Research articles for the 2019-06-14

A Quantum Algorithm for Trading Strategies with Position Limits
Salov, Valerii
The number of unique trading strategies with a limited number of futures contracts on short and long positions exponentially grows with the number of ticks. The latter reaches today in daily sessions hundreds of thousands. Evaluation of the set properties of strategies may require quantum computations. A quantum algorithm for the set is suggested.

A Survey of Systemic Risk Indicators
Di Cesare, Antonio,Rogantini Picco, Anna
The aim of this survey is to provide a rigorous, but not so technical, introduction to several systemic risk indicators frequently used in official publications by institutions involved in macroprudential analysis and policy. The selected indicators are classified using three taxonomies. The first one adopts the point of view of regulators and policy-makers, whose attention is usually focused on the implementability and forward-looking nature of the indicators. The second taxonomy highlights the features that are most relevant for researchers, i.e. the reliance on a sound theoretical background and the use of advanced analytical techniques. The third taxonomy classifies the indicators according to the specific aspects of systemic risks that are captured. For each indicator both general and technical descriptions are provided, as well as specific examples.

Bail-inable Securities and Financial Contracting: Can Contracts Discipline Bankers?
Martino, Edoardo
The post-crisis stream of reforms, especially the new recovery and resolution framework, has been often welcomed for its aim to increase market discipline in the banking sector, allocating the losses to shareholders and creditors of failing banks and not anymore on the general public though state bail-out. Nonetheless, the concrete mechanisms according to which such turnaround shall happen and the corporate governance consequences of financial reforms have been severely understudied.The paper tackles the trade-off between market discipline and financial stability in the post-crisis EU regulatory environment through the lenses of financial contracting. Building on the debt as a mechanism to contingently allocate control, the paper approaches the regulatory framework as a set of restrictions to contractual freedom, exploring the room for investors to discipline risk-taking of banks through specific contractual arrangements.Traditional contractual devices are scrutinized against the qualitative requirements for regulatory capital and bail-inable securities and turned out to be largely unavailable because of regulatory constraints, so that the ability of investors to limit risk-taking appetite of managers is limited. Therefore, the attention moves to the peculiar case of contingent convertible instruments (Cocos), discussing some design features that might allow investors to successfully reduce risk-taking incentives both before and after the distress of the bank, enhancing market discipline after all.

Before the Cult of Equity: New Monthly Indices of the British Share Market, 1829-1929
Campbell, Gareth,Grossman, Richard S.,Turner, John D.
This paper presents new monthly capital gains, dividend yield, and total return indices for common equities quoted on British stock exchanges from 1829 to 1929. As well as creating an all-share index, we create a blue-chip index of the 30 largest companies, which we splice to the Financial Times 30 index to create a near-two-century-long (1829-2018) monthly share index. We use the new indices to examine the timing of British business cycles and compare the returns on home and foreign UK investment. We also construct indices for 22 domestic sectors, and calculate CAPM betas for each sector.

Bitcoin and Integration Patterns in the Forex Market
Virk, Nader
Integration patterns between five leading conventional currencies after the US dollar and Bitcoin boost the investment potential of the latter relative to its hedging potential. We document that conditional Bitcoin volatility does not influence its dynamic pairwise correlations whereas the change in volatility of conventional currencies do affect the forex market integration patterns.

Can Contingent Convertibles Help Private Asset Managers Fund Their Acquisition of Non-Performing Loans from Portuguese Banks?
Santos, Andre Oliveira
This paper analyzes the capital structure of private asset managers in which theacquisition of nonperforming loans (NPLs) is funded with Contingent Convertibles(CoCos) placed with investors. The paper develops a model based on NPL transferprices and residual recovery rates to assess capital structures consisting of CoCos andequity. The CoCos would contain put and call options to write down losses and write upprofits, respectively, arising from liquidation and restructuring procedures. The paperconcludes that the protection mechanism provided by debt write-downs embedded inCoCos and the incentives to investors provided by debt write-ups could help bridge thegap between Portuguese banks' NPL bid prices and private equity firms' ask prices.

Can Hedge Funds Benefit from CSR Investment?
Duanmu, Jun,Huang, Qiping,Li, Yongjia,McBrayer, Garrett
We explore the extent to which hedge funds incorporate corporate social responsibility (CSR) considerations in the development of their investment strategies. Using an asset-weighted composite measure of CSR by fund, we examine the difference in financial performance between hedge funds with high CSR investment relative to those with low investment and document no statistical difference. Yet, we find that hedge funds increase their exposure to high CSR investments over our sample period, specifically post-financial crisis. We find that the increases in CSR investment are consistent with hedge funds utilizing CSR strategies as a form of risk mitigation. Specifically, hedge funds with higher weighted CSR scores exhibit significantly lower risk factor loadings than funds with lower weighted CSR scores. Our results suggest that hedge funds are able to derive benefits by using CSR considerations as a form of risk-mitigation in their investment policies.

