Research articles for the 2019-06-06

A Regional Decomposition of US Housing Prices and Volume: Market Dynamics and Economic Diversification Opportunities
Antonakakis, Nikolaos,Chatziantoniou, Ioannis,Gabauer, David
In this study we employ a TVP-VAR model in order to investigate dynamic connectedness of housing prices and sales volume across four US regional housing markets; namely, Midwest, Northeast, South, as well as, West, for the period between January 1990 and March 2019. Furthermore, utilising an insightful decomposition of the results, we provide a thorough investigation of the underlying dynamics. Overall, results indicate that during turbulent economic periods, it is sales volume shocks that drive developments in the US housing market, rather than shocks in housing prices. In addition, we find that the South is rather a persistent net transmitter of both prices and volume housing market shocks, while the Northeast, a net receiver. On the whole, all four markets assume both roles over time. Results are important for policy makers and regulators aiming to alleviate the negative ramifications of an overheated housing market. In addition, given that over time, the four markets behave differently in connection with their short run shock-transmission capacity, results are also suggestive that there is potential for economic (i.e., rather than strictly geographical) portfolio diversification.

Aggregation Mechanisms for Crowd Predictions
Palan, Stefan,Huber, Juergen,Senninger, Larissa
When the information of many individuals is pooled, the resulting aggregate often is a good predictor of unknown quantities or facts (“wisdom of crowds”). This aggregate predictor frequently outperforms the forecasts of experts or even the best individual forecast included in the aggregation process. However, an appropriate aggregation mechanism is considered crucial to reaping the benefits of a “wise crowd”. Of the many possible ways to aggregate individual forecasts, we compare (uncensored and censored) mean and median, continuous double auction market prices and sealed bid-offer call market prices in a controlled experiment. We use an asymmetric information structure where subjects know different subsets of the total information needed to exactly calculate the asset value to be estimated. We find that prices from continuous double auction markets clearly outperform all alternative approaches for aggregating dispersed information and that information is only useful to the best-informed subjects.

An Intraday Analysis of Related Investment Vehicles Traded in the NYSE and AMEX
Chen, Qingqing
This paper undertakes an intraday analysis of related investment vehicles traded in the NYSE and AMEX. This paper investigates how the trading behaviors of three related investment vehicles (American Depository Receipt, Exchange-traded Fund, and Closed-end Fund) differ across countries using high-frequency intraday data. I Â…find that ADRs trade at transaction prices that are on average worse than ETFs and CEFs. The trading of ADRs, ETFs, and CEFs follows positive feedback strategies. The buy and sell trades of the three securities are driven by the net order imbalances and past returns of three securities themselves. The correlated trading behaviors of the three securities can be explained by momentum traders with a common information set.

An Islamic Perspective of Business Finance (A Comparative Study With Conventional and Capitalistic Financing)
Syed, Mahmood Ali,Akkinapally, Yugenghar,Ahmed, Badiuddin
India is big country with the population of 1.210 billion of which about 172 million (14%) are Muslims.We are having the conventional system of banking and finance which is based on only interest. A common practice seen here is anyone who is having any surplus money would be interested in starting the finance business instead of investing in productive projects and developing the economy. In this paper we are trying to provide information about the Islamic beliefs on loans, currency, investment and banking and finance besides how to use the money in the various Islamic investment modules. The emphasizing on important investment modules in Islamic Banking and Finance where by practical application can be done to achieve the objective real growth and development of economy.

Assessment of Business Angel Activity in Northern European Countries
Prohorovs, Anatolijs,Fainglozs, Levs
Business angels are one of the main sources of financing for innovative start-up companies. In this regard, it has been discussed in the existing literature that policy-makers and stakeholders are in great need for a tool to measure the level and scale of the development of the business angel market. It has been also mentioned that business angel activity in different countries is highly heterogeneous. However, so far in the existing literature the comparison of the level of business angel activity in the countries of Northern Europe has not been made. Therefore, the aim of our research is to compare the level of the visible business angel market activity in Northern European countries. To conduct a comparative assessment of the business angels' activity, we used the Business Angel Activity Index calculation methodology developed by us. In this methodology, we justified the set of indicators and the weight of indicators for the calculation of the composite index. We have discovered that in 2016 â€" 2017 Estonia and Finland demonstrated the highest level of business angel activity among the countries of Northern Europe. We have also established that population size, the size of economy and GDP per capita rate in the Northern European countries are not the main factors that have a considerable impact on the level of business angel activity. Moreover, we confirm that business angel activity in the countries of Northern Europe is highly heterogeneous. We have also found that high scores of the ratio of the number of business angels to the working population in particular countries do not guarantee high level of business angel investment activity in these countries. The paper also discusses the number of factors ensuring high business angel activity.

Bank Capital Requirements, Loan Guarantees and Firm Performance
Mayordomo, Sergio,Moreno, Antonio,Ongena, Steven,Rodriguez-Moreno, Maria
This paper studies the effects of the bank capital requirements imposed by the European authorities in October 2011 on loan collateral and personal guarantees usage to enhance capital ratios. We use detailed information on the loan contracts granted by a representative Spanish bank and several subsidiaries to nonfinancial corporations around that date. We document that personal guarantees usage increases more than that of collateral, especially at subsidiaries with lower capital ratios. However, although the former type of guarantees demonstrably disciplined firms in their risk-taking before 2011, their subsequent overuse may have blunted their impact and may have even undermined firm performance and investment.

