Research articles for the 2019-08-08
A Model of Presidential Debates
arXiv
arXiv
Presidential debates are thought to provide an important public good by revealing information on candidates to voters. However, this may not always be the case. We consider an endogenous model of presidential debates in which an incumbent and a contender (who is privately informed about her own quality) publicly announce whether they are willing to participate in a public debate, after taking into account that a voter's choice of candidate depends on her beliefs regarding the candidates' qualities and on the state of nature. Surprisingly, it is found that in equilibrium a debate occurs or does not occur independently of the contender's quality or the sequence of the candidates' announcements to participate and therefore the announcements are uninformative.
A Review on Human Development Index
SSRN
Human development index is considered as very important for economy as by looking on it, development level of any country can be seen. It is based on education Index, health index and on GDP so for the purpose of analyzing the developing level of a country in different years, it is important to consider its HDI. In literature, Different authors have worked on HDI. The current paper summarizes the work by different authors so from this review paper the work that had been done on HDI can be seen.
SSRN
Human development index is considered as very important for economy as by looking on it, development level of any country can be seen. It is based on education Index, health index and on GDP so for the purpose of analyzing the developing level of a country in different years, it is important to consider its HDI. In literature, Different authors have worked on HDI. The current paper summarizes the work by different authors so from this review paper the work that had been done on HDI can be seen.
An Introduction to Data Property Ownership Rights and Data Protection Responsibilities
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This paper examines data property with an eye toward offering definitions that distinguish this type of property interest from that available for conventional intellectual property. The paper also will identify the legal rights vested in data creators as well as data protection rights for individuals whose online activities generate data that can be collected, collated, analyzed and sold.The paper identifies the interests of various constituencies and stakeholders including governments, commercial ventures, civil society and individuals. It will report on objectives, strategies and work products generated by national governments, trade associations, companies and public interest groups offering legislative, policy and regulatory recommendations. More broadly, the paper identifies current best practices in data property protection by examining proposed and existing safeguards in specific countries and regions.
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This paper examines data property with an eye toward offering definitions that distinguish this type of property interest from that available for conventional intellectual property. The paper also will identify the legal rights vested in data creators as well as data protection rights for individuals whose online activities generate data that can be collected, collated, analyzed and sold.The paper identifies the interests of various constituencies and stakeholders including governments, commercial ventures, civil society and individuals. It will report on objectives, strategies and work products generated by national governments, trade associations, companies and public interest groups offering legislative, policy and regulatory recommendations. More broadly, the paper identifies current best practices in data property protection by examining proposed and existing safeguards in specific countries and regions.
An instantaneous market volatility estimation
arXiv
arXiv
Working on different aspects of algorithmic trading we empirically discovered a new market invariant. It links together the volatility of the instrument with its traded volume, the average spread and the volume in the order book. The invariant has been tested on different markets and different asset classes. In all cases we did not find significant violation of the invariant. The formula for the invariant was used for the volatility estimation, which we called the instantaneous volatility. Quantitative comparison showed that it reproduces realised volatility better than one-day-ahead GARCH(1,1) prediction. Because of the short-term prediction nature, the instantaneous volatility could be used by algo developers, volatility traders and other market professionals.
Anomalous diffusions in option prices: connecting trade duration and the volatility term structure
arXiv
arXiv
Anomalous diffusions arise as scaling limits of continuous-time random walks (CTRWs) whose innovation times are distributed according to a power law. The impact of a non-exponential waiting time does not vanish with time and leads to different distribution spread rates compared to standard models. In financial modelling this has been used to accommodate for random trade duration in the tick-by-tick price process. We show here that anomalous diffusions are able to reproduce the market behaviour of the implied volatility more consistently than usual L\'evy or stochastic volatility models. We focus on two distinct classes of underlying asset models, one with independent price innovations and waiting times, and one allowing dependence between these two components. These two models capture the well-known paradigm according to which shorter trade duration is associated with higher return impact of individual trades.
We fully describe these processes in a semimartingale setting leading no-arbitrage pricing formulae, and study their statistical properties. We observe that skewness and kurtosis of the asset returns do not tend to zero as time goes by. We also characterize the large-maturity asymptotics of Call option prices, and find that the convergence rate is slower than in standard L\'evy regimes, which in turn yields a declining implied volatility term structure and a slower decay of the skew.
Bank Networks and Acquisitions
SSRN
Does the pre-deal geographic overlap of the branches of two banks affect the probability that they merge, post-announcement stock returns, and post-merger performance? We compile information on U.S. bank acquisitions from 1984 through 2016, construct several measures of network overlap, and design and implement a new identification strategy. We find that greater pre-deal network overlap (1) increases the likelihood that two banks merge, (2) boosts the cumulative abnormal returns of the acquirer, target, and combined banks, and (3) reduces employment, boosts revenues, reduces the number of branches, improves loan quality, and expedites executive turnover.
SSRN
Does the pre-deal geographic overlap of the branches of two banks affect the probability that they merge, post-announcement stock returns, and post-merger performance? We compile information on U.S. bank acquisitions from 1984 through 2016, construct several measures of network overlap, and design and implement a new identification strategy. We find that greater pre-deal network overlap (1) increases the likelihood that two banks merge, (2) boosts the cumulative abnormal returns of the acquirer, target, and combined banks, and (3) reduces employment, boosts revenues, reduces the number of branches, improves loan quality, and expedites executive turnover.