Credit Supply and Productivity Growth
Manaresi, Francesco,Pierri, Nicola
We study the impact of bank credit on firm productivity. We exploit a matched firm-bankdatabase covering all the credit relationships of Italian corporations, together with a naturalexperiment, to measure idiosyncratic supply-side shocks to credit availability and to estimatea production model augmented with financial frictions. We find that a contraction in creditsupply causes a reduction of firm TFP growth and also harms IT-adoption, innovation,exporting, and adoption of superior management practices, while a credit expansion haslimited impact. Quantitatively, the credit contraction between 2007 and 2009 accounts forabout a quarter of observed the decline in TFP.

Decomposing Momentum Spread
Guo, James Tengyu
Since momentum arbitrage activity, buying winners and selling losers, effectively enlarges the return spread between these two groups, I connect the momentum spread to future momentum performance. I find that the momentum spread (the difference of the formation-period recent 6-month returns between winners and losers) negatively predicts future momentum profit in the long-term, but not in the following month. I further decompose the momentum spread into the spreads of old or young momentum stocks based on whether a stock has been identified as a momentum stock for more than three months. I show that the negative predictability is mainly driven by the old momentum spread. For the top 20% of the sample period associated with the highest values of old momentum spread, the momentum reversals happen sooner (only six months after formation) and stronger (more than 120 basis points per month from month 7 to month 24 after formation), relative to negligible momentum reversals observed following the bottom 20% period with low old momentum spread. As these old momentum stocks are more likely to be exploited by arbitrageurs, these findings suggest that momentum is amplified by arbitrage activity and excessive arbitrage destabilizes the asset prices and generates strong reversals.

Deregulation and the Securitization Boom
McGowan, Danny,Nguyen, Huyen
We provide novel evidence that bank branching deregulation increased securitization in the lead up to the financial crisis. The exogenous state-specific removal of interstate branching restrictions increases the probability that 1) a bank operates an "originate to distribute" model by 7%, and 2) a loan is securitized by 5.6%. These effects are more pronounced among large banks. We find that the increase in securitization stems from deregulation increasing the cost of deposits as the equilibrium number of bank branches rises across markets. The findings highlight a hitherto neglected factor behind the rapid expansion in securitization before the financial crisis.

Discriminatory Pricing of Over-the-Counter Derivatives
Hau, Harald,Hoffmann, Peter,Langfield, Sam,Timmer, Yannick
New regulatory data reveal extensive price discrimination against non-financialclients in the FX derivatives market. The client at the 90th percentile pays aneffective spread of 0.5%, while the bottom quarter incur transaction costs of lessthan 0.02%. Consistent with models of search frictions in over-the-counter markets,dealers charge higher spreads to less sophisticated clients. However, price discriminationis eliminated when clients trade through multi-dealer request-for-quote platforms.We also document that dealers extract rents from captive clients and marketopacity, but only for contracts negotiated bilaterally with unsophisticated clients.

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.

Estimating Expectations of Shocks Using Option Prices
Di Cesare, Antonio
The jump-diffusion model introduced by Merton is used to price a cross-section of options at different dates. At any point in time, the parameters of the model are estimated by minimizing the sum of squared implied volatility errors, and their informational content is compared with the widely used Black and Scholes implied volatility, calculated on at-the-money options. While in normal conditions the parameters of Merton's model do not seem to provide any additional information, in periods of high variability of asset prices the jump-diffusion approach may help to disentangle the cases in which volatility reflects only uncertainty on economic fundamentals from those in which it is fuelled by fears of financial crisis.

Financial Frictions and Stimulative Effects of Temporary Corporate Tax Cuts
Gbohoui, William,Castro, Rui
This paper uses an industry equilibrium model where some firms are financially constrainedto quantify the effects of a transitory corporate tax cut funded by a future tax increase on theU.S. economy. It finds that by increasing current cash-flows tax cuts alleviate financingfrictions, hereby stimulating current investment. Per dollar of tax stimulus, aggregateinvestment increases by 26 cents on impact, and aggregate output by 3.5 cents. The averageeffect masks heterogeneity: multipliers are close to 1 for constrained firms, especially newentrants, and negative for larger and unconstrained firms. The output effects extend well pastthe period the policy is reversed, leading to a cumulative multiplier of 7.2 cents. Multipliersare significantly larger when controlling for the investment crowding-out effect amongunconstrained firms.

