Research articles for the 2019-06-24

A New Solution to Market Definition: An Approach Based on Multi-dimensional Substitutability Statistics
Yan Yang

Market definition is an important component in the premerger investigation, but the models used in the market definition have not developed much in the past three decades since the Critical Loss Analysis (CLA) was proposed in 1989. The CLA helps the Hypothetical Monopolist Test to determine whether the hypothetical monopolist is going to profit from the small but significant and non-transitory increase in price (SSNIP). However, the CLA has long been criticized by academic scholars for its tendency to conclude a narrow market. Although the CLA was adopted by the 2010 Horizontal Merger Guidelines (the 2010 Guidelines), the criticisms are likely still valid. In this dissertation, we discussed the mathematical deduction of CLA, the data used, and the SSNIP defined by the Agencies. Based on our research, we concluded that the narrow market conclusion was due to the incorrect implementation of the CLA; not the model itself. On the other hand, there are other unresolvable problems in the CLA and the Hypothetical Monopolist Test. The SSNIP test and the CLA are bright resolutions for market definition problem during their time, but we have more advanced tools to solve the task nowadays. In this dissertation, we propose a model which is based directly on the multi-dimensional substitutability between the products and is capable of maximizing the substitutability of product features within each group. Since the 2010 Guidelines does not exclude the use of models other than the ones mentioned by the Guidelines, our method can hopefully supplement the current models to show a better picture of the substitutive relations and provide a more stable definition of the market.

Analyzing Credit Risk Transmission to the Non- Financial Sector in Europe: A Network Approach
Gross, Christian,Siklos, Pierre L.
We use a factor model and elastic net shrinkage to model a high-dimensional network of European CDS spreads. Our empirical approach allows us to assess the joint transmission of bank and sovereign risk to the non-financial corporate sector. Our findings identify a sectoral clustering in the CDS network, where financial institutions are in the center and non-financial entities as well as sovereigns are grouped around the financial center. The network has a geographical component reflected in different patterns of real-sector risk transmission across countries. Our framework also provides dynamic estimates of risk transmission, a useful tool for systemic risk monitoring.

Are Cryptocurrency Traders Pioneers or Just Risk-Seekers? Evidence from Brokerage Accounts
Pelster, Matthias,Breitmayer, Bastian,Hasso, Tim
Are cryptocurrency traders driven by a desire to invest in a new asset class to diversify their portfolio or are they merely seeking to increase their levels of risk? To answer this question, we use individual-level brokerage data and study their behavior in stock trading around the time they engage in their first cryptocurrency trade. We find that when engaging in cryptocurrency trading investors simultaneously increase their risk-seeking behavior in stock trading as they increase their trading intensity and use of leverage. The increase in risk-seeking in stocks is particularly pronounced when volatility in cryptocurrency returns is low, suggesting that their overall behavior is driven by excitement-seeking.

Asset Pricing and Monetary Policy
Dong, Bingbing
This paper examines the role of money in understanding the behavior of asset prices and whether and how monetary policy should react to asset prices such as stock prices and equity premiums. To do so, I introduce money via the form of transaction cost into a production economy with limited stock market participation where agents with lower inter-temporal elasticity of substitution (IES), called non-stockholders, have no access to stock market. In addition to facilitating transactions of consumption goods, money also redistributes wealth by countercyclically transferring resources from stockholders to non-stockholders, the main role of non-state contingent bonds. The benchmark model resolves quantitatively the risk premium puzzle and the risk-free return puzzle, matches macroeconomic behavior such as volatilities of output, consumption and investment, and is in line with empirically documented facts about money growth, inflation and asset prices in literature. This model is then used to evaluate alternative policies for money growth rates. I find that monetary policies are welfare improving for both stockholders and non-stockholders if they reduce equity premiums in the economy. These policies include a lower expected money growth, a pro-cyclical money growth rate, and growth rates of money being positively reacting to equity prices or equity premiums, all of which enhance the precautionary saving role of money.

Business Taxonomy Construction Using Concept-Level Hierarchical Clustering
Haodong Bai,Frank Z. Xing,Erik Cambria,Win-Bin Huang

Business taxonomies are indispensable tools for investors to do equity research and make professional decisions. However, to identify the structure of industry sectors in an emerging market is challenging for two reasons. First, existing taxonomies are designed for mature markets, which may not be the appropriate classification for small companies with innovative business models. Second, emerging markets are fast-developing, thus the static business taxonomies cannot promptly reflect the new features. In this article, we propose a new method to construct business taxonomies automatically from the content of corporate annual reports. Extracted concepts are hierarchically clustered using greedy affinity propagation. Our method requires less supervision and is able to discover new terms. Experiments and evaluation on the Chinese National Equities Exchange and Quotations (NEEQ) market show several advantages of the business taxonomy we build. Our results provide an effective tool for understanding and investing in the new growth companies.

Change of Measure in Midcurve Pricing
K.E. Feldman

We derive measure change formulae required to price midcurve swaptions in the forward swap annuity measure with stochastic annuities' ratios. We construct the corresponding linear and exponential terminal swap rate pricing models and show how they capture the midcurve swaption correlation skew.

