Research articles for the 2019-06-27

A Fighting Chance? Small Family Farmers & How Little We Know
Lowdermilk, Jamey Mavis
This Article explores the intent and effectiveness of chapter 12 of the Bankruptcy Code. The last farm crisis inspired debt restructuring tailored to the agricultural sector, which hundreds of small commercial family farmers access annually. While chapter 12 allows qualifying debtors to write down all of their secured debt and extend repayment over a longer period, such specialized features may be insufficient.This Article reveals that although some chapter 12 debtors reorganize and avoid foreclosure, and the shadow effect of chapter 12 empowers reorganization outside of bankruptcy, few small family farmers file and fewer still report on success. A case study profiling a small family farm bankruptcy in the Middle District of North Carolina suggests an interdependence with the health of the local, rural economy. Yet legal institutions and corresponding research struggle to address the experience of rural communities and their financial circumstances. Similarly, chapter 12 studies on family farm debtors across the country fail to incorporate the input of farmers, the uniqueness of their geographies, or their relationship with the local economy. Research for this Article uncovered only a single study of chapter 12 that interviewed participating farmers. In that study, conducted in 1995, Iowa farmers had two recommendations: enhance access to operating credit in bankruptcy and examine the necessity of a trustee given the capacity of secured creditors to protect their interests.This Article posits that absent a better understanding of small commercial family farm debtors in recent years, our policies may be driven more by popular media than by lived experiences. Looking ahead, research should focus on the quantitative and qualitative experience of small family farmers within the context of their local economy, including the retail businesses and service providers on which they, their families, and their neighbors rely for income and employment. Such research should explore the nexus between rural poverty, unemployment, food insecurity, and small family farm failure, particularly in underrepresented geographies and from the perspective of farmers themselves.

A Purpose-Based Theory of Corporate Law
Raz, Asaf
Modern corporate law scholarship focuses on flexible, normative questions: should multiple-class shares be permitted? To what extent should staggered boards be implemented? Yet, the range of possible answers is constrained by a far more fundamental inquiry: what is a corporation, and what is its purpose? The structure of corporate law â€" the set of economic and doctrinal concepts that attach to every corporation, without exception â€" informs an extremely wide range of practical issues. However, that structure is inadequately addressed in current scholarship, leaving the participants in the corporate law sphere engaged in isolated, ineffective discourse.This Article mainly operates in two scholarly spaces: one is the increasingly salient debate between shareholderists ("shareholder primacy" advocates) and stakeholderists ("corporate social responsibility" advocates). This Article reveals that neither camp actually complies with positive law and normative considerations. The corporation is a separate legal person, not owned by its shareholders, nor having identity of interests with them. Yet, the purpose of the (for-profit) corporation is, and should be, the lawful pursuit of its own economic profit.The second space in which this Article contributes a fresh outlook is the "corporate anatomy" literature. The purpose-based theory of corporate law â€" a unified, ground-level "instructions manual" for what corporate law is and how it differs from other fields â€" delivers a more nuanced understanding of the corporation's anatomy than that suggested by Kraakman et al., and relies on a broader, more substantive definition of what "corporations" include.After an introduction, Part 2 of the Article discusses in great detail the five phenomena that define corporate law: the corporation's purpose, personhood, stakeholders, residual claimants and fiduciaries. As this Article explains, the structure of corporate law places certain boundaries on what our normative analysis can do: for example, due to corporate law's uniquely open-ended nature, it is not possible to rely solely on "contract" when analyzing the corporation's relationships with other parties. At the same time, contrary to some stakeholderist claims, corporate law is also not public law. In short, corporate law has a unique structure of its own, designed to achieve certain economic and societal goals (and greatly succeeding in that). Part 3 applies the theory to three high-currency topics: shareholder activism, corporations' constitutional rights, and the rise of LLCs and other "alternative" corporations. In each case, the purpose-based theory of corporate law produces new, often pointy, conclusions. Part 4 summarizes.Not only is corporate law not "dead," as some commentators are keen on suggesting, it is more important than ever. This Article assembles the puzzle of corporate law.

