significantly negative in China’s stock market, which violates traditional assets pricing theory. More interestingly, this puzzle seems unique in China’s stock market, while the average overnight returns on various stock indices from other countries’ or regions’ markets are all positive or not significantly different from zero. Empirical evidence reveals that the limited attention theory can at least partially explain this phenomenon.

Liquidity Risks, Transaction costs and Online Portfolio Selection
Ha, Youngmin,Zhang, Hai
The performance of online (sequential) portfolio selection (OPS), which rebalances a portfolio in every period (e.g. daily or weekly) in order to maximise the portfolio's expected terminal wealth in the long run, has been overestimated by the ideal assumption of unlimited market liquidity or no market impact cost. Therefore, a new transaction cost factor model that considers both market impact costs, estimated from limit order book (LOB) data, and proportional transaction costs has been proposed in this paper to measure existing OPS strategies performance in a more practical way as well as to develop a more effective OPS method. Backtesting results from the historical LOB data of NASDAQ-traded stocks show both the performance deterioration of existing OPS methods by the market impact costs and the superiority of our proposed OPS method in the environment of limited market liquidity.

Optimal Deterrence, the Illegality Defence, and Corporate Attribution
Kwok, Kelvin Hiu Fai,Lim, Ernest
Companies are often penalised for violating regulatory requirements of various kinds, including those under competition law. Some of the relevant statutes only impose liability on the company, but not its directors or employees, whose wrongdoing must nonetheless be attributed to the company to render it liable. Where a company infringes competition law or another regulatory statute and seeks to recover the penalty by suing its delinquent insiders for breach of duties, should courts allow or prevent the company’s recovery? This article examines this complex issue â€" which straddles competition/regulatory law, company law, agency law, and private law (in particular the illegality defence) â€" from a theoretical perspective, and makes two key contributions. First, it advances a refined concept of optimal deterrence, and argues that courts should not deprive the company of its well-established right to sue under company and agency law by interpreting the deterrence policy under competition law or another regulatory statute in light of this concept and recognising the limits of judicial law-making. Second, this article demonstrates for the first time how courts should analyse private law claims arising from corporate regulatory infringements under the ‘range of factors’ approach to the illegality defence, using competition law infringements as an illustration. Under our proposal, courts need not proceed to the stage of balancing competing and incommensurable factors to arrive at the conclusion that companies should not be precluded by the illegality defence from recovering against their delinquent insiders.

Pension Fund ALM - Can Pension Funds Stabilize Funding Levels and Improve Long-Term Return by Hedging Longevity Risk?
Schrager, David
In this paper we analyze the impact hedging longevity risk can have on a pension fund’s funding ratio volatility and ALM strategy. Our model captures all relevant aspects of the ALM problem and is calibrated to industry statistics; however, we’ve sacrificed model complexity to make the solution more intuitive and presentable. Our main conclusion is that hedging longevity risk creates additional risk budget to be put towards more rewarding asset allocation strategies, thereby improving the overall ALM outcome of the modelled pension fund.We show that at representative parameters for the risk and return on the balance sheet, and a range of realistic hedge prices, executing longevity hedges elevates the Efficient Frontier across all reasonable risk budgets. Therefore, implementing a longevity hedging strategy can improve the fund’s Sharpe Ratio and ALM outlook considerably. This is especially true for funds with a low risk budget, e.g. when the funding ratio is close to 105%.Our results are consistent with earlier work on this topic by Cocco and Gomes (2012), who demonstrate the benefits of financial assets designed to hedge shocks to the survival probabilities in a life cycle model with longevity risk. Our analysis differs since we focus on the pension fund rather than the household balance sheet, use a more extensive model for the financial market, have an explicit definition of the hedge instrument and use market information on the pricing of longevity hedges which lacks in.

