Research articles for the 2019-07-18

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.

An Empirical Test of the Consumption-Based Asset Pricing Model (CCAPM) in Latin America
Kirch, Guilherme,Terra, Paulo R. S.,Alves, Tiago Wickstrom
This study investigates whether the Consumption-based Capital Asset Pricing Model (CCAPM) is consistent with the data from four Latin-American countries: Brazil, Chile, Colombia, and Mexico. Empirical results showed that there is a statistical significant relationship between mean excess returns and consumption betas in the countries cited above, with the exception of Mexico. Such results are, in part, similar to the results reported in previous studies for the United States of America.

An intelligent financial portfolio trading strategy using deep Q-learning
Hyungjun Park,Min Kyu Sim,Dong Gu Choi

A goal of financial portfolio trading is maximizing the trader's utility by allocating capital to assets in a portfolio in the investment horizon. Our study suggests an approach for deriving an intelligent portfolio trading strategy using deep Q-learning. In this approach, we introduce a Markov decision process model to enable an agent to learn about the financial environment and develop a deep neural network structure to approximate a Q-function. In addition, we devise three techniques to derive a trading strategy that chooses reasonable actions and is applicable to the real world. First, the action space of the learning agent is modeled as an intuitive set of trading directions that can be carried out for individual assets in the portfolio. Second, we introduce a mapping function that can replace an infeasible agent action in each state with a similar and valuable action to derive a reasonable trading strategy. Last, we introduce a method by which an agent simulates all feasible actions and learns about these experiences to utilize the training data efficiently. To validate our approach, we conduct backtests for two representative portfolios, and we find that the intelligent strategy derived using our approach is superior to the benchmark strategies.

Behavioural Macroeconomic Policy: New perspectives on time inconsistency
Michelle Baddeley

This paper brings together divergent approaches to time inconsistency from macroeconomic policy and behavioural economics. Behavioural discount functions from behavioural microeconomics are embedded into a game-theoretic analysis of temptation versus enforcement to construct an encompassing model, nesting combinations of time consistent and time inconsistent preferences. The analysis presented in this paper shows that, with hyperbolic/quasihyperbolic discounting, the enforceable range of inflation targets is narrowed. This suggests limits to the effectiveness of monetary targets, under certain conditions. The paper concludes with a discussion of monetary policy implications, explored specifically in the light of current macroeconomic policy debates.

Brownian bridge with random length and pinning point for modelling of financial information
Mohammed Louriki

Developed countries are increasingly relying on gas storage to ensure security of supply. In this article we consider an approach to gas storage valuation in which the information about the time at which the holder of a gas storage contract should choose to inject or withdraw gas is modelled using a Brownian bridge that starts at zero and is conditioned to equal a constant x in the time of injection and a constant y in the time of withdrawal. This enables to catch some empirical facts on the behavior of gas storage markets: when the Brownian bridge process is away from the boundaries x and y, the holder of the gas storage contract can be relatively sure that the best decision is to do nothing. However, when the bridge information process absorbs y, the holder of the contract should take the decision of withdrawing gas on the other hand, they should take the decision to inject gas when the process absorbs x. In this sense the Brownian bridge information process leaks information concerning the time at which the holder of a storage contract can choose to inject gas, do nothing, or withdraw gas. The issue of storage valuation is not limited to gas markets, storages also plays a significant, balancing role in, for example, oil markets, soft commodity markets and even electricity. The principle of our approach is applicable to those markets as well. In this paper we define and study the Brownian bridge with random length and pinning point. Its main objectives is to see if the properties of Brownian bridges with deterministic length and pinning point remain valid in case its length and pinning point are random. Amongst other we prove that the bridge fails to be Markovian for pinning points having a law, which is absolutely continuous with respect to the Lebesgue measure.

CEO-CFO Educational Ties and Mergers and Acquisitions
Belot, Francois,Waxin, Timothée
This paper analyzes the social connections between a firm’s chief executive officer (CEO) and its chief financial officer (CFO). We focus on French educational networks and examine the corporate governance and performance of firms whose CEO and CFO attended the same elite college (Grande école). Given the strong involvement of CEOs and CFOs in the takeover process, we investigate acquisition policies and observe that strong social ties within the top management team are associated with higher acquisitiveness and lower returns for bidder shareholders. These results are consistent with excessive managerial homogeneity reducing CEO monitoring and reinforcing decisional biases such as overconfidence. We find that CEOs are more likely to choose socially connected CFOs when CEOs are more powerful and are employed at firms with lower board monitoring. We also show that CEOs are less likely to be fired when the firms’ CFOs are drawn from the same network. These results suggest that social connections within executive committees come at the cost of CEO entrenchment and corporate governance failures.

