Research articles for the 2019-07-30

(Macro) Prudential Taxation of Good News
Piguillem, Facundo,Flemming, Jean,L'Huillier, Jean-Paul
We analyze the optimal macroprudential policy under the presence of news shocks. News are shocks to the growth rate that convey information about future growth. In this context, crises are characterized by long periods with positive shocks (and good news) that eventually revert,rendering the collateral constraint binding and triggering deleveraging. In this environment it is optimal to tax borrowing during good times, and let agents act freely leaving the allocations undistorted, including borrowing and lending, when the economy reverts to a bad state. We contrast our findings to the case of standard, shocks to the level of income, where it is optimal to tax debt in bad times, when agents need to borrow the most for precautionary savings motives. Also, taxes are used much less often and are around one-tenth of those under level shocks.

A Model of Fickle Capital Flows and Retrenchment
Caballero, Ricardo J.,Simsek, Alp
We develop a model of gross capital flows and analyze their role in global financial stability. In our model, consistent with the data, when a country experiences asset fire sales, foreign investments exit (fickleness) while domestic investments abroad return home (retrenchment). When countries have symmetric expected returns and financial development, the benefits of retrenchment dominate the costs of fickleness and gross flows increase fire-sale prices. Fickleness, however, creates a coordination problem since it encourages local policymakers to restrict capital inflows. When countries are asymmetric, capital flows are driven by additional mechanisms, reach-for-safety and reach-for-yield, that can destabilize the receiving country.

A Risk-Centric Model of Demand Recessions and Speculation
Caballero, Ricardo J.,Simsek, Alp
We theoretically analyze the interactions between asset prices, financial speculation, and macroeconomic outcomes when output is determined by aggregate demand. If the interest rate is constrained, a decline in risky asset valuations generates a demand recession. This reduces earnings and generates a negative feedback loop between asset prices and aggregate demand. In the recession phase, beliefs matter not only because they affect asset valuations but also because they determine the strength of the amplification mechanism. In the ex-ante boom phase, belief disagreements (or heterogeneous asset valuations) matter because they induce investors to speculate. This speculation exacerbates the crash by reducing high-valuation investors' wealth when the economy transitions to recession. Macroprudential policy that restricts speculation in the boom can Pareto improve welfare by increasing asset prices and aggregate demand in the recession.

A Simple Factoring Pricing Model
Ilaria Nava,Davide Cuccio,Lorenzo Giada,Claudio Nordio

In a simplified setting, we show how to price invoice non-recourse factoring taking into account not only the credit worthiness of the debtor but also the assignor's one, together with the default correlation between the two. Indeed, the possible default of the assignor might impact the payoff by means of the bankruptcy revocatory, especially in case of undisclosed factoring.

A procedure for loss-optimising default definitions across simulated credit risk scenarios
Arno Botha,Conrad Beyers,Pieter de Villiers

A new procedure is presented for the objective comparison and evaluation of default definitions. This allows the lender to find a default threshold at which the financial loss of a loan portfolio is minimised, in accordance with Basel II. Alternative delinquency measures, other than simply measuring payments in arrears, can also be evaluated using this optimisation procedure. Furthermore, a simulation study is performed in testing the procedure from `first principles' across a wide range of credit risk scenarios. Specifically, three probabilistic techniques are used to generate cash flows, while the parameters of each are varied, as part of the simulation study. The results show that loss minima can exist for a select range of credit risk profiles, which suggests that the loss optimisation of default thresholds can become a viable practice. The default decision is therefore framed anew as an optimisation problem in choosing a default threshold that is neither too early nor too late in loan life. These results also challenges current practices wherein default is pragmatically defined as `90 days past due', with little objective evidence for its overall suitability or financial impact, at least beyond flawed roll rate analyses or a regulator's decree.

Algorithmic market making: the case of equity derivatives
Bastien Baldacci,Philippe Bergault,Olivier Guéant

In this article, we tackle the problem of a market maker in charge of a book of equity derivatives on a single liquid underlying asset. By using an approximation of the portfolio in terms of its vega, we show that the seemingly high-dimensional stochastic optimal control problem of an equity option market maker is in fact tractable. More precisely, the problem faced by an equity option market maker is characterized by a two-dimensional functional equation that can be solved numerically using interpolation techniques and classical Euler schemes, even for large portfolios. Numerical examples are provided for a large book of equity options.

