Research articles for the 2019-07-01

A Revision of the Merton Jump-Diffusion Model: A Simple, Closed-Form Formula
Alghalith, Moawia
In this paper, we show that the Merton jump-diffusion model and formula are needlessly cumbersome. In doing so, we provide a far simpler, closed-form formula that doesn't require a computational method.

A Tale of Two Consequences: Intended and Unintended Outcomes of the Japan TOPIX Tick Size Changes
Ravi Kashyap

We look at the effect of the tick size changes on the TOPIX 100 index names made by the Tokyo Stock Exchange on Jan-14-2014 and Jul-22-2104. The intended consequence of the change is price improvement and shorter time to execution. We look at security level metrics that include the spread, trading volume, number of trades and the size of trades to establish whether this goal is accomplished. An unintended effect might be the reduction in execution sizes, which would then mean that institutions with large orders would have greater difficulty in sourcing liquidity. We look at a sample of real orders to see if the execution costs have gone up across the orders since the implementation of this change.

We study the mechanisms that affect how securities are traded on an exchange, before delving into the specifics of the TSE tick size events. Some of the topics we explore are: The Venue Menu and How to Increase Revenue; To Automate or Not to Automate; Microstructure under the Microscope; The Price of Connections to High (and Faraway) Places; Speed Thrills but Kills; Pick a Size for the Perfect Tick; TSE Tick Size Experiments, Then and Now; Sergey Bubka and the Regulators; Bird`s Eye View; Deep Dive; Possibilities for a Deeper Dive; Does Tick Size Matter? Tick Size Does Matter!

A weighted finite difference method for subdiffusive Black Scholes Model
Grzegorz Krzyżanowski,Marcin Magdziarz,Łukasz Płociniczak

In this paper we focus on the subdiffusive Black Scholes model. The main part of our work consists of the finite difference method as a numerical approach to the option pricing in the considered model. We derive the governing fractional differential equation and the related weighted numerical scheme being a generalization of the classical Crank-Nicolson scheme. The proposed method has $2-\alpha$ order of accuracy with respect to time where $\alpha\in(0,1)$ is the subdiffusion parameter, and $2$ with respect to space. Further, we provide the stability and convergence analysis. Finally, we present some numerical results.

Affine realizations with affine state processes for stochastic partial differential equations
Stefan Tappe

The goal of this paper is to clarify when a stochastic partial differential equation with an affine realization admits affine state processes. This includes a characterization of the set of initial points of the realization. Several examples, as the HJMM equation from mathematical finance, illustrate our results.

Analisis Perbandingan Risiko dan Tingkat Pengembalian Reksadana Syariah dan Reksadana Konvensional (Comparison of Risk and Level of Returns of Conventional Sharia and Consequences)
Yazir, Abdul Gani,, Suhardi
Indonesian Abstract: Penelitian ini bertujuan untuk mengetahui perhitungan risiko dan tingkat pengembalian PNM Amanah Syariah dan PNM Dana Sejahtera II dan untuk memberikan bukti empiris bahwa ada antara kinerja reksa dana syariah dan indeks syariah (indeks JII), antara kinerja reksa dana konvensional dan indeks konvensional indeks LQ45), dan juga antara kinerja reksa dana syariah dan reksa dana konvensional. Ini menggunakan metode deskriptif dengan studi banding dan menggunakan analisis statistik seperti independent sample t-test, paired sample t-test, dan analisis regresi sederhana untuk menguji hipotesis. Data dalam bentuk nilai aset bersih per unit partisipasi (NAV / unit), Indeks Harga Saham Gabungan (IHSG), Indeks Islam Jakarta (JII), Indeks LQ45 harian, suku bunga Sertifikat Bank Indonesia (SBI), dan Sertifikat Wadiah Bank Indonesia (SWBI) atau Sertifikat Bank Indonesia syariah (SBIS). Hasil hipotesis pertama menunjukkan bahwa dari tahun 2008 hingga 2010 rata-rata pengembalian reksa dana syariah dan indeks syariah JII identik atau serupa, tetapi rata-rata risiko variabel-variabel tersebut adalah sebaliknya. Hipotesis kedua menghasilkan bahwa dari tahun 2008 hingga 2010, pengembalian rata-rata reksa dana konvensional dan indeks LQ45 konvensional identik atau serupa, tetapi risiko rata-rata reksa dana konvensional dan indeks LQ45 konvensional adalah sebaliknya. Sementara hasil hipotesis ketiga dari 2008 hingga 2010 rata-rata pengembalian dan risiko reksa dana syariah dan reksa dana konvensional identik atau serupa kecuali pada tahun 2010, rata-rata risiko variabel tidak identik atau serupa. Berdasarkan angka indeks Sharpe, indeks Treynor, dan Indeks Jensen, hipotesis ketiga menunjukkan bahwa kinerja reksa dana syariah lebih baik daripada kinerja reksa dana konvensional. Kemudian, melalui model Jensen hipotesis ini juga menghasilkan kinerja reksa dana syariah lebih baik daripada kinerja pasar dan reksa dana konvensional sehingga dapat disimpulkan semakin tinggi kelebihan pengembalian pasar, semakin tinggi kelebihan pengembalian reksa dana portofolio dan sebaliknya, dengan mengasumsikan variabel lainnya konstan.English Abstract: This study aims to determine risk calculation and rate of return PNM Amanah Sharia and PNM Dana Sejahtera II, and to provide empirical evidence that there are between the performance of sharia mutual fund and sharia index (JII index), between the performance of conventional mutual fund and conventional index LQ45 index), and also between the performance of sharia mutual fund and conventional mutual fund. It applies descriptive method with the comparative study and uses statistical analysis such as independent sample t-test, paired sample t-test, and simple regression analysis to test the hypotheses. Data is in the form of net asset value per unit of participation (NAV/unit), Combined Stock Price Index (IHSG), Jakarta Islamic Index (JII), daily LQ45 Index, the interest rate of Bank Indonesia Certificates (SBI), and Wadiah Certificate of Bank Indonesia (SWBI) or Certificate of Bank Indonesia sharia (SBIS). The results of the first hypothesis show that from 2008 to 2010 the average of return of sharia mutual fund and JII sharia index is identical or similar, but the average of the risk of those variables is vice versa. The second hypothesis yields that from 2008 to 2010 the average return of the conventional mutual fund and conventional LQ45 index is identical or similar, but the average risk of conventional mutual fund and conventional LQ45 index is vice versa. While the third hypothesis results from 2008 to 2010 the average of return and risk of sharia mutual fund and conventional mutual fund are identical or similar except in 2010, the average of the risk of the variables is not identical or similar. Based on Sharpe index figures, Treynor index, and Jensen Index, the third hypothesis indicates that the performance of sharia mutual fund is better than the performance of the conventional mutual fund. Then, through the Jensen model this hypothesis also yields the performance of sharia mutual fund is better than the market performance and the conventional mutual fund so that it can be concluded the higher the excess of market return, the higher the excess of return of mutual fund portfolio and vice versa, by assuming the other variables are constant.