Fintech in Financial Inclusion: Machine Learning Applications in Assessing Credit Risk
Bazarbash, Majid
Recent advances in digital technology and big data have allowed FinTech (financial technology)lending to emerge as a potentially promising solution to reduce the cost of credit and increasefinancial inclusion. However, machine learning (ML) methods that lie at the heart of FinTech credithave remained largely a black box for the nontechnical audience. This paper contributes to theliterature by discussing potential strengths and weaknesses of ML-based credit assessment through(1) presenting core ideas and the most common techniques in ML for the nontechnical audience; and(2) discussing the fundamental challenges in credit risk analysis. FinTech credit has the potential toenhance financial inclusion and outperform traditional credit scoring by (1) leveraging nontraditionaldata sources to improve the assessment of the borrower's track record; (2) appraising collateral value;(3) forecasting income prospects; and (4) predicting changes in general conditions. However, becauseof the central role of data in ML-based analysis, data relevance should be ensured, especially insituations when a deep structural change occurs, when borrowers could counterfeit certain indicators,and when agency problems arising from information asymmetry could not be resolved. To avoiddigital financial exclusion and redlining, variables that trigger discrimination should not be used toassess credit rating.

Georgia’s Capital Market: Functioning Problems and Development Directions in Association with European Union
Abuselidze, George
The paper represents the study of ongoing tendencies on the Georgian capital market; the relationship between executed legislative infrastructure and institutional reforms has been established. The purpose of the work is to analyze the characteristics of formation and functioning of capital market in Georgia, to identify existing problems and develop ways to solve it.In the paper it is established: whether the capital market development reforms in Georgia are in the right direction; is it possible to improve investors’ rights on the capital market as a result of changes? The following is stated: what significant importance has comprehensive policy development for country’s capital market development; on which principles should stay on, which direction and order should develop capital market; what is needed to achieve the goals set in the short and medium periods; what role should participants play in this process.In the summary of paper planned reforms for Georgia’s capital market development and their possible outcomes are given, considering European experience, the author’s recommendations are presented in terms of effectiveness of these measures.

Globalization, Market Power, and the Natural Interest Rate
Natal, Jean-Marc,Stoffels, Nicolas
We argue that strong globalization forces have been an important determinant of globalreal interest rates over the last five decades, as they have been key drivers of changes inthe natural real interest rate-i.e. the interest rate consistent with output at its potentialand constant inflation. An important implication of our analysis is that increasedcompetition in goods and labor market since the 1970s can help explain both the largeincrease in real interest rates up to the mid-1980s and-as globalization forces mature andmay even go into reverse, leading to incrementally rising market power-its subsequentand protracted decline accompanied by lower inflation. The analysis has importantimplications for monetary policy and the optimal pace of normalization.

Hedging Demand in Long-Term Asset Allocation With an Application to Carry Trade Strategies
Laborda Herrero, Ricardo,Olmo, Jose
We derive a closed-form expression for the mean and marginal hedging demand on risky assets in long-term asset allocation problems. To do this, we transform the multiperiod Euler equation characterizing the optimal asset demand into a modified one-period Euler equation characterizing the optimal short-term asset allocation. The hedging demand depends on the predictability of the risky asset, the persistence of the predictors, and the degree of investor's relative risk aversion. The cross-correlation between the state variables characterizing the parametric portfolio policy rule is another factor determining the hedging demand. We illustrate these insights empirically in rebalancing long-term currency carry trade strategies.

Inefficient Fire-Sales in Decentralized Asset Markets
Ebrahimy, Ehsan
Classic models of fire-sales that emphasize liquidity-constrained natural buyers can-notfully account for the asset fire-sales during the Financial Crisis of 2008. I present a modelto demonstrate that fire-sales may happen even when there is a sizable pool of naturalbuyers and in the absence of asymmetric information, due to a coordina-tion failureamong buyers. In particular, I show that when trade is decentralized and participation isendogenous, constrained asset demand and liquidity needs that are ex-pected to increaseover time create complementarity among buyers' decisions to wait. This complementaritymakes competitive markets prone to coordination failures and fire-sales which may beinefficient. I also discuss various policy options to eliminate the risk of fire-sales in such asetup.

Insider Trading with Penalties
Carre, Sylvain,Collin-Dufresne, Pierre,Gabriel, Franck
We establish existence and uniqueness of equilibrium in a generalised one-period Kyle (1985) model where insider trades can be subject to a size-dependent penalty. The result is obtained by considering uniform noise and holds for virtually any penalty function. Uniqueness is among all non-decreasing strategies. The insider demand and the price functions are in general non-linear, yet tractable.We apply this result to regulation issues. We show analytically that the penalty functions maximising price informativeness for given noise traders' losses eliminate small rather than large trades. We generalise this result to cases where a budget constraint distorts the set of penalties available to the regulator.