Burying LIBOR
Klingler, Sven,Syrstad, Olav
We examine the consequences of the decision to discontinue the London Interbank Offered Rate (LIBOR) by the end of 2021. Guided by a model in which banks and non-banks can lend to each other, subject to realistic regulatory constraints, we show that tighter financial regulation increases interbank rates but lowers broad rates (in which lenders are non-banks). Moreover, Treasury bill issuance and the proportion of non-banks among the lenders affect the new rates. Our findings suggest that the transition away from LIBOR increases benchmark rate volatility and introduces a basis between regions with interbank rates and broad rates.

Corporate Social Responsibility and Stock Prices After the Financial Crisis: The Role of Primary Strategic CSR Activities
Pintekova, Aneta,Kukacka, Jiri
We analyze the relationship between corporate social responsibility and the stock market performance of U.S. companies in the post-global financial crisis period. A new measure of social responsibility, called the Thomson Reuters Environmental, Social, Governance, and Controversies Score (TRESGC Score), is used. The results of the fixed effects regression show a positive and statistically, as well as economically, significant impact of the TRESGC Score on the financial results of companies. As a novel feature of our analysis, socially responsible activities are further divided into those closely related to the core business of the examined companies, called primary activities, and those that are not directly related to the companies' business core, called secondary activities. The impact of primary activities on corporate stock market performance is significantly positive, while secondary activities do not have a substantial effect on the financial results. The empirical results thus suggest that if companies aim to increase their share prices via the corporate social responsibility channel, they should select their socially responsible initiatives strategically.

Deep Learning in Asset Pricing
Luyang Chen,Markus Pelger,Jason Zhu

We estimate a general non-linear asset pricing model with deep neural networks applied to all U.S. equity data combined with a substantial set of macroeconomic and firm-specific information. Our crucial innovation is the use of the no-arbitrage condition as part of the neural network algorithm. We estimate the stochastic discount factor (SDF or pricing kernel) that explains all asset prices from the conditional moment constraints implied by no-arbitrage. For this purpose, we combine three different deep neural network structures in a novel way: a feedforward network to capture non-linearities, a recurrent Long-Short-Term-Memory network to find a small set of economic state processes and a generative adversarial network to identify the portfolio strategies with the least explained pricing information. Our model allows us to understand what are the key factors that drive asset prices to identify mispricing of stocks and to generate the mean-variance efficient portfolio. Empirically, our approach outperforms out-of-sample all other benchmark approaches: Our optimal portfolio has an annual Sharpe Ratio of 2.6, we explain 8% of the variation in individual stock returns and explain over 90% of average returns for all anomaly sorted portfolios.

Deep PPDEs for rough local stochastic volatility
Antoine Jacquier,Mugad Oumgari

We introduce the notion of rough local stochastic volatility models, extending the classical concept to the case where volatility is driven by some Volterra process. In this setting, we show that the pricing function is the solution to a path-dependent PDE, for which we develop a numerical scheme based on Deep Learning techniques. Numerical simulations suggest that the latter is extremely efficient, and provides a good alternative to classical Monte Carlo simulations.

Determinants of the Possibilities by Investors’ Risk-Taking: Empirical Evidence From Vietnam
Huynh, Toan Luu Duc,Chi Le, Trung,Wong, Wing Keung
This paper focuses on determining the factors influencing investors’ risk-taking through empirical evidence from Vietnam. This study investigates risk perception, expected return and herding behavior, and other determinants such as historical volatility and subjective financial risk attitude; according to previous studies, these are the main components affecting risk-taking behavior among investors. Overconfidence (better than average, miscalibration, and excessive optimism) is also taken into consideration. We employ pooled-OLS and quantile regression to overcome the shortage of research models in this field. In addition, we demonstrate how risk-taking behavior can be affected by those factors with the application of measures across four different investment channels. This study suggests implications for investors who wish to control risk.

Duration-Driven Returns
Gormsen, Niels Joachim,Lazarus, Eben
We propose a duration-based explanation for the return to major equity risk factors, including value, profitability, investment, low risk, and payout factors. Both in the US and globally, firms with high expected returns predicted by these factors also have a short cash-flow duration, meaning that these firms are expected to earn most of their cash flows in the near future. The returns to the factors can thus be explained by a simple model where near-future cash flows have high risk- adjusted returns, which is consistent with the evidence on the equity term structure. We find evidence for such a model using a novel dataset of single-stock dividend futures that allow us to study fixed-maturity equity claims for a cross-section of firms.

Escaping From the Poverty Trap With Social Innovation: A Social Microcredit Programme in Hungary
Molnár, György,Havas, Attila
This paper describes a Hungarian social microcredit programme, called Kiútprogram and discusses the major lessons drawn from its operation. It was launched some 10 years ago as an adaptation of the Grameen model to the Hungarian circumstances to decrease the level of prejudice and discrimination against the Roma and improve their living conditions in the most remote, deprived areas of Hungary; microlending has been understood and introduced as a device to achieve these aims â€" and not as a profit-seeking business activity.During the almost ten-year long learning process, from the simple adaptation of the Grameen model the Kiútprogram has arrived to the denial of the most important features of joint liability in group lending, namely the application of the devices of social collateral. Experience has also shown that a loan itself is not sufficient to assist escaping from the poverty trap. Without knowledge transfer and without inter-community connection building â€" at least in the case of discriminated minorities â€" the effect of the loan may even be detrimental. In a modern society not only physical, but also social and cultural capital is needed to run a successful business in the formal sector of the economy.In the Kiútprogram’s model the loan plays a crucial role in escaping from the aspiration trap, and thus helps overcome learned helplessness. Loans without any â€" financial or social â€" collateral signal that the lender trusts the client, not only in her honesty, but also in her abilities. This method of lending strongly suggests to the clients the conviction that she is able of achieving a business success. Neither financial aid, nor loan with (social) collateral is suitable to reach this effect.