Bankalarda İç Kontrol ve İç Denetim Faaliyetlerinin Eşgüdümü: Şube Denetim Faaliyetleri Üzerine Bir İnceleme (Coordination of Internal Control and Internal Audit Activities in Banks: An Examination Upon Branch Audit Activities)
Kartal, Mustafa Tevfik,Çoban Çelikdemir, Neşe
Turkish Abstract: Bankalarda güvence sağlayan iç ve dış taraflarca gerçekleştirilen birçok denetim çalışması bulunmaktadır. Bu denetim çalışmalarının birçoğu genel müdürlük bölümlerine, bankacılık süreçlerine ve bilgi sistemlerine odaklanmaktadır. Ek olarak, bankacılıkta denetim açısından önemli bir alanı ise şubelerdir. Türkiye’de 2018 yılsonu itibarıyla 11.565 banka şubesi bulunmaktadır. Banka şubelerinde bir günde milyarlarca işlem gerçekleştirilmektedir. Bu nedenle, bankacılıkta şube denetimi özel önem verilmesi gereken bir alan olarak ortaya çıkmaktadır. Banka şubelerinin etkin denetimi için güvence sağlayan tüm iç tarafların çalışmalarının birbirleri ile uyumlu olması, kaynakların ve denetim faaliyetlerinin eşgüdüm içinde ve uyum yaklaşımıyla yürütülmesi gerekmektedir. Böylece, her gün sayısız işlemin gerçekleştirildiği banka şubelerinde risk seviyesi minimize edilebilecektir. Bu çalışmada bankacılıkta şube denetimine ilişkin denetim çerçevesinin ortaya konulması amaçlanmak birlikte şube denetiminde dikkat edilmesi gereken hususlar vurgulanmış ve şube denetimi üzerine bir örneğe yer verilmiştir. English Abstract: There are a variety of audit works executed by internal and external assurance providers in banks. Most of these audit works focuses on head office departments, banking process and information system. In addition, one of the most important areas in banking is branch audit. There are 11,565 bank branches in Turkey as of 2018 year end. Billions transactions are made on each day in bank branches. For this reason, branch audit in banking is one area that should be given special attention. All audit works provided by internal assurance providers should be compliant with each other, resources and audit activities should be executed with coordination and harmonious approach in order to efficient audit of bank branches. Hence, risk level at bank branches, at where countless transactions are practiced each day, could be minimized. This paper is prepared to exhibit audit framework regarding branch audit in banking. In addition, critical points that should be taken into consideration in branch audits are addressed and one example regarding branch audit is exemplified.

Bilateral Defaultable Financial Derivatives Pricing and Credit Valuation Adjustment
Xiao, Tim
The one-side defaultable financial derivatives valuation problems have been studied extensively, but the valuation of bilateral derivatives with asymmetric credit qualities is still lacking convincing mechanism. This paper presents an analytical model for valuing derivatives subject to default by both counterparties. The default-free interest rates are modeled by the Market Models, while the default time is modeled by the reduced-form model as the first jump of a time-inhomogeneous Poisson process. All quantities modeled are market-observable. The closed-form solution gives us a better understanding of the impact of the credit asymmetry on swap value, credit value adjustment, swap rate and swap spread.

