Research articles for the 2019-05-29

A finança islâmica nas sociedades ocidentais (Islamic Finance in Western Societies)
Teixeira Fernandes, José Pedro
Portuguese Abstract: Nos últimos anos, diversas empresas ocidentais ligadas à actividade bancária e ao sector segurador passaram a oferecer no mercado produtos financeiros de acordo com as prescrições da sharia islâmica. Inicialmente, o mercado-alvo eram apenas os países árabes e islâmicos sobretudo do Médio Oriente. Recentemente, a tendência estendeu-se também aos mercados ocidentais tendo como finalidade atrair a liquidez de investidores árabes e configurar produtos «éticos» para os muçulmanos residentes na Europa e América do Norte. Face a esta expansão, o objectivo principal deste artigo é discutir as questões levantadas pela finança islâmica de uma maneira abrangente. A análise será feita ligando esta tendência empresarial aos desenvolvimentos mais gerais do islamismo (islão político) e ao relativismo-multiculturalista ocidental, procurando avaliar as consequências que daí podem resultar para as sociedades democráticas e seculares do Ocidente.English Abstract: In the last years several Western corporations from the financial sector, including banks, insurance companies, and rating agencies, begun to offer on the market financial products in conformity with the prescriptions of Islamic Shari’a. At the beginning, the targets were only the Arab and the Islamic markets mainly in the Middle East. More recently, this trend also extended to the Western market, targeting both the liquidity of Arab investors and the Muslim populations of Europe and North America with "ethical" products. Thus, the main objective of this paper is discussing, in a broad way, what is at stake with the expansion of the Islamic finance to the Western societies. The analysis will connect this business trend with other general developments, particularly with Islamism (political Islam), and the Western relativism and multiculturalism. The final purpose is to make an assessment of the possible consequences for the democratic and secular societies of the West.

Age Matters
Guo, Danqiao,Boyle, Phelim P.,Weng, Chengguo,Wirjanto, Tony S.
This paper starts from examining the performance of equally weighted 1/N stock portfolios over time. During the last four decades these portfolios outperformed the market. The construction of these portfolios implies that their constituent stocks are in general older than those in the market as a whole. We show that the differential performance can be explained by the relation between stock returns and firm age. We document a significant relation between age and returns. Since 1977 stock returns have been an increasing function of age apart from the oldest ages. For this period the age effect completely dominates the size effect.

An Aspect of Optimal Regression Design for LSMC
Christian Weiß,Zoran Nikolić

Practitioners sometimes suggest to use a combination of Sobol sequences and orthonormal polynomials when applying an LSMC algorithm for evaluation of option prices or in the context of risk capital calculation under the Solvency II regime. In this paper, we give a theoretical justification why good implementations of an LSMC algorithm should indeed combine these two features in order to assure numerical stability. Moreover, an explicit bound for the number of outer scenarios necessary to guarantee a prescribed degree of numerical stability is derived. We embed our observations into a coherent presentation of the theoretical background of LSMC in the insurance setting.

An assets-liabilities dynamical model of banking system and systemic risk governance
Lorella Fatone,Francesca Mariani

We consider the problem of governing systemic risk in an assets-liabilities dynamical model of banking system. In the model considered each bank is represented by its assets and its liabilities.The capital reserves of a bank are the difference between assets and liabilities of the bank. A bank is solvent when its capital reserves are greater or equal to zero otherwise the bank is failed.The banking system dynamics is defined by an initial value problem for a system of stochastic differential equations whose independent variable is time and whose dependent variables are the assets and the liabilities of the banks.The banking system model presented generalizes those discussed in [4],[3] and describes a homogeneous population of banks. The main features of the model are a cooperation mechanism among banks and the possibility of the (direct) intervention of the monetary authority in the banking system dynamics. We call systemic risk or systemic event in a bounded time interval the fact that in that time interval at least a given fraction of the banks fails. The probability of systemic risk in a bounded time interval is evaluated using statistical simulation. The systemic risk governance pursues the goal of keeping the probability of systemic risk in a bounded time interval between two given thresholds.The monetary authority is responsible for the systemic risk governance.The governance consists in the choice of the assets and of the liabilities of a kind of "ideal bank" as functions of time and in the choice of the rules that regulate the cooperation mechanism among banks.These rules are obtained solving an optimal control problem for the pseudo mean field approximation of the banking system model. The governance induces the banks of the system to behave like the "ideal bank". Shocks acting on the assets or on the liabilities of the banks are simulated.

Analysis of Corporate Venture Capital from an Investor Perspective
Ladnar, Nadine,Zureck, Alexander
Corporate venture capital (CVC) is on the rise. About 300 investments carried out by Google show the current relevance of CVC. Existing literature is focused on specific topics influencing the success of CVC and on the objectives pursued with CVC. In this paper, these factors are concluded. It is described what should be the main drivers to invest CVC. Moreover, this paper provides an answer to the question what is the best way to invest CVC, especially when it comes to structuring. It can be derived from a literature-based method that CVC is of particular importance for companies with a high need for innovation in a competitive environment. A second finding is that founding a CVC unit investing indirectly in venture capital (VC) funds first and after a certain amount of time, investing directly leads companies to success. While investing, corporate investors can use incentives in order to avoid principal-agent issues.

