Research articles for the 2019-07-31

A Global Financial Transaction Tax - Theory, Practice and Potential Revenues
Pekanov, Atanas,Schratzenstaller, Margit
This study presents in detail the concept of a financial transaction tax (FTT) and the theoretical and empirical evidence in favour and against introducing it, the potential revenues, different implementation designs and its ability to correct various market failures. We analyse the benefits and challenges of introducing a tax on financial transactions, putting special focus on the introduction of such a tax on a world-wide scale. For a number of reasons, international cooperation is deemed a central prerequisite for an efficient FTT. The purpose of the tax is to raise substantial revenues and help dampen excessive financial market speculation and market volatility. An FTT would ensure that the financial sector contributes more substantially to government revenues. In its optimal form, the tax would be broad-based and there will be no financial instrument types exempted. In a second step, we analyse from a political economy perspective the prospects, the current status, and the lessons learnt from the European discussion on the implementation of an FTT. Finally, we calculate the revenue potential of a global FTT and report how much revenues would accrue to specific countries. We estimate that the tax, if imposed globally and taking into account still evasion, relocation and lock-in effects, can bring significant revenues â€" between 237.9 and 418.8 billion $ annually. The baseline case delivers 326.9 billion $ overall for the global economy, which corresponds to 0.43 percent of global GDP. These are lower bounds for potential revenues due to missing data on a number of financial instrument types. For specific countries, in the baseline case this would result in 72.57 billion $ annual potential revenues for the USA (0.37 percent of GDP), 119.46 billion $ for the European Union (0.69 percent of GDP), 10.00 billion $ for Germany (0.27 percent of GDP), 9.99 billion $ for France (0.39 percent of GDP) and 19.99 billion $ for Japan (0.41 percent of GDP).

A Survey of Systemic Risk Indicators
Di Cesare, Antonio,Rogantini Picco, Anna
The aim of this survey is to provide a rigorous, but not so technical, introduction to several systemic risk indicators frequently used in official publications by institutions involved in macroprudential analysis and policy. The selected indicators are classified using three taxonomies. The first one adopts the point of view of regulators and policy-makers, whose attention is usually focused on the implementability and forward-looking nature of the indicators. The second taxonomy highlights the features that are most relevant for researchers, i.e. the reliance on a sound theoretical background and the use of advanced analytical techniques. The third taxonomy classifies the indicators according to the specific aspects of systemic risks that are captured. For each indicator both general and technical descriptions are provided, as well as specific examples.

Adoption of CSR and Sustainability Reporting Standards: Economic Analysis and Review
Christensen, Hans Bonde,Hail, Luzi,Leuz, Christian
This study provides an economic analysis of the determinants and consequences of corporate social responsibility (CSR) and sustainability reporting. To frame our analysis, we consider a widespread mandatory adoption of CSR reporting standards in the United States. The study focuses on the economic effects of standards for disclosure and reporting, not on the effects of CSR activities and policies themselves. It draws on an extensive review of the relevant academic (CSR and non-CSR) literatures in accounting, economics, finance, and management. Based on a discussion of the fundamental economic forces at play and the key features and determinants of (voluntary) CSR reporting, we derive and evaluate possible economic consequences, including capital-market effects for select stakeholders as well as potential firm responses and real effects in firm behavior. We also highlight issues related to the implementation and enforcement of CSR reporting standards. Our analysis yields a number of insights that are relevant to the current debate on CSR and sustainability reporting and provides scholars with avenues for future research.

An Optimal Early Warning System for Currency Crises Under Model Uncertainty
Mohamed, Mamdouh,Abdel-Latif, Hany
This paper assesses a number of early warning (EWS) models of financial crises with the aim of proposing an optimal model that can predict the incidence of a currency crisis in developing countries. For this purpose, we employ the dynamic model averaging (DMA) and equal weighting (EW) approaches to combine forecasts from individual models allowing for time varying weights. Taking Egypt as a case study and focusing only on currency crises, our findings show that combining forecasts (DMA- and EW-based EWS) models which account for model uncertainty perform better than other competing models in both in-sample and out-of-sample forecasts.

