Research articles for the 2019-07-16

A Model of Presidential Debates
Doron Klunover,John Morgan

Presidential debates are thought to provide an important public good by revealing information on candidates to voters. However, this may not always be the case. We consider an endogenous model of presidential debates in which an incumbent and a contender (who is privately informed about her own quality) publicly announce whether they are willing to participate in a public debate, after taking into account that a voter's choice of candidate depends on her beliefs regarding the candidates' qualities and on the state of nature. Surprisingly, it is found that in equilibrium a debate occurs or does not occur independently of the contender's quality or the sequence of the candidates' announcements to participate and therefore the announcements are uninformative.

Anatomy of Blockchain Revolution. From Digital Gold to Digital Treasures Through the Digital Crash
Izhutov, Pavel
The crypto-economy is booming and its combined market cap already exceeds $300B. However, many experts silently admit that most of this growth is fueled mainly by speculation and fraud, which implies that crypto-investors and their money will not be together for long.In this paper, we try to analyze why this could be the case, and what to expect after the crash.

Asymmetric linkages: maxmin vs. reflected maxmin copulas
Damjana Kokol Bukovšek,Tomaž Košir,Blaž Mojškerc,Matjaž Omladič

In this paper we introduce some new copulas emerging from shock models. It was shown earlier that reflected maxmin copulas (RMM for short) are not just some specific singular copulas; they contain many important absolutely continuous copulas including the negative quadrant dependent part of the Eyraud-Farlie-Gumbel-Morgenstern class. The main goal of this paper is to develop the RMM copulas with dependent endogenous shocks and give evidence that RMM copulas may exhibit some characteristics better than the original maxmin copulas (MM for short): (1) An important evidence for that is the iteration procedure of the RMM transformation which we prove to be always convergent and we give many properties of it that are useful in applications. (2) Using this result we find also the limit of the iteration procedure of the MM transformation thus answering a question proposed earlier by Durante, Omladi\v{c}, Ora\v{z}em, and Ru\v{z}i\'{c}. (3) We give the multivariate dependent RMM copula that compares to the MM version given by Durante, Omladi\v{c}, Ora\v{z}em, and Ru\v{z}i\'{c}. In all our copulas the idiosyncratic and systemic shocks are combined via asymmetric linking functions as opposed to Marshall copulas where symmetric linking functions are used.

Calculating Returns in the Secondary Corporate Loan Market
Beyhaghi, Mehdi,Ehsani, Sina
This note describes in detail the methodology to calculate returns in the secondary corporate loan market. It is provided as a supplementary note to "The cross-section of expected returns in the secondary corporate loan market."

Can Risk Be Shared Across Investor Cohorts? Evidence from a Popular Savings Product
Hombert, Johan,Lyonnet, Victor
This paper shows how one of the most popular savings products in Europe - life insurance financial products - shares market risk across investor cohorts. Insurers smooth returns by varying reserves that offset fluctuations in asset returns. Reserves are passed on between successive investor cohorts, causing redistribution across cohorts. Using regulatory and survey data on the 1.4 trillion euro French market, we estimate this redistribution to be quantitatively large: 1.4% of savings value per year on average, or 0.8% of GDP. These findings challenge a large theoretical literature that assumes inter-cohort risk sharing is impossible. We develop and provide evidence for a model in which the elasticity of investor demand to predictable returns determines the amount of risk sharing that is possible. The evidence is consistent with low elasticity, sustaining inter-cohort risk sharing despite predictable returns. Demand elasticity is higher for investors with a larger investment amount, suggesting that low investor sophistication enables inter-cohort risk sharing.

Comovements and Spillovers in International Commercial and Residential Real Estate Markets
Kishor, N. Kundan
To what extent do the commercial and the residential estate markets move together across different countries? Do the shocks originating in one of these markets spillover to the other markets? We answer these questions by applying a modified version of the dynamic factor model to the commercial and residential real estate prices in the Euro area, Hong Kong, Singapore and the U.S. This modified dynamic factor model decomposes the price growth in these two real estate markets into common, spillover and idiosyncratic components. The results show significant heterogeneity in the relative importance of these three components in the evolution of commercial and residential price growth across different countries and across time. Our findings suggest that the spillover from residential to commercial real estate market dominates the spillover from commercial to real estate market for all the countries in our sample. We also find that common component accounts for a large fraction of the price movements in the residential markets in the EU area and the U.S, whereas spillover and common component together explain more than two-third of the variations in Hong Kong and Singapore. We also find that the role of spillover from one market to another increased significantly during the financial crisis of 2008-09.

