Research articles for the 2019-10-14

A BSDE-based approach for the optimal reinsurance problem under partial information
Matteo Brachetta,Claudia Ceci

We investigate the optimal reinsurance problem under the criterion of maximizing the expected utility of terminal wealth when the insurance company has restricted information on the loss process. We propose a risk model with claim arrival intensity and claim sizes distribution affected by an unobservable environmental stochastic factor. By filtering techniques (with marked point process observations), we reduce the original problem to an equivalent stochastic control problem under full information. Since the classical Hamilton-Jacobi-Bellman approach does not apply, due to the infinite dimensionality of the filter, we choose an alternative approach based on Backward Stochastic Differential Equations (BSDEs). Precisely, we characterize the value process and the optimal reinsurance strategy in terms of the unique solution to a BSDE driven by a marked point process.

A Literature Review of Financial Contracting Theory from the Islamic and Conventional Overviews: Contributions, Gaps, and Perspectives
Ajmi, Hechem,AbdulAziz, Hassanuddeen,Kassim, Salina,Mansour, Walid
This paper discusses the financial contracting theory from the conventional and Islamic perspectives. It provides an overview of the contributions in this field and discusses the gaps in the literature. In addition, it proposes two relevant approaches namely the financial contracting enforceability approach and the adverse selection analysis in order to deal with conflicts of interest among economic agents. The first approach is meant to assess the contract that maximizes the value of the firm subject to the enforcement constraint for the agent and the participation constraint for the principal. The second approach considers an adverse selection framework in order to determine the principal’s subjective perception of the risk of default when equity and debt financings are used. Similarly, it suggests avenues for future research. Firstly, it calls for a deeper understanding of venture capital as a potential model of mushārakah. Secondly, it puts stress on the importance of examining crowd-funding functioning from the principal-agent point of view. Thirdly, it sheds some light on the necessity to yield financial explanation about the excessive use of murābaḥah instead of ijārah. In a nutshell, we assume that the alternative approaches can be adopted to provide relevant insights regarding the proposed future researches.

A Practical Approach to Cash Department of a Bank
Rahman, Md. Ashabur
Cash department is an important department of any bank. It is the main source of all banking activities for the reason every day bank has to remain certain amount in cash in accordance with the rules and regulations. This department is a very sensitive organ of a bank. The procedures of receiving cash are maintained properly with the help of Cashier. Documents relevant to this section including cash deposit and cash withdrawal are preserved as record very carefully. At present, cash department of a bank provide services to the clients by using modern technology. Various debit and credit vouchers are used in cash department. Different kinds of cheques are used for cash withdrawal whereas various registrars are maintained to keep record of each transaction. Clearing helps in cash collection from other banks and debit card or credit card makes easier cash withdrawal from the ATM booth. However, customers’ satisfaction highly depends on cash department of a bank.

Anticollusion Enforcement: Justice for Consumers and Equity for Firms
Dasgupta, Sudipto,Zaldokas, Alminas
We consider the case of changing competition that comes from stronger antitrust enforcement around the world to show that, as the equilibrium switches from collusion to oligopolistic competition, firms step up investment and increase equity issuance. As a result, debt ratios fall. These results imply the importance of financial flexibility in surviving competitive threats. Our identification relies on a difference-in-differences estimation based on the staggered passage of leniency programs in 63 countries around the world from 1990 to 2012.

Bank Holding Company Dividend Policy: Changed by Recession?
Theis, John,Yesilyaprak, Ata M,Jauregui, Andres,Dutta, Amitabh S.
This study examines seven basic theories of dividend policies in bank holding companies during the worst recession since The Great Depression. Data is obtained from Uniform Bank Performance Reports for 2008 where large losses were reported for the US banks. Previous studies found that the management of the companies believe that dividend policy is important created by the present value of future dividends, or the capital gains associated with the future dividends. Dickens et al used Barclay et al model and studied the factors that may have an impact on dividend policies of publicly traded bank holding companies. Their results indicate investment opportunity, size, expected earnings, inside ownership and previous dividend are significant factors in bank holding companies dividend policies. The model used in this paper includes investment opportunities, regulation, agency affects, dividend smoothing, earnings risk, and residual earnings and found that there is a difference between dividend policies of bank holding companies during deep recession and good economy. Furthermore, factors such as investment opportunity, dividend history, size, residual earnings and insider ownership have significant affect on dividend policies of bank holding companies.

Capturing Intrinsic Risk Attitude
Traeger, Christian P.
This study introduces a new conceptualization of intrinsic risk attitude. In contrast to the Arrow--Pratt measure, it links directly to preferences on the multidimensional consumption space and is independent of the way in which we measure consumption, the commodity under observation, and market prices or liquidity constraints. The presented measure relies on intertemporal choice to distinguish intrinsic aversion to risk from taste or satiation. The present study characterizes risk attitude axiomatically, functionally, and numerically and compares risk attitudes across agents with differing tastes. The analysis works with a class of preference representations satisfying certainty additivity and Neumann & Morgenstern’s (1944) axioms. The underlying representation overlaps with Kreps & Porteus’s (1978) and Epstein & Zin’s (1989) models, but introduces an insightful symmetry in time and risk aggregators that helps explain the different functional manifestations of intrinsic risk attitude. An application of the concept shows that the widely employed isoelastic version of Epstein-Zin-Weil preferences implies an intrinsic risk aversion that increases in consumption for intertemporal elasticities of substitution below unity, addressing a puzzle about the difference in estimates of intertemporal substitutability in the long-run risk literature as compared to other literatures.

Career or Flexible Work Arrangements? Gender Differences in Self-Employment in a Young Market Economy
buttler, dominik,Sierminska, Eva
We examine supply-side determinants of transition from the wage and salary sector to self-employment of women and men living Poland. The empirical analysis is made possible due to a unique and under explored longitudinal survey -- Social Diagnosis â€" that contains rare indicators such as job preferences and work events. The empirical results in the 2007-2015 period indicate that women and men transitioning into self-employment are differently motivated. In terms of job attributes, women find independence at work and for those in professional occupations a job matching their competences as a desirable job attribute, while for men the lack of stress, a good salary and independence is key. The analysis of work events and its influence on self-employment weakly confirms the glass-ceiling hypothesis. In line with other research, our analysis indicates that financial constraints strongly determine the entry into self-employment. A key human capital determinant is past entrepreneurial experience indicating a slow, cautious transition process into self-employment.