Retirement Security, Finance Science, SeLFIES and The Flex MMM Plan
Muralidhar, Arun
Prof. Merton’s attempts to improve retirement security over the last 40 years, when viewed through his preferred lens of using “finance science” to address societal challenges, results in the creation of SeLFIES (Standard-of-Living indexed, Forward-starting, Income-only Securities) to improve retirement outcomes. SeLFIES have been proposed in countries as diverse as Australia, Chile, Colombia, France, India, Japan, Portugal, Spain, South Africa, South Korea, Turkey, and the United States â€" all interested in funding infrastructure and improving retirement security. Merton (1984) introduced the idea of government-issued consumption-linked bonds as a way to allow a fully funded public pension fund to offer consumption-indexed annuities. Later, Merton (2007) would address the challenges of defined contribution (DC) plans and argue that the welfare of individuals should be expressed in units of retirement income, and not wealth. A key insight is that the traditional “risk-free” asset in Modern Portfolio Theory (MPT) was risky from a retirement income perspective. Muralidhar, Ohashi and Shin (2014), in developing the Relative Asset Pricing Model (RAPM), leveraged the Merton (2007) idea that in retirement planning (or in any goals-based portfolio), investors care about (the utility of) funded status, defined as wealth divided by stochastic liabilities, and not expected utility of wealth. In RAPM, an additional variable â€" the relative risk-free asset or the asset that replicates the stochastic goal â€" is critical to asset allocation and asset pricing (and CAPM is just a special case of RAPM; namely CAPM assumes a deterministic goal). Currently in DC plans, the goal replicating portfolio (an annuity) is illiquid, costly and complex and Modigliani (1986) highlights the “annuity puzzle”. Muralidhar (2015) and Muralidhar, Ohashi and Shin (2015) recommend the creation of a new bond that replicates the desired cash flow profile in DC plans â€" a bond (called BFFS) that pays a fixed currency coupon, in real-terms, that starts paying once an individual retires for a period equal to the life expectancy of the country. Merton and Muralidhar (2017b) recommend linking these bonds to per-capita consumption (leveraging Merton 1984) thereby creating SeLFIES and show why SeLFIES are a good deal for governments too. BFFS/SeLFIES help complete financial markets and this idea is easily extended to other goals. The paper concludes by demonstrating how finance science can be used to design effective DC pension plans for uncovered workers.

Risk Assessment Models of the Activities of Companies Implementing R&D Projects
Minasyan, Vigen Babkenovich
Companies implementing R & D projects encounter their own unique features: they require large capital investments, long-term implementation, they are associated with high growth potential and a low probability of success, as well as financing problems. Some of the problems encountered have been studied before and are still being investigated. In recent years, there have been studies at the model level of problems on the financing of R & D projects. The problem of risks arising from the implementation of R & D projects has been dealt with at a narrative level in many papers. At the model level, from our point of view, this problem has not yet been sufficiently studied. The model presented in this paper allows to investigate the risks that companies face while implementing R&D projects and to develop a method for assessing the corresponding risks using a modified VaR measure. The formulae have been obtained to calculate this measure and they have been transformed to simple analytical expressions under the assumptions of a uniform distribution of cash flow of the project or by triangular distribution. The constructed model takes into account the most important causes of risks in projects with R&D, which investors intuitively sense. The constructed model allows to evaluate the risks of projects with R & D using the VaR risk measure with all possible parameters present in the model. This model can be used in practice both for preliminary risk assessment of an R & D project even before its implementation and taking a decision on risk-based implementation, as well as for standardising the decision-making process on projects with R & D with a standardised “risk appetite” using VaR risk measuring method.

The Art, Craft, and Science of Risk Management in Small-and Medium-Sized Family Businesses
Moschella, Jason,Boulianne, Emilio,Magnan, Michel
In this study, we investigate how risk management is practiced and perceived within the setting of small- and medium-sized businesses (SMEs). We fill a gap in the extant risk management literature, which focuses almost exclusively on large organizations. We interview SME owners to gain insight into the specific risk management activities they engage in, the drivers that lead to the adoption of said activities, their attitudes towards risk management, and how their accountants shape and contribute to risk management in SMEs. We find that rather than a specific set of formal processes, SME owners view risk management as a mindset that emphasizes the preservation of key assets, creation of competitive advantages, and development of business opportunities. Nevertheless, these activities are usually planned and deliberate. We also find that accountants add value to the risk management process by helping owners interpret financial and operating information and by analyzing trends in data.

The Impact of Cash Flow Management Versus Accruals Management on Credit Rating Performance and Usage
Zhang, Eliza Xia
Corporate bond issuers attempt to influence bond ratings through their discretion over reported numbers, which could diminish credit rating quality. I find that cash flow management is negatively associated with rating quality, while accruals management is not. These results suggest that rating agencies fail to adjust for cash flow management, but they undo accruals management. The differential results for cash flow management versus accruals management could be due to the rating agencies’ more skeptical attitude towards accruals and the lower cost of adjusting accruals management. The relation between cash flow management and rating quality is weaker for issuers with high leverage and issuers with prior ratings around the investment-/speculative-grade cutoff. Overall, the evidence suggests that rating management through managerial discretion over reported numbers has a detrimental impact on rating quality, but only via the cash flow component. Fortunately, the bond market understands the implications of cash flow management on rating quality and relies less on ratings in response to cash flow management.