Bank Assets, Liquidity and Credit Cycles
Lubello, Federico,Petrella, Ivan,Santoro, Emiliano
We study how bank collateral assets and their pledgeability affect the amplitude of credit cycles. To this end, we develop a tractable model where bankers intermediate funds between savers and borrowers. If bankers default, savers acquire the right to liquidate bankers' assets. However, due to the vertically integrated structure of our credit economy, savers anticipate that liquidating financial assets (i.e., loans) is conditional on borrowers being solvent on their debt obligations. This friction limits the collateralization of bankers' financial assets beyond that of real assets (i.e., capital). In this context, increasing the pledgeability of financial assets eases more credit and reduces the spread between the loan and the deposit rate, thus attenuating capital misallocation as it typically emerges in credit economies à la Kiyotaki and Moore (1997). We uncover a close connection between the collateralization of bank loans, macroeconomic amplification and the degree of procyclicality of bank leverage.

Behind the Scenes of the Beauty Contest: Window Dressing and the G-SIB Framework
Behn, Markus,Mangiante, Giacomo,Parisi, Laura,Wedow, Michael
This paper illustrates that systemically important banks reduce a range of activities at year-end, leading to lower additional capital requirements in the form of G-SIB buffers. The effects are stronger for banks with higher incentives to reduce the indicators, and for banks with balance sheet structures that can more easily be adjusted. The observed reduction in activity may imply an overall underestimation of banks' systemic importance as well as a distortion in their relative ranking, with implications for banks' ability to absorb losses. Moreover, a reduction in the provision of certain services at year-end may adversely affect overall market functioning.

CVA and vulnerable options in stochastic volatility models
Elisa Alos,Fabio Antonelli,Alessandro Ramponi,Sergio Scarlatti

In this work we want to provide a general principle to evaluate the CVA (Credit Value Adjustment) for a vulnerable option, that is an option subject to some default event, concerning the solvability of the issuer. CVA is needed to evaluate correctly the contract and it is particularly important in presence of WWR (Wrong Way Risk), when a credit deterioration determines an increase of the claim's price. In particular, we are interested in evaluating the CVA in stochastic volatility models for the underlying's price (which often fit quite well the market's prices) when admitting correlation with the default event. By cunningly using Ito's calculus, we provide a general representation formula applicable to some popular models such as SABR, Hull \& White and Heston, which explicitly shows the correction in CVA due to the processes correlation. Later, we specialize this formula and construct its approximation for the three selected models. Lastly, we run a numerical study to test the formula's accuracy, comparing our results with Monte Carlo simulations.

Capital Structure Determinants in Transitional Economies
Bylo, Ardita,Cankaya, Serkan
Most of the empirical studies about capital structure tend to focus either on overall developed markets or on emerging countries. This paper aims to analyze the determinants of the capital structure of the companies in the Western Balkans (WBs) using a panel of 30 non-financial firms listed in Zagreb Stock Exchange, Belgrade Stock Exchange, and Macedonian Stock Exchange over the period of 2012â€"2017. The leverage ratio is modeled as a function of firm-specific characteristics. The study shows that firms in the WBs tend to rely more on short-term debt rather than long-term debt. There is a significant negative impact of liquidity, profitability and tax on both leverage level and short-term debt ratio. The long-term debt ratio is significantly positively affected by the growth opportunities of these companies and by its past level. theory. The results obtained from this empirical research indicate that companies in the WBs follow the pecking order. These findings appear to be similar to the results of previous studies of this nature done about emerging and transitional economies.

Challenges of Indexation in S&P 500 Index Volatility Investment Strategies
Sundberg, Margaret
S&P 500 Index option-based volatility indexes have untenable risk-return profiles. These volatility indexes are not designed with consideration of important real-world risk characteristics of options and fail to represent volatility as a differentiated asset-class with relevance to the long-term utility of investors. Implications of the S&P 500 Index return distribution on the profit and loss (P&L) distribution of a directionally hedged option position are presented. The ensuing five cardinal characteristics of options on S&P 500 Index, central to designing viable volatility investment strategies, are enumerated.

Current Perspectives and Challenges in the Pharmaceutical, Life Science and Health Care Sectors
Haraszkiewicz-Birkemeier, Natalia
The pharmaceutical industry is one of the most innovative sectors in the world. In 2014, the global drug sales market exceeded one trillion dollars for the first time. Innovative, patented drugs represent the largest part of pharmaceutical sales revenues. Nowadays partnerships, licensing and M&A are important parts of R&D strategies to use assets in the most efficient way and accelerate translation of biomedical innovations to bring novel products, services and solutions to the market for patients who need them.

