Research articles for the 2019-08-06

A Regression Discontinuity Design for Categorical Ordered Running Variables with An Application to Central Bank Purchases of Corporate Bonds
Li, Fan,Mercatanti, Andrea,Mäkinen, Taneli,Silvestrini, Andrea
We propose a regression discontinuity design which can be employed when assignment to a treatment is determined by an ordinal variable. The proposal first requires an ordered probit model for the ordinal running variable to be estimated. The estimated probability of being assigned to a treatment is then adopted as a latent continuous running variable and used to identify a covariate-balanced subsample around the threshold. Assuming the local unconfoundedness of the treatment in the subsample, an estimate of the effect of the programme is obtained by employing a weighted estimator of the average treatment effect. We apply our methodology to estimate the causal effect of the corporate sector purchase programme of the European Central Bank on bond spreads.

A Theoretical Analysis Connecting Conservative Accounting to the Cost of Capital
Penman, Stephen H.,Zhang, Xiao-Jun
We connect conservative accounting to the cost of capital by developing an accounting model within an asset pricing framework. The model has three distinctive features: (1) transaction-cycle-conformity, where the book value equals the value of cash at the beginning and the end of a cash-to-cash transaction cycle; (2) a revenue recognition principle, where uncertainty affects the amount of revenues recognized; (3) a matching principle, where expenses are matched with revenue with a conservative bias due to uncertainty. We demonstrate how the growth rate of expected earnings, the accruals-to-cash ratio, and the expected earnings yield relate to the expected stock return.

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.

An Early Warning System for Less Significant Italian Banks
Ferriani, Fabrizio,Cornacchia, Wanda,Farroni, Paolo,Ferrara, Eliana,Guarino, Francesco,Pisanti, Francesco
This paper presents a statistical early warning system for less significant institutions (LSIs) under the direct supervision of the Bank of Italy. The model is calibrated on the basis of a wider definition of possible distress events, using the universe of Italian LSIs active in the period 2008-2016 as a reference. We selected an extensive list of variables that might give early warnings of a crisis in relation both to the overall banking system and Italy’s macro-financial situation, and to individual banks’ performances. A logit model is used to calculate the probability of default (PD) for each bank, with time horizon estimates set at four and six quarters. The empirical specifications proposed are tested using several statistical indices; the ex-post analysis of the estimated PDs shows a percentage of correct bank classification in the range of 80-90 per cent, with better results the nearer the moment of prediction is to when a crisis situation actually occurs.

An Exploratory Study of Car Ijarah Practices in Islamic Banks of Pakistan
Yasser, Farah,Naz, Muhammad Azeem,Khalid, Zunera
Islamic banking is the system where all rules and regulations of the banking system are governed by Shariah rules, providing collective impartiality and fairness, while gratifying the financial requirements of the community and maintaining high principles of moral values, simplicity, and wisdom of accountability. As we can see in the past years, there is an escalation in competition and emphasis on ethics, all across the globe, therefore, Islamic products are attracting not only Muslims but non- Muslims as well. Moreover, the shariah rules provide collective impartiality and fairness, while gratifying the financial requirements of the community. The main objective of this study is to review the Car Ijarah, in the light of Shariah principles and its practical implications by the Islamic banks in Pakistan. In this study, the survey research method is used for collecting the data. In this regard, Islamic banking personnel at a managerial level were asked to fill the questionnaires. A detailed analysis of the lease documents of each bank was also done. This study highlights that most of the conditions in Ijarah agreements in Pakistani Islamic banks are according to Shariah laws such as lease rentals starts at the delivery of the vehicle, customers are liable to pay any loss due to their negligence and wear and tear. Whereas, bank is liable to pay any loss due to the natural disaster. Also, banks have opted to charge variable lease rentals in long-term lease as well as transfer of ownership, after the completion of lease term, is in the hands of bank, etc. At the same time this study evidently identifies the deficiencies in existing Ijarah products where they are simply not following Shariah guidelines for example expenses related to purchase are borne by lessee. Secondly, most of the banks have no right to cancel the lease agreement at any time if the lessee has violated lease agreement. Insurance expense (Takaful) is also born by lessee.

