Research articles for the 2019-07-11

A Factor-Based Approach to Diversifying Oil Exposure
Lohre, Harald,Radatz, Erhard,Rother, Carsten,humphreys, mark
Institutional investors who are highly sensitive to oil price changes are keen to reduce their risk exposure without explicitly engaging in oil price hedging. We investigate a viable alternative that considers diversifying oil exposure by employing adequate market and style factors. In particular, we present a multi-asset multi-factor solution in which quality and low volatility style factors play a crucial role in mitigating oil risk exposure while increasing overall portfolio diversification.

A global economic policy uncertainty index from principal component analysis
Peng-Fei Dai,Xiong Xiong,Wei-Xing Zhou

This paper constructs a global economic policy uncertainty index through the principal component analysis of the economic policy uncertainty indices for twenty primary economies around the world. We find that the PCA-based global economic policy uncertainty index is a good proxy for the economic policy uncertainty on a global scale, which is quite consistent with the GDP-weighted global economic policy uncertainty index. The PCA-based economic policy uncertainty index is found to be positively related with the volatility and correlation of the global financial market, which indicates that the stocks are more volatile and correlated when the global economic policy uncertainty is higher. The PCA-based global economic policy uncertainty index performs slightly better because the relationship between the PCA-based uncertainty and market volatility and correlation is more significant.

Adaptive Pricing in Insurance: Generalized Linear Models and Gaussian Process Regression Approaches
Yuqing Zhang,Neil Walton

We study the application of dynamic pricing to insurance. We view this as an online revenue management problem where the insurance company looks to set prices to optimize the long-run revenue from selling a new insurance product. We develop two pricing models: an adaptive Generalized Linear Model (GLM) and an adaptive Gaussian Process (GP) regression model. Both balance between exploration, where we choose prices in order to learn the distribution of demands & claims for the insurance product, and exploitation, where we myopically choose the best price from the information gathered so far. The performance of the pricing policies is measured in terms of regret: the expected revenue loss caused by not using the optimal price. As is commonplace in insurance, we model demand and claims by GLMs. In our adaptive GLM design, we use the maximum quasi-likelihood estimation (MQLE) to estimate the unknown parameters. We show that, if prices are chosen with suitably decreasing variability, the MQLE parameters eventually exist and converge to the correct values, which in turn implies that the sequence of chosen prices will also converge to the optimal price. In the adaptive GP regression model, we sample demand and claims from Gaussian Processes and then choose selling prices by the upper confidence bound rule. We also analyze these GLM and GP pricing algorithms with delayed claims. Although similar results exist in other domains, this is among the first works to consider dynamic pricing problems in the field of insurance. We also believe this is the first work to consider Gaussian Process regression in the context of insurance pricing. These initial findings suggest that online machine learning algorithms could be a fruitful area of future investigation and application in insurance.

Análisis del crecimiento de las ventas mediante un modelo logarítmico con ratios (Analysis of the Growth of Sales Through a Logarithmic Model With Ratios)
Bernal Domínguez, Dra. Deyanira
Spanish Abstract: El fenómeno sobre crecimiento empresarial es un tema que ha sido poco estudiado en México. El objetivo fue determinar qué indicadores inciden en el crecimiento de las ventas en empresas mexicanas emisoras del ramo de bebidas. La metodología fueron dos estudios de casos con enfoque longitudinal. Los datos cuantitativos que se recabaron con base en reportes financieros anuales de 2010 a 2016 fueron ventas, consumidores, activo total y empleados. Se demuestra que las intensidades de los ratios que inciden en parte al crecimiento de las ventas son productividad, intensidad de trabajo, intensidad de capital y la frecuencia de consumo.English Abstract: The phenomenon of business growth is a subject that has been little studied in Mexico. The objective was to determine which indicators affect the growth of sales in Mexican beverage issuing companies. The methodology was two case studies with a longitudinal approach. The quantitative data that was collected based on annual financial reports from 2010 to 2016, were sales, consumers, total assets and employees. It is shown that the intensities of the ratios that partially affect the growth of sales are: productivity, labor intensity, capital intensity and the frequency of consumption.

