Research articles for the 2019-10-23

A Coherent Framework for Predicting Emerging Market Credit Spreads with Support Vector Regression
Anderson, Gary,Audzeyeva, Alena
We propose a coherent framework using support vector regression (SRV) for generating and ranking a set of high quality models for predicting emerging market sovereign credit spreads. Our framework adapts a global optimization algorithm employing an hv-block cross-validation metric, pertinent for models with serially correlated economic variables, to produce robust sets of tuning parameters for SRV kernel functions. In contrast to previous approaches identifying a single "best" tuning parameter setting, a task that is pragmatically improbable to achieve in many applications, we proceed with a collection of tuning parameter candidates, employing the Model Confidence Set test to select the most accurate models from the collection of promising candidates. Using bond credit spread data for three large emerging market economies and an array of input variables motivated by economic theory, we apply our framework to identify relatively small sets of SVR models with su perior out-of-sample forecasting performance. Benchmarking our SRV forecasts against random walk and conventional linear model forecasts provides evidence for the notably superior forecasting accuracy of SRV-based models. In contrast to routinely used linear model benchmarks, the SRV-based models can generate accurate forecasts using only a small set of input variables limited to the country-specific credit-spread-curve factors, lending some support to the rational expectation theory of the term structure in the context of emerging market credit spreads. Consequently, our evidence indicates a better ability of highly flexible SVR to capture investor expectations about future spreads reflected in today's credit spread curve.

An Intertemporal Preference with Risk and Loss Aversion
Choi, Kyoung Jin,Jeon, Junkee,Koo, Hyeng Keun
The purpose of this paper is to study a model of intertemporal preference which has both risk aversion and loss aversion and can be represented by a utility function exhibiting a minimal departure from the time-separable von Neumann-Morgenstern utility. The preference is globally concave, and thus shows risk aversion over all choices. Thus, it is different from a typical preference in the prospect theory, which exhibits risk seeking for losses. It has, however, loss aversion by overweighting losses where gains and losses are calculated from the previous level of consumption. We study the optimal consumption and attitude toward risk of an agent with the preference.

Are Equity Crowdfunding Investors Active Investors?
Hornuf, Lars,Schilling, Tobias,Schwienbacher, Armin
It is often assumed that entrepreneurs retain more control of their venture when they opt for equity crowdfunding as compared to venture capital, notably because crowd investors are passive. We study whether crowd investors are indeed passive by analysing the cash flow and control rights crowd investors receive in equity crowdfunding in Germany, where more flexible contracts are offered than in many other countries. We document that in Germany many of the rights used in venture capital investment contracts are also used in equity crowdfunding contracts. We find that crowd investors are asked to pay higher prices if they receive more cash flow and exit rights, consistent with the fact that these rights are valuable to the crowd. However, these rights have no meaningful economic impact, since they do not affect campaign outcome, the likelihood of securing follow-on funding, nor the likelihood of liquidation of the venture. These results are inconsistent with control rights theory that predicts positive impacts, in contrast to results documented for venture capital contracts. Rather, our results suggest that crowd investors are passive investors whose control rights are ineffective or not exercised.

Aristocratic Privilege. Exploiting
Oosterlinck, Kim,Ureche, Loredana,Vaslin, Jacques-Marie
According to North and Weingast (1989), institutions that protect bondholders' rights lower borrowing costs for the state and are therefore beneficial to both the state and the bondholders. In this paper we argue that such institutions may be so strong that bondholders can exploit them for their own benefit, not the state's. To prove this point, we focus on the (non-)conversion of French bonds during the second quarter of the 19th century. At the time, France was able to convert its bonds. In other words, the state could ask bondholders to choose between redemption at par or a new bond with a lower coupon. Even though improvements in French credit meant the state could benefit from converting its debt as early as May 1825, no conversion took place before March 1852. Had it occurred at the first date, the French state would have saved the equivalent of 2.7 years of debt service. Our analysis shows that the institutions prevailing at the time gave large bondholders the power to veto any conversion.