Conditional Optimal Stopping: A Time-Inconsistent Optimization
Marcel Nutz,Yuchong Zhang

Inspired by recent work of P.-L. Lions on conditional optimal control, we introduce a problem of optimal stopping under bounded rationality: the objective is the expected payoff at the time of stopping, conditioned on another event. For instance, an agent may care only about states where she is still alive at the time of stopping, or a company may condition on not being bankrupt. We observe that conditional optimization is time-inconsistent due to the dynamic change of the conditioning probability and develop an equilibrium approach in the spirit of R. H. Strotz' work for sophisticated agents in discrete time. Equilibria are found to be essentially unique in the case of a finite time horizon whereas an infinite horizon gives rise to non-uniqueness and other interesting phenomena. We also introduce a theory which generalizes the classical Snell envelope approach for optimal stopping by considering a pair of processes with Snell-type properties.

Crowdfunding Dynamics
Belleflamme, Paul,Lambert, Thomas,Schwienbacher, Armin
Various forms of social learning and network effects are at work on crowdfunding platforms, giving rise to informational and payoff externalities. We use novel entrepreneur-backer data to study how these externalities shape funding dynamics, within and across projects. We find that backers decide to back a particular project based on past contributions not only to that project—as documented by prior work—but also to other contemporaneous projects—a novel result. Our difference-in-differences estimates indicate that such ‘cross-project funding dynamics’ account for 4-5% in the increase of contributions that projects generate on a daily basis. We show that recurrent backers are the main transmission channel of cross-project funding dynamics: by initiating social learning about project existence and quality, recurrent backers encourage future funding by other backers. Our results demonstrate that even though contemporaneous projects compete for funding, they jointly benefit from their common presence on the platform. We finally show that these crowdfunding dynamics stir platform growth, with important consequences for competition among platforms.

Dynamic Optimization for Goals-Based Wealth Management with Multiple Goals
Ostrov, Daniel N,Das, Sanjiv Ranjan,Srivastav, Deep,Radhakrishnan, Anand
We develop a dynamic programming methodology that seeks to maximize investor outcomes over multiple, potentially competing goals (such as upgrading a home, paying college tuition, or maintaining an income stream in retirement), even when financial resources are limited. Unlike Monte Carlo approaches currently in wide use in the wealth management industry, our approach uses investor preferences to dynamically make the optimal determination for fulfilling or not fulfilling each goal and for selecting the investor’s investment portfolio. This can be computed quickly, even for numerous investor goals spread over different or concurrent time periods, where each goal may allow for partial fulfillment or be all-or-nothing. The probabilities of attaining each (full or partial) goal under the optimal scenario are also computed, so the investor can ensure the algorithm accurately reflects their preference for the relative importance of each of their goals. These portfolio prescriptions are consistent with Prospect Theory.

Eigen-entropy measure to study phase separation in market behavior
Anirban Chakraborti,Hrishidev,Kiran Sharma,Hirdesh K. Pharasi

One of the spectacular examples of a complex system is the financial market, which displays rich correlation structures among price returns of different assets. The eigenvalue decomposition of a correlation matrix into partial correlations - market, group and random modes, enables identification of dominant stocks or "influential leaders" and sectors or "communities". The correlation-based network of leaders and communities changes with time, especially during market events like crashes, bubbles, etc. Using a novel entropy measure - eigen-entropy, computed from the eigen-centralities (ranks) of different stocks in the correlation-network, we extract information about the "disorder" (or randomness) in the market and its modes. The relative-entropy measures computed for these modes enable us to construct a "phase space", where the different market events undergo "phase-separation" and display "order-disorder" transitions, as observed in critical phenomena in physics. We choose the US S&P-500 and Japanese Nikkei-225 financial markets, over a 32-year period, and study the evolution of the cross-correlation matrices computed over different short time-intervals or "epochs", and their corresponding eigen-entropies. We compare and contrast the empirical results against the numerical results for Wishart orthogonal ensemble (WOE), which has the maximum disorder (randomness) and hence, the highest eigen-entropy. This new methodology helps us to better understand market dynamics, and characterize the events in different phases as anomalies, bubbles, crashes, etc. This can be easily adapted and broadly applied to the studies of other complex systems such as in brain science or environment.

Exposure to Daily Price Changes and Inflation Expectations
D'Acunto, Francesco,Malmendier, Ulrike,Ospina, Juan,Weber, Michael
We show that, to form aggregate inflation expectations, consumers rely on the price changes they face in their daily lives while grocery shopping. Specifically, the frequency and size of price changes, rather than their expenditure share, matter for individuals’ inflation expectations. To document these facts, we collect novel micro data for a representative US sample that uniquely match individual expectations, detailed information about consumption bundles, and item-level prices. Our results suggest that the frequency and size of grocery-price changes to which consumers are personally exposed should be incorporated in models of expectations formation. Central banks' focus on core inflation - which excludes grocery prices - to design expectations-based policies might lead to systematic mistakes.

Green Bonds: The Reserve Management Perspective
Fender, Ingo,McMorrow, Mike,Sahakyan, Vahe,Zulaica, Omar
Central banks' frameworks for managing foreign exchange reserves have traditionally balanced a triad of objectives: liquidity, safety and return. Pursuing these objectives involves explicit trade-offs. Recently central banks have shown interest in incorporating environmental sustainability objectives into their reserve management frameworks. Rather than a triad, central banks may analyse (and weigh) a tetrad of reserve management objectives in allocating part of their foreign exchange reserves to green bonds.