Consistency of option prices under bid-ask spreads
Stefan Gerhold,I. Cetin Gülüm

Given a finite set of European call option prices on a single underlying, we want to know when there is a market model which is consistent with these prices. In contrast to previous studies, we allow models where the underlying trades at a bid-ask spread. The main question then is how large (in terms of a deterministic bound) this spread must be to explain the given prices. We fully solve this problem in the case of a single maturity, and give several partial results for multiple maturities. For the latter, our main mathematical tool is a recent result on approximation by peacocks [S. Gerhold, I.C. G\"ul\"uum, arXiv:1512.06640].

Corporate Social Responsibility and Labor Investment Efficiency
Pereira da Silva, Paulo
Using a large dataset of U.S. firms and covering the period 2004-2017, we investigate Corporate Social Responsibility (CSR) influence on a firm’s employment decisions. In doing so, panel data regression is employed with the aim of exploring the effects of CSR on abnormal net hiring. Our main findings indicate that CSR hardly affects abnormal net hiring in the form of over-investment (i.e., over-hiring and under-firing). However, CSR appears to be a pervasive determinant of under-investment, particularly in what concerns under-hiring. The effect of CSR on labor under-investment appears to be centered in firms exhibiting extreme positive CSR performance, i.e., firms ranked in the fifth quintile of CSR scores in a given year. Notably, our results reveal greater sensitivity of under-investment to CSR performance in firms exhibiting lower financial constraints and lower financial slack. Industries with high-skilled employees and low substitutability between labor and capital also exhibit a greater impact of CSR performance on under-investment. Our interpretation of the results is that lower flexibility in employment decisions makes CSR firms more prone to under-hiring.

Does Environmental Performance Help Firms’ Value to Recover Faster from Environmental Controversies: International Evidence?
Ullah, Muhammad
Even though researchers have thoroughly investigated the link between the environmental performance (EP) of firms and their financial performance, it remains rare in the context of financial resilience against environmental controversies (EC). Therefore, this study aims to contribute to the literature by analyzing the impact of the EP of firms on their financial resilience against the financial shock caused by EC, and the moderating role of country-level environmental standards in this relationship. According to the resource-based view, EP is a source of green image and reputation among stakeholders, and a firm may reinforce that image and reputation to mitigate the impact of EC on the firm’s market value. However, this relationship may not be observed if the firm’s country is not environmentally-oriented. By performing survival analysis on an international dataset of 233 observations, the results show that EP prior to disclosure of EC significantly increases the likelihood of a firm’s market price recovery from the shock. Indicating that EP is source of green image and reputation which attracts investors’ attention. This enables firms to cope with EC shocks. This relationship is robust on inclusion of different control variables, regression models and different measures of resilience. The results also find that this relationship is significant only in environmentally-oriented countries. Which shows that EP of firms pays off when the country-level environmental standards are strong. Furthermore, two of the subcategories of EP i.e. “emission reduction” and “product innovation” have the same association with resilience. However, the “resource reduction” category does not affect resilience significantly, which may have a trade-off effect between its financial benefits and costs.

Economic Policy Uncertainty and Corporate Cash Holdings: An International Evidence
Al-Thaqeb, Saud,Javadi, Siamak,Mollagholamali, Mohsen
We examine the relationship between corporate cash holdings of firm among 21 countries and their respective economic policy uncertainty index. We are able to replicate the positive relationship between the cash holding and policy uncertainty index in the US and major emerging market economies. However, contrary to the findings of the previous literature, we find that there is an inverse relationship between the economic policy uncertainty and cash holdings in the whole sample. These results persist if we remove the US from our sample. Further, we show that the negative effect of uncertainty on cash holding is driven by developed countries other than US. We also show that in the face of uncertainty, countries with better governance index cash holding decreases more. Finally, we provide a channel for this reduction of cash in the face of uncertainty by showing that the dividend payments increase in the presence of uncertainty.

Effect of Microfinance on Women Empowerment: A Case Study of Pakistan
Niaz, Muhammad,Iqbal, Mazhar
Women empowerment is a pivotal issue of developing counties, particularly in Asia and Africa. Zero poverty and gender equality are the distinctive goals among SDGs of UN. Considering the empirically tested impact of microfinance on women empowerment in different regions of the world, this paper assesses the impact of microfinance on empowerment and poverty alleviation in women living in Pakistan. This impact has been analyzed comprehensively with better empirical methodology (Ordinary Least Square â€" OLS and Propensity Score Matching â€" PSM) and comparatively a larger cross-sectional dataset of 670 respondents. From the values of the responses, Multidimensional Poverty Index (MPI) has been developed to assess the Multidimensional poverty levels of the respondents. Results showed that exposure to microfinance has a positive impact on women empowerment, poverty alleviation, and social status of women by raising their income level. Therefore, it is concluded that microfinance and MFIs are considered to be an effective mechanism for attaining the SDGs in Pakistan.