Common Ownership and Startup Growth
Eldar, Ofer,Grennan, Jillian,Waldock, Katherine
Is common ownership anticompetitive or do firms benefit when the same investors hold stakes in competing firms? We exploit a quasi-natural experiment in the venture capital (VC) industry - the staggered introduction of exemptions from liability when investors pursue conflicting business opportunities - as a shock to common ownership. We find increases in same-industry investment and directorships held at competing startups. Despite potential conflicts from information sharing, commonly held startups benefit by raising more capital through more investment rounds. Evidence from VC funds' returns and startups' exits suggests common ownership helps weaker startups improve rather than biasing competition toward winners.

Consumption smoothing in the working-class households of interwar Japan
Kota Ogasawara

I analyze Osaka factory worker households in the early 1920s, whether idiosyncratic income shocks were shared efficiently, and which consumption categories were robust to shocks. While the null hypothesis of full risk-sharing of total expenditures was rejected, factory workers maintained their households, in that they paid for essential expenditures (rent, utilities, and commutation) during economic hardship. Additionally, children's education expenditures were possibly robust to idiosyncratic income shocks. The results suggest that temporary income is statistically significantly increased if disposable income drops due to idiosyncratic shocks. Historical documents suggest microfinancial lending and saving institutions helped mitigate risk-based vulnerabilities.

Corporate Accelerator and Start-up Performance
Seitz, Nikolaus,Lehmann, Erik E.,Haslanger, Patrick
Corporate accelerators (CA) are a rapidly growing institutional phenomenon. As agile innovation units they offer start-ups fixed-term coaching programs, designed to provide benefits for start-ups and corporations. Although their proliferation is evident, little is known about their efficacy and drivers of performance. Analyzing a hand-collected novel dataset containing more than 200 start-ups across 15 CA programs located throughout Germany, our results suggest that while start-ups benefit from small, specialized and industry-specific programs through synergies and economies of scale and scope; increasing specialization generates also disadvantages for the accelerated start-ups. Lock-in effects and hold-up problems make it difficult to raise follow-up financing.

Discretionary Disclosure Complexity: New Predictions and Evidence from Index Funds
deHaan, Ed,Song, Yang,Xie, Chloe,Zhu, Christina
Do managers attempt to obfuscate weak performance with complex disclosures? A significant challenge in addressing this question is controlling for non-discretionary disclosure complexity driven by the underlying firm and its economic transactions. We examine the “manager obfuscation” hypothesis in the context of homogenous S&P 500 index funds. This allows us to hold non-discretionary complexity (e.g., investments and risks) largely constant in order to examine how funds’ disclosure choices covary with net performance (as measured by expenses or, equivalently, post-expense returns). We have three findings that are relevant to both the mutual fund and corporate disclosure literatures. First, funds with weaker net performance have more complex disclosures, which is compelling evidence of managerial obfuscation. Second, funds obfuscate weak performance by ex ante creating unnecessarily complex within-fund class structures. This indicates that seemingly non-discretionary firm characteristics may be part of a discretionary obfuscation strategy. Third, we find that funds simultaneously choose both their expenses and complexity, which is a departure from most studies’ assumption that managers choose disclosure complexity to obfuscate non-discretionary poor performance.

Dissecting the Yield Curve: The International Evidence
Berardi, Andrea,Plazzi, Alberto
Using a stochastic volatility affine term structure model, we explicitly consider the interrelation between yield curves and macro and volatility factors. We provide estimates of short rate expectations, term premium and convexity of nominal yields and for their real and inflation components for four different currency areas: US, Euro Area, UK, and Japan. We find that in all areas there are non-negligible convexity effects in correspondence with high volatility periods, and that term premium and convexity explain a significant proportion of the dynamics at the long end of the yield curve. Using panel regressions, we show that, overall, short rate expectations are procyclical while term premia exhibit a countercyclical behaviour and tend to increase with yield volatility. We also detect strong cross-country co-movements both in short rate expectations and term premia, with the degree of connectedness exhibiting significant time variation.

Do Social Ties Trump Collateral in Determining Loan Performance? Evidence Using Same Day Loan Repayments
Agarwal, Sumit,, Prasanna,Vishen, Nitin
We compare default rates of collateral based individual loans and joint liability based group loans in situations where the same individual is required to repay both the types of loans on the same day. We find that among such pairs of loans, group loans out-perform by 10.1 percentage points. The results hold even when the collateral on individual loans are relatively easily enforceable. Moreover, the out-performance of group loans increases during periods of economic distress. Our results show that social ties are more potent than collateral based lending in enforcing loan contracts.