Herds on Green Meadows â€" The Decarbonization of Institutional Portfolios
Benz, Lukas,Jacob, Andrea,Paulus, Stefan,Wilkens, Marco
We analyze an emerging sustainable trend in asset management: the decarbonization of institutional portfolios. By using broad institutional ownership data we show that investors exhibit herding behavior in the sense of decarbonization. They are inclined to follow their own or other investors’ buys in green stocks and sales in brown stocks over adjacent quarters. In addition, we find that Hedge Funds as well as Investment Advisors lead the herd by executing trades in the sense of decarbonization. This is in line with expectations, since Investment Advisors are often bound to social norms, which nowadays include awareness for environmental aspects. For the aspired achievement of market-wide decarbonization, investors leading the herd should be encouraged to further decarbonize their portfolios in order to trigger follow-up trades.

Heuristics Bias and Investment Performance: Does Age Matter? Evidence from Colombo Stock Exchange.
Siraji, Meerakkuddy
This study investigates the existence of heuristics biases in the Colombo Stock Exchange and their effect on investment performance from individual investor’s point of view. In specific, the effects of anchoring, availability bias, gamblers fallacy, overconfidence and representativeness are investigated. Further, the study inspects whether heuristics biases differ between younger and older investors. The primary data were collected by a survey of 425 individual investors. The data were analyzed using multivariate analysis such as Confirmatory Factor Analysis (CFA) and Structure Equation Modeling (SEM). The results show that there is a statistically significant effect of anchoring, availability bias, overconfidence and representativeness bias on investment performance. However, gamblers fallacy not significantly affects investment performance. Furthermore, statistically, significant differences are found between the answers of younger and older investors. This study, hopefully, will help investors to be aware of the impact of their own heuristics bias on their decision making in the stock market, thus increasing the rationality of investment decisions for enhanced market efficiency.

How Do Firms Manage Their Interest Rate Exposure?
Hecht, Andreas
Purpose: This paper aims to identify how non-financial firms manage their interest rate (IR) exposure. IR risk is complex, since it comprises the unequal cash flow and fair value risk. The paper is able to separate both risk types and investigate empirically how the exposure is composed and managed, and whether firms increase or decrease their exposure with derivative transactions.Design/methodology/approach: The paper examines an unexplored regulatory environment that contains publicly reported IR exposure data on the firms’ exposures before and after hedging. The data were complemented by indicative interviews with four treasury executives of major German corporations, including two DAX-30 firms, to include professional opinions to validate the results.Findings: The paper provides new empirical insights about how non-financial firms manage their interest rate exposure. It suggests that firms use hedging instruments to swap from fixed- to floating-rate positions predominantly in the short-to medium-term, and that 63 [37] percent of IR firm exposure are managed using risk-decreasing [risk-increasing/-constant] strategies.Practical implications: Interviewed treasury executives suggest that the advanced disclosures benefit various stakeholders, ranging from financial analysts and shareholders to potential investors through more meaningful analyses on firms’ risk management activities. Further, the treasury executives indicate that the new data granularity would enable firms to carry out unprecedented competitive analyses and thereby benchmark and improve their own risk management. Originality/value: The paper is the first empirical study to analyze the interest rate activities of non-financial firms based on actually reported exposure data before and after hedging, rather than using proxy variables. In addition, the new data granularity enables a separate analysis of the cash flow and fair value risk to focus on the non-financial firms’ requirements.

Individual Behavior and Collective Action: The Path to Iceland's Financial Collapse
Gylfason, Thorvaldur,Zoega, Gylfi
Unsustainable accumulation of debt precedes financial crises. The recent Western financial crisis was no exception in this regard. The external debt of Greece, Iceland, Ireland, and Spain increased exponentially, in Iceland at a rate higher than the rate of interest on foreign debt. The Ponzi scheme that played out in Iceland begs the question why a country would set out on a path that could lead to a financial crisis. We address this question and describe the private incentives faced by bankers, financiers, politicians and others. In particular, we show how private incentives and a culture that valued financial gains above all else collided with socially desirable outcomes. The root of the problem in Iceland as well as in other crisis countries was a failure at the state level to align private incentives with what was socially prudent, a failure due, at least in Iceland, to a combination of mistakes, incompetence and what can only be called corruption. Furthermore, misplaced belief in a market economy where morals and ethics play no role paved the way to serious lapses in accounting and in the operation of the banks.

Information Spillover, Profit Opportunities, and Return Deviations Analysis: The Case of Cross-Listed BHP Billiton
Su, Roger,Yi, Ronghua,Hooper, Keith,Dutta, Amitabh S.
This paper examines (1) whether a cross-listed company spillover effect starts from an earlier time zone market to a later time zone market, whether investors can find profit opportunities from cross-listed share trading, and (2) whether the magnitude of cross-listed share performance deviations can be sufficiently explained by market fundamental factors. BHP Billiton, the world’s largest mining company, is listed on both Australian and UK stock exchanges and has become a perfect example to be examined for the above two hypotheses. We analyze BHP and BLT daily share price returns from 2001 to 2011 and most available Australian and UK market fundamental factors in the same period. With regression analysis, we find evidence that a spillover effect may start from the earlier time zone. Our findings partly support that investors can get arbitrage profit from cross-listed shares when they hold a medium-term position; in the short term, there is no strong evidence to show BHP and BLT prices will converge. Furthermore, we haven’t found any evidence that any individual market fundamental factor can sufficiently explain the magnitude of cross-listed share performance deviations.

Intermediation in Markets for Goods and Markets for Assets
Nosal, Ed,Wong, YY Linda,Wright, Randall
We analyze agents' decisions to act as producers or intermediaries using equilibrium search theory. Extending previous analyses in various ways, we ask when intermediation emerges and study its efficiency. In one version of the framework, meant to resemble retail, middlemen hold goods, which entails (storage) costs; that model always displays uniqueness and simple transition dynamics. In another version, middlemen hold assets, which entails negative costs, i.e., positive returns; that model can have multiple equilibria and complicated belief-based dynamics. These results are consistent with the venerable view that intermediation in financial markets is more prone to instability than in goods markets.

