Research articles for the 2019-08-15

Analysis of Murabaha Financing from Influence of Asset, Deposit Fund, and Profitability
, Nurhasanah,Melzatia, Shinta
This study aims to determine the effect of financing to deposit ratio (FDR), DPK, return on assets (ROA), non performing financing (NPF), capital adequacy ratio (CAR), and operational efficiency ratio (BOPO) on murabaha financing (MF). The population in this study is an Islamic commercial bank during the period 2012-2017, from all populations there are 11 Islamic commercial bank which have criteria to be used as research samples. Data used in this research are annual financial statements published on the official website of Islamic commercial bank. The analysis technique used in this research is multiple linear regression analysis. The results of this study indicate that the FDR has no significant effect on murabaha financing; DPK (DPK) has a significant positive effect on MF; ROA has no significant effect on MF; NPF has a significant positive effect on MF; CAR has no significant effect on MF; and BOPO has no significant effect on MF.

Automation Impacts on China's Polarized Job Market
Haohui 'Caron' Chen,Xun Li,Morgan Frank,Xiaozhen Qin,Weipan Xu,Manuel Cebrian,Iyad Rahwan

When facing threats from automation, a worker residing in a large Chinese city might not be as lucky as a worker in a large U.S. city, depending on the type of large city in which one resides. Empirical studies found that large U.S. cities exhibit resilience to automation impacts because of the increased occupational and skill specialization. However, in this study, we observe polarized responses in large Chinese cities to automation impacts. The polarization might be attributed to the elaborate master planning of the central government, through which cities are assigned with different industrial goals to achieve globally optimal economic success and, thus, a fast-growing economy. By dividing Chinese cities into two groups based on their administrative levels and premium resources allocated by the central government, we find that Chinese cities follow two distinct industrial development trajectories, one trajectory owning government support leads to a diversified industrial structure and, thus, a diversified job market, and the other leads to specialty cities and, thus, a specialized job market. By revisiting the automation impacts on a polarized job market, we observe a Simpson's paradox through which a larger city of a diversified job market results in greater resilience, whereas larger cities of specialized job markets are more susceptible. These findings inform policy makers to deploy appropriate policies to mitigate the polarized automation impacts.

Best Short
Della Corte, Pasquale ,Kosowski, Robert,Rapanos, Nikolaos
We use publicly disclosed short positions for stocks traded in European markets from 2012 to 2018 and show that the risk-adjusted excess returns of short positions for which hedge funds have high conviction outperform other short positions that account for a smaller proportion of the funds' disclosed positions. The six-factor alpha of a long-short strategy based on conviction is 6 per cent per annum after adjusting for transaction costs. Our results inform the public policy debate about the pros and cons of the public disclosure of short positions akin to Frank, Poterba, Shackelford, and Shoven (2004) for the public disclosure of long positions.

Corporate Credit Provision
Boyarchenko, Nina,Mueller, Philippe
Productive firms can access credit markets directly by issuing corporate bonds or by borrowing through financial intermediaries. In this paper, we study the cyclical properties of corporate credit provision through these two types of debt instruments in major advanced economies. We argue that the cyclicality of corporate credit is closely related to the cyclicality of the types of financial intermediaries active in the provision of credit. When a debt instrument is held by institutions that manage their balance sheets through debt issuance, credit provision through that instrument is procyclical. But when a debt instrument is held by institutions that manage their balance sheets through equity issuance, credit provision through that instrument is countercyclical. We show that cross-country differences in the cyclicality of corporate credit can be ascribed to differences in the composition of the aggregate financial sector, and not to differences in the balance sheet management practices of each type of financial intermediary.