Linear Beta Pricing with Inefficient Benchmarks in a Given Factor Structure
Diacogiannis, George,Ioannidis, Christos
We show the equivalence between the zero-beta version of a multi-factor arbitrage pricing model and a linear pricing model utilizing undiversified inefficient benchmarks in a given factor structure. The resulting linear model is a two-beta model, with one beta related to the inefficient benchmark and another adjusting for its inefficiency. This linear model shows that there are only two distinctive and computable sources of risk, affecting security expected returns, despite the existence of several risk factors. In a short empirical example we demonstrate that the model can be employed to provide guidance and allow researchers to test for the validity of their selection of the underlying risk factors driving variations in security returns.

Optimal Currency Hedging: Horizon Matters
Arruda, Nelson,Bergeron, Alain,Kritzman, Mark
Investors have long debated what fraction, if any, of their portfolio’s currency exposure they should hedge. Although the answers cover a broad range, often with dubious rationale, most informed investors agree that the solution should be based on mean-variance optimization, deployed either to maximize expected utility for cases in which the investor has non-zero expectations for the mean currency returns, or to minimize risk when the means are assumed to equal 0. This approach presents a serious challenge, however, because it depends on how currencies co-vary with each other and with the underlying portfolio, and these covariances themselves vary significantly with the return interval used to estimate them. The authors show that monthly covariances produce unreliable results for horizons that are longer than one month.

Options on Tontines: An Innovative Way of Combining Tontines and Annuities
Chen, An,Rach, Manuel
Increases in the life expectancy, the low interest rate environment and the tightening solvency regulation have led to the rebirth of tontines. Compared to annuities, where insurers bear all the longevity risk, policyholders bear most of the longevity risk in a tontine. In this article, we come up with an innovative retirement product which contains the annuity and the tontine as special cases: a tontine with a minimum guaranteed payment. The payoff of this product consists of a guaranteed payoff and a call option written on a tontine. We find that this retirement product is able to achieve a better risk sharing between policyholders and insurers than annuities and tontines. For the majority of risk-averse policyholders, the new product can generate a higher expected lifetime utility than annuities and tontines. For the insurer, the new product is able to reduce the (conditional) expected loss drastically compared to an annuity, while the loss probability remains fairly the same. In addition, by varying the guaranteed payments, the insurer is able to provide a variety of products to policyholders with different degrees of risk aversion and liquidity needs.

Peer Pressure: How do Peer-to-Peer Lenders affect Banks' Cost of Deposits and Liability Structure?
Farag, Hisham,Koirala, Santosh,McGowan, Danny
This paper shows that banks’ cost of deposits increase following exposure to the Fintech sector. We exploit the exogenous, staggered removal of restrictions on investing through peer-to-peer lending platforms by US states. The entry of Lending Club and Prosper cause the cost of deposits to increase by approximately 11% as banks face more intense competition for deposit funds. Banks’ liability structure also shifts towards greater reliance on non-deposit funding. The findings provide regulatory insights into the unintended consequences, and potentially destabilizing effects, of the nascent Fintech sector on the banking industry.

Pitching Research: Insights and Reflections from using a Web Portal in a Doctoral Course Exercise
Faff, Robert W.,Godfrey, Keith,Brosnan, Mark,Dorris, Alana,Orole, Felix,Salehudin, Imam,Wong, Charlane,Zhaunerchyk, Kate
Faff’s (2015, 2019) pitching research concept provides a simple 2-page template tool, with the aim of presenting a framework SO THAT a novice researcher can confidently and succinctly convey all the essential elements of a new research proposal to an academic expert. The “low technology” way of implementing the pitching research exercise is to create a pitch using a WORD version of the template. However, a web portal version is freely available at PitchMyResearch â€" and this provides a more “high tech”, “mobile friendly” way of completing the pitching task. The current paper explores user data (primarily, the sequence of completion and time spent on each item) extracted from the web portal, based on pitch exercises conducted in a PhD course at the University of Queensland.

Pledged Collateral Market's Role in Transmission to Short-Term Market Rates
Singh, Manmohan,Goel, Rohit
In global financial centers, short-term market rates are effectively determined in the pledged collateral market, where banks and other financial institutions exchange collateral (such as bonds and equities) for money. Furthermore, the use of long-dated securities as collateral for short tenors-or example, in securities-lending and repo markets, and prime brokerage funding-impacts the risk premia (or moneyness) along the yield curve. In this paper, we deploy a methodology to show that transactions using long dated collateral also affect short-term market rates. Our results suggest that the unwind of central bank balance sheets will likely strengthen the monetary policy transmission, as dealer balance-sheet space is now relatively less constrained, with a rebound in collateral reuse.