Funding Adjustments in Equity Linear Products
Stefania Gabrielli,Andrea Pallavicini,Stefano Scoleri

Valuation adjustments are nowadays a common practice to include credit and liquidity effects in option pricing. Funding costs arising from collateral procedures, hedging strategies and taxes are added to option prices to take into account the production cost of financial contracts so that a profitability analysis can be reliably assessed. In particular, when dealing with linear products, we need a precise evaluation of such contributions since bid-ask spreads may be very tight. In this paper we start from a general pricing framework inclusive of valuation adjustments to derive simple evaluation formulae for the relevant case of total return equity swaps when stock lending and borrowing is adopted as hedging strategy.

Game-Theoretic Optimal Portfolios in Continuous Time
Alex Garivaltis

We consider a two-person trading game in continuous time whereby each player chooses a constant rebalancing rule $b$ that he must adhere to over $[0,t]$. If $V_t(b)$ denotes the final wealth of the rebalancing rule $b$, then Player 1 (the `numerator player') picks $b$ so as to maximize $\mathbb{E}[V_t(b)/V_t(c)]$, while Player 2 (the `denominator player') picks $c$ so as to minimize it. In the unique Nash equilibrium, both players use the continuous-time Kelly rule $b^*=c^*=\Sigma^{-1}(\mu-r\textbf{1})$, where $\Sigma$ is the covariance of instantaneous returns per unit time, $\mu$ is the drift vector of the stock market, and $\textbf{1}$ is a vector of ones. Thus, even over very short intervals of time $[0,t]$, the desire to perform well relative to other traders leads one to adopt the Kelly rule, which is ordinarily derived by maximizing the asymptotic exponential growth rate of wealth. Hence, we find agreement with Bell and Cover's (1988) result in discrete time.

Hierarchical adaptive sparse grids and quasi Monte Carlo for option pricing under the rough Bergomi model
Christian Bayer,Chiheb Ben Hammouda,Raul Tempone

The rough Bergomi (rBergomi) model, introduced recently in [4], is a promising rough volatility model in quantitative finance. This new model exhibits consistent results with the empirical fact of implied volatility surfaces being essentially time-invariant. This model also has the ability to capture the term structure of skew observed in equity markets. In the absence of analytical European option pricing methods for the model, and due to the non-Markovian nature of the fractional driver, the prevalent option is to use Monte Carlo (MC) simulation for pricing. Despite recent advances in the MC method in this context, pricing under the rBergomi model is still a time-consuming task. To overcome this issue, we design a novel, alternative, hierarchical approach, based on i) adaptive sparse grids quadrature (ASGQ) as in [22], and ii) Quasi Monte Carlo (QMC). Both techniques are coupled with Brownian bridge construction and Richardson extrapolation. By uncovering the available regularity, our hierarchical methods demonstrate substantial computational gains with respect to the standard MC method, when reaching a sufficiently small relative error tolerance in the price estimates across different parameter constellations, even for very small values of the Hurst parameter. Our work opens a new research direction in this field, i.e. to investigate the performance of methods other than Monte Carlo for pricing and calibrating under the rBergomi model.

Implied and Realized Volatility: A Study of Distributions and the Distribution of Difference
M. Dashti Moghaddam,Jiong Liu,R. A. Serota

We study distributions of realized variance (squared realized volatility) and squared implied volatility, as represented by VIX and VXO indices. We find that Generalized Beta distribution provide the best fits. These fits are much more accurate for realized variance than for squared VIX and VXO -- possibly another indicator that the latter have deficiencies in predicting the former. We also show that there are noticeable differences between the distributions of the 1970-2017 realized variance and its 1990-2017 portion, for which VIX and VXO became available. This may be indicative of a feedback effect that implied volatility has on realized volatility. We also discuss the distribution of the difference between squared implied volatility and realized variance and show that, at the basic level, it is consistent with Pearson's correlations obtained from linear regression.