Assessing the effect of advertising expenditures upon sales: a Bayesian structural time series model
Víctor Gallego,Pablo Suárez-García,Pablo Angulo,David Gómez-Ullate

We propose a robust implementation of the Nerlove--Arrow model using a Bayesian structural time series model to explain the relationship between advertising expenditures of a country-wide fast-food franchise network with its weekly sales. Thanks to the flexibility and modularity of the model, it is well suited to generalization to other markets or situations. Its Bayesian nature facilitates incorporating \emph{a priori} information (the manager's views), which can be updated with relevant data. This aspect of the model will be used to present a strategy of budget scheduling across time and channels.

Bank Capital in the Short and in the Long Run
Mendicino, Caterina,Nikolov, Kalin,Suarez, Javier,Supera, Dominik
How far should capital requirements be raised in order to ensure a strong and resilient banking system without imposing undue costs on the real economy? Capital requirement increases make banks safer and are beneficial in the long run but also entail transition costs because their imposition reduces credit supply and aggregate demand on impact. In the baseline scenario of a quantitative macro-banking model, 25% of the long-run welfare gains are lost due to transitional costs. The strength of monetary policy accommodation and the degree of bank riskiness are key determinants of the trade-off between the short-run costs and long-run benefits from changes in capital requirements.

Bank Lending Market: Growth Due to Large Business
Khromov, Michael,Khudko, Elizaveta
In 2018, banking credit plays the key role in the provision of the corporate sector’s borrowed resources. From 2014 through 2017, increment of the total bond market debt exceeded Rb 1 trillion, which was comparable with the bank debt growth of the corporate borrowers. Bank lending notably increased in 2018. Large business increased its presence both in the bank lending market and in the bank market.

Bank Loan Remains the Main Tool to Maintain Households’ Spending
Khromov, Michael
Households’ bank savings at the turn of 2019 have demonstrated better performance against the last year. The largest share of deposits unlike last year was denominated in foreign currency. In the meantime, brisk recovery of the bank lending on the retail side is ongoing. This strengthens the credit model of the households’ financial behavior.

Can Friends Seed More Buzz and Adoption?
Kumar, Vineet,Sudhir, K.
A critical element of word of mouth (WOM) or buzz marketing is to identify seeds, often central actors with high degree in the social network. Seed identification typically requires data on the full network structure, which is often unavailable. We therefore examine the impact of WOM seeding strategies motivated by the friendship paradox to obtain more central nodes without knowing network structure. But higher-degree nodes may communicate less with neighbors; therefore whether friendship paradox motivated seeding strategies increase or reduce WOM and adoption remains an empirical question. We develop and estimate a model of WOM and adoption using data on microfinance adoption across 43 villages in India for which we have data on social networks. Counterfactuals show that the proposed seeding strategies are about 15-20% more effective than random seeding in increasing adoption. Remarkably, they are also about 5-11% more effective than opinion leader seeding, and are relative more effective when we have fewer seeds.

Climatic Variations and the Market Value of Insurance Firms
Hu, Bin,McKitrick, Ross
Major insurance and reinsurance firms have expressed concern that global warming poses economic threats to the industry due to increased risk of extreme weather events. Past studies have examined the connection between global warming trends and the value of insured damages. In principle, if weather-related threats are increasing, insurance firms may face higher payouts, but they may also enjoy an expanded market for insurance products. If they are able to price the new risks appropriately they may even end up better off. This study examines whether climatic variations have historically been connected to the profitability of insurance firms. We form a portfolio of insurance firms and then estimate a three-factor model augmented with climate variables of interest. Short-run relationships between climatic variables and insurance firms indicate that temporary deviations have small but likely beneficial effects on insurance firms. Overall, our results suggest that the past increases in extreme weather conditions have not had a negative effect on the market value of insurance firms.

Co-jumping of Treasury Yield Curve Rates
Barunik, Jozef,Fiser, Pavel
We study the role of co-jumps in the interest rate futures markets. To disentangle continuous part of quadratic covariation from co-jumps, we localize the co-jumps precisely through wavelet coefficients and identify statistically significant ones. Using high frequency data about U.S. and European yield curves we quantify the effect of co-jumps on their correlation structure. Empirical findings reveal much stronger co-jumping behavior of the U.S. yield curves in comparison to the European one. Further, we connect co-jumping behavior to the monetary policy announcements, and study effect of 103 FOMC and 119 ECB announcements on the identified co-jumps during the period from January 2007 to December 2017.

Comparative Study for Performance Analysis of Routing Protocols in Mobility and Non-mobility Scenarios
Acharekar, Paresh,Mehta, Saurabh,Panbude, Shraddha
A Mobile Ad-hoc Network (MANET) has a collection of numbers of wireless nodes which is each device in MANET having ability to free to move in any direction so that it is useful in all applications. In MANET nodes change position quite frequently, this means that we have need routing protocols that quickly adapts to topology changes. An ad-hoc network is self-organising and distributive in manner. The MANET is works as router so that linked with the other nearest devices. A mobile ad hoc network (MANET) is a wireless network follows the multiple hop routing instead of static network infra to provide network connectivity. Each device in a MANET is free to move independently in all direction free way sand will therefore nodes change position in large networks all routing protocols. The routing protocols are needed for conveying information in Ad-hoc network there are various performance parameters to compare theAd-hoc routing protocols.