Corporate Investment, External Shocks, and Capital Controls: The Effect of the China Connect
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Capital controls have been proposed as a way for emerging market economies to curb the negative consequences of global financial cycles. We present empirical evidence relevant for the debate on this proposition by studying an important capital account liberalization in China: the Shanghai (Shenzhen)-Hong Kong Stock Connect of the mid-2010’s. This program created a channel for cross-border equity investments into a selected set of stocks while the overall capital controls policy remained in place. Using a difference-in-difference approach, we find that firm-level investment is negatively affected by US monetary policy shocks, argued by Miranda-Agrippino and Rey (2019) to be the crucial driver of the Global Financial Cycle, and that firms in the Connect are relatively more adversely affected than those that remained outside of it. These effects are stronger for firms with a weaker financial condition, with a higher level of financial constraints, with a higher equity return volatility, and which operated in the non-tradable sector. Our empirical findings constitute evidence that capital liberalization policies can have adverse consequences.
SSRN
Capital controls have been proposed as a way for emerging market economies to curb the negative consequences of global financial cycles. We present empirical evidence relevant for the debate on this proposition by studying an important capital account liberalization in China: the Shanghai (Shenzhen)-Hong Kong Stock Connect of the mid-2010’s. This program created a channel for cross-border equity investments into a selected set of stocks while the overall capital controls policy remained in place. Using a difference-in-difference approach, we find that firm-level investment is negatively affected by US monetary policy shocks, argued by Miranda-Agrippino and Rey (2019) to be the crucial driver of the Global Financial Cycle, and that firms in the Connect are relatively more adversely affected than those that remained outside of it. These effects are stronger for firms with a weaker financial condition, with a higher level of financial constraints, with a higher equity return volatility, and which operated in the non-tradable sector. Our empirical findings constitute evidence that capital liberalization policies can have adverse consequences.
Digitizing Payments: Opportunities for Financial Inclusion for Sub-Saharan Africa
SSRN
Use of technology innovation and digital inclined financial services has seen a remarkable endorsement in Africa. Mobile money accounts are growing and could overcome the number to those of financial institutions in Africa. The paper examines generally the opportunities for sub-Saharan African countries in digitizing financial services. The paper recommends the need to integrate financial inclusion strategies within humanitarian activities and proposes a shift in humanitarian using digital payments. It notes this should be done in a hierarchy, and with a long-term goal, taking into consideration the different needs of financial services within an economy.
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Use of technology innovation and digital inclined financial services has seen a remarkable endorsement in Africa. Mobile money accounts are growing and could overcome the number to those of financial institutions in Africa. The paper examines generally the opportunities for sub-Saharan African countries in digitizing financial services. The paper recommends the need to integrate financial inclusion strategies within humanitarian activities and proposes a shift in humanitarian using digital payments. It notes this should be done in a hierarchy, and with a long-term goal, taking into consideration the different needs of financial services within an economy.
Downside Uncertainty Shocks in the Oil and Gold Markets
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We construct downside variance risk premiums from the crude oil and gold option data and use them as proxies for market downside uncertainty risks. We find that these downside variance risk premiums contain commodity market-specific pricing information. Further- more, the gold market's exposure to downside uncertainty shocks is cross-sectionally priced in several sectors of the stock market while its crude oil market counterpart is not. This implies that the downside uncertainty for the gold market may be a key state variable rep- resenting investment opportunity sets under the Intertemporal Capital Asset Pricing Model (ICAPM).
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We construct downside variance risk premiums from the crude oil and gold option data and use them as proxies for market downside uncertainty risks. We find that these downside variance risk premiums contain commodity market-specific pricing information. Further- more, the gold market's exposure to downside uncertainty shocks is cross-sectionally priced in several sectors of the stock market while its crude oil market counterpart is not. This implies that the downside uncertainty for the gold market may be a key state variable rep- resenting investment opportunity sets under the Intertemporal Capital Asset Pricing Model (ICAPM).
Dynamic Liquidity Management with Information Asymmetry
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I provide a dynamic model of the financial intermediary’s optimal choice of cash holding and asset securitization. Cash holding is costly while asset securitization suffers from information asymmetry problem. More cash holding reduces the liquidity shortage which limits the maximum amount of cash the intermediaries can get by selling assets. Therefore, investment will increase less than the cash holding increases. The trade-off between cost of holding cash and loss of investment determines the optimal cash holding and asset securitization. I show that there exists a threshold such that when the minimum asset payoff is below the threshold, the adverse selection problem of the asset market is so severe that the intermediaries will hold enough cash and the secondary market for assets collapses. A decrease in the cost of holding cash encourages cash holding and makes the asset market more likely to collapse. These results hold both when the asset minimum payoff is i.i.d. or decreases stochastically when credit supply increases. The paper sheds light on why banks now hold a much higher level of liquid assets and the private-label securitization market remains dead after ten years since the crisis.
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I provide a dynamic model of the financial intermediary’s optimal choice of cash holding and asset securitization. Cash holding is costly while asset securitization suffers from information asymmetry problem. More cash holding reduces the liquidity shortage which limits the maximum amount of cash the intermediaries can get by selling assets. Therefore, investment will increase less than the cash holding increases. The trade-off between cost of holding cash and loss of investment determines the optimal cash holding and asset securitization. I show that there exists a threshold such that when the minimum asset payoff is below the threshold, the adverse selection problem of the asset market is so severe that the intermediaries will hold enough cash and the secondary market for assets collapses. A decrease in the cost of holding cash encourages cash holding and makes the asset market more likely to collapse. These results hold both when the asset minimum payoff is i.i.d. or decreases stochastically when credit supply increases. The paper sheds light on why banks now hold a much higher level of liquid assets and the private-label securitization market remains dead after ten years since the crisis.