Institutional Investors, Corporate Governance and Stewardship Codes: Problems and Perspectives.
Alvaro, Simone,Maugeri, Marco,Strampelli, Giovanni
This paper analyses the role that the Stewardship Codes can play in regulating the voting decisions of institutional investors in the shareholders’ meetings of the companies in which they have invested. The issue is particularly relevant if we consider that the European directive on the rights of the shareholders, starting from the assumption that the lack of interest of shareholders in listed companies has been one of the factors behind the financial crisis of 2007/2008, insofar as it encouraged speculative behavior by managers, assigns to institutional investors the task of monitoring the conduct of directors and exercising their voting rights (‘engagement’) in order to ensure the balanced growth of the value of the shares that is sustainable in the long term. However, this approach of the European legislator comes up against a series of uncertainties. Firstly, the technical meaning of terms such as ‘engagement’, ‘stewardship’ or ‘activism’ of institutional investors is unclear. Secondly, there is doubt as to whether institutional investors have adequate incentives to exercise careful and continuous monitoring of investee companies. At least in the case of traditional investors, in fact, the diversification of investment portfolios and the consequent reduced size of the shareholdings held in each individual company could render the option of disinvestment (exit) more efficient than the option of voting in the shareholders’ meeting (voice), which requires the costly acquisition and processing of information on subjects on the agenda of the various shareholders’ meetings, with the further disadvantage that other investors could take advantage of the increase in value resulting from such activities without incurring any economic burden (so-called ‘free riding’). Finally, one can raise legal doubts about the possibility for multiple ‘activist’ investors to adopt forms of functional coordination to counteract directors’ decisions considered inefficient or to activate insider information channels with the board of directors of the issuer in order to start a dialogue on the strategies that the issuer intends to pursue in the management of the company. Therefore, against the framework described above, this study is aimed at understanding how stewardship codes can stimulate institutional investors’ ‘engagement’ activities. After a brief historical reconstruction of the origins of shareholder activism and clarification of the meaning to be attributed to the definitions of ‘engagement’ (understood as a technique of dialogue with the issuer management) and ‘stewardship’ (understood as a set of initiatives with which asset managers protect the value of their beneficial owners’ investment), this paper tackles both the problem of the lack of engagement incentives, emphasizing the role that the so-called. ‘passive’ funds (i.e. those that pursue investment policies intended to reproduce faithfully the composition of the market indexes) can play in guiding the management of the issuer in a long-term perspective and the problem of the legislative and regulatory rules applicable to institutional investor engagement. In addition, the paper emphasizes the ‘signposting’ function that adherence to a stewardship code is able to develop with regard both to the market and the issuer itself, in terms of the seriousness of the commitment with which the investor intends to foster the prospect of sustainable creation of value in the long term. Finally, certain solutions are analyzed that could help to enhance the role of the stewardship codes: i) the assignment of a rating to the methods with which the code has been implemented by the individual institutional investor; ii) the anticipation of regulatory obligations of transparency concerning these method; iii) the formulation of a rule, based on the law or case law, which promotes the timely and continuous application of the corporate governance provisions as a relevant index of adequacy of the investment processes and organizational structures of the intermediary.

Is there a Benefit from Reduced Regulation on Small Banks?
Srivastav, Abhishek,Vallascas, Francesco
Beginning June 2015, several U.S. Bank Holding Companies (BHCs) have been newly classified as small banks by regulators, thus benefiting from a friendlier regulatory environment. We exploit this decrease in regulation in a difference-in-differences setting to show that less regulation on small BHCs boosts small business lending of the affiliated commercial banks without affecting risk-taking or transparency in these subsidiaries. The increase in small business lending is stronger when the parent BHC is farther from the new regulatory asset threshold that identifies small banks. Further, the regulatory relief has positive implications for the funding opportunities of affiliated commercial banks and has a real impact on the local economy. Overall, we show that the effects of the regulatory relief are in line with its desired objectives.

Liquidity Provision, Ambiguous Asset Returns and the Financial Crisis
Spanjers, Willem
For an economy with dysfunctional intertemporal financial markets the financial sector is modelled as a competitive banking sector offering deposit contracts. In a setting related to Allen and Gale (1998) properties of the optimal liquidity provision are analyzed for illiquid assets with ambiguous returns. In the context of our model, ambiguity â€" i.e. incalculable risk- leads to dynamically inconsistent investor behavior. If the financial sector fails to recognize the presence of ambiguity, unanticipated fundamental crises may occur, which are incorrectly blamed on investors ‘losing their nerves’ and ‘panicking’. The basic mechanism of the Financial Crisis resembles the liquidation of illiquid assets during a banking panic. The combination of providing additional liquidity and supporting distressed financial institutions implements the regulatory policy suggested by the model. A credible commitment to such ‘bail-out policy’ does not create a moral hazard problem. Rather, it implements the second-best efficient outcome by discouraging excessive caution. Reducing ambiguity by increasing stability, transparency and predictability- as suggested by ordo-liberalism and the ‘Freiburger Schule’- enhances ex-ante welfare.

Mapping the Sahelian Space
Olivier Walther,Denis Retaille

This chapter examines the geographical meaning of the Sahel, its fluid boundaries, and its spatial dynamics. Unlike other approaches that define the Sahel as a bioclimatic zone or as an ungoverned area, it shows that the Sahel is primarily a space of circulation in which uncertainty has historically been overcome by mobility. The first part of the paper discusses how pre-colonial empires relied on a network of markets and cities that facilitated trade and social relationships across the region and beyond. The second part explores changing regional mobility patterns precipitated by colonial powers and the new approach they developed to control networks and flows. The third part discusses the contradiction between the mobile strategies adopted by local herders, farmers and traders in the Sahel and the territorial development initiatives of modern states and international donors. Particular attention is paid in the last section to how the Sahel was progressively redefined through a security lens.

Market-based Financing Reforms and Shareholder Valuations: Event Study Evidence from the Chinese Science and Technology Innovation Board
QIN, Yaohua,Xiao, He,Zhang, Yifei
This paper studies the impact of the newly introduced science and technology innovation board (STIB) on stock valuations in China. This Nasdaq-style board features a market-based IPO system that contrasts with the current approved-based arrangement. Event study approach shows that A-share firms pertaining to STIB related industries increased significantly after the reform announcement. The effect is stronger for Non-SOEs and firms with higher R&D capacity. Public shareholders of the firms filing STIB IPO applications experienced salient growth in their abnormal returns while their industry competitors suffered price drops. Financial analysts also broadened their company coverages in STIB related industries and revised their market valuation forecasts positively in line with the market investors.