Cost-Benefit Analysis of Leaning Against the Wind
Saunders, Trent,Tulip, Peter
Setting interest rates higher than macroeconomic conditions would warrant due to concerns about financial instability is called ‘leaning against the wind’. Many recent papers have attempted to quantify and evaluate the effects of this policy. This paper summarises this research and applies the approach to Australia. The papers we survey see the benefit of leaning against the wind as avoiding financial crises, such as those that affected Australia in 1990 or other countries in 2008. Most of the international research finds that interest rates have too small an effect on the probability of a crisis for this benefit to be worth higher unemployment. Using Australian data, we find similar results. We estimate the costs of leaning against the wind to be three to eight times larger than the benefit of avoiding financial crises. However, research has not yet quantified the increased resilience of household balance sheets, which may be an extra benefit of leaning against the wind.

Debt Shift, Financial Development and Income Inequality
Bezemer, Dirk,SamarIna, Anna
Does financial development increase income inequality? Ambiguous answers to this question may be due to over-aggregation of ‘financial development’. In a sample of 40 developed economies over 1990-2013, we study the effects on income inequality of different components of financial development. There was a shift in bank credit allocation, away from supporting investments by non-financial firms and towards financing real estate markets (‘debt shift’). In system-GMM estimations, we find that mortgage credit increases income inequality while credit to non-financial business reduces inequality. The effect of business credit is conditional on macroeconomic and labor market factors related to broader income formation, such as wage share, investment, trade openness, and labor force participation. House prices and the size of the real estate sector condition the impact of mortgage credit on income inequality.

EU28 Legal and Fiscal Readiness for the Adoption of an On-Tax Financing Mechanism â€" EuroPACE
Styczynska, Izabela,Zubel, Karolina
EuroPACE is an innovative financial mechanism inspired by an American building improvement initiative called Property Assessed Clean Energy (PACE). The innovative character of the EuroPACE mechanism is that financing through EuroPACE is linked to the taxes paid on a property. In other words, the financing lent by a private investor is repaid through property taxes and other charges related to the buildings. EuroPACE is therefore in line with the EC’s objectives of (1) putting EE first, (2) contributing to the EU’s global leadership, and (3) empowering consumers to enable MS to reach their energy and climate targets for 2030. Last but not least, EuroPACE could contribute to the democratisation of the energy supply by offering cash-flow positive, decentralised EE solutions.The EuroPACE mechanism engages several stakeholders in the process: local government, investors, equipment installers, and homeowners. To establish the EuroPACE programme, several conditions must be satisfied, each of which are relevant for different stakeholder at different stages of the implementation. For the purpose of this report, we divided these criteria into two categories: key criteria, which make the implementation possible, and complementary criteria, which make the implementation easier. For the time being, it is a pure hypothesis to be tested with potential EuroPACE implementation.One ought to remember that residential on-tax financing is a concept in its infancy in the EU. Therefore, the methodology to evaluate the readiness of a country to implement on-tax financing is complex and consists of six stages:- Identification of fiscal and regulatory conditions;- Data collection;- Weighting;- Grading;- Country SWOT analysis;- Qualitative assessment.

Factor Affecting Tax Avoidance Through Thin Capitalisation: Multinational Enterprises in Indonesia
Waluyo, Waluyo,Doktoralina, Caturida Meiwanto
The multiplication of direct investment in Indonesia is not equal to adequate tax regulations. In turn, it creates loopholes for the minimisation of tax burdens through thin capitalisation. The purpose of this research is to analyse the factors affecting tax avoidance using thin capitalisation. The independent variables in this research are multi-nationality, the utilisation of tax havens and institutional ownership, while the dependent variable in this research is tax avoidance. This study uses secondary data obtained from readily accessible sources and the annual reports of 122 multi-national enterprises listed on the Indonesian Stock Exchange. The determination method of sampling is by way of purposive sampling, that is sample selection according to specific criteria. The data analysis method used is path analysis. The results of the research show that multi-nationality and the utilisation of a tax haven positively affect thin capitalisation, while institutional ownership has a negative effect on thin capitalisation. Thin capitalisation has a positive impact on tax avoidance. Indirectly, multi-nationality and the utilisation of taxes have positive effects on tax avoidance through thin capitalisation, while institutional ownership negatively affects tax avoidance through thin capitalisation.