Application to File Brief and Brief of Amici Curiae, Center for Responsible Lending, National Association of Consumer Advocates, Public Citizen, Inc., and Public Good Law Center in Support of Appellants
Williams, Brady C.,Mermin, Ted
Amicus Brief submitted to the California Supreme Court in De La Torre v CashCall Inc., 5 Cal.5th 966 (Cal. 2018): The Ninth Circuit has asked this Court whether the interest rate on consumer loans of $2,500 or more can render the loans unconscionable under section 22302 of the California Financial Code. The answer â€" with the proviso that any unconscionability determination must be made in the context of the terms and circumstances of the loans in question â€" is yes. . . .When the legislature removed the interest rate cap on loans above $2,500, it did not impliedly repeal the historic principle that courts may intervene where a contract or provision is unduly oppressive or unconscionable. Rather, the legislature recognized that the statute’s unconscionability provision would remain a safeguard against the excesses of an unfettered free market. The doctrine of unconscionability, a “principle of equity applicable to all contracts generally,” applies to all provisions of all contracts. (See Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 820.) A loan’s interest rate, whether governed by a statutory rate cap or not, is no exception. The incorporation of Civil Code section 1670.5 into Financial Code section 22302 evinces a clear legislative intent that courts should police the consumer credit market for unduly oppressive contract terms. The legislative mandate of Finance Code section 22302 is clear: where the market for consumer loans fails to produce socially tolerable terms, the courts may step in. The attributes of the loans at issue in this case â€" their relatively large size, the length of the repayment period and, notably, their high interest rates â€" provide ample foundation for a finding that the loans are in fact unconscionable. For the current proceeding, however, it is enough to say this: The interest rate on consumer loans of $2,500 or more can â€" in the context of the other terms and circumstances of the loans â€" render the loans unconscionable under section 22302 of the California Financial Code.

Are Stress Tests Beauty Contests?
Quagliariello, Mario
There is increasing debate on whether official-sector stress tests are fit for purpose and deliver what they are designed for. In the EU, this discussion focuses on the costs and benefits of such a large-scale bottom-up exercise and on the possible options to improve its usefulness for banks, supervisors and the general public, but also on exploring ways to make it less burdensome.This paper discusses whether some improvements to the design of the EU-wide stress test could better align the incentives of the different stakeholders involved. In particular, the objective is to understand whether there is room for mitigating the beauty contest problem, namely the problem that banks are more interested in showing that they are outperforming others than in identifying actual risks in an adverse scenario.

Business Strategy and Excess Leverage
Akindayomi, Akinloye,Amin, Md Ruhul
Purpose: The purpose of this study is to investigate whether excess leverage is associated with business strategy for non-financial and non-utilities US firms over the period from 1999 to 2017. We also examine the link between the cross-sectional difference in excess leverage and long-term debt issuance and earnings volatility. Empirical methodology: We use a comprehensive measure of business strategy based on Miles and Snow’s (1978, 2003) theoretical framework, following Bentley et al. (2013). Based on Miles and Snow’s (1978, 2003) theoretical framework, we account for two endpoints (prospectors and defenders) of the business strategy continuum. To test our empirical predictions, we use fixed-effect regression models.Findings: We find that firms following an innovation-oriented business strategy (prospectors) are associated with lower excess leverage. Especially, compared with defenders, prospectors are likely to have lower excess debt. Our further analyses show that these firms issue less long-term debt and exhibit greater earnings volatility, which leads to increased operating risk. The negative association between a firm’s business strategy and excess leverage is consistent with the trade-off theory of capital structure.Contribution: This study relates to the literature that focuses on the strategic aspect of a firm’s risk-taking behavior. Prior studies show that a firm’s business strategy has an impact on its financial reporting and tax planning practices among others. We add to this line of research by showing the effect of business strategy on excess leverage.