Corporate Tax Avoidance and Debt Costs
Shevlin, Terry J.,Urcan, Oktay,Vasvari, Florin P.
We use path analysis to investigate how corporate tax avoidance is priced in bond yields and bank loan spreads. We find that approximately one half of the total effect of tax avoidance on bond yields is explained through the negative effect of tax avoidance on future pre-tax cash flow levels and volatility and, to a lesser extent, lower information quality. The effects of these mediating variables are much less pronounced for bank loan spreads. The results of additional cross-sectional analyses indicate that, relative to bond investors, banks are able to reduce information asymmetry problems more effectively, given their access to firms’ private information and greater ability to monitor borrowers.

Debt Covenant Design and Creditor Control Rights: Evidence from the Tightest Covenant
Wang, Jing
Within the same debt contract, some financial covenants are considerably more restrictive than others. I exploit this heterogeneity in covenant design and show that the design of the most restrictive covenant is systematically associated with covenant outcomes - compliance, violations, or renegotiations. Consistent with an alleviation of moral hazard problems, tighter capital expenditure restrictions (performance covenants) are more likely to facilitate ex post creditor control through covenant renegotiations (violations). By contrast, borrowers are more likely to comply with contracts with tighter capital covenants, suggesting that these covenants more effectively align shareholder-creditor interests ex ante to avoid adverse selection problems.

Decision Making, Belief and Behavioural Biases
Behavioural finance theories explain "why" individuals exhibit behaviours that do not maximize expected utility. Behavioural finance highlights inefficiencies, such as under- or over-reactions to information, as causes of market trends and, in extreme cases, of bubbles and crashes. Such reactions have been attributed to limited investor attention, overconfidence, over optimism, mimicry (herding instinct) and noise trading. Technical analysts consider behavioural finance to be behavioural economics' "academic cousin" and the theoretical basis for technical analysis.This research work establishes a relationship between Decision Making, Beliefs and how cognitive behavioural biases affect or inter relate with one another.

Disability Incidence and Functional Decline among Older Adults with Major Chronic Diseases
Fong, Joelle H.
Background: More than 80% of elderly Americans have at least one chronic disease. While past studies have shown that the pattern of functional loss follows a distinct progression that may differ by gender and institutional settings, little is known about whether such patterns differ in relation to chronic health condition. The aim of this study is to investigate the pattern of functional loss among older adults with major chronic illnesses, and to compare their onset, ordering and general pattern of incident ADL disability with those of persons without such conditions.Methods: We use a nationally representative sample of persons aged 80+ from the 1998-2016 Asset and Health Dynamics of the Oldest Old survey. The group with major noncommunicable diseases (including cardiovascular disease, cancer, chronic respiratory disease, and diabetes) comprises 3,514,052 subjects, while the comparison group comprises 1,073,263 subjects. Self-reports of having difficulty with six distinct ADLs are used to estimate disability incidence rate. Nonparametric statistical methods are used to derive median onset ages and ADL loss sequence separately for each group. Results: Older adults with major chronic diseases have higher rates of incident disability across all ADL items, and those who are have disabilities face a higher mortality risk. For the full sample, the estimated median onset ages of ADL disabilities range from 91.5 to 95.6. Disability occurs earlier for chronically ill persons (onset ages 91.1-95.0) than for those in the comparison group (onset ages 93.5-98.1). The pattern of functional loss is, however, largely similar between groups. The loss sequence for both subpopulations are characterized by an early-loss cluster and a late-loss cluster. Results also show that disability progression for those with major chronic diseases is compressed within a shorter timeframe, and that timing gaps between adjacent disabilities are smaller. Conclusions: Older Americans with major noncommunicable diseases face an earlier and steeper slope of functional decline. Chronic care delivery programs should adapt to dynamic changes in older patients’ functional status. Health interventions to help patients delay disability onset and optimize functional autonomy within emerging models of chronic care should especially target early-loss activities such as bathing, dressing, and walking.