The Liquidity Hierarchy in the U.S. Treasury Market
Baker, Lee,McPhail, Lihong,Tuckman, Bruce
We describe the complex nature of liquidity in the markets for Treasury bonds and futures contracts. Using a risk-adjusted measure of trading volume, we find that, while overall volume is greater across all cash securities than across all futures contracts, certain futures contracts are more liquid than certain cash securities, and vice versa. Furthermore, futures contracts play a special role in liquidity-challenged environments. Finally, average trade size, in risk terms, is much higher for cash securities than for futures contracts. These findings can be useful to investment practitioners, who constantly weigh the relative values of various securities against their liquidity.

The Liquidity of Credit Default Index Swap Networks
Haynes, Richard,McPhail, Lihong
Recent regulatory reforms like the mandatory clearing of standardized swap contracts and mandatory trading on centralized execution platforms have significantly changed the derivatives landscape. These reforms have, in certain cases, led the market to increasingly trade on multilateral platforms, potentially affecting the average cost of execution. Prior research has examined the effects of centralized trading on execution costs and has generally found reduced costs, especially for entities with higher transaction volumes or greater execution flexibility. We use detailed information on the trading of credit index swaps, the most actively traded credit derivatives instrument, between May 2014 and Sep 2016. We find that the customers who trade with a higher number of dealers (high network degree) and those who trade with the most active dealers (high network centrality) incur lower trading costs; for at least the less liquid indices, this cost improvement increases as trade size increases. We also identify a few liquidity trends: measures like average daily volumes, average price impact, and price dispersion have remained steady or have improved. However, during the same period, trade sizes for certain indices may have declined slightly.

The Paris Agreement and Electricity Markets Outside the EU
Estêvão, João,Raposo, Clara C.,Lopes, José
Climate change has been at the center of economic and social discussion for some years. The passage of time has intensified this debate and reflection. A well-known relevant event in this domain was the signature of the Paris Agreement in 2014, and its subsequent enforcement by European Union (EU) member countries. This study examines if the climate change measures adopted by the Agreement had an impact on the electricity sector outside the EU28, seeking to assess whether there is international diversity in these markets or if they work uniformly at global level. The goal of this work is to study the behavior of spot electricity prices before and after the Agreement was signed by EU members, analyze its effect in terms of spot prices, and determine the conditions that lead to stability and non-stability. We examine the behavior of spot electricity prices in two different electricity markets: the US and Brazil. The study applies both qualitative methodologies, namely fsQCA, and quantitative methodology, in order to identify changes in the pattern of electricity price behavior with the advent of the Agreement. Arguably, regulatory theory still incorporates the effects of the emergence of global dynamics in the regulation process. However, what this article suggests is that changes in regulatory frameworks with global impact, even if exogenous to a specific market, can profoundly alter the dynamics of that market.

The Pricing of Market and Idiosyncratic Jump and Volatility Risks
Middelhoff, T. Frederik
This paper analyzes the risk-return relation of different variance components in the cross-section of option and stock returns. Using option portfolios that have a constant exposure to either jump or diffusive risk, I decompose variance risk into four components: market volatility risk, idiosyncratic volatility risk, market jump risk, and idiosyncratic jump risk. The lion’s share of stocks' variance risk is paid for the idiosyncratic components, with Sharp Ratios of -3.44 for idiosyncratic jump risk and 2.15 for idiosyncratic volatility risk. While all four components are at play when stocks earn negative returns, idiosyncratic jump and volatility risks are most important to explain positive returns. In addition, stocks that have higher idiosyncratic jump risk premiums earn higher future returns.

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.

Time-Series Variation in Factor Premia: The Influence of the Business Cycle
Polk, Christopher,Haghbin, Mo,de Longis, Alessio
Factor cyclicality can be understood in the context of factor sensitivity to aggregate cash-flow news. Factors exhibit different sensitivities to macroeconomic risk, and this heterogeneity can be exploited to motivate dynamic rotation strategies among five commonly established factors: size, value, quality, low volatility and momentum. A timely and realistic identification of business cycle regimes, using leading economic indicators and global risk appetite, can be used to construct long-only factor rotation strategies with information ratios nearly twice as large as static multifactor strategies. Results are statistically and economically significant after accounting for transaction costs, capacity and turnover.