Dynamic Probabilistic Forecasting with Uncertainty
Benth, Fred Espen,Kutrolli, Gleda,Stefani, Silvana
We introduce a dynamical model for the time evolution of probability density functions incorporating uncertainty in the parameters. The uncertainty follows stochastic processes, thereby defining a new class of stochastic processes with values in the space of probability densities. The purpose is to quantify uncertainty that can be used for probabilistic forecasting. Starting from a set of traded prices of equity indices such as FTSEMIB, FTSE100 and S&P500 we do some empirical studies. We apply our dynamic probabilistic forecasting to option pricing, where our proposed notion of model uncertainty reduces to uncertainty on future volatility. A distribution of option prices follows, reflecting the uncertainty on the distribution of the underlying prices. We associate measures of model uncertainty of prices in the context of Cont (2006). As a further application we look at the Sharpe ratio and the VaR measure of market risk as well, proposing some decision rules for investors, regulators and risk managers.

Economic Condition and Financial Cognition
Delis, Manthos D.,Galariotis, Emilios C.,Monne, Jerome
We use a randomized controlled survey experiment to examine how prompting individuals to think about their personal economic condition (priming) affects their scores on a subsequent financial literacy quiz. We find that priming negatively (positively) affects the performance of relatively poor (rich) individuals. The marginal effect of poverty on financial literacy scores is 3.7 times higher for primed (treated) respondents compared to nonprimed ones. We also show that higher anxiety and shame are key explanations for our baseline findings. Our findings shed light on how economic condition affects financial cognition, especially with regard to cognitive impediments led by negative emotions.

Examining the Viability to Allow Dual-Class Share Structure Companies to List in the Financial Market of the People’s Republic of China: Lessons and Experiences From Hong Kong
Ho, Kong Shan
In early 2019, the China Securities Regulatory Commission (CSRC) published guidelines for a new Science and Technology Innovation Board (STI Board) that will be created at the Shanghai Stock Exchange (SSE). The board will feature innovative scientific and technological enterprises and is perceived as one of the major reforms of the People’ Republic of China (China) stock market in three decades. The new board will enable innovative and technology companies with dual-class share (DCS) structure to list on the board subject to certain safeguards and restrictions. This article examines the reform launched by the CSRC and SSE in allowing DCS structure companies to list on this new board despite legal and institutional shortcomings of its financial market. In doing so, it will also make reference to the Hong Kong financial market as it has also recently allowed DCS structure companies to list on its exchange. The development of DCS structure companies in Hong Kong and its eventual adoption by the Hong Kong Stock Exchange (HKEx) provide valuable lessons and experiences for China’s financial market.

Executive Gender and Prospect-Value Bias: Evidence from Insider Trading
Sehrish, Saba,Ding, David K.,Visaltanachoti, Nuttawat
This study shows that prospect value influences insider-trading decisions, and the impact is stronger among female executives’ trades. Insiders who buy (sell) when their company's prospect value is above (below) other firms’ prospect values lose 34 (12) basis points over the next month. Female insider trades, as compared with trades by their male counterparts, are affected more by prospect-value bias, and they suffer significantly higher resultant losses. While the findings contradict the overconfidence hypothesis that predicts poor trading decisions by male insiders, the results are consistent with the male insiders’ superior information access hypothesis, suggesting that behavioral biases diminish with knowledge.

Follow the Leader: Index Tracking with Factor Models
Jiang, Pan,Perez, Marcos Fabricio
We propose a new methodology to select a subset of assets for (partial) index replication, based on the latest research on factor models of large dimensions. Our method selects the set of leader stocks that are able to fully capture the systematic risk of the index to be replicated. Our selection methodology is consistent as the sample size and the number of assets jointly approach infinity. Monte Carlo experiments show that our estimated index replica is able to track the underlying index with relative small tracking errors in finite samples. We show the applicability of the method by tracking the S&P500 equally weighed index with promising out-of-sample performance. Using a maximum of 27 stocks, we are able to replicate the index, and obtain similar performance than a replica portfolio with 200 stocks selected by their correlation with the index. Our method can be easily adapted for synthetic index replication and to incorporate measures of liquidity or transaction cost.

Forecasting financial crashes with quantum computing
Roman Orus,Samuel Mugel,Enrique Lizaso

A key problem in financial mathematics is the forecasting of financial crashes: if we perturb asset prices, will financial institutions fail on a massive scale? This was recently shown to be a computationally intractable (NP-hard) problem. Financial crashes are inherently difficult to predict, even for a regulator which has complete information about the financial system. In this paper we show how this problem can be handled by quantum annealers. More specifically, we map the equilibrium condition of a toy-model financial network to the ground-state problem of a spin-1/2 quantum Hamiltonian with 2-body interactions, i.e., a quadratic unconstrained binary optimization (QUBO) problem. The equilibrium market values of institutions after a sudden shock to the network can then be calculated via adiabatic quantum computation and, more generically, by quantum annealers. Our procedure could be implemented on near-term quantum processors, thus providing a potentially more efficient way to assess financial equilibrium and predict financial crashes.

Hedging Momentum
Li, Kai,Ma, Le
We assess empirically the intertemporal hedging for assets with momentum (we term it “intertemporal momentum” or IM). Consistent with the dynamic portfolio theory, we show that (1) IM significantly forecasts stock returns at both market level and firm level over long horizons and complements standard myopic momentum (MM); (2) IM strategies produce returns with a slightly lower mean (due to the cost of hedging), much lower volatility, higher skewness (due to the heavy penalty for very negative returns), and hence much higher Sharpe ratio (due to the investment target), comparing with MM; (3) because our IM strategies and static augmented MM strategies manage different risks, a simple combination of them not only generates low volatility as our intertemporal strategies but also high mean as static strategies, more than quadrupling Sharpe ratios of MM; (4) the strong performance of our strategies over long investment horizons reflects the fact that momentum depends heavily on horizons.