Evaluating Crypto Exchanges in the Absence of Governmental Frameworks - A Multiple Criteria Scoring Model
SSRN
Since the introduction of Bitcoin in 2008, trading venues for cryptocurrencies, so called cryptocurrency exchanges, have undergone a fast development. Today cryptocurrencies totaling to more than USD 16bn are traded on more than 200 of such platforms, thereby surpassing the volume traded of numerous national stock exchanges. At the same time cryptocurrency exchanges are oftentimes not subject to a specific regulatory framework. Consumers who want to use these novel services are virtually left blindfolded when it comes to pivotal selection criteria. Yet, not even attempting to differentiate the quality levels provided by the various cryptocurrency exchanges would be tantamount to throwing out the baby with the bath water. In this work-in-progress paper, we develop an innovative scoring system to discriminate among cryptocurrency exchange offerings. In the absence of regulatory frameworks we identify 34 factors that may be considered by consumers when choosing the right cryptocurrency exchange offering. The advantages and disadvantages of such a scoring system are discussed and we provide suggestions for further development.
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Since the introduction of Bitcoin in 2008, trading venues for cryptocurrencies, so called cryptocurrency exchanges, have undergone a fast development. Today cryptocurrencies totaling to more than USD 16bn are traded on more than 200 of such platforms, thereby surpassing the volume traded of numerous national stock exchanges. At the same time cryptocurrency exchanges are oftentimes not subject to a specific regulatory framework. Consumers who want to use these novel services are virtually left blindfolded when it comes to pivotal selection criteria. Yet, not even attempting to differentiate the quality levels provided by the various cryptocurrency exchanges would be tantamount to throwing out the baby with the bath water. In this work-in-progress paper, we develop an innovative scoring system to discriminate among cryptocurrency exchange offerings. In the absence of regulatory frameworks we identify 34 factors that may be considered by consumers when choosing the right cryptocurrency exchange offering. The advantages and disadvantages of such a scoring system are discussed and we provide suggestions for further development.
Fast Pricing of Energy Derivatives with Mean-reverting Jump Processes
arXiv
arXiv
The law of a mean-reverting (Ornstein-Uhlenbeck) process driven by a compound Poisson with exponential jumps is investigated in the context of the energy derivatives pricing. The said distribution turns out to be related to the self-decomposable gamma laws, and its density and characteristic function are here given in closed-form. Algorithms for the exact simulation of such a process are accordingly derived with the advantage of being significantly faster (at least 30 times) than those available in the literature. They are also extended to more general cases (bilateral exponential jumps, and time-dependent intensity of the Poisson process). These results are finally applied to the pricing of gas storages and swings under jump-diffusion market models, and the apparent computational advantages of the proposed procedures are emphasized
Filing, Fast and Slow: Reporting Lag and Stock Returns
SSRN
We study the impact of Reporting Lag, the time it takes a firm to file its annual or quarterly reports, on future stock returns. Firms that report faster command a significant premium compared to slower-filing firms. We investigate the determinants of Reporting Lag and explore the relationship between document characteristics and the timeliness of financial reporting. We provide convincing evidence that document similarity and the change in sentiment between consecutive reports play a key role. Shorter Reporting Lags are associated with higher risk-adjusted excess returns, more positive earnings surprises, better firm efficiency, a higher similarity between subsequent reports and more positive sentiment compared to the previous report.
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We study the impact of Reporting Lag, the time it takes a firm to file its annual or quarterly reports, on future stock returns. Firms that report faster command a significant premium compared to slower-filing firms. We investigate the determinants of Reporting Lag and explore the relationship between document characteristics and the timeliness of financial reporting. We provide convincing evidence that document similarity and the change in sentiment between consecutive reports play a key role. Shorter Reporting Lags are associated with higher risk-adjusted excess returns, more positive earnings surprises, better firm efficiency, a higher similarity between subsequent reports and more positive sentiment compared to the previous report.
Hiring Your Friends: Evidence from the Market for Financial Economists
SSRN
We study connections in academic hiring in a sample of finance doctoral graduates. Departments hire individuals with school connections to other recently hired faculty at a significantly greater rate than is expected. Similarly, schools exhibit an elevated propensity to hire individuals with names that indicate a similar ethnic background to incumbent department members. School-connected hires tend to publish at a significantly higher rate than expected, a finding that is robust to a large number of model modifications and is stronger in more research-intensive departments. The evidence on school connections appears highly consistent with an employer information benefit from hiring based on school connections. Ethnic-connected hires tend to publish at lower-than-predicted rates when controlling for hiring-school characteristics, but this finding is not robust to the inclusion of hiring-school fixed effects. This evidence suggests that the possible information benefits of school-connected hiring do not immediately extend to other types of connections.
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We study connections in academic hiring in a sample of finance doctoral graduates. Departments hire individuals with school connections to other recently hired faculty at a significantly greater rate than is expected. Similarly, schools exhibit an elevated propensity to hire individuals with names that indicate a similar ethnic background to incumbent department members. School-connected hires tend to publish at a significantly higher rate than expected, a finding that is robust to a large number of model modifications and is stronger in more research-intensive departments. The evidence on school connections appears highly consistent with an employer information benefit from hiring based on school connections. Ethnic-connected hires tend to publish at lower-than-predicted rates when controlling for hiring-school characteristics, but this finding is not robust to the inclusion of hiring-school fixed effects. This evidence suggests that the possible information benefits of school-connected hiring do not immediately extend to other types of connections.