Mean-Variance Investing with Factor Tilting
Boido, Claudio,Fasano, Antonio
A number of investors and portfolio managers are increasing the presence of alternative assets in their portfolios to a level close to traditional assets, harbouring the new frontiers in asset management research, including new risk premia, alternative beta, multifactor models. We build an investment portfolio based on a combination of broad asset classes and selected investing factors. In this way, we can improve the Markowitzian optimization by tilting the asset allocation with manager expectations, taking advantage of factor lower volatility when compared to asset classes.

Measuring Activity of Business Angels in Central and Eastern European Counties
Prohorovs, Anatolijs,Fainglozs, Levs,Solesvik, Marina
Business angels (BAs) are an important source of financing for start-up companies, thus many countries implement different initiatives to support BAs. However, in order to obtain accurate data on the level of BA activity it is necessary to develop tools for measuring it. The existing literature does not offer any methodology for comparative assessment of BA activity based on the data on the visible BA market and other available information.Therefore, we have developed the methodology for comparative assessment of BA activity. Based on this methodology, we have also developed a new composite index of BA activity. We have also performed an assessment of BA activity in Central and Eastern European (CEE) countries. The results of our research have demonstrated very high heterogeneity in the scope of activity among BAs across CEE countries. They have also empirically attested that such indices as GDP, GDP per capita and the total adult population are not the main factors that influence BA activity in CEE countries.

Non-Performing Loans in European Systemic and Non-Systemic Banks
Ozili, Peterson K
The distinction between GSIBs (systemic banks) and non GSIBs (non-systemic banks) is driven by policy reasons. I examine the behaviour of non-performing loans in European systemic and non-systemic banks, and find that more profitable banks witness higher non-performing loans regardless of whether they are systemic or non-systemic. Systemic banks have fewer non-performing loans during economic booms and during periods of increased lending while non-systemic banks experience higher NPLs during periods of increased lending. I also observe that European non-systemic banks that exceed regulatory capital requirements have higher NPLs. In the post-2007 financial crisis period, the NPL of systemic banks is negatively associated with the economic cycle which imply that the NPL of systemic banks is procyclical with the state of the economy, and the NPL of systemic banks are positively associated with loan supply and bank profitability. On the other hand, the NPL of non-systemic banks is negatively associated with regulatory capital ratios, and is positively associated with bank profitability for non-systemic banks in the post-2007 financial crisis period. The findings have implications.

On expansions for the Black-Scholes prices and hedge parameters
Jean-Philippe Aguilar

We derive new formulas for the price of the European call and put options in the Black-Scholes model, under the form of uniformly convergent series generalizing previously known approximations. We also provide precise boundaries for the convergence speed and apply the results to the calculation of hedge parameters (Greeks).

On the Nature of Jump Risk Premia
Orłowski, Piotr,Schneider, Paul,Trojani, Fabio
We shed light on the nature of jump risk compensation by studying the profits from a trading strategy that bets on the high-frequency jump skew of S&P 500 returns. Earlier evidence suggests the jump risk premium is large and positive. We find it to be concentrated in periods when the index option market is closed, and investors cannot trade options. Whenever jump skew can be traded continuously, the premium vanishes. We conclude the jump skew premium in index options is not compensation for the risk of occasional, large returns, but for the investors’ inability to adjust their nonlinear risk exposure.

On the Refracted-Reflected Spectrally Negative Levy Processes
Pérez, José-Luis,Yamazaki, Kazutoshi
We study a combination of the refracted and reflected Levy processes. Given a spectrally negative Levy process and two boundaries, it is reflected at the lower boundary while, whenever it is above the upper boundary, a linear drift at a constant rate is subtracted from the increments of the process. Using the scale functions, we compute the resolvent measure, the Laplace transform of the occupation times as well as other fluctuation identities that will be useful in applied probability including insurance, queues, and inventory management.

Option Informed Stock Picking
Szado, Edward,Kazemi, Hossein B.,Schneeweis, Thomas
A wide range of research has suggested that informed trading in options markets may effectively signal subsequent changes in equity prices. In this paper, we analyze the performance of long/short strategies based on a number of signals from options markets.In addition, we create an easily implemented long-only strategy based on a subset of the signals (volatility risk premium, option/stock volume ratio, implied volatility skew and realized volatility). In order to minimize transaction costs and liquidity issues we restrict our analysis to S&P 500 constituents, we rebalance our portfolio monthly and limit our holdings to 50 individual stocks. Our analysis of the period from 1996 through mid-2015 shows significant outperformance of a long-only equal weighted portfolio of 50 stocks (similar results were found when considering 10-stock portfolios), relative to the S&P 500 and the equal weighted S&P 500. A return attribution analysis confirms that the outperformance is provided by individual stock selection rather than sector selection.

Performance Analysis of Options-Based Equity Mutual Funds, Closed-End Funds, and Exchange-Traded Funds
Black, Keith,Szado, Edward
Mutual fund managers may implement a variety of trading strategies using exchange-traded equity and equity index options. These strategies predominately include covered calls, where call options are sold against long positions, and put writes, where put options are sold against cash collateral. Previously, the literature has documented superior risk-adjusted performance of mechanical index strategies, such as the CBOE S&P 500 Buy-Write Index (BXM) and the CBOE S&P 500 Put-Write Index (PUT). This study documents strong risk-adjusted performance of a large sample of listed funds, which earned similar returns to the S&P 500 Index from 2000 through, with substantially less risk as measured by standard deviation or beta. While the performance of the BXM is stated before fees, the sample of options-based funds outperformed BXM after fees over the sample period.