Utility Divestitures in Germany: A Case Study of Corporate Financial Strategies and Energy Transition Risk
Hörnlein, Lena
Germany is in the midst of a radical transformation of its power sector, which in 2016 led two of its main electric utilities, EON and RWE, to undertake dramatic restructurings. EON spun off its fossil fuel and trading segments, while RWE carved out its renewable energy, retail and grid business.The paper examines the drivers of these divestitures. Building on corporate finance literature, the paper uses a mix of comparative descriptive statistics, interviews and event studies to test four groups of hypotheses. The evidence rejects drivers related to operations and management, biased investment and investor preferences and instead points to financing-related drivers.Among the financing-related drivers, debt overhang and risk contamination seemed to have played the main role. Utilities restructured to save their healthy assets (renewables and grid infrastructure) from losses at their conventional power generation business (fossil fuel and nuclear plants).Already weakened from record losses in their fossil fuel powered generation fleet due to low electricity prices, after 2011 the nuclear exit emerged as an additional challenge to the utilities. Investors doubted the adequacy of utilities provisions for decommissioning nuclear power plants and storing toxic waste, and feared major cost increases for which the utilities would be unlimitedly liable.The paper uses existing research on divestitures in an empirical case that has implications for the evolution of European power markets. The results suggest that exiting conventional technologies as part of the transition to a more renewable energy mix might cause substantial costs. If these are not clarified and allocated ex ante, policy makers might find themselves forced to either burden tax payers or endanger utilities that are of systemic relevance to the energy sector.

Voluntary Information Disclosure with Heterogeneous Beliefs
Liu, xia,Liu, Shancun,Lu, Lei,Shi, Yongdong,Xiong, Xiong
We present a model in which an insider and an informed outsider have heterogeneous beliefs on their shared information about a risky asset and analyze the insider’s incentive for voluntarily disclosing the information to the public. We find that, with heterogeneous beliefs, the insider might choose voluntary disclosure to seek excess profits. Specifically, the insider is more likely to release the information to the public when he has a greater relative information advantage than the informed outsider. Our findings shed light on why some firm insiders prefer to trade against informed outsiders, and some others prefer to drive informed outsiders out of trading through voluntary disclosure.

When Do Commodity Prices Matter for the Carry Trade? The Role of FX Liquidity
Jeanneret, Alexandre
Carry traders invest in high-yield currencies, which are typically the currencies of commodity exporters. Guided by this stylized fact, we study the impact of commodity prices on carry trade performance. Commodity price shocks contemporaneously explain and predict carry trade returns but only when currency market liquidity is low. Our findings are consistent with the premise that a decline in commodity prices is perceived as negative news for commodity exporters and induces carry traders to unwind their positions, thereby exacerbating the downward price pressure during liquidity dry-outs. This sheds new light on the interconnection between the commodity and currency markets.

Who Trades Cryptocurrencies, How Do They Trade It, and How Do They Perform? Evidence from Brokerage Accounts
Hasso, Tim,Pelster, Matthias,Breitmayer, Bastian
We investigate the demographic characteristics, trading patterns, and performance of 465.926 brokerage accounts with respect to cryptocurrency trading. We find that cryptocurrency trading became increasingly popular across individuals of all different groups of age, gender, and trading patterns. Yet, men are more likely to engage in cryptocurrency trading, trade more frequently, and more speculative, respectively. As a result, men realize lower returns. Furthermore, we find that investors vary their trading patterns across different asset classes.