Inversion of Convex Ordering: Local Volatility Does Not Maximize the Price of VIX Futures
Beatrice Acciaio,Julien Guyon

It has often been stated that, within the class of continuous stochastic volatility models calibrated to vanillas, the price of a VIX future is maximized by the Dupire local volatility model. In this article we prove that this statement is incorrect: we build a continuous stochastic volatility model in which a VIX future is strictly more expensive than in its associated local volatility model. More generally, in this model, strictly convex payoffs on a squared VIX are strictly cheaper than in the associated local volatility model. This corresponds to an inversion of convex ordering between local and stochastic variances, when moving from instantaneous variances to squared VIX, as convex payoffs on instantaneous variances are always cheaper in the local volatility model. We thus prove that this inversion of convex ordering, which is observed in the SPX market for short VIX maturities, can be produced by a continuous stochastic volatility model. We also prove that the model can be extended so that, as suggested by market data, the convex ordering is preserved for long maturities.

Investor Interest and the Returns to Commodity Investing
Bhardwaj, Geetesh,Gorton, Gary B.,Rouwenhorst, K. Geert
The authors examine the behavior of monthly commodity futures returns over the decade since 2004 when new investor inflows entered the asset class. The main findings are that average returns have been similar to their long-term historical means. Correlations among commodities and commodity-equity correlations temporarily increased around the financial crisis, but have since returned to normal. This variation is linked to the business cycle instead of the financialization of the asset class.

Investors’ Response to the #MeToo Movement: Does Corporate Culture Matter?
Billings, Mary Brooke,Klein, April,Shi, Crystal (Yanting)
This paper provides evidence that the #MeToo movement revised investors’ beliefs about the cost of fostering a culture that excludes women, as reflected by the absence of women directors in the board room. In particular, we document an overall negative market reaction tracking the timeline of events associated with the #MeToo movement, beginning with the Harvey Weinstein exposé in October of 2017 in the New York Times. This negative response concentrates in firms that have traditionally excluded women from their boards. In contrast, for companies that embrace the inclusion of women on their boards, this negative effect is moderated. Overall, investors appear to have revised their beliefs about the risks associated with future revelations of misconduct, and also about the value of having women in the board room shaping the culture of the firm.

Job Insecurity, Debt Burdens and Individual Health
Cuesta, Maite Blázquez,Budría, Santiago,Moro‐Egido, Ana I.
Job insecurity exerts negative effects on self-reported health. Using the Spanish Survey of Household Finances for 2011-2014, this paper asks whether and to what extent debt burdens enhance these detrimental health effects. To address potential endogeneity problems surrounding this question, the paper adopts Deb and Trivedi's (2006) econometric approach. The results show that the negative effect of job insecurity on self-assessed health is exacerbated if the individual is over-indebted. Moreover, the role of over-indebtedness differs between types of debt, with nonmortgage debts causing larger health losses than mortgage debts. Specifically, the results suggest that being over-indebted with non-mortgage debts boosts the negative impact of job insecurity by a factor of three. Thus, concerns about job insecurity should not be decoupled from concerns about increasing household indebtedness, and policy measures intended to improve individual welfare should consider both phenomena together.

Long Run Feedback in the Broker Call Money Market
Alex Garivaltis

I unravel the basic long run dynamics of the broker call money market, which is the pile of cash that funds margin loans to retail clients (read: continuous time Kelly gamblers). Call money is assumed to supply itself perfectly inelastically, and to continuously reinvest all principal and interest. I show that the relative size of the money market (that is, relative to the Kelly bankroll) is a martingale that nonetheless converges in probability to zero. The margin loan interest rate is a submartingale that converges in mean square to the choke price $r_\infty:=\nu-\sigma^2/2$, where $\nu$ is the asymptotic compound growth rate of the stock market and $\sigma$ is its annual volatility. In this environment, the gambler no longer beats the market asymptotically a.s. by an exponential factor (as he would under perfectly elastic supply). Rather, he beats the market asymptotically with very high probability (think 98%) by a factor (say 1.87, or 87% more final wealth) whose mean cannot exceed what the leverage ratio was at the start of the model (say, $2:1$). Although the ratio of the gambler's wealth to that of an equivalent buy-and-hold investor is a submartingale (always expected to increase), his realized compound growth rate converges in mean square to $\nu$. This happens because the equilibrium leverage ratio converges to $1:1$ in lockstep with the gradual rise of margin loan interest rates.

Making Use of Home Equity: The Potential of Housing Wealth to Enhance Retirement Security
Bravo, Jorge Miguel,Ayuso, Mercedes,Holzmann, Robert
The demographic change underway, declining adequacy levels from traditional pay-as-you-go old-age social security systems, structural reforms in pension schemes and the reduction in the traditional family support have increased the need for additional private savings to cover the old age income gap. In this paper we discuss the necessity, the role and the viability of home equity release schemes in supplementing public and private pensions in an integrated way. We use the latest European data from the Eurosystem Household Finance and Consumption Survey (HFCS) to analyse the household's wealth composition and accumulation process in the euro area. To quantify the size of the housing wealth and its potential to enhance existing and future retirement income, we compute the equity-to-value ratio (ETV) for all countries, estimate the time to loan payoff and compute the amount of home equity that is expected to be released over a 10-year period through regular monthly mortgage payments. We then catalogue and discuss the many alternative options for managing and accessing housing wealth over the life cycle, and highlight the main characteristics, risks, advantages and drawbacks of the two most important market products (home reversion plans and reverse mortgages). Finally, we discuss the main demand-side and supply-side obstacles and challenges to the development of equity release markets and extract some policy implications.

Mixed Levy Subordinated Market Model and Implied Probability Weighting Function
Abootaleb Shirvani,Yuan Hu,Svetlozar T. Rachev,Frank J. Fabozzi

It is essential to incorporate the impact of investor behavior when modeling the dynamics of asset returns. In this paper, we reconcile behavioral finance and rational finance by incorporating investor behavior within the framework of dynamic asset pricing theory. To include the views of investors, we employ the method of subordination which has been proposed in the literature by including business (intrinsic, market) time. We define a mixed Levy subordinated model by adding a single subordinated Levy process to the well-known log-normal model, resulting in a new log-price process. We apply the proposed models to study the behavioral finance notion of "greed and fear" disposition from the perspective of rational dynamic asset pricing theory. The greedy or fearful disposition of option traders is studied using the shape of the probability weighting function. We then derive the implied probability weighting function for the fear and greed deposition of option traders in comparison to spot traders. Our result shows the diminishing sensitivity of option traders. Diminishing sensitivity results in option traders overweighting the probability of big losses in comparison to spot traders.