Are the Combinations of Health Care Sector and T-Bill One of the Best Choices for Investment?
Lv, Zhihui,Chu, Amanda,Chiang, Thomas Chinan,Wong, Wing-Keung
Health care sector plays an increasingly important role in the stock market because it is growing nearly in the entire period and has low correlation with the business cycle. On the other hand, T-Bill is also an important asset in investment because it has positive return and small variance. In this paper, we employ the mean-variance (MV) rules and stochastic dominance (SD) approach to investigate the portfolio performance with and without both health care sector and T-Bill in the US over the period from September 1986 to May 2017. The results show that all the portfolios with health care asset and 6-M TB significantly dominate the corresponding portfolios without health care and 6-M TB, regardless whether short sale is allowed. This study also concludes that the combinations of health care sector and 6-M TB not only reduce risk but also gain better return and all risk-averse investors prefer to invest in portfolios with health care sector and 6-M TB, regardless whether they buy long or sell short the market.By employing the mean-variance (MV) rules and stochastic dominance (SD) approach, this paper investigates the portfolio performance with and without both health care sector and T-Bill in the U.S. market over the period from September 1986 to May 2017. The results show that all the portfolios with health care asset and 6-m TB significantly dominate the corresponding portfolios without health care and 6-m TB, regardless whether short sale is allowed. This study also concludes that the combinations of health care sector and 6-m TB not only reduce risk but also gain better return; all risk-averse investors prefer to invest in portfolios with health care sector and 6-m TB, regardless whether they buy long or sell short the market.

Can You hear the Shape of a Market? Geometric Arbitrage and Spectral Theory
Simone Farinelli,Hideyuki Takada

Geometric Arbitrage Theory reformulates a generic asset model possibly allowing for arbitrage by packaging all assets and their forwards dynamics into a stochastic principal fibre bundle, with a connection whose parallel transport encodes discounting and portfolio rebalancing, and whose curvature measures, in this geometric language, the 'instantaneous arbitrage capability' generated by the market itself. The cashflow bundle is the vector bundle associated to this stochastic principal fibre bundle for the natural choice of the vector space fibre. The cashflow bundle carries a stochastic covariant differentiation induced by the connection on the principal fibre bundle. The link between arbitrage theory and spectral theory of the connection Laplacian on the vector bundle is given by the zero eigenspace resulting in a parametrization of all risk neutral measures equivalent to the statistical one. This indicates that a market satisfies the (NFLVR) condition if and only if $0$ is in the discrete spectrum of the connection Laplacian on the cash flow bundle or of the Dirac Laplacian of the twisted cash flow bundle with the exterior algebra bundle. We apply this result by extending Jarrow-Protter-Shimbo theory of asset bubbles for complete arbitrage free markets to markets not satisfying the (NFLVR). Moreover, by means of the Atiyah-Singer index theorem, we prove that the Euler characteristic of the asset nominal space is a topological obstruction to the the (NFLVR) condition, and, by means of the Bochner-Weitzenb\"ock formula, the non vanishing of the homology group of the cash flow bundle is revealed to be a topological obstruction to (NFLVR), too. Asset bubbles are defined, classified and decomposed for markets allowing arbitrage.

Causes of Non-Performing Loans: The Experience of Gulf Cooperation Council Countries
Farooq, Mohammad Omar,Elseoud, Mohammed,Turen, Seref,Abdulla, Mohamed
As financial intermediaries and provider of financial services, banking sector plays a pivotal role in the development of any economy. Performance of loans in banks’ portfolios is a critical issue for this sector. The purpose of this study is to examine the determinants of Non-Performing Loans in Gulf Cooperation Council region. This study investigates the significant factors determining the Non-Performing Loans in banking sector of this region taking into consideration bank specific as well as macroeconomic factors. Two step Generalized Method of Moments approach to study the relationship among the variables was used to examine the determinants of Non-Performing Loans in this region for a period from 2009 to 2015. Four different models employed as a result of the examination of the theories were used to observe and analyse the determinants of these non-performing loans. According to the findings of the model generated from the bad management hypothesis, Non-performing loans are a serious issue requiring due attention, and bank profitability measured by Return on Average Assets has significant and negative effect on Non-Performing Loans. This suggests that banks in this region have more incentive to increase return by using their assets and effectively managing the funds contributed by the shareholders respectively.

Computing a Data Dividend
Eric Bax

Quality data is a fundamental contributor to success in statistics and machine learning. If a statistical assessment or machine learning leads to decisions that create value, data contributors may want a share of that value. This paper presents methods to assess the value of individual data samples, and of sets of samples, to apportion value among different data contributors. We use Shapley values for individual samples and Owen values for combined samples, and show that these values can be computed in polynomial time in spite of their definitions having numbers of terms that are exponential in the number of samples.

Continuous viscosity solutions to linear-quadratic stochastic control problems with singular terminal state constraint
Ulrich Horst,Xiaonyu Xia

This paper establishes the existence of a unique nonnegative continuous viscosity solution to the HJB equation associated with a Markovian linear-quadratic control problems with singular terminal state constraint and possibly unbounded cost coefficients. The existence result is based on a novel comparison principle for semi-continuous viscosity sub- and supersolutions for PDEs with singular terminal value. Continuity of the viscosity solution is enough to carry out the verification argument.