Experimental Asset Markets with An Indefinite Horizon
Duffy, John,Jiang, Janet,Xie, Huan
We study the trade of indefinitely-lived assets in experimental markets. The traded prices of these assets are on average more than 40% below the risk-neutral fundamental value under the expected utility assumption. We examine the effects of three interrelated factors for the traded price, payoff uncertainty about the asset’s dividend payments, horizon uncertainty about the duration of trade, and the expected utility assumption. Our results suggest that horizon uncertainty does not significantly affect the traded price. Incorporating risk aversion into non-expected utility models with recursive preferences and probability weighting can rationalize the low prices observed in our indefinite-horizon asset markets.

Four Things No One Will Tell You About ESG Data
Kotsantonis, Sakis,Serafeim, George
As the ESG finance field and the use of ESG data in investment decision‐making continue to grow, we seek to shed light on several important aspects of ESG measurement and data. This article is intended to provide a useful guide for the rapidly rising number of people entering the field. We focus on the following:• The sheer variety, and inconsistency, of the data and measures, and of how companies report them. Listing more than 20 different ways companies report their employee health and safety data, the authors show how such inconsistencies lead to significantly different results when looking at the same group of companies.• ‘Benchmarking,’ or how data providers define companies' peer groups, can be crucial in determining the performance ranking of a company. The lack of transparency among data providers about peer group components and observed ranges for ESG metrics creates market‐wide inconsistencies and undermines their reliability.• The differences in the imputation methods used by ESG researchers and analysts to deal with vast ‘data gaps’ that span ranges of companies and time periods for different ESG metrics can cause large ‘disagreements’ among the providers, with different gap‐filling approaches leading to big discrepancies.• The disagreements among ESG data providers are not only large, but actually increase with the quantity of publicly available information. Citing a recent study showing that companies that provide more ESG disclosure tend to have more variation in their ESG ratings, the authors interpret this finding as clear evidence of the need for ‘a clearer understanding of what different ESG metrics might tell us and how they might best be institutionalized for assessing corporate performance.’What can be done to address these problems with ESG data? Companies should ‘take control of the ESG data narrative’ by proactively shaping disclosure instead of being overwhelmed by survey requests. To that end, companies should ‘customize’ their metrics to some extent, while at the same time seeking to self‐regulate by reaching agreement with industry peers on a ‘reasonable baseline’ of standardized ESG metrics designed to achieve comparability. Investors are urged to push for more meaningful ESG disclosure by narrowing the demand for ESG data into somewhat more standardized, but still manageable metrics. Stock exchanges should consider issuingâ€"and perhaps even mandatingâ€"guidelines for ESG disclosures designed in collaboration with companies, investors, and regulators. And data providers should come to agreement on best practices and become as transparent as possible about their methodologies and the reliability of their data.

IFRS Adoption and Within-Jurisdiction Comparability: Evidence from Chinese Dual-Class Firms
Guan, Jenny Xinjiao,Ye, Kangtao,Zhang, Shanshan,Zhang, Xiao-Jun
We analyze a unique set of Chinese firms to isolate the effect of accounting standards on within-jurisdiction comparability. A sample of Chinese firms simultaneously maintain two sets of financial statements over the period of 2001-2006 because of their dual-class share structure: statements for A-shares follow Chinese GAAP and those for B-shares follow IFRS. We find a disparity in within-jurisdiction accounting comparability between these two sets of accounting standards: IFRS produces less comparable information within jurisdiction than does Chinese GAAP. We also find that the disparity in comparability is related to fair value accounting, especially when corporate governance is weak. Further, we find that comparability disparity incurs capital market consequence. Disparity in comparability is associated with the differences in stock price and liquidity between A- and B-shares. Our study has implications for the effects of IFRS adoption on overall comparability in general and within-jurisdiction comparability in particular. Our study suggests that a country has to trade off the loss from impaired within-jurisdiction comparability against the benefit from enhanced cross-jurisdiction comparability when considering IFRS adoption.