Multi-Horizon Mean-Covariance Estimation for Serial Correlated Returns
Ding, Zhuanxin
Assume asset returns follow a VARMA_MARCH structure, this paper derives the proper multi-horizon mean and covariance matrix estimations that can be used as inputs to mean-variance optimization problem for investors with different horizons. The result is further extended to vector error-correction model with GARCH errors. A simple example is given to show the significant impact of serial correlation to multi-horizon volatility and correlation estimation in asset allocation study. The result can also be applied to calculate multi-horizon volatility estimation for option trading purposes when the underlying model is built upon high frequency data.

Negative interest rates in the euro area: does it hurt banks?
Stráský, Jan,Hwang, Hyunjeong
The negative interest rate policy (NIRP) has been in place in the euro area since June 2014. While the NIRP can provide additional monetary accommodation in the situation where the neutral rate of interest is most likely negative, there are also unintended consequences for banks' profitability and potential financial stability risks associated with this policy. The paper assesses the effect of the NIRP on the net interest rate margins of the euro area banks using quarterly consolidated bank level data for some 50 banking groups directly supervised by the Single Supervisory Mechanism. Since our data set extends to 2018, it allows us to examine the period of negative short-term interest rates separately from the period of low, but positive policy rates. The econometric results confirm the effect of the interest rate level on bank profitability and, in some specifications, also suggest an additional negative effect on bank profitability in the period of negative euro area short-term interest rates. This additional effect of the NIRP is the strongest when looking at the disaggregated components of net interest income, i.e. interest income and interest expense. However, the effects are not particularly robust across various profitability measures and tend to disappear when conditioning on macroeconomic variables, such as expected real GDP growth and inflation expectations. Therefore, in line with other existing studies, we find weak evidence of possible negative effects on bank profitability from keeping rates low for an extended period of time. Statistical analysis of the bank-level data also points to an ongoing compression of non-interest income, in particular for the best performing banks, and a slow recovery in return on total assets among all banks over the analysed period.This Working Paper relates to the 2018 OECD Economic Survey of Euro Area(

Networks of monetary flow at native resolution
Carolina Mattsson

People and companies move money with every financial transaction they make. We aim to understand how such activity gives rise to large-scale patterns of monetary flow. In this work, we trace the movement of e-money through the accounts of a mobile money system using the provider's own transaction records. The resulting transaction sequences---balance-respecting trajectories---are data objects that represent observed monetary flows. Common sequential motifs correspond to known use-cases of mobile money: digital payments, digital transfers, and money storage. We find that each activity creates a distinct network structure within the system, and we uncover coordinated gaming of the mobile money provider's commission schedule. Moreover, we find that e-money passes through the system in anywhere from minutes to months. This pronounced heterogeneity, even within the same use-case, can inform the modeling of turnover in money supply. Our methodology relates economic activity at the transaction level to large-scale patterns of monetary flow, broadening the scope of empirical study about the network and temporal structure of the economy.

Non-Bank Counterparties in International Banking
Luna, Pablo Garcia,Hardy, Bryan
The BIS has expanded the details that it publishes about banks' balance sheet linkages with nonbank counterparties. These additional details show that banks have increasingly large positions vis-à-vis the non-bank financial sector. Their exposures to non-financial counterparties are highly concentrated, mainly in holdings of advanced economy government debt. At the same time, banks lend significant amounts to non-financial corporations located in financial centres. Banks' cross-border claims on households are relatively small, while their cross-border liabilities to this sector reflect non-resident nationals making deposits with banks in their home country.

Non-compliance in randomized control trials without exclusion restrictions
Masayuki Sawada

In the context of a randomized experiment with non-compliance, I identify treatment effects without exclusion restrictions. Instead of relying on specific experimental designs, I exploit a baseline survey which is commonly available in randomized control trials. I show the identification of the average treatment effect on the treated (ATT) as well as the local average treatment effect (LATE) assuming that a baseline variable maintains similar rank orders as the control outcome. I then apply this strategy to a microcredit experiment with one-sided non-compliance to identify the ATT. In microcredit studies, a direct effect of the treatment assignment has been a threat to identification of the ATT based on an IV strategy. I find the IV estimate of log revenue for the ATT is 2.2 times larger than my preferred estimate of log revenue. R package ptse is available for this analysis.

Operations of Foreign Exchange Department of a Commercial Bank
Rahman, Md. Ashabur
The Foreign Exchange Department of a bank performs foreign exchange operations as well as transactions. The main function of a forex department is to handle foreign inward remittances as well as outward remittances as well as buying and selling of foreign currencies. In some cases, Foreign Currency Account (FCA) is maintained for foreign transactions. The Letter of Credit is a very important import document which is issued by this department of a bank. This department also receives inward foreign remittance from the migrant workers living and working abroad. However, Foreign Exchange Department of a bank plays very important role in a countries economic growth because international business is highly depended on Foreign Exchange Department of a bank. Any foreign currency, traveller's cheques, letters of credit and bills of exchange are processed by this department.