Bayesian Estimation of Macro-Finance DSGE Models with Stochastic Volatility
Rapach, David,Tan, Fei
Researchers are increasingly turning to dynamic stochastic general equilibrium (DSGE) models to analyze the structural foundations of risk premia. However, existing DSGE studies of risk premia rarely incorporate stochastic volatility, despite its popularity in empirical asset pricing and growing importance in empirical macroeconomics. We extend the existing literature by developing a Bayesian Markov chain Monte Carlo (MCMC) algorithm for estimating risk premia in DSGE models with stochastic volatility. We first propose a Bayesian procedure for estimating a stochastic volatility process in levels and then integrate the procedure into a larger MCMC algorithm that incorporates an affine model solution based on log-normality. The larger MCMC algorithm makes likelihood-based estimation of risk premia in DSGE models with stochastic volatility computationally feasible and efficient. We use the algorithm to estimate the US equity risk premium in a DSGE model with recursive preferences that includes time-preference, technology, investment, and volatility shocks. Time-preference and technology shocks are primarily responsible for the sizable equity risk premium in the estimated DSGE model. The estimated historical stochastic volatility and equity risk premium series display pronounced countercyclical fluctuations.

Beating the House: Identifying Inefficiencies in Sports Betting Markets
Sathya Ramesh,Ragib Mostofa,Marco Bornstein,John Dobelman

Inefficient markets allow investors to consistently outperform the market. To demonstrate that inefficiencies exist in sports betting markets, we created a betting algorithm that generates above market returns for the NFL, NBA, NCAAF, NCAAB, and WNBA betting markets. To formulate our betting strategy, we collected and examined a novel dataset of bets, and created a non-parametric win probability model to find positive expected value situations. As the United States Supreme Court has recently repealed the federal ban on sports betting, research on sports betting markets is increasingly relevant for the growing sports betting industry.

Board's IT Expertise and Firm Innovation
Matta, Moksh,Vijayaraghavan, Rajesh,Cavusoglu, Hasan
We examine the relationship between the board’s IT expertise and firm innovation. Using a novel handâ€"collected dataset from biographies of directors, we find that the board’s IT expertise has a positive influence on firm innovation â€" measured in terms of R&D expenditures and patents applied. The board’s IT expertise is one dimension among various existing governance mechanisms in a firm that can influence innovation. Studying the conditions under which the board’s IT expertise matters, we analyze the crossâ€"sectional variation in a firm’s existing governance mechanisms with regards to innovation. Building on prior research, we identify three mechanisms that are associated with innovation â€" institutional ownership, classified board, and CEO/Chair duality. We find that the board’s IT expertise can substitute for these governance mechanisms in driving innovation. The board’s IT expertise, we find, also has a positive impact on innovation quality, as measured by patent related citations. We also find that the board’s IT expertise can reduce information asymmetries even in relatively complex firms and can spur innovation. We further present evidence that the type of IT directors on the board matters. In particular, innovation outcomes are primarily driven by outside/independent IT directors. Finally, we exploit industry level data breaches as an exogenous shock for the appointment of IT directors on board, and argue that our results are not driven by endogeneity.

CEO Networks and Shareholder Litigation
McCumber, William R.,Sun, Lingna
This paper documents that firms led by Chief Executive Officers (CEOs) with greater network power and influence are more likely to be subject to securities class action (SCA) lawsuits, and that these lawsuits are more likely to led by institutional investors. Firms with more connected CEOs are more likely to have their firms’ cases dismissed, or, subject to the suit surviving a motion to dismiss, have lower settlement amounts than firms whose CEOs are less connected. The suits appear to be an alternative method of governance in that defendant firms with highly central CEOs are more likely to replace the CEO and increase the independence of the board in the years following the SCA. We find that the market values the suits, regardless of the immediate outcome, as cumulative abnormal returns around the announcement of the suit are highest for firms with highly connected CEOs. Further, CEOs whose firms are subject to SCA alternative governance suffer decreases in network power subsequent to the SCA.

Competition Links and Stock Returns
Eisdorfer, Assaf,Froot, Kenneth,Ozik, Gideon,Sadka, Ronnie
We consider a firm’s competitiveness based on the manner by which other firms mention it on their 10-K filings. Using all public firm filings simultaneously, we implement a PageRank-type algorithm to produce a dynamic measure of firm competitiveness, denoted C-Rank. A high-minus-low C-Rank portfolio yields 16% alpha annually, where return predictability mainly stems from cross-sector competitiveness. The findings are largely consistent with investor underreaction to firm business opportunities identified by other strong firms. Nevertheless, stock return covariation with the C-Rank portfolio spread suggests that part of the return predictability can be interpreted as compensation for systematic cross-sector disruption risk.