CEO Early-Life Disaster Experience and Stock Price Crash Risk
Chen, Yangyang,Fan, Qingliang,Yang, Xin,Zolotoy, Leon
We document that stocks of the firms led by CEOs with early-life natural disaster experience have higher crash risk. The effect of CEO disaster experience is amplified for CEOs with high equity risk-taking incentives and CEOs serving as the chairman of the board. Further evidence suggests that CEOs with disaster experience, on average, show greater tendency to hoard bad news. Supplemental analysis reveals a non-monotone relation between severity of CEO disaster experience and crash risk. Our findings suggest that, by influencing CEO’s risk attitudes, early-life disaster experience impacts CEO’s propensity to hoard bad news, engendering formation of stock price crashes.

Career Choice as an Extended Spatial Evolutionary Public Goods Game
Yuan Cheng,Yanbo Xue,Meng Chang

We propose an extended spatial evolutionary public goods game (SEPGG) model to study the dynamics of individual career choice and the corresponding social output. Based on the social value orientation theory, we categorized two classes of work, namely the public work if it serves public interests, and the private work if it serves personal interests. Under the context of SEPGG, choosing public work is to cooperate and choosing private work is to defect. We then investigate the effects of employee productivity, human capital and external subsidies on individual career choices of the two work types, as well as the overall social welfare. From simulation results, we found that when employee productivity of public work is low, people are more willing to enter the private sector. Although this will make both the effort level and human capital of individuals doing private work higher than those engaging in public work, the total outcome of the private sector is still lower than that of the public sector provided a low level of public subsidies. When the employee productivity is higher for public work, a certain amount of subsidy can greatly improve system output. On the contrary, when the employee productivity of public work is low, provisions of subsidy to the public sector can result in a decline in social output.

Certainty Equivalent and Utility Indifference Pricing for Incomplete Preferences via Convex Vector Optimization
Birgit Rudloff,Firdevs Ulus

For incomplete preference relations that are represented by multiple priors and/or multiple -- possibly multivariate -- utility functions, we define a certainty equivalent as well as the utility buy and sell prices and indifference price bounds as set-valued functions of the claim. Furthermore, we motivate and introduce the notion of a weak and a strong certainty equivalent. We will show that our definitions contain as special cases some definitions found in the literature so far on complete or special incomplete preferences. We prove monotonicity and convexity properties of utility buy and sell prices that hold in total analogy to the properties of the scalar indifference prices for complete preferences. We show how the (weak and strong) set-valued certainty equivalent as well as the indifference price bounds can be computed or approximated by solving convex vector optimization problems. Numerical examples and their economic interpretations are given for the univariate as well as for the multivariate case.

Contagion in the CoCos Market? A Case Study of Two Stress Events
Bologna, Pierluigi,Miglietta, Arianna,Segura, Anatoli
The post-crisis regulatory framework has fostered the development of the contingent convertible bonds (CoCos) market. These instruments permit banks to absorb losses as a going concern but their critics warn that they could have potentially destabilizing effects in stress situations. We analyse the dynamics of the European CoCos market during two stress episodes that occurred in 2016 and that were triggered by news of substantial unexpected losses faced by a European systemically important bank. Our econometric approach aims to disentangle the fundamental channel by which the contagion of such bank’s distress spreads to the rest of the market from a possible CoCo-specific contagion channel. We find evidence of significant CoCo-specific contagion in the two stress episodes, which could be the result of investors’ reassessment of the CoCos’ riskiness or of uncertainty about their supervisory treatment. Moreover, we find that the CoCo-specific contagion was weaker in the second stress event, suggesting that as investors learn about the specific features of these instruments and their supervisory treatment the CoCos market becomes more resilient.