Perspectiva de Transformación Social en la Educación y la Empresa (Perspective of Social Transformation in Education and Business)
Jayson Andrey, Bernate,Betancourt Jiménez, Milton Javier,Johanna Alexandra , Carrillo Villamizar,Fonseca Franco, Ingrid Patricia,García Celis, Mauro Freddy,Ortiz Navarrete, Wilber,Edward Johnn , Silva Giraldo,Cesar Augusto , Silva Giraldo,Urrea Roa, Pedro Nel,Juan Carlos , Valderrama Cárdenas
Spanish Abstract:<\b> Perspectiva de Transformación Social en la Educación y la Empresa son los temas centrales del volumen 3 de la colección: investigación en educación, empresa y sociedad, inherentes a procesos investigativos y reflexivos. Algunos capítulos abordan reflexiones y experiencias en materia de formación, tanto en investigación como en otros campos y prácticas del saber y el conocimiento. Algunos más analizan tópicos relacionados con la investigación y los procesos de apropiación, generación y uso del conocimiento. Y otros más orbitan sobre experiencias y procesos educativos, didácticos y metodológicos, para fortalecer los aprendizajes en dominios dados del saber.CAPITULO 1. MIRADA SOBRE EL SISTEMA EDUCATIVO OFICIAL COLOMBIANO EN LA ACTUALIDAD, los autores Jayson Bernate , Ingrid Fonseca , Pedro Urrea , Mauro García , Milton Betancourt, ilustra aspectos relevantes en las reformas de la educación pública colombiana, a través de la reflexión pedagógica docente, identificada desde el gobierno como política nacional, de ahí que se contemplen apartados fundamentales para vincular todos los estamentos que hacen parte de la comunidad académica en búsqueda de los objetivos fundamentales para la gestación de seres proactivos y creadores de nuevas ideologías, ya que a consecuencia de la creación de nuevos decretos se partió en dos la historia del sistema educativo oficial en Colombia. CAPITULO 2. INSTITUCIONES EDUCATIVAS PARA EL TRABAJO Y DESARROLLO HUMANO DE SAN VICENTE DEL CAGUÁN CAQUETÁ Y SU PARTICIPACIÃ"N EN EL POSTCONFLICTO, el autor Ortiz Navarrete, Wilber, presenta un análisis del postconflicto relacionando la dimensión educativa como uno de los principales referentes que dinamizan la consolidación del mismo buscando dignificar los niveles de sociedad actual. A su vez el aporte de la formación para el trabajo y desarrollo humano en la generación de competencias integrales que permiten la inserción y estabilidad en el campo laboral. CAPITULO 3. NARRATIVAS DE PROGRESO EN LA CONYUGALIDAD, los autores Silva Giraldo, Edward Johnn, Carrillo Villamizar, Johanna Alexandra, Valderrama Cárdenas, Juan Carlos y Silva Giraldo, Cesar Augusto, presentan un estudio que condujo a generar intercambios de saberes mediante la realización de ejercicios prácticos de meta-observación, sustentados en el modelo sistémico narrativo y la psicología positiva, para reconocer los recursos y las capacidades de las parejas. CAPITULO 4. POR QUÉ Y PARA QUÉ ESTUDIAR LOS GESTOS, el autor Valderrama Cárdenas, Juan Carlos, presenta una revisión teórica que explora los estudios clásicos respecto a la comunicación no-verbal, los hallazgos más recientes acerca de las posibles funciones de los gestos en la comunicación, en el pensamiento y en el desarrollo de habilidades para resolver problemas.English Abstract: Perspective of Social Transformation in Education and Business are the central themes of volume 3 of the collection: research in education, business and society, inherent in investigative and reflective processes. Some chapters address reflections and experiences in training, both in research and in other fields and practices of knowledge and knowledge. Some more analyze topics related to research and processes of appropriation, generation and use of knowledge. And others orbit about educational, educational and methodological experiences and processes, to strengthen learning in given domains of knowledge.CHAPTER 1. LOOK ON THE COLOMBIAN OFFICIAL EDUCATIONAL SYSTEM IN THE CURRENT SESSION, the authors Jayson Bernate, Ingrid Fonseca, Pedro Urrea, Mauro García, Milton Betancourt, illustrates relevant aspects in the reforms of Colombian public education, through teaching pedagogical reflection , identified from the government as a national policy, hence fundamental sections are contemplated to link all the levels that are part of the academic community in search of the fundamental objectives for the gestation of proactive beings and creators of new ideologies, since as a consequence The history of the official education system in Colombia was split in two by the creation of new decrees.CHAPTER 2. EDUCATIONAL INSTITUTIONS FOR THE WORK AND HUMAN DEVELOPMENT OF SAN VICENTE DEL CAGUÁN CAQUETÁ AND ITS PARTICIPATION IN THE POSTCONFLICT, the author Ortiz Navarrete, Wilber, presents a post-conflict analysis relating the educational dimension as one of the main references that boost consolidation of the same looking to dignify the levels of current society. At the same time, the contribution of training for work and human development in the generation of integral competences that allow insertion and stability in the labor field.CHAPTER 3. PROGRESS NARRATIVES IN THE CONJUGALITY, the authors Silva Giraldo, Edward Johnn, Carrillo Villamizar, Johanna Alexandra, Valderrama Cárdenas, Juan Carlos and Silva Giraldo, Cesar Augusto, present a study that led to the exchange of knowledge through the realization of Practical meta-observation exercises, based on the systemic narrative model and positive psychology, to recognize the resources and capacities of couples.CHAPTER 4. WHY AND WHY TO STUDY GESTURES, author Valderrama Cárdenas, Juan Carlos, presents a theoretical review that explores classic studies regarding non-verbal communication, the most recent findings about the possible functions of gestures in communication, in thinking and in the development of problem solving skills.

Playing it Safe: Global Systemically Important Banks after the Crisis
Goel, Tirupam,Lewrick, Ulf,Mathur, Aakriti
Post-crisis reforms aim to mitigate the systemic risks that arise from global systemically important banks (G-SIBs). Based on our estimates of G- SIBs' probability of distress, we find that their resilience has improved in recent years on the back of higher capital ratios. Furthermore, by benchmarking G-SIBs' balance sheet adjustments against those of other major banks, we show that these adjustments accord with the incentives set by the post-crisis regulatory framework. This suggests that the systemic importance of G-SIBs has declined in recent years.