Post-Crisis Corporate Culture and Governance in Banking
Thakor, Anjan V.
This paper provides a brief assessment of how ethics, culture and corporate governance have evolved in banking since the financial crisis. It concludes that we need to strengthen capital ratios and equity governance in banking to improve ethics and culture, and de-emphasize liquidity regulation. It also advocates the embrace of authentic organizational higher purpose in banking as a way to foster stability and growth.

Predictability of Equity Returns over Different Time Horizons: A Nonparametric Approach
Chen, Qingqing,Hong, Yongmiao
This paper aims to test whether equity returns are predictable over various horizons. We propose a reliable and powerful nonparametric test to examine the predictability of equity returns, which can be interpreted as a signal-to-noise ratio test. Our comprehensive in-sample and out-of-sample analysis shows that the commonly used predictive variables such as short rate, dividend yields and earnings yields have good predictability power at both short and long horizons, different from both the conventional wisdom and Ang and Bekaert (2007). Contrary to Goyal and Welch (2007), an out-of-sample nonparametric forecast outperforms the historical mean model and linear predictive models.

Pricing under Fairness Concerns
Erik Eyster,Kristof Madarasz,Pascal Michaillat

This paper proposes a theory of pricing consistent with two well-documented patterns: customers care about fairness, and firms take these concerns into account when they set prices. The theory assumes that customers find a price unfair when it carries a high markup over cost, and that customers dislike unfair prices. Since markups are not observable, customers must extract them from prices. The theory assumes that customers infer less than rationally: when a price rises after an increase in marginal cost, customers partially misattribute the higher price to a higher markup---which they find unfair. Firms anticipate this response and trim their price increases, which reduces the passthrough of marginal costs into prices below one: prices are somewhat rigid. Embedded in a New Keynesian model---as a replacement of Calvo pricing---our theory produces monetary nonneutrality. When monetary policy loosens and inflation rises, customers misperceive markups as higher and feel unfairly treated; firms mitigate the perceived unfairness of prices by reducing their markups, which in general equilibrium leads to higher output.

Private Benefits Without Control? Modern Chapter 11 and the Market for Corporate Control
Couwenberg, Oscar,Lubben, Stephen J.
Outside of bankruptcy, a board of directors’ decision to take control rights away from existing shareholders and grant them to another is subject to heightened fiduciary duties. As the sale of control represents a kind of end game, shareholders have one last chance to realize the full value for their investment. In such a context, their interests warrant special protection.A similar sale of control can happen in a chapter 11 procedure when a bankruptcy plan revamps the capital structure of the firm. In such a restructuring of the firm, control rights can be newly created, redefined and redistributed to corporate stakeholders. As bankruptcy always implicates many more stakeholders than only shareholders, a sale of control thus implicates a wider array of control rights owners than a normal control transaction. However, in a chapter 11 procedure fiduciary duties protecting interests of such owners of control rights do not arise and this creates the potential for agency misdeeds. We discuss three recent chapter 11 or 15 cases in which the bankruptcy plans lead to a restructuring of the capital structures, redistributing control in the process. Our viewpoint is that in such complex restructuring processes, private benefits of control provide incentives to a select group of investors to twist the plan to their advantage. Our three cases show: 1) a lack of openness to other investors who are not part of the plan proposing classes; 2) that plans redistribute control via penny warrants, private placements, and other similar devices, shutting out other shareholders or diluting holdings significantly; and 3) a deal and fee structure that explicitly rewards specific groups and not others. We conclude that in chapter 11 procedures, a redistribution of benefits is possible to an extent not possible under state corporate law. However, as we discuss only three exemplary cases, caution is warranted at the moment as we cannot provide a full empirical picture of private benefits in chapter 11 and chapter 15 procedures.

Return-Preserving Bubbles
Peng, Qiusha
This paper introduces a bubbly asset to a standard macroeconomic model with heterogeneous agents and borrowing constraints. In this tractable quantitative framework, I show the possibility of a return-preserving bubble which absorbs savings with no good investment opportunities. Analysis on the stationary benchmark shows that the equilibrium is unique and low economic growth propagates bubbles. Further exploration on the cyclicality in the bubbly asset shows that its returns are procyclical and it has a low expected rate of return which equals the expected economic growth rate. These cyclical properties are consistent with puzzling empirical results on gold.

Risk-Sensitive Compact Decision Trees for Autonomous Execution in Presence of Simulated Market Response
Svitlana Vyetrenko,Shaojie Xu

We demonstrate an application of risk-sensitive reinforcement learning to optimizing execution in limit order book markets. We represent taking order execution decisions based on limit order book knowledge by a Markov Decision Process; and train a trading agent in a market simulator, which emulates multi-agent interaction by synthesizing market response to our agent's execution decisions from historical data. Due to market impact, executing high volume orders can incur significant cost. We learn trading signals from market microstructure in presence of simulated market response and derive explainable decision-tree-based execution policies using risk-sensitive Q-learning to minimize execution cost subject to constraints on cost variance.

Selling VIX Futures and Options for Portfolio Return Enhancement
Szado, Edward
The term structure of VIX futures is generally upward sloping. The persistent VIX contango may result in abnormally strong performance for VIX futures selling or VIX call writing strategies. However, the high volatility of volatility and significant jump risk may expose short uncovered VIX positions to extreme tail risk.In this paper we consider the performance of VIX futures and call option selling in a portfolio context in 2008 and 2016 as well as over a 10+ year period beginning in 2006. In addition, we consider alternative strategies including VIX futures spread strategies, and the dynamically de-levering VIX futures selling strategies represented by the VPD and VPN indexes. The VPD Index had annual returns that were much higher than those of the S&P 500 Index in 2009 and 2016 (years without large spikes in VIX), but the VPD returns were lower than those of the S&P 500 in 2008 and 2018, years with significant upward spikes in the VIX Index.While the goal of the study is not to make a particular recommendation for a VIX-based investment strategy, meaningful portfolio return enhancements are possible over particular time periods with small allocations to VIX selling. A large allocation to uncovered selling of VIX instruments could have substantial volatility jump risk exposure which can result in economically meaningful and potentially catastrophic losses. However, the VPN Index - which sells VIX futures, holds money market instruments and buys VIX calls â€" had lower volatility and less severe maximum drawdowns than the stock and commodity benchmark indexes studied in the period of analysis.