Corporate Restructuring: Firm Characteristics and Performance
Mat Nor, Fauzias,Alias, Norazlan,Yaacob, Mohd
Theoretically, corporate restructuring is meant to remove firms' operating and financial constraints and improve firms performance. However, corporate restructuring announcement might be interpreted differently by the market. Using event-study method, this study examines the impact of corporate restructuring announcements made by selected firms on their stock prices. Overall, the effect of the restructuring announcements, made by these companies on stock prices was significant while the average two years of return on total assets and return on operating cash flow in the post restructuring period were mixed. Evidence also indicates that debt reduction, refocusing and alignment of interest between management and shareholders through board of directors' ownership do not constitute the main focus for some firms in the post restructuring period.

Correlators of Polynomial Processes
Fred Espen Benth,Silvia Lavagnini

A process is polynomial if its extended generator maps any polynomial to a polynomial of equal or lower degree. Then its conditional moments can be calculated in closed form, up to the computation of the exponential of the so-called generator matrix. In this article, we provide an explicit formula to the problem of computing correlators, that is, computing the expected value of moments of the process at different time points along its path. The strength of our formula is that it only involves linear combinations of the exponential of the generator matrix, as in the one-dimensional case. The framework developed allows then for easy-to-implement solutions when it comes to financial pricing, such as for path-dependent options or in a stochastic volatility models context.

Debt Dynamics and Credit Risk
Feldhütter, Peter,Schaefer, Stephen M.
The dynamics of debt are crucial in structural models of credit risk, and this paper provides a theoretical and empirical examination of these dynamics. Empirically, the future level of debt in US industrial firms is negatively related to current leverage. Furthermore, when a firm experiences a negative shock to it's equity, debt increases in the short run but declines in the long run. We incorporate these dynamics of debt into a structural model of credit risk and compare the term structure of default rates and credit spreads with those in existing models. The model improves the ability to capture the level of credit spreads particularly at short maturities.

Distorting Private Equity Performance: The Rise of Fund Debt
Albertus, James F.,Denes, Matthew
This paper studies the emergence of debt financing by private equity funds. Using confidential data on U.S. buyout funds, we document the increasing use of subscription lines of credit (SLCs) as an additional source of capital. We find that funds using SLCs tend to reduce the amount of equity invested relative to fund size and delay capital calls. Our results suggest that the use of SLCs increases IRR-based performance by 6.1 percentage points, while multiples-based performance slightly declines. Overall, we provide the first evidence on a new source of capital in private equity and its impact on funds.

Do We Need Electronic Stock Dealers?
Aramian, Fatemeh,Norden, Lars L.
Stock dealers are investment firms that trade out of their own inventories by internalizing the trades off exchanges. We analyze the extent to which traders’ stock transactions occur with dealers and the associated costs. Traders face a choice between exchanges’ anonymous trading and high transparency and dealers’ negotiation ability and low transparency. The choice hinges on the trade-off between avoiding price impact and paying low costs for liquidity supply. Our results show that dealer trades have lower price impact, and cost more, than exchange trades. Hence, traders might choose dealers over exchanges to avoid price impact, and they might be willing to pay the associated higher liquidity supply cost. In our analyses, we look to Systematic Internalizers (SIs), who are dealers with slack regulation relative exchanges when it comes to transparency and minimum tick size. We show that dealers’ comparative advantages matter for attracting trade flow.

Dynkin games with incomplete and asymmetric information
Tiziano De Angelis,Erik Ekström,Kristoffer Glover

We study Nash equilibria for a two-player zero-sum optimal stopping game with incomplete and asymmetric information. In our set-up, the drift of the underlying diffusion process is unknown to one player (incomplete information feature), but known to the other one (asymmetric information feature). We formulate the problem and reduce it to a fully Markovian setup where the uninformed player optimises over stopping times and the informed one uses randomised stopping times in order to hide their informational advantage. Then we provide a general verification result which allows us to find Nash equilibria by solving suitable quasi-variational inequalities with some non-standard constraints. Finally, we study an example with linear payoffs, in which an explicit solution of the corresponding quasi-variational inequalities can be obtained.

Employment Effects of Alleviating Financing Frictions: Worker-Level Evidence from a Loan Guarantee Program
Barrot, Jean-Noel,Martin, Thorsten,Sauvagnat, Julien,Vallee, Boris
We document the impact on worker employment trajectories of a countercyclical loan guarantee program aiming at mitigating financing frictions for SMEs. Our identification strategy exploits plausibly exogenous heterogeneity in policy generosity between French regions, interacted with a geographical regression discontinuity design. We show that the guarantees result in a significantly higher likelihood of being employed over the seven years following the intervention, which translates into significantly higher cumulated earnings. The program benefits disproportionately high wage, male and younger workers, due to both differences in retention decisions by the initial employer and differences in labor market frictions for these populations. We estimate the gross cost to preserve a job(-year) to be around EUR 3,200, and a negative net cost when we include the savings on unemployment benefits.