Assessing Bank Market Power Given Limited Consumer Consideration
Abrams, Eliot
Models of demand traditionally assume that consumers consider all products available in a market. However, in practice, consumers often only consider a small subset of products. I demonstrate the importance of accounting for this behavior in the context of bank deposit market power. I estimate a model of bank competition for deposits in the twenty largest US Metropolitan Statistical Areas over 2004 to 2018. I find that accounting for limited consumer consideration of banks increases market power estimates for online direct banks, better explains the differential pass through of federal funds rate changes to depositors, and revises the assessment of prominent political proposals to strengthen bank competition. In contrast to results assuming full consideration, I predict that introducing a postal bank or a widely-considered online direct bank, say an Amazon bank, would substantially increase competition.

Assessing Merger Impacts on Consumer Welfare in a Converging Internet Marketplace
Frieden, Rob
This article identifies substantial flaws in how U.S. government agencies and courts assess merger proposals by ventures operating in the information, communications and entertainment (“ICE”) marketplace. Using current market definitions, consumer impact assessments and economic doctrine, antitrust enforcement agencies may fail to identify the risk of harm to consumers and competition, a so-called false negative. In recent years, the Department of Justice, Federal Communications Commission and Federal Trade Commission, individually and collectively, have assessed the competitive consequences of numerous multi-billion dollar acquisitions and have conditionally approved almost all of them. These agencies appear predisposed to favor deals that involve vertical integration up and down market segments, based on an assumption that short terms consumer welfare gains would exceed any potential competitive harms. The article concludes that reviewing government agencies appear to overemphasize past and current marketplace conditions rather than assess future impacts on consumers and competition. By “fighting the last war,” these agencies fail to identify new risks to consumer welfare, particularly by ventures operating in multiple markets that do not readily fit into the conventional assessment of mutually exclusive vertical and horizontal “food chains.” In an ecosystem where both technologies and markets converge, ventures can appear to offer consumers an incredible value proposition akin to a “free lunch.” A better calibrated, multi-dimensional analysis would identify significant offsetting harms.The article suggests that the narrow fixation on near term impact on consumers and the prices they pay insufficiently assesses the potential for harm, particularly for Internet-based ventures that require no cash payment for service. Government antitrust enforcement agencies compound mistakes in market impact assessment by ignoring how firms finance “free services” through often obscured collection, analysis and sale of consumer data. In light of increasing concentration in the ICE marketplace, through mergers and the impact of converging technologies, surviving ventures can adversely impact both core and now more closely integrated, adjacent markets.The article will examine how and why the FTC approved the acquisition of DoubleClick by Google in 2007, having concluded insignificant competitive harm will occur even as Google quickly grew to dominate nearly all sectors of the ICE advertising marketplace. The article also evaluates whether in conditionally approving Comcast’s acquisition of NBC/Universal the FCC failed to safeguard consumers. Additionally, the article considers whether AT&T, as anticipated by reviewing courts, flowed through to consumers any of the anticipated efficiency gains and cost savings generated by its acquisition of Time Warner.The article concludes that recent and future ICE acquisitions have a much greater likelihood of generating legitimate concerns about competitive and consumer harms, particularly as ICE market becomes ever more concentrated and often dominated by a single firm. The article does not recommend a repudiation of Chicago School antitrust doctrine, but recommends that reviewing agencies and courts calibrate empirical measures of prospective costs and benefits of a proposed merger by identifying short term and longer-term impacts on core and adjacent markets.

Bank Resolution and Public Backstop in An Asymmetric Banking Union
Segura, Anatoli,Vicente, S.
This paper characterizes the optimal banking union with endogenous participation in a two-country economy in which domestic bank failures may be contemporaneous to sovereign crises, giving rise to risk-sharing motives to mutualize bail-out funding. Raising public funds to conduct bail-outs entails a deadweight loss. Bank bail-ins create disruption costs. The optimal resolution trades-off these costs. Truthfully eliciting information from domestic authorities imposes a domestic co-payment to fund bail-outs. When country asymmetry is large, ensuring the ex-ante participation of the fiscally stronger country requires a reduced contribution by this country, which increases the likelihood of bailing out its failing bank.