Evaluación de la solvencia (Creditworthiness Assessment)
Zunzunegui, Fernando
Spanish Abstract: Hay normas de gobierno de productos, que condicionan la producción y distribución de los préstamos a la satisfacción de las necesidades de los clientes a los que se destinan, y unas normas de conducta, de conocer al cliente, evaluarle y suministrarle por personal cualificado información clara y comprensible sobre el producto ofrecido. En este capítulo nos vamos a ocupar de la obligación de evaluación de la solvencia del potencial prestatario. La correcta evaluación requiere conocer al cliente y para conocer al cliente es necesario evaluarlo con profesionalidad.English Abstract:There are rules of product governance which condition the design and distribution of loans to meet the needs of targeted customers. There are also conduct of business rules to know the customer, assess him and provide him clear and comprehensible information on the product by qualified staff. This chapter addresses the obligation to carry out the creditworthiness assessment of the potential borrower. The correct assessment requires to know the client, and to know the client it is necessary to assess him in a professional manner.

Formal verification of trading in financial markets
Suneel Sarswat,Abhishek Kr Singh

We introduce a formal framework for analyzing trades in financial markets. An exchange is where multiple buyers and sellers participate to trade. These days, all big exchanges use computer algorithms that implement double sided auctions to match buy and sell requests and these algorithms must abide by certain regulatory guidelines. For example, market regulators enforce that a matching produced by exchanges should be \emph{fair}, \emph{uniform} and \emph{individual rational}. To verify these properties of trades, we first formally define these notions in a theorem prover and then give formal proofs of relevant results on matchings. Finally, we use this framework to verify properties of two important classes of double sided auctions. All the definitions and results presented in this paper are completely formalised in the Coq proof assistant without adding any additional axioms to it.

Global Rules for a Global Market Place? â€" The Regulation and Supervision of FinTech Providers
Lehmann, Matthias
Financial technology (FinTech) revolutionizes the way in which financial services are rendered. Although the phenomenon is not new, it has taken on a novel dimension. Markets which were once national are morphing into global ones. The interest in regulating them not only exists, but to some extent is even higher compared to traditional services. This article illustrates the many different needs for regulating FinTech providers, from the protection of investors and consumers to the fight against money laundering and tax evasion. The article demonstrates that these questions cannot be adequately addressed by a laboratory free space or by self-regulation. It also shows that idiosyncratic national rules would result in legal fragmentation and deprive the world of the benefit that digital services can provide.The paper suggests therefore that global standards would be the most adequate solution for the regulation of global services. It proposes to re-conceptualize the FSB and to transform it into a ‘Financial Stability and Innovation Board’. In light of the diverging customs, knowledge and practices of residents around the world, the global standards need to be complemented by tailored national rules. Also, global rule harmonization will not cause differences in supervision to disappear. Regulatory competition and arbitrage might give incentives to countries to lower their supervisory standards, accepting negative externalities for residents of other states in order to become a global FinTech hub. This tendency must be countered by a competition for the strictest quality of supervision. Since such a competition requires transparency, this article suggests requiring mandatory information about the competent supervisor in any marketing and customer communication by a FinTech service provider. Through experience and ratings of supervisors, a run for quality will be triggered.

Information Arrival, Delay, and Clustering in Financial Markets With Dynamic Freeriding
Aghamolla, Cyrus,Hashimoto, Tadashi
We study informational freeriding in a model where agents privately acquire information and then decide when to reveal it by taking an action. Examples of such freeriding are prevalent in financial markets, e.g., the timing of IPOs, analysts' forecasts, and mutual funds' investment decisions. The main results show that, in large populations, few agents provide significant information while the vast majority of agents freeride. We highlight the role of uncertainty and market size in shaping the dynamics of price discovery. Our predictions include, among others, that heightened uncertainty enhances information production, yet weakens the precision and speed of information aggregation in the market.

Learning through Difficult Times: Evidence from Financial Analysts
Gong, Lei,Li, Frank Weikai,Zhang, Zilong
We document that financial analysts who experienced industry shocks over their career (experienced analysts) make more accurate earnings forecasts and more informative recommendation changes. The effect is unlikely to be explained by improved access to management as we find a stronger effect of industry shock experience after Regulation Fair Disclosure. Exogenous coverage termination of experienced analysts have real impacts on affected firms’ information environment. Overall, the evidence suggests that analysts can acquire industry expertise by learning through difficult times.