Invest in Your Abilities Wisely: The Value of Managerial Ability and General Ability for Inventor CEOs
Lin, Zhilu,Patel, Pankaj,Feng, Cong
Though there has been an increasing interest in understanding the role of inventor CEOs in recent years, the role of widely received CEO abilities â€" general and managerial ability â€" has received limited attention. In this paper, we study the effects of inventor CEOs, CEOs’ general ability, and managerial ability on firm innovation. We find that firms led by inventor CEOs spur firm innovation and that firms led by inventor CEOs with higher general ability spur greater firm innovation. However, firms led by inventor CEOs with higher managerial ability are detrimental to firm innovation.

Is Positive Sentiment in Corporate Annual Reports Informative? Evidence from Deep Learning
Azimi, Mehran,Agrawal, Anup
We use a novel text classification approach from deep learning to more accurately measure sentiment in a large sample of 10-Ks. In contrast to most prior literature, we find that positive, and negative, sentiment predicts abnormal return and abnormal trading volume around 10-K filing date and future firm fundamentals and policies. Our results suggest that the qualitative information contained in corporate annual reports is richer than previously found. Both positive and negative sentiments are informative when measured accurately, but they do not have symmetric implications, suggesting that a net sentiment measure advocated by prior studies would be less informative.

Mean-variance hedging of unit linked life insurance contracts in a jump-diffusion model
Frank Bosserhoff,Mitja Stadje

We consider a time-consistent mean-variance portfolio selection problem of an insurer and allow for the incorporation of basis (mortality) risk. The optimal solution is identified with a Nash subgame perfect equilibrium. We characterize an optimal strategy as solution of a system of partial integro-differential equations (PIDEs), a so called extended Hamilton-Jacobi-Bellman (HJB) system. We prove that the equilibrium is necessarily a solution of the extended HJB system. Under certain conditions we obtain an explicit solution to the extended HJB system and provide the optimal trading strategies in closed-form. A simulation shows that the previously found strategies yield payoffs whose expectations and variances are robust regarding the distribution of jump sizes of the stock. The same phenomenon is observed when the variance is correctly estimated, but erroneously ascribed to the diffusion components solely. Further, we show that differences in the insurance horizon and the time to maturity of a longevity asset do not add to the variance of the terminal wealth.

Micro-Evidence From a System-Wide Financial Meltdown: The German Crisis of 1931
Blickle, Kristian,Brunnermeier, Markus K.,Luck, Stephan
In this paper, we use hand-collected monthly bank balance sheet data during a system-wide run on the German banking system in 1931 to study the determinants of bank stability. We derive three key insights. First, demand deposits are â€" despite the absence of deposit insurance â€" largely stable and the run is centered around the collapse of interbank and wholesale funding. Second, while aggregate deposits are contracting, deposits are also partially reshuffled within the system with some banks receiving deposit inflows during the run. Third, we show that both, better capitalized and more liquid banks, are more stable and less likely to be subject to deposit outflows during the run. However, only higher bank capital is associated with higher credit provision in the crisis.

Modelling Crypto Asset Price Dynamics, Optimal Crypto Portfolio, and Crypto Option Valuation
Yuan Hu,Svetlozar T. Rache,Frank J. Fabozzi