Crowdfunding as Gambling: Evidence from Repeated Natural Experiments
Demir, Tolga,Mohammadi, Ali,Shafi, Kourosh
We explore whether sensation-seeking, a personality trait that involves risk-taking for novelty and thrill, is one of the underlying motivations for participating in peer-to-peer lending crowdfunding markets. To empirically substantiate this argument, we test whether individuals participating in Prosper, one of the largest lending markets in the U.S., reduce their lending activity when gambling in the form of playing the multistate lotteries Powerball and Mega Millions becomes more attractive. Lottery is a repeated natural experiment: Lottery jackpots are randomly won and a series of draws with no winners form large jackpots. We find that the thrill of winning a large jackpot lottery, perhaps intensified by advertising and media coverage around this event, fulfills some lenders’ desire of sensation-seeking and substitutes participating in Prosper, decreasing their lending activity. We discuss implications for lenders and borrowers, as well as platform organizers and policy makers.

Does Trust among Banks Matter for Bilateral Trade? Evidence from Shocks in the Interbank Market
Del Prete, Silvia,Federico, Stefano
Do financial crises have an impact on trade flows via a shock to corporate risk or to bank risk? Focusing on Italy’s exports during a period characterized by both the global financial crisis and by the sovereign debt crisis, we exploit the prediction of standard trade models according to which financial shocks should be magnified by the time needed to ship a good to the importer’s country and by sector-level financial vulnerability. We also use bank-pair data on Italian banks’ assets and liabilities vis-à-vis their foreign bank counterparts in a specific country to construct proxies for the availability of trade finance in a given market. We find evidence of a negative impact of financial shocks on exports, especially to more distant countries and in more financially vulnerable sectors. The main channels seem to be mainly related to an increase in corporate risk (reflecting shocks to bank finance and to buyer-supplier trade credit), while the ‘contagion effect’ of shocks stemming from bank risk seems to be much less significant.

Dynamic Optimal Portfolios for Multiple Co-Integrated Assets
T. N. Li,A. Papanicolaou

In this paper we construct and analyse a multi-asset model to be used for long-term statistical arbitrage strategies. A key feature of the model is that all assets have \textit{co-integration}, which, if sustained, allows for long-term positive profits with low probability of losses. Optimal portfolios are found by solving a Hamilton-Jacobi-Bellman equation, to which we can introduce portfolio constraints such as market neutral or dollar neutral. Under specific conditions of the parameters, we can prove there is long-term stability for an optimal portfolio with stable growth rate. Historical prices of the S\&P500 constituents can be tested for co-integration and our model calibrated for analysis, from which we find that co-integration strategies require a terminal investment horizon sufficiently far into the future in order for the optimal portfolios to gain from co-integration. The data also demonstrates that statistical arbitrage portfolios will have improved in-sample Sharpe ratios compared to multivariate Merton portfolios, and that statistical arbitrage portfolios are naturally immune to market fluctuations.

Evaluating Pest Management Strategies: A Robust Method and its Application to Strawberry Disease Management
Ariel Soto-Caro,Feng Wu,Zhengfei Guan

Farmers use pesticides to reduce yield losses. The efficacies of pesticide treatments are often evaluated by analyzing the average treatment effects and risks. The stochastic efficiency with respect to a function is often employed in such evaluations through ranking the certainty equivalents of each treatment. The main challenge of using this method is gathering an adequate number of observations to produce results with statistical power. However, in many cases, only a limited number of trials are replicated in field experiments, leaving an inadequate number of observations. In addition, this method focuses only on the farmer's profit without incorporating the impact of disease pressure on yield and profit. The objective of our study is to propose a methodology to address the issue of an insufficient number of observations using simulations and take into account the effect of disease pressure on yield through a quantile regression model. We apply this method to the case of strawberry disease management in Florida.