Let the Parametric Phoenix Fly
Barroso, Pedro,Reichenecker, Jurij-Andrei,Reichenecker, Michael R.
In international portfolios investors move away from domestic-only investing and diversify their allocation of assets by foreign equities. The exposure to foreign currencies adds an additional risk component which is managed in the currency overlay. To achieve an ideal weighting of the allocation of assets and the exposure to currencies, this study proposes a novel approach for a joint optimization. For the optimal weighting of equities we suggest to employ characteristics of momentum, value, and size strategies while currencies are allocated according to characteristics of carry trade, currency momentum, and currency value strategies. Relative to a benchmark and in an out-of-sample setting, we document an increase in the portfolios’ Sharpe ratio by 30% after transaction and rebalancing costs. This relative improvement is primarily driven by the increase in portfolios’ returns, while the portfolios’ overall volatility remains unaffected.

Machine Learning in Asset Management
Snow, Derek
This paper investigates various machine learning trading and portfolio optimisation models and techniques. The notebooks to this paper are Python based. By last count there are about 15 distinct trading varieties and around 100 trading strategies. Code and data are made available where appropriate. The hope is that this paper will organically grow with future developments in machine learning and data processing techniques.

Moody’s and S&P Ratings: Are They Equivalent? Conservative Ratings and Split Rated Bond Yields
Livingston, Miles,Wei, Jie (Diana),Zhou, Lei
We examine the relative impact of Moody’s and S&P ratings on bond yields and find that at issuance, yields on split rated bonds with superior Moody’s ratings are about 8 basis points lower than yields on split rated bonds with superior S&P ratings. This suggests that investors differentiate between the two ratings and assign more weight to the ratings from Moody’s, the more conservative rating agency. Moody’s becomes more conservative after 1998 and the impact of a superior Moody’s rating becomes stronger. Furthermore, the differential impact of the two ratings is more pronounced for the more opaque Rule 144A issues.

Powershare Mechanics
Beka Dalakishvili,Ana Mikatadze

This paper proposes the governance framework of a gamified social network for charity crowdfunding fueled by public computing. It introduces optimal scarce resource allocation model, technological configuration of the FIRE consensus protocol, and multi-layer incentivization structure that maximizes value creation within the network.

Predicting Corporate Bankruptcies
Snow, Derek
In this study, I present the use of non-linear models and accounting inputs to predict the occurrence of litigated bankruptcies and associated filing outcomes. The main purpose of this study is to identify the accounting patterns associated with bankruptcy. The filing outcomes include, among other things, how long the bankruptcy process will endure, whether the firm will successfully emerge after the bankruptcy period, whether the bankruptcy is tortuous and whether it will involve asset sales. The study highlights the importance of previously unidentified variables useful in predicting bankruptcies and bankruptcy outcomes. The study categorises predictor variables in accounting dimensions to empirically identify the importance of each dimension to the prediction tasks. The high-dimensionality of the gradient boosting machine allows us to identify and explain the nonlinear interactions between a wide range of variables to get a sense of the most important combinations.