Dividend Policy Decisions and Ownership Concentration: Evidence from Thai Public Companies
Connelly, J. Thomas,Wolff, Christian C. P.
In this paper we examine the relationship between ownership concentration and dividend policy for Thai publicly listed companies. High family ownership firms have higher dividend payouts than low family ownership firms, which we interpret to mean high family ownership firms follow a more rational dividend policy. This finding is consistent with the prediction that agency conflicts between the managers and shareholders are lower at firms with a controlling shareholder. The evidence is robust through different econometric specifications, robust when the level used to determine the extent of family ownership (family control) is lowered to 10 percent of the outstanding shares, and robust to the inclusion of the ownership wedge as a proxy for the severity of agency conflicts.

Do Complex Financial Models Lead to Complex Dynamics? Agent-Based Models and Multifractality
Kukacka, Jiri,Kristoufek, Ladislav
Agent-based models are usually claimed to generate complex dynamics; however, the link to such complexity has not been put to a more rigorous examination. This paper studies such a link between complexity of financial time series-measured by their multifractal properties-and the design of various agent-based frameworks used to model the heterogeneity of financial markets. Seven popular models are analyzed, and while some of the models do not generate interesting multifractal patterns at all, we observe a general tendency towards multifractal behavior for the Bornholdt Ising model, Kirman's original model in a computational setup by Gilli and Winker, and the model by Franke and Westerhoff. Complexity is thus not an automatic feature of the time series generated by any agent-based model but only by models with specific properties, here the ones with strong herding characteristics. In addition, as multifractality is considered one of the financial stylized facts, its presence can be used as a new means of validation of such models.

Dual Ownership and Risk-taking Incentives in Managerial Compensation
Chen, Tao,Zhang, Li,Zhu, Qifei
This paper studies how conflicts between equity holders and bond holders affect the design of corporate managerial compensation. Firms with a higher ownership by institutional investors that simultaneously hold equity and bond of the firm ("dual holders'') adopt compensation policies with lower risk-taking incentives. Using financial-firm mergers that create dual holders for their portfolio companies as shocks, we identify a causal link between dual ownership and managerial compensation structure. Furthermore, dual holders vote on compensation-related managerial proposals in a way that reduces risk-taking incentives, compared with pure equity holders of the same firm.

Efficient SRI / ESG Portfolios
Geczy, Christopher,Guerard, John,Samonov, Mikhail
Using an earnings forecasting model has been shown to be useful and highly statistically significant in U.S. stock selection. We find that incorporation of ESG criteria can enhance stockholder returns holding risk constant under reasonable assumptions. The novel approach here uses a normalization of ESG strengths and weaknesses ratings, applied in both robust simply-weighted and realistic optimized portfolio settings. In part, it confirms a now classical “no-cost” result for certain SRI/ESG investment constraints and, with Diversity, Human Rights, and Governance criteria, shows that SRI/ESG information can enhance portfolio returns. Thus, SRI / ESG investors may not have to expect lower portfolio returns and Sharpe Ratios.

Externalities and Financial Crisis - Enough to Cause Collapse?
Miller, Marcus H.,Zhang, Lei
After the boom in US subprime lending came the bust - with a run on US shadow banks. The magnitude of boom and bust were, it seems, amplified by two significant externalities triggered by aggregate shocks: the endogeneity of bank equity due to mark-to-market accounting and of bank liquidity due to 'fire-sales' of securitised assets. We show how adding a systemic 'bank run' to the canonical model of Adrian and Shin allows for a tractable analytical treatment - including the counterfactual of complete collapse that forces the Treasury and the Fed to intervene.

Extracting Statistical Factors When Betas are Time-Varying
Gagliardini, Patrick,Ma, Hao
This paper deals with identification and inference on the unobservable conditional factor space and its dimension in large unbalanced panels of asset returns. The model specification is nonparametric regarding the way the loadings vary in time as functions of common shocks and individual characteristics. The number of active factors can also be time-varying as an effect of the changing macroeconomic environment. The method deploys Instrumental Variables (IV) which have full-rank covariation with the factor betas in the cross-section. It allows for a large dimension of the vector generating the conditioning information by machine learning techniques. In an empirical application, we infer the conditional factor space in the panel of monthly returns of individual stocks in the CRSP dataset between January 1971 and December 2017.