Are Analysts Really Optimistic in Their Stock Recommendations? The Case of the Polish Capital Market
Bogumila, Brycz,Dudycz, Tadeusz,WÅ‚odarczyk, Katarzyna
This paper examines the relation between the quality of forecasts and the types of analysts’ stock recommendations. Using hand-collected data on stock recommendations issued for companies listed on the Warsaw Stock Exchange (WSE) in the period 2005â€"2012, we find that, despite analysts’ clear tendency to issue positive stock recommendations, this tendency generally does not affect the quality of their forecasts in all types of stock recommendations. The accuracy of forecasts, however, decreases as the complexity of the forecasted items (revenue, EBIT, net income, and FCF) increases. We also find no clear difference in the level of analysts’ optimism (pessimism) in their forecasts between different types of stock recommendations, but analysts’ optimism is visible in the size of their forecasts’ overestimation. The findings can help in assessing the value of the stock recommendation on the WSE.

CCAR Consistent WWR for CVA and Capital
Borue, Vadim
Wrong way risk (WWR) phenomena in counterparty credit risk value adjustment (CVA) and capital is well understood. It arises from level correlation or cointegration of counterparty default and exposure. There is very limited trading available in CVA space and therefore different banks take quite different assumptions for computing CVA. It is well known that using historical daily correlation of changes between market variables and counterparty hazard rate is not sufficient to produce significant correlation of levels of defaults and exposure. Since WWR comes from correlation of levels and non daily changes of market variables WWR may be easily underestimated. Under risk neutral measure it is generally difficult to correlate levels of market variables through common drifts, which generally do not exist. On the other hand simple way to create level correlation under risk neutral measure would be by global synchronized jump of all market variables. We argue in this note that such jump is already available and is prescribed in CCAR stress testing, so using those jumps will produce WWR exposure comparable between different banks and would reflects regulators consistent WWR in CVA.

Can Firms CEOs Predict the Future Performance after Going Public?
Yamada, Kazuo
This paper examines how the post-IPO operating performance is determined. Unlike previous studies, we obtain the expected operating performance of IPO firms. Our findings are as follow. First, we find weak evidence of the agency problem that IPOs with high secondary shares record lower sales, but the realized sales is still above the expected sales. We also find the cyclicity in the IPO market: the difference between realized and expected sales (profit) negatively relates to the IPO market.

Concentración bancaria, competencia y estabilidad financiera en Colombia (Bank Concentration, Competition and Financial Stability in Colombia)
Castaño, Juan David,Torres, Alejandro
Spanish Abstract: El aumento reciente en los niveles de concentración y regulación de los sistemas financieros alrededor del mundo ha revivido el debate sobre la relación entre concentración bancaria, competencia y estabilidad financiera. En este trabajo se analiza la relación entre estas variables para el caso colombiano a partir del uso de diferentes indicadores de concentración y competencia relevantes en la literatura. Los resultados obtenidos confirman la existencia de un fuerte proceso de concentración del mercado bancario durante la última década, que ha estado acompañado a su vez de una disminución en el nivel de competencia entre los participantes. Sin embargo, este proceso no ha comprometido la estabilidad financiera y, por el contrario, ha mejorado. Pese a ello, se evidencia la existencia de una relación no lineal entre estas variables, que sugiere que no es recomendable continuar aumentando los niveles de concentración a futuro.English Abstract: The recent increase in concentration levels and the regulation of financial systems around the world has revived the debate on the relationship between banking concentration, market competition and financial stability. In this paper, we study the relationship between these variables for the recent Colombian case. Our results confirms the existence of a strong banking concentration process during the last decade, which has been accompanied in turn by a decrease in the level of competition among banks. However, this process has not compromised the stability of the banking system. On the contrary, it has been improved. Finally, we found a non-linear relationship between these variables, suggesting it is not recommended to increase the banking concentration levels in to the future.

Discussion of ‘Making Sense of Soft Information: Interpretation Bias and Loan Quality’
Vashishtha, Rahul
Campbell, Loumioti, and Wittenberg-Moerman (2018), henceforth CLW, provide evidence on the effect of human cognitive limitations on the processing of soft information in a Credit Union. Their results suggest that cognitive limitations constitute an important barrier to financial markets’ ability to extract soft information. In this discussion, I delineate CLW’s contribution and implications of their results, highlight key features of the empirical analyses that address interpretational difficulties that might confront some readers, and point out some limitations and unanswered questions that appear important to address in future research to obtain a more complete understanding of soft information production in financial markets.