Country Risk: Determinants, Measures and Implications â€" The 2019 Edition
Damodaran, Aswath
As companies and investors globalize, we are increasingly faced with estimation questions about the risk associated with this globalization. When investors invest in China Mobile, Infosys or Vale, they may be rewarded with higher returns, but they are also exposed to additional risk. When Siemens and Apple push for growth in Asia and Latin America, they clearly are exposed to the political and economic turmoil that often characterize these markets. In practical terms, how, if at all, should we adjust for this additional risk? We will begin the paper with an overview of overall country risk, its sources and measures. We will continue with a discussion of sovereign default risk and examine sovereign ratings and credit default swaps (CDS) as measures of that risk. We will extend that discussion to look at country risk from the perspective of equity investors, by looking at equity risk premiums for different countries and consequences for valuation. In the fourth section, we argue that a company’s exposure to country risk should not be determined by where it is incorporated and traded. By that measure, neither Coca Cola nor Nestle are exposed to country risk. Exposure to country risk should come from a company’s operations, making country risk a critical component of the valuation of almost every large multinational corporation. In the final section, we will also look at how to move across currencies in valuation and capital budgeting, and how to avoid mismatching errors.

Do Fund Managers Misestimate Climatic Disaster Risk?
Alok, Shashwat,Kumar, Nitin,Wermers, Russ
We examine whether professional money managers overreact to large climatic disasters. We find that managers within a major disaster region underweight disaster-zone stocks to a much greater degree than distant managers, and that this aversion to disaster-zone stocks is related to a salience bias that decreases over time and distance from the disaster â€" rather than to superior information possessed by close managers. This overreaction can be costly to fund investors for some especially salient disasters â€" hurricanes and tornadoes: a long-short strategy that exploits the overreaction generates a significant DGTW-adjusted return over the following two years.

Dual representations for systemic risk measures
Çağın Ararat,Birgit Rudloff

The financial crisis showed the importance of measuring, allocating and regulating systemic risk. Recently, the systemic risk measures that can be decomposed into an aggregation function and a scalar measure of risk, received a lot of attention. In this framework, capital allocations are added after aggregation and can represent bailout costs. More recently, a framework has been introduced, where institutions are supplied with capital allocations before aggregation. This yields an interpretation that is particularly useful for regulatory purposes. In each framework, the set of all feasible capital allocations leads to a multivariate risk measure. In this paper, we present dual representations for scalar systemic risk measures as well as for the corresponding multivariate risk measures concerning capital allocations. Our results cover both frameworks: aggregating after allocating and allocating after aggregation. As examples, we consider the aggregation mechanisms of the Eisenberg-Noe model as well as those of the resource allocation and network flow models.

Dynamic tail inference with log-Laplace volatility
Gordon V. Chavez

We propose a family of models that enable predictive estimation of time-varying extreme event probabilities in heavy-tailed and nonlinearly dependent time series. The models are a white noise process with conditionally log-Laplace stochastic volatility. In contrast to other, similar stochastic volatility formalisms, this process has analytic expressions for its conditional probabilistic structure that enable straightforward estimation of dynamically changing extreme event probabilities. The process and volatility are conditionally Pareto-tailed, with tail exponent given by the reciprocal of the log-volatility's mean absolute innovation. This formalism can accommodate a wide variety of nonlinear dependence, as well as conditional power law-tail behavior ranging from weakly non-Gaussian to Cauchy-like tails. We provide a computationally straightforward estimation procedure that uses an asymptotic approximation of the process' dynamic large deviation probabilities. We demonstrate the estimator's utility with a simulation study. We then show the method's predictive capabilities on a simulated nonlinear time series where the volatility is driven by the chaotic Lorenz system. Lastly we provide an empirical application, which shows that this simple modeling method can be effectively used for dynamic and predictive tail inference in financial time series.

Environmental Hazards and Risk Management in the Financial Sector: A Systematic Literature Review
Breitenstein, Miriam,Nguyen, Duc Khuong,Walther, Thomas
We conduct a systematic literature review on environmental and climate related risk management in the financial sector. The systematic literature review identified a total of 36 relevant articles. A formal coding leads to the aggregation and classification of papers to three main categories that consider the impact of environmental concerns on financial risk, the current state of environmental risk practices in the finance sector, and lastly measures to assess those risks within financial institutions. Our results put forward the risk reduction for financial institutions which highly commit with environmental responsibility and performance. More importantly, investors’ increase in awareness and willingness to assess climate-related financial risk would incentivize corporate managers to adopt more proactive environmental policies and practices. These findings also allow for intriguing discussions about several alleys for future research.