Fast Trading and the Virtue of Entropy: Evidence from the Foreign Exchange Market
Corsetti, Giancarlo,Lafarguette, Romain,Mehl, Arnaud
Focusing on the foreign exchange reaction to macroeconomic announcements, we show that fast trading is positively and significantly correlated with the entropy of the distribution of quoted prices in reaction to news: a larger share of fast trading increases the degree of diversity of quotes in the order book, for given liquidity, order book depth and size of order flows. Exploiting the WM Reuters’ reform of the fixing methodology in February 2015 as a natural experiment, we provide evidence that fast trading raises entropy, rather than reacting to it. While more entropy in quoted prices means noisier information and arguably complicates price discovery from an individual trader’s perspective, we show that, in the aggregate, more entropy actually brings traded prices closer to the random walk hypothesis, and improves indicators of market efficiency and quality of trade execution. We estimate that a 10 percent increase in entropy reduces the negative impact of macro news by over 60% for effective spreads, against over 40% for realized spreads and price impacts. Our findings suggest that the main mechanism by which fast trading may have desirable effects on market performance specifically hinges on enhanced heterogeneity in trading patterns, best captured by entropy.

Fee Structure and Fund Manager's Optimal Selling Rule
Liu, Zhenya,Han, Xuyuan,Zhan, Yaosong
We investigate the impacts of fee structure on a typical on the fund manager's optimal selling price. The fee structure includes the self-investment ratio in the fund, management fee, incentive fee, and the high watermark. Based on the explicit solution of the optimal selling price, we find that the optimal selling price is negatively related to the self-investment ratio and management fee, and positively related to the incentive fee and high watermark. This conclusion inspires designing an incentive contract for the manager: the fund manager should be offered more incentive fee and higher watermark, lower management fee, and self-investment ratio, which will possibly improve the fund performance.

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

How Do Lenders Monitor? A Discussion of Shan, Tang, and Winton (2019)
Demerjian, Peter R.
Credit default swaps (CDS) represent a major innovation in debt markets, allowing lenders to transfer credit risk to a counterparty by paying a premium. Shan, Tang, and Winton (2019) explore whether the availability of CDS affects the monitoring incentives of lenders. Their paper finds that CDS leads to looser loan terms (less collateral and looser covenants), consistent with a reduction in monitoring incentives. I examine several aspects of their study, including whether loan provisions and CDS should serve the same purpose, and differences between CDS and non-CDS borrowers. In total, although the authors present empirical evidence consistent with their prediction, the sample selection and research design potentially limit the generalizability of the authors’ results.

Industry Competition: The Blockchain versus Centralized Authority
Aoyagi, Jun
Existing industries must deal with encroachment by the blockchain protocol. We provide an abstract asset-trading model to analyze the competition between the blockchain operated by the distributed ledger system (DLS) and the traditional industry run by a centralized authority. They both provide a trading method to users (traders) and try to mitigate information asymmetry between users. In contrast to the traditional models of industry competition (e.g., Bertrand and Cournot), the blockchain’s strategy is determined competitively by its miners and users. Our model characterizes when and why the blockchain can be more efficient than the centralized authority and investigates why we need the blockchain system in addition to the existing trading methods.

Insurers’ Investment Strategies: Pro- or Countercyclical?
Fache Rousová, Linda ,Giuzio, Margherita
Traditionally, insurers are seen as stabilisers of financial markets that act countercyclically by buying assets whose price falls. Recent studies challenge this view by providing empirical evidence of procyclicality. This paper sheds new light on the underlying reasons for these opposing views. Our model predicts procyclicality when prices fall due to increasing risk premia, and countercyclicality in response to rises in the risk-free rate. Using granular data on insurers’ government bond holdings, we validate these predictions empirically. Our findings contribute to the current policy discussion on macroprudential measures beyond banking.