Judgment Day: Algorithmic Trading around the Swiss Franc Cap Removal
SSRN
A key issue raised by the growth of algorithmic trading (AT) is how it responds in extreme situations. Using data on foreign exchange (FX) with a precise identification of AT, we find that AT contributed to the deterioration of market quality following the removal of the cap on the Swiss franc on 15 January 2015. Algorithmic traders withdrew market liquidity and generated uninformative volatility, both outside and during periods of perceived central bank intervention. We find that agency algorithms run by banks â€" rather than proprietary algorithms run by high-frequency traders â€" were particularly detrimental for market quality.
SSRN
A key issue raised by the growth of algorithmic trading (AT) is how it responds in extreme situations. Using data on foreign exchange (FX) with a precise identification of AT, we find that AT contributed to the deterioration of market quality following the removal of the cap on the Swiss franc on 15 January 2015. Algorithmic traders withdrew market liquidity and generated uninformative volatility, both outside and during periods of perceived central bank intervention. We find that agency algorithms run by banks â€" rather than proprietary algorithms run by high-frequency traders â€" were particularly detrimental for market quality.
Machine Learning Portfolios with Equal Risk Contributions
SSRN
We use machine learning methods to forecast individual stock returns and create long-short portfolios in the Brazilian stock market, using a rich data set including technical and fundamental predictive signals. We further develop an algorithm that combines long-short portfolios obtained with various machine learning methods such that (i) the risk contributions of all individual long-short portfolios are equal, and (ii) the aggregate risk contribution of all long positions equals that of all short positions. Compared with an equally-weighted combination of the original portfolios, the portfolio obtained with our algorithm has over twice the Sharpe ratio and less than a third of the maximum drawdown.
SSRN
We use machine learning methods to forecast individual stock returns and create long-short portfolios in the Brazilian stock market, using a rich data set including technical and fundamental predictive signals. We further develop an algorithm that combines long-short portfolios obtained with various machine learning methods such that (i) the risk contributions of all individual long-short portfolios are equal, and (ii) the aggregate risk contribution of all long positions equals that of all short positions. Compared with an equally-weighted combination of the original portfolios, the portfolio obtained with our algorithm has over twice the Sharpe ratio and less than a third of the maximum drawdown.
Macroprudential Regulation and Leakage to the Shadow Banking Sector
SSRN
Macroprudential policies for financial institutions have received increasing prominence since the global financial crisis. These policies are often aimed at the commercial banking sector, while a host of other non-bank financial institutions, or shadow banks, may not fall under their jurisdiction. We study the effects of tightening commercial bank regulation on the shadow banking sector. For this purpose, we develop a DSGE model that differentiates between regulated, monopolistically competitive commercial banks and a shadow banking system that relies on funding in a perfectly competitive market for investments. After estimating the model using euro area data from 1999-2014 including information on shadow banks, we find that tighter capital requirements on commercial banks increase shadow bank lending, which may have adverse financial stability effects. Coordinating the macroprudential tightening with monetary easing can limit this leakage mechanism, while still bringing about the desired reduction in aggregate lending. We discuss how regulators that either do or do not consider credit leakage to shadow banks set policy in response to macroeconomic shocks. Lastly, in a counterfactual analysis, we then compare how a macroprudential policy implemented before the crisis on all financial institutions, or just on commercial banks, would have dampened the leverage cycle.
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Macroprudential policies for financial institutions have received increasing prominence since the global financial crisis. These policies are often aimed at the commercial banking sector, while a host of other non-bank financial institutions, or shadow banks, may not fall under their jurisdiction. We study the effects of tightening commercial bank regulation on the shadow banking sector. For this purpose, we develop a DSGE model that differentiates between regulated, monopolistically competitive commercial banks and a shadow banking system that relies on funding in a perfectly competitive market for investments. After estimating the model using euro area data from 1999-2014 including information on shadow banks, we find that tighter capital requirements on commercial banks increase shadow bank lending, which may have adverse financial stability effects. Coordinating the macroprudential tightening with monetary easing can limit this leakage mechanism, while still bringing about the desired reduction in aggregate lending. We discuss how regulators that either do or do not consider credit leakage to shadow banks set policy in response to macroeconomic shocks. Lastly, in a counterfactual analysis, we then compare how a macroprudential policy implemented before the crisis on all financial institutions, or just on commercial banks, would have dampened the leverage cycle.
Nailing the Flag to the Mast â€" Promises of Super-Priority in Public Debt
SSRN
Confronted with eroding market confidence in a country's debt obligations, what's a local politician to do? Major changes to fiscal policies are inevitably controversial back home. Securing financial support from multilateral official sector entities usually involves knuckling under to unpopular economic reforms. But there is one measure all politicians can take quickly and cheaply â€" cross their hearts, hope to die, and solemnly promise to treat debt service payments as the first, the highest and the most sacred priority in the use of public funds. The question is, what are such promises worth in practice? We argue not much.