External Governance and Debt Structure
Bharath, Sreedhar T.,Hertzel, Michael G.
This paper examines how external governance pressure provided by both the product market and the market for corporate control affects the type of debt that firms issue. Consistent with a governance mechanism substitution effect, we find that (i) an exogenous increase in governance pressure from the product market has a significant negative impact on the use of bank financing over public debt issuance, and (ii) an exogenous decrease in governance pressure from the takeover market has a significant positive impact on the use of bank financing. Tests using changes in the strictness of loan covenants provides corroborative evidence. We interpret these findings as consistent with the notion that firms endogenously substitute among alternative governance mechanisms in devising an optimal governance structure and that demand for creditor governance depends on the relative strength of alternative external governance mechanisms.

Global Fixed Income Portfolios: A Macroeconomic Invariant Solution
Bruno Scalzo Dees

Global fixed income returns span across multiple maturities and economies, that is, they naturally reside on multi-dimensional data structures referred to as tensors. In contrast to standard "flat-view" multivariate models that are agnostic to data structure and only describe linear pairwise relationships, we introduce a tensor-valued approach to model the global risks shared by multiple interest rate curves. In this way, the estimated risk factors can be analytically decomposed into maturity-domain and country-domain constituents, which allows the investor to devise rigorous and tractable global portfolio management and hedging strategies tailored to each risk domain. An empirical analysis confirms the existence of global risk factors shared by eight developed economies, and demonstrates their ability to compactly describe the global macroeconomic environment.

High-Frequency Betas and Cross Section of Expected Stock Returns in Southeast Asia
arief, usman,Husodo, Zaäfri A.,Muchtar, Asiah Rusdi
We investigate how systematic, continuous, and discrete (jump) risk affects the cross section of expected stock returns in Southeast Asia. Using the latest econometric techniques and a high-frequency dataset, we construct two high-frequency betas associated with intraday continuous and discontinuous risk premia. To improve our consistency, we use several statistical robustness levels and multiple frequencies. We empirically find that both continuous and discontinuous risk premia are significant and positive in Indonesia, and these results are consistent for lower frequency data samples. We also reveal that diffusive and jump risk premia have different impacts in other countries, but the results are not consistent for lower frequency samples.

Information Technology, Governance and Insurance in Sub-Saharan Africa
Asongu, Simplice,Nnanna, Joseph,Acha-Anyi, Paul N.
Purpose â€" This study investigates the role of ICT in modulating the effect of governance on insurance penetration in 42 sub-Saharan African countries using data for the period 2004-2014.Design/methodology/approach â€" Two insurance indicators are used in the analysis, namely: life insurance and non-life insurance. The three ICT modulating dynamics employed include: mobile phone penetration, internet penetration and fixed broadband subscriptions. Six governance channels are also considered, namely: political stability, “voice & accountability”, regulation quality, government effectiveness, the rule of law and corruption-control. The empirical evidence is based on generalized method of moments.Findings â€" The following main findings are established. First, mobile phone penetration does not significantly modulate governance channels to positively affect life insurance while it effectively complements “voice & accountability” to induce a positive net effect on non-life insurance. Second, internet penetration complements: (i) governance dynamics of political stability, government effectiveness and rule of law to induce positive net effects on life insurance: and (ii) corruption-control for an overall positive effect on non-life insurance. Third, the relevance of fixed broadband subscriptions in promoting life insurance is apparent via governance channels of regulation quality, government effectiveness and the rule of law while fixed broadband subscriptions do not induce significant overall net effects on non-life insurance though the conditional effects are overwhelmingly significant.Orginality/value â€" To the best our knowledge, studies on the relevance of ICT in promoting insurance consumption through governance channels are sparse, especially for a region such as sub-Saharan Africa where insurance penetration is low compared to other regions of the world.