Composite Likelihood Estimation of an Autoregressive Panel Probit Model with Random Effects
Tuzcuoglu, Kerem
Modeling and estimating autocorrelated discrete data can be challenging. In this paper, we use an autoregressive panel probit model where the autocorrelation in the discrete variable is driven by the autocorrelation in the latent variable. In such a non-linear model, the autocorrelation in an unobserved variable results in an intractable likelihood containing high-dimensional integrals. To tackle this problem, we use composite likelihoods that involve much lower order of integration. However, parameter identification becomes problematic since the information employed in lower dimensional distributions may not be rich enough for identification. Therefore, we characterize types of composite likelihoods that are valid for this model and study conditions under which the parameters can be identified. Moreover, we provide consistency and asymptotic normality results of the pairwise composite likelihood estimator and conduct Monte Carlo studies to assess its finite-sample performances. Finally, we apply our method to analyze credit ratings. The results indicate a significant improvement in the estimated probabilities for rating transitions compared with static models.

Contest Architecture with Public Disclosures
Toomas Hinnosaar

I study optimal disclosure policies in sequential contests. A contest designer chooses at which periods to publicly disclose the efforts of previous contestants. I provide results for a wide range of possible objectives for the contest designer. While different objectives involve different trade-offs, I show that under many circumstances the optimal contest is one of the three basic contest structures widely studied in the literature: simultaneous, first-mover, or sequential contest.

Continuous-Time Mean-Variance Portfolio Selection: A Reinforcement Learning Framework
Wang, Haoran,Zhou, Xun Yu
We approach the continuous-time mean-variance (MV) portfolio selection with reinforcement learning (RL). The problem is to achieve the best tradeoff between exploration and exploitation, and is formulated as an entropy-regularized, relaxed stochastic control problem. We prove that the optimal feedback policy for this problem must be Gaussian, with time-decaying variance. We then establish connections between the entropy-regularized MV and the classical MV, including the solvability equivalence and the convergence as exploration weighting parameter decays to zero. Finally, we prove a policy improvement theorem, based on which we devise an implementable RL algorithm. We find that our algorithm outperforms both an adaptive control based method and a deep neural networks based algorithm by a large margin in our simulations.

Convergence to the Mean Field Game Limit: A Case Study
Marcel Nutz,Jaime San Martin,Xiaowei Tan

We study the convergence of Nash equilibria in a game of optimal stopping. If the associated mean field game has a unique equilibrium, any sequence of $n$-player equilibria converges to it as $n\to\infty$. However, both the finite and infinite player versions of the game often admit multiple equilibria. We show that mean field equilibria satisfying a transversality condition are limit points of $n$-player equilibria, but we also exhibit a remarkable class of mean field equilibria that are not limits, thus questioning their interpretation as "large $n$" equilibria.

Corporate Compliance Systems - The Effect on Risk, Performance and Firm Value
Bannier, Christina E.,Bauer, Anastasia,Bofinger, Yannik,Ewelt-Knauer, Corinna
This study examines the reported compliance activities of 112 publicly listed German firms over the years 2014 to 2017 and assesses their effect on firm risk, performance and value. We build a score that accounts for 24 different compliance-related items and find that higher reported compliance activity reduces downside (or tail) risk. Though return on equity is not affected by compliance, there is a positive effect on operating performance and on firm value measured via Tobin's Q. A principal component analysis shows that these beneficial compliance effects are mainly driven by institutionalized compliance components. Management-centric and externally-oriented compliance activities appear rather detrimental for reducing downside risk.

Does Portfolio Comprising of Solvent Companies Consistently Provide Robust Performance? An Empirical Analysis
Pardawala, Yasmin,Sinha, Bhaskkar
This paper talks about identifying firms which are easily prone to bankruptcy and avoids including such stocks in the stock portfolio. The importance of risk, returns, profitability, value and growth strategies while creating a portfolio are highlighted in this paper. The univariate Z-Score and asset size are used for separating investible stocks from non-investible stocks. The performance of such a portfolio is tested over a time period for its robustness. The allocation of weights is done on the basis of market cap i.e. large cap is given a weight of 65% to 97% and the mid-cap is given a weight of 3% to 35%. This allocation is helpful for arriving at the number of shares to be purchased.

Does Shareholder Litigation Risk Cause Public Firms to Delist? Evidence from Universal Demand Laws
Le, Nhan,Nguyen, Duc Duy,Sila, Vathunyoo
The number of listed firms in the U.S. has fallen by half since the late 1990s. Our paper examines whether and to what extent the costs of shareholder litigation have contributed to this trend. Using the staggered adoption of universal demand (UD) laws, we find that the reduction in shareholder litigation risk lowers incidences of firms delisting from stock exchanges. Furthermore, the effect is concentrated among firms facing higher ex ante litigation risk. UD law adoptions also encourage new listings. Overall, our findings suggest that the pressure imposed by shareholder litigation increases the costs of listing.