SSRN
Confronted with eroding market confidence in a country's debt obligations, what's a local politician to do? Major changes to fiscal policies are inevitably controversial back home. Securing financial support from multilateral official sector entities usually involves knuckling under to unpopular economic reforms. But there is one measure all politicians can take quickly and cheaply â€" cross their hearts, hope to die, and solemnly promise to treat debt service payments as the first, the highest and the most sacred priority in the use of public funds. The question is, what are such promises worth in practice? We argue not much.
Noncooperative dynamics in election interference
arXiv
arXiv
Foreign power interference in domestic elections is an age-old, existential threat to societies. Manifested through myriad methods from war to words, such interference is a timely example of strategic interaction between economic and political agents. We model this interaction between rational game players as a continuous-time differential game, constructing an analytical model of this competition with a variety of payoff structures. Structures corresponding to all-or-nothing attitudes regarding the effect of the interference operations by only one player lead to an arms race in which both countries spend increasing amounts on interference and counter-interference operations. We then confront our model with data pertaining to the Russian interference in the 2016 United States presidential election contest, introducing and estimating a Bayesian structural time series model of election polls and social media posts by Russian internet trolls. We show that our analytical model, while purposefully abstract and simple, adequately captures many temporal characteristics of the election and social media activity.
Operational Scales, Sources of Finance, and Firms’ Performance: Evidence from Vietnamese Longitudinal Data
SSRN
This study investigates a longitudinal dataset consisting of financial and operational data from 37 listed companies listed on Vietnamese stock market, covering the period 2004-13. By performing three main types of regression analysis - pooled OLS, fixed-effect and random-effect regressions - the investigation finds mixed results on the relationships between operational scales, sources of finance and firms' performance, depending on the choice of analytical model and use of independent/dependent variables. In most situation, fixed-effect models appear to be preferable, providing for reasonably consistent results. Toward the end, the paper offers some further explanation about the obtained insights, which reflect the nature of a business environment of a transition economy and an emerging market.
SSRN
This study investigates a longitudinal dataset consisting of financial and operational data from 37 listed companies listed on Vietnamese stock market, covering the period 2004-13. By performing three main types of regression analysis - pooled OLS, fixed-effect and random-effect regressions - the investigation finds mixed results on the relationships between operational scales, sources of finance and firms' performance, depending on the choice of analytical model and use of independent/dependent variables. In most situation, fixed-effect models appear to be preferable, providing for reasonably consistent results. Toward the end, the paper offers some further explanation about the obtained insights, which reflect the nature of a business environment of a transition economy and an emerging market.
Poverty Reduction and Stock Market Development: Evidence from Africa
SSRN
Despite the increased number of stock exchanges in Africa, this segment of the financial market remains underdeveloped with low market capitalization, volume and illiquidity. Furthermore, the aftershock of the 2008 financial crisis exacerbates the poor market condition with the attendant decrease in investment. Efforts of previous policies to promote stock market development and restore investors’ confidence did not yield a positive outcome as they are yet to meet the rising demand for capital needed by domestic firms. This paper examines the relationship between poverty reduction and stock market development in Africa, using the pooled mean group (PMG) model for the sample period of 1996 to 2016. The findings suggest poverty reduction has a positive effect on stock market development both in the long-run and short-run estimates. For policy prescription, the government of the respective countries should implement programs that will promote financial inclusion and alleviate poverty to promote domestic investment in stock markets in the region.
SSRN
Despite the increased number of stock exchanges in Africa, this segment of the financial market remains underdeveloped with low market capitalization, volume and illiquidity. Furthermore, the aftershock of the 2008 financial crisis exacerbates the poor market condition with the attendant decrease in investment. Efforts of previous policies to promote stock market development and restore investors’ confidence did not yield a positive outcome as they are yet to meet the rising demand for capital needed by domestic firms. This paper examines the relationship between poverty reduction and stock market development in Africa, using the pooled mean group (PMG) model for the sample period of 1996 to 2016. The findings suggest poverty reduction has a positive effect on stock market development both in the long-run and short-run estimates. For policy prescription, the government of the respective countries should implement programs that will promote financial inclusion and alleviate poverty to promote domestic investment in stock markets in the region.
Pricing the Bermudan Options: A Closed-Form, Simple Formula
SSRN
We introduce a simple, closed-form formula for pricing the Bermudan options. Furthermore, the formula does not require any additional parameter (relative to the European option formula). Moreover, this formula can be easily adjusted to accommodate American options.
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We introduce a simple, closed-form formula for pricing the Bermudan options. Furthermore, the formula does not require any additional parameter (relative to the European option formula). Moreover, this formula can be easily adjusted to accommodate American options.
Relative Existence for Recursive Utility
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Existence theorems for endowment economies with growth and sophisticated recursive preferences have proven difficult to come by. We offer a simple proof technique that covers many models of interest, such as the Bansal-Yaron long-run risk model, models with stochastic volatility and jumps, models with volatility of volatility and models with consumption disasters and time-varying intensities. We also prove existence for models with smooth ambiguity aversion and learning. Collectively these results cover many of the leading asset pricing models today.
SSRN
Existence theorems for endowment economies with growth and sophisticated recursive preferences have proven difficult to come by. We offer a simple proof technique that covers many models of interest, such as the Bansal-Yaron long-run risk model, models with stochastic volatility and jumps, models with volatility of volatility and models with consumption disasters and time-varying intensities. We also prove existence for models with smooth ambiguity aversion and learning. Collectively these results cover many of the leading asset pricing models today.