Identify and understand pay-it-forward reciprocity using millions of online red packets
Yuan Yuan,Tracy Liu,Chenhao Tan,Qian Chen,Alex Pentland,Jie Tang

Pay-it-forward reciprocity encourages the spread of prosocial behavior. However, existing empirical evidence of pay-it-forward behavior has been largely based on laboratory experiments, which are limited in sample size and external validity. Extending this research, our study uses a natural experiment to examine pay-it-forward reciprocity in a real-life context with a large-scale dataset of 3.4 million users of an online platform. Our natural experiment is enabled by the randomness in the mechanism that WeChat, a Chinese online social networking platform, uses to split an online monetary gift (also known as a "red packet") to its recipients. Our results show that recipients on average pay forward 10.34% of the amount they receive. We further find that "Luckiest draw" recipients, or those who obtain the largest shares of their corresponding red packets, are 1.5 times more likely to pay it forward than other recipients. Our analyses indicate that in a multiple recipient setting, users' pay-it-forward behavior is enforced by a group norm that luckiest draw recipients should send the first subsequent gift and promoted by their distributional social preferences of the random amounts split by the platform. Finally, our study shows that those recipients without any in-group friends do pay it forward, even though their pay-it-forward behavior is less likely to be driven by their reputational concerns among acquaintances. Overall, our work provides insights into mechanisms and conditions that encourage pay-it-forward reciprocity, which have implications for fostering prosocial behavior.

Interest Rate Risk in the Banking Book: Management with Discrete-time Affine â„š Term Structure Models
Bloechlinger, Andreas
I present an analytical valuation model for the management of fixed-income instruments traded in imperfectly competitive markets, like non-maturity deposits and credit card loans in the banking book, inter alia, to stabilize the profit margin. Banking book instruments contain embedded options such as withdrawal rights, discretionary pricing and zero-based floors. Analytical solutions speed up computation time to calculate valuations, earnings and risk measures like closed-form expressions for margin spreads, hedge ratios and parameter sensitivities to derive management actions. Asymptotically, according to martingale central limit theorems and thanks to the long-term nature of the banking book, Gaussian approximations can be applied.

Investor Reaction to Economic Sanctions: The Case of Russian Global Depositary Receipts
Kim, Oksana
We examine the impact that the economic sanctions imposed by the Western community on the Russian economy in March 2014 have had on the pricing of Global Depositary Receipts (GDRs) traded in London. We document that following the first announcement of the imposition of sanctions, the returns of Russian GDRs increased in the case of both the Moscow Exchange and London listings, indicating an enhanced risk of trading with Russian securities. This effect was more pronounced in the case of London listings compared to local listings, which resulted in an overall decrease in the returns spread between the GDR and underlying home market shares. In contrast, we do not find evidence that imposition of sanctions affected turnover by volume of home or London-based GDR trades around the sanctions announcement, suggesting that investors did not pull out of Russian GDRs, but instead, reassessed investment risks associated with Russian securities. Last, our findings provide no evidence of a moderating impact on pricing of Russian GDRs by the two mechanisms that are expected to be indicative of enhanced [decreased] risks for GDRs, namely, state ownership [presence of foreign nationals on boards of directors]. Our study contributes to the debate on the importance of complex assessment of outcomes of international sanctions on individual economies and firms.

Long Run Feedback in the Broker Call Money Market
Alex Garivaltis

I unravel the basic long run dynamics of the broker call money market, which is the pile of cash that funds margin loans to retail clients (read: continuous time Kelly gamblers). Call money is assumed to supply itself perfectly inelastically, and to continuously reinvest all principal and interest. I show that the relative size of the money market (that is, relative to the Kelly bankroll) is a martingale that nonetheless converges in probability to zero. The margin loan interest rate is a submartingale that converges in mean square to the choke price $r_\infty:=\nu-\sigma^2/2$, where $\nu$ is the asymptotic compound growth rate of the stock market and $\sigma$ is its annual volatility. In this environment, the gambler no longer beats the market asymptotically a.s. by an exponential factor (as he would under perfectly elastic supply). Rather, he beats the market asymptotically with very high probability (think 98%) by a factor (say 1.87, or 87% more final wealth) whose mean cannot exceed what the leverage ratio was at the start of the model (say, $2:1$). Although the ratio of the gambler's wealth to that of an equivalent buy-and-hold investor is a submartingale (always expected to increase), his realized compound growth rate converges in mean square to $\nu$. This happens because the equilibrium leverage ratio converges to $1:1$ in lockstep with the gradual rise of margin loan interest rates.

