Research articles for the 2019-08-07

A Closer Look at Credit Rating Processes: Uncovering the Impact of Analyst Rotation
Dinkelaker, Kilian,Mattig, Andreas Walter,Morkoetter, Stefan
We investigate the effect of credit analyst rotation in the context of long-term ratings of S&P 500 issuers between 2002 and 2015. We find that analyst rotation in the coverage of issuers is associated with higher rating activity and a lower credit risk assessment (e.g., rating downgrades) following the appointment of a new credit analyst. Our results provide empirical support for policies relating to mandatory credit analyst rotation programs.

A Dynamic Theory of Collateral Quality and Long-Term Interventions
Lee, Michael Junho,Neuhann, Daniel
We study a dynamic model of collateralized lending under adverse selection in which the quality of collateral assets is endogenously determined by hidden effort. Complementarities in incentives lead to non-ergodic dynamics: Asset quality and output grow when asset quality is high, but stagnate or deteriorate otherwise. Inefficiencies remain, even in the most efficient competitive equilibriumâ€"investment and output are vulnerable to spells of lending market illiquidity, and these spells may persist because of suboptimal effort. Nevertheless, benevolent regulators without commitment can destroy welfare by prioritizing liquidity over incentives. Optimal interventions with commitment call for large, long-term subsidies in excess of what is required to restore liquidity.

A Simple Model of Speculation as a Spontaneous Breaking of Symmetry - The Welfare Analyses and Some Problems in the Decision Making Theory
Aoki, Takaaki
This paper analyzes the effect of speculation on the economic welfare from various welfare criteria, using a simple Edgeworth box within a three-period competitive framework. Here “speculation” is defined as a series of transition processes of each agent’s spontaneous production of private information, the exchange of commodities based on it under the externality (i.e., symmetry breaking) environment, and finally its spillover into public. It is explicitly shown that the complete sharing of produced information under externality environment, if not accompanied by a positive productivity effect of the “right” decision, does not necessarily attain the non-negative economic value especially in terms of ex-ante expected utility. It is also shown that in the ex-ante sense the first theorem of welfare economics could break in the course of information production. Lastly some points about why this could happen are discussed.

Accounting Comparability and the Accuracy of Peer-based Valuation Models
Young, Steven,Zeng, Yachang
We examine the link between enhanced accounting comparability and the valuation performance of pricing multiples. Using the warranted multiple method proposed by Bhojraj and Lee (2002, Journal of Accounting Research), we demonstrate how enhanced accounting comparability leads to better peer-based valuation performance. Empirical tests using firms from 15 EU countries over the period 1997-2011 (with comparable peers selected from the entire cross-section of foreign firms) document significant improvement in valuation performance measured as pricing accuracy, the ability of value estimates to explain cross-sectional variation in observed price, and the ability of the pricing multiple to predict future market-to-book multiples. Findings for a series of identification tests suggest that enhanced valuation performance is the consequence of improvements in the degree of cross-border accounting comparability that occurred during the sample window, and that a significant fraction of comparability gain operates through improved peer selection.

Agglomerative Fast Super-Paramagnetic Clustering
Lionel Yelibi,Tim Gebbie

We consider the problem of fast time-series data clustering. Building on previous work modeling the correlation-based Hamiltonian of spin variables we present a fast non-expensive agglomerative algorithm. The method is tested on synthetic correlated time-series and noisy synthetic data-sets with built-in cluster structure to demonstrate that the algorithm produces meaningful non-trivial results. We argue that ASPC can reduce compute time costs and resource usage cost for large scale clustering while being serialized and hence has no obvious parallelization requirement. The algorithm can be an effective choice for state-detection for online learning in a fast non-linear data environment because the algorithm requires no prior information about the number of clusters.

Allocative Efficiency and Finance
Linarello, Andrea,Petrella, Andrea,Sette, Enrico
This paper studies the effect of bank lending shocks on aggregate labor productivity. Exploiting a unique administrative dataset covering the universe of Italian manufacturing firms between 2000 and 2015, we apply the Melitz and Polanec (2015) decomposition at the 4-digit industry level to distinguish the contribution to aggregate productivity growth of: changes in surviving firms’ average productivity, market share reallocation among surviving firms, and firm entry and exit. We estimate the impact of credit shocks on each of these components, using data from the Italian Credit Register to construct industry-specific exogenous credit supply shocks. Only for the 2008-2015 period, we find that a tightening in the supply of credit lowers average productivity but increases the covariance between market share and productivity among incumbents, thus boosting the reallocation of labor. We find no significant effects of credit supply shocks on the contribution made by firm entry and exit. We find that the effects of negative credit shocks on average productivity and reallocation are concentrated in industries with a lower share of tangible capital and collateralized debt.

AlphaStock: A Buying-Winners-and-Selling-Losers Investment Strategy using Interpretable Deep Reinforcement Attention Networks
Jingyuan Wang,Yang Zhang,Ke Tang,Junjie Wu,Zhang Xiong

Recent years have witnessed the successful marriage of finance innovations and AI techniques in various finance applications including quantitative trading (QT). Despite great research efforts devoted to leveraging deep learning (DL) methods for building better QT strategies, existing studies still face serious challenges especially from the side of finance, such as the balance of risk and return, the resistance to extreme loss, and the interpretability of strategies, which limit the application of DL-based strategies in real-life financial markets. In this work, we propose AlphaStock, a novel reinforcement learning (RL) based investment strategy enhanced by interpretable deep attention networks, to address the above challenges. Our main contributions are summarized as follows: i) We integrate deep attention networks with a Sharpe ratio-oriented reinforcement learning framework to achieve a risk-return balanced investment strategy; ii) We suggest modeling interrelationships among assets to avoid selection bias and develop a cross-asset attention mechanism; iii) To our best knowledge, this work is among the first to offer an interpretable investment strategy using deep reinforcement learning models. The experiments on long-periodic U.S. and Chinese markets demonstrate the effectiveness and robustness of AlphaStock over diverse market states. It turns out that AlphaStock tends to select the stocks as winners with high long-term growth, low volatility, high intrinsic value, and being undervalued recently.

An Empirical Investigation of Linkages between India and Major Asian Stock Markets
Rajkumar, Giridhari
The paper attempts to understand the inter-linkages and causal relationships between the stock exchanges. This study covers Tokyo Stock Exchange (TSE), Hong Kong Stock Exchange (HSE), Bombay Stock Exchange (BSE) and National Stock Exchanges (NSE). To establish the relationship, the daily closing data of the stock indices such as the Nikkei in Japan, Hangseng in Hong Kong with that of NSE Nifty and BSE Sensex in India during the period March 2007 to August 2014 are used. The Granger-causality and Cointegration test were used to check the causal relationship. The study found that there is uni-directional short-term causal influence from Indian stock markets to the Japanese and Hong-Kong stock market while no long-term relationships are found between the Indian and Japanese market as well as with the Hong Kong market over the study period.