Shareholder Activism in Germany
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Shareholder activism by hedge funds has taken hold in Germany in spite of large ownership concentration. This essay uses the example of Stada Arzneimittel AG to highlight features of activism, German style. It goes on to discuss the legal issues raised by activist campaigns at the two stages of acquiring a shareholding in the target company and, subsequently, of interacting with its management and pressuring for strategic or corporate governance changes. In light of the theory and evidence on the short-term and long-term effects of shareholder activism, the essay concludes that German and European law has rightly refrained from intervening in this most recent corporate governance development. The law lacks a reliable filter to sort desirable from undesirable forms of activism.
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Shareholder activism by hedge funds has taken hold in Germany in spite of large ownership concentration. This essay uses the example of Stada Arzneimittel AG to highlight features of activism, German style. It goes on to discuss the legal issues raised by activist campaigns at the two stages of acquiring a shareholding in the target company and, subsequently, of interacting with its management and pressuring for strategic or corporate governance changes. In light of the theory and evidence on the short-term and long-term effects of shareholder activism, the essay concludes that German and European law has rightly refrained from intervening in this most recent corporate governance development. The law lacks a reliable filter to sort desirable from undesirable forms of activism.
Should Central Banks Burst Bubbles? Risk Sharing and the Welfare Effects of Bubble Policy
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This paper investigates the welfare consequences of bubble policy in a greater-fool bubble model with rational, risk averse investors in an asset market. Some investors may be informed that the asset is overpriced, and try to sell to uninformed buyers. A central bank prevents speculative bubbles by revealing the state of the world to the entire market if at least one agent knows for sure that the asset is overpriced. We show that such a policy may be harmful for both buyers and sellers in asset markets, because the information revelation interferes with beneficial risk sharing between the agents, as in Hirshleifer (1971). This contrasts with previous results that show that anti-bubble policy can improve the allocation of production in asset markets. Therefore, this study suggests that asset market policy presents a trade-off between the allocation of production and the allocation of risk.
SSRN
This paper investigates the welfare consequences of bubble policy in a greater-fool bubble model with rational, risk averse investors in an asset market. Some investors may be informed that the asset is overpriced, and try to sell to uninformed buyers. A central bank prevents speculative bubbles by revealing the state of the world to the entire market if at least one agent knows for sure that the asset is overpriced. We show that such a policy may be harmful for both buyers and sellers in asset markets, because the information revelation interferes with beneficial risk sharing between the agents, as in Hirshleifer (1971). This contrasts with previous results that show that anti-bubble policy can improve the allocation of production in asset markets. Therefore, this study suggests that asset market policy presents a trade-off between the allocation of production and the allocation of risk.
Stock Market Performance and Economic Philosophy: Long Obama (Demand Side) Short Trump (Supply Side)
SSRN
This paper compares the stock market (S&P) performance during presidents Trump and Obama. The comparison is interesting since Obama employed a stimulus plan (demand side) while Trump employed a tax cut (supply side). We use the inauguration date as the benchmark start till analyses day 7/7/2019; first 662 days. The S&P performance during President Obama (first 622 trading days) is 59.1% while the S&P performance during President Trump is only 32.5%. As for volatility, during the entire 2 terms of Obama presidency, the Dow never lost 1000 points or more in a day, while in the first 2 years of Trump presidency Dow lost twice 1000 points or more in a day. Also, during the first 622 days of Trump presidency, the Dow lost 500 and 400 points or more in a day about 16 and 25 times, respectively; almost three times more than the entire president’s Obama 2 terms presidency. With regard to drop of the unemployment rate, which is lagging policy by 3 quarters, during president Obama the unemployment rate went down by 1% (from 10% down to 9%), while during president Trump from 4.1% to 3.6%. Thus, we conclude that the demand side beats the supply side in this round.
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This paper compares the stock market (S&P) performance during presidents Trump and Obama. The comparison is interesting since Obama employed a stimulus plan (demand side) while Trump employed a tax cut (supply side). We use the inauguration date as the benchmark start till analyses day 7/7/2019; first 662 days. The S&P performance during President Obama (first 622 trading days) is 59.1% while the S&P performance during President Trump is only 32.5%. As for volatility, during the entire 2 terms of Obama presidency, the Dow never lost 1000 points or more in a day, while in the first 2 years of Trump presidency Dow lost twice 1000 points or more in a day. Also, during the first 622 days of Trump presidency, the Dow lost 500 and 400 points or more in a day about 16 and 25 times, respectively; almost three times more than the entire president’s Obama 2 terms presidency. With regard to drop of the unemployment rate, which is lagging policy by 3 quarters, during president Obama the unemployment rate went down by 1% (from 10% down to 9%), while during president Trump from 4.1% to 3.6%. Thus, we conclude that the demand side beats the supply side in this round.
Stress Testing and Bank Lending
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Bank stress tests are a major form of regulatory oversight. Banks respond to the toughness of the tests by changing their lending behavior. Regulators care about bank lending; therefore, banks' reactions to the tests affect the tests' design and create a feedback loop. We demonstrate that stress tests may be (1) soft, in order to encourage lending in the future, or (2) tough, in order to deter excessive risk-taking in the future. There may be multiple equilibria due to strategic complementarity. Regulators may strategically delay stress tests. We also analyze bottom-up stress tests and banking supervision exams.