Is Tax Planning Best Done In Private?
Hoopes, Jeffrey L.,Langetieg, Patrick,Maydew, Edward L.,Mullaney, Michele
We investigate whether privately-held firms engage in more tax planning than do publicly-held firms. Private firms are commonly believed to face lower non-tax costs of tax planning relative to public firms, allowing them to engage in more tax planning. However, empirical evidence of U.S. private firm tax planning is limited, primarily because of difficulty in obtaining private firm data. We make use of detailed administrative data from the Internal Revenue Service, which cover virtually all U.S. public and private firms and allow us to examine a variety of specific tax planning measures. Contrary to conventional wisdom, we find no evidence that private corporations engage in more tax planning relative to similar-sized public corporations in the same industry. Moreover, some evidence suggests that private firms actually engage in less tax planning. These findings are not explained by firm characteristics commonly used to explain tax behavior. These results have important implications for researchers as well as for policymakers and managers.

Local Government Debt and Regional Competition in China
Qu, Xi,Xu, Zhiwei,Zhu, Jun
The GDP tournament among local governments plays a crucial role in supporting China's growth miracle. Investment-driven economic growth has led to a surge in local government debt in the past decade. To understand the relationship between local government debt and regional competition in GDP growth, we build a simple decision model of local governors based on prospect theory. Using a comprehensive data set of prefectural-level government debt, our empirical results confirm the theoretical prediction that regional competition in GDP growth does affect the dynamics of local government debt. The effect presents an asymmetric pattern, in the sense that a local government with GDP growth falling behind its competitors tends to issue debt more aggressively, while the effect is insignificant for local governments with GDP growth ahead of their competitors'. Furthermore, we find that the regulatory policy implemented at the end of 2015 that places a ceiling on local government debt effectively dampens the impact of regional competition on local government debt. However, local government investment remains strongly responsive to the regional GDP growth gap, probably because of alternative financial channels such as land financing. The above finding indicates that the debt regulatory policy cannot largely prevent local governments from implementing a pro-growth strategy induced by regional competition.

Location and portfolio selection problems: A unified framework
Justo Puerto,Moises Rodríguez-Madrena,Andrea Scozzari

Given a set of assets and an investment capital, the classical portfolio selection problem consists in determining the amount of capital to be invested in each asset in order to build the most profitable portfolio. The portfolio optimization problem is naturally modeled as a mean-risk bi-criteria optimization problem where the mean rate of return of the portfolio must be maximized whereas a given risk measure must be minimized. Several mathematical programming models and techniques have been presented in the literature in order to efficiently solve the portfolio problem. A relatively recent promising line of research is to exploit clustering information of an assets network in order to develop new portfolio optimization paradigms. In this paper we endow the assets network with a metric based on correlation coefficients between assets' returns, and show how classical location problems on networks can be used for clustering assets. In particular, by adding a new criterion to the portfolio selection problem based on an objective function of a classical location problem, we are able to measure the effect of clustering on the selected assets with respect to the non-selected ones. Most papers dealing with clustering and portfolio selection models solve these problems in two distinct steps: cluster first and then selection. The innovative contribution of this paper is that we propose a Mixed-Integer Linear Programming formulation for dealing with this problem in a unified phase. The effectiveness of our approach is validated reporting some preliminary computational experiments on some real financial dataset.

National Culture and Bank Deposits
Mourouzidou Damtsa, Stella,Milidonis, Andreas,Stathopoulos, Konstantinos
This paper investigates the relation between national culture and bank deposits. Using annual data (1995-2015) of a sample of 99 banks that participated in the 2014 stress tests of the European Banking Authority, we document relations between three national cultural traits and bank deposits. The effect of hierarchy and individualism on deposits is stronger (positive and negative, respectively) in domestic banks where culture is more homogeneous compared to global banks. On the other hand, the positive effect of trust on deposits is robust in both domestic and global banks, reinforcing the view that banking is largely based on trust. Motivated by recent regulatory changes emphasizing the importance of liquidity (deposit) stability, we further analyse the impact of annual bank-level deposit stability within countries where trust is invariant. We show that high deposit volatility decreases the positive effect of trust on deposit levels. Results are robust to endogeneity concerns, thus suggesting a causal effect, and are economically significant.

Nature of thermodynamics equation of state towards economics equation of state
Burin Gumjudpai,Yuthana Sethapramote

This work critics on nature of thermodynamics coordinates and on roles of the variables in the equation of state (EoS). Coordinate variables in the EoS are analyzed so that central concepts are noticed and are used to lay a foundation in building of a new EoS or in testing EoS status of a newly constructed empirical equation. With these concepts, we classify EoS into two classes. We find that the EoS of market with unitary price demand and linear price-dependent supply function proposed by \cite{GumjMarket}, is not an EoS because it has only one degree of freedom.