Distributions of Historic Market Data -- Relaxation and Correlations
M. Dashti Moghaddam,Zhiyuan Liu,R. A. Serota

We show that, for a class of mean-reverting models, the correlation function of stochastic variance (squared volatility) contains only one -- relaxation -- parameter. We generalize and simplify the expression for leverage for this class of models. We apply our results to specific examples of such models -- multiplicative, Heston, and combined multiplicative-Heston -- and use historic stock market data to obtain parameters of their steady-state distributions and cross-correlations between Weiner processes in the models for stock returns and stochastic variance.

Does One-Size-Fits-All Minimum Wage Cause Financial Stress to Small Businesses? Evidence from 15 Million Establishments
Chava, Sudheer,Oettl, Alexander,Singh, Manpreet
Do increases in federal minimum wage impact the financial health of small businesses? Using inter-temporal variation in whether a state's minimum wage is bound by the federal rate and credit-score data for approximately 15.2 million establishments for the period 1989-2013, we find that increases in federal minimum wage worsen the financial health of small businesses in the affected states. Small, young, labor-intensive, minimum-wage sensitive establishments located in the bounded states and those located in competitive and low-income areas experience higher financial stress. Increases in the minimum wage also lead to lower bank credit, higher loan defaults, lower employment and, higher exits for small businesses and a lower entry. Our results document the costs of one-size-fits-all nationwide minimum wage and highlight how it can have an adverse effect on the financial health of some small businesses.

Economic and Financial Transactions Govern Business Cycles
Olkhov, Victor
Problem/Relevance - This paper presents new description of the business cycles that for decades remain as relevant and important economic problem. Research Objective/Questions - We propose that econometrics can provide sufficient data for assessments of risk ratings for almost all economic agents. We use risk ratings as coordinates of agents and show that the business cycles are consequences of collective change of risk coordinates of agents and their financial variables.Methodology - We aggregate similar financial variables of agents and define macro variables as functions on economic space. Economic and financial transactions between agents are the only tools that change their extensive variables. We aggregate similar transactions between agents with risk coordinates x and y and define macro transactions as functions of x and y. We derive economic equations that describe evolution of macro transactions and hence describe evolution of macro variables.Major Findings - As example we study simple model that describes interactions between Credits transactions from Creditors at x to Borrowers at y and Loan-Repayment transactions that describe refunds from Borrowers at y to Creditors at x. We show that collective motions of Creditors and Borrowers from safer to risky area and back on economic space induce frequencies of macroeconomic Credit cycles.Implications - Our model can improve forecasting of the business cycles and help increase economic sustainability and financial policy-making. That requires development of risk ratings methodologies and corporate accounting procedures that should correspond each other to enable risk assessments of economic agents.

Exponential stock models driven by tempered stable processes
Uwe Küchler,Stefan Tappe

We investigate exponential stock models driven by tempered stable processes, which constitute a rich family of purely discontinuous L\'{e}vy processes. With a view of option pricing, we provide a systematic analysis of the existence of equivalent martingale measures, under which the model remains analytically tractable. This includes the existence of Esscher martingale measures and martingale measures having minimal distance to the physical probability measure. Moreover, we provide pricing formulae for European call options and perform a case study.

Financial Viability of a Photovoltaic System: The Case of University Hospital at the UFSCar/Brazil
, Isis Restivo Duaik ,Ferraz, Diogo,Costa, Naijela da,Moralles, Herick Fernando,Rebelatto, Daisy Aparecida do Nascimento
Considering the negative consequences of the excessive use of nonrenewable energy resources and the continuous development of technologies related to photovoltaic solar energy, the present paper aims to analyze if the photovoltaic energy systems are economically viable for university hospitals. For this, a photovoltaic system was designed in the parking lot of the University Hospital of the Federal University of São Carlos (UFSCar) and analyzed the financial viability of its installation. This paper develops a bibliographic review of the literature on Photovoltaic Energy and University Hospitals, describes the methods used for this type of analysis and measures, from the cash flow of the work, its financial viability. From the analyzes, it was verified that the work is financially viable, with an expected generation of 194.2 MWh in the first year and a payback of 7 years. This paper contributes to the feasibility of photovoltaic projects in university hospitals, which can contribute to the reduction of the electric energy consumption in the establishment, leading to the reduction of its operational costs, reduction of the emission of pollution and diversification of the Brazilian energy matrix. In addition, the results of this paper can be used as a scientific basis for other fields, such as hospitals and clinics, both public and private.