Market Discipline, Social Preferences, and Corporate Policies
Gantchev, Nickolay,Giannetti, Mariassunta,Li, Rachel
Using a novel dataset of negative news coverage of the environmental and social (E&S) practices of firms around the world, we show that customers and investors can provide market discipline and impose their ethical standards on firm policies. Investors sell firms with heightened E&S risk, especially if they are from E&S conscious countries. Similarly, heightened E&S risk is associated with a drop in firms’ sales in E&S conscious countries. This behavior of E&S conscious investors and customers leads to significant declines in stock prices, which push firms to improve their E&S policies in the years following negative realizations of E&S risk. Overall, our results indicate that customers and shareholders are able to impose their social preferences on firms, suggesting that market discipline works.

Market fragmentation and market consolidation: Multiple steady states in systems of adaptive traders choosing where to trade
Aleksandra Alorić,Peter Sollich

Technological progress is leading to proliferation and diversification of trading venues, thus increasing the relevance of the long-standing question of market fragmentation versus consolidation. To address this issue quantitatively, we analyse systems of adaptive traders that choose where to trade based on their previous experience. We demonstrate that only based on aggregate parameters about trading venues, such as the demand to supply ratio, we can assess whether a population of traders will prefer fragmentation or specialization towards a single venue. We investigate what conditions lead to market fragmentation for populations with a long memory and analyse the stability and other properties of both fragmented and consolidated steady states. Finally we investigate the dynamics of populations with finite memory; when this memory is long the true long-time steady states are consolidated but fragmented states are strongly metastable, dominating the behaviour out to long times.

On the quasi-sure superhedging duality with frictions
Erhan Bayraktar,Matteo Burzoni

We prove the superhedging duality for a discrete-time financial market with proportional transaction costs under model uncertainty. Frictions are modeled through solvency cones as in the original model of [Kabanov, Y., Hedging and liquidation under transaction costs in currency markets. Fin. Stoch., 3(2):237-248, 1999] adapted to the quasi-sure setup of [Bouchard, B. and Nutz, M., Arbitrage and duality in nondominated discrete-time models. Ann. Appl. Probab., 25(2):823-859, 2015]. Our approach allows to remove the restrictive assumption of No Arbitrage of the Second Kind considered in [Bouchard, B., Deng, S. and Tan, X., Super-replication with proportional transaction cost under model uncertainty, Math. Fin., 29(3):837-860, 2019] and to show the duality under the more natural condition of No Strict Arbitrage. In addition, we extend the results to models with portfolio constraints.

Optimal Comparability, Real Effects, and Asset Prices
Wu, Sang,Xue, Wenjie
This paper examines how accounting comparability affects investment efficiency and risk-allocation in the economy. We develop the statistical and informational properties of accounting reports under varying degrees of comparability, consistent with the descriptions from legislators, standard-setters, and academics. In our information economics framework, a perfectly comparable accounting measurement system enables investors to perfectly infer the difference between any two firms' future cash flows although investors remain uncertain about either firm's cash flow itself. After solving for each firm's equilibrium investment decision and capital market share price, we analyze how comparability affects: (i) investment efficiency, (ii) risk of the market portfolio, and (iii) price volatility. Given the tension among the three effects, perfect comparability is not socially optimal. In addition, investors demand more comparable accounting reports than preparers.

Overreaction in Credit Spreads: The Role of Lenders' Personal Economic Experiences
Carvalho, Daniel R.,Gao, Janet,Ma, Pengfei
We provide micro-level evidence that credit spreads overreact to lenders’ recent personal economic experiences. Using unique data on the location of the real estate properties of loan officers originating large corporate loans, we show that credit spreads overweight recent economic conditions in officers’ local neighborhoods, that we capture using local housing price growth. Higher local growth in officers’ areas is associated with significantly lower credit spreads. The analysis suggests that these effects cannot be explained by borrower and bank fundamentals, or changes in officer wealth, and that they capture officers’ responses to their local economic experiences. Overall, the evidence is most consistent with the view that lenders’ beliefs drive this overreaction in credit spreads to their recent personal experiences.

Pricing Options Under Stochastic Volatility: A Simple, Closed-Form Formula
Alghalith, Moawia
We overcome the limitations of the Black-Scholes model. It is the first paper to provide a simple, closed-form formula (that doesn't require numerical/computational methods) under stochastic volatility. The formula is as simple as the classical Black-Scholes pricing formula. Furthermore, this paper modifies the Black-Scholes model to make it consistent with the empirical reality.

Professional Directors and Governance Quality
Wahid, Aida Sijamic,Welch, Kyle T.
We examine professional directors â€" board members with no employment outside of serving as independent directors. We find that boards with a higher percentage of professional directors engage in more acquisitions, experience lower acquisition-announcement returns, and exhibit lower performance-turnover sensitivity and lower financial performance. We also examine the returns surrounding the appointment-announcement dates of professional directors and find that firms experience significantly lower cumulative abnormal returns upon the appointment announcement of professional directors as compared to non-professional directors. The negative returns are primarily experienced by firms that face greater agency issues, suggesting that the market does not value professional directors for stricter monitoring. Overall, our findings do not lend support for calls to professionalize corporate boards.