Large Scale Continuous-Time Mean-Variance Portfolio Allocation via Reinforcement Learning
Wang, Haoran
We propose to solve large scale Markowitz mean-variance (MV) portfolio allocation problem using reinforcement learning (RL). By adopting the recently developed continuous-time exploratory control framework, we formulate the exploratory MV problem in high dimensions. We further show the optimality of a multivariate Gaussian feedback policy, with time-decaying variance, in trading off exploration and exploitation. Based on a provable policy improvement theorem, we devise a scalable and data-efficient RL algorithm and conduct large scale empirical tests using data from the S&P 500 stocks. We found that our method consistently achieves over 10% annualized returns and it outperforms econometric methods and the deep RL method by large margins, for both long and medium terms of investment with monthly and daily trading.

Moment Generating Function, Expectation and Variance of Ubiquitous Distributions with Applications in Decision Sciences: A Review
Pho, Kim-Hung,Ho, Thi Diem-Chinh,Tran, Tuan-Kiet,Wong, Wing-Keung
Statistics have been widely used in many disciplines including science, social science, business, engineering, and many others. One of the most important areas in statistics is to study the properties of distribution functions. To bridge the gap in the literature, this paper presents the theory of some important distribution functions and their moment generating functions. We introduce two approaches to derive the expectations and variances for all the distribution functions being studied in our paper and discuss the advantages and disadvantages of each approach in our paper. In addition, we display the diagrams of the probability mass function, probability density function, and cumulative distribution function for each distribution function being investigated in this paper. Furthermore, we review the applications of the theory discussed and developed in this paper to decision sciences.

Optimal Solution Techniques in Decision Sciences: A Review
Pho, Kim-Hung,Tran, Tuan-Kiet,Ho, Thi Diem-Chinh,Wong, Wing-Keung
Methods to find the optimization solution are fundamental and extremely crucial for scientists to program computational software to solve optimization problems efficiently and for practitioners to use it efficiently. Thus, it is very essential to know about the idea, origin, and usage of these methods. Although the methods have been used for very long time and the theory has been developed too long, most, if not all, of the authors who develop the theory are unknown and the theory has not been stated clearly and systematically. To bridge the gap in the literature in this area and provide academics and practitioners with an overview of the methods, this paper reviews and discusses the four most commonly used methods to find the optimization solution including the bisection, gradient, Newton-Raphson, and secant methods. We first introduce the origin and idea of the methods and develop all the necessary theorems to prove the existence and convergence of the estimate for each method. We then give two examples to illustrate the approaches. Thereafter, we review the literature of the applications of getting the optimization solutions in some important issues and discuss the advantages and disadvantages of each method. We note that all the theorems developed in our paper could be well-known but, so far, we have not seen any book or paper that discusses all the theorems stated in our paper in detail. Thus, we believe the theorems developed in our paper could still have some contributions to the literature. Our review is useful for academics and practitioners in finding the optimization solutions in their studies.

Performance-Based Vesting Compensation and Debt Contracting
King, Tao-Hsien Dolly,Shen, Chen
This paper examines whether the risk-taking incentives induced by performance-based vesting (p-v) compensation influence bank loan contracting and credit ratings. Consistent with our risk-shifting hypothesis, we find that the p-v based compensation, as measured by the proportion of grant date fair value of p-v based compensation to total compensation, significantly increases loan spreads and encourages more no price protection such as performance pricing and secured by collateral. We also find that p-v based compensation increases loan maturity while reduces the covenant strictness as a trade-off. Next, we subcategorize p-v based compensation by its performance type, instrument use, and performance metric. Consistent with previous literature, we find that the loan spread is negatively (positively) associated with accounting (stock price)-based compensation. We also find a tradeoff effect between the price- and non-price features of bank loan contracts such as performance pricing and restrictive covenants, as the positive effect of incentives induced by p-v based compensation on the cost of bank loans is offset by more restrictive features in loan contracts. Next, we perform the analysis using the Chief Financial Officer (CFO)’s p-v compensation and obtain the similar results. Last, we perform the analysis to determine the effects of p-v based compensation on firms’ credit rating. We find the incentive induced by p-v based compensation carry out to the credit rating market by reducing the firm’s credit rating.