Convex Relaxation Based Locational Marginal Prices
Anna Winnicki,Mariola Ndrio,Subhonmesh Bose

We propose and analyze semidefinite relaxation based locational marginal prices (RLMPs) for real and reactive power in electricity markets. Our analysis reveals that when the non-convex economic dispatch problem has zero duality gap, the RLMPs exhibit properties similar to locational marginal prices with linearized power flow equations. Otherwise, they behave similar to convex hull prices. Restricted to radial distribution networks, RLMPs reduce to second-order cone relaxation based distribution locational marginal prices. We illustrate our theoretical results on numerical examples.

Corporate Governance Compliance and Firm Value: A Cultural Perspective
Orihara, Masanori,Eshraghi, Arman
We show the corporate governance reforms introduced by the Japanese government since 2014 have not succeeded in increasing aggregate firm value. These policies, of which voluntary disclosure in the form of ‘comply or explain’ is a major element, have inadvertently led to overcompliance by target firms listed in the first section of the Tokyo Stock Exchange as well as a range of non-target firms. We argue this overcompliance behaviour is, inter alia, correlated with the cultural values of ‘conformity’, ‘respect for authority’ and ‘power distance’, which permeate the Japanese corporate culture. This results in smaller firms, which are typically not listed on the first section of the exchange, following the compliance behaviour of larger firms listed on the first section in the same industry sector. Importantly, this pressure to follow in the steps of leading firms is to the detriment of board effectiveness and shareholder value. We document a larger reduction in the market value of young and R&D intensive firms, and firms appointing outsider directors with lower advising quality. These findings highlight the risks in adopting corporate governance policies without due attention to cultural nuances.

Corporate Governance and Social Impact of Non‐Profits: Evidence from a Randomized Program in Healthcare in the Democratic Republic of Congo
Fangwa, Anicet,Flammer, Caroline,Huysentruyt, Marieke,Quelin, Bertrand V.
How can non-profit organizations improve their governance to increase their social impact? This study examines the effectiveness of a bundle of governance mechanisms (consisting of pro-social incentives and auditing) in the context of a randomized governance program conducted in the Democratic Republic of Congo’s healthcare sector. Within the program, a set of health centers were randomly assigned to a governance treatment while others were not. We find that improved governance leads to i) higher operating efficiency and ii) improvements in social performance (measured by a reduction in the occurrence of stillbirths and neonatal deaths). Furthermore, we find that funding is not a substitute for governance â€" health centers that only receive funding increase their scale, but do not show improvements in operating efficiency nor social performance. Overall, our results suggest that corporate governance plays an important role in achieving the non-profits’ objectives and increasing the social impact of the funds invested.

Debt Structure
Colla, Paolo,Ippolito, Filippo,Li, Kai
We review the literature on debt structure, which is a central element in a firm’s capital structure. We first survey both theoretical and empirical research pertaining to debt characteristics â€" maturity and priority â€" and debt types â€" bank loans, corporate bonds, credit lines, commercial paper, and capital leases. We then present comprehensive empirical evidence on public U.S. firms’ debt structure, highlighting that over three-quarters of U.S. firms concentrate their borrowing in one debt type, and offer some suggestive explanations for the observed pattern. Finally, we discuss directions for future research, including a better understanding of debt structure choices by non-U.S. firms and by private firms, the cross-sectional and temporal variations in debt structure, and the corporate policy implications of firms’ debt structure choices.

Does Capital Structure Affects Firms’ Performance in Ghana? Panel Data Analysis
MacCarthy, John,Ahulu, Helena
This paper examines the effect of capital structure on the firms’ performance. The study collected data from seventeen firms listed on the Ghana Stock Exchange from 2009 to 2018. A quantitative research technique is used to collect data to test two hypotheses. Panel data regression is employed to determine the effect of capital structure on firms’ performance. The study revealed that short-term debt and total debt accounted for 67% and 76.3% respectively of capital used to finance the operations for the period. Furthermore, the study revealed that there is significant and negative relationship between capital structures and firms’ performance. The study concludes that firms should minimise the use of debt capital and rather concentrate on equity capital to finance their operations. The study recommends that firms should increase sales and invest in tangible assets to maximise the firms’ performance.