An Indicator of Macro-Financial Stress for Italy
Miglietta, Arianna,Venditti, Fabrizio
We develop a measure of systemic stress for the Italian financial markets (FCI-IT) that aggregates information from five major segments of the whole financial system, i.e. the money market, the bond market, the equity market, the foreign exchange market and the market for stocks of financial intermediaries. The index builds on the methodology of the Composite Indicator of Systemic Stress (CISS) developed by Hollò, Kremer and Lo Duca (2012) for the euro area. We set up a simple TVAR model to verify whether the proposed measure is able to provide significant and consistent information about the evolution of macroeconomic variables when financial conditions change. The indicator’s performance is evaluated against two alternative metrics publicly available (e.g. the euro-area CISS and the Italian CLIFS). Our results show that FCI-IT behaves quite similarly to the other indexes considered in signalling high-stress periods, but it also identifies episodes of financial distress for the Italian economy which are disregarded by the other two. During periods of high stress, the effects of financial shocks on gross domestic product are significant.

Anti-Money Laundering in Bitcoin: Experimenting with Graph Convolutional Networks for Financial Forensics
Mark Weber,Giacomo Domeniconi,Jie Chen,Daniel Karl I. Weidele,Claudio Bellei,Tom Robinson,Charles E. Leiserson

Anti-money laundering (AML) regulations play a critical role in safeguarding financial systems, but bear high costs for institutions and drive financial exclusion for those on the socioeconomic and international margins. The advent of cryptocurrency has introduced an intriguing paradox: pseudonymity allows criminals to hide in plain sight, but open data gives more power to investigators and enables the crowdsourcing of forensic analysis. Meanwhile advances in learning algorithms show great promise for the AML toolkit. In this workshop tutorial, we motivate the opportunity to reconcile the cause of safety with that of financial inclusion. We contribute the Elliptic Data Set, a time series graph of over 200K Bitcoin transactions (nodes), 234K directed payment flows (edges), and 166 node features, including ones based on non-public data; to our knowledge, this is the largest labelled transaction data set publicly available in any cryptocurrency. We share results from a binary classification task predicting illicit transactions using variations of Logistic Regression (LR), Random Forest (RF), Multilayer Perceptrons (MLP), and Graph Convolutional Networks (GCN), with GCN being of special interest as an emergent new method for capturing relational information. The results show the superiority of Random Forest (RF), but also invite algorithmic work to combine the respective powers of RF and graph methods. Lastly, we consider visualization for analysis and explainability, which is difficult given the size and dynamism of real-world transaction graphs, and we offer a simple prototype capable of navigating the graph and observing model performance on illicit activity over time. With this tutorial and data set, we hope to a) invite feedback in support of our ongoing inquiry, and b) inspire others to work on this societally important challenge.

Are Business Start-Ups Liquidity Constrained? Evidence from a Quasi-Experimental Allocation of Housing Wealth in East Germany
Fuchs, Tobias,Gebhardt, Georg
Are entrepreneurs liquidity constraint? Using quasi-random housing wealth variation resulting from communist era decisions, we argue yes, as we find that wealthier East Germans are more likely to become self-employed after reunification. In the literature, no such strong relationship was found using regional house price changes the US and UK. In these economies, our results suggest, the effects of liquidity constraints are masked by anticipatory savings of the would be self-employed, which was impossible for the East Germans in our sample due to communism.

Aspetti economici e regolamentari delle «cripto-attività» (Economic and Regulatory Aspects of Crypto-Assets)
Gola, Carlo,Caponera, Andrea
Italian Abstract: Il presente lavoro analizza i profili economici, contabili e prudenziali delle “cripto-attività” tipo bitcoin e illustra la regolamentazione delle piattaforme di scambio adottata nelle varie giurisdizioni. La letteratura esaminata mostra che questa particolare classe di “cripto-attività” non rientra nelle categorie di moneta e di strumento finanziario. La natura economica di questi gettoni digitali, in particolare l’intrinseca instabilità del prezzo e l’illiquidità del mercato, ne influenzano i trattamenti contabile e prudenziale. Il lavoro fornisce una sintetica descrizione del protocollo blockchain, degli exchanges, dei wallet providers, e di altri aspetti correlati (initial coin offerings, smart contracts), tra cui una tassonomia dei gettoni digitali (DLT digital tokens). English Abstract: In this study, we investigate the economic characteristics of bitcoin and similar crypto-assets. Following an introduction to the blockchain protocol, the role of exchanges and of digital wallet providers, we consider the regulatory measures adopted in various jurisdictions. Lastly, we examine the accounting and prudential aspects related to crypto-assets, of which significant uncertainties still remain. The paper provides a taxonomy of crypto-assets, and describes the basic features of the initial coin offerings (ICOs) and related aspects. The literature shows that bitcoin, and similar crypto-assets, do not fully fall within the category of money and financial instruments. This class of digital tokens, based on a permissionless distributed ledger technology (DLT), is highly volatile and absent of intrinsic value. The instability of their price, which is often undetermined, must be considered when evaluating these instruments from an accounting and prudential standpoint.

Assessing Financial Stability Risks from the Real Estate Market in Italy: An Update
Ciocchetta, Federica,Cornacchia, Wanda
We provide an update of the analytical framework to assess financial stability risks arising from the real estate sector in Italy. The enhancement concerns the definition of a new vulnerability indicator, measured in terms of the flow of total non-performing loans (NPLs) and not, as done previously, in terms of bad loans only. We focus separately on households (as an approximation for residential real estate, RRE) and on firms engaged in construction, management and investment services in the real estate sector (as an approximation for commercial real estate, CRE). Two early warning models are estimated using the new vulnerability indicator for RRE and CRE, respectively, as dependent variable. Both models exhibit good forecasting performances: the median predictions fit well the new vulnerability indicators in out-of-sample forecasts. Overall, models’ projections indicate that potential risks for banks stemming from the real estate sector will remain contained in the next few quarters.