Environmental, Social and Governance Investment Standardization: Moving Towards Sustainable Economy
Plastun, Oleksiy,Makarenko, Inna,Yelnikova, Yulia,Makarenko, Serhiy
This paper is devoted to the investigation of environmental, social and governance investment (investment with ESG criterion) normative base in the context of standardization process in sustainable economy financing. Complexity of such standardization and the lack of commonly accepted regulations, indexes metrics are under discussions of scholars, which encourage the need for clear guidance in ESG investment. 651 sustainability rating products and more than 300 investment policy instruments in different countries show the need for classifying the ESG standards. The solution of this scientific and practical task is based on the developed ESG investment standards system classifications. Proposed classification incorporates such criteria as level of standards adoption, mandatory degree, sectorial specificity, degree of companies’ awareness of responsible activity, ensuring transparency and the benchmarks formation, creating the institutional support of the ESG investment standardization process in sustainable economy and making more grounded investment and regulatory decisions.

Exploring Price Gap Anomaly in the Ukrainian Stock Market
Plastun, Oleksiy,Makarenko, Inna,Khomutenko, Lyudmila,Shcherbak, Svitlana,Tryfonova, Olha
This paper analyzes price gaps in the Ukrainian stock market for the case of UX index over the period 2009â€"2018. Using different statistical tests (Student’s t-tests, ANOVA, Mann-Whitney test) and regression analysis with dummy variables, as well as modified cumulative approach and trading simulation, the authors test a number of hypotheses searching for price patterns and abnormal market behavior related to price gaps: there is seasonality in price gaps (H1); price gaps generate statistical anomalies in the Ukrainian stock market (H2); upward gaps generate price patterns in the Ukrainian stock market (H3) and downward gaps generate price patterns in the Ukrainian stock market (H4). Overall results are consistent with the Efficient Market Hypothesis: there is no seasonality in price gaps and in most cases there is no evidences of price patterns or abnormal price behavior after the gaps in the Ukrainian stock market. Nevertheless, the authors find very strong and convincing evidences in favor of momentum effect on the days of negative gaps. These observations are confirmed by trading simulations: trading strategy based on detected price pattern generates profits and demonstrates overall efficiency, which is against the market efficiency. These results can be interesting both for academicians (further evidences against market efficiency) and practitioners (real and effective trading strategy to generate profits in the Ukrainian market market).

Historical Evolution of Monthly Anomalies in International Stock Markets
Plastun, Oleksiy,Sibande, Xolani,Gupta, Rangan,Wohar, Mark E.
This paper is a comprehensive investigation of the evolution of various monthly anomalies (January effect, December effect, and the Mark Twain effect) in the US stock market for its entire history. This is done using various statistical techniques (average analysis, Student’s t-test, ANOVA, the Mann-Whitney test) and a trading simulation approach). To confirm our results we extended the analysis to the UK, Japan, Canada, France, Switzerland, Germany and Italy stock markets. The results indicate that the January effect was most prevalent in the US and that the December effect and the Mark Twain effect were never prevalent in the US. This result was confirmed in other markets as well. The January effect was most prevalent in the middle of the 20th century but has since disappeared. Furthermore, the January effect provided exploitable profit opportunities. Our results are consistent and add to the existing literature through the use of a complete history of the US market. Overall, the US stock market is consistent with the Adaptive Market Hypothesis.

How Does Policy Uncertainty Influence Financial Market Uncertainty Across the G7?
Smales, Lee A.
Economic policy uncertainty (EPU) relates to ambiguity surrounding possible changes in government policy and their associate impact on firm performance. This uncertainty places additional stress on economic agents and has implications for the global economy via delays in firm investment and hiring, and postponement of household consumption. We utilise the EPU measure of Baker et al. (2016) to investigate whether financial market uncertainty is influenced by policy uncertainty across the G7. Our empirical results show that financial market uncertainty (implied volatility) increases as economic policy uncertainty increases (and the economy weakens). This relationship holds even after controlling for macroeconomic state variables and country / time fixed effects, and is consistent for monthly and daily data frequency. The correlation of political uncertainty among countries varies over time, increasing in tranquil times of low EPU, and sharply decreasing during times of crisis. We also show that US policy uncertainty has an economic and statistically significant impact on global financial market uncertainty, a spill-over effect that is consistent with the important role that US policy decisions play in the global economy.