Previsiones financieras (Financial Forecasts - Presentation Slides)
Casielles, Jorge
Spanish Abstract: Cómo hacer previsiones financieras cuadrando el balance con crédito bancario: ¿Cómo calculamos los activos fijos previsionales, las existencias, las cuentas por cobrar, la deuda a largo plazo, las cuentas a pagar, el patrimonio y la deuda? Efecto del crecimiento, los días operativos, % NOF y % AFN, payout y ROS. Previsiones financieras cuando las ventas no aumentan: si estamos realizando previsiones financieras y esperamos que las ventas no cambien, ¿aumentan las NOF? Si el AFN no cambia, ¿aumentará la deuda? Previsiones financieras cuando las ventas no aumentan y los días operativos cambian. Si estamos haciendo una previsión financiera y esperamos que las ventas no cambien, pero los días operativos cambian, ¿afectará esto a las NOF? ¿Afectará esto a la deuda? Previsiones financieras cuando las ventas crecen. Si esperamos que las ventas aumenten, pero los días operativos no cambien y el AFN no cambie, ¿afectará esto a la deuda? Previsiones financieras cuando las ventas y AFN aumentan: si esperamos que las ventas y AFN aumenten, ¿afectará esto a la deuda? El efecto del payout: si estamos realizando previsiones financieras para dos escenarios con payout diferentes, ¿qué escenario necesitará menos deuda? El efecto del ROS: si estamos realizando previsiones financieras para dos escenarios con ROS diferentes, ¿qué escenario necesitará menos deuda? Un atajo para hacer el balance previsional cuadrando el balance con la deuda. Introducción a la tasa de crecimiento sostenible. La tasa de crecimiento sostenible: ¿Cuál es la primera definición para la tasa de crecimiento sostenible? ¿Cómo se calcula si CAPEX = Amortizaciones? ¿Cómo se calcula si g AFN = g ventas? ¿Cuál es la segunda definición de Tasa de Crecimiento Sostenible? ¿Cómo se calcula? Cómo hacer previsiones a partir de establecer un objetivo de nivel de deuda. ¿Qué es el Cash Flow de los accionistas? Se incluyen múltiples ejercicios, un mini caso real y preguntas de autoevaluaciónEnglish Abstract: How to make forecast by balancing the balance sheet with bank credit: How do we calculate the estimated fixed assets, Inventory, receivables, cash long term debt accounts payable equity and debt? Effect of growth, the operating days, % NFO and % NFA, payout and ROS. Financial Forecasting when sales don’t grow: If we are making a financial forecasting and we expect the sales don’t change, do expected NFO increase? If NFA don’t change, will the debt increase?. Financial Forecasting when sales don’t grow and the operating days change. If we are making a financial forecasting and we expect sales don’t change but operational days change, will this affect to NFO? will this affect to debt? Financial Forecasting when sales grow. If we expect sales increase but operational days don’t change and NFA don’t change, will this affect to debt? Financial Forecasting when sales and NFA grow: If we expect sales and NFA increase, will this affect to debt? The effect of payout: If we are making the financial forecasting for two scenarios with different payouts (the rest is equal), which scenario will need less debt? The effect of ROS: If we are making the financial forecasting for two scenarios with different ROS (the rest is equal), which scenario will need less debt? A shortcut to make the balance sheet forecast balancing the balance with debt. Introduction to The Sustainable Growth Rate.The Sustainable Growth Rate: Which is the first definition for Sustainable Growth Rate? How is it calculated if CAPEX = Depreciation? How is it calculated if g NFA = g sales? Which is the second definition for Sustainable Growth Rate? How is it calculated? How to make forecast from setting a debt level target. What is shareholders cash Flow? Multiple exercises and practice questions are included.

Requisitos de conocimientos y competencia (Knowledge and Competence Requirements)
Zunzunegui, Fernando
Spanish Abstract: La formación de los empleados permite dar mejor información y elevar la transparencia al cliente financiero. En este sentido, la Ley de crédito inmobiliario incluye los requisitos de cualificación del personal entre las medidas de refuerzo de la transparencia que favorecen la seguridad jurídica. En este artículo nos ocupamos de los requisitos de capacitación del personal como normas de conducta de especial relevancia. Su objetivo es asegurar que el prestatario recibe una información adecuada. Además, como medida complementaria se fomenta la educación del prestatario. La comunicación es más fluida cuando se comparte una misma cultura y un mismo lenguaje.English Abstract: Training of employees allows to provide better information and to increase transparency. In this respect, Immovable Credit Law includes qualification requirements for staff among transparency reinforcement measures that improve legal certainty. This paper addresses training requirements of employees as conduct of business rules of special relevance. Its aim is to ensure that the borrower receives appropriate information. Moreover, education of borrowers is fostered as a complementary measure. Communication is more fluent when sharing the same culture and language.

Risk Reduction and Efficiency Increase in Large Portfolios: Leverage and Shrinkage
Zhao, Zhao,Ledoit, Olivier,Jiang, Hui
Two basic solutions have been proposed to fix the well-documented incompatibility of the sample covariance matrix with Markowitz mean-variance portfolio optimization: first, restrict leverage so much that no short sales are allowed; or, second, linearly shrink the sample covariance matrix towards a parsimonious target. Mathematically, there is a deep connection between the two approaches, and empirically they display similar performances. Recent developments have turned the choice between no-short-sales and linear shrinkage into a false ’either-or’ dichotomy. What if, instead of 0% leverage we considered fully-invested, long-short 130/30 portfolios, or even 150/50, given that prime brokers, fund regulators and investors have started to allow it? And instead of linearly shrinking the unconditional covariance matrix, what if we allowed for each of the eigenvalues of the sample covariance matrix to have its own shrinkage intensity, optimally determined under large-dimensional asymptotics, while also incorporating Multivariate GARCH effects? Our empirical evidence finds that, indeed, these new developments enable us to have ‘the best of both worlds’ by combining some appropriate leverage constraint with a judiciously chosen shrinkage method. The overall winner is a 150/50 investment strategy where the covariance matrix estimator is a combination of DCC (Dynamic Conditional Correlation â€" a well-known Multivariate GARCH model) â€" with NL (Non-Linear shrinkage, a substantial upgrade upon linear shrinkage technology); although 130/30 DCC-NL comes a close second. This is true both in the ‘pure’ case of estimating the Global Minimum Variance portfolio, and also for textbook-style construction of Markowitz mean-variance efficient portfolio.