Intraday Momentum: Evidence from the Crude Oil Market
Wen, Zhuzhu,Cho, Ro,Ma, Diandian,Xu, Yahua
Our analysis of high-frequency United States Oil Fund (USO) data from 2006 to 2018 shows that intraday momentum exists in the crude oil market. The first half-hour return from the previous day’s market close positively predicts the last half-hour return both in-sample and out-of-sample. Predictability is stronger during crisis periods and on days with higher realized volatility, higher trading volume, higher overnight returns, and jumps. A market timing strategy, constructed by using the first half-hour return as a timing signal, outperforms two other benchmark strategies.

Knowledge Cycles and Corporate Investment
Bustamante, Maria Cecilia,Cujean, Julien,Frésard, Laurent
We propose a theory of how the process of knowledge creation within firms affects their investment decisions. Firms accumulate knowledge through successive rounds of experimentation in the form of capital expenditures, and reset knowledge when they explore new technologies. This process generates endogenous knowledge cycles, which govern firms' investment. Because risky experimentation makes firms information averse, investment increases in knowledge but Q decreases in knowledge. The relationship between investment and Q thus varies over the knowledge cycle and is strongest early in the cycle. We find empirical support for the knowledge channel using a text-based measure of knowledge cycles from public firms. The knowledge channel could explain why investment has been weak in recent years despite high valuation.

Market Reaction to the Financial Transaction Tax Adoption in Europe
Chokor, Ahmad
This paper studies the European stock market reactions to a number of events associated with the adoption of a Financial Transaction Tax (FTT). We assess the impact of the FTT implementation process on eight European countries that are involved in the European Union financial transactions tax project. We first analyze the equity market returns to events increasing the probability of an FTT adoption in Europe in order to investigate investors’ perceptions of the FTT externalities. We then assess whether particular firm characteristics explain cross-sectional variations in firms’ return reactions. The results show that events which increase the probability of the tax adoption in Europe are associated with a negative abnormal return for concerned stocks. Moreover, we find that the magnitude of the returns’ reaction was not the same across all the European firms.

Mathematical Analysis of Dynamic Risk Default in Microfinance
Mohammed Kaicer,Abdelilah Kaddar

In this work we will develop a new approach to solve the non repayment problem in microfinance due to the problem of asymmetric information. This approach is based on modeling and simulation of ordinary differential systems where time remains a primordial component, they thus enable microfinance institutions to manage their risk portfolios by a prediction of numbers of solvent and insolvent borrowers ever a period, in order to define or redefine its development strategy, investment and management in an area, where the population is often poor and in need a mechanism of financial inclusion.

Non-exchangeability of copulas arising from shock models
Damjana Kokol Bukovšek,Tomaž Košir,Blaž Mojškerc,Matjaž Omladič

When choosing the right copula for our data a key point is to distinguish the family that describes it at the best. In this respect, a better choice of the copulas could be obtained through the information about the (non)symmetry of the data. Exchangeability as a probability concept (first next to independence) has been studied since 1930's, copulas have been studied since 1950's, and even the most important class of copulas from the point of view of applications, i.e. the ones arising from shock models s.a. Marshall's copulas, have been studied since 1960's. However, the point of non-exchangeability of copulas was brought up only in 2006 and has been intensively studied ever since. One of the main contributions of this paper is the maximal asymmetry function for a family of copulas. We compute this function for the major families of shock-based copulas, i.e. Marshall, maxmin and reflected maxmin (RMM for short) copulas and also for some other important families. We compute the sharp bound of asymmetry measure $\mu_\infty$, the most important of the asymmetry measures, for the family of Marshall copulas and the family of maxmin copulas, which both equal to $\frac{4}{27}\ (\approx 0.148)$. One should compare this bound to the one for the class of PQD copulas to which they belong, which is $3-2\sqrt{2}\ \approx 0.172)$, and to the general bound for all copulas that is $\frac13$. Furthermore, we give the sharp bound of the same asymmetry measure for RMM copulas which is $3-2\sqrt{2}$, compared to the same bound for NQD copulas, where they belong, which is $\sqrt{5}-2\ (\approx 0.236)$. One of our main results is also the statistical interpretation of shocks in a given model at which the maximal asymmetry measure bound is attained. These interpretations for the three families studied are illustrated by examples that should be helpful to practitioners when choosing the model for their data.