Internal Deadlines, Drug Approvals, and Safety Problems
Cohen, Lauren,Gurun, Umit,Li, Danielle
Absent explicit quotas, incentives, reporting, or fiscal year-end motives, drug approvals around the world surge at the end of each month, and particularly in the last weeks of each year. This pattern is found in a large, global data set consisting of drug approvals from the United States, the European Union, Japan, China, and South Korea, suggesting that this pattern reflects an empirical regularity common across cultures and regulatory regimes. In the United States, the number of December drug approvals is roughly 80% larger than in any other month. Similar approval spikes occur at the end of each calendar month. Additionally, approvals spike before holidays, such as before Thanksgiving in the United States and the Chinese New Year in China (but not vice versa). Drugs approved in December and at month-ends are associated with significantly more adverse effects, including more hospitalizations, life-threatening incidents, and deaths. This pattern is consistent with a model in which regulators rush to meet internal production benchmarks associated with salient calendar periods: this type of "desk-clearing" behavior results in more lax review, which leads both to increased output and increased safety issues.

International Debt and Special Purpose Entities: Evidence from Ireland
Galstyan, Vahagn,Maqui Lopez, Eduardo,McQuade, Peter
This paper examines international debt issuance through Irish-resident Special Purpose Entities (SPEs). Using a unique new dataset covering the population of Irish-resident SPEs reporting to the Central Bank of Ireland over the period 2005-2017, we identify cross-country debt financing links channelled through SPEs. The empirical analysis suggests that tax optimisation is an important motive, particularly for sponsors of Irish-resident securitisation vehicles, while investor protection and financial development are important additional considerations for sponsors of non-securitisation vehicles.

Moral Hazard and the Property Rights Approach to the Theory of the Firm
Schmitz, Patrick W.
In the Grossman-Hart-Moore property rights theory, there are no frictions ex post (i.e., after non-contractible investments have been sunk). In contrast, in transaction cost economics ex-post frictions play a central role. In this note, we bring the property rights theory closer to transaction cost economics by allowing for ex-post moral hazard. As a consequence, central conclusions of the Grossman-Hart-Moore theory may be overturned. In particular, even though only party A has to make an investment decision, B-ownership can yield higher investment incentives. Moreover, ownership matters even when investments are fully relationship-specific (i.e., when they have no impact on the parties' disagreement payoffs).

Multiple Subordinated Modeling of Asset Returns
Abootaleb Shirvani,Svetlozar T. Rachev,Frank J. Fabozzi

Subordination is an often used stochastic process in modeling asset prices. Subordinated Levy price processes and local volatility price processes are now the main tools in modern dynamic asset pricing theory. In this paper, we introduce the theory of multiple internally embedded financial time-clocks motivated by behavioral finance. To be consistent with dynamic asset pricing theory and option pricing, as suggested by behavioral finance, the investors' view is considered by introducing an intrinsic time process which we refer to as a behavioral subordinator. The process is subordinated to the Brownian motion process in the well-known log-normal model, resulting in a new log-price process. The number of embedded subordinations results in a new parameter that must be estimated and this parameter is as important as the mean and variance of asset returns. We describe new distributions, demonstrating how they can be applied to modeling the tail behavior of stock market returns. We apply the proposed models to modeling S&P 500 returns, treating the CBOE Volatility Index as intrinsic time change and the CBOE Volatility-of-Volatility Index as the volatility subordinator. We find that these volatility indexes are not proper time-change subordinators in modeling the returns of the S&P 500.

On the existence of sure profits via flash strategies
Claudio Fontana,Markus Pelger,Eckhard Platen

We introduce and study the notion of sure profit via flash strategy, consisting of a high-frequency limit of buy-and-hold trading strategies. In a fully general setting, without imposing any semimartingale restriction, we prove that there are no sure profits via flash strategies if and only if asset prices do not exhibit predictable jumps. This result relies on the general theory of processes and provides the most general formulation of the well-known fact that, in an arbitrage-free financial market, asset prices (including dividends) should not exhibit jumps of a predictable direction or magnitude at predictable times. We furthermore show that any price process is always right-continuous in the absence of sure profits. Our results are robust under small transaction costs and imply that, under minimal assumptions, price changes occurring at scheduled dates should only be due to unanticipated information releases.

Overall Financial Inclusion Across 55 Countries: 12 Financial Inclusion Enabling Variables
C, Viswanatha Reedy
The present study aims to evaluate the role of 12 financial inclusion enabling environment variables towards the overall financial inclusion across 55 countries. To examine the impact of each extracted factor on overall financial inclusion, factorial regression analysis was carried out and to highlight the impact of each individual variable on overall financial inclusion, the linear multiple regression model has been used. The empirical results show that the majority of the predictor variables studied has a significant positive effect on overall financial inclusion.