Does Stardom Affect the Informativeness of a CEO’s Insider Trades?
Sabherwal, Sanjiv,Uddin, Mohammad Riaz
This study examines whether the celebrity or star status of a chief executive officer (CEO) affects the informativeness of his insider trades. Using three different measures to identify star CEOs in a sample of S&P 1500 firms, we find that trades of non-star CEOs predict future abnormal returns and earnings innovations and that trades of star CEOs do not. The predictive power of non-star CEO trades is mostly attributable to opportunistic trades, not routine trades. We also find evidence suggesting that the abnormal returns associated with non-star CEO insider trades are due to the lower visibility and consequently less scrutiny of non-star CEOs compared with star CEOs.

Doyoureadme? Temporal Trends in the Language Complexity of Financial Reporting
Lesmy, Danny,Muchnik, Lev,Mugerman, Yevgeny
Regulators, practitioners, and researchers are expressing growing concern over the readability of financial disclosures. Several recent regulatory guidelines are aimed specifically at simplifying the language of financial reporting in order to ensure that the reports can be read and understood by the public at large. However, quantitative scientific evidence of the evolving linguistic complexity of finance is scarce. In this work we introduce various methods for measuring the linguistic complexity of financial texts. Some of these methods rely on advanced Natural Language Processing (NLP) techniques unavailable when earlier studies were conducted. We apply these methods to decades’ worth of texts from various domains. We have found that 10-K reports have grown substantially longer, more complex and less readable. In terms of education necessary to comprehend them, this increased complexity translates to additional 2.2 years of schooling over the course of 18 years. A similar pattern of using highly complex language is also evident in financial news. The latter finding suggests that financial reality is becoming increasingly difficult to describe and explain. In contrast, the language of other corpora, including general news and scientific publications, has become more readable over the same period of time.

FinTech Challengers and Incumbents' Responses: A Window into Innovation Strategy Modes within Australia's Financial Services Sector
Gold, Martin,Ali, Paul
FinTech (financial technology) is asserted as a disruptive paradigm with digital technologies driving authentic innovation within the financial services industry. Much attention and hyperbole has been attributed to startup FinTech developers and the potential of applications for consumers of financial products and financial markets. Substantial emphasis has been given to the perceived vulnerabilities of industry incumbents facing disruption from technology-enabled platforms (‘BigTechs’) and entrepreneurial start-ups. However, institutional incumbents command large market franchises and possess deep financial and technical resources. Incumbents also have most to gain from leveraging FinTech developments. As the financial services industry is saturated with information systems, innovative technologies which have the potential to re-configure industry markets and institutional logics, inevitably confront regulatory boundaries. Given intense competition for technological advantage, strategic and corporate activity closely follows FinTech development.This article examines FinTech within Australia’s financial services sector and offshore. It provides a stringent scientific definition of the FinTech phenomenon, addressing a lacuna within the extant research. Recognising that disruptive FinTech deepens the financial services industry’s core intermediation function, it presents a taxonomy for readily locating innovations within the industry’s value chain, and assessing their transformational potential (and thus, systemic impact). Focusing upon the incumbent’s perspective, this article examines three collaboration strategies using exploratory case studies, to show how Australian financial institutions incorporate and appropriate FinTech innovations. The article discusses insights and suggestions for further research directions relevant to academics, industry participants, and policymakers.

Framework for Debating Finance with Publications and Films
Henriques-de-Brito, Marcelo
The initial goal of this work is to present a new pictorial framework with the body of knowledge for financial analysis and portfolio management, including investment instruments as well as the required fundamental and applied knowledge for financial decision making. An additional objective is to list scenes of films and publications in English sorted according to the suggested framework so as to be used with groups and engage them to discuss financial cases and issues in English, since this language is used in the financial industry worldwide. Such recommendations of films and publications target real, practical situations and circumstances accessible by audiences with various backgrounds. A further purpose of this work is to present a procedure to employ surveys during presentations with debates. Such procedure includes the suggestion of collecting answers from attendees using QR code, which enables on-line feedback of the audience using their smartphones.

Gender, Credit, and Firm Outcomes
Delis, Manthos D.,Hasan, Iftekhar,Iosifidi, Maria,Ongena, Steven
Is there a gender gap in credit demand or credit supply affecting firm performance? Using a unique sample of loan applications by small and micro enterprises, we find that, ceteris paribus, female entrepreneurs are more prudent loan applicants, who are less likely to apply (or reapply) for credit, and less likely to default after loan origination. However, more proactive behavior of male applicants pays off, yielding higher average firm performance after loan origination. We show that most of the performance gap between small male- and female-owned firms is attributed to the identified gender differences in credit demand.