Should Central Banks Issue Digital Currency?
Keister, Todd,Sanches, Daniel R.
We study how the introduction of a central bank-issued digital currency affects interest rates, the level of economic activity, and welfare in an environment where both central bank money and private bank deposits are used in exchange. Banks in our model are financially constrained, and the liquidity premium on bank deposits affects the level of aggregate investment. We study the optimal design of a digital currency in this setting, including whether it should pay interest and how widely it should circulate. We highlight an important policy tradeoff: while a digital currency tends to promote efficiency in exchange, it can also crowd out bank deposits, raise banks' funding costs, and decrease investment. Despite these effects, introducing a central bank digital currency often raises welfare.

Simultaneous Multilateral Search
Glebkin, Sergei,Shen, Ji,Yueshen, Bart Z.
We study simultaneous multilateral search (SMS) in an over-the-counter market: when searching, an investor contacts several potential counterparties and then chooses to trade with the one offering the best quote. Search intensity (how frequently one can search) and search capacity (how many potential counterparties one can contact) affect equilibrium objects differently. Despite investor homogeneity, quote dispersion arises in equilibrium, with bids possibly crossing asks. We contrast SMS to bilateral bargaining (BB), where investors engage in Nash bargaining with one potential counterparty each time. Given the choice, investors might prefer BB over SMS, hurting allocative efficiency.

State Ownership and International Expansion: The S-Curve Relationship
Kalasin, Kiattichai,Cuervo-Cazurra, Alvaro ,Ramamurti, Ravi
We study how state ownership affects the international expansion of emerging-market firms. Building on agency theory and the resource-based view, we propose an S-curve relationship: Firms with a low level of state ownership have a limited level of international expansion, those with a medium level of state ownership have an increasing level, and those with a high level of state ownership have a decreasing level. This S-curve is the outcome of the interaction between the “hindering hand” of state ownership, arising from multilevel agency problems, and the “helping hand,” arising from state-ownership advantages. Analyses of 674 publicly traded firms from 16 emerging markets support these ideas and reveal that the inflection points in the S-curve appear at state-ownership levels of 20 percent and 43 percent.

The Differential Impact of Financial Intermediation on Economic Growth in Oil-Dependent Economies
Anyanwu, Anthony,Gan, Christopher,Hu, Baiding
This paper analyses the relationship between bank credit and economic growth. We extend existing literature by treating separately the oil and non-oil sectors of 28 oil-dependent economies from 1990-2012. We employ panel cointegration and pooled mean group estimation techniques which are appropriate for drawing conclusions from dynamic heterogenous panels. The results of the panel cointegration test indicate that bank credit has no significant long-run relationship with non-oil GDP per capita. The results of the pooled mean group estimator reveal no significant long-run impact of bank credit on non-oil GDP per capita. Overall results suggest that banks so not yet provide adequate credit to stimulate non-oil economic growth. The policy implication of our findings is that the financial sector should be more involved in productive investment activities to promote inclusive growth.

The Effect of Bank Recapitalization Policy on Corporate Investment: Evidence from a Banking Crisis in Japan
Kasahara, Hiroyuki,Sawada, Yasuyuki,Suzuki, Michio
This study examines the effect of government capital injections into financially troubled banks on corporate investment during the Japanese banking crisis of the late 1990s. By helping them to meet the capital requirements imposed by Japanese banking regulation, recapitalization enables banks to respond to loan demands. This, in turn, helps firms to increase their investment, especially for high-productivity firms, for which the return from investment is high. To test this mechanism empirically, combining the balance sheet data of Japanese manufacturing firms with that of banks, we examine how the impact of bank regulatory capital ratios and capital injections on bank loans and firm's investments vary across firms, depending on their total factor productivity (TFP) and financial health status. We find that the estimated interaction of a firm's TFP with a bank's capital ratio or capital injection is positive and significant, implying that the effect of capital injections on bank loans and investments is larger for high-productive firms than it is for low-productive firms. Counterfactual policy experiments suggest that capital injections made in March of 1998 and 1999 had a substantial reallocation effect, shifting investments from low- to high-productivity firms.

The Effect of Corporate Taxation on Loss Provisioning of Property-Casualty Insurers: Evidence from the Adoption of SSAP 101
Cheng, Jiang,Chow, Travis,Lin, Tzuting,Ng, Jeffrey
When provisions for losses are tax deductible, firms confront the dilemma of whether to accrue higher losses, which while reducing current taxes, will also lower reported earnings. In this paper, we examine how the adoption of Statement of Statutory Accounting Principles (SSAP) 101, a recent accounting standard that significantly limits management’s discretion in the recognition and measurement of tax contingencies, affects the loss provisions of property-casualty insurers. We find a significant decrease in loss provisions after SSAP 101 for private insurers over public ones, which have been subject to a similar accounting standard under GAAP. The result is consistent with SSAP 101 resulting in an equilibrium shift away from using loss accruals to avoid tax. Additionally, private insurers exhibit increased persistence in both loss provisions and earnings and decreased volatility in their return on assets, suggesting that financial reporting quality improves when incentives to distort earnings for tax purposes are constrained. Overall, our study offers important insight into how corporation taxation and accounting standards affect the insurance industry’s accounting choices.