Financial Constraints versus Financial Flexibility: What Drives Zero-Debt Puzzle in Emerging Markets?
Iliasov, Denys,Kokoreva, Maria
This study is focused on gaps in the theory of capital structure research regarding the phenomenon of zero-debt behavior. On the sample of firms from 21 countries with emerging capital markets over the period of 2010â€"2015, we show that the zero-debt policy choice is firstly driven by financial flexibility motive, while financial constraints could be regarded as the second motive. We show that major determinants of the zero-leverage choice are growth opportunities, profitability, business risk and cash holdings. We find that all these firms are smaller, less profitable, riskier and possess high cash holdings. Moreover, we find that macroeconomic conditions have lower influence on the debt policy decision in comparison with corporate determinants.

Financing for the Polish Economy: Prospects and Threats (Finansowanie polskiej gospodarki: perspektywy i zagrożenia)
Halesiak, Andrzej,Pytlarczyk, Ernest,Kawalec, Stefan,Więckowski, Mariusz
English Abstract: In a properly functioning economy, finance has important role to play in making main sectors of the economy â€" production, trade, services â€" to thrive. One of the most important â€" and often unappreciated â€" channels by which finance affects the processes taking place in the real sector is the selection of investment projects. It is banks and financial intermediaries that to a great degree decide which projects are carried out in the economy at a given moment, and which are not. If financial institutions are excessively conservative (which today is often an effect of the tight regulatory environment), they will prefer low-risk projects with high levels of collateral (e.g. mortgage loans). A financial system oriented this way will rarely be a source of problems, but at the same time not inclined to finance innovative projects with high potential to benefit the economy. Thus for any economy, a very important question is whether its regulatory framework smartly balances both of these aspects: financial system safety and the need to take on risk.When analyzing the functioning of the financial system, it’s worth noting the gradual blurring of certain traditional boundaries. While decades ago households were the main source of savings in the economy, and the borrowers were enterprises and the public sector, today both households and companies are on both sides, as suppliers and receivers of capital. The boundary between the functioning of banks and capital markets is also increasingly blurred. Today banks operate broadly through the capital market, both as acquirers of securities and as issuers.One area that has been developing dynamically in recent years is the flow of financial resources bypassing traditional intermediaries: direct lending through the peer-to-peer (P2P - direct financing of a project by business partners) and crowdfunding platforms (fundraising by collecting money online).Polish Abstract: W dobrze funkcjonujÄ…cej gospodarce finanse majÄ… przede wszystkim charakter wspierajÄ…cy â€" umożliwiajÄ… rozwój produkcji, handlu, usÅ‚ug itd. Jednym z najbardziej istotnych â€" a czÄ™sto niedocenianych - kanałów poprzez który oddziaÅ‚ujÄ… one na procesy zachodzÄ…ce w sferze realnej, jest do­konywanie przez instytucje finansowe selekcji projektów inwestycyjnych. To wÅ‚aÅ›nie banki i poÅ›rednicy finansowi w dużej mierze decydujÄ… o tym, które projekty sÄ…, a które nie sÄ… w gospodarce w danym momencie realizowane. JeÅ›li instytucje finansowe charakteryzuje nadmierny konserwa­tyzm (w dzisiejszych czasach czÄ™sto pochodna ograniczeÅ„ regulacyjnych), to bÄ™dÄ… preferować bezpieczne projekty o wysokim poziomie zabezpieczeÅ„ (np. kredyty hipotecz­ne). Tak ukierunkowany system finansowy nie bÄ™dzie z re­guÅ‚y źródÅ‚em problemów, ale równoczeÅ›nie nie bÄ™dzie też skÅ‚onny finansować innowacyjnych projektów o dużym po­tencjale korzyÅ›ci dla gospodarki. Dlatego też bardzo istot­nÄ… kwestiÄ… z punktu widzenia danej gospodarki jest to, aby tworzone w niej ramy regulacyjne umiejÄ™tnie wyważaÅ‚y oba te aspekty: bezpieczeÅ„stwo i potrzebÄ™ ponoszenia ryzyka.AnalizujÄ…c funkcjonowanie systemu finansowego warto zwrócić uwagÄ™ na kwestiÄ™ stopniowego zacierania siÄ™ nie­których tradycyjnych granic. O ile jeszcze kilkadziesiÄ…t lat temu głównym źródÅ‚em oszczÄ™dnoÅ›ci w gospodarce byÅ‚y gospodarstwa domowe, a pożyczkobiorcami przedsiÄ™bior­stwa i sektor publiczny, to obecnie zarówno gospodarstwa jak i firmy wystÄ™pujÄ… z reguÅ‚y po obu stronach â€" jako do­stawcy i biorcy kapitaÅ‚u. Coraz bardziej rozmywa siÄ™ także granica pomiÄ™dzy funkcjonowaniem banków, a rynku kapi­taÅ‚owego â€" dziÅ› banki powszechnie dziaÅ‚ajÄ… poprzez rynek kapitaÅ‚owy, zarówno jako nabywcy papierów wartoÅ›cio­wych, jak też ich emitenci.RozwijajÄ…cy siÄ™ w dynamicznie w ostatnich latach obszar, to przepÅ‚yw Å›rodków finansowych z pominiÄ™ciem tradycyj­nych poÅ›redników: pożyczanie w ramach rozwiÄ…zaÅ„ takich, jak peer-to-peer (P2P - bezpoÅ›rednie finansowanie projektu przez partnerów bizne­sowych), czy crowdfunding (finansowanie konkretnego projektu przez spo­łeczność, w formie zwykle internetowej zbiórki pieniÄ™dzy).