Portfolio Cuts: A Graph-Theoretic Framework to Diversification
Bruno Scalzo Dees,Ljubisa Stankovic,Anthony G. Constantinides,Danilo P. Mandic

Investment returns naturally reside on irregular domains, however, standard multivariate portfolio optimization methods are agnostic to data structure. To this end, we investigate ways for domain knowledge to be conveniently incorporated into the analysis, by means of graphs. Next, to relax the assumption of the completeness of graph topology and to equip the graph model with practically relevant physical intuition, we introduce the portfolio cut paradigm. Such a graph-theoretic portfolio partitioning technique is shown to allow the investor to devise robust and tractable asset allocation schemes, by virtue of a rigorous graph framework for considering smaller, computationally feasible, and economically meaningful clusters of assets, based on graph cuts. In turn, this makes it possible to fully utilize the asset returns covariance matrix for constructing the portfolio, even without the requirement for its inversion. The advantages of the proposed framework over traditional methods are demonstrated through numerical simulations based on real-world price data.

Pure Rank Preferences and Variation in Risk-Taking Behavior
Stark, Oded,Budzinski, Wiktor,Jakubek, Marcin
Assuming that an individual's rank in the wealth distribution is the only factor determining the individual's wellbeing, we analyze the individual's risk preferences in relation to gaining or losing rank, rather than the individual’s risk preferences towards gaining or losing absolute wealth. We show that in this characterization of preferences, a high-ranked individual is more willing than a low-ranked individual to take risks that can provide him with a rise in rank: relative risk aversion with respect to rank in the wealth distribution is a decreasing function of rank. This result is robust to incorporating (the level of) absolute wealth in the individual's utility function.

Short-Selling Constraints Generate Overpricing: Evidence from Rule 201
H. Florindo, Oscar,Penalva Zuasti, Jose S.,Tapia, Mikel
The main contribution of this article is to establish a causal link between the imposition of short selling constraints and positive and significant abnormal returns, together with an improvement in liquidity. In the debate between the theory of overpricing (Miller (1977), Jones and Lamont (2002)) and the illiquidity hypothesis (Amihud and Mendelson, 1986), the data supports the former and rejects the latter for the short-selling constraints imposed by Rule 201 in the U.S. Our analysis uses the difference-in-differences methodology combined with a choice of treatment and controls based on the regression discontinuity approach that allows us to precisely select very similar assets as counterfactuals, and which explains the differences in findings from the previous literature. We use placebo tests to verify that our results are linked to the ban itself, and we find evidence that differences in the effect of short-selling constraints between small and large assets is more likely to be due to differences in the information content of price changes than to the firm’s market capitalization.

Subjective Models of the Macroeconomy: Evidence from Experts and a Representative Sample
Andre, Peter,Pizzinelli, Carlo,Roth, Christopher,Wohlfart, Johannes
We propose a method to measure people’s subjective models of the macroeconomy. Using a sample of 2,200 households representative of the US population and a sample of more than 1,000 experts, we measure beliefs about how the unemployment rate and the inflation rate respond to four different hypothetical exogenous shocks: a monetary policy shock, a government spending shock, an income tax shock, and an oil price shock. While expert predictions are quantitatively close to benchmarks from standard DSGE models and VAR evidence and relatively homogeneous, there is strong heterogeneity among households. Households predict changes in unemployment that are largely in line with the experts’ responses for all four shocks. However, their predictions of changes in inflation are at odds with those of experts both for the tax shock and the interest rate shock. We show that a substantial fraction of deviations of household predictions from expert predictions can be explained by the use of a simple heuristic according to which people expect a positive co-movement among variables they perceive as good and among variables they perceive as bad. Our findings inform the validity of central assumptions about the expectation formation process and have important implications for the optimal design of fiscal and monetary policy.

Synergizing Ventures
Akcigit, Ufuk,Dinlersoz, Emin,Greenwood, Jeremy,Penciakova, Veronika
Venture capital (VC) and growth are examined both empirically and theoretically. Empirically, VC-backed startups have higher early growth rates and initial patent quality than non-VC-backed ones. VC-backing increases a startup’s likelihood of reaching the right tails of the firm size and innovation distributions. Furthermore, outcomes are better for startups matched with more experienced venture capitalists. An endogenous growth model, where venture capitalists provide both expertise and financing for business startups, is constructed to match these facts. The presence of venture capital, the degree of assortative matching between startups and financiers, and the taxation of VC-backed startups matter significantly for growth.

Systematic Asset Allocation using Flexible Views for South African Markets
Ann Sebastian,Tim Gebbie

We implement a systematic asset allocation model using the Historical Simulation with Flexible Probabilities (HS-FP) framework developed by Meucci. The HS-FP framework is a flexible non-parametric estimation approach that considers future asset class behavior to be conditional on time and market environments, and derives a forward looking distribution that is consistent with this view while remaining close as possible to the prior distribution. The framework derives the forward looking distribution by applying unequal time and state conditioned probabilities to historical observations of asset class returns. This is achieved using relative entropy to find estimates with the least distortion to the prior distribution. Here, we use the HS-FP framework on South African financial market data for asset allocation purposes; by estimating expected returns, correlations and volatilities that are better represented through the measured market cycle. We demonstrated a range of state variables that can be useful towards understanding market environments. Concretely, we compare the out-of-sample performance for a specific configuration of the HS-FP model relative to classic Mean Variance Optimization(MVO) and Equally Weighted (EW) benchmark models. The framework displays low probability of backtest overfitting and the out-of-sample net returns and Sharpe ratio point estimates of the HS-FP model outperforms the benchmark models. However, the results are inconsistent when training windows are varied, the Sharpe ratio is seen to be inflated, and the method does not demonstrate statistically significant out-performance on a gross and net basis.

The Countercyclical Capital Buffer and the Composition of Bank Lending
Auer, Raphael,Ongena, Steven
Do macroprudential regulations on residential lending influence commercial lending behavior too? To answer this question, we identify the compositional changes in banks’ supply of credit using the variation in their holdings of residential mortgages on which extra capital requirements were uniformly imposed by the countercyclical capital buffer (CCyB) introduced in Switzerland in 2012. We find that the CCyB’s introduction led to higher growth in commercial lending although this was unrelated to conditions in regional housing markets. Interest rates and fees charged to the firms concurrently increased. We rationalize these findings in a model featuring both private and firm-specific collateral.