Overcoming the Matthew Effect in Status Dominated Environments â€" a Configurational Analysis of Venture Capital Investments
Berger, Elisabeth S.C.,Kuckertz, Andreas
Entering status dominated environments as new entrant is a difficult endeavor. Accumulated advantages go along with the tendency of incumbents to succeed, whereas entrants are likely to lose (Matthew effect). This study examines what combination of deal resources accumulated by venture capital partners lead to high deal performance in order to analyze if new entrants can nonetheless overcome the burden of being new, i.e. having a low status position and only weak ties with current actors in status dominated environments. Our configurational analysis of 333 venture capital investments reveals opportunities for entrants to succeed that go beyond joining forces with established actors. Our findings contribute to research on interorganizational network formation and the strategic actions new entrants on the VC market may take to be successful. Furthermore, the study sheds light on the effect of syndicated opposed to single venture capitalist deals and suggests that successful syndicates require a certain degree of homogeneity among the investors.

Private Equity Acquisitions and Strategic Buyers: Information Discounts versus Synergies
Flor, Christian Riis,Sorensen, Peter Norman
We characterize when private equity funds have a competitive advantage over strategic buyers in acquiring a target firm. Private equity funds are more inclined to cut loss-making projects, thereby gaining an information advantage for understanding value creation with the target's remaining assets. Strategic buyers more often integrate with the target to obtain synergy gains. Private equity funds are more likely to win takeover competitions when their information advantage is greater, their required return premium is smaller, and strategic buyers' synergy gains are smaller. Such takeovers by private equity funds can improve economic welfare.

Profitable Price Impact: The Case of Convertible Bond Arbitrage
Nozari, Milad,Pascutti, Michael,Tookes, Heather
We investigate a potential source of profit to convertible bond arbitrageurs that is new to the literature: anticipatory hedging in advance of convertible bond issues. When the reference stock price in a convertible bond contract is determined after a new issue is announced, anticipatory short selling in the underlying stock can result in a “profitable price impact” (PPI). Downward stock price pressure prior to pricing creates an abnormally cheap embedded call option in the bond. Consistent with a PPI, we document significant declines in the stock prices of issuers on bond pricing days. These declines are more concentrated during the last hour of the pricing day and are followed by partial adjustments in the days following pricing.

Prudential Monetary Policy
Caballero, Ricardo J.,Simsek, Alp
Should monetary policy have a prudential dimension? That is, should policymakers raise interest rates to rein in financial excesses during a boom? We theoretically investigate this issue using an aggregate demand model with asset price booms and financial speculation. In our model, monetary policy affects financial stability through its impact on asset prices. Our main result shows that, when macroprudential policy is imperfect, small doses of prudential monetary policy (PMP) can provide financial stability benefits that are equivalent to tightening leverage limits. PMP reduces asset prices during the boom, which softens the asset price crash when the economy transitions into a recession. This mitigates the recession because higher asset prices support leveraged, high-valuation investors' balance sheets. An alternative intuition is that PMP raises the interest rate to create room for monetary policy to react to negative asset price shocks. The policy is most effective when there is extensive speculation and leverage limits are neither too tight nor too slack.

Sentiment and Speculation in a Market with Heterogeneous Beliefs
Martin, Ian,Papadimitriou, Dimitris
We present a dynamic model featuring risk-averse investors with heterogeneous beliefs. Individual investors have stable beliefs and risk aversion, but agents who were correct in hindsight become relatively wealthy; their beliefs are overrepresented in market sentiment, so "the market" is bullish following good news and bearish following bad news. Extreme states are far more important than in a homogeneous economy. Investors understand that sentiment drives volatility up, and demand high risk premia in compensation. Moderate investors supply liquidity: they trade against market sentiment in the hope of capturing a variance risk premium created by the presence of extremists.

Shorting in Speculative Markets
Marcel Nutz,José A. Scheinkman

We propose a continuous-time model of trading with heterogeneous beliefs. Risk-neutral agents face quadratic costs-of-carry on positions and thus their marginal valuations decrease with the size of their position, as it would be the case for risk-averse agents. In the equilibrium models of heterogeneous beliefs that followed Harrison-Kreps, investors are risk-neutral, short-selling is prohibited and agents face constant marginal costs of carrying positions. The resulting resale option guarantees that the price exceeds the price of the asset when speculation is ruled out; the difference is identified as a bubble. In our model increasing marginal costs entail that the price depends on asset supply. Second, agents also value an option to delay, and this may cause the market to equilibrate below the buy-and-hold price. Third, we introduce the possibility of short-selling. A Hamilton-Jacobi-Bellman equation of a novel form quantifies precisely the influence of the costs-of-carry on the price. An unexpected decrease in shorting costs may lead to the collapse of a bubble; this links the financial innovations that facilitated shorting of MBSs to the subsequent collapse of prices.