Hybrid symbiotic organisms search feedforward neural network model for stock price prediction
Bradley J. Pillay,Absalom E. Ezugwu

The prediction of stock prices is an important task in economics, investment and financial decision-making. It has for several decades, spurred the interest of many researchers to design stock price predictive models. In this paper, the symbiotic organisms search algorithm, a new metaheuristic algorithm is employed as an efficient method for training feedforward neural networks (FFNN). The training process is used to build a better stock price predictive model. The Straits Times Index, Nikkei 225, NASDAQ Composite, S&P 500, and Dow Jones Industrial Average indices were utilized as time series data sets for training and testing proposed predic-tive model. Three evaluation methods namely, Root Mean Squared Error, Mean Absolute Percentage Error and Mean Absolution Deviation are used to compare the results of the implemented model. The computational results obtained revealed that the hybrid Symbiotic Organisms Search Algorithm exhibited outstanding predictive performance when compared to the hybrid Particle Swarm Optimization, Genetic Algorithm, and ARIMA based models. The new model is a promising predictive technique for solving high dimensional nonlinear time series data that are difficult to capture by traditional models.

Information Content of Option Prices: Comparing Analyst Forecasts to Option-Based Forecasts
Sanford, Anthony
Finance researchers keep producing increasingly complex and computationally-intensive models of stock returns. Separately, professional analysts forecast stock returns daily for their clients. Are the sophisticated methods of researchers achieving better forecasts or are we better off relying on the expertise of analysts on the ground? Do the two sets of actors even capture the same information? In this paper, I hypothesize that analyst forecasts and forecasts constructed using option prices will be different because they draw on different information sets. Using hypothesis tests and quantile regressions, I find that option-based forecasts are statistically significantly different from analyst forecasts at every level of the forecast distribution. Then, using cross-sectional regressions, I show that this difference originates in the distinct information sets used to create the forecasts: option based forecasts incorporate information about the probability of extreme events while analyst forecasts focus on information about firm and macroeconomic fundamentals.

Inherent Instability: Scenario-Free Analysis of Financial Systems with Interacting Contagion Channels
Wiersema, Garbrand,Kleinnijenhuis, Alissa M.,Wetzer, Thom,Farmer, J. Doyne
Currently financial stress test simulations that take into account multiple interacting contagion mechanisms are conditional on a specific, subjectively imposed stress-scenario. Eigenvalue-based approaches, in contrast, provide a scenario-independent measure of systemic stability, but only handle a single contagion mechanism. We develop an eigenvalue-based approach that gives the best of both worlds, allowing analysis of multiple, interacting contagion channels without the need to impose a subjective stress scenario. This allows us to demonstrate that the instability due to interacting channels can far exceed that of the sum of the individual channels acting alone. We derive an analytic formula in the limit of a large number of institutions that gives the instability threshold as a function of the relative size and intensity of contagion channels, providing valuable insights into financial stability whilst requiring very little data to be calibrated to real financial systems.

Machine Learning on EPEX Order Books: Insights and Forecasts
Simon Schnürch,Andreas Wagner

This paper employs machine learning algorithms to forecast German electricity spot market prices. The forecasts utilize in particular bid and ask order book data from the spot market but also fundamental market data like renewable infeed and expected demand. Appropriate feature extraction for the order book data is developed. Using cross-validation to optimise hyperparameters, neural networks and random forests are proposed and compared to statistical reference models. The machine learning models outperform traditional approaches.