Quant GANs: Deep Generation of Financial Time Series
Magnus Wiese,Robert Knobloch,Ralf Korn,Peter Kretschmer

Modeling financial time series by stochastic processes is a challenging task and a central area of research in financial mathematics. In this paper, we break through this barrier and present Quant GANs, a data-driven model which is inspired by the recent success of generative adversarial networks (GANs). Quant GANs consist of a generator and discriminator function which utilize temporal convolutional networks (TCNs) and thereby achieve to capture longer-ranging dependencies such as the presence of volatility clusters. Furthermore, the generator function is explicitly constructed such that the induced stochastic process allows a transition to its risk-neutral distribution. Our numerical results highlight that distributional properties for small and large lags are in an excellent agreement and dependence properties such as volatility clusters, leverage effects, and serial autocorrelations can be generated by the generator function of Quant GANs, demonstrably in high fidelity.

Reducing Legal Uncertainty and Regulatory Arbitrage for Robo-Advice
Maume, Philipp
Robo-advisers are online financial adviser services that use algorithms to create investment recommendations without human input. They deliver advice at low costs and they are growing in popularity. However, the nature of the interaction between client and machine raises many legal questions under the applicable EU regulation. This article argues that robo-advisers provide investment advice within the meaning of the Second Markets in Financial Instruments Directive (MiFiD2). They are subject to authorisation by the national regulator and ongoing conduct requirements. It might be tempting to introduce regulatory sandboxes to address the persisting legal uncertainties in practice, but such a regulatory change does not seem likely in the near future. Instead, regulatory arbitrage should be reduced by a uniform application of the MiFiD2 framework throughout the EU. Regulators and courts should also be aware that software replacing human advisers diverges from the basic idea of human interaction that forms the basis of contract law. Investment firms are able to use new technology in the services they provide. However, as this means introducing new risks for investors, the investment firm should be subject to a strict liability regime for failures of the respective technology (for example, the unavailability of the service).

Roads and Loans
Agarwal, Sumit,Mukherjee, Abhiroop,Naaraayanan, S Lakshmi
Does financing respond to changes in productive opportunities even for the world's poor? We shed light by examining the response of private bank financing to a rural road-building program in India. The program prioritized roads for villages above explicit population thresholds, allowing us to use discontinuities in treatment probability for identification. We find large financing responses - odds of a villager getting a loan is twice as high, and the average loan amounts are about 50% higher - for villages just above the threshold compared to those below. Benefits seem to flow disproportionately to those traditionally disadvantaged in rural societies.

Securitization Structures and Security Design
Gauthier, Laurent
Securitization has been a subject of interest in the security design literature, and various models have been developed in order to explain why such transactions should produce senior securities and junior securities. However securitization structures are far more complex than a simple tranching by seniority. Using a model extending the existing literature, we derive new results by considering that interest and principal should be separately contractible, and that the senior bonds in a securitization should be par-priced, both realistic constraints. This allows us to derive optimal designs closely resembling actual securitization structures. Further, we show that the resecuritization of residuals, in the form of NIMs or reremics, is optimal through a pooling effect. We also analyze the interactions between collateral characteristics and pricing, reflecting securitization execution, and issuer structure choices. With a simple numerical application, we illustrate how important resecuritization is, and also how more attractive an excess-spread structure is relative to a more standard structure, as expected collateral losses increase. According to our analysis, the apparent complexity in excess-spread structure and in resecuritizations can be explained by a valid optimal design argument.

Success Is Good but Failure Is Not So Bad Either: Serial Entrepreneurs and Venture Capital Contracting
Nahata, Rajarishi
I analyze prior entrepreneurship as a determinant of financial contracting with venture capitalists and find more company-favorable contracts in startups founded by serial entrepreneurs. Repeat founders and other insiders retain greater board control and also suffer less equity dilution in their dealings with VCs. Second, serial founders retain their CEO positions more often. Third, startups founded by serial entrepreneurs obtain higher valuations at VC funding although this finding is confined to previously successful founders who also obtain the best contracts. Interestingly these results obtain despite poorer performance of such startups and VCs funding them sooner. Overall, even previously unsuccessful serial entrepreneurs receive better deal terms than novice founders, consistent with entrepreneurial learning being an important factor in fostering future entrepreneurship.