SSRN
Bank stress tests are a major form of regulatory oversight. Banks respond to the toughness of the tests by changing their lending behavior. Regulators care about bank lending; therefore, banks' reactions to the tests affect the tests' design and create a feedback loop. We demonstrate that stress tests may be (1) soft, in order to encourage lending in the future, or (2) tough, in order to deter excessive risk-taking in the future. There may be multiple equilibria due to strategic complementarity. Regulators may strategically delay stress tests. We also analyze bottom-up stress tests and banking supervision exams.
The Anatomy of the Euro Area Interest Rate Swap Market
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Using a novel regulatory dataset of fully identified derivatives transactions, this paper provides the first comprehensive analysis of the structure of the euro area interest rate swap (IRS) market after the start of the mandatory clearing obligation. Our dataset contains 1.7 million bilateral IRS transactions of banks and non-banks. Our key results are as follows: 1) The euro area IRS market is highly standardised and concentrated around the group of the G16 Dealers but also around a significant group of core “intermediaries"(and major CCPs). 2) Banks are active in all segments of the IRS euro market, whereas non-banks are often specialised. 3) When using relative net exposures as a proxy for the “flow of risk" in the IRS market, we find that risk absorption takes place in the core as well as the periphery of the network but in absolute terms the risk absorption is largely at the core. 4) Among the Basel III capital and liquidity ratios, the leverage ratio plays a key role in determining a bank's IRS trading activity.
SSRN
Using a novel regulatory dataset of fully identified derivatives transactions, this paper provides the first comprehensive analysis of the structure of the euro area interest rate swap (IRS) market after the start of the mandatory clearing obligation. Our dataset contains 1.7 million bilateral IRS transactions of banks and non-banks. Our key results are as follows: 1) The euro area IRS market is highly standardised and concentrated around the group of the G16 Dealers but also around a significant group of core “intermediaries"(and major CCPs). 2) Banks are active in all segments of the IRS euro market, whereas non-banks are often specialised. 3) When using relative net exposures as a proxy for the “flow of risk" in the IRS market, we find that risk absorption takes place in the core as well as the periphery of the network but in absolute terms the risk absorption is largely at the core. 4) Among the Basel III capital and liquidity ratios, the leverage ratio plays a key role in determining a bank's IRS trading activity.
The Begging Game: On the Power of the Ask in Monetary Giving
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The literature on monetary giving has largely focused on the psychological mechanisms that underlie prosocial giving behaviors. Yet in practice giving is almost always done in response to a solicitation or "ask." In this paper we study solicitation strategy, providing evidence that the "ask" may alter the nature of an exchange relationship in a manner that favors recipients relative to giving situations in which the recipient is passive. We introduce a variant of the dictator game called the "begging game" in which an individual can ask for some or all of an amount of money bestowed upon another individual. Our results indicate that both the asked for and received amounts in the begging game are systematically higher than typically shown in dictator games, while asks of half yield the best result in expectation. When counter-offers are allowed, 87.5% ask for half or more of the total sum, with 80% receiving at least some money. Hence large asks are often not punished. Our combined results help quantify the "power of the ask."
SSRN
The literature on monetary giving has largely focused on the psychological mechanisms that underlie prosocial giving behaviors. Yet in practice giving is almost always done in response to a solicitation or "ask." In this paper we study solicitation strategy, providing evidence that the "ask" may alter the nature of an exchange relationship in a manner that favors recipients relative to giving situations in which the recipient is passive. We introduce a variant of the dictator game called the "begging game" in which an individual can ask for some or all of an amount of money bestowed upon another individual. Our results indicate that both the asked for and received amounts in the begging game are systematically higher than typically shown in dictator games, while asks of half yield the best result in expectation. When counter-offers are allowed, 87.5% ask for half or more of the total sum, with 80% receiving at least some money. Hence large asks are often not punished. Our combined results help quantify the "power of the ask."
The Effects of Borrowers’ Discouragement, Perceptive Discrimination and Risk-taking on Entrepreneurs’ Preferences for External Financing
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This paper examines the impacts of borrowers’ discouragement, self-perceived discrimination to apply for bank financing and appetite for risk-taking on preferences for external financing amongst ethnic minority businesses (EMBs) in the UK. Our results suggest three main reasons for borrower discouragement to apply for bank financing, namely financing cost, financing history and fear of prejudice. We find that borrowers’ discouragement and self-perceived discrimination significantly impact preferences for external financing. Specifically, EMBs prefer more asset financing if they are discouraged due to financing cost, whilst less asset financing if they are discouraged due to fear of prejudice. However, there is no significant impact of discouragement or self-perceived discrimination on the preference for bank financing. Entrepreneurial risk-taking explained little variation in EMBs’ preferences for external financing.
SSRN
This paper examines the impacts of borrowers’ discouragement, self-perceived discrimination to apply for bank financing and appetite for risk-taking on preferences for external financing amongst ethnic minority businesses (EMBs) in the UK. Our results suggest three main reasons for borrower discouragement to apply for bank financing, namely financing cost, financing history and fear of prejudice. We find that borrowers’ discouragement and self-perceived discrimination significantly impact preferences for external financing. Specifically, EMBs prefer more asset financing if they are discouraged due to financing cost, whilst less asset financing if they are discouraged due to fear of prejudice. However, there is no significant impact of discouragement or self-perceived discrimination on the preference for bank financing. Entrepreneurial risk-taking explained little variation in EMBs’ preferences for external financing.