Risk-dependent centrality in economic and financial networks
Paolo Bartesaghi,Michele Benzi,Gian Paolo Clemente,Rosanna Grassi,Ernesto Estrada

Node centrality is one of the most important and widely used concepts in the study of complex networks. Here, we extend the paradigm of node centrality in financial and economic networks to consider the changes of node "importance" produced not only by the variation of the topology of the system but also as a consequence of the external levels of risk to which the network as a whole is submitted. Starting from the "Susceptible-Infected" (SI) model of epidemics and its relation to the communicability functions of networks we develop a series of risk-dependent centralities for nodes in (financial and economic) networks. We analyze here some of the most important mathematical properties of these risk-dependent centrality measures. In particular, we study the newly observed phenomenon of ranking interlacement, by means of which two entities may interlace their ranking positions in terms of risk in the network as a consequence of the change in the external conditions only, i.e., without any change in the topology. We test the risk-dependent centralities by studying two real-world systems: the network generated by collecting assets of the S\&P 100 and the corporate board network of the US top companies, according to Forbes in 1999. We found that a high position in the ranking of the analyzed financial companies according to their risk-dependent centrality corresponds to companies more sensitive to the external market variations during the periods of crisis.

Signatures of crypto-currency market decoupling from the Forex
Stanisław Drożdż,Ludovico Minati,Paweł Oświęcimka,Marek Stanuszek,Marcin Wątorek

Based on the high-frequency recordings from Kraken, a cryptocurrency exchange and professional trading platform that aims to bring Bitcoin and other cryptocurrencies into the mainstream, the multiscale cross-correlations involving the Bitcoin (BTC), Ethereum (ETH), Euro (EUR) and US dollar (USD) are studied over the period between July 1, 2016 and December 31, 2018. It is shown that the multiscaling characteristics of the exchange rate fluctuations related to the cryptocurrency market approach those of the Forex. This, in particular, applies to the BTC/ETH exchange rate, whose Hurst exponent by the end of 2018 started approaching the value of 0.5, which is characteristic of the mature world markets. Furthermore, the BTC/ETH direct exchange rate has already developed multifractality, which manifests itself via broad singularity spectra. A particularly significant result is that the measures applied for detecting cross-correlations between the dynamics of the BTC/ETH and EUR/USD exchange rates do not show any noticeable relationships. This may be taken as an indication that the cryptocurrency market has begun decoupling itself from the Forex.

Strategic Uncertainty and the Power of Extrinsic Signals â€" Evidence from an Experimental Study of Bank Runs
Arifovic, Jasmina,Jiang, Janet
We investigate how the level of strategic uncertainty affects the coordination power of publicly observed extrinsic signals in a controlled laboratory environment in the context of a bank-run game. We run three treatments featuring different levels of strategic uncertainty. Although theory predicts that an equilibrium where agents’ choices and economic outcomes follow the realization of the extrinsic signal exists in all treatments, strong responses to the extrinsic signal occur only in the treatment where strategic uncertainty is high.

Taking Control: Active Investment Choice in Singapore’s National Defined Contribution Scheme
Fong, Joelle H.
This paper examines what factors drive active investment choice among more than 7,000 older plan participants in the Singaporean Central Provident Fund (CPF), and assesses the extent to which financial knowledge, experience, and attitudes help predict such choice. We find that only 16% of plan participants aged 50 and above in our sample in 2016 invest a portion of their pension savings outside of the default government-run CPF fund. Plan participants who are male, younger, not married, currently working for pay, have higher risk tolerance, and higher net worth are more likely to choose to actively manage their pension savings. Education is a strong independent determinant of active investment choice, but its effect diminishes with age. Longer-term financial planning horizon and experience in managing household finances, as well as in stocks investment, are also significantly associated with higher self-invested balances. Financial literacy score is, however, not significantly associated with non-default decision-making in our sample. Our findings have important implications for policy makers seeking to encourage greater individual responsibility in pension savings and investments within defined-contribution retirement systems.