Predictive Blends: Fundamental Indexing Meets Markowitz
Pysarenko, Sergiy,Alexeev, Vitali,Tapon, Francis
When constructing a portfolio of stocks, do you turn a blind eye to the firms’ future outlooks based on careful consideration of companies’ fundamentals, or do you ignore the stocks’ correlation structures which ensure the best diversification? The Fundamental Indexing (FI) and Markowitz mean-variance optimization (MVO) approaches are complementary but, until now, have been considered separately in the portfolio choice literature. Using data on S&P 500 constituents, we evaluate a novel portfolio construction technique that utilizes the benefits of both approaches. Relying on the idea of forecast averaging, we propose to blend the two previously mentioned techniques to provide investors with a clear binocular vision. The out-of-sample results of the blended portfolios attest to their superior performance when compared to common market benchmarks, and to portfolios constructed solely based on the FI or MVO methods. In pursuit of the optimal blend between the two distinct portfolio construction techniques, MVO and FI, we find that the ratio of market capitalization to GDP, being a leading indicator for an overpriced market, demonstrates remarkably advantageous properties. Our superior results cannot be explained by classic asset pricing models.

Private Information from Extreme Price Movements (Empirical Evidences from Southeast Asia Countries)
arief, usman,Husodo, Zaäfri A.
This research studies private information from extreme price movements or jumps. We calculate the private information using a reduced form model from the stochastic volatility jump process and use several statistical robustness tests as well as several frequencies to improve our consistency. The study reveals that private information is significant in explain the existence of jumps in capital markets in Southeast Asia, whereas macroeconomic events cannot explain them. We determine empirically that private information in Malaysia, Singapore, Thailand, and Indonesia are not persistent and that its value gradually decreases when we use the lower frequency. Based on the Famaâ€"Macbeth regression, our study shows that private information in the capital market has a strong positive relationship with individual returns in Indonesia’s capital market, and Thailand’s capital market for all frequencies.

Resilience of Trading Networks: Evidence from the Sterling Corporate Bond Market
Mallaburn, David,Roberts-Sklar, Matt,Silvestri, Laura
We study the network structure and resilience of the sterling investment-grade and high-yield corporate bond markets. Using proprietary, transaction-level data, first we analyse the key properties of the trading networks in these markets. We find that the trading networks exhibit a core-periphery structure where a large number of non-dealers trade with a small number of dealers. Consistent with dealer behaviour in the primary market, we find that trading activity is particularly concentrated for newly issued bonds, where the top three dealers account for 45% of trading volume. Second, we test the resilience of these markets to the failure or paralysis of a key dealer, or to bond rating downgrades. We find that whilst the network structure has been broadly stable and the market broadly resilient around bond downgrades over our 2012â€"2017 sample period, the reliance on a small number of participants makes the trading network somewhat fragile to the withdrawal of a few key dealers from the market.

Risk Premium in the Era of Shale Oil
Ferriani, Fabrizio,Natoli, Filippo,Veronese, Giovanni,Zeni, Federica
The boom in the production of shale oil in the United States has triggered a structural transformation of the oil market. We show, both theoretically and empirically, that this process has significant consequences for oil risk premium. We construct a model based on shale producers interacting with financial speculators in the futures market. Compared to conventional oil, shale oil technology is more flexible, but producers have higher risk aversion and face additional costs due to their reliance on external finance. Our model helps to explain the observed pattern of aggregate hedging by US oil companies in the last decade. The empirical analysis shows that the hedging pressure of shale producers has become more important than that of conventional producers in explaining the oil futures risk premium.