Real Estate Performance, the Macroeconomy and Leverage
Delfim, Jean-Christophe,Hoesli, Martin
Using U.S. data for 1986-2017, the paper focuses on the impacts of macroeconomic risk factors and leverage on the performance of the various types of real estate exposure (direct, non-listed, and listed). The response of core funds to economic risk factors is akin to that of direct investments; however, real estate fund and direct investment performance are less tightly related as more aggressive (i.e., value-added and opportunistic) strategies are envisaged. Only REIT performance is linked to that of the stock market. Leverage matters as it amplifies the responses to the economic factors and hence investment risk.

Recognizing Loan Losses in Banks: An Examination of Alternative Approaches
Vijayaraghavan, Rajesh
I investigate the accounting rules for loan loss recognition in banks. In June 2016 the FASB issued a new rule, effective in December 2019, that will replace current GAAP with a model that allows banks to use broader information to estimate loan loss allowances. To empirically examine current GAAP and the new model, I exploit differences in the information sets allowed under the old and the new rules. Using a methodology that combines micro data and machine learning techniques, I provide evidence that it is possible to construct a loan loss recognition model that outperforms the current GAAP without expanding the information set beyond that permitted under the current rule. I find that expanding this model’s information set does not significantly improve its performance. My model’s predicted allowances would have been materially larger at the outset of the financial crisis than actual reported bank estimates. The differences are due to that my model consistently assigns larger weights to certain input variables relative to current GAAP. I also find that weakly capitalized banks under-provision relative to well capitalized banks. My results provide a novel method to examine aspects of the new accounting rule before it comes into effect. The findings suggest that the way information is used, rather than the use of broader information set improves the estimates of loan loss allowance.

Reconsidering Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets
Corgnet, Brice,Deck, Cary,DeSantis, Mark,Hampton, Kyle W.,Kimbrough, Erik O.
The ability of markets to aggregate diverse information is a cornerstone of economics and finance, and empirical evidence for such aggregation has been demonstrated in previous laboratory experiments. Most notably Plott and Sunder (1988) find clear support for the rational expectations hypothesis in their Series B and C markets. However, recent studies have called into question the robustness of these findings. In this paper, we report the result of a direct replication of the key information aggregation results presented in Plott and Sunder. We do not find the same strong evidence in support of rational expectations that Plott and Sunder report suggesting information aggregation is a fragile property of markets.

Reference Points in the Housing Market
Andersen, Steffen,Badarinza, Cristian,Liu, Lu,Marx, Julie,Ramadorai, Tarun
Using comprehensive and granular Danish data, we revisit the determinants of listing and selling decisions in the housing market. Nominal losses and down-payment constraints significantly and causally affect the gap between listing prices and hedonic valuations. These determinants have interactive effects on household behavior. Reference-dependent loss aversion is most pronounced for unconstrained households, and households experiencing gains raise listing prices at higher levels of home equity, suggesting that gains affect the reference level of desired housing. Demographics also matterâ€"older, poorer, and moderately-educated households exhibit greater reference dependence. We estimate a parsimonious and flexible model of reference points using a generalized logistic function, common in biology, to unify these facts in a tractable framework.

Retail Shareholder Participation in the Proxy Process: Monitoring, Engagement, and Voting
Brav, Alon,Cain, Matthew D.,Zytnick, Jonathon
This paper studies U.S. retail shareholder voting using a detailed sample of anonymized retail shareholder voting records over the period 2015-2017. We find that retail voters tend to vote more when the firm itself is smaller, when their ownership stake in the portfolio firm is higher and, consistent with informed choice, when the shareholder receives more information from the firm about the agenda. On the choice of how to vote, we find a positive association between retail shareholder support for management and recent performance, which is substantially greater than that for institutional investors. The association between retail shareholder support for management and ISS recommendations is lower than that for institutional investors. Small retail shareholders oppose management to a greater extent than do large retail shareholders, and retail shareholders in general oppose management more at small companies than large ones. Finally, we observe that, on average, voting support for ESG-related proposals is lower among large retail investors than institutional investors. Our results provide support for the idea that retail shareholders are an important force in firm voting, and that institutional voting differs substantially from retail shareholder voting. Thus, the voting choices of fund managers can be a poor proxy for the choices of their ultimate beneficiaries.

Rethinking Fiscal Policy in Oil-Exporting Countries
Mirzoev, Tokhir,Zhu, Ling
We examine the existing fiscal policy paradigm in commodity-exporting countries. First,we argue that its centerpiece-the permanent income hypothesis (PIH)-is not consistentwith either intergenerational equity or long-term sustainability in the presence ofuncertainty. Policies to achieve these goals need to be more prudent and better anchoredthan the PIH. Second, we point out the presence of a volatility tradeoff betweengovernment spending and wealth and re-assess long-held views on the appropriate fiscalanchors, the vice of procyclicality, and the (im)possibility of simultaneously smoothingconsumption and ensuring intergenerational equity and sustainability. Finally, we proposewhat we call a prudent wealth stabilization policy that would be more consistent withlong-term fiscal policy goals, yet relatively simple to implement and communicate.