Terminal Value Calculation with Constant Payout Ratio and Active Debt Management
Diedrich, Ralf,Dierkes, Stefan,Raths, Evelyn,Sümpelmann, Johannes
Due to the possible deferral of capital gains taxes, retaining earnings provide a tax advantage compared to distributing them. Because of this, the calculation of the terminal value is often based on the assumption of an exogenously determined payout ratio. The present study considers this assumption and develops a valuation model for the case in which the firm pursuits an active debt management, that is, adopts a financing policy based on market values. The terminal value is determined under both free cash flow and flow to equity approaches. Overall, it is shown that the valuation formula used in standard practice does not take into account all the financial effects caused by the retention of earnings. A simulation of the valuation error highlights that the value contribution of the dividend policy is overestimated by more than 25% on average. This result points out the need to carefully rethink the currently employed approaches to terminal value calculation.

The Effects of MiFID II on Sell-Side Analysts, Buy-Side Analysts, and Firms
Fang, Bingxu,Hope, Ole-Kristian,Huang, Zhongwei,Moldovan, Rucsandra
This paper provides early but comprehensive empirical evidence on a major new investor protection regulation in Europe, MiFID II, which requires investment firms to unbundle the costs they charge to clients. Specifically, MiFID II requires asset managers and broker-dealers to unbundle the cost of investment research and advisory services from other services they provide. We examine the effects of this new regulation in difference-in-differences matched-sample research designs with firm fixed effects and test for numerous potential outcomes. We find a decrease in the number of sell-side analysts covering European firms after MiFID II implementation. For example, 334 firms completely lose their analyst coverage. On average, the analysts who dropped coverage have higher lifetime forecast errors, higher forecast optimism, less experience on the job, and less experience covering the firm dropped. We do not find significant changes in consensus forecast errors or dispersion. However, the remaining analysts are more likely to make sell or hold stock recommendations, their recommendation revisions garner greater market reactions, and their recommendations are more profitable. In addition, sell-side analysts seem to cater more to the buy-side after MiFID II by providing industry recommendations along with stock recommendations. Importantly, we find evidence that buy-side investment firms turn to more in-house research after MiFID II implementation. Especially interesting, buy-side analysts increase their participation and engagement in earnings conference calls compared to the control group. Finally, we find some evidence that stock-market liquidity decreases post-MiFID II (after taking into account firms’ disclosure responses and changes in analyst coverage). Our findings have implications beyond Europe, as investors are currently pressuring the U.S. Securities and Exchange Commission to adopt a similar regulation.

The Impact of the Operating Leverage and Financial Leverage on the Firm’s Value: Empirical Evidence from Pakistan
Laghari, Attaullah
Purpose: The main objective of this study is to analyze the impact of operating leverage and financial leverage on the firm’s value based on data of firms listed in Karachi Stock Exchange (KSE).Design/Methodology/Approach: To analyze the impact of leverage on the firm’s value, Panel Data from 2005 to 2009 is employed by using regression technique.Findings: The regression results reveal that there is significant impact of Degree of Operating Leverage (DOL) and Degree of Financial Leverage (DFL) on the firm’s value. The findings are consistent with the studies observed in the literature. Originality/Value: Since both Degree of Operating Leverage and Degree of Financial Leverage are measures of Business risk and Financial risk, their presence may significantly affect firm’s value. Therefore, the main value of this paper is to provide the comprehensive understanding of sources of risk and their impact on the firm’s value.

Trade Credit in the Product Market Network
McConnell, John J.,Wang, Jing,Wang, Liying
We argue that an industry’s likelihood to propagate liquidity shocks to both directly and distantly connected industries influences the use and extension of trade credit. Using industry centrality as a measure of the likelihood of shock propagation, we find that firms in more central customer (supplier) industries receive (extend) more (less) trade credit than firms in less central industries, even after controlling for other industry features including direct trade connections and product specificity. Evidence from two liquidity shocks supports the proposition that the threat of shock propagation provides an incentive for nonfinancial firms to provide liquidity support through trade credit.