Regulatory Interventions in Consumer Financial Markets: The Case of Credit Cards
Galenianos, Manolis,Gavazza, Alessandro
We build a framework to understand the effects of regulatory interventions in credit markets, such as caps on interest rates and higher compliance costs for lenders. We focus on the credit card market, in which we observe U.S. consumers borrowing at high and very dispersed interest rates, despite receiving many credit card offers. Our framework includes two main features that may explain these patterns: endogenous effort of examining offers and product differentiation. Our calibration suggests that these patterns occur because borrowers do not examine most of the offers that they receive. The calibrated model implies that interest rate caps reduce credit supply modestly and curb lenders' market power significantly, leading to large gains in consumer surplus, whereas higher compliance costs unambiguously decrease consumer surplus.

Relative Bound and Asymptotic Comparison of Expectile with Respect to Expected Shortfall
Samuel Drapeau,Mekonnen Tadese

Expectile bears some interesting properties in comparison to the industry wide expected shortfall in terms of assessment of tail risk. We study the relationship between expectile and expected shortfall using duality results and the link to optimized certainty equivalent. Lower and upper bounds of expectile are derived in terms of expected shortfall as well as a characterization of expectile in terms of expected shortfall. Further, we study the asymptotic behavior of expectile with respect to expected shortfall as the risk level goes to $0$ in terms of extreme value distributions. Illustrating the formulation of expectile in terms of expected shortfall, we also provide explicit or semi-explicit expressions of expectile for some classical distributions.

Replication in Financial Economics
Harvey, Campbell R.
The existing replication policies at top finance journals are far weaker than the policies at top economics journals. This paper explores both the costs and benefits of having a stronger replication policy in the context of my failed 2010 initiative to develop a unified policy across all top finance journals. For example, the most obvious cost of a replication policy is the additional burden it imposes on authors in answering questions about both the code and data. Indeed, this cost is disproportionately placed on our most productive researchers â€" potentially leading to less innovation. On the other hand, having a strong policy would likely reduce research misconduct â€" in particular, soft misconduct such as p-hacking. I present a framework to mitigate the costs associated with replication and maximize the benefits.

Semi-parametric Realized Nonlinear Conditional Autoregressive Expectile and Expected Shortfall
Chao Wang,Richard Gerlach

A joint conditional autoregressive expectile and Expected Shortfall framework is proposed. The framework is extended through incorporating a measurement equation which models the contemporaneous dependence between the realized measures and the latent conditional expectile. Nonlinear threshold specification is further incorporated into the proposed framework. A Bayesian Markov Chain Monte Carlo method is adapted for estimation, whose properties are assessed and compared with maximum likelihood via a simulation study. One-day-ahead VaR and ES forecasting studies, with seven market indices, provide empirical support to the proposed models.

Semi-tractability of optimal stopping problems via a weighted stochastic mesh algorithm
D. Belomestny,M. Kaledin,J. Schoenmakers

In this article we propose a Weighted Stochastic Mesh (WSM) Algorithm for approximating the value of a discrete and continuous time optimal stopping problem. We prove that in the discrete case the WSM algorithm leads to

semi-tractability of the corresponding optimal problems in the sense that its complexity is bounded in order by $\varepsilon^{-4}\log^{d+2}(1/\varepsilon)$ with $d$ being the dimension of the underlying Markov chain. Furthermore we study the WSM approach in the context of continuous time optimal stopping problems and derive the corresponding complexity bounds. Although we can not prove semi-tractability in this case, our bounds turn out to be the tightest ones among the bounds known for the existing algorithms in the literature. We illustrate our theoretical findings by a numerical example.

Short Sellers and Long-Run Management Forecasts
Chen, Xia,Cheng, Qiang,Luo, Ting ,Yue, Heng
We examine how short sellers affect long-run management forecasts using a natural experiment (Regulation SHO) that relaxes short-selling constraints on a group of randomly selected firms (referred to as pilot firms). We find that compared to other firms, the pilot firms issue more long-run good news forecasts but do not change the frequency of long-run bad news forecasts. The increase in good news forecasts is greater when the pilot firms have higher quality forecasts, more uncertainty about firm value, or higher manager equity incentives. Overall, these results and the results of additional analyses indicate that the reduction in short-selling constraints and the increase in short-selling threat induce managers to enhance disclosures through more long-run forecasts, primarily in the case of good news, to discourage short sellers.

Should Taxable Investors Shun Dividends?
Israel, Ronen,Liberman, Joseph,Sosner, Nathan,Wang, Lixin
Whereas the benefits of capital gains management to the tax efficiency of investment strategies have been extensively documented in the literature, evidence on the benefits of avoiding high-dividend-paying stocks is less conclusive. We evaluate the tax benefit of dividend avoidance for quantitative multi-style strategies. We find that dividend avoidance generally reduces implementation efficiency, thus lowering expected pre-tax returns. Such reduction in implementation efficiency is particularly pronounced for strategies with naturally higher dividend yields, such as strategies with a large exposure to the value style. Importantly, dividend avoidance detracts from the ability to manage capital gains. All things considered, the tax benefit of lowering the dividend yield is not enough to compensate for the associated increase in capital gains taxes and decrease in expected pre-tax returns.