Risk-Control Strategies
Patrice Gaillardetz,Saeb Hachem

In this paper, we consider the pricing of derivative products that involve dynamic hedging strategies and payments within the planning horizon. Equity-indexed annuities (EIAs), Guaranteed investment certificate (GIC), American and Barrier options are typical examples of these products. Our exploration involves evaluation under different assumptions related to the way the risk is tailored by the issuer. The unified constrained discrete stochastic dynamic programming framework presented in this paper makes use of sequential local minimizing strategies related to stochastic transitions. This sequential minimizations takes into account all intermediate requirements and involves several dynamic risk measures modelling. To demonstrate the flexibility of this framework we present numerical examples featuring GICs and point-to-point EIAs.

Safety Traps, Liquidity and Information-Sensitive Assets
Loberto, Michele
We investigate the implications of a scarcity of safe assets in a framework in which the safety of an asset is an equilibrium outcome. The intrinsic characteristics and supply of the assets determine their liquidity properties and degree of safeness. The equilibrium can be inefficient even if assets are plentiful and information insensitive. Only a sufficiently broad expansion of a particular class of safe information-insensitive assets can achieve the first-best allocation, while a marginal increase in their supply can be ineffective. We conclude that microfounding assets safety is fundamental to understand the effects and policy implications of safe assets scarcity.

Stochastic ordering of Gini indexes for multivariate elliptical random variables
Chuancun Yin

In this paper, we establish the stochastic ordering of the Gini indexes for multivariate elliptical risks which generalized the corresponding results for multivariate normal risks. It is shown that several conditions on dispersion matrices and the components of dispersion matrices of multivariate normal risks for the monotonicity of the Gini index in the usual stochastic order proposed by Samanthi, Wei and Brazauskas (2016) and Kim and Kim (2019) also suitable for multivariate elliptical risks.

Suboptimal Credit Card Repayments: A Laboratory Experiment
Ozyilmaz, Hakan,Zhang, Guangli
Many recent papers have documented evidence on consumers' failure to minimize interest charges when repaying credit card debt. In this paper, we examine two potential mechanisms that lead to the observed suboptimal credit card repayments. Our design varies the degree of salience of the interest rate information across two decision frames - credit card repayment and mutual fund investment. We find compelling evidence that suggests the cause of failure is the inherent negative frame of the credit card repayment. Our result suggests people's ability to take arbitrage opportunities can be interfered by the framing of the decision problem. Furthermore, we find saliently disclosing interest rate information has no significant impact on subjects' allocation decisions. This suggests limited effectiveness of conventional information disclosure policies.

Tail Risk Interdependence
Polanski, Arnold,Stoja, Evarist,Chiu, Ching-Wai (Jeremy)
We present a framework focused on the interdependence of high-dimensional tail events. This framework allows us to analyse and quantify tail interdependence at different levels of extremity, decompose it into systemic and residual part and to measure the contribution of a constituent to the interdependence of a system. In particular, tail interdependence can capture simultaneous distress of the constituents of a (financial or economic) system and measure its systemic risk. We investigate systemic distress in several financial datasets confirming some known stylized facts and discovering some new findings. Further, we devise statistical tests of interdependence in the tails and outline some additional extensions.

The Deposit Base â€" Multibanking and Bank Stability
Hakenes, Hendrik,Schliephake, Eva
To provide maturity transformation, banks need a deposit base â€" deposits that could be, but are not, withdrawn most of the time and are, thus, used for long-termlending. In a global-games environment, we show that a higher deposit base protects banks against panic runs. As depositors become more flexible in their bank relations, keeping multiple accounts at different institutions, the deposit base of banks changes. We analyze the impact of multi-banking on bank stability and show that in an economy with specialized institutions, households allocate too few funds to maturity-transforming institutions (banks). A policy-maker should support the banks, even though they are more fragile. If only some institutions are protected by deposit insurance, the deposit base moves away from the unprotected institutions, leaving them more prone to runs.