Oil Futures Volatility and the Economy
Kang, Boda,Sklibosios Nikitopoulos, Christina,Prokopczuk, Marcel
Oil futures volatility plays an important role in the global economy. To assess this contribution, we first develop and estimate a multi-factor oil futures pricing model with stochastic volatility which is able to disentangle long-term, medium-term and short-term variations in commodity markets volatility. The volatility estimates reveal that in line with theory, the volatility factors are unspanned, persistent and carry negative market price of risk, while crude oil markets are becoming more integrated with financial markets. After 2004, short-term volatility of futures prices is driven by industrial production, credit spreads and the US dollar index, along the traditional drivers of hedging pressure and VIX. Medium-term volatility is consistently related to open interest and credit spreads, while oil sector variables such as inventory and consumption have a measurable impact after 2004 due to significant structural changes in the economy and the oil sector. Interest rates matter mostly for the long-term futures price volatility.

Online Appendix for 'Do Delays in Banks’ Loan Loss Provisioning Affect Economic Downturns? Evidence from the U.S. Housing Market'
Kim, Sehwa
This is an Online Appendix to "Do Delays in Banks' Loan Loss Provisioning Affect Economic Downturns? Evidence from the U.S. Housing Market", available at:

Optimal Investment-Consumption Decisions With Partially Observed Inflation: A Discrete-Time Formulation
Bensoussan, Alain,Sethi, Suresh
We consider a discrete-time optimal consumption and investment problem of an investor who is interested in maximizing his utility from consumption and terminal wealth subject to a random inflation in the consumption basket price over time. We consider two cases: (i) when the investor observes the basket price and (ii) when he receives only noisy signals on the basket price. We derive the optimal policies and show that a modified Mutual Fund Theorem consisting of three funds holds in both cases, as it does in the continuous-time setting. The compositions of the funds in the two cases are the same but in general the investor’s allocations of his wealth into these funds differ.

Option Return Predictability and Variance Risk Premium
Bai, Haorui,Zhang, Xiaoyan,Zhou, Hao
Firm-level variance risk premium (VRP) significantly predicts future option returns, after controlling for previously documented option return predictors. We find the risk- adjusted return spread for high VRP over low VRP options is -11.96 percent per month with t-stats of -4.75 for call return and -1.92 percent per month with t-stats of -10.86 for delta-hedged call return. The negative relation between VRP and future option returns is mainly driven by pure second order risk premium and both good and bad volatility uncertainty contribute to the predictability.

Player-Compatible Equilibrium
Drew Fudenberg,Kevin He

Player-Compatible Equilibrium (PCE) imposes cross-player restrictions on the magnitudes of the players' "trembles" onto different strategies. These restrictions capture the idea that trembles correspond to deliberate experiments by agents who are unsure of the prevailing distribution of play. PCE selects intuitive equilibria in a number of examples where trembling-hand perfect equilibrium (Selten, 1975) and proper equilibrium (Myerson, 1978) have no bite. We show that rational learning and some near-optimal heuristics imply our compatibility restrictions in a steady-state setting.

Pope Breaking News: The Effect of TV Coverage on Electoral Success and Financial Markets
Caprini, Giulia
This paper exploits a natural experiment to estimate the impact of politicians' TV coverage in campaign on their vote shares. Two weeks before the 2013 Italian general election, the Pope Benedict XVI suddenly resigned and the TV coverage of politics dropped sharply. An instrumental variable analysis shows that Berlusconi's lower TV exposure (-26 percentage points) caused a vote share loss of 2 percentage points, leading to his defeat in this particularly close election. The coverage shock induced some former Berlusconi supporters to shift their political information source from TV to internet. This, in turn, contributed to change their political affiliation in favor of the party with an Internet-centered propaganda. Besides the influence on political outcomes, the paper shows that candidates' TV coverage also affects financial markets. When the ``Pope news" broke, the stock of Mediaset (Berlusconi's broadcaster) underperformed an otherwise similar synthetic control portfolio: financial investors penalize politically connected firms when the likelihood of reaping political benefits lessens.

Portfolio Insurance Strategies for a Target Annuitization Fund
Xu, Mengyi,Sherris, Michael,Shao, Adam Wenqiang
The transition from defined benefit to defined contribution (DC) pension schemes has increased the interest in target annuitization funds that aim to fund a minimum level of retirement income. Prior literature has studied the optimal investment strategies for DC funds that provide minimum guarantees, but far less attention has been given to portfolio insurance strategies, especially for target annuitization funds. We evaluate the performance of option-based and constant proportion portfolio insurance strategies for a DC fund that targets a minimum level of inflation-protected annuity income at retirement. We show how the portfolio allocation to an equity fund varies depending on the member's age upon joining the fund, displaying a downward trend through time for members joining the fund before ages in the mid-30s. We demonstrate how both portfolio insurance strategies provide strong protection against downside equity risk in financing a minimum level of retirement income. The option-based strategy often leads to higher accumulated savings at retirement and is also shown to provide a more robust level of protection when equity markets are more volatile and when contributions to the pension fund are lower.