Speaking of Secession: A Theory of Linguistic Secession
Dudar, Sami
Language is argued as a recognizable human right that can be enforced under international covenants. This theory of language as a human right is applied to the treatment of the Turks to undermine the Kurdish people in Turkey by subverting and constricting the Kurdish language. It is argued that, under such a linguistic theory, secession is permitted under international law and the creation of a new and recognizable government, separate from the previous host nation, across international borders where the concentration of the identifiable people is most dense.

Spillover Effects of Fraud Allegations and Investor Sentiment
Darrough, Masako N.,Huang, Rong,Zhao, Sha
We examine whether a stock price spillover effect spreads through the method of listing or country of origin and whether this spillover effect changes when investor sentiment shifts. Using a sample of fraud allegations against Chinese companies that became public through reverse mergers (CRMs), we investigate whether firms that experienced negative spillover effects on their stock prices are those from the same country and/or with the same method of listing as the firms accused of fraud. We first show that the negative spillover effect channeled through the firm’s country of origin becomes stronger when investor sentiment about Chinese companies becomes pessimistic, as evinced by significant declines in the stock prices of non-fraudulent Chinese companies, including both CRMs and Chinese IPOs. Second, we show that the negative spillover effects on CRMs are stronger than those on Chinese IPOs and non-Chinese reverse mergers, suggesting that both country and listing method are applicable to CRMs. Our findings indicate that: (1) investor sentiment plays an important role in the spillover process involving fraud allegations; and (2) while the two channels could co-exist, negative spillover effects that spread through the country of origin play a more prominent role than those that spread through the method of listing.

Sustained Credit Card Borrowing
Grodzicki, Daniel,Koulayev, Sergei
Using a large panel of credit card accounts, we examine the dynamics of credit card borrowing and repayment in the United States and what these imply for the expected costs of credit card debt to consumers. Our analysis reveals that: (1) credit cards are predominantly used to borrow, (2) card debt is sustained for long periods and balances frequently rise before being repaid, (3) this debt is potentially more costly than anticipated. Specifically, we document that 82% of outstanding balances are debt and that 70% of this debt accrues to those borrowing continuously for a year or more. The expected annualized cost of a borrowing episode is 28% of its initial balance, or 13 p.p. higher than the average APR. Moreover, credit scores decline during episodes, further raising the expected cost of borrowing on a card.

Synergizing Ventures
Akcigit, Ufuk,Dinlersoz, Emin,Greenwood, Jeremy,Penciakova, Veronika
Empirically, VC-backed startups have higher early growth rates and patenting levels than non-VC-backed ones. Venture capitalists increase a startup's likelihood of reaching the right tails of the firm size and innovation distributions. Furthermore, outcomes are better for startups matched with more experienced venture capitalists. An endogenous growth model, where venture capitalists provide both expertise and financing for business startups, is constructed to match these facts. The presence of venture capital, the degree of assortative matching between startups and financiers, and the taxation of VC-backed startups matter significantly for growth.

Taxes, Debt, Investments and the Choice of Business Form with Overconfident and Pessimistic Entrepreneurs
Miglo, Anton,Brodziak, Magdalena
This article is the first to analyze the simultaneous choice of investment and organizational form using the behavioral finance approach. When entrepreneurs are rational, the choice of investment and organizational form is irrelevant in most cases. However, when entrepreneurs are overconfident/pessimistic, it leads to overinvestment/underinvestment. We show that a combination of corporate tax for limited liability businesses along with a universal personal income tax can improve the efficiency of decision-making and increase social surplus.

The Costs of the Rotten Barrel: Financial Performance and Unethical Culture Based on Employee Reviews
Di Miceli da Silveira, Alexandre
I investigate the relationship between unethical culture and financial performance based on a text analysis of over 100,000 employee reviews posted at Glassdoor in Brazil. My measure of unethical culture is based on the “two-factor model of ethical culture” developed by Ethical Systems. The model identifies five “disqualifiers” or ethical dimensions companies need to avert for an ethical culture to flourish. After creating an original list of around 1,400 terms related to the unethical culture dimensions, I find that companies scoring higher in unethical culture are less profitable and that this relationship is likely to be economically relevant. Of the five dimensions that make up an unethical culture, the three with stronger negative correlations with performance are organizational unfairness, lack of awareness, and fear of retaliation. Causality running from culture to performance, though, cannot be claimed, as endogeneity concerns may still be present despite best efforts to mitigate it. To my knowledge, this is the first paper to document a link between an (un)ethical culture and corporate performance using online reviews. For investors, I contribute by showing that ethical culture measured by employee reviews is a value-relevant source of information.