Market Making under a Weakly Consistent Limit Order Book Model
Baron Law,Frederi Viens

We develop from the ground up a new market-making model tailor-made for high-frequency trading under a limit order book (LOB), based on the well-known classification of order types in market microstructure. Our flexible framework allows arbitrary volume, jump, and spread distributions as well as the use of market orders. It also honors the consistency of price movements upon arrivals of different order types (e.g. price never goes down on buy market order) in addition to respecting the price-time priority of LOB. In contrast to the approach of regular control on diffusion as in the classical Avellaneda and Stoikov market-making framework, we exploit the techniques of optimal switching and impulse control on marked point processes, which have proven to be very effective in modeling the order-book features. The Hamilton-Jacobi-Bellman quasi-variational inequality (HJBQVI) associated with the control problem can be solved numerically via the finite-difference method. We illustrate our optimal trading strategy with a full numerical analysis, calibrated to the order-book statistics of a popular ETF. Our simulation shows that the profit of market-making can be seriously overstated under LOBs with inconsistent price movements.

Nowcasting Recessions using the SVM Machine Learning Algorithm
Alexander James,Yaser S. Abu-Mostafa,Xiao Qiao

We introduce a novel application of Support Vector Machines (SVM), an important Machine Learning algorithm, to determine the beginning and end of recessions in real time. Nowcasting, "forecasting" a condition about the present time because the full information about it is not available until later, is key for recessions, which are only determined months after the fact. We show that SVM has excellent predictive performance for this task, and we provide implementation details to facilitate its use in similar problems in economics and finance.

Peer Effect on Consumer Default Decision: Evidence From Online Lending Platform
Li, Emma,Liao, Li,Wang, Zhengwei,Wang, Xincheng
The existence of peer effect on financial decision is well documented in the literature. However, little is known about the peer effect on default choice of consumer credit. We fill this gap by using a novel data and research design constructed from a cash loan platform in China. We find the default decision of the peers who defaulted before the default of the borrower can predict the default choice of borrower. The likelihood of default of the borrower increases by approximately 16% as one more “Before” peers who has defaulted. However, the number of “After” peers is not significantly correlated with the default choice of borrower. The results provide evidence on the casual effect of peers default decision on borrower’s default decision and mitigate the effect from the similarity effect shared between borrowers and their peers.

Profitability of Insurance Brokerage Firms in Ghana
Owusu-Sekyere, Franklin,Kotey, Richard
The financial industry is growing up rapidly, enabling large volumes of transactions to be carried out. This growth has significantly increased the demand for insurance and insurance products. Though prior studies have examined the factors that drive the performance of the insurance industry from life and non-life perspective, not much attention had been given to the contribution of insurance brokers who perform key roles in the insurance sector. This study examined the factors that determine the profitability of insurance brokers in a developing economy, Ghana. Panel data from 64 insurance brokerage firms were sampled over a period of 5 years (2011 to 2015). The study adopted a fixed effects and random effects estimation model using robust standard errors to check for biases. We found that monetary assets and firm size positively affects returns (ROA and ROE) whilst debt and fixed assets had a negative effect on returns. Comparing monetary assets and size, size contributed more to profitability. The study recommends that government, policymakers, and other stakeholders adopt competent growth and development strategies to ensure the sector is more resourced.

Revisiting Feller Diffusion: Derivation and Simulation
Ranjiva Munasinghe,Leslie Kanthan,Pathum Kossinna

We propose a simpler derivation of the probability density function of Feller Diffusion using the Fourier Transform and solving the resulting equation via the Method of Characteristics. We also discuss simulation algorithms and confirm key properties related to hitting time probabilities via the simulation.

Risk measures with markets volatility
Fei Sun,Yijun Hu

Since the risk in financial markets has become much more uncertain and volatile than before, the usual risk measures may be limited when dealing with the risk management. In this paper, we will study several classes of risk measures on a special space $L^{p(\cdot)}$ where the variable exponent $p(\cdot)$ is no longer a given real number like the space $L^{p}$, but a random variable, which reflects the possible volatility of the financial markets. The dual representations for them are also provided.

Short Sellers and Managerial Equity Market Timing
Mishra, Suchi,Öztekin, Özde,Rahman, Anisur
Managers tend to issue equity when a firm is overvalued. Short selling is generally frequent among overvalued firms. By conditioning short selling on firm overvaluation, we show that short selling reduces managerial equity market timing and increases leverage. This moderating impact of short selling on market timing is more pronounced in firms with independent boards, suggesting that board independence facilitates the incorporation into financing decisions of important adverse information embedded in short selling. Furthermore, this impact is more pronounced in firms with an increased likelihood of misvaluation â€" smaller firms, firms with low institutional ownership, and firms with higher intangible assets. The decomposition of market-to-book ratio into misvaluation and growth components shows that the moderating effect of short selling is related to a firm’s overvaluation relative to its long-run value. These results are robust to a quasi-natural experiment utilizing an exogenous shock to the short-selling environment created by the SEC’s Reg SHO pilot program.