Herd Behaviour in Asset Market Booms and Crashes: The Role of Monetary Policy
Micossi, Stefano,D'Onofrio, Alexandra,Peirce, Fabrizia
One important conclusion of Robert Shiller's influential 2015 book, Irrational Exuberance, is that bubbles are random exogenous phenomena that cannot be foreseen and do not depend on macroeconomic policies. This CEPR Policy Insight throws light on the root causes of speculative fevers in asset markets and related financial booms and busts. It shows empirical evidence indicating that Shiller may have overlooked the role that lax monetary policy played in triggering financial bubbles in the 2000s by offering investors a perverse promise of ever-increasing asset prices.

Implications of Money-Back Guarantees for Individual Retirement Accounts: Protection Then and Now
Horneff, Vanya,Liebler, Daniel,Maurer, Raimond,Mitchell, Olivia S.
In the wake of the financial crisis and continued volatility in international capital markets, there is growing interest in mechanisms that can protect people against retirement account volatility. This paper explores the consequences for savers’ wellbeing of implementing market-based retirement account guarantees, using a life cycle consumption and portfolio choice model where investors have access to stocks, bonds, and tax-qualified retirement accounts. We evaluate the case of German Riester plans adopted in 2002, an individual retirement account produce that includes embedded mandatory money-back guarantees. These guarantees influenced participant consumption, saving, and investment behavior in the higher interest rate environment of that era, and they have even larger impacts in a low-return world such as the present. Importantly, we conclude that abandoning these guarantees could enhance old-age consumption for over 80% of retirees, particularly lower earners, without harming consumption during the accumulation phase. Our results are of general interest for other countries implementing default investment options in individual retirement accounts, such as the U.S. 401(k) defined contribution plans and the Pan European Pension Product (PEPP) recently launched by the European Parliament.

Inference of Binary Regime Models with Jump Discontinuities
Milan Kumar Das,Anindya Goswami,Sharan Rajani

We have developed a statistical technique to test the model assumption of binary regime switching extension of the geometric L\'{e}vy process (GLP) by proposing a new discriminating statistics. The statistics is sensitive to the transition kernel of the regime switching model. With this statistics, given a time series data, one can test the hypothesis on the nature of regime switching. Furthermore, we have implemented this statistics for testing the regime switching hypothesis with Indian sectoral indices and have reported the result here. The result shows a clear indication of presence of multiple regimes in the data.

Leveraged Loans: Definition and Market Development
G. Pedraz, Carlos
Over the past decade, the volume of leveraged loans has grown to reach its highest level since the end of the crisis. Growth has been more contained in Spain, which accounted for 5% of the total volume of such lending in Europe in the period 2016-2018.The terms and conditions of leveraged loans have become less restrictive and a large proportion is distributed among institutional investors worldwide, in the form of collateralised loan obligations (CLOs).This originate-to-distribute model poses potential risks for the financial system. In the event of a cyclical downturn the losses in this market could be significant, in particular, owing to the relaxation of investor protections. In addition, given the importance of these loans as a source of corporate financing, a rise in defaults would have adverse effects on the real economy.

Meta-Analysis in Financial Economics: Opportunities, Challenges, and Contemporary Applications
Geyer-Klingeberg, Jerome,Hang, Markus,Rathgeber, Andreas
The volume of empirical research output in finance exhibits a strong upward trajectory, often producing widely varying and ambiguous results. At the same time, we observe a credibility crisis challenging the reliability and transparency of academic research. This creates demand for methods that objectively evaluate and consolidate previous empirical evidence. Meta-analysis is a statistical method to aggregate a set of prior studies, to discover and explain consistencies as well as inconsistencies within the reported results, and to detect and filter out common distorting effects due to publication bias or model misspecification. However, while meta-analysis is a standard tool for research synthesis and evidence-based decisions in many related research disciplines, like management, marketing, or economics, it has been rarely applied in finance. The goal of this paper is to provide a comprehensive overview and discussion of the opportunities of meta-analytical research in financial economics, its recent applications, as well as related challenges and limitations. Thereby, we aim at increasing the awareness and acceptance of meta-analysis in finance and stimulating its future application in the field.