The Effect of Economic and Political Uncertainty on Sovereign CDS Spreads
Pan, Wei-Fong,Wang, Xinjie,Xu, Weike,Zhang, Jinfan
This study examines the effect of economic and political uncertainty on sovereign CDS spreads using a novel panel index of world uncertainty. We document that sovereign CDS spreads are positively associated with uncertainty. A 1% increase in uncertainty leads to a 0.86% increase in sovereign CDS spreads. The effect of uncertainty is persistent for at least ten quarters. The result is robust for contracts with different maturities, and to controls for local and global risk factors and country- and time-fixed effects. Overall, our results suggest that economic and political uncertainty contributes to both local and global components of sovereign CDS spreads.

The Idiosyncratic Risk in Chinese Stock Market
Darby, Julia,Zhang, Hai,Zhang, Jinkai
Using daily stock return data of all listed firms in Chinese stock market from 1998 to 2018, we disaggregate the volatility of common stocks at the market, industry and firm levels. We find market volatility, on average, is the highest while firm volatility tends to lead to market and industry volatility series. None long-term trend time series behaviour exists for all three volatility series and firm volatility is best described by an autoregressive process with regime shifts associated with the structural market reforms or volatile market movements. We further proceed to identify the source of volatility at the industry level and find the idiosyncratic volatility in the largest manufacturing industry not only accounts for the largest proportion in the aggregate firm volatility but also is the lead indicator for the idiosyncratic volatility of other industries. Finally, unlike Brandt et al. [Review of Financial Studies 23(2): 863-899 (2010)], we find the idiosyncratic volatility in Chinese stock market is associated with high stock trading activities by institutional investors, the result of which is also robust when using other measures of idiosyncratic volatility.

The Network Structure within the Financial Statements: An Exploratory Study Using Eye-Tracking Through the Lens of Network Theory
Chen, Yasheng,Panggabean, Tota,Lee, Cheng-Hsun
Value relevance literature suggests that investors are primarily interested in earnings information that can help investors assess equity value. Thus far, most researchers have concentrated on the aggregate level in the relationships between information in the financial statements and the value of the firm. This paper advances the study by exploring what financial statements items that have value relevance to individuals. We examine the value relevance by using the financial statement users’ visual attention data. We ground our model on network theory and employ the eye-tracking technique to examine the centrality of financial statements items. Compare to previous value relevance studies; our method employs a more direct way of investigating the relationship between the financial statement items and the investment decision. We find that most earnings items are the “celebrity actors” or the nodes of individuals’ attention that are relevant to individuals’ investment decision. Our findings corroborate the FASB statement that financial items are interrelated and should not be used independently. We provide new evidence for FASB and IASB to continue their joint project on restructuring the financial statements.

The Power of Non-Monetary Incentive: Experimental Evidence from P2P Lending in China
Brusa, Francesca,Luo, Xueming ,Fang, Zheng
This paper focuses on the Chinese P2P lending practice of using mobile data access to enhance loan enforcement via a novel incentive scheme that involves reputational sanctions. In a privately implemented randomized controlled trial, we test this mechanism both in parallel to and coupled with accommodative monetary incentives on the repayment decision of 18,000 late borrowers vis-à-vis ex-post reminders. Within 24 hours, we find that late borrowers are sensitive to the generosity of the monetary incentive but equally responsive to a warning of reporting delinquent behavior to others and a full late fee waiver. Furthermore, in joint schemes, the social incentive neutralizes the benefits of increasing the generosity of the monetary incentive. Borrowers who respond to early incentives largely pay-off the loan on time. The social incentive provides a direct metric for testing the impact of reputational concerns on repayment choices, affects behavior through a credible announcement and educates borrowers to execute subsequent payments on time.

Uncertain Risk Parity
Shah, Anish
Risk parity is portfolio construction technique that scales each part of a portfolio --- e.g., stocks, bonds, currencies, commodities --- so that its contribution to net portfolio risk matches its budgeted risk. Because risks are measured using a point-estimate of covariance, the method is subject to problems arising from estimation error. This paper describes a way of executing risk parity with covariance explicitly modeled as uncertain in order to achieve a robust weighting that is free of unintended exposure to hidden risks.

Using Column Generation to Solve Extensions to the Markowitz Model
Lorenz M. Roebers,Aras Selvi,Juan C. Vera

We introduce a solution scheme for portfolio optimization problems with cardinality constraints. Typical portfolio optimization problems are extensions of the classical Markowitz mean-variance portfolio optimization model. We solve such type of problems using a method similar to column generation. In this scheme, the original problem is restricted to a subset of the assets resulting in a master convex quadratic problem. Then the dual information of the master problem is used in a sub-problem to propose more assets to consider. We also consider other extensions to the Markowitz model to diversify the portfolio selection within the given intervals for active weights.

What Drives New Mutual Fund Clustering?
Gu, Ariel,Louca, Christodoulos
Over time, the aggregate new mutual fund volume is considerably larger in “hot” markets. The naïve explanation that new fund volume correlates with the economic environment is incomplete because active mutual funds, on average, underperform. However, we demonstrate that fund families exploit IPO-related investment opportunities, which correlate cross-sectionally for economy-wide reasons, more by creating new funds than by using existing funds. This naturally leads to new fund volume clustering that is correlated with the economic environment. In addition, consistent with fund families strategically exploiting the economic environment, new funds with access to IPO offerings outperform and attract higher investment flows.