Singularity Bias, Systemic Risk and Credit Indexes
Cherubini, Umberto,Gobbi, Fabio,Mulinacci, Sabrina
Singular distributions, such as the Marshall-Olkin one, assign a probability mass to the simultaneous occurrence of events. Aim of this paper is to: i) evaluate the presence of a singular component in the joint default distribution of financial institutions; ii) provide systemic risk measures based on singular distributions; iii) evaluate the impact on the systemic measure of the use of absolutely continuous distributions if the true distribution is singular (we call this singularity bias). The analysis is carried out in a set of hidden common shocks models with Archimedean dependence for which the simultaneous shock intensity is proportional to the CDS credit index of the banks involved, a key feature to define a test of the presence of a singularity. The model is applied to a panel of European banks in the sovereign crisis period and after the crisis, and the specification test based on credit indexes shows clear evidence of the presence of a singular component during the crisis, while this hypothesis is rejected at the 10% probability level in the post crisis period. In the crisis period we evaluate the impact of the singularity bias on two measures representative of the actuarial approach to systemic risk. The singularity bias induces a severe underestimation of last-to-default systemic risk measures, while the sign and magnitude of the effect is more difficult to predict for measures that take into account the default of all subsets of banks.

Tenor-Based Interest Rate Term Structures: Roll-Over Risk Perspective
Backwell, Alex,Macrina, Andrea,Schlogl, Erik,Skovmand, David
Modelling the risk that a financial institution may not be able to roll over short-term borrowing at the market reference rate, we derive the dynamics of (interbank) reference term rates (e.g., LIBOR) and their spread vis-aÌ€-vis benchmarks based on overnight reference rates, e.g., rates implied by overnight index swaps (OIS). This is particularly relevant to the current debate around the transition of replacing the former by the latter. The model endogenously generates different interest rate term structures for each tenor, that is, for each different choice of the length of the interest rate accrual period, be it overnight (e.g., OIS), threeâ€"month LIBOR, sixâ€"month LIBOR, etc. We show that it can be calibrated simultaneously to available market instruments at a particular point in time, and the model interpolates the market for basis spreads of different tenors well, giving confidence for the use of the model to price bespoke tenors relative to the market.

The Black-Scholes Equation in Presence of Arbitrage
Simone Farinelli,Hideyuki Takada

We apply Geometric Arbitrage Theory to obtain results in Mathematical Finance, which do not need stochastic differential geometry in their formulation. First, for a generic market dynamics given by a multidimensional It\^o's process we specify and prove the equivalence between (NFLVR) and expected utility maximization. As a by-product we provide a geometric characterization of the (NUPBR) condition given by the zero curvature (ZC) condition. Finally, we extend the Black-Scholes PDE to markets allowing arbitrage.

The Business-Model ‘Flag’: A Visualization Tool for Pitching Financials
Wagner, Rodrigo Andres
This paper offers a new visualization for business-plan pitching, teaching, and presentation. The model uses the standard economics plot of quantity vs price and the diagram takes the shape of a flag. The flag’s total area represents Revenues and different portions of the flag conveniently accommodate fixed and variable costs, leaving profits as a residual income. The model complements existing frameworks for business modeling (e.g. Business Model Canvas) because it allows for a quick visual differentiation of the quantitative assumptions of the business, and their implications for profit and growth narratives. The framework is grounded on the basic economics and accounting (i.e. Cost-Volume-Profit) of the business and its environment, but at the same time, it serves as a map for discussion. Among other things, the framework visualizes breakeven and demand, re-centering the conversation on the basic arithmetic of where profits would come from. This creates some discipline against the excess of “smoke and mirrors” and buzzwords in pitches. The visual nature of the model helps quickly communicate the business rationale to team members and experts that do not specialize in the financials, but that can give useful feedback. The model allows for quick visual simulation of how changes in assumptions would affect profitability. The paper discusses different applications to new ventures, international expansions, marketing investments and even non-profits.

The Debt-Equity Choice When Regulatory Thresholds are Based on Equity Values: Evidence from SOX 404
Weber, David P.,Yang, Yanhua Sunny Sunny
When larger market values of equity result in being subject to costly regulation, firms have incentives to shift their sources of financing toward debt and away from equity. We use the Sarbanes-Oxley Act of 2002 (SOX) as a setting to provide evidence of such incentives. Smaller firms were granted several reprieves and eventually exempted from the internal control audit requirements of SOX Section 404, which many consider the most costly and onerous aspect of SOX. Using a difference-in-differences design, we show that relative to control firms, firms just below the regulatory threshold have increased propensities to issue debt, decreased propensities to issue equity, and increased leverage levels in the post-SOX period. These results are consistent with firms altering their financing choices to maintain their exempt status and demonstrate an economic consequence of regulatory regimes that are tiered by equity values.