The Likelihood of Divorce and the Riskiness of Financial Decisions
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We link causally the riskiness of men's management of their finances with the probability of their experiencing a divorce. Our point of departure is that when comparing single men to married men, the former manage their finances in a more aggressive (that is, riskier) manner. Assuming that single men believe that low relative wealth has a negative effect on their standing in the marriage market and that they care about their standing in that market more than married men do, we find that a stronger distaste for low relative wealth translates into reduced relative risk aversion and, consequently, into riskier financial behavior. With this relationship in place we show how this difference varies depending on the "background" likelihood of divorce and, hence, on the likelihood of re-entry into the marriage market: married men in environments that are more prone to divorce exhibit risk-taking behavior that is more similar to that of single men than married men in environments that are little prone to divorce. We offer a theoretical contribution that helps inform and interpret empirical observations and regularities and can serve as a guide for follow-up empirical work, having established and identified the direction of causality.
SSRN
We link causally the riskiness of men's management of their finances with the probability of their experiencing a divorce. Our point of departure is that when comparing single men to married men, the former manage their finances in a more aggressive (that is, riskier) manner. Assuming that single men believe that low relative wealth has a negative effect on their standing in the marriage market and that they care about their standing in that market more than married men do, we find that a stronger distaste for low relative wealth translates into reduced relative risk aversion and, consequently, into riskier financial behavior. With this relationship in place we show how this difference varies depending on the "background" likelihood of divorce and, hence, on the likelihood of re-entry into the marriage market: married men in environments that are more prone to divorce exhibit risk-taking behavior that is more similar to that of single men than married men in environments that are little prone to divorce. We offer a theoretical contribution that helps inform and interpret empirical observations and regularities and can serve as a guide for follow-up empirical work, having established and identified the direction of causality.
The Long-Run Determinants of Indian Government Bond Yields (Presentation Slides)
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Presentation of paper examining how Indian long-term government bond yields are affected by changes in short term bond yields and fiscal policy variables. The models estimated show that in India the short-term interest rate is the key driver of the long-term government bond yield over the long-run. The government debt ratio does not have any discernible adverse effect on IGBs’ yields over the long-run.
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Presentation of paper examining how Indian long-term government bond yields are affected by changes in short term bond yields and fiscal policy variables. The models estimated show that in India the short-term interest rate is the key driver of the long-term government bond yield over the long-run. The government debt ratio does not have any discernible adverse effect on IGBs’ yields over the long-run.
The Marginal Cost of Mining, Metcalfe's Law and Cryptocurrency Value Formation: Causal Inferences from the Instrumental Variable Approach
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This paper is the first to rigorously test commonly cited simplistic theories of cryptocurrency pricing, namely, cost-based model and Metcalfe’s law, using causal inferences from the instrumental variables approach on block-level data for six proof-of-work coins. Positive effects of hashrate and transaction count implied by cost-based pricing and Metcalfe’s law, respectively, are non-existent for any of the coins investigated. Negative and insignificant estimators cannot be explained by weak instruments, suggesting previously reported strong positive relationships are spurious due to autocorrelation and endogeneity. The study reinforces the need for a more sophisticated cryptocurrency valuation framework.
SSRN
This paper is the first to rigorously test commonly cited simplistic theories of cryptocurrency pricing, namely, cost-based model and Metcalfe’s law, using causal inferences from the instrumental variables approach on block-level data for six proof-of-work coins. Positive effects of hashrate and transaction count implied by cost-based pricing and Metcalfe’s law, respectively, are non-existent for any of the coins investigated. Negative and insignificant estimators cannot be explained by weak instruments, suggesting previously reported strong positive relationships are spurious due to autocorrelation and endogeneity. The study reinforces the need for a more sophisticated cryptocurrency valuation framework.
The Role of Financial Reporting in Resolving Uncertainty about Corporate Investment Opportunities
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This discussion of the survey of the literature on financial reporting and corporate investment by Roychowdhury et al. (2019) focuses on an area in this literature that has received less attention â€" how financial reporting helps managers allocate capital across investment opportunities within their firms in the presence of uncertainty. We discuss the theory on investment under uncertainty and offer suggestions for future research.
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This discussion of the survey of the literature on financial reporting and corporate investment by Roychowdhury et al. (2019) focuses on an area in this literature that has received less attention â€" how financial reporting helps managers allocate capital across investment opportunities within their firms in the presence of uncertainty. We discuss the theory on investment under uncertainty and offer suggestions for future research.
Time-Varying Continuous and Jump Betas: The Role of Firm Characteristics and Periods of Stress
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Using high frequency data we decompose the time-varying beta for stocks into beta for continuous systematic risk and beta for discontinuous systematic risk. Estimated discontinuous betas for S&P500 constituents over 2003-2011 generally exceed the corresponding continuous betas. Smaller stocks are more sensitive to discontinuities than their larger counterparts, and during periods of financial distress, high leverage stocks are more exposed to systematic risk. Higher credit ratings and lower volatility are each associated with smaller betas. Industry effects are also apparent. We use the estimates to show that discontinuous risk carries a significantly positive premium, but continuous risk does not.
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Using high frequency data we decompose the time-varying beta for stocks into beta for continuous systematic risk and beta for discontinuous systematic risk. Estimated discontinuous betas for S&P500 constituents over 2003-2011 generally exceed the corresponding continuous betas. Smaller stocks are more sensitive to discontinuities than their larger counterparts, and during periods of financial distress, high leverage stocks are more exposed to systematic risk. Higher credit ratings and lower volatility are each associated with smaller betas. Industry effects are also apparent. We use the estimates to show that discontinuous risk carries a significantly positive premium, but continuous risk does not.