Real-world forward rate dynamics with affine realizations
Eckhard Platen,Stefan Tappe

We investigate the existence of affine realizations for L\'{e}vy driven interest rate term structure models under the real-world probability measure, which so far has only been studied under an assumed risk-neutral probability measure. For models driven by Wiener processes, all results obtained under the risk-neutral approach concerning the existence of affine realizations are transferred to the general case. A similar result holds true for models driven by compound Poisson processes with finite jump size distributions. However, in the presence of jumps with infinite activity we obtain severe restrictions on the structure of the market price of risk; typically, it must even be constant.

Regulating LIBRA: The Transformative Potential of Facebook’s Cryptocurrency and Possible Regulatory Responses
Zetzsche, Dirk A.,Buckley, Ross P.,Arner, Douglas W.
Libra is the first private cryptocurrency with the potential to change the worldwide payment and monetary system landscape. Due to the scale and reach provided by its affiliation with Facebook, the question will be not whether, but how, to regulate it. This short paper introduces the Libra project and analyses the potential responses open to regulators worldwide.

Sampling Error and the Joint Estimation of Imputation Credit Value and Cash Dividend Value
Cannavan, Damien,Gray, Stephen,Hall, Jason
Since dividend imputation was introduced to Australia 32 years ago, researchers and corporate finance practitioners have debated the extent to which imputation credits are incorporated into share prices. One reason for divergence of opinions is the selective interpretation of coefficient estimates from regression. Sample observations exhibit little dispersion of corporate tax rates and franking percentages. This means that if noise in a sample leads to the value of cash being understated, the same noise is likely to lead to the value of credits being overstated. Using simulation analysis we show that there is an inverse relationship between estimates of credit value and cash value due to random variation in samples. This problem is exacerbated by a lack of independence across observations.Regression analysis has merit, provided inference accounts for the inverse relationship between estimates of cash dividend value and imputation credit value. We consider five studies which reported estimates of 0.34 to 0.57 for imputation credit value and 0.73 to 0.88 for cash dividend value. The implication of our simulation analysis is that it would be incorrect to claim that cash is fully valued, but that imputation credit value lies within the range of 0.34 to 0.57. This would represent selective interpretation. A researcher cannot claim to have a reliable sample and research method which allows interpretation of one coefficient, but at the same time ignore the implications of other coefficients from the same sample and research method. The evidence suggests that, if cash is in fact fully valued by the market, then sampling error leads to the coefficient on cash (0.73 to 0.88) being understated and therefore the coefficient on credits (0.34 to 0.57) being overstated.

Statistical mechanics of time series
Riccardo Marcaccioli,Giacomo Livan

Countless natural and social multivariate systems are studied through sets of simultaneous and time-spaced measurements of the observables that drive their dynamics, i.e., through sets of time series. Typically, this is done via hypothesis testing: the statistical properties of the empirical time series are tested against those expected under a suitable null hypothesis. This is a very challenging task in complex interacting systems, where statistical stability is often poor due to lack of stationarity and ergodicity. Here, we describe an unsupervised, data-driven framework to perform hypothesis testing in such situations. This consists of a statistical mechanical theory - derived from first principles - for ensembles of time series designed to preserve, on average, some of the statistical properties observed on an empirical set of time series. We showcase its possible applications on a set of stock market returns from the NYSE.

Takeover, Distress, and Equity Issuance: Evidence from Korea
Cho, Euna
We study the motive and the economic effects of takeover in Korea, which has not been actively studied due to difficulties in collecting data. Using the data of largest shareholder change disclosed in the Korea Exchange's public disclosure system in 2004-2017, we estimate logit regressions of the likelihood that the firms to be a target. We also estimate panel regressions to examine the effect of takeovers on financial performances. The results show that takeovers in Korea occur in relation to financial distress, and that some companies tend to be targeted repeatedly. However, after the takeover, the financial distress is not resolved, indicating poor performance of takeovers motivated by financial distress.