Despite being described as a medium of exchange, cryptocurrencies do not have the typical attributes of a medium of exchange. Consequently, cryptocurrencies are more appropriately described as crypto assets. A common investment attribute shared by the more than 2,500 crypto assets is that they are highly volatile. An investor interested in reducing price volatility of a portfolio of crypto assets can do so by constructing an optimal portfolio through standard optimization techniques that minimize tail risk. Because crypto assets are not backed by any real assets, forming a hedge to reduce the risk contribution of a single crypto asset can only be done with another set of similar assets (i.e., a set of other crypto assets). A major finding of this paper is that crypto portfolios constructed via optimizations that minimize variance and Conditional Value at Risk outperform a major stock market index (the S$\&$P 500). As of this writing, options in which the underlying is a crypto asset index are not traded, one of the reasons being that the academic literature has not formulated an acceptable fair pricing model. We offer a fair valuation model for crypto asset options based on a dynamic pricing model for the underlying crypto assets. The model was carefully backtested and therefore offers a reliable model for the underlying crypto assets in the natural world. We then obtain the valuation of crypto options by passing the natural world to the equivalent martingale measure via the Esscher transform. Because of the absence of traded crypto options we could not compare the prices obtained from our valuation model to market prices. Yet, we can claim that if such options on crypto assets are introduced, they should follow closely our theoretical prices after adjusting for market frictions and design feature nuances.

Mutual Funds’ Exits, Financial Crisis and Darwin
Zalewska, Anna (Ania),Zhang, Yue
It is recognized in the literature that there is a negative relationship between fund performance and fund exit. This paper analyses the performance of 6,600 U.S. mutual funds that exited the market in the 2000â€"2014 period and nearly twice as many U.S. mutual funds that remained operational to provide evidence on whether fundâ€"families acted in the best interest of their investors by exiting the worst performing funds. We show that the negative performanceâ€"exit relationship broke down during the 2008 financial crisis. We also show that the absence of the clearing ‘Darwinian’ forces during the crisis period had a negative impact on investors’ wealth. We show that although the mergers that occurred during the financial crisis did not result in the postâ€"merger decline in the performance of the acquiring funds, the mergers that occurred in the years following the financial crisis resulted in the statistically significantly worse postâ€"merger performance of both the acquirers and of the targets in comparison with their preâ€"merger performance.

Optimal exercise of American options under stock pinning
Bernardo D'Auria,Eduardo García-Portugués,Abel Guada-Azze

We address the problem of optimally exercising American options based on the assumption that the underlying stock's price follows a Brownian bridge whose final value coincides with the strike price. In order to do so, we solve the discounted optimal stopping problem endowed with the gain function $G(x) = (S - x)^+$ and a Brownian bridge whose final value equals $S$. These settings came up as a first approach of optimally exercising an option within the so-called "stock pinning" scenario. The optimal stopping boundary for this problem is proved to be the unique solution, up to certain regularity conditions, of an integral equation, which is then numerically solved by an algorithm hereby exposed. We face the case where the volatility is unspecified by providing an estimated optimal stopping boundary that, alongside with pointwise confidence intervals, provide alternative stopping rules. Finally, we demonstrate the usefulness of our method within the stock pinning scenario through a comparison with the optimal exercise time based on a geometric Brownian motion. We base our comparison on the contingent claims and the 5-minutes intraday stock price data of Apple and IBM for the period 2011-2018. Supplementary materials with the main proofs and auxiliary lemmas are available online.

Private Deposit Insurance, Deposit Flows, and Bank Lending
Danisewicz, Piotr,lee, chun hei,Schaeck, Klaus
We examine the role of private deposit insurance for deposit flows and bank lending during a financial crisis. Exploiting the availability of private deposit insurance to banks in Massachusetts, we show that banks whose deposits are privately insured experience greater deposit inflows and expand lending during the recent crisis, in contrast to banks whose deposits are only federally insured. The deposit inflows are particularly pronounced prior to the increase of the federal deposit insurance limit and the introduction of the Transaction Account Guarantee Program. Our results highlight the complementary role of private sector solutions for the regulatory framework in banking.

Risk-neutral option pricing under GARCH intensity model
Kyungsub Lee

The risk-neutral option pricing method under GARCH intensity model is examined. The GARCH intensity model incorporates the characteristics of financial return series such as volatility clustering, leverage effect and conditional asymmetry. The GARCH intensity option pricing model has flexibility in changing the volatility according to the probability measure change.