Cash in Hand and Savings Decisions
Spantig, Lisa
Cash is an important means of transaction, generally assumed to be fungible. However, behavioral economics and consumer research show that ‘cash in hand’, physically holding on to cash and then handing it away, affects purchasing decisions. I study how cash in hand influences decisions in a different but very important domain: savings. Savings accounts are a promising tool for reducing poverty, but the use of savings accounts is often puzzlingly low. Holding on to cash that needs to be physically deposited into a savings account may increase the psychological costs of saving. This study experimentally identifies the causal effect of cash in hand on savings deposits of microfinance clients in the Philippines. In contrast to many laboratory and several field studies with similar interventions, I do not find reduced savings deposits due to cash in hand. I discuss reasons for and consequence of this surprising finding, in particular for developing economics where lots of transactions are still cash-based.

Central Moments, Stochastic Dominance, Moment Rule, and Diversification
Chan, Raymond Honfu,Chow, Sheung Chi,Guo, Xu,Wong, Wing-Keung
In this paper, we develop some properties to state the relationships between the central moments and stochastic dominance for both the general utility functions and the polynomial utility functions. This leads to draw preferences of both risk averters and risk seekers on their choices of assets with different moments. In addition, we extend the mean-variance (mv) rule to get the moment rule which counts all moments in the decision. We apply the theory to portfolio diversification.

Centros and Defensive Regulatory Competition: Some Thoughts and a Glimpse at the Data
Gelter, Martin
This paper looks at the phenomenon of “defensive regulatory competition” following Centros, Überseering and Inspire Art. In order to retain control over the corporate governing private limited entities operating within their territories and to prevent the proliferation of “foreign limited” formations, Member States have modified some of the features of their laws that company founders considers most unattractive, such as minimum capital and time-consuming incorporation procedures. The first part of the paper analyzes the market for the law governing privately held firms, drawing from the debate in the United States. The US and Europa differ in that regulatory competition, as far as substantive law is concerned, focuses mainly on ex post mechanisms such as directors’ duties and veil piercing. By contrast, European competition seems to be driven by ex ante issues relating to firm formation, such as minimum capital. The second part of the paper draws from an ongoing empirical research project that attempts to explore the effects of regulatory competition and uses reforms in Germany and Belgium as examples. Regression analysis suggests that at least the German 2008 reform had a minor effect on the number of UK private limited companies being set up to do business in Germany.

Climate Disaster Risks - Empirics and a Multi-Phase Dynamic Model
Mittnik, Stefan,Semmler, Willi,Haider, Alexander
Recent research in financial economics has shown that rare large disasters have the potential to disrupt financial sectors via the destruction of capital stocks and jumps in risk premia. These disruptions often entail negative feedback e?ects on the macroecon-omy. Research on disaster risks has also actively been pursued in the macroeconomic models of climate change. Our paper uses insights from the former work to study disaster risks in the macroeconomics of climate change and to spell out policy needs. Empirically the link between carbon dioxide emission and the frequency of climate re-lated disaster is investigated using cross-sectional and panel data. The modeling part then uses a multi-phase dynamic macro model to explore this causal nexus and the e?ects of rare large disasters resulting in capital losses and rising risk premia. Our proposed multi-phase dynamic model, incorporating climate-related disaster shocks and their aftermath as one phase, is suitable for studying mitigation and adaptation policies.

Competition and Bank Risk the Role of Securitization and Bank Capital
Altunbas, Yener,Marques-Ibanez, David,Leuvensteijn, Michiel,Zhao, Tianshu
We examine how bank competition in the run-up to the 2007-2009 crisis affects banks' systemic risk during the crisis. We then investigate whether this effect is influenced by two key bank characteristics: securitization and bank capital. Using a sample of the largest listed banks from 15 countries, we find that greater market power at the bank level and higher competition at the industry level lead to higher realized systemic risk. The results suggest that the use of securitization exacerbates the effects of market power on the systemic dimension of bank risk, while capitalization partially mitigates its impact.

Could Omega Ratio Perform Better Than Sharpe Ratio?
Chow, Sheung-Chi,Lu, Richard,Wong, Wing-Keung
In this paper, we will investigate whether there is any Sharpe ratio rule or Omega ratio rule that can be used to show that one asset outperforms another asset if it has a higher Sharpe ratio and/or Omega ratio. We find that Sharpe ratio rule could not detect preference of both risk averters and risk seekers in some strong dominance cases. We set up the Omega ratio rule and find that the Omega ratio rule is better than the mean-variance rule because the former could the former can detect the first order stochastic dominated asset but the latter cannot. We also show the superiority of the Omega ratio rule over any Sharpe ratio rule by using hedging funds data.

Could Stock Hedge Bitcoin Risk(s) and Vice Versa?
Okorie, David Iheke
This paper is saddled with the task of investigating the Bitcoin market behaviour in the presence of a government risk. This is because both the institutional and retail investors' interests in the Bitcoin market is growing rapidly. Conversely, the seemingly unregulated nature of this market is a serious concern to most economies and results to the placement of ban on Initial Coin Offering (ICO) in some economies by the government. Daily series of return and volume within the window of the ICO ban in China was used for the Bitcoin market and S&P500 stock market to examine the effect of a government risk in the Bitcoin market and possible hedging capabilities. Empirical results show that the ban dampened Bitcoin returns and the returns from each market can predict the other. The Exogenous Dynamic Conditional Correlation (Exo-DCC) model result suggests that, yes! the S&P500 stocks is capable of hedging Bitcoin risk while Bitcoin can also hedge S&P500 stocks risks and vice versa. The Exogenous BEKK (Exo-BEKK) model result shows evidence of bidirectional volatility spill over between the two markets studied. In practice, investors (institutions and retailers) can comfortably form a robust investment portfolio with (at least) these two assets and develop a hedging strategy such that the impacts of risks on the portfolio's returns are safely hedged.

Creating a Euro Area Safe Asset Without Mutualizing Risk (Much)
Leandro, Alvaro,Zettelmeyer, Jeromin
This paper explains and evaluates three proposals to create â€Å"safe assets� for the euro area based on sovereign bonds, in which sovereign risk is limited through diversification and some form of seniority. These assets would be held by banks and other financial institutions, replacing concentrated exposures to their own sovereigns. The paper focuses on three ideas: (1) to create multitranche â€Å"sovereign bond-backed securities� (SBBS), of which the senior tranche would constitute a safe asset; (2) to create a senior, publicly owned financial intermediary that would issue a bond backed by a diversified portfolio of sovereign loans (â€Å"E-bonds�); and (3) to issue sovereign bonds in several tranches and induce banks to hold a diversified pool of senior sovereign bonds (â€Å"multitranche national bond issuance�). Public attention (including public criticism) has so far focused on the first idea; the other two have not yet been seriously debated. We find that none of the competing proposals entirely dominates the others. SBBS do not deserve most of the criticism to which they have been subjected. At the same time, E-bond and multi-tranche national bond issuance have several interesting features—including inducing fiscal discipline—and warrant further exploration.