Equity Risk Premiums (ERP): Determinants, Estimation and Implications â€" The 2019 Edition
Damodaran, Aswath
The equity risk premium is the price of risk in equity markets, and it is a key input in estimating costs of equity and capital in both corporate finance and valuation. Given its importance, it is surprising how haphazard the estimation of equity risk premiums remains in practice. We begin this paper by looking at the economic determinants of equity risk premiums, including investor risk aversion, information uncertainty and perceptions of macroeconomic risk. In the standard approach to estimating the equity risk premium, historical returns are used, with the difference in annual returns on stocks versus bonds, over a long period, comprising the expected risk premium. We note the limitations of this approach, even in markets like the United States, which have long periods of historical data available, and its complete failure in emerging markets, where the historical data tends to be limited and volatile. We look at two other approaches to estimating equity risk premiums â€" the survey approach, where investors and managers are asked to assess the risk premium and the implied approach, where a forward-looking estimate of the premium is estimated using either current equity prices or risk premiums in non-equity markets. In the next section, we look at the relationship between the equity risk premium and risk premiums in the bond market (default spreads) and in real estate (cap rates) and how that relationship can be mined to generated expected equity risk premiums. We close the paper by examining why different approaches yield different values for the equity risk premium, and how to choose the “right” number to use in analysis.

Financial Characteristics of Cost of Funds Indexed Loans
Greenfield, Patrick,Hall, Arden
Two recent articles by Hancock and Passmore (2016) and Passmore and von Hafften (2017) make several suggestions for improving the home mortgage contract to make homeownership more achievable for creditworthy borrowers. Though the proposals in the two papers differ in some aspects, one common feature is an adjustable rate indexed to a cost of funds (COF) measure. Such indices are based on the interest expense as a fraction of liability balance for one or a group of depository institutions. One of these, the 11th District Cost of Funds (COF) Index, was in wide use in the 1980s and '90s, but use has fallen off since then. COF indices have the advantage that they are less volatile than market-based indices such as the 1-year U.S. Treasury rate, so that borrowers are not exposed to rapid increases in payments in a rising rate environment. We analyze COF-indexed ARMs from the point of view of the lender. First we develop a methodology for constructing a liability portfolio that closely tracks the specific COF index proposed by Hancock and Passmore (2016) and Passmore and von Hafften (2017). We then explore the financial characteristics of this liability portfolio. We show that the liability portfolio, and by implication, the mortgages it would fund, s are a characteristic of fixed-rate mortgages: Values can vary significantly from par if rates change. This creates two problems for lenders: Pricing of COF-indexed ARMs is difficult because it depends not only on current interest rates but also on interest rates when principal is r paid, either through amortization or prepayment. Second, deviations from par make mortgage prepayment options valuable, so that lenders offering the product must manage option risk as well as interest rate risk. We conclude that while mortgages using a COF index have clear benefits for borrowers, they also are more difficult for lenders to price accurately. Further, once they are in lenders' portfolios, they increase the complexity of interest rate risk management. While these issues do not imply that COF indices cannot be part of innovative new mortgage designs, understanding their financial characteristics may contribute to the search for a better mortgage.

Foreign Investors’ Trading Behaviors around Merger and Acquisition Announcements: Evidence from Korea
Yang, Jin Young,Segara, Reuben
In this paper, we examine foreign investors’ trading behaviors around merger and acquisition (M&A) announcements in the Korean stock market (both KOSPI and KOSDAQ markets). We find evidence that foreign investors are more likely to buy target stocks with larger wealth effects, while domestic individual investors tend to buy target stocks with smaller wealth effects more intensely prior to M&A announcements on the KOSPI market. On the contrary, our results reveal that both foreign and domestic investors are not able to identify target stocks with larger wealth effects on the KOSDAQ market. Further, we find that in response to M&A announcements, only foreign investors can find target stocks with greater subsequent returns on the KOSDAQ market, but not on the KOSPI market.

Heuristics in Multi-Winner Approval Voting
Jaelle Scheuerman,Jason L. Harman,Nicholas Mattei,K. Brent Venable

In many real world situations, collective decisions are made using voting. Moreover, scenarios such as committee or board elections require voting rules that return multiple winners. In multi-winner approval voting (AV), an agent may vote for as many candidates as they wish. Winners are chosen by tallying up the votes and choosing the top-$k$ candidates receiving the most votes. An agent may manipulate the vote to achieve a better outcome by voting in a way that does not reflect their true preferences. In complex and uncertain situations, agents may use heuristics to strategize, instead of incurring the additional effort required to compute the manipulation which most favors them.In this paper, we examine voting behavior in multi-winner approval voting scenarios with complete information. We show that people generally manipulate their vote to obtain a better outcome, but often do not identify the optimal manipulation. Instead, voters tend to prioritize the candidates with the highest utilities. Using simulations, we demonstrate the effectiveness of these heuristics in situations where agents only have access to partial information.

How to Ensure Your Supervisory College Meeting Is an Abysmal Failure
Alford, Duncan
This tongue-in-cheek short article is based on my conversations with central bankers and bank supervisors regarding the operation of supervisory colleges. The tone of the article was inspired by a “tongue in cheek” presentation by the Honorable William B. Traxler, Jr., judge on the 4th Circuit Court of Appeals, Richmond, Virginia, at a bar meeting in South Carolina in the late 1990s and more recently, by a dinner speech given by Norman T.L. Chan on Nov. 22, 2017, entitled “How to Get Rid of Banking Supervisors.” Mr. Chan indicated his motivation for the title of the speech was to attract “a few more senior bankers to help foot the dinner bill."