Robust Desmoothed Real Estate Returns
Delfim, Jean-Christophe,Hoesli, Martin
This research starts from the observation that common desmoothing models are likely to generate some extreme returns. Such returns will distort risk measurement and hence can lead to investment decisions that are suboptimal relative to those that would be made if a transaction based index were available. Thus, we propose to improve the desmoothing models by incorporating a robust filter into the procedure. We report that in addition to properly treating for smoothing, the method prevents the occurrence of extreme values. As shown with U.S. data, our method leads to desmoothed series whose characteristics are akin to those of transaction-based indices.

Simulating stress in the UK corporate bond market: investor behaviour and asset fire-sales
Baranova, Yuliya,Douglas, Graeme,Silvestri, Laura
We build a framework to simulate stress dynamics in the UK corporate bond market. This quantifies how the behaviours and interactions of major market participants, including open-ended funds, dealers, and institutional investors, can amplify different types of shocks to corporate bond prices. We model market participants' incentives to buy or sell corporate bonds in response to initial price falls, the constraints under which they operate (including those arising due to regulation), and how the resulting behaviour may amplify initial falls in price and impact market functioning. We find that the magnitude of amplification depends on the cause of the initial reduction in price and is larger in the case of shocks to credit risk or risk-free interest rates, than in the case of a perceived deterioration in corporate bond market liquidity. Amplification also depends on agents' proximity to their regulatory constraints. We further find that long-term institutional investors (eg pension funds) only partially mitigate the amplification due to their slower-moving nature. Finally, we find that shocks to corporate bond spreads, similar in magnitude to the largest weekly moves observed in the past, could trigger asset sales that may test the capacity of dealers to absorb them.

Soft Law Instruments in Restructuring and Insolvency Law: Exploring Its Rise and Impact
Wessels, Bob,Boon, Gert-Jan
Soft law instruments are increasingly prevalent in the area of procedural and substantive restructuring and insolvency law. These instruments, all embodied in legally non-binding texts, originate from so-called standard-setting organisations, such as the United Nations Commission on International Trade Law (UNCITRAL) Working Group V (Insolvency) and the World Bank, as well as mainly insolvency practitioners’ organisations, such as INSOL International and INSOL Europe. Ambiguity of what they are and how they impact hard law has blurred the actual role that these soft law instruments have. This raises questions of how soft law instruments can be (legally) characterized, what advantages and disadvantages they have (compared to hard law), and how legislators and policy makers in the field of restructuring and insolvency make use of them.The vague nature of soft law instruments is a general impediment for practitioners and scholars to consider its relevance. Still, in recent years, legislators and policy makers have given particular attention to such instruments, especially in the area of restructuring and insolvency. In both the European Insolvency Regulation Recast (EIR 2015) and the proposal for a Preventive Restructuring Directive, the EU legislator makes explicit reference to soft law instruments. But, also, the Dutch Vereniging insolventierecht advocaten (INSOLAD) and the Dutch national consultative body of supervisory judges in bankruptcy and suspension of payment cases (Recofa) have set soft law standards for practice.To highlight the rise and impact of soft law instruments, we will explore the meaning and development of soft law instruments in restructuring and insolvency law. From this analysis we observe that soft law instruments are relevant, also in practice, as they are used for example by insolvency practitioners, policy makers and courts. The growing group of standard-setting organisations focuses on specific topics, for convergence of law and practice, including cooperation and communication by judges and insolvency practitioners in cross-border insolvency cases, as well as issues pertaining to (preventive) restructuring of distressed companies. This article is structured as follows: in part two we will introduce the concepts of soft law and standard-setting organisation, in part three this will be related to the field of international restructuring and insolvency law by elaborating on instruments in this area, which is elaborated in part four with an overview of the relevant instruments on cooperation and communication and on restructuring distressed businesses. In part five we discuss various advantages and disadvantages of the use of soft law instruments. Subsequently, in part six, we discuss several examples in order to review the impact that soft law instruments in restructuring and insolvency have. This is followed by a conclusion in part seven.

Strengthening the Monetary Policy Framework in Korea
Clinton, Kevin,Craig, R.,Laxton, Douglas,Wang, Hou
Adoption of inflation targeting by the Bank of Korea (BOK) in 1998 contributed to low and stable inflation. However, after the global financial crisis (GFC) monetary policy faced more challenging conditions. Inflation slipped below the target range in 2012 and remains below it despite a cut in the target to 2 percent in 2016. Policy also became more complex with the addition of financial stability to the central bank's mandate. To address these challenges, this paper proposes a two-pronged approach to strengthen the effectiveness with which monetary policy can meet its objectives: first, enhanced communication on how the target will be achieved over the medium-term, building on a forecasting and policy analysis system; and, second, by clarifying the complementary role of macroprudential policy in containing financial stability risks so that monetary policy can focus on the inflation target. Simulation of a macro model calibrated to Korea illustrates how it can be used to provide this greater medium-term focus on achieving the inflation target and strengthen communication.