Deposit Market Power, Funding Stability and Long-Term Credit
Li, Lei,Loutskina, Elena,Strahan, Philip E.
This paper shows that banks raising deposit in more concentrated markets have more funding stability which enhances banks’ ability to extend longer maturity loans. We show that banks raising deposits in concentrated markets exhibit less pro-cyclical financing costs and profits, which in turn reduces the funding risk of originating long-term, illiquid loans. Consistently, banks with deposit HHI one standard deviation above average extend loans with about 20% longer maturity than those with deposit HHI one standard deviation below average. Deposit concentration also allows bank to charge lower maturity premiums. Access to banks raising funds in concentrated markets improves growth in industries traditionally reliant on long-term credit.

Dichotomy between Sharī‘ah Compliance and the Economic Goals of Islamic Finance Institutions
Ayub, Muhammad,Paldi, Camille
Islamic banking has crossed the milestone of forty years since the Dubai Islamic Bank and the Islamic Development Bank were established in 1975. Islamic banking windows, standalone Islamic banking systems and even full-fledged Islamic banks, are operating as a part of global finance industry in the scenario wherein interest based institutions capture the overwhelming part of the business. Islamic banking institutions (IBIs) use Islamic equivalents of almost all conventional finance products for financing and liquidity and risk management, from ‘over draft’ to the most toxic derivatives like swaps to compete with the conventional banks in profitability. As a commercial necessity and the need to compete for profitability, many Islamic finance professionals, academics and some Sharī‘ah scholars advocate for the use of such products and devices treating it ‘â•'ājjah’ for risk hedging on the basis of ‘maâ•–laâ•'ah’ or ‘umÅ«m balwa’. The path dependency syndrome may lead to credibility loss to Islamic finance resulting in persistent financial exclusion of the faith based clients / investors. This paper discusses the severity of the dichotomy between economic goals and the Sharī‘ah compliance focusing on the negative impact of financial derivatives and suggests some policy initiatives and steps to reduce it and make Islamic banking and finance an increasingly sustainable global discipline based on sound principles. It recommends that the jurists and Islamic finance professionals should explore the Sharī‘ah rules and real business potentials to find answers to the current Islamic banking conundrum and lead the industry on the right path of developing Sharī‘ah based ethical products and using really Sharī‘ah based devices to hedge risk.

Distant or Close Cousins: Connectedness Between Cryptocurrencies and Traditional Currencies Volatilities
Andrada Félix, Julián,Fernandez-Perez, Adrian,Sosvilla-Rivero, Simon
This paper examines the volatility interconnection between the main cryptocurrencies and traditional currencies during the period of February 2014-September 2018 using both a framework proposed by Diebold and Yilmaz (2014) and the modified approach of Antonakakis and Gabauer (2017). Our results suggest that a 34.43%, of the total variance of the forecast errors is explained by shocks across the eight examined cryptocurrencies and traditional currencies, indicating that the remainder 65.57% of the variation is due to idiosyncratic shocks. Furthermore, we find that volatility connectedness varies over time, with a surge during periods of increasing economic and financial instability. When we aggregate both markets by blocks, we find that the block of traditional currencies and the block of cryptocurrencies are mostly disconnected with periods of mild net volatility spill over between both blocks. Finally, our findings suggest that financial market variables are the main drivers of total connectedness within the traditional currencies, while the cryptocurrency-specific variables are identified as the key determinant for the total connectedness within the traditional currencies and a combination of business cycles and cryptocurrency-specific variables explain the directional volatility connectedness between both blocks.

Drivers of Cross-Border Banking in Sub-Saharan Africa
Mathieu, Paul,Pani, Marco,Chen, Shiyuan,Maino, Rodolfo
Using data collected from pan-African banks' (PABs), balance sheets and other sources (Orbis, Fitch), this study identifies some key patterns of cross-border investment in bank subsidiaries by key banking groups in sub-Saharan Africa (SSA) and discusses some of the determinants of this investment. Using a gravity model relating the annual value of a banking group's investment in the net equity of its subsidiaries to a set of explanatory variables, the analysis finds that cross-border banking is in part driven by a search for yield, diversification, and expansion for strategic reasons.

Dualism of Government Guarantees: Evidence from the 2005 FDI Reform Act
Puente M., Diego
I present a novel approach to the study of the trade-off between stability and moral hazard induced by deposit insurance. Specifically, I use the FDI Reform Act of 2005 as an exogenous shock to the existing insurance scheme in the US and study its impact on bank risk. This reform raised the coverage limit for individual retirement accounts (IRAs) from USD 100,000 to 250,000. I report an increase in banks’ liquidity and insolvency risk caused by this Reform. In addition, I show banks more influenced by the 2005 reform were 38 percentage points less likely to fail during the GFC.

Dynamic Competitive Persuasion
Mark Whitmeyer

We examine a dynamic game of competitive persuasion played between two long-lived sellers over $T \leq \infty$ periods. Each period, each seller provides information via a Blackwell experiment to a single short-lived buyer, who buys from the seller whose product has the highest expected quality. We solve for the unique subgame perfect equilibrium of this game, and conduct comparative statics: in particular we find that long horizons lead to less information.

Explaining the Profitability Anomaly
Erhard, Ryan,Sloan, Richard G.
We provide a new explanation for the profitability anomaly. Our explanation is based on the observation that investors frequently value stocks by assigning similar price-to-earnings multiples to firms with similar expected growth. We show that this naive approach to valuation results in lower future stock returns for less profitable firms and that this relation is concentrated in firms with higher expected growth. The relation arises because less profitable firms must issue additional equity in the future to finance growth, thus diluting the claims of existing stockholders to future cash flows. Using a battery of empirical tests, we show that investors and analysts do not appear to anticipate the higher future dilution in less profitable growth firms and that this appears to explain the profitability anomaly.

Financial Access, Governance and Insurance Sector Development in Sub-Saharan Africa
Asongu, Simplice,Odhiambo, Nicholas
Purpose â€"This study investigates the role of financial access in moderating the effect of governance on insurance consumption in 42 Sub-Saharan African countries using data for the period 2004-2014.Design/methodology/approach â€" Two life insurance indicators are used, notably: life insurance and non-life insurance. Six governance measurements are also used, namely: political stability, “voice & accountability”, government effectiveness, regulation quality, corruption-control and the rule of law. The empirical evidence is based on the Generalised Method of Moments (GMM) and Least Squares Dummy Variable Corrected (LSDVC) estimators.Findings â€"Estimations from the LSDVC are not significant while the following main findings are established from the GMM. First, financial access promotes life insurance through channels of political stability, “voice & accountability”, government effectiveness, the rule of law and corruption-control. Second, financial access also stimulates non-life insurance via governance mechanisms of political stability, “voice & accountability”, government effectiveness, regulation quality, the rule of law and corruption-control. Originality/value â€" This research complements the sparse literature on insurance promotion in Africa by engaging the hitherto unexplored role of financial access through governance channels.