Borsa İstanbul’da Haftaiçi Anomalisi üzerine bir İnceleme (A Study on the Day of the Week Anomalies at Borsa Istanbul)
Aliyev, Dr. Fuzuli,Gamarli, Nigar
Turkish Abstract: Bu çalışmada, Borsa İstanbul’da (BIST) hafta içi günleri anomalilerinin gözlenip gözlenmediği araştırılmıştır. Bu amaçla 2015 yılı itibariyle 52 haftalık BIST 100 endeksi elde edilmiştir. Bu anomali üzerine pek çok çalışma olmasına rağmen, genelde Pazartesi günü ve Ocak ayı etkileri incelenmiştir. Bu çalışmada hafta içi günlerinin ortalamasının her bir günün ayrı ayrılıkla diğer hafta içi günlerinin ortalamasından farklı olup olmadığı test edilmiştir. Burada öncelikle konu ile ilgili literatür taraması yapılmış, sonra ise ampirik bir çalışma gerçekleştirilmiştir. Çalışmanın ampirik bölümünde Eviews programı kullanılmış, t-testi uygulanmıştır. Analiz sonuçlarına göre, 2015 yılına dair veri setimizde anomali görülmemiştir.English Abstract: This paper investigates the presence of day-of-the-week anomalies on the daily returns at Istanbul Stock Exchange (ISE). Daily returns on BIST 100 index have been obtained for the year 2015. Although several writers have examined this anomaly so far, in general Monday and January effects have been investigated. In this paper the average of the each weekday different from the average of other weekdays has been tested. Initially, previous studies related to this anomaly have been summarized and after that an empirical study has been performed. In the empirical part of the paper Eviews program was used and t-test was performed. According to the results, in our data set for the year 2015 the day-of-the week anomalies haven't been observed.

Branching Particle Pricers with Heston Examples
Michael A. Kouritzin,Anne MacKay

The use of sequential Monte Carlo within simulation for path-dependent option pricing is proposed and evaluated. Recently, it was shown that explicit solutions and importance sampling are valuable for efficient simulation of spot price and volatility, especially for purposes of path-dependent option pricing. The resulting simulation algorithm is an analog to the weighted particle filtering algorithm that might be improved by resampling or branching. Indeed, some branching algorithms are shown herein to improve pricing performance substantially while some resampling algorithms are shown to be less suitable in certain cases. A historical property is given and explained as the distinguishing feature between the sequential Monte Carlo algorithms that work on path-dependent option pricing and those that do not. In particular, it is recommended to use the so-called effective particle branching algorithm within importance-sampling Monte Carlo methods for path-dependent option pricing. All recommendations are based upon numeric comparison of option pricing problems in the Heston model.

Building Diversified Portfolios that Outperform Out-of-Sample
Lopez de Prado, Marcos
This paper introduces the Hierarchical Risk Parity (HRP) approach. HRP portfolios address three major concerns of quadratic optimizers in general and Markowitz’s CLA in particular: Instability, concentration and underperformance.HRP applies modern mathematics (graph theory and machine learning techniques) to build a diversified portfolio based on the information contained in the covariance matrix. However, unlike quadratic optimizers, HRP does not require the invertibility of the covariance matrix. In fact, HRP can compute a portfolio on an ill-degenerated or even a singular covariance matrix, an impossible feat for quadratic optimizers. Monte Carlo experiments show that HRP delivers lower out-of-sample variance than CLA, even though minimum-variance is CLA’s optimization objective. HRP also produces less risky portfolios out-of-sample compared to traditional risk parity methods.A presentation can be found at

Detailed study of a moving average trading rule
Fernando F. Ferreira,A. Christian Silva,Ju-Yi Yen

We present a detailed study of the performance of a trading rule that uses moving average of past returns to predict future returns on stock indexes. Our main goal is to link performance and the stochastic process of the traded asset. Our study reports short, medium and long term effects by looking at the Sharpe ratio (SR). We calculate the Sharpe ratio of our trading rule as a function of the probability distribution function of the underlying traded asset and compare it with data. We show that if the performance is mainly due to presence of autocorrelation in the returns of the traded assets, the SR as a function of the portfolio formation period (look-back) is very different from performance due to the drift (average return). The SR shows that for look-back periods of a few months the investor is more likely to tap into autocorrelation. However, for look-back larger than few months, the drift of the asset becomes progressively more important. Finally, our empirical work reports a new long-term effect, namely oscillation of the SR and propose a non-stationary model to account for such oscillations.

Determinants of Corporate Governance Practices in Brazil: 2010 to 2014
De Carvalho, Antonio Gledson ,Dal'Bó, Filipe,Sampaio, Joelson Oliveira
We study the determinants of corporate governance (CG) practices in Brazil between 2010 and 2014. We build CG subindices for Board Structure, Board Procedures, Minority Shareholders Rights, and Disclosure, and an overall CG index, BCGI, computed as the average of these four subindices. During our sample period, CG practices changed significantly: improvement was stronger among firms in the High- than Low-requirement listings. Tangibility and Liquidity are the only two variables predict CG practices with some consistency. We find no evidence that Tobin’s q predicts CG practices. This last result lowers the possibility of reverse causation in analyses that use CG practices as determinant of firm value.

Discrete-type approximations for non-Markovian optimal stopping problems: Part II
Sérgio C. Bezerra,Alberto Ohashi,Francesco Russo,Francys de Souza

In this paper, we present a Longstaff-Schwartz-type algorithm for optimal stopping time problems based on the Brownian motion filtration. The algorithm is based on Le\~ao, Ohashi and Russo and, in contrast to previous works, our methodology applies to optimal stopping problems for fully non-Markovian and non-semimartingale state processes such as functionals of path-dependent stochastic differential equations and fractional Brownian motions. Based on statistical learning theory techniques, we provide overall error estimates in terms of concrete approximation architecture spaces with finite Vapnik-Chervonenkis dimension. Analytical properties of continuation values for path-dependent SDEs and concrete linear architecture approximating spaces are also discussed.