Optimal Dynamic Futures Portfolio in a Regime-Switching Market Framework
Leung, Tim,Zhou, Yang
We study the problem of dynamically trading futures in a regime-switching market. Modeling the underlying asset price as a Markov-modulated diffusion process, we present a utility maximization approach to determine the optimal futures trading strategy. This leads to the analysis of the associated system of Hamilton-Jacobi-Bellman (HJB) equations, which are reduced to a system of linear ODEs. We apply our stochastic framework to two models, namely, the Regime-Switching Geometric Brownian Motion (RS-GBM) model and Regime-Switching Exponential Ornstein-Uhlenbeck (RS-XOU) model. Numerical examples are provided to illustrate the investor's optimal futures positions and portfolio value across market regimes.

Origin and Historical Evolution of Juristic Exegesis in Sub-Continent (Academic Analysis) ((نشأة التفسير الفقهي وتطوره في شبه القارة (دراسة تحليلية)
Rao, Dr. Muhammad Atif Aslam
The knowledge of Tafsīr (exegesis, commentary, interpretation) is indeed the result of pondering over Qur’ānic verses by some great scholarly men often known as Mufassirīn (exegetes). The initial instances of Tafsīr can be traced back to the glorious era of Prophet (peace and mercy be upon him). Aḥkām ul Qur’ān or juristic exegesis (Tafsīr ul fiqhī) is one of the most important field of the research in Islamic Studies. Muslim jurists specially from sub-continent have produced a remarkable juristic exegesis in the field of Quranic Studies. This research covers briefly an overview of these works done by the Mufassirin of sub-continent in the field of Juristic exegesis.

Overconfidence Among Option Traders
Chen, Han-Sheng,Sabherwal, Sanjiv
The investor overconfidence theory predicts a direct relationship between market-wide turnover and lagged market return. Whereas previous research has examined this prediction in the equity market, we focus on trading in the options market. Controlling for stock market cross-sectional volatility, stock idiosyncratic risk, and option market volatility, we find that option trading turnover is positively related to past stock market return. In addition, call option turnover and call to put ratio are also positively associated with the past stock market return. These findings are consistent with the overconfidence theory. We also find that overconfident investors trade more in the options market than in the equity market. We rule out explanations other than investor overconfidence, such as momentum trading and varying risk preferences, for our findings.

Portfolio Theory, Information Theory and Tsallis Statistics
Marco A. S. Trindade,Sergio Floquet,Lourival M. S. Filho

We developed a strategic of optimal portfolio based on information theory and Tsallis statistics. The growth rate of a stock market is defined by using $q$-deformed functions and we find that the wealth after n days with the optimal portfolio is given by a $q$-exponential function. In this context, the asymptotic optimality is investigated on causal portfolios, showing advantages of the optimal portfolio over an arbitrary choice of causal portfolios. Finally, we apply the formulation in a small number of stocks in brazilian stock market $[B]^{3}$ and analyzed the results.

Research Foundation Review 2018
Smith, Paul,Aronson, Theodore R.,Haslett, Bud,Siegel, Laurence B.,Chambers, Donald R.,Black, Keith,Lacey, Nelson J.,Kahn, Ronald N.,Ibbotson, Roger G.,Idzorek, Thomas M.,Kaplan, Paul D.,Xiong, James X.,Becker, Ying L.,Reinganum, Marc R.,Fridson, Martin S.,Miranda, Mauro Costa,Greis, Michael,Weber, Elke U.,Klement, Joachim,Pojarliev, Momtchil,Hill, Joanne M.
[The Research Foundation Review 2018 summarizes the offerings from the CFA Institute Research Foundation over the past yearâ€"books, literature reviews, workshop presentations, and other relevant material.

Shocks Implication on the Fundamental Drivers of Pan-European Equity Reits: Volatility Connectedness
Nassili, Naoufal,Simon, Arnaud,Malle, Richard
The European economic integration and the financialization of the real estate certainly brought enormous contributions for the investment in this class of asset, on the other hand, the faster propagation of the shocks and the sudden corrections of markets become serious subjects. The aim of this paper is to shed light on these invisible risks, our contribution is to unravel the mystery around the existing volatility spillovers among equity REITs. The econometric modelisation is done through the Generalized Variance Decomposition of Diebold & Yilmaz and the time-frequency dynamics framework of Barunik & Krehlik. Exchange-listed equity REITs have complex patterns of volatility since they are the nexus of two markets: the real estate and the equity market. From a sample of 42 Pan-European REITs throughout a period of 15 years spanning from 2004 to the end of 2018 and using an intra-day sampling we document several insights and findings. In the static connectedness, we did find similar results as the literature analyzing equity connectedness at stress period i.e. convergence of connectedness among the REITs. Moreover, REITs co-movements is mainly explained by the geographical aspects and commercial real estate sub-sectors. Dynamically, the source of shocks (e.g. from Monetary policy or from stock market) does not always explain the persistency of these shocks but rather how markets interpret the shocks during high-frequency intervals.