Macroeconomics Determinants of the Correlation Between Stocks and Bonds
Pericoli, Marcello
We analyze the correlation between the stock and bond markets in Germany and the US. We use a standard no-arbitrage affine model to decompose the correlation between these two assets into its main drivers. The correlation between bond yields and stock returns is a key determinant of asset allocation. Our results show that the correlation is primarily influenced by the uncertainty about inflation and real interest rates as well as by co-movement between inflation, real interest rates and dividend growth. Shocks to inflation, real interest rates and dividend growth can explain the correlation’s temporary deviation from its long-term dynamics.

Medium-Term Asymmetric Fluctuations and EMU as an Optimum Currency Area
Hessel, Jeroen
Recent studies find that short-term fluctuations in EMU have been symmetric. This finding leads to benign views on the functioning of EMU as an optimum currency area (OCA), that are difficult to reconcile with the sovereign debt crisis. We try to solve this puzzle by looking at medium-term fluctuations instead, and reach five conclusions. First, medium-term fluctuations in EMU are much larger and less symmetric than short-term fluctuations. Second, medium-term fluctuations have become larger and less symmetric over time, while short-term fluctuations have become smaller and more symmetric. Third, medium-term fluctuations in EMU are less symmetric than in the US, while short-term fluctuations are more symmetric. Fourth, medium-term fluctuations in the euro area have become more strongly correlated with financial variables like credit and house prices, and less strongly correlated with real variables like productivity. Finally, medium-term fluctuations are more closely related to imbalances in price competitiveness, current accounts and budget deficits than short-term fluctuations. We conclude that our medium-term perspective has become relevant in the monetary union, due to the increasing importance of financial factors. It leads to less benign views on the functioning of EMU and on the endogenous OCA hypothesis.

Microfinance: Battling a Wicked Problem
Ashta, Arvind
A school of thought hails microcredit as a social innovation, a messiah to enable people to help themselves out of poverty through entrepreneurship. An opposing school of thought considers microcredit as a capitalist demon ensnaring the poor in poverty and debt. The layman and the million professionals working in this industry are at a loss to make sense of the stories that circulate about microcredit. This book provides this sense-making, useful for students, professionals, investors and researchers who are attracted to this field.Poverty is a wicked problem, akin to Hydra, the Greek mythological monster with many heads. As microcredit tries to balance multiple objectives to grapple with these multiple heads, it has needed to shift the weapons it uses. The arsenal for this battle has needed new philosophies, changing ethics, differing missions, institutional partnerships, the latest technologies and new products. These rapid innovations have differed in speed across the world, with adaptations in developed and developing countries. This book presents these with many case studies and field research.It is clear that development initiatives, no matter how financial, cross academic disciplines. At the very least, they affect disciplines such as economics, business management, sociology, history, geography, politics, legal systems in place, as well as science, which is evolving at such a high speed. The book provides this multidisciplinary view and motivates future research and practices.

Natural Catastrophes and Bank Lending: The Case of Flood Risk in Italy
Faiella, Ivan,Natoli, Filippo
We investigate the relationship between bank lending and catastrophe risk by analyzing the exposure of banks to Italian firms located in areas at risk of flooding. By matching a new map of flood risk areas with proprietary data on bank loans at municipal level we find that, on controlling for sectoral- and province-level fixed effects, lending to non-financial firms is negatively correlated with their flood risk exposure. A province-level analysis, which also allows us to control for bank- and firm-specific factors, confirms this finding when the borrowers are small and medium-sized enterprises. This investigation gives an initial insight into the relationship between the risk of natural catastrophes - exacerbated by climate change - and lending decisions.