Taming Financial Development to Reduce Crises
Ben Naceur, Sami,Candelon, Bertrand,Lajaunie, Quentin
This paper assesses whether and how financial development triggers the occurrence of banking crises. It builds on a database that includes financial development as well as financial access, depth and efficiency for almost 100 countries. Through estimation of a dynamic logit panel model, it appears that financial development, from an institutional dimension and to a lesser extent from a market dimension, triggers financial instability within a one- to two-year horizon. Additionally, whereas financial access is destabilizing for advanced countries, it is stabilizing for emerging and low income ones. Both results have important implications for macroprudential policies and financial regulations.

Taming the Blockchain Beast? Regulatory Implications for the Cryptocurrency Market
Shanaev, Savva,Sharma, Satish,Shuraeva, Arina,Ghimire, Binam
This paper uses a unique dataset of 120 regulatory events from five classes to test the relevance of the regulatory framework for cryptocurrency value. Time-series market-wide estimates and panel estimates for 300 individual coins and tokens show statistically and economically significant impact of anti-money laundering and issuance regulation. Tighter regulation and more active role of government decrease cryptocurrency prices, evidencing that potentially lower risks and wider adoption commonly attributed to the establishment of the regulatory framework do not compensate for respective efficiency and consumer utility losses. The market is generally efficient in reflecting regulatory information in cryptocurrency prices.

The Evolution of Banking Activity: Institutional, Regulatory and Market Innovation. Considerations and Research Ideas (L'evoluzione dell’attività bancaria tra innovazioni istituzionali, regolamentari e di mercato: alcune riflessioni e spunti di ricerca)
Scannella, Enzo
English Abstract: This paper aims to examine the evolution of the bank business models in Italy, with reference to some crucial institutional, economic, and regulatory aspects. A proper and well-functioning banking system is an essential condition to ensure a stable and efficient financial system, and a well-functioning real economy. The Italian banking system is affected by a deep reconfiguration of business models as a consequence of financial, market, technological, and institutional innovations that are posing some critical questions to the traditional role and functions of a bank in a globalized and interconnected economic system.Italian Abstract: Il lavoro intende prendere in esame talune sfide competitive delle banche italiane, con particolare riferimento ai cambiamenti dei profili istituzionali, economici e regolamentari dell’attività bancaria. Un corretto ed ordinato sistema bancario costituisce condizione essenziale per la stabilità e l’efficienza del sistema finanziario e per il buon funzionamento del sistema economico reale. La riconfigurazione dei modelli di business come conseguenza di processi innovativi di natura finanziaria, tecnologica, di mercato e istituzionale, impongono di prendere in esame aspetti cruciali dell’economia e gestione delle banche in un contesto economico sempre più globale e interconnesso.

The Impact of Trail Commissions in Financial Advice: Evidence from a Natural Experiment
Sokolinski, Stanislav
I analyze the causal effect of reduction in mandatory trail commissions paid to financial advisers for distributing mutual fund shares to retail investors. I exploit a policy experiment in Israel and a difference-in-differences design by comparing outcomes for mutual funds that were subject to different changes in commissions. There are two opposing effects of mandatory commissions on investor demand: they can increase fund expense ratios leading to lower demand but they can also incentivize advisers to “steer” investors resulting in higher demand. The reduction in commissions leads to a reduction in fund expense ratios following by an increase in net fund flows which implies that the expense ratio effect is stronger than the steering effect on average. However, a separate analysis of sales and redemptions reveals that high commissions prevent redemptions because the redeeming investors are much less sensitive to changes in expense ratios. I also find that fund families benefited from increased net fund flows and followed up by opening new funds as well as shifting existing funds into investment categories with reduced commissions. My study suggests that adviser commissions produce differential impact on buyers and sellers due to the differences in price sensitivity.

The Motives to Borrow
Fatás, Antonio,Ghosh, Atish,Panizza, Ugo,Presbitero, Andrea
Governments issue debt for good and bad reasons. While the good reasons-intertemporal tax-smoothing, fiscal stimulus, and asset management-can explain some of the increases in public debt in recent years, they cannot account for all of the observed changes. Bad reasons for borrowing are driven by political failures associated with intergenerational transfers, strategic manipulation, and common pool problems. These political failures are a major cause of overborrowing though budgetary institutions and fiscal rules can play a role in mitigating governments' tendencies to overborrow. While it is difficult to establish a clear causal link from high public debt to low output growth, it is likely that some countries pay a price-in terms of lower growth and greater output volatility-for excessive debt accumulation.