The Economic Effects of Private Equity Buyouts
Davis, Steven J.,Haltiwanger, John,Handley, Kyle,Lipsius, Ben,Lerner, Josh,Miranda, Javier
We examine thousands of U.S. private equity (PE) buyouts from 1980 to 2013, a period that saw huge swings in credit market tightness and GDP growth. Our results show striking, systematic differences in the real-side effects of PE buyouts, depending on buyout type and external conditions. Employment at target firms shrinks 13% over two years in buyouts of publicly listed firms but expands 13% in buyouts of privately held firms, both relative to contemporaneous outcomes at control firms. Labor productivity rises 8% at targets over two years post buyout (again, relative to controls), with large gains for both public-to-private and private-to-private buyouts. Target productivity gains are larger yet for deals executed amidst tight credit conditions. A post-buyout widening of credit spreads or slowdown in GDP growth lowers employment growth at targets and sharply curtails productivity gains in public-to-private and divisional buyouts. Average earnings per worker fall by 1.7% at target firms after buyouts, largely erasing a pre-buyout wage premium relative to controls. Wage effects are also heterogeneous. In these and other respects, the economic effects of private equity vary greatly by buyout type and with external conditions.

The Interplay between Oil and Food Commodity Prices: Has it Changed Over Time?
Peersman, Gert,Rüth, Sebastian K.,der Veken, Wouter Van
Using time-varying BVARs, we find that oil price increases caused by oil supply shocks did not affect food commodity prices before the start of the millennium, but had positive spillover effects in more recent periods. Likewise, shortfalls in global food commodity supply—resulting from bad harvests—have positive effects on crude oil prices since the early 2000s, in contrast to the preceding era. Remarkably, we also document greater spillover effects of both supply shocks on metals and minerals commodity prices in recent periods, as well as a stronger impact on the own price compared to earlier decades. This (simultaneous) time variation of commodity price dynamics cannot be explained by the biofuels revolution and is more likely the consequence of heightened informational frictions and information discovery in more globalized and financialized commodity markets.

Uncertainty Shocks and Financial Crisis Indicators
Hristov, Nikolay,Roth, Markus
The current paper broadens the understanding of the role played by uncertainty in the context of macroeconomic fluctuations. It focuses on the implications of uncertainty shocks for indicators that tend to precede financial crises. In an empirical analysis we show for a set of four euro area countries that negative uncertainty shocks, while boosting economic activity, are followed by unfavorable reactions of financial crisis indicators. We conclude that standard uncertainty measures contain some useful information on the potential buildup of vulnerabilities in the financial system.

Universal Basic Income: The Last Bullet in the Darkness
Mohammad Rasoolinejad

Universal Basic Income (UBI) has recently been gaining traction. Arguments exist on both sides in favor of and against it. Like any other financial tool, UBI can be useful if used with discretion. This paper seeks to clarify how UBI affects the economy, including how it can be beneficial. The key point is to regulate the rate of UBI based on the inflation rate. This should be done by an independent institution from the executive branch of the government. If implemented correctly, UBI can add a powerful tool to the Federal Reserve toolkit. UBI can be used to reintroduce inflation to the countries which suffer long-lasting deflationary environment. UBI has the potential to decrease the wealth disparity, decrease the national debt, increase productivity, and increase comparative advantage of the economy. UBI also can substitute the current welfare systems because of its transparency and efficiency. This article focuses more on the United States, but similar ideas can be implemented in other developed nations.

What Does Peer-to-Peer Lending Evidence Say About the Risk-Taking Channel of Monetary Policy?
Huang, Yiping,Li, Xiang,Wang, Chu
This paper uses loan application-level data from a peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we are the first to provide quantitative evidence of the impact of monetary policy on the risk-taking of nonbank financial institution. We find that the search-for-yield is the main workhorse of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and a greater riskiness of credit allocation, but these changes do not necessarily relate to a larger loan amount on average.

مراجعة علمية لكتاب: أكذوبة الأسواق المالية: الرياضيات والإشارات السعرية ومصير الأرض من الناحية البيئية
Belabes, Abderrazak
Arabic Abstract: يطرح الكتاب سؤالاً جوهريًا عن حقيقة الإشارات السعرية في الأسواق المالية العالمية التي يرتكز عليها الخطاب النيوكلاسيكي: هل يمكن التعويل عليها كمعلومة أساسية في تحليل الوقائع ورسم السياسات الاقتصادية للحد من التوزيع غير العادل للدخول والإضرار بالبيئة؟. ويبيÙ'Ù† الكتاب أن توجيه الأسواق المالية للاقتصاد من خلال الإشارات السعرية هي مجرÙ'د أكذوبة، فالتقلب هو خاصية ذاتية للأسواق المالية تثير دخانًا يخفي الاتجاهات الكبرى للأسعار والآثار الخارجية التي تؤثر سلبًا على حياة الناس. ويشرح الكتاب كيف أن تطبيق النظريات الرياضية الأكثر تقدمًا قد عزز القدرة على التفنن في الإفادة من فوارق الأسعار، فكلما زادت درجة هذا التفنن، كلما اقترب التطبيق من النظرية، مما يظهر أن النماذج الرياضية التي تستخدم في عالم المال ليست مجرÙ'د وصف لما يحصل، وإنما هي موجهة للسلوك. وهذا يطرح مسألة خُلقية قلما يُنتبه لها: ما هي الرياضيات التي ينبغي أن ننشغل بها؟ ولمصلحة من؟English Abstract: The book raises a fundamental question about the reality of price signal in the global financial markets on which the neoclassical discourse is based: Can it be considered as basic information in the analysis of facts and the formulation of economic policies to limit the unequal distribution of incomes and damage to the environment? The book shows that directing economy through price signal is just a lie. Volatility is an intrinsic characteristic of financial markets that generate a smoke and hides major price trends and externalities which negatively affect people's lives. The book explains how the application of advanced mathematical theories has enhanced the ability to master the advantage of price differentials. The more the degree of sophistication increases, the more the application approximates theory. The mathematical modelling used in the financial world is not just a description of what happens, it is performative. This raises an ethical question that is rarely noticed: What mathematics should we be preoccupied with? For whose benefit?