The Development of FinTech. Opportunities and Risks for the Financial Industry in the Digital Age - With Preface to the Series Dedicated to FinTech
Giuseppe, D'Agostino,Munafò, Pasquale,Schena, Cristiana,Tanda, Alessandra,Arlotta, Carlo,Potenza, Gianluca
FinTech is a new part of the financial industry that is radically innovating the way financial services are built and offered. In this paper, we analyse FinTech characteristics, their activities and related risks, highlighting analogies and differences in the activities performed by the financial intermediaries and the financial markets that are subject to specific regulation. In general, the study underlines the opportunity to pursue an effective balance between the urge to stimulate innovation and competition in the financial markets to bring benefits to the customers, on the one hand, and the need to ensure market stability both at micro and macro-level, transparency and fairness towards customers, as well as the prevention of unlawful activities, on the other hand. Additionally, the paper provides an overview of the main strategies that incumbents are following in the new market conditions.

The Economic Explanation Behind the Skyscraper Race
Since the twenty-first century, China has led the world in the number and height of skyscraper construction. Facing the increasingly fierce skyscrapers competition, researchers give different explanations from the perspectives of urban planning, architecture, culturology and so on. Through literature review and summary, the paper explains the motivation and mechanism behind the competition from four economic perspectives of land rent and land price, business cycle, game theory as well as capital flow, to provide reference for the reasonable and orderly construction of skyscraper.

The Economics of Investor-Paid Credit Rating Agencies
Bongaerts, Dion
I model direct competition between investor-paid and issuer-paid credit rating agencies (CRAs). Frictions in the form of issuer private benefits induce issuer-paid CRAs to inflate ratings. Investor-paid CRAs optimally generate more accurate ratings, leading to adverse selection for investors that do not purchase these ratings. Yet, rating fees being sunk costs for investors, the endogenous response of issuers and issuer-paid CRAs, and endogenous free-riding by other investors prevent investor-paid ratings from dominating in equilibrium. Consequently, producing investor-paid ratings reduces welfare due to redundant information production. My results conform to several empirical regularities.

The Effects of Regulating Benchmarks
Aquilina, Matteo,Pirrone, Andrea
In financial markets, dealers may take advantage of information asymmetries and extract a rent from buy-side traders. We show that an increase in the precision of a benchmark reduces noise in market prices and increases partic- ipation by overcoming traders’ and regulators’ inability to penalize dealers sufficiently.

The Impact of Uncertainty and Certainty Shocks
Schüler, Yves Stephan
I identify uncertainty shocks within a novel Bayesian quantile VAR, unifying Bloom's (2009) two identification steps into one. I find that uncertainty shocks are at least three times more important for the macroeconomy relative to the two-step identification. Exactly opposite to uncertainty shocks, I identify certainty shocks and show that uncertainty and certainty shocks differ. While uncertainty shocks persistently depress real activity (explaining up to 25.8% of its fluctuations), certainty shocks temporarily raise real activity before subsequently suppressing it, erasing almost entirely its previous gains (explaining around 0.4% of its fluctuations). Furthermore, while uncertainty shocks occur, for instance, at the Bloom (2009) dates of uncertainty, events associated with certainty shocks are often reminiscent of irrational exuberance. The distinction between uncertainty and certainty shocks suggests that a range of studies is at risk of recovering incorrect dynamic responses to uncertainty shocks.

The Nexus of Safe Asset Shortage, Credit Growth and Financial Instability
Kim, Sujin
Does a shortage of safe assets sow the seeds of instability of financial system? This paper empirically explores the hypothesis of safe asset shortage-induced excess credit booms and financial instability. As an alternative step forward from the assumption of growth- or wealth-based demand for safe assets, the study underlines demographic factors as a main determinant of safe asset demand. Based on the long-run trends of aging and government debt, I newly construct a safe asset shortage index. Using the index, the consecutive empirical exercises confirm the positive relationship of safe asset shortage-credit expansion-aggregate risks of financial system. The estimation of the crisis probabilistic model for 17 advanced economies in 1970-2013 presents new evidence that the (high) level of private credit at a time of increasing safe asset shortage is the major predictor of financial crises. The fixed-effect panel analysis results for 18 advanced countries in 1980-2016 also show a significant, positive contribution of safe asset shortage to credit growth. The total effect of the shortage depends positively on securitization growth and negatively on net capital outflows. The latter effect is considerably dominant.