Impact of Capital Structure on Firm Value: Evidence from Nifty
sharma, rajshree,Nathani, Navita
This study examines the effect of capital structure on value of firm of automobile companies during 2009 to 2018. Variables including size. Profitability, Tangibility. Growth and age taken for examining value of firm .the study found that the relation indicates leverage, profit, size, tangibility, and liquidity age are significantly effect on value of firm. Moreover, fertilizer sector found insignificant. Other macro economic factors i.e. GDP found insignificant but inflation rate significant with price to book value.

Industry Experience of Board CEO, and Acquisition Performance
Bhattacharya, Debarati,Kao, Ya-Yun,Li, Wei-Hsien
This study examines the collective impact of expert boards and CEOs on acquisition performance, providing new insight into the CEO-board relationship. Acquiring firms with expert boards earn an additional 1.16 percentage points when their CEOs are new to the target industry compared to firms with “non-experienced” boards. However, compared to firms with expert boards alone, acquiring firms with expert boards earn an additional 3.91 percentage points when their CEOs are also experts in the target industry. Robust to endogeneity checks, our evidence supports the vigilant-advisor, resource provisioning, and “shared experience” hypotheses that take three distinct views of the CEO-board relationship. Generalist CEOs and public targets intensify the shared experience effect, whereas less powerful CEOs and private targets intensify the resource provisioning effect. Finally, experienced directors improve the quality of acquisitions by assisting acquirers to avoid large losses, identify targets with higher synergies, and negotiate better deals.

Less is More in the Age of Information Overload: The Paradigm Shift from a Shareholder- To a Stakeholder-Oriented Market
Passador, Maria Lucia,Riganti, Federico
This paper aims to examine the innovations introduced by Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 and its transposition measures in Italy (considering the Legislative Decree No. 254 of 30 December 2016, and the recent regulation by the national Supervisory Authority) and in other European countries, as part of a wider research work on non-financial information statements (“NFSs”) and listed companies operating within the European markets. It is designed to verify the effectiveness of the tools offered, with the intent of developing a system which can (i) combine, also through the NFSs, long-term profitability, social justice, and environmental protection, and thus (ii) prevent risks to sustainability and (iii) increase the confidence of investors and consumers.The article is structured in several parts, striving to examining the European regulation, focusing on the NFS comparative and Italian scenario, by offering a descriptive and empirical analysis of the matter, as well as offering some systemic conclusions, in particular with reference to social interest and to the most suitable way to disclose such information.Ultimately, the paper is intended to provide the reader with a critical overview of the current non-financial information framework, as it applies at European and at Member State level. Nevertheless, in a forward-looking sense, this piece seeks to understand whether, and how, the issue of non-financial statements can actually (i) modify the actual corporate dialectic within companies required to disclose non-financial information; (ii) improve the accountability of such companies, as well as from the point of view of corporate social responsibility (“CSR”); and (iii) involve investors, primarily institutional ones, in the “life” of those companies which are subject to the NFS regime.

Loss Causation and the Materialization of Risk Doctrine in Securities Fraud Class Actions
Booth, Richard A.
In the context of a claim for securities fraud under SEC Rule 10b-5, most federal circuit courts have ruled or recognized that loss causation can be proven by an event that demonstrates an earlier statement by a defendant company to be false. In other words, corrective disclosure need not take the form of speech. Rather, a statement can be shown to be false by the materialization of a risk that was concealed by the company, and investors can be compensated for any losses they suffer as a result. Although this materialization doctrine is well established, it is the thesis here that its ultimate effect is to over-compensate investors, thus encouraging excessive securities litigation and chilling voluntary disclosure. The point is graphically illustrated by the securities litigation that followed the Deepwater Horizon explosion and spill. There, plaintiffs argued that BP (the operator of the rig) had misrepresented its safety practices. Assuming the allegations to be true, the pre-event market price of BP stock would have been a bit lower, reflecting additional risk. If plaintiffs had paid that lower price, they would have had no claim as a result of the explosion and spill. So if plaintiffs recover an amount equal to pre-spill price inflation, they will be in exactly the same financial position as if they had bought knowing the truth. But most of the price decline following the event came from the prospect of cash outflows resulting from clean-up, repairs, fines, settlements, and possibly an increase in the cost of capital. To compensate buyers for these consequential losses is excessive. The risk of such losses is one that can be diversified away by investors. Moreover, if these consequential losses are actionable at all, they constitute a claim of mismanagement belonging to the company that should be pursued in a derivative action.To generalize: In cases in which loss causation can be shown only by materialization, the bulk of the claim is almost always more properly characterized as one on behalf of the company that should be resolved by a derivative action instead of by a class action on behalf of individual investors. Moreover, to recharacterize such claims as derivative carries significant collateral benefits: Because the company stands to recover (rather than to pay), derivative actions avoid the circularity problem endemic in class actions while providing a remedy that is perfectly tailored to the true (undiversifiable) loss suffered by investors. It is difficult to overstate the significance of this insight: It implies that much of securities litigation, as we know it must be recast as derivative rather than direct.