The Importance of Truth Telling and Trust
Sanney, Kenneth J.,Trautman, Lawrence J.,Yordy, Eric D.,Cowart, Tammy,Sewell, Destynie
Few principles influence success as fundamentally as truth. Truthfulness is the foundation upon which human relationships are built. Truth is the antecedent to trust and trust is the antecedent to cooperation. Without truth, sustainable success is impossible in human dealings. Hence, the importance of truth has been the subject of theological and scholarly pursuit for centuries. Since the latter part of the 20th century, the burgeoning fields of applied ethics has joined in this pursuit. In a 1992 essay, Stanford Business Professor Ronald A. Howard observed: “[t]he ethical dilemmas which my students and business associates seem to face evolve around issues of truth telling.” From Wells Fargo’s creation of over 2 million fake accounts, to GM’s deadly ignition switches, to the ten-billion-dollar fraud that was the healthcare and life-science company Theranos, Inc., today’s ethical dilemmas continue to evolve around issues of truth telling. How truthful we choose to be with others has a significant bearing upon reciprocal truthfulness and trust. Adherence to truthfulness and the subsequent development of trust are vital for meaningful interpersonal relationships, healthy organizational cultures, and prosperous societies.Successful leaders recognize that the organizational cost of institutionalized deceit, in both financial and human terms, is too expensive to condone. In the past seven decades, we have seen an erosion of trust in many of our institutions. Only 3% of Americans trust the federal government to do what is right “just about always” while just 14% trust the federal government to do what is right “most of the time” for a combined 17% of Americans expressing trust in the federal government. In 1958, the combined percent of Americans expressing such trust was 73%. A foundation built on a first-order principle of truth telling will better equip our students with the skills to effectively deal with the moral dilemmas that evolve around truth telling and build trust with those in their professional and personal lives.

Three Triggers? Negative Equity, Income Shocks and Institutions As Determinants of Mortgage Default
Linn, Andrew,Lyons, Ronan C.
In understanding the determinants of mortgage default, the consensus has moved from an ‘option theory’ model to the ‘double trigger’ hypothesis. Nonetheless, that consensus is based on within-country studies of default. This paper examines the determinants of mortgage default across five European countries, using a large dataset of over 2.3 million active mortgage loans originated between 1991 and 2013 across over 150 banks. The analysis finds support for both elements of the double trigger: while negative equity itself is a relatively small contributor to default, the effect of unemployment, and other variables such as the interest rate, is stronger for those in negative equity. The double trigger, however, varies by country: country-specific factors are found to have a large effect on default rates. For any given level of a loan’s Loan to Value (‘LTV’) ratio, and as LTV changes, borrowers were more sensitive to the interest rate and unemployment in Ireland and Portugal than in the UK or the Netherlands.

U.S. Shale Producers: A Case of Dynamic Risk Management?
Ferriani, Fabrizio,Veronese, Giovanni
Using more than a decade of firm-level data on U.S. oil producers' hedging portfolios, we document for the first time a strong positive link between net worth and hedging in the oil producing sector. We exploit as quasi-natural experiments two similarly dramatic oil price slumps, in 2008 and in 2014-2015, and we show how a shock to net worth differently affects risk management practices among E\&P firms depending on their initial financial positions. The link between net worth and hedging decisions holds in both episodes, but in the second oil slump we also find a significant role of leverage and credit constraints in reducing the hedging activity, a result that we attribute to the marked increase in leverage following the diffusion of the shale technology. Finally, we test if collateral constraints also impinge the extensive margin of risk management. Though in this case the effect is less apparent, our results generally points to a more limited use of linear derivative contracts when firms' net worth increases.

Voluntary Pre-Trade Anonymity and Market Liquidity
Martínez, Miguel Angel,Tapia, Mikel
This paper analyses the effects on liquidity of voluntary pre-trade anonymity in the trading process. We confirm previous studies showing that market liquidity improves immediately after anonymous trading. Using the daily percentage of effective volume traded anonymously, we show that the anonymity-liquidity relationship presents a nonlinear U-shape. We focus on the voluntary concealment of broker identification introduced by the Spanish Stock Exchange in October 2015. We conclude that, in our sample, anonymity increases stock liquidity but at a decreasing rate; when a considerable part of the effective volume is traded anonymously, additional percentages of anonymous trading deteriorates stock liquidity.