Sustainability Reporting
Hijink, Steven,Veld, Lars
For decades, reporting requirements for companies â€" corporate reporting â€" aimed to provide users of corporate reports with relevant information when making decisions about investing in or contracting with these companies. However, in recent years, the focus on reporting requirements specifically requiring information on a company’s financial performance shifted â€" and broadened â€" towards reporting requirements on other, non-financial, aspects of a company's business as well. At the same time, it can be concluded that the current landscape of reporting requirements that goes beyond financial reporting is, at best, a patchwork of frameworks and requirements. The development of a dominant, globally accepted single set of sustainability reporting standards that could be seen as the counterpart of the standards on financial reporting like the IFRS, is lacking. The authors recommend an international approach towards further developing - and harmonizing - sustainability reporting.

The Management of Economic Decline and the Dimension of Organizational Change
Onofrei, Mihaela,Lupu, Dan
In the current climate, more and more companies are faced with multiple failures, which are the basic problem that crisis management must resolve. In situations of economic decline, the need for change at the organizational level is imperative to facilitate the recovery of a company. This study aims to identify methods of corporate restructuring, which would be to adopt could be adopted by Romanian companies in a time of crisis, to ensure business sustainability. The research methodology has a theoretical and an empirical component and it is based on statistical methods that facilitated a quantitative approach, using a sample of 82 companies listed on Bucharest Stock Exchange, all of them being declared insolvent between 2000 and 2010. The research results have contributed to the classification of companies, both by generating causes of insolvency and by restructuring methods.

The inverted U-shaped effect of urban hotspots spatial compactness on urban economic growth
Weipan Xu,Haohui'Caron' Chen,Enrique Frias-Martinez,Manuel Cebrian,Xun Li

The compact city, as a sustainable concept, is intended to augment the efficiency of urban function. However, previous studies have concentrated more on morphology than on structure. The present study focuses on urban structural elements, i.e., urban hotspots consisting of high-density and high-intensity socioeconomic zones, and explores the economic performance associated with their spatial structure. We use nighttime luminosity (NTL) data and the Loubar method to identify and extract the hotspot and ultimately draw two conclusions. First, with population increasing, the hotspot number scales sublinearly with an exponent of approximately 0.50~0.55, regardless of the location in China, the EU or the US, while the intersect values are totally different, which is mainly due to different economic developmental level. Secondly, we demonstrate that the compactness of hotspots imposes an inverted U-shaped influence on economic growth, which implies that an optimal compactness coefficient does exist. These findings are helpful for urban planning.

Under Pressure: Listing Status and Disinvestment in Japan
French, Joseph J.,Fujitani, Ryosuke,Yasuda, Yukihiro
We provide the first large sample comparisons of disinvestment by listed and unlisted firms. This study focuses on Japanese firms from 2001-2017, as this was a period of economic stagnation and financial reforms encouraging companies to restructure. We show that stock market listing is positively related to disinvestment. Listed firms disinvest 1.9% more than similar unlisted firms. Disinvestment activities of listed companies are also more sensitive to investment opportunities. Additionally, firms that disinvest show improvements in ROA and increases in future investment. Finally, we find that foreign (financial institution) ownership is positively (negatively) related to disinvestment.

Why Finnish polytechnics reject top applicants
Kristian Koerselman

I use a panel of higher education clearinghouse data to study the centralized assignment of applicants to Finnish polytechnics. I show that on a yearly basis, large numbers of top applicants unnecessarily remain unassigned to any program. There are programs which rejected applicants would find acceptable, but the assignment mechanism both discourages applicants from applying, and stops programs from admitting those who do. A mechanism which would admit each year's most eligible applicants has the potential to substantially reduce re-applications, thereby shortening the long queues into Finnish higher education.