Do Short-Term Incentives Affect Long-Term Productivity?
Almeida, Heitor,Ersahin, Nuri,Fos, Vyacheslav,Irani, Rustom M.,Kronlund, Mathias
Previous research shows that stock repurchases that are caused by earnings management lead to reductions in firm-level investment and employment. It is natural to expect firms to cut less productive investment and employment first, which could lead to a positive effect on firm-level productivity. However, using Census data, we find that firms make cuts across the board irrespective of plant productivity. This pattern seems to be associated with frictions in the labor market. Specifically, we find evidence that unionization of the labor force may prevent firms from doing efficient downsizing, forcing them to engage in easy or expedient downsizing instead. As a result of this inefficient downsizing, EPS-driven repurchases lead to a reduction in long-term productivity.

Does Governmental Decentralization Accelerate the Accounting Manipulation of State-Owned Enterprises? Evidence from China
Su, Qiaoling,Zhang, Xunchang
Pyramidal structures are the common methods to organize enterprises, either private or state-owned around the world. This study considers both political cost and agency cost theory in pyramidal structures constructed by Chinese government mainly for governmental decentralization. Although this pyramids structure, with intermediate layers, support to minimize political costs of governmental intervention, they also detour managers from their top owners and hence aggrandize agency costs. All else equal, according to the agency cost theory, we assume that the changed pyramidal structures enhance motivations of accounting manipulations, because of reducing supervision from the top owners; on the other hand, according to the political cost theory, these pyramidal structures reduce motivations of accounting manipulations for remitting intervention from government. Based on hand-collected data from all Chinese A listed local-state-owned enterprises (SOE hereafter) between 2004 and 2016, we find that the pyramidal structures in China have not achieved the optimal partition of power between the state-owner and the managers where the point at the marginal agency costs are equal to the marginal political costs, encouraging earnings management on SOE after governmental decentralization. We further investigate on whether pyramidal structure is associated with earnings management, and find that managers without holding shares, the lower level of salary and the higher level of interventional districts increase earning management when the level of intermediate layers enhanced.

Existence of affine realizations for stochastic partial differential equations driven by L\'evy processes
Stefan Tappe

The goal of this paper is to clarify when a semilinear stochastic partial differential equation driven by L\'evy processes admits an affine realization. Our results are accompanied by several examples arising in natural sciences and economics.

Financial reporting frequency and external finance: Evidence from a quasi-natural experiment in Japan
Fujitani, Ryosuke
Using a unique institutional background of Japan, this study first examines the effects of the increase in the reporting frequency on corporate financing. From Difference-in-Difference (DiD) analysis, I show that the increase in the reporting frequency increases external finance but not finance from bank. Next, I find that the positive effects of the increase in the reporting frequency are stronger in firms with a) financial constraints, b) ex-ante information asymmetry, and c) more external capital demand. I also find that the firms a) do not change the cash holding intensity, b) invest more, and c) payout more. Unlike prior literature, these findings suggest that the increase in the reporting frequency enhances firm activities.

Finding Consistent Trends with Strong Momentum - Rsi for Trend-Following and Momentum Strategies
Hill CMT, Arthur
Investors and traders typically use the Relative Strength Index (RSI) to find signals that help identify turning points in security prices. This strategy, however, discounts the true nature of the indicator and limits its potential. A breakdown of the RSI formula reveals that its power lies in its ability to identify consistent uptrends with strong momentum. Some practitioners use RSI ranges to identify existing trends and RSI extremes to signal momentum shifts. However, these approaches do not quantify how long RSI should hold its range, how regularly RSI should reach a momentum milestone and, most importantly, if RSI range and momentum indications have predictive value. The goal of this paper is to systematically test RSI range and momentum signals using stocks in the S&P 500. Moreover, this paper will show that the RSI range alone is inadequate because it does not always capture upside momentum. The RSI range measures trend consistency well, but a momentum component is needed to uncover the strongest uptrends. After quantifying and testing, this paper will provide evidence that signals combining an RSI bull range with RSI momentum can foreshadow sizable advances with good success rates. As such, these signals can be part of a successful investing strategy that combines trend-following and momentum.

Forward-Looking Policy Rules and Currency Premia
Filippou, Ilias,Taylor, Mark P.
We evaluate the cross-sectional predictive ability of a forward-looking monetary policy reaction function, or Taylor rule, in both statistical and economic terms. We find that investors require a premium for holding currency portfolios with high implied interest rates while currency portfolios with low implied rates offer negative currency excess returns. Our forward- looking Taylor rule signals are orthogonal to current nominal interest rates and disconnected from carry trade portfolios and other currency investment strategies. The profitability of the Taylor rule portfolio spread is mainly driven by inflation forecasts rather than the output gap and is robust to data snooping and a wide range of robustness checks.