The Effect of the Type of Price on Bitcoin Literature: Analysis of the Weak-Form Effciency
Vidal-Tomás, David
Research on Bitcoin has been conducted without considering the effect of the database and type of price on the results of different strands of the literature. To study this point, we analyse Bitcoin returns using five different databases: Coindesk, Bitcoinaverage, Coinmarketcap, Bitcoincharts and BraveNewCoin. Our research shows that the statistical features of Bitcoin returns depend on the type of price that is included in each database: close and weighted price. This fact affects the weak-form efficiency literature since we demonstrate that market efficiency arises from close prices while market inefficiency arises from weighted prices.

The Portfolio Diversification Potential of Long VIX Futures and Options Strategies
Szado, Edward
It is well established that the VIX Index tends to be negatively correlated with equity markets. This suggests that VIX futures and options may have the potential to provide significant diversification benefits for traditional portfolios. However, since the term structure of VIX futures is generally upward sloping, long VIX futures positions can place a significant drag on portfolio performance.In this paper we consider the performance of strategies that buy VIX futures or VIX call options in a portfolio context in 2008 and 2016, as well as over a 10+ year period from 2006 to 2017. In addition, we consider alternative strategies including long S&P 500® protective put strategies and the dynamic S&P 500 plus VIX call buying strategy of the VXTH index.Meaningful portfolio diversification benefits for risk-averse investors are possible over particular time periods with small allocations to long VIX futures or call options, but there can be substantial portfolio drag if large allocations are made over long time periods during which there are flat to rising stock markets.

The emerging sectoral diversity of startup ecosystems
Clement Gastaud,Theophile Carniel,Jean-Michel Dalle

Thanks to the recent availability of comprehensive and detailed online databases of startup companies, it has become possible to more directly investigate startup ecosystems i.e. startup populations in specific regions. In this paper, we analyze the emergence of 20+ such ecosystems in Europe and the USA, with a specific focus on their sectoral diversity. Analyzing the sectoral landscapes of these ecosystems using a new visualization tool indeed highlights marked differences in terms of diversity, which we characterize using metrics derived from ecological sciences. Numerical simulations suggest that the emerging diversity of startup ecosystems can be explained using a simple preferential attachment model based on sectoral funding.

The route to chaos in routing games: Population increase drives period-doubling instability, chaos & inefficiency with Price of Anarchy equal to one
Thiparat Chotibut,Fryderyk Falniowski,Michał Misiurewicz,Georgios Piliouras

We study a learning dynamic model of routing (congestion) games to explore how an increase in the total demand influences system performance. We focus on non-atomic routing games with two parallel edges of linear cost, where all agents evolve using Multiplicative Weights Updates with a fixed learning rate. Previous game-theoretic equilibrium analysis suggests that system performance is close to optimal in the large population limit, as seen by the Price of Anarchy reduction. In this work, however, we reveal a rather undesirable consequence of non-equilibrium phenomena driven by population increase. As the total demand rises, we prove that the learning dynamics unavoidably become non-equilibrating, typically chaotic. The Price of Anarchy predictions of near-optimal performance no longer apply. To the contrary, the time-average social cost may converge to its worst possible value in the large population limit.

Every system has a carrying capacity, above which the dynamics is non-equilibrating. If the equilibrium flow is a symmetric $50-50\%$ split, the system exhibits one period-doubling bifurcation. A single periodic attractor of period two replaces the attracting fixed point when the demand exceeds the carrying capacity. In general, for asymmetric equilibrium flows, increasing the demand destabilizes the system, so that the system eventually becomes Li-Yorke chaotic with positive topological entropy. This demand-driven instability emerges from any pair of linear cost functions. Remarkably, in any non-equilibrating regime, the time-average flows on the edges converge {\it exactly} to the equilibrium flows, a property akin to no-regret learning in zero-sum games. Our results extend to any sequence of shrinking learning rates, e.g., $1/\sqrt{T}$, by allowing for a dynamically increasing population size.

Институты коллективных жилищных сбережений
Polterovich, Victor,Ilinskiy, Dmitry,Boltonosov, Igor,Starkov, Oleg,Tutundzhyan, Artem,Zhikhareva, Alina
Modern Russian bank mortgages are not widely available to low- and middle-income households due to the high cost of housing, high interest rates and strict requirements for borrowers. There are reasons to believe that the solvent demand for mortgage loans may be increased through the development of collective savings institutions and cooperatives, such as сontractual savings for housing (Bausparkassen), housing savings accounts, housing savings and housing building cooperatives. This study analyzes foreign and domestic experience of their formation and functioning. It is shown that in the current Russian conditions, Bausparkassen and housing savings accounts are the most promising institution providing accumulation of savings of the general public for the purchase of housing. It is advisable to develop corporate programs to help employees to purchase housing, and combine them with savings and loan programs. Recommendations have been developed to improve legislation aimed at establishing and improving collective savings institutions. The book is based on the research conducted under the state contract No. GK 17/235 dated November 13, 2017. "Improvement of legislative regulation in order to increase the affordability of the population's own housing, including the development of mortgage lending mechanisms, сontractual savings for housing, share building, housing building cooperatives.