Measuring Skewness Premia
Langlois, Hugues
We provide a new methodology to empirically investigate the respective roles of systematic and idiosyncratic skewness in explaining expected stock returns. Forming a risk factor that captures systematic skewness risk and forming idiosyncratic skewness sorted portfolios only require the ordering of stocks with respect to each skewness measure. Accordingly, we use a large number of predictors to forecast the cross-sectional ranks of systematic and idiosyncratic skewness which are considerably easier to predict than their actual values. Compared to other measures of ex ante systematic skewness, our forecasts create a significant spread in ex post systematic skewness. A predicted systematic skewness risk factor carries a significant risk premium that ranges from 7% to 12% per year and is robust to the inclusion of downside beta, size, value, momentum, profitability, and investment factors. In contrast to systematic skewness, the role of idiosyncratic skewness in pricing stocks is less robust. Finally, we document how the determinants of systematic skewness differ from those of idiosyncratic skewness.

Mortgage Rate Refinancing and Household Balance Sheets: Evidence from Expansionary and Contractionary Monetary Policy Episodes
Kartashova, Katya,Zhou, Xiaoqing
We study the causal effect of mortgage rate changes on consumer mortgage payment choices, consumption and balance sheets during an expansionary and a contractionary monetary policy episode in Canada. Our identification takes advantage of the fact that the rates of short-term fixed-rate mortgages (FRMs) in the Canadian mortgage market have to be reset according to the prevailing market rates at predetermined time intervals. Our empirical strategy exploits this exogenous variation in the timing of mortgage rate resets. We document that, when the mortgage rate decreases, borrowers convert only part of the interest savings into liquidity and use the rest to pay down their mortgages, while fully adjusting their payments upward to meet the required changes when the mortgage rate rises. We also find asymmetries in durable consumption responses. Auto spending increases when the mortgage rate falls, but does not change when the mortgage rate increases. However, borrowers actively pay down their revolving debt in both episodes. These results can be rationalized by the income effects of mortgage rate changes in conjunction with consumer expectations about future interest rates. Finally, we explore the implications of the exogenous refinancing of short-term mortgages for monetary policy. Our findings are relevant for monetary policy makers seeking to manage the transition back to higher interest rates in the post-financial crisis period, especially in countries where short-term FRMs are prevalent.

New Essentials of Economic Theory III. Economic Applications
Olkhov, Victor
This paper presents applications of our theory to description of particular economic problems. We give all definitions and equations in Part I and II of our work. Here we argue propagation of small perturbations of economic variables and transactions on economic space. We show that small perturbations may follow wave equations that have parallels to propagation of sound waves and surface waves in fluids. We underline that nature of economic waves is completely different from waves in physical fluids but parallels between them may be useful for their studies. Wave generation, propagation and interactions are the most general properties of any complex system. Descriptions of economic waves on economic space fill existing gap in economic modeling. Usage of economic space allows distribute agents by their risk ratings as coordinates. Agents on economic space cover economic domain bounded by minimum and maximum risk grades. Change of risk ratings of agents due to their economic activity, economic processes or other factors induce flows of economic variables, transactions and expectations. Borders of economic domain cause fluctuations of economic flows and mean risks and these fluctuations describe business cycles. For example fluctuations of credit flows model credit cycles, investment flows model investment cycles and etc. Further we model assets price disturbances as consequences of relations between transactions and expectations. As last economic sample we argue classical Black-Scholes-Merton option pricing model and discuss problems those arise from modeling on economic space.

Optimal Portfolio Choice with Path Dependent Labor Income: The Infinite Horizon Case
Biffis, Enrico,Gozzi, Fausto,Prosdocimi, Cecilia
We consider an infinite horizon portfolio problem with borrowing constraints, in which an agent receives labor income which adjusts to financial market shocks in a path dependent way. This path-dependency is the novelty of the model, and leads to an infinite dimensional stochastic optimal control problem. We solve the problem completely, and find explicitly the optimal controls in feedback form. This is possible because we are able to find an explicit solution to the associated infinite dimensional Hamilton-Jacobi-Bellman (HJB) equation, even if state constraints are present. To the best of our knowledge, this is the first infinite dimensional generalization of Merton's optimal portfolio problem for which explicit solutions can be found. The explicit solution allows us to study the properties of optimal strategies and discuss their financial implications.

Parallel Experimentation in a Competitive Advertising Marketplace
Xiliang Lin,Harikesh S. Nair,Navdeep S. Sahni,Caio Waisman

When multiple firms are simultaneously running experiments on a platform, the treatment effects for one firm may depend on the experimentation policies of others. This paper presents a set of causal estimands that are relevant to such an environment. We also present an experimental design that is suitable for facilitating experimentation across multiple competitors in such an environment. Together, these can be used by a platform to run experiments "as a service," on behalf of its participating firms. We show that the causal estimands we develop are identified nonparametrically by the variation induced by the design, and present two scalable estimators that help measure them in typical high-dimensional situations. We implement the design on the advertising platform of, an eCommerce company, which is also a publisher of digital ads in China. We discuss how the design is engineered within the platform's auction-driven ad-allocation system, which is typical of modern, digital advertising marketplaces. Finally, we present results from a parallel experiment involving 16 advertisers and millions of users. These results showcase the importance of accommodating a role for interactions across experimenters and demonstrates the viability of the framework.