Impact of Higher Capital Buffers on Banks’ Lending and Risk-Taking: Evidence from the Euro Area Experiments
Cappelletti, Giuseppe,Ponte Marques, Aurea,Varraso, Paolo,Budrys, Žymantas,Peeters, Jonas
We study the impact of higher bank capital buffers, namely of the Other Systemically Important Institutions (O-SII) buffer, on banks' lending and risk-taking behaviour. The O-SII buffer is a macroprudential policy aiming to increase banks' resilience. However, higher capital requirements associated with the policy may likely constrain lending. While this may be a desired effect of the policy, it could, at least in the short-term, pose costs for economic activity. Moreover, by changing the relative attractiveness of different asset classes, a higher capital requirement could also lead to risk-shifting and therefore promote the build-up (or deleverage) of banks' risk-taking. Since the end of 2015, national authorities, under the EBA framework, started to identify banks as O-SII and impose additional capital buffers. The identification of the O-SII is mainly based on a cutoff rule, ie. banks whose score is above a certain threshold are automatically designated as systemically important. This feature allows studying the effects of higher capital requirements by comparing banks whose score was close to the threshold. Relying on confidential granular supervisory data, between 2014 and 2017, we find that banks identified as O-SII reduced, in the short-term, their credit supply to households and financial sectors and shifted their lending to less risky counterparts within the non-financial corporations. In the medium-term, the impact on credit supply is defused and banks shift their lending to less risky counterparts within the financial and household sectors. Our findings suggest that the discontinuous policy change had limited effects on the overall supply of credit although we find evidence of a reduction in the credit supply at the inception of the macroprudential policy. This result supports the hypothesis that the implementation of the O-SII's framework could have a positive disciplining effect by reducing banks' risk-taking while having only a reduced adverse impact on the real economy through a temporary decrease in credit supply.

Improved Forecasting of Cryptocurrency Price using Social Signals
Maria Glenski,Tim Weninger,Svitlana Volkova

Social media signals have been successfully used to develop large-scale predictive and anticipatory analytics. For example, forecasting stock market prices and influenza outbreaks. Recently, social data has been explored to forecast price fluctuations of cryptocurrencies, which are a novel disruptive technology with significant political and economic implications. In this paper we leverage and contrast the predictive power of social signals, specifically user behavior and communication patterns, from multiple social platforms GitHub and Reddit to forecast prices for three cyptocurrencies with high developer and community interest - Bitcoin, Ethereum, and Monero. We evaluate the performance of neural network models that rely on long short-term memory units (LSTMs) trained on historical price data and social data against price only LSTMs and baseline autoregressive integrated moving average (ARIMA) models, commonly used to predict stock prices. Our results not only demonstrate that social signals reduce error when forecasting daily coin price, but also show that the language used in comments within the official communities on Reddit (r/Bitcoin, r/Ethereum, and r/Monero) are the best predictors overall. We observe that models are more accurate in forecasting price one day ahead for Bitcoin (4% root mean squared percent error) compared to Ethereum (7%) and Monero (8%).

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.

International Conference on Applied Business and Economics, ICABE 2019 (Table of Contents)
Grima, Simon,Thalassinos, Eleftherios Ioannis
Selected articles presented in the conference have been included in this selective volume ICABE 2018. Articles are in economics, finance and management discipline related to latest development in ASEAN EC.

Likelihood Evaluation of Jump-Diffusion Models Using Deterministic Nonlinear Filters
Jean-François Bégin,Mathieu Boudreault

In this study, we develop a deterministic nonlinear filtering algorithm based on a high-dimensional version of Kitagawa (1987) to evaluate the likelihood function of models that allow for stochastic volatility and jumps whose arrival intensity is also stochastic. We show numerically that the deterministic filtering method is precise and much faster than the particle filter, in addition to yielding a smooth function over the parameter space. We then find the maximum likelihood estimates of various models that include stochastic volatility, jumps in the returns and variance, and also stochastic jump arrival intensity with the S&P 500 daily returns. During the Great Recession, the jump arrival intensity increases significantly and contributes to the clustering of volatility and negative returns.

Mean and Volatility Spillovers between REIT and Stocks Returns A STVAR-BTGARCH-M Model
Das, Mahamitra,Kundu, Srikanta,Sarkar, Nityananda
In this study we have examined volatility spillovers as well as volatility-in-mean effect between REIT returns and stock returns for both the USA and the UK by applying a bivariate GARCH-M model where the conditional mean is specified by a smooth transition VAR model. Dynamic conditional correlation approach has been applied with the GJR-GARCH specification so that the intrinsic nature of asymmetric volatility in case of positive and negative shocks can be duly captured. The major findings that we have empirically found is that the mean spillover effect from stock returns to REIT returns is significant for both the countries while the same from REIT returns to stock returns is significant only in the UK. It is also evident from the results that own risk-return relationship of REIT market is positive and significant only in the bear market situation in both the countries while for the stock market own risk-return relationship is insignificant for both the bull and bear markets in the USA but it is negative in the bear market condition and positive in the bull market situation for the UK. We have also found that asymmetric nature of conditional variance and dynamic behavior in the conditional correlation holds as well. Finally, several tests of hypotheses regarding equality of various kinds of spillover effects in the bull and bear market situations show that these spillover effects are not the same in the two market conditions in most of the aspects considered in this study.

Optimal stopping via reinforced regression
Denis Belomestny,John Schoenmakers,Vladimir Spokoiny,Bakhyt Zharkynbay

In this note we propose a new approach towards solving numerically optimal stopping problems via reinforced regression based Monte Carlo algorithms. The main idea of the method is to reinforce standard linear regression algorithms in each backward induction step by adding new basis functions based on previously estimated continuation values. The proposed methodology is illustrated by a numerical example from mathematical finance.