Financial Market Development in Emerging Asia: the Corporate Governance Perspective (Presentation Slides)
Oxelheim, Lars
Presentation on why Asia is different from Europe and the USA from a corporate governance perspective: weak formal institutions (e.g. law enforcement), diverse informal institutions (e.g. in terms of social elite) and with institutional dynamism (ongoing development of regulations, e.g. privatization) using economic liberalization as primary engine of growth.

Higher Multilateral Development Bank Lending, Unchanged Capital Resources and Triple-A Rating. A Possible Trinity after All?
Settimo, Riccardo
This paper contributes to the literature on Multilateral Development Banks’ (MDBs) balance sheet optimization in two ways. First, it looks at solutions to alleviate the ‘trilemma’ faced by MDBs â€" stemming from G20 shareholders’ calls for increasing development lending while, simultaneously, keeping capital resources and triple-A credit ratings unchanged. The employment of rating methodologies that take into account MDBs’ peculiarities more appropriately represents one viable solution, as it would allow them to significantly increase available lending capacity for given rating levels and equity resources. Second, the econometric evidence suggests the existence of a rather narrow difference in the cost of funding between triple-A and AA+ rated institutions. Combining the two results, the paper concludes that applying an alternative rating methodology and opting for an AA+ credit rating (instead of triple-A), the four MDBs considered (IBRD, ADB, IADB and AfDB) could more than triple their spare lending capacity, from USD 415 bn to 1.370 bn, with a relatively limited impact on funding costs, estimated at between 40 and 50 bps.

How to Make Banks Too Safe to Fail
Sarin, Natasha
There is widespread consensus that the Great Recession did not have to be as Great: Had regulators acted earlier and more aggressively to stem the financial panic, its consequences would have been less severe. Instead, the average American household lost nearly a third of its net worth; two-and-a-half million businesses closed their doors; and nine million families lost their homes. Why was more not done? And are we better prepared to weather the next storm? Two explanations are typically offered for the lack of aggressive response at the onset of the Great Recession. The first is that financial crises occur unexpectedly, offering little time for intervention by even nimble and alert regulators. The second is that even those who realized that a downturn was on the horizon were constrained by their lack of legal authority to fortify large financial institutions.This Article disputes both these myths. First, there was significant time between the onset of the crisis and its peak: Between the summer of 2007 and the collapse of Lehman Brothers in September 2008, warning signs appeared in financial markets and many commentators sounded the alarms. Second, regulators had at their disposal significant legal authority to bolster banks and prevent failures. In fact, they used this authority with respect to small banks, but not large systemically important firms.There is an alternative explanation for the tepid early response to the crisis. Regulators’ default is inaction until regulatory measures of bank health signal distress. These measures are slow to updateâ€"in many cases, the day before banks failed, their regulatory capital measures suggested no cause for concern. In the absence of significant change, regulators will inevitably be fire-fighting future financial crises ex-post; rather than successfully policing financial markets ex-ante.This Article recommends a way forward. It advocates for automatic recapitalization of financial firms when markets indicate that distress is likely. Such an approach would have forced large banks to stop paying dividends and to raise new capital between the summer of 2007 and the fall of 2008, helping to forestall the worst of the Recession. The stress-testing regime, with minor modifications, is a potential tool to dynamically monitor the financial sector and respond to crises at their onset.Unfortunately, those who lead the Federal Reserve today are not learning from the mistakes of the Great Recession; they are forgetting them. Recent dilution of the stress tests and moves toward more static capital requirements go in the exact opposite direction of this Article’s recommendations. These changes are catastrophic. Unless policymakers are quick to course correct, the next financial crisis is becoming increasingly inevitable. Successful firefighting and good fortune prevented the Great Recession from being a Great Depression. It is unclear whether we will be so lucky next time.

In the Name of National Security: Foreign Takeover Protection and Firm Innovation
Shi, Wei
Many countries have recently enacted investment-related national security screening laws and regulations (“national security laws” for short) that protect domestic firms from acquisition by foreign firms. This study investigates the influence of foreign takeover protection triggered by national security laws on firm innovation. We argue that an increase in foreign takeover protection can lead firms to reduce research and development (R&D) investment because such protection is detrimental to the governance role of the market for corporate control and product market competition. Further, an increase in foreign takeover protection can harm innovation efficiency, as measured by new product introductions relative to R&D expenditure. Using the enactment of the Foreign Investment and National Security Act in the U.S. as our empirical context, we find support for our arguments. This study contributes to strategy research by highlighting the governance role of foreign takeovers.

Innovation Search Strategy and Predictable Returns
Fitzgerald, Tristan,Balsmeier, Benjamin,Fleming, Lee,Manso, Gustavo
Because of the intangible and highly uncertain nature of innovation, investors may have difficulty processing information associated with a firm’s innovation search strategy. Due to cognitive and strategic biases, investors are likely to pay more attention to unfamiliar explorative patents rather than incremental exploitative patents. We find that innovative firms focusing on exploitation rather than exploration tend to generate superior subsequent short-term operating performance. Analysts do not seem to detect this, as firms currently focused on exploitation tend to outperform the market’s near-term earnings expectations. The stock market also seems unable to accurately incorporate information about a firm’s innovation search strategy. We find that firms with exploitation strategies are undervalued relative to firms with exploration strategies and that this return differential is incremental to standard risk and innovation-based pricing factors examined in the prior literature. This result suggests a more nuanced view on whether stock market pressure hampers innovation, and may have implications for optimal firm financing choices and corporate disclosure policy.

Intensifying Financial Inclusion Through the Provision of Financial Literacy Training: A Gendered Perspective
Koomson, Isaac,Villano, Renato,Hadley, David
This study examines the impact of financial literacy training on financial inclusion and its intensity using data collected from a randomised control trial. An additive index of financial inclusion is generated from four financial inclusion indicators. After testing for baseline balance and estimating impact, our findings show that beneficiaries of financial literacy training are about 7.2 percentage points more likely to own an account while they are 8.2 percentage points more likely to save. Overall, beneficiaries of financial literacy training had a 9.5 percentage points advantage in receiving financial assistance than their non-beneficiary counterparts. While financial literacy training only showed a significant impact on account ownership for female-beneficiary households, male-beneficiary households also only experienced an impact in their savings behaviour and receipt of financial assistance. Moreover, beneficiaries of financial literacy training are more likely to intensify their financial inclusion and the intensity of inclusion is higher for male and young beneficiary households. The results highlight the need to strengthen financial literacy training in order to close the gender financial inclusion gap.