Sonic Thunder vs Brian the Snail â€" Fast-Sounding Racehorse Names and Prediction Accuracy in Betting Exchange Markets
Merz, Oliver,Flepp, Raphael,Franck, Egon P.
This paper examines the influence of objectively irrelevant information on prediction accuracy in horse-racing betting exchange markets. In horse racing, the name of a horse does not depend on the horse’s performance and is thus uninformative. We investigate the impact of fast-sounding horse names on prediction market price accuracy and betting returns. Using over 3 million horse bets, we find evidence that the winning probabilities of bets on horses with fast-sounding names are overstated, which impairs the prediction accuracy of such bets. This finding implies that the prices in betting exchange markets are not efficient, as prices become distorted by incorporating the misleading information from a horse’s fast-sounding name. This bias translates into significantly lower betting returns for horses classified as fast-sounding compared to the returns of all other horses.

Stock Market's Assessment of Monetary Policy Transmission: The Cash Flow Effect
Gürkaynak, Refet S.,Karasoy-Can, Hatice Gökce,Lee, Sang Seok
We show that firm liability structure and associated cash flow matter for firm behavior, and that financial market participants price stocks accordingly. Looking at firm level stock price changes around monetary policy announcements, we find that firms that have more cash flow exposure see their stock prices affected more. The stock price reaction depends on the maturity and type of debt issued by the firm, and the forward guidance provided by the Fed. This effect has remained intact during the ZLB period. Importantly, we show that the effect is not a rule of thumb behavior outcome and that the marginal stock market participant actually studies and reacts to the liability structure of firm balance sheets. The cash flow exposure at the time of monetary policy actions predicts future net worth, investment, and assets, verifying the stock pricing decision and also providing evidence of cash flow effects on firms’ real behavior. The results hold for S&P500 firms that are usually thought of not being subject to tight financial constraints.

The Community Reinvestment Act (Cra) and Bank Branching Patterns
Ding, Lei,Reid, Carolina
This paper examines the relationship between the Community Reinvestment Act (CRA) and bank branching patterns, measured by the risk of branch closure and the net loss of branches at the neighborhood level, in the aftermath of Great Recession. Between 2009 and 2017, there was a larger decline in the number of bank branches in lower-income neighborhoods than in more affluent ones, raising concerns about access to mainstream financial services. However, once we control for supply and demand factors that influence bank branching decisions, we find generally consistent evidence that the CRA is associated with a lower risk of branch closure, and the effects are stronger for neighborhoods with fewer branches, for larger banks, and for major metro areas. The CRA also reduces the risk of net bank losses in lower-income neighborhoods. The evidence from our analysis is consistent with the notion that the CRA helps banks meet the credit needs of underserved communities and populations by ensuring the continued presence of brick-and-mortar branches.

The Compulsory Notification Mechanism under Merger Control in China: Evaluation and Reform
Li, Jian,Hou, Liyang
The compulsory notifications for mergers transactions under the framework of antitrust law aims to remedy anti-competitive harm by blocking or conditionally approving mergers ex ante in conjunction with the deterrence effects. However, such a mechanism brings prominent costs in addition to the benefits. It is thus necessary to evaluate both the costs and benefits to implement such a mechanism to see if there is an efficient alternative. The first decade of the enforcement of China’ merger control demonstrated insufficient benefits due to the low proportion of blocked and conditional approved cases and unsatisfactory deterrence effects. In the meanwhile, the costs to implement the compulsory mechanism in China is substantially larger, including high investigation costs, high opportunity costs associated with suspended merger transactions, and high notification costs. In comparison, the voluntary notification mechanism, though superficially producing less benefits in preventing anti-competitive mergers, can significantly save implementation costs. Given the limited administrative budget and the active ex post antitrust enforcement currently ongoing in China, the voluntary mechanism is advisable to be the most feasible option for the future reform.