Tracking foreign capital: the effect of capital inflows on bank lending in the UK
Kneer, Christiane,Raabe, Alexander
This paper examines how UK banks channel capital inflows to the individual sectors of the domestic economy and to overseas residents. Information on the source country of foreign capital deposited with UK banks allows us to construct a novel Bartik instrument for capital inflows. Our results suggest that foreign funds boost bank lending to the domestic economy. This result is due to the positive effect of capital inflows on bank lending to non-financial firms and to other domestic financial institutions. Banks do not channel capital inflows directly to households or the public sector. Much of the foreign capital is also channelled back abroad, reflecting the role of the UK as a global financial centre.

Türkiye’de Faizsiz Finans Kuruluşları Açısından Bir Dönüm Noktası: Faizsiz Finans Muhasebe Standartları (FFMS) Üzerine Bir İnceleme (A Milestone in Terms Interest-Free Financial Institutions in Turkey: An Examination upon Interest-Free Finance Accounting Standards (IFFAS))
Kartal, Mustafa Tevfik
Turkish Abstract: Türkiye’de 1985 yılında faaliyet göstermeye başlayan faizsiz finans kuruluşlarının sektör payı 2019 Mart sonu itibarıyla %5,5 olarak gerçekleşmiştir. Sektör payının yeterince gelişmemesi çeşitli eksiklikler/sorunlar bulunduğunu göstermektedir. Bu eksikliklerden birisi faizsiz finans kuruluşlarının faaliyetlerine uygun muhasebe ve finansal raporlama çerçevesinin bulunmamasıdır. Bu kapsamda, faizsiz finans kuruluşlarının muhasebe ve raporlama çerçevesi eksikliğine yönelik olarak 21.05.2019 tarihinde Kamu Gözetimi, Muhasebe ve Denetim Standartları Kurumu (KGK) tarafından FFMS yayınlanmıştır. Düzenleme faizsiz finans kuruluşlarına ilave raporlama yükümlülükleri getirmektedir. Zekât ve sadaka fonu ile karz fonu kaynakları ve kullanımları tabloları bu yükümlülüklerden bazılarıdır. Ayrıca, yeni raporlama çerçevesi 2020 yılında uygulamaya gireceğinden faizsiz finans kuruluşlarının hazırlık çalışmalarını tamamlamak ve raporlama altyapılarını uyarlamak için sınırlı bir zamanı bulunmaktadır. Türk Bankacılık Sektörü açısından ise düzenlemenin sektör verilerinin konsolide edilmesi ve mevduat bankacılığı-katılım bankacılığı kıyaslamalarında eşleştirme sorunlarına neden olacağı düşünülmektedir. Diğer taraftan, yeni raporlama çerçevesi ile birlikte faizsiz finans kuruluşları faaliyetlerini faizsiz finans yaklaşımı çerçevesinde raporlama imkânına kavuşmuştur. Düzenlemenin getirdiği uygulamaların olumsuz gelişmelere neden olmaması için Türk Bankacılık Sektörü ve Türk Katılım Bankacılığı üzerindeki etkileri Bankacılık Düzenleme ve Denetleme Kurumu (BDDK), KGK ve Türkiye Katılım Bankaları Birliği tarafından izlenmeli, olumsuz etkilerin görülmesi halinde gerekli tedbirler alınmalıdır. English Abstract: Market share of interest-free finance institutions, which started to operate in 1985 in Turkey, has been 5.5% as of 2019 March end. Underdevelopment of market share shows that there are various shortcomings/problems. One of these is that there is no accounting and financial reporting framework suitable for the activities of interest-free finance institutions. In order to eliminate the deficiency of accounting and reporting framework of interest-free finance institutions, IFFAS have been issued by Public Oversight, Accounting and Auditing Standards Authority (POA) on 05.21.2019. The regulation imposes additional reporting obligations to interest-free financial institutions. Fund resources and uses statements of zakat, alms and karz funds are some of these obligations. Moreover, there is a limited time to complete the preparatory works and adapt reporting infrastructures of interest-free finance institutions since new reporting framework will be implemented in 2020. In terms of the Turkish Banking Sector, it is expected that the regulation would cause pairing problems in the consolidation of sector data and in the comparison of deposit banking-participation banking. On the other hand, interest-free finance institutions have been able to report their activities within the framework of interest-free finance approach with the new reporting framework. In order not to cause unfavorable developments, implications of the regulation on Turkish Banking Sector and Turkish Participation Banking should be followed up by Banking Regulation and Supervision Agency (BRSA), POA and Participation Banks Association of Turkey. If adverse effects are observed, necessary measures should be taken.