Inter-Enterprise Credit and Adjustment During Financial Crises: The Role of Firm Size
Coricelli, Fabrizio,Frigerio, Marco
Analyzing a large firm-level database for European countries, the paper shows that during the Great Recession trade credit amplified the liquidity squeeze on SMEs induced by the contraction of bank credit. Because of their generally weaker bargaining power in the inter-enterprise credit market, SMEs sharply increased their net trade credit and thus transferred financial resources to larger firms. The paper finds that the liquidity squeeze induced by trade credit had large negative effects on real activity by SMEs, contributing to the fall in employment, wages and investments.

Intermediation in the Interbank Lending Market
Craig, Ben R.,Ma, Yiming
This paper studies systemic risk in the interbank market. We first establish that in the German interbank lending market, a few large banks intermediate funding flows between many smaller periphery banks and that shocks to these intermediary banks in the financial crisis spill over to the activities of the periphery banks. We then develop a network model in which banks trade off the costs and benefits of link formation to explain these patterns. The model is structurally estimated using banks' preferences as revealed by the observed network structure in the pre-crisis period. It explains why the interbank intermediation arrangement arises, estimates the frictions underlying the arrangement, and quantifies how shocks are transmitted across the network. Model estimates based on pre-crisis data successfully predict changes in network-links and in lending arising from the crisis in out-of-sample tests. Finally, we quantify the systemic risk of a single intermediary and the impact of ECB funding in reducing this risk through model counterfactuals.

Market Efficiency and Inefficiency: An Overview on the Adaptive Market Hypothesis
, Nang Biak Sing,Rajkumar, Giridhari
Academic research and financial trader during the past 50 years are unable to come to consent whether the capital market are efficient or not.The inconclusive and mixed result of the market efficiency and inefficiency gave the birth of new theories that reconcile the two schools of thought in a natural and satisfying conclusive manner. The theory called Adaptive market hypothesis (AMH) was propounded by Andrew Lo in 2004. The present paper explored the various literatures related to the efficient market hypothesis and had identified the various findings of the studies conducted. The paper aimed to identify the existing gap related to the study of the market efficiency by exploring the related literatures. The paper scrutinized the controversial EMH and explored the related literatures and has come out with the existing gap in understanding the market efficiency.

Multivariate Garch with dynamic beta
Matthias Raddant,Friedrich Wagner

We present a solution for the problems related to the application of multivariate Garch models to markets with a large number of stocks by restricting the form of the covariance matrix. It contains one component describing the market and a second simple component to account for the remaining contribution to the volatility. This allows the analytical calculation of the inverse covariance matrix. We compare our model with the results of other Garch models for the daily returns from the S&P500 market. The description of the covariance matrix turns out to be similar to the DCC model but has fewer free parameters and requires less computing time. The model also has the advantage that it contains the calculation of dynamic beta values. As applications we use the daily values of $\beta$ coefficients available from the market component to confirm a transition of the market in 2006. Further we discuss the relationship of our model with the leverage effect.

Option Pricing Under Power Laws: A Robust Heuristic
Nassim Nicholas Taleb,Brandon Yarckin,Chitpuneet Mann,Damir Delic,Mark Spitznage

We build a heuristic that takes a given option price in the tails with strike K and extends (for calls, all strikes > K, for put all strikes < K) assuming the continuation falls into what we define as "Karamata Constant" over which the strong Pareto law holds. The heuristic produces relative prices for options, with for sole parameter the tail index alpha under some mild arbitrage constraints.

Usual restrictions such as finiteness of variance are not required.

The heuristic allows us to scrutinize the volatility surface and test theories of relative tail option mispricing and overpricing usually built on thin tailed models and modification of the Black-Scholes formula.

Ownership Concentration and Stock Liquidity in an Emerging Market
Tran, Nam,Nguyen, Cuong,Le, Dat Chi
This study explores the liquidity influence of ownership concentration in the Vietnamese stock market where equity holdings are highly concentrated and under weak protection for minority shareholders. We find that stocks of firms with higher concentrated ownership are less traded in terms of lower share turnover and trading volume. This effect implies the real friction channel, rather than the information friction channel, of ownership concentration impairing stock liquidity. It is from the emerging market context of Vietnam that large shareholders are usually institutional investors who have long-term investment horizons. The result is robust to the different types of blockholders, alternative measures of ownership concentration and stock liquidity, and several regression estimators. It is arguable that Vietnamese firms face a trade-off between the monitoring benefit and the liquidity detriment when opting for concentrated ownership structures.

Psychological and Social Motivations in Microfinance Contracts: Theory and Evidence
Dhami, Sanjit,Arshad, Junaid,al-Nowaihi, Ali
Microfinance contracts have enormous economic and welfare significance. We study, theoretically and empirically, the problem of effort choice under individual liability (IL) and joint liability (JL) contracts when loan repayments are made either privately, or publicly in front of one’s social group. Our theoretical model identifies guilt from letting down the expectations of partners in a JL contract, and shame from falling short of normatively inadequate effort, under public repayment of loans, as the main psychological drivers of effort choice. Evidence from our lab-in-the-field experiment in Pakistan reveals large treatment effects and confirms the central roles of guilt and shame. Under private repayment, a JL contract increases effort by almost 100% relative to an IL contract. Under public repayment, effort levels are comparable under IL and JL contracts, which is consistent with recent empirical results. This indicates that shame-aversion plays a more important role as compared to guilt-aversion. Under IL, repayment in public relative to private repayment increases effort by 60%, confirming our shame-aversion hypothesis. Under JL, a comparison of private and public repayment shows that shame trumps guilt in explaining effort choices of borrowers.

Quantile-Frequency Analysis and Spectral Divergence Metrics for Diagnostic Checks of Time Series With Nonlinear Dynamics
Ta-Hsin Li

Nonlinear dynamic volatility has been observed in many financial time series. The recently proposed quantile periodogram offers an alternative way to examine this phenomena in the frequency domain. The quantile periodogram is constructed from trigonometric quantile regression of time series data at different frequencies and quantile levels. It is a useful tool for quantile-frequency analysis (QFA) of nonlinear serial dependence. This paper introduces a number of spectral divergence metrics based on the quantile periodogram for diagnostic checks of financial time series models and model-based discriminant analysis. The parametric bootstrapping technique is employed to compute the $p$-values of the metrics. The usefulness of the proposed method is demonstrated empirically by a case study using the daily log returns of the S\&P 500 index over three periods of time together with their GARCH-type models. The results show that the QFA method is able to provide additional insights into the goodness of fit of these financial time series models that may have been missed by conventional tests. The results also show that the QFA method offers a more informative way of discriminant analysis for detecting regime changes in time series.