On the Forward Smile
Roos, Thomas
Using short-time expansion techniques, we obtain analytic implied volatilities for European and forward starting options for a family of stochastic volatility models with arbitrary local volatility component and time dependent (piecewise constant) parameters. The formulas can be used to efficiently calibrate the model to European options at two expiries and to calculate the spanning forward starting option price.

Political Uncertainty and Private Debt Contracting: Evidence from the U.S. Gubernatorial Elections
Kim, Kirak,Nguyen, Trang
We investigate the effect of political uncertainty on private loan contracts by exploiting the U.S. gubernatorial elections as a source of variation in uncertainty. We show that lenders are more likely to impose financial covenants and state-contingent pricing grids on borrowers headquartered in the states in election years, compared with off-election years. The effects are stronger when the winning voting margins are narrow or when incumbent governors are term-limited, supporting the notion of political uncertainty manifesting itself in loan contracting outcomes. Additionally, consistent with the intuition that uncertainty exacerbates adverse selection problems, the effect of elections is more pronounced among the borrowers with greater information asymmetry, proxied for by lending relationship and Big Four auditors. Overall our evidence suggests that gubernatorial elections increase transitory uncertainty, yielding significant impacts on debt contracts and the cost of private debt capital.

Robust risk aggregation with neural networks
Stephan Eckstein,Michael Kupper,Mathias Pohl

We consider settings in which the distribution of a multivariate random variable is partly ambiguous. We assume the ambiguity lies on the level of dependence structure, and that the marginal distributions are known. Furthermore, a current best guess for the distribution, called reference measure, is available. We work with the set of distributions that are both close to the given reference measure in a transportation distance (e.g. the Wasserstein distance), and additionally have the correct marginal structure. The goal is to find upper and lower bounds for integrals of interest with respect to distributions in this set.

The described problem appears naturally in the context of risk aggregation. When aggregating different risks, the marginal distributions of these risks are known and the task is to quantify their joint effect on a given system. This is typically done by applying a meaningful risk measure to the sum of the individual risks. For this purpose, the stochastic interdependencies between the risks need to be specified. In practice the models of this dependence structure are however subject to relatively high model ambiguity.

The contribution of this paper is twofold: Firstly, we derive a dual representation of the considered problem and prove that strong duality holds. Secondly, we propose a generally applicable and computationally feasible method, which relies on neural networks, in order to numerically solve the derived dual problem. The latter method is tested on a number of toy examples, before it is finally applied to perform robust risk aggregation in a real world instance.

Sovereign Debt Maturity Structure and Its Costs
Corneli, Flavia
I propose a theoretical model of a debt contract between a sovereign and its international lenders that determines the optimal debt maturity structure and related costs. It is shaped by two financial frictions: limited liability (the country cannot guarantee that it will not dilute its obligations or default on them) and market incompleteness (only non-contingent assets can be issued). I find that, in equilibrium, debt dilution constrains the amount of long-term debt issuance. I then focus on two aspects that are currently widely debated in both academic and policy fora: the possibility of sovereign debt restructuring with private creditors and international official lending in the event of exclusion from the international capital markets. The possibility of restructuring after default stimulates long-term debt issuance. However, in equilibrium, the proposed crisis management tools are unable to loosen the constraint on long-term debt issuance. Consistently with the empirical literature, I find that even when these policy options for crisis resolution are available, the country tends to issue mainly short-term debt.

Statistical Arbitrage in Jump-Diffusion Models with Compound Poisson Processes
Akyildirim, Erdinc,Fabozzi, Frank J.,Goncu, Ahmet,Sensoy, Ahmet
We prove the existence of statistical arbitrage opportunities for jump-diffusion models of stock prices when the jump-size distribution is assumed to have finite moments. We show that to obtain statistical arbitrage, the risky asset holding must go to zero in time. Existence of statistical arbitrage is demonstrated via `buy-and-hold until barrier' strategy, where the investor sells the risky asset when it hits a deterministic boundary. In order to exploit statistical arbitrage opportunities, the investor needs to have a good approximation of the physical probability measure and the drift of the stochastic process for a given asset.