The Consequences of Student Loan Credit Expansions: Evidence from Three Decades of Default Cycles
Looney, Adam,Yannelis, Constantine
This paper studies the link between credit availability and student loan repayment using administrative federal student loan data. We demonstrate that expansions and contractions in federal student loan credit to institutions with high default rates explain most of the time series variation in student loan defaults between 1980 and 2010. Expansions in loan eligibility between 1976 and 1988 led to the entry of new, high-risk institutions, and default rates exceeding 30 percent in the late 1980s. Credit access was subsequently tightened through strict institutional and student accountability measures. This contracted credit availability at the highest default rate institutions, which in turn caused an exodus of institutions with high default rates, resulting in lower default rates on student loans. After 1992, the cycle was repeated, with credit access gradually loosened by unwinding many of the pre-1992 reforms. We confirm this time series narrative by examining discrete policy changes governing access to credit to show that tightening credit supply led to the closure of high-default schools and the relaxation of accountability rules resulted in their expansion. Our estimates imply that 85 percent of the increase in default between 1980 and 1990, and 95 percent of the decrease in default between 1990 and 2000 is driven by schools entering and exiting loan programs. One-third of the recent increase in default is associated with the entry of online programs following the relaxation of rules for lending to online schools, and another third is associated with the abolition of rules limiting the share of revenue coming from federal programs

The Origination and Distribution of Money Market Instruments: Sterling Bills of Exchange during the First Globalisation
Accominotti, Olivier,Lucena Piquero, Delio,Ugolini, Stefano
This paper presents a detailed analysis of how liquid money market instruments â€" sterling bills of exchange â€" were produced during the first globalisation. We rely on a unique data set that reports systematic information on all 23,493 bills re-discounted by the Bank of England in the year 1906. Using descriptive statistics and network analysis, we reconstruct the complete network of linkages between agents involved in the origination and distribution of London bills. Our analysis reveals the truly global dimension of the London bill market before the First World War and underscores the crucial role played by London intermediaries (acceptors and discounters) in overcoming information asymmetries between borrowers and lenders on this market. The complex industrial organisation of the London money market ensured that risky private debts could be transformed into extremely liquid and safe monetary instruments traded throughout the global financial system.

The Role of Chinese Economic Variables on the Australian and New Zealand Equity Returns
Ge, Yongbo,Wu, Ji (George),Zhang, Jing,Zou, Liping
This study investigates the explanatory power of Chinese economic variables on the Australian and New Zealand equity returns. Results suggest that Chinese economic variables have significant explanatory power for both market-level and industry-level portfolio returns. Our results are robust when using the Principal Component Analysis (PCA) approach. We also find the predictive power is stronger for the post-FTA period. In addition, the out-of-sample analysis confirms our previous results, suggesting that Chinese economic variables contain incremental information when estimating Australian and New Zealand equity market returns. We believe our findings have important implications for investors and policymakers in both countries.

The Wall Street Stampede: Exit As Governance with Interacting Blockholders
Cvijanovic, Dragana,Dasgupta, Amil,Zachariadis, Konstantinos E.
In firms with multiple blockholders governance via exit is affected by how blockholders react to each others' exit. Institutional investors, who hold the majority of equity blocks, are heterogeneous in their incentives. How do these incentives affect the manner in which institutional blockholders respond to each others' exit? We present a model that shows that open-ended institutional investors, who are subject to investor redemption risk, will be sensitive to an informed blockholder's exit, giving rise to correlated exits and strengthening governance. Thus, exposure to redemption risk, universally a negative force in asset pricing, plays a positive role in corporate governance. Using data on engagement campaigns by activist hedge funds we present large-sample evidence consistent with our theoretical mechanism.

What Drives Inventory Accumulation? News on Rates of Return and Marginal Costs
Görtz, Christoph,Gunn, Christopher,Lubik, Thomas
We study the effects of news shocks on inventory accumulation in a structural VAR framework. We establish that inventories react strongly and positively to news about future increases in total factor productivity. Theory suggests that the transmission channel of news shocks to inventories works through movements in marginal costs, through movements in sales, or through interest rates. We provide evidence that changes in external and internal rates of return are central to the transmission for such news shocks. We do not find evidence of a strong substitution effect that shifts production from the present into the future.