Real Option Exercise Decisions in Information Technology Investments: A Comment and Suggestions for Further Research
Schosser, Josef
The paper comments on Khan et al. (2017), who study real option exercise decisions in the context of a single IT project and in a portfolio setting, respectively. Detailed recommendations for further research are derived.

Review of the Plan for Integrating Big Data Analytics Program for the Electronic Marketing System and Customer Relationship Management: A Case Study XYZ Institution
Idha Sudianto

This research aims to explore business processes and what the factors have major influence on electronic marketing and CRM systems? Which data needs to be analyzed and integrated in the system, and how to do that? How effective of integration the electronic marketing and CRM with big data enabled to support Marketing and Customer Relation operations. Research based on case studies at XYZ Organization: International Language Education Service in Surabaya. Research is studying secondary data which is supported by qualitative research methods. Using purposive sampling technique with observation and interviewing several respondents who need the system integration. The documentation of interview is coded to keep confidentiality of the informant. Method of extending participation, triangulation of data sources, discussions and the adequacy of the theory are uses to validate data. Miles and Huberman models is uses to do analysis the data interview. Results of the research are expected to become a holistic approach to fully integrate the Big Data Analytics program with electronic marketing and CRM systems.

Risk Pooling, Leverage, and the Business Cycle
Dindo, Pietro,Modena, Andrea,Pelizzon, Loriana
This paper investigates the interdependence between the risk-pooling activity of the financial sector and: output, consumption, risk-free rate, and Sharpe ratio in a dynamic general equilibrium model of a productive economy. Due to their exposure to idiosyncratic shocks and market segmentation, heterogeneous households/entrepreneurs (h/entrepreneurs) are willing to mitigate their risk through a financial sector. The financial sector pools risky claims issued by different firms within its assets, faces an associated intermediation cost and, via leverage, provides a risk-free asset to h/entrepreneurs. Exogenous systematic shocks change the relative size of the financial sector, and thus the equilibrium amount of pooled risk, making financial leverage state-dependent and counter-cyclical. We study how this mechanism endogenously channels amplification of consumption and mitigation of output fluctuations. In equilibrium, financial sector leverage also determines counter-cyclical Sharpe ratios and pro-cyclical risk-free interest rates. Last, we investigate the relationship between the size of the financial sector, leverage, and welfare. We show that limiting financial sector leverage determines a sub-optimal pooling of idiosyncratic risk but fosters the growth rate of the h/entrepreneurs’ consumption. On the other side, when the financial sector is too large, it destroys too many resources after intermediation costs. Therefore, the h/entrepreneurs benefit the most when the financial sector is neither too small nor too big.

Solving high-dimensional optimal stopping problems using deep learning
Sebastian Becker,Patrick Cheridito,Arnulf Jentzen,Timo Welti

Nowadays many financial derivatives which are traded on stock and futures exchanges, such as American or Bermudan options, are of early exercise type. Often the pricing of early exercise options gives rise to high-dimensional optimal stopping problems, since the dimension corresponds to the number of underlyings in the associated hedging portfolio. High-dimensional optimal stopping problems are, however, notoriously difficult to solve due to the well-known curse of dimensionality. In this work we propose an algorithm for solving such problems, which is based on deep learning and computes, in the context of early exercise option pricing, both approximations for an optimal exercise strategy and the price of the considered option. The proposed algorithm can also be applied to optimal stopping problems that arise in other areas where the underlying stochastic process can be efficiently simulated. We present numerical results for a large number of example problems, which include the pricing of many high-dimensional American and Bermudan options such as, for example, Bermudan max-call options in up to 5000 dimensions. Most of the obtained results are compared to reference values computed by exploiting the specific problem design or, where available, to reference values from the literature. These numerical results suggest that the proposed algorithm is highly effective in the case of many underlyings, in terms of both accuracy and speed.

The Evolution of the Pillar 2 Framework for Banks: Some Thoughts after the Financial Crisis
Bevilacqua, Marco,Cannata, Francesco,Cardarelli, Silvia,Cristiano, Raffaele Arturo.,Gallina, Simona,Petronzi, Michele
This paper examines the evolution of the Pillar 2 framework for banks, introduced by the Basel 2 Accord, and discusses the main issues at stake in the current policy debate. The main objective of Pillar 2 was to complement the minimum requirements established by regulators (Pillar 1) with tailored supervisory measures based on a thorough assessment of banks’ risk profiles. However, its implementation coincided in most jurisdictions with the outbreak of the global financial crisis: the main policy objective became to restore the stability of the global financial system. In this context, Pillar 2 contributed significantly to enhance supervisory action, in particular by raising capital requirements. Nevertheless, a number of issues still remain. Today, in the run-up to the completion of the post-crisis regulatory reform, the debate has regained momentum and a sound supervisory framework can be finalized under more favorable conditions, to avoid that Pillar 2 loses its key properties.

The Impact of Anti-Money Laundering Oversight on Banks' Suspicious Transaction Reporting: Evidence from Italy
Gara, Mario,Manaresi, Francesco,Marchetti, Domenico Junior,Marinucci, Marco
We provide the first thorough investigation of the effect of anti-money laundering inspections on banks' reporting of suspicious transactions. We do so by using highly detailed data from Bank of Italy and UIF (Italian authority for anti-money laundering), which include information on i) on-site inspections by authorities and follow-up actions, and ii) quantity and quality of suspicious transactions reports being filed by banks before and after inspections. Through a difference-in-differences econometric analysis we find that inspections (notably when followed by some type of intervention by the authority) induce, ceteris paribus, an increase in suspicious transaction reports being filed by banks. Crucially, the effect is not limited to low-quality reports, as feared in the literature ('crying wolf' effect) but is spread to high-quality reports. Authorities' oversight is thus shown to increase the quantity of information shared by banks without deteriorating its quality.