Tempered stable distributions and processes
Uwe Küchler,Stefan Tappe

We investigate the class of tempered stable distributions and their associated processes. Our analysis of tempered stable distributions includes limit distributions, parameter estimation and the study of their densities. Regarding tempered stable processes, we deal with density transformations and compute their $p$-variation indices. Exponential stock models driven by tempered stable processes are discussed as well.

The Economic Drivers of Commodity Market Volatility
Prokopczuk, Marcel,Stancu, Andrei,Symeonidis, Lazaros
We analyze the relationship between economic uncertainty and commodity market volatility. We find that commodity market volatility comoves strongly with economic and financial uncertainty, especially during recessions. Variables associated with credit risk, financial market stress, and fluctuations in business conditions bear significant predictive ability for commodity market volatility. The documented predictability is mainly observed in the period after the financialization of commodity markets (i.e. post-2004) and it peaks around the 2008-2009 global financial crisis.

The Effect of Language on Investing: Evidence from Searches in Chinese Versus English
Chuang, Hui-Ching,Hasan, Iftekhar,Huang, YinSiang,Lin, Chih-Yung
This study examines the language effect on investing using the Google search records of Chinese- versus English-speaking searchers. First, we find that the attention of Chinese speakers induces that of English speakers, increases abnormal news coverage, and has better predictability on stock returns. Second, Chinese searchers react faster to the shock of news events than those who search in English possibly because of a time lag for translation. Third, Chinese attention can reduce the price drift of earning surprises, whereas English attention cannot do so. Last, evidence shows that the firm-level information asymmetry is the channel of the local advantage. Therefore, our results suggest that investors using their local official language have a home advantage to find more profitable investment opportunities.

Trademark Protection and Bank Loan Contracting: The Evidence from the 1996 Federal Trademark Dilution Act
Chiu, Wan-Chien,Hsu, Po-Hsuan,Wang, Chih-Wei
This paper examines the role of trademark protection in bank loan contracting by exploiting the 1996 Federal Trademark Dilution Act (FTDA) that substantially strengthened the protection of famous trademarks. A difference-in-differences analysis based on the FTDA suggests that firms with more famous trademarks pay significantly lower interest rates, and reveal lower cash flow volatility and higher profitability. We also find a significantly increased frequency in firms’ use of trademarks as collateral to secure bank loans. These results are consistent with the view that banks account for enhanced brand value through trademark protection that strengthens firms’ market positions.

Visible and Invisible Forces: What Drives the Intensity of Trading in the European Carbon Market?
Kalaitzoglou, Iordanis
This study models the trading intensity in European Allowances (EUA) futures contracts in the European Climate Exchange (ECX) using various specifications and investigates the forecasting ability of observable versus unobservable factors. This set up tests empirically the impact of the evolving market structure through regulatory updates, captured by trading volume fluctuations, to the intensity of trading in the European Carbon market. The findings suggest that observable market characteristics capture better the dynamics of trading intensity than their latent counterparts, which implies that regulatory changes that enhance transparency would also improve market efficiency.

Why Bitcoin Dominates
Peterson, Timothy
Just as network effects can dramatically increase value through positive feedback, value can be lost as networks shrink due to competition or incompatibility. In the instance of cryptocurrency as a network and with Metcalfe’s Law as the methodology, we illustrate by numerical example that holding less than 100% of the dominant coin results in sub-optimal value for all network participants. We calculate the economic impact of competing coins (“altcoins”) on Bitcoin’s value and find that they may negatively impact the entire cryptocurrency ecosystem theoretical maximum value by several billion dollars. More importantly, we illustrate that the trade-offs between a dominant cryptocurrency network and a competing alternative are not one-for-one. Metcalfe’s Law gives a simple approximation rule: the percent change in value is approximately twice the percent change in users. In the four currencies we studied, we found that without exception, price sensitivity to change in users centered around 2×. The asymmetrical nature of network effects also means traditional “money flow” analysis used in equity markets incorrectly estimates the impact of capital movements across network assets.Furthermore, we find network size dominates transaction activity as a price driver in at least three of four coins examined. Value is impacted asymmetrically and favors or disfavors the dominant coin, depending on whether a currency is being adopted or shunned: abandoning one currency in favor another will affect the dominant coin with greater impact. This finding offers a possible explanation for the resistance of governments and central banks to Facebook’s planned offering of its digital currency Libra.