Институт Подготовки Кадров Непосредственно У Работодателя (Нанимателя): Наличие, Название, Предмет и Место в Системе Трудового Права (Training Provided Directly by Employer: Presence, Title, Object and Place in the System of Labour Law)
Kryvoi, Viktor
Russian Abstract: Ð' современных условиях одной из важнейших задач социальной политики (и ее составляющей â€" кадровой политики) любого государства и на международном уровне стало постоянное развитие человеческих ресурсов в сфере труда. Ð' данном направлении в статье разрабатываются наиболее общие из теоретических проблем института трудового права о подготовке кадров непосредственно у работодателя (нанимателя).Автор подвергает критическому анализу имеющиеся в научно-практической литературе и законодательстве подходы к изначальным положениям названного института: его фактическому наличию в реальной жизни, названию, предмету и месту в системе трудового права. Применительно к последнему он, в частности, считает, что структурно размещать рассматриваемое юридическое явление при регулировании индивидуальных трудовых и связанных с ними отношений необходимо непосредственно за центральным институтом трудового договора.Ð'носятся (с необходимой аргументацией) предложения по внедрению в учебные издания и нормативные правовые акты конкретных юридических формулировок. Ð' статье также воздается особая дань петербургскому профессору А.С. Пашкову за глубокие комплексные исследования сложнейших вопросов профессиональной подготовки работников с выходом на формирование социальной и кадровой политики в обсуждаемом ракурсе.English Abstract: One of the most important tasks of social policy (and its component - personnel policy) of any state and at the international level is the constant development of human resources in the workplace. In this direction, the article develops the most common of the theoretical problems training directly with the employer (employer).The author critically analyzes the approaches in the scientific and practical literature and legislation to the original provisions of the named institution: its actual presence in real life, its name, subject and place in the system of labour law. With regard to the latter, he, in particular, believes that it is necessary to structurally place the considered legal phenomenon in the regulation of individual labour and related relations directly behind the central institution of the employment contract.Submitted (with the necessary arguments) proposals for the introduction of specific legal formulations into educational publications and normative legal acts.The article also pays special tribute to the Petersburg professor A.S. Pashkov for deep comprehensive studies of the most difficult issues of vocational training of workers with access to the formation of social and personnel policy in the discussed perspective.

Модели оценки рисков деятельности компаний, реализующих проекты с НИОКР (Risk Assesssment Models of the Activities of Companies Implementing R&D Projects)
Minasyan, Vigen Babkenovich
Russian Abstract: Компании, реализующие проекты c НИОКР (R & D), сталкиваются с их уникальными особенностями: они требуют больших капитальных вложений, длительного срока их реализации, связаны высоким потенциалом роста и низкой вероятностью успеха, а также с проблемами финансирования. Часть возникающих проблем исследовалась прежде и продолжает исследоваться в настоящее время. Ð' последние годы появились исследования на модельном уровне проблем с финансированием R&D проектов. Проблема рисков, возникающих при реализации проектов R&D, на описательном уровне рассматривалась во многих работах. На модельном уровне, с нашей точки зрения, данная проблема пока недостаточно исследована. Ð' данной работе предложена модель, позволяющая исследовать риски, возникающие при реализации компаниями проектов с R&D, и развит метод оценки соответствующих рисков, с помощью модифицированной для данного применения меры VaR. Получены формулы для расчета данной меры, и они доведены до простых аналитических выражений в предположениях равномерного распределения денежного потока от проекта или треугольного распределения. Построенная модель учитывает важнейшие причины возникновения рисков в проектах с R&D, которые инвесторы интуитивно ощущают. Построенная модель позволяет оценить риски проектов с R&D с помощью меры риска VaR при всевозможных параметрах, присутствующих в модели. Ð"анную модель можно использовать на практике как для предварительной оценки риска проекта R&D еще до его реализации и принятия решения о реализации с учетом риска, так и для стандартизации процесса принятия решения о реализации проектов с R&D c стандартизированным учетом «аппетита к риску» с применением меры риска VaR. English Abstract: Companies, that implement R&D projects, face their unique characteristics: they require large capital investments and long implementation period; they are associated with high growth potential and low probability of success, as well as with financing problems. Some of the emerging problems have been investigated before and are still being investigated nowadays. In particular, the problems with financing R&D projects. The problem of risks arising from the implementation of R&D projects at the descriptive level was considered in many works. At the model level, from our point of view, this problem has not been sufficiently investigated. The model represented in this work allows to investigate the risks that companies face while implementing R&D projects and to develop a method for assessing the corresponding risks using a modified VaR measure. The formulas have been obtained to calculate this measure and they have been brought to simple analytical expressions under the assumptions of a uniform distribution of the cash flow from the project or triangular distribution. The constructed model takes into account the most important causes of risk project with R&D, investor who intuitively feel. The constructed model allows to evaluate the project risk of R&D via VaR risk measure for all possible parameters present in the model. This model can be used in practice for R&D of the preliminary assessment of the project before its implementation and decide on the implementation of risk-based, and to standardize the decision-making process for project with the R&D and standardized view of the «risk appetite» with use of risk measures VaR.