Pension Savings: The Real Return - 2018 Edition
Šebo, Ján,Voicu, Ştefan Dragoş ,Andersen, Carsten,Mączyńska, Aleksandra ,Davydoff, Didier,Marchionni, Lorenzo, Diaz, Marissa,Mešťan, Michal,Christoff, Lubomir,Mujagić, Edin,Laetitia, Gabaut,Naacke, Grégoire ,Hagen, Johannes,Prache, Guillaume,Herrero, Fernando,Rutecka, Joanna,Houdmont, Arnaud,Nagell, Lina Strandvåg
In June 2013, BETTER FINANCE published a research report entitled “Private Pensions: The Real Return” which evaluated the return of private pension products after charges, after inflation (“real” returns) and â€" where possible â€" after taxation. This first report furthermore identified the factors affecting these returns in Denmark, France and Spain, including an indepth description of the pension savings vehicles available in these countries.In September 2014, BETTER FINANCE published the 2014 edition of the "Pension Savings: The Real Return" research report, which included data updates for the three countries covered in the initial study, as well as new in-depth evaluations of pension savings for five new countries: Belgium, Germany, Italy, Poland and the United Kingdom.The 2015 edition of the BETTER FINANCE research report was aimed at updating the existing country cases and expanding the coverage to 15 European Union countries with the addition of Bulgaria, Estonia, Latvia, the Netherlands, Romania, Sweden and Slovakia. With the inclusion of these countries the research report reached a coverage of approximately 85% of the EU population.The 2016, 2017 and 2018 editions are updates of the 15 existing country cases, with this year’s edition also expanding the geographic scope to include Lithuania. The report is based on the most recent data available at the time of print and includes a wider range of available pension vehicles with the aim of encompassing all financial savings products actually used by EU citizens to save for retirement. Furthermore, overviews on recent trends in the respective long-term savings and pension markets are provided.The entire series of research reports has illustrated over the years that real returns of retirement savings have been, and still are on average, very low once charges, inflation and taxes have been taken into account. Measuring the impact of all these elements (inflation, charges and taxes) is especially important in a low interest rate environment because the real return for savers can be substantially negative. Since a comprehensive approach to provide this indispensable information to savers is not provided for the time being by Public Authorities or other independent bodies, this research report aims to improve transparency on the real returns of long-term and pension savings in Europe. This is in line with the European Commission’s current “Action” to improve the transparency of performance and fees in this area (as part of its Capital Markets Union â€" CMU - Action Plan). This CMU Action was proposed by BETTER FINANCE in 2015.

Power Distance, Political Uncertainty and Stock Price Crash Risk: International Evidence
Su, Qiaoling,Ye, Jianming,Zhang, Xunchang
This paper tests the proposition that the unbalanced power distance (i.e., Hofstede Cultural Dimensions- Power Distance Index) and individual stock price crash risk. We examine the stock price behavior of 35 countries’ listed firms from 2004 to 2016 and use multivariate analyses to document that societal power distance is important in explaining the propensity of releasing accounting information. These propensities create a psychological hint on timing management, particularly for bad news. As countries with higher Power Distance (PD) prefer to keep things under control, the result will be fewer unexpected stock price crashes during the long windows. However, because the higher Power Distance countries devote the market to maintain temporary peace before and during the periods of political events (i.e., national elections), the results will be changed to an increase in crash risks after the political events window. Consistent with these predictions, we find that, in the higher PD countries, companies have less incentive to hide negative information and to generate stock price crashes. This situation is substantially changed during the post-political windows when the firms and the ways of spreading information are more controlled by the government. Our findings suggest that formal mechanism alone is insufficient to explain the behaviors of corporate disclosure that entangle with informal instruments.

Pricing of counterparty risk and funding with CSA discounting, portfolio effects and initial margin
Francesca Biagini,Alessandro Gnoatto,Immacolata Oliva

In this paper we extend the existing literature on xVA along three directions. First, we extend existing BSDE-based xVA frameworks to include initial margin by following the approach of Cr\'epey (2015a) and Cr\'epey (2015b). Next, we solve the consistency problem that arises when the front-office desk of the bank uses trade-specific discount curves that differ from the discount curve adopted by the xVA desk. Finally, we address the existence of multiple aggregation levels for contingent claims in the portfolio between the bank and the counterparty by providing suitable extensions of our proposed single-claim xVA framework.

Quest for Robust Optimal Macroprudential Policy
Aguilar, Pablo,Hurtado, Samuel,Fahr, Stephan,Gerba, Eddie
This paper contributes by providing a new approach to study optimal macroprudential policies based on economy wide welfare. Following Gerba (2017), we pin down a welfare function based on a first-and second order approximation of the aggregate utility in the economy and use it to determine the merits of different macroprudential rules for Euro Area. With the aim to test this framework, we apply it to the model of Clerc et al. (2015). We find that the optimal level of capital is 15.6 percent, or 2.4 percentage points higher tan the 2001-2015 value. Optimal capital reduces significantly the volatility of the economy while increasing somewhat the total level of welfare in steady state, even with a time-invariant instrument. Expressed differently, bank default rates would have been 3.5 percentage points lower while credit and GDP 5% and 0.8% higher had optimal capital level been in place during the 2011-2013 crisis. Further, using a model-consistent loss function, we find that the optimal Countercyclical Capital Buffer (CCyB) rule depends on whether observed or optimal capital levels are already in place. Conditional on optimal capital level, optimal CCyB rule should respond to movements in total credit and mortgage lending spreads. Gains in welfare from optimal combination of instruments is higher than the sum of their individual effects due to synergies and positive mutual spillovers.