Pricing Discretely Monitored Barrier Options Under Markov Processes Using a Markov Chain Approximation
Cui, Zhenyu,Taylor, Stephen Michael
We propose an explicit closed-form approximation formula for the price of discretely monitored single or double barrier options whose underlying asset evolves according to a generic one-dimensional Markov process. This set of stochastic processes includes, but is not limited to, diffusion and jump diffusion processes commonly used in derivative pricing applications. The formula’s derivation combines the integral equation method, the Zâˆ'transform technique, and a continuous-time Markov chain approximation of the underlying Markov process. It does not require one to perform an intermediate numerical quadrature or related potentially runtime-intensive, error-prone, or otherwise complicated numerical procedure that may require a high degree of tuning to ensure appropriate accuracy (e.g. an inverse Laplace transform or inverse Zâˆ'transform). Rather, the price and Greeks of a discretely-monitored double barrier option may be explicitly expressed in terms of rudimentary matrix operations. In addition, this framework may be extended to include additional features of barrier options often encountered in practice. Examples including time-dependent barriers and non-uniform monitoring time intervals, may be seamlessly incorporated into this framework. In addition, by limiting the monitoring frequency to a large value, we also obtain an accurate closed-form formula for the price and Greeks of continuously-monitored double barrier options with time-dependent barriers under general Markov processes. Finally, we provide many numerical examples to demonstrate the accuracy and efficiency of the proposed formula as well as its ability to reproduce existing benchmark results in the relevant literature.

Prudential Regulation and Financial Information in Spanish Banks: 1995-2015
Marín Hernández, Salvador ,Gras Gil, Ester,Ortiz Martínez, Esther
In this paper we seek to ascertain whether the changes in prudential financial regulation in Spain in the period 1995â€"2015 have had an effect on financial stability and whether this can be assessed for Spain from the behavior of the z-score and the LLP variables, as has been done elsewhere. We analyze the implementation of the statistical or dynamic provision in 2000 and also the adoption of the Basel II agreement in 2008. The sample analyzed comprises 48 Spanish banks. As our main conclusions, we provide evidence that the changes that have taken place in prudential financial regulation in Spain cannot be adequately analyzed and interpreted with the behavior of the z-score and LLP variables for that period, since in this context they are not good indicators of greater or lesser financial stability due to interference from the Spanish banking regulator.

Risk management with machine-learning-based algorithms
Simon Fécamp,Joseph Mikael,Xavier Warin

We propose some machine-learning-based algorithms to solve hedging problems in incomplete markets. Sources of incompleteness cover illiquidity, untradable risk factors, discrete hedging dates and transaction costs. The proposed algorithms resulting strategies are compared to classical stochastic control techniques on several payoffs using a variance criterion. One of the proposed algorithm is flexible enough to be used with several existing risk criteria. We furthermore propose a new moment-based risk criteria.

Scalar multivariate risk measures with a single eligible asset
Zachary Feinstein,Birgit Rudloff

In this paper we present results on scalar risk measures in markets with transaction costs. Such risk measures are defined as the minimal capital requirements in the cash asset. First, some results are provided on the dual representation of such risk measures, with particular emphasis given on the space of dual variables as (equivalent) martingale measures and prices consistent with the market model. Then, these dual representations are used to obtain the main results of this paper on time consistency for scalar risk measures in markets with frictions. It is well known from the superhedging risk measure in markets with transaction costs, as in Jouini and Kallal (1995), Roux and Zastawniak (2016), and Loehne and Rudloff (2014), that the usual scalar concept of time consistency is too strong and not satisfied. We will show that a weaker notion of time consistency can be defined, which corresponds to the usual scalar time consistency but under any fixed consistent pricing process. We will prove the equivalence of this weaker notion of time consistency and a certain type of backward recursion with respect to the underlying risk measure with a fixed consistent pricing process. Several examples are given, with special emphasis on the superhedging risk measure.

Stochastic volatility, jumps and leverage in energy and stock markets: evidence from high frequency data
Baum, Christopher F,Zerilli, Paola,Chen, Liyuan
In this paper, we propose a model for futures returns that has the potential to provide both individual investors and firms who have positions in financial and energy commodity futures a valid tail risk management tool. In doing so, we also aim to explore the commonalities between these markets and the degree of financialization of energy commodities. Unlike most of the existing studies in energy derivative markets based on daily data, our empirical analysis makes use of high-frequency (tick-by-tick) data from the futures markets, aggregated to 10-minute intervals during the trading day. The intraday variation is then utilized to generate daily time series of prices, returns and realized variance. We estimate stochastic volatility models using a GMM approach based on the moment conditions of the Integrated Volatility derived from high frequency data. While existing empirical studies in energy markets embed either leverage or jumps in the futures return dynamics, we show that the introduction of both features improves the ability to forecast volatility as an indicator for risk for both the S&P500 and natural gas futures markets using both the RMSE and MAE criteria. Our analysis also shows that overall, the introduction of both leverage and jumps in the SVJL model provides the best forecast for risk in both a VaR and a CVaR sense for investors who have any position in natural gas futures regardless of their degree of risk aversion. In the S&P500 market, the SVJL model provides the most precise forecast of risk in a CVaR sense for risk-averse investors with any position in futures, regardless of their degree of risk aversion. Focusing on a firm's internal risk management, the introduction of both jumps and leverage in the SVJL model would benefit speculative firms who are short natural gas futures aiming at minimizing tail risk in a VaR sense, as well as speculative firms who are long S&P500 futures and use either VaR or CVaR as financial risk management criteria while wanting to minimize the opportunity cost of capital.