Strategic Trading as a Response to Short Sellers
Di Maggio, Marco,Franzoni, Francesco A.,Massa, Massimo,Tubaldi, Roberto
We study empirically informed traders' reaction to the presence of short sellers in the market. We find that investors with positive views on a stock strategically slow down their trades when short sellers are present in the same stock. Moreover, they purchase larger amounts to take advantage of the price decline induced by short sellers. Furthermore, they break up their buy trades across multiple brokers, suggesting that they wish to hide from the short sellers. This behavior may impact price discovery, as we find a sizeable reduction of positive information impounding for stocks more exposed to short selling during information sensitive periods. The evidence is confirmed exploiting exogenous variation in short interest provided by the Reg SHO Pilot Program. The findings have relevance for the regulatory debate on the market impact of short selling.

Structural Disparities in MSMEs in Pre Bifurcated Andhra Pradesh â€" How to Fill the Lacuna?
C, Viswanatha Reedy
MSME sector has become the backbone of Indian economy by providing large employment with lower capital cost, reducing regional imbalances through rural and backward industrialization, assuring equal distribution of national income and wealth. In the changing global industrial climate, the Government of united Andhra Pradesh, in line with the Central Government Policy, has placed much emphasis for the growth of MSMEs and envisaged special incentives and concessions to this sector. In order to ensure the policy implementation of the Government, the APSFC has continued to enhance its funding to this sector. The present paper analyses the flow of credit in terms of sanctions and disbursements, assistance to MSMEs, the district-wise, region-wise distribution of lending towards MSMEs in terms of number of units, amount sanctioned and disbursed, trend analysis using regression model, ANOVA: Single Factor to highlight the difference between assistance given to MSMEs and others. Lastly, few suggestions were offered for strengthening the position of MSMEs in the newly formed Andhra Pradesh.

Terrorist Attacks, Investor Sentiment, and the Pricing of Initial Public Offerings
Chen, Yangyang,Goyal, Abhinav,Veeraraghavan, Madhu,Zolotoy, Leon
Using terrorist attacks as exogenous shocks to investor sentiment, we study the impact of investor sentiment on initial public offering (IPO) pricing. IPOs listed within the periods following terrorist attacks experience lower first-day returns. The impact of terrorist attacks is magnified when there is greater IPO valuation uncertainty and when the terrorist attacks are more salient to investors. Further, IPOs with terrorist attacks in the pre-IPO period have more pessimistic media tone. These IPOs also have lower levels of price revisions, subscriptions, and total proceeds. Collectively, our findings underscore the salience of investor sentiment in shaping IPO outcomes.

Testing for Contagion in Economic Literature
Kocabaş, Ceren
The contagion of the financial crisis is an unavoidable fact for the economies of the global system anymore. Therefore measuring contagion, analyzing the propagation of volatility across countries became mainly important research topics among economists. There are many different econometric techniques used to test for contagion effect of financial crises. Transmission of shocks from one country to another can be calculated with four different techniques. The empirical literature mostly based on the techniques of measuring cross-market correlations, GARCH models, cointegration and probit models. In these models, economists use financial or real indicators or both of them in their analyses. As the financial indicators, they generally use share price indices, interest rates, exchange rates, and inflation rate. As the real indicators, they generally use the values of GDP, imports, exports, unemployment rate, etc. The aim of this paper is to underline the prominent empirical studies in the field of contagious crises.

The Transmission of Shocks in Endogenousfinancial Networks: A Structural Approach
Heipertz, Jonas,Ouazad, Amine,Rancière, Romain
The paper uses bank- and instrument-level data on asset holdings and liabilities to identify and estimate a general equilibrium model of trade in financial instruments. Bilateral ties are formed as each bank selects the size and the diversification of its assets and liabilities. Shocks propagate due to the response, rather than the size, of bilateral ties to such shocks. This general equilibrium propagation of shocks reveals a financial network where the strength of a tie is determined by the sensitivity of an instrument's return to other instruments' returns. General equilibrium analysis predicts the propagation of real, financial and policy shocks. The network's shape adjusts endogenously in response to shocks, to either amplify or mitigate partial equilibrium shocks. The network exhibits key theoretical properties: (i) more connected networks lead to less amplification of partial equilibrium shocks, (ii) the influence of a bank's equity is independent of the size of its holdings; (ii) more risk-averse banks are more diversified, lowering their own volatility but increasing their influence on other banks. The general equilibrium based network model is structurally estimated on disaggregated data for the universe of French banks. We used the estimated network to assess the effects of ECB quantitative easing policy on asset prices, balance-sheets, individual bank distress risk, and networks systemicness.