Regularities in stock markets
Abhin Kakkad,Harsh Vasoya,Arnab K. Ray

From the stock markets of six countries with high GDP, we study the stock indices, S&P 500 (NYSE, USA), SSE Composite (SSE, China), Nikkei (TSE, Japan), DAX (FSE, Germany), FTSE 100 (LSE, Britain) and NIFTY (NSE, India). The daily mean growth of the stock values is exponential. The daily price fluctuations about the mean growth are Gaussian, but with a finite asymptotic convergence. The growth of the monthly average of stock values is statistically self-similar to their daily growth. The monthly fluctuations of the price follow a Wiener process, with a decline of the volatility. The mean growth of the daily volume of trade is exponential. These observations are globally applicable and underline regularities across global stock markets.

Social Trading at a Glance - A Performance Analysis of Signal Providers
Deneke, Alexander
This study provides an overview of the characteristics of signal providers on social trading platforms, which are increasing in relevance supported by the fact that retail investors do not like to make investment decisions by themselves. Signal providers and receivers exist on the platform. We use a proprietary data set of one of the largest German social trading platforms. Signal providers are grouped to certain career levels, which represent a track record calculated with the help of certain performance and risk variables. Career level five represents the highest possible ranking. We show that signal providers in general neither outperform mutual funds nor the market. However, the motivation for signal receivers to go on social trading platforms should be the high transparency and simplicity to invest amongst others. Furthermore, the study's robustness check indicates that signal providers' investment strategies are not likely to be effected in times of high market volatility due to not investing in assets that are highly prone to market movements. This behaviour is shown by a factor analysis.

Sparse Index Clones via the Sorted L1-Norm
Kremer, Philipp,Brzyski, Damian,Bogdan, Malgorzata,Paterlini, Sandra
Index tracking and hedge fund replication aim at cloning the return time series properties of a given benchmark, by either using only a subset of its original constituents or by a set of risk factors. In this paper, we propose a model that relies on the Sorted L1 Penalized Estimator, called SLOPE, for index tracking and hedge fund replication. SLOPE is capable of not only providing sparsity but also to form groups among assets depending on their partial correlation with the index or the hedge fund return times series. The grouping structure can then be exploited to create individual investment strategies that allow building portfolios with a smaller number of active positions, but still comparable tracking properties. Considering equity index data over the period from December 2004 to January 2016 and hedge fund returns from June 1994 to July 2017, we show that the SLOPE based approaches can often outperform state-of-the-art non-convex approaches.

Taking a Walk on the Wild Side: What Can Microfinance Organizations Learn From Organisms to Survive at the Edge of Chaos?
Ashta, Arvind
This essay views the findings from research on microfinance innovations in the light of complexity theory as viewed from the lens of naturological school.

Tests for the weights of the global minimum variance portfolio in a high-dimensional setting
Taras Bodnar,Solomiia Dmytriv,Nestor Parolya,Wolfgang Schmid

In this study, we construct two tests for the weights of the global minimum variance portfolio (GMVP) in a high-dimensional setting, namely, when the number of assets $p$ depends on the sample size $n$ such that $\frac{p}{n}\to c \in (0,1)$ as $n$ tends to infinity. In the case of a singular covariance matrix with rank equal to $q$ we assume that $q/n\to \tilde{c}\in(0, 1)$ as $n\to\infty$. The considered tests are based on the sample estimator and on the shrinkage estimator of the GMVP weights. We derive the asymptotic distributions of the test statistics under the null and alternative hypotheses. Moreover, we provide a simulation study where the power functions and the receiver operating characteristic curves of the proposed tests are compared with other existing approaches. We observe that the test based on the shrinkage estimator performs well even for values of $c$ close to one.

The Effect of Credit Risk and Capital Adequacy Ratio Upon Return on Asset (a Case Study at Banking Listed in Indonesia Stock Exchange)
Anwar, Juli,Murwaningsar, Etty
The aim of the study to examine the effect of credit risk as measured by non-performing loan, and capital adequacy ratio to profitability level measured by return on assets in banking companies listed in Indonesia Stock Exchange (IDX). This research belongs to causative research. The population in this study is the state-owned banks listed on the Indonesia Stock Exchange. The sample of this study is determined by purposive sampling method so that obtained four sample companies. The type of data used is secondary data obtained from The analysis the method used is multiple regression analysis, correlation, determination and partial test of hypothesis with t-test and simultaneously with F test. Based on the results of multiple regression analysis with 5% significance level, the results of this study conclude: (1) non-performing loan has a negative and significant influence on profitability in banking companies listed on Indonesia Stock Exchange (2) capital adequacy ratio positively affect profitability on banking industry listed on Indonesia Stock Exchange. So simultaneously and together it can be concluded that NPL and CAR have an effect on ROA.

The Exchange of Flow Toxicity
Easley, David,Lopez de Prado, Marcos,O'Hara, Maureen
Flow toxicity can be measured in terms of the probability that a liquidity provider is adversely selected by informed traders. In previous papers we introduced the concept of Volume-synchronized Probability of Informed Trading (the VPIN* metric), and provided a robust estimation procedure. In this study, we discuss the asymmetric impact that an incorrect estimation of the VPIN metric has on a market maker’s performance. This asymmetry may be part of the explanation for the evaporation of liquidity witnessed on May 6th 2010. To mitigate that undesirable behavior, we present the specifications of a VPIN contract, which could be used to hedge against the risk of higher than expected levels of toxicity, as well as to monitor such risk. Among other applications, it would also work as an execution benchmark, and a price discovery mechanism, since it allows for the externalization of market participants’ views of future toxicity.