Türkiye Ekonomisinde Kalkınma Planları ve Kalkınma Planlarındaki Söylem Değişiklikleri (Development Plans in Turkish Economy and Changes on Their Discourses)
Çelik, Onur,Çetiner, Sibbel
Turkish Abstract: Türkiye ekonomisi değişen dünyaya uyum sağlamak amacıyla çeşitli politikalar üretmiş ve uygulamaya çalışmıştır. Zaman içerisinde temel söylemi ve uygulama biçimi farklılıklar gösteren politikalar 1930’lu yıllarda devletçi, 1950’li yıllarda liberal şekilde oluşmuş, 1960 sonrasındaysa planlı kalkınma biçimini almıştır. Bu dönüşümlerle ciddi ivme kazanan ekonomi küresel etkiyi barındırarak 1980 sonrasında liberal yapıya dönüşmüştür. Dönüşümler, Türkiye ekonomisinin bugünkü iktisadi kimliğinin belirmesinde önemli rol oynamıştır. Bu çalışmada Türkiye ekonomisindeki kalkınma hamle ve planlarının incelenmesi, hedeflerinin ortaya konulması ve karşılaştırılması amaçlanmıştır. Çalışmanın içerdiği kalkınma hamle ve planlarının incelenmesi sonucunda, kalkınma planlarının toplumun refahını artırmaya yönelik etkiler yarattığı ve nitel hedeflere evrildiği sonucuna ulaşılmıştır.English Abstract: The Turkish economy has developed various development policies for the purpose of adjusting the changing world and tried to apply them. Those policies, whose discourse and implementation method varied over time, formed a statist policy during 1930s, a liberal policy in 1950s and a planned development in 1960s and later. The economy which gained a serious momentum with these transformations turned itself into a liberal economy after 1980 through the global influence. These transformations played important role in the determination of the economic identity of the Turkish economy. In this study, it is aimed to reveal and compare the development plans in Turkey Economy. Targets of changing development plans, researched in this paper, according to our results, indicate a social wealth increasing effect and evolved into qualitative objectives.

We Need No Dime from the IMF: Is This a Temporary Illusion or Can the Turkish Economy Recover from the Current Recession without the IMF Loans?
Taskinsoy, John
IMF praised the Turkish financial system for escaping the 2008 global financial crisis with a minor dent in its economy, the success was attributable to significant capital buffers built up in the aftermath of the 2001 economic crisis, more effective fiscal and monetary management, strengthened banking regulation and supervision, and commitment to fiscal rules. Turkey’s strengthened banking system is capable of absorbing endogenous and exogenous shocks under highly adverse market conditions. Thanks to the relentless work by the Banking Regulation and Supervision Agency of Turkey (BRSA, or BDDK in Turkish), prolonged political stability (one-party government since 2002) coupled with much improved global investor confidence have enabled Turkey to become one of the G-20 nations. The gradually improving positive image of Turkey has changed with President (then Prime Minister) Recep Tayip Erdoğan’s remarks of “No IMF in Turkey’s future”, Erdoğan has also said that the “IMF chapter will not be reopened”. Connected or a mere coincidence, Turkey’s protracted (i.e. over half a century) bid for its accession to the EU was blocked by Cyprus in December 2009. Since the repeated speculative attacks on Turkish lira in August 2018, lira’s value against the dollar has plummeted (lira has depreciated more than 80% of its value in a matter of a month) and the country’s foreign reserves have shrunk noticeably; consequently, the Turkish economy has debilitated and found itself in an inevitable financial emergency. Although Turkey had made the last remaining payment from its 19th standby agreement to the IMF in May 2008, at the backdrop of Turkey’s fractured economy, Turkey’s divorce from the IMF can hardly qualify as a true graduation since the country is on the brink of an economic crisis, attributable to excessive private and household debt, a failed coup attempt on July 15, 2016 by a fraction of the Turkish army, massive dollarization (close to $200 billion), fast rising unemployment (over 14%), continued speculative attacks on lira, and a cascade of corporate defaults. Since the IMF bailout package is out of possibilities, the Turkish financial authorities must find fresh capital immediately to avoid its highly fragile economy being pushed into an economic slump.

Who Is Successful in Foreign Exchange Margin Trading? New Survey Evidence from Japan
Hayo, Bernd,Iwatsubo, Kentaro
We use a 2018 survey of FX margin traders in Japan to investigate which key factors influence their performance: socio-demographic and economic situation, investment strategy and trading behaviour, and/orfinancial literacy. First, the data show that variables from all three groups are significant predictors oftraders’ performance. Second, we find that older traders and those without a specific trading strategydemonstrate lower performance. Performanceis higher for those who trade greater amounts, rely more on fundamental analysis, and report having profitable FX trade skills. Third, respondents’ subjectively stated claim of having FX trade skills is based on a more advanced understanding of FX trading and a reliance on professional advice. Neither objective financial knowledge nor over/underconfidence play a noteworthy role in the performance of margin traders.