Supplementary Material for 'A ReMeDI for Microstructure Noise'
Li, Z. Merrick,Linton, Oliver B.
This note contains the supplements to Li and Linton (2019). Section A contains extensive simulation studies. Section B presents the methodology and a detailed numerical algorithm to select the tuning parameters. Section C presents additional empirical studies. Section D contains all mathematical proofs.

Taxable Stock Trading with Deep Reinforcement Learning
Shan Huang

In this paper, we propose stock trading based on the average tax basis. Recall that when selling stocks, capital gain should be taxed while capital loss can earn certain tax rebate. We learn the optimal trading strategies with and without considering taxes by reinforcement learning. The result shows that tax ignorance could induce more than 62% loss on the average portfolio returns, implying that taxes should be embedded in the environment of continuous stock trading on AI platforms.

The Effect of the Eurosystem’s Expanded Asset Purchase Programme on Inflation Expectations: Evidence From the ECB Survey of Professional Forecasters
Bulligan, Guido
This paper investigates the effect of ECB asset purchases on inflation expectations in the euro area, as measured by the ECB Survey of Professional Forecasters. To identify the effects on individual expectations we adopt a panel approach, where the Eurosystem Asset Purchase Programme (APP) shocks are used as covariates to explain the revisions in the individual inflation forecasts; controls for updates in macroeconomic and financial developments are also included. Our results indicate that the first APP announcement in January 2015 resulted in a statistically significant upwards revision of medium term inflation expectations and lowered the forecasters’ assessment of the probability of a low inflation regime. The average effect however masks significant differences among forecasters: forecasters that were relatively more accurate prior to the announcement were also those who revised their inflation forecasts more markedly.

The Effectiveness of Capital Controls
Nispi Landi, Valerio,Schiavone, Alessandro
The goal of this work is a systematic analysis of the effectiveness of capital controls in reducing the volume of capital flows and the probability of extreme events (surges and flights), strengthening financial stability and affecting the exchange rate. We find that controls significantly reduce capital flows, even though the effectiveness varies across economies and types of investment. Moreover capital controls tend to reduce the probability of extreme episodes. With regard to financial stability objectives, controls on banking inflows reduce domestic credit growth, but this effect is mainly driven by advanced economies. Controls on capital inflows reduce the share of domestic loans denominated in foreign currency. Finally, our estimates suggest that capital controls on inflows tend to be associated with an undervalued exchange rate only in emerging market economies.

The Growth of Chinese R&D and Innovation
Gao, Xiaodan,Zhao, Jake
China's GDP has grown at a tremendous rate over the last 40 years, but its total R&D expenditure has grown even more. We construct a model of firm dynamics which produces endogenous increases in R&D and productivity. We then take the model to the data and find that R&D expenditure as a percentage of GDP should have plateaued in the absence of government incentives. Also, Chinese firm productivity would have lagged more than 10 years behind without foreign technology spillovers. Finally, we assess the efficacy of various R&D policies. Giving greater R&D subsidies to less productive firms is more efficient, while giving greater subsidies to firms with lower R&D expenditures is not as efficient.

Volatility-of-Volatility Risk in the Crude Oil Market
Xu, Yahua,Roh, Tai-Yong
Under the stochastic volatility-of-volatility framework, we show that oil volatility-of-volatility risk is a significant pricing factor for cross-sectional delta-hedged gains constructed from 1-month United States Oil Fund (USO) options, and is negatively priced. Moreover, oil volatility-of-volatility risk can significantly and negatively predict one-period ahead delta-hedged option gains. The findings are robust after implementing several tests such as controlling for jump risk measures, another measure of oil volatility-of-volatility and delta-hedged gains constructed from 1-week USO options. The information content of oil volatility-of-volatility is also distinctive from its equity counterpart, which can contribute to predicting the future real personal consumption expenditure.