The Mitigating Effect of Stop-Losses for Delegated Investments on the Proneness Towards the Disposition Effect
Deneke, Alexander,Seidens, Sebastian
This paper studies the behaviour of retail investors, that tend to be unwilling to make financial decisions on their own and therefore follow other investors' strategies on online trading platforms, in particular with respect to their proneness towards the disposition effect. Therefore, we combine two mitigating effects on the proneness towards the disposition effect for signal receivers on an online trading platform, namely delegated investments and a stop-loss function. We find that signal receivers undertaking delegated investment decisions on an online trading platform have a negative proneness towards the disposition effect. We further show that signal receivers on theplatform making use of a stop-loss are even less prone to the disposition effect than investors not making use of it. Thereby, we add a new investment type to the analysed asset classes of Chang et al. (2016) separated by delegation and no delegation.

Time-changed \levy processes and option pricing: a critical comment
Hasan Fallahgoul,Kihun Nam

Carr and Wu (2004), henceforth CW, developed a framework that encompasses almost all of the continuous-time models proposed in the option pricing literature. Their framework hinges on the stopping time property of the time changes. By analyzing the measurability of the time changes with respect to the underlying filtration, we show that all models CW proposed for the time changes fail to satisfy this assumption.

Tracking VIX with VIX Futures: Portfolio Construction and Performance
Tim Leung,Brian Ward

We study a series of static and dynamic portfolios of VIX futures and their effectiveness to track the VIX index. We derive each portfolio using optimization methods, and evaluate its tracking performance from both empirical and theoretical perspectives. Among our results, we show that static portfolios of different VIX futures fail to track VIX closely. VIX futures simply do not react quickly enough to movements in the spot VIX. In a discrete-time model, we design and implement a dynamic trading strategy that adjusts daily to optimally track VIX. The model is calibrated to historical data and a simulation study is performed to understand the properties exhibited by the strategy. In addition, comparing to the volatility ETN, VXX, we find that our dynamic strategy has a superior tracking performance.

Tracking VIX with VIX Futures: Portfolio Construction and Performance
Leung, Tim,Ward, Brian
We study a series of static and dynamic portfolios of VIX futures and their effectiveness to track the VIX index. We derive each portfolio using optimization methods, and evaluate its tracking performance from both empirical and theoretical perspectives. Among our results, we show that static portfolios of different VIX futures fail to track VIX closely. VIX futures simply do not react quickly enough to movements in the spot VIX. In a discrete-time model, we design and implement a dynamic trading strategy that adjusts daily to optimally track VIX. The model is calibrated to historical data and a simulation study is performed to understand the properties exhibited by the strategy. In addition, comparing to the volatility ETN, VXX, we find that our dynamic strategy has a superior tracking performance.

Value Bubbles
Chibane, Messaoud,Ouzan, Samuel
According to several extended behavioral theories, value profits should mirror momentum profits, and vary over time. We test these theories in the cross section of returns. Value returns depend on market states. From 1926 to 2018, following negative market return, the average so-called value premium is about three time its unconditional counterpart, whereas it appears to vanish following positive market return. Moreover, several short episodes of extreme losses in momentum strategy (momentum crashes) are contemporaneous with extreme value profits (value bubbles). Our results are robust to various time varying risk- based explanations.

Value of Trust: Pricing Utility Tokens in a Blockchain-based Network
Izhutov, Pavel
Blockchain technology has the potential to revolutionize the way trusted computing is delivered to end users. One of the pillars enabling the shift is a decentralized token-based business model. While intuitively appealing, little is known about the economic properties of such models. In this note we consider a setting where trusted computation is delegated to the nodes with probabilities proportional to their ”stakes” in the network, that is, the number of tokens they own and lock up as a collateral. In this setting we find the equilibrium token price, number of miners participating in the system and show how trust created by the blockchain is reflected in the token valuation.

Why so many significant Phase 3 results in clinical trials?
Jérôme Adda,Christian Decker,Marco Ottaviani

Planning and execution of clinical research and publication of results should conform to the highest ethical standards, given that human lives are at stake. However, economic incentives can generate conflicts of interest for investigators, who may be inclined to withhold unfavorable results or even tamper with the data. Analyzing p-values reported to the registry with two different methodologies, we find suspicious patterns only for results from trials conducted by smaller industry sponsors, with presumably less reputation at stake. First, a density discontinuity test reveals an upward jump at the classical threshold for statistical significance for Phase 3 results by small industry sponsors, suggesting some selective reporting. Second, we find an excess mass of significant results in Phase 3 compared to Phase 2. However, we can explain almost completely this excess mass for large industry sponsors, once we account for the incentives to selectively continue research through a novel technique linking trials across phases. In contrast, for trials sponsored by small pharmaceutical companies, selective continuation of trials economizing on research costs only explains one third of the increase in the number of significant results from Phase 2 to Phase 3. The different pattern depending on the type of sponsor suggests that reputational concerns can mitigate the short-run economic incentives that undermine integrity in reporting results of clinical research.