Sustainable Finance, the Good, the Bad and the Ugly: A Critical Assessment of the EU Institutional Framework for the Green Transition
Esposito, Lorenzo,Mastromatteo, Giuseppe,Gatti, Enrico Giuseppe
The transition to a green economy is arguably the most important economic transformation of the next decades. To be completed it requires the mobilization of astounding resources, a flow of technological innovation and a whole series of new rules going from technical standards to financial regulation. Given the resources it needs, the transition, to be credible, requires a full engagement of the financial system. On this regard we analyze the policy set-up of Europe, the most advanced area on the issue. We identify a three-layer functioning of the EU project for transition. The first one (“green products”) is fully compatible with the present financial system. A second layer entails changes in the business model and organization of financial operators but it can be phased in with minor overhauls. Finally, there is a third layer, largely incompatible with the present financial system, yet crucial to achieve transition. We show that, according to the same EU analysis, the transition needs a total change in the financial landscape and therefore it is, rebus sic stantibus, intrinsically unfeasible. We suggest ways to escape the dilemma that connects financial stability and green economy.

The Vietnamese Financial Economy: Reforms and Development, 1986-2016
Vuong, Quan Hoang
In an age of reform, Vietnam’s financial systems have come to a critical stage in which the quality of policy-making, independence of the central banking operations and over-risk controls will ultimately be required if the country is set to move forward in a sustainable fashion. Analysts may have different views about Vietnam’s financial economy, but all agree that it has evolved and grown fast over the past three decades. The next course of development will depend on how Vietnamese society views raison d’être of its financial systems and financial health. But the process will much depend on the economic growth of the economy as a whole. Failing to support a sustained growth puts VFS’s existence at risk as economic growth helps mitigate higher risk-taking behavior and contain instability in less competitive markets.

Time-Varying Risk Premia in Large International Equity Markets
Langlois, Hugues,Chaieb, Ines,Scaillet, Olivier
We estimate international factor models with time-varying factor exposures and risk premia at the individual stock level using a large unbalanced panel of 58,674 stocks in 46 countries over the 1985-2017 period. We consider market, size, value, momentum, profitability, and investment factors aggregated at the country, regional, and world level. The country market in excess of the world or regional market is required in addition to world or regional factors to capture the factor structure for both developed and emerging markets. We do not reject mixed CAPM models with regional and excess country market factors for 76% of the countries. We do not reject mixed multi-factor models in 80% to 94% of countries. Value and momentum premia show more variability over time and across countries than profitability and investment premia. The excess country market premium is statistically significant in many developed and emerging markets but economically larger in emerging markets.

Underwriting in the Australian IPO Markets: Determinants and Pricing
Marsden, Alastair,Murgulov, Zoltan,Rhee, S. Ghon,Veeraraghavan, Madhu
We examine the factors that explain the underwriting decision and underwriting fees for a sample of Australian Initial Public Offerings (IPOs), spanning the period 1999-2016. This includes young and often unprofitable IPOs that list as Commitments Test Entities (CTEs). We find: (i) CTE IPOs are more likely to be underwritten than non-CTE IPOs; (ii) IPOs that allow oversubscription of the shares and/or are issued by way of a bookbuild are less likely to be underwritten; and, for underwritten offers, we find (iii) greater initial returns and wealth loss to pre-existing shareholders for bookbuild IPOs and lower initial returns (wealth loss) in IPOs that allow oversubscription of the shares.

Using Accounting Earnings and Aggregate Economic Indicators to Estimate Firm-level Systematic Risk
Ball, Ray,Sadka, Gil,Tseng, Ayung
We revisit the literature on using accounting earnings to estimate firm-level systematic risk. We use macroeconomic indicators to measure undiversifiable aggregate risk; conventional listed-firm indexes reflect an unrepresentative subset of aggregate assets and are expected to substantially mismeasure risk (Roll, 1977). Earnings and macroeconomic indicators are realized annual outcomes that are well aligned for capturing the contemporaneous co-movements that underlie systematic risk, whereas stock returns incorporate changes in expected future outcomes. The macroeconomic indicators we use reflect changes in aggregate supply and demand, providing a parsimonious model incorporating the two fundamental determinants of aggregate outcomes. We find that firms' earnings-based sensitivities (betas) to aggregate supply and demand shocks are negatively correlated, and explain twice the cross-section of returns as conventional "index" betas. They are correlated with firm characteristics employed in empirical asset pricing models, and explain one third of the explanatory power of those characteristics, suggesting that at least part of firm characteristics' predictive ability is due to their correlation with systematic risk. These results provide a theory-based equivalent to the empirically-based Ball, Sadka and Sadka (2009) results that principal components of earnings are correlated with principal components of returns, and explain a significant portion of the returns cross-section.