The Measurement of External Accounts
Adler, Gustavo,Krogstrup, Signe,Garcia-Macia, Daniel
Growing international integration in trade and finance can challenge the measurement of external accounts. This paper presents a unified conceptual framework for identifying sources of mismeasurement of foreign investment income in current account balances. The framework allows to derive a precise definition of measurement distortions and an empirical strategy for estimating their importance. As an application, we empirically estimate two specific distortions related to inflation and retained earnings on portfolio equity for a broad set of countries. We find these may explain a non-trivial share of current account imbalances and that they are particularly relevant in countries with large external investment positions. We also discuss how merchanting and profit-shifting activities could lead to measurement distortions. We suggest areas for future research and underline the need to strengthen data collection efforts.

The Politics of Capital Markets Union
Ringe, Wolf-Georg
EU policymakers are currently implementing the capital markets union (CMU) agendaâ€"a collection of individual steps that, taken together, should strengthen cross-border market integration in EU capital markets. However, the imminent departure of the United Kingdom from the EU reshuffles the cards in this project, since the absence of the United Kingdom as the continent’s most developed capital market jeopardizes the objective of creating a truly Europe-wide deep and liquid market that merits its name.This paper argues that the purpose of the CMU project can and should be redefined. The initial thrust behind the project in 2014â€"2015 seems to have been to court the British public in a bid to influence the Brexit referendum. After the UK’s vote to leave, that objective no longer provides the glue that holds the CMU agenda together. Instead, I show that CMU can helpfully be redefined and reexplained in an entirely new context. Specifically, the CMU agenda provides a sensible set of measures to strengthen the architecture of the Eurozone: cross-border integration of national financial markets holds the promise of promoting so-called ‘private risk sharing’ that can serve as an important boost to reinforce the fragile framework of the common currency.This paper makes two points. First, it explores the initial motivation behind launching the CMU agenda. The paper argues that the initial purpose wasâ€"among other thingsâ€"a political bid to influence the growing anti-EU attitude and to win over the City of London. Since this strategy was ultimately unsuccessfulâ€"at least, it did not suffice to secure a majority voting for a UK-wide ‘remain’ voteâ€"the entirety of the CMU project was put into question. In a second step, the paper shows that the CMU agenda currently on the tableâ€"if sufficiently reinforced and expandedâ€"may find a new purpose in strengthening the Eurozone architecture. The latter point comes amid the ongoing policy debate on the future of the Euro.

The QMIT Leveraged Buyout (LBO) Model & Enhancements via Sentiment Based Alternative Data
Sharma, Milind,Ganesan, Aravind
This paper introduces the QMIT LBO model and describes its salient characteristics. In addition to a 41% long term hit rate the Top 100 model predictions can be traded quite profitably as an equal weighted long portfolio. A Russell 2000 Value index hedge increases the Sortino ratio to ~2.5 over the 19-year history. It then synopsizes the SESI (sentiment) signal from RavenPack and investigates its merits as an overlay to the base level LBO Top 100 trading signal. Given that SESI captures newsbased sentiment which may include rumors on such LBO names it is logical to ascertain whether benefits may accrue from trading such a combined quantamental signal. We conduct a series of experiments involving the daily overlay of SESI for the 10-year period (2007-16) to the weekly rebalanced LBO Top 100 and find substantial improvements in annualized returns as well as Sharpe and Sortino ratios, not to mention the drawdown profile of the overlaid strategy. The best overlay scenario tested results in a 46% boost to the Sharpe ratio with an absolute +8.6% improvement to annualized returns.

The Risk of Financial Networks in the Context of Globalization
Manta, Otilia
The process of globalization inevitably leads to the rethinking (conceptual reconstruction) of the paradigm of growth and economic development at local, regional, national, European and global level, implicitly on the financial market as a whole. The high challenge, on the one hand, of the depletion and / or deterioration of the resources (especially natural) and, on the other hand, of our optimization model - the maximization of the objective functions at the level of the economic and financial actors, is likely to advertise a radical change in the options and means we address this important activity of the individual and society: the economic and financial activity.At the same time, it is obvious that financial activity can no longer be regarded in itself as a mode governed by discreet rationality distinct from others, rationality based on consistent and sufficient logic. Logic and rationality at the level of financial markets must accept, under the pressure of global problems, a permanent and fundamental communication with the other logic of individual and social behavior (praxis). In addition, they must accept the possibility and desirability of re-evaluations, repositions or even refunds, in light of the new paradigms of the economic process, including the process of finance and a knowledge of the financial network's risks.

The Risk of Policy Tipping and Stranded Carbon Assets
der Ploeg, Rick van,Rezai, Armon
If global warming is to stay below 2°C, there are four risks of assets stranding. First, substantial fossil fuel reserves will be stranded at the end of the fossil era. Second, this will be true for exploration capital too. Third, unanticipated changes in present or expected future climate policy cause instantaneous discrete jumps in today’s valuation of physical and natural capital. Fourth, if timing and intensity of climate policy are uncertain, revaluation of assets occurs as uncertainty about future climate policy is resolved. E.g. abandoning climate policy plans immediately boosts scarcity rent, market capitalization, exploration investment and discoveries. To explain and quantify these four effects, we use an analytical model of investment in exploration capital with intertemporal adjustment costs, depletion of reserves and market capitalization, and calibrate it to the global oil and gas industry. Climate policy implements a carbon budget commensurate with 2°C peak warming and we allow for different instruments: immediate or delayed carbon taxes and renewable subsidies. The social welfare ranking of these instruments is inverse to that of the oil and gas industry which prefers renewable subsidy and delaying taxes for as long as possible. We also pay attention to how the legislative â€Å"risk� of tipping into policy action affects the timing of the end of the fossil era, the profitability of existing capital, and green paradox effects.

Trainspotting: Board Appointments in Private Firms
Baltrunaite, Audinga,Karmaziene, Egle
We examine how expanding the local pool of potential directors affects board appointments in Italian private firms. To establish the causality of the relationship, we rely on the gradual introduction of a high-speed train to obtain exogenous variation in firm access to potential directors’ supply. Using administrative data on board members of the universe of limited liability companies, we find that a positive shock in director supply triggers more board renewals. Under the assumption that director and firm quality are complements in the production process, there is evidence that the director-firm match quality improves. Moreover, firms exposed to such director supply shock become more productive and the effect primarily arises from the most productive firms. Interestingly, family firms remain rather immune to a more open talent pool â€" their board appointments change little, and so does their productivity.

Transparency and Model Evolution in Stress Testing
Flannery , Mark J.
Bank stress tests must be revisable in order to cope with new, emerging risks in the financial sector. Some of these revisions will likely involve model parameters, in addition to the macro-variable shocks that have been applied heretofore. The potential for such revisions would be handicapped by making the test models fully transparent to the public. This tension makes it inadvisable to share model parameters widely if the stress tests are to remain an informative component of the supervisory system for large banks.