The mitigating role of regulation on the concentric patterns of broadband diffusion. The case of Finland
Jaume Benseny,Juuso Töyli,Heikki Hämmäinen,Andrés Arcia-Moret

This article analyzes the role of Finnish regulation in achieving the broadband penetration goals defined by the National Regulatory Authority. It is well known that in the absence of regulatory mitigation the population density has a positive effect on broadband diffusion. Hence, we measure the effect of the population density on the determinants of broadband diffusion throughout the postal codes of Finland via Geographically Weighted Regression. We suggest that the main determinants of broadband diffusion and the population density follow a spatial pattern that is either concentric with a weak/medium/strong strength or non-concentric convex/concave. Based on 10 patterns, we argue that the Finnish spectrum policy encouraged Mobile Network Operators to satisfy ambitious Universal Service Obligations without the need for a Universal Service Fund. Spectrum auctions facilitated infrastructure-based competition via equitable spectrum allocation and coverage obligation delivery via low-fee licenses. However, state subsidies for fiber deployment did not attract investment from nationwide operators due to mobile preference. These subsidies encouraged demand-driven investment, leading to the emergence of fiber consumer cooperatives. To explain this emergence, we show that when population density decreases, the level of mobile service quality decreases and community commitment increases. Hence, we recommend regulators implementing market-driven strategies for 5G to stimulate local investment. For example, by allocating the 3.5 GHz and higher bands partly through local light licensing.

Total, Asymmetric and Frequency Connectedness between Oil and Forex Markets
Baruník, Jozef,Kočenda, Evžen
We analyze total, asymmetric and frequency connectedness between oil and forex markets using high-frequency, intra-day data over the period 2007 - 2017. By employing variance decompositions and their spectral representation in combination with realized semivariances to account for asymmetric and frequency connectedness, we obtain interesting results. We show that divergence in monetary policy regimes affects forex volatility spillovers but that adding oil to a forex portfolio decreases the total connectedness of the mixed portfolio. Asymmetries in connectedness are relatively small. While negative shocks dominate forex volatility connectedness, positive shocks prevail when oil and forex markets are assessed jointly. Frequency connectedness is largely driven by uncertainty shocks and to a lesser extent by liquidity shocks, which impact long-term connectedness the most and lead to its dramatic increase during periods of distress.

Venture Capital and the Performance of Blockchain Technology-Based Firms: Evidence from Initial Coin Offerings (ICOs)
Fisch, Christian,Momtaz, Paul P.
Little is known about the role of venture capital (VC) in the financing of blockchain technology- based firms (BTBFs). We assess BTBF post-ICO performance in terms of growth, utilization, and profits and employ econometric methods to control for the endogeneity inherent in VC financing. Our results suggest that VC financing causes BTBFs to substantially outperform their peers. Specifically, we find that VCs are not able to pick better BTBFs to invest in (selection effect). Instead, they add value post-investment (treatment effect). Overall, we show that VCs are an important, value-increasing intermediary in the emerging blockchain sector.

What Can Nepal Learn from Her South Asian Neighbors, Ireland and UK for Sustained Economic Growth? A Policy Commentary
Koirala, Santosh,Bhandari, Subhas
While national development indicators of Nepal seem to be in a positive direction both over time and compared to its neighboring economies, Nepalese policymakers need to work on the predictability of regulatory stances and work seriously on institutional development. The competitive environment facing Nepal in light of performances of her neighboring countries in the global economy presents both threat and opportunities for Nepal. Nepal has much to learn from Ireland and the United Kingdom in developing institutions that drive economic development. Further, recent episodes of capital flight from London to Dublin and Ireland’s strong substitutability with the post-Brexit UK as an investment destination should be eye-opening to a nation like Nepal competing, with her neighboring economies, to work towards establishing more unambiguous policies and political stability.