Research articles for the 2019-11-11
SSRN
We study the stock market reactions to the Tax Cuts and Jobs Act (TCJA), the most significant structural tax reform in over 30 years. We find that the TCJA benefited highly-taxed firms but hindered firms with international operations and those with high interest expense and tax losses. Moreover, financially constrained and high growth opportunity firms did not benefit. Rather, market participants anticipate that most of the TCJA’s benefits will be passed on to shareholders via higher corporate payouts. We confirm these market expectations by documenting that firms did increase payouts via repurchases after the TCJA, but did not increase their corporate investments.
arXiv
This paper analyses the interaction between centralised carbon emissive technologies and distributed intermittent non-emissive technologies. In our model, there is a representative consumer who can satisfy her electricity demand by investing in distributed generation (solar panels) and by buying power from a centralised firm at a price the firm sets. Distributed generation is intermittent and induces an externality cost to the consumer. The firm provides non-random electricity generation subject to a carbon tax and to transmission costs. The objective of the consumer is to satisfy her demand while mini\-mising investment costs, payments to the firm and intermittency costs. The objective of the firm is to satisfy the consumer's residual demand while minimising investment costs, demand deviation costs, and maximising the payments from the consumer. We formulate the investment decisions as McKean-Vlasov control problems with stochastic coefficients. We provide explicit, price model-free solutions to the optimal decision problems faced by each player, the solution of the Pareto optimum, and the Stackelberg equilibrium where the firm is the leader. We find that, from the social planner's point of view, the carbon tax or transmission costs are necessary to justify a positive share of distributed capacity in the long-term, whatever the respective investment costs of both technologies are. The Stackelberg equilibrium is far from the Pareto equilibrium and leads to an over-investment in distributed energy and to a much higher price for centralised energy.
SSRN
Although prior work indicates that insider purchases signal undervaluation, there is scant evidence about what specific information such purchases convey, or what determines the extent of the undervaluation. Our theory explains the nature of the information conveyed by insider purchases, their incidence, and their signaling value. We argue that, conditional on information asymmetry, open market purchases occur when they plausibly signal that risk averse, undiversified insiders are willing to bear incremental wealth risk. Our tests account for limits to the public observability of insiders’ wealth and show, consistent with our predictions, that insider purchases are more frequent and informative in higher-risk contexts which we define, alternatively, as firms with higher fundamental risk (e.g., small, high book-to-market, high volatility firms), firms experiencing riskier circumstances (e.g., poor financial and market performance, low reporting credibility), and firms where insiders’ are exposed to higher risk as a result of their compensation contracts and ownership (e.g., option and share holdings, employment horizon). Further, exploiting our prediction that the signaling value of purchases depends on the increase in the insider’s wealth risk that is inferred by investors, we show that strategies based on linear combinations of the high-risk facets of these factors magnify the abnormal returns to strategies mimicking insider purchases by a factor of two to three. Finally, our results are robust to considering opportunistic/routine partitions of the sample, suggesting that insider purchases are largely strategic.
arXiv
As Mobility as a Service (MaaS) systems become increasingly popular, travel is changing from unimodal trips to personalized services offered by a market of mobility operators. Traditional traffic assignment models ignore the interaction of different operators. However, a key characteristic of MaaS markets is that urban trip decisions depend on both user route decisions as well as operator service and pricing decisions. We adopt a new paradigm for traffic assignment in a MaaS network of multiple operators using the concept of stable matching to allocate costs and determine prices offered by operators corresponding to user route choices and operator service choices without resorting to nonconvex bilevel programming formulations. Unlike our prior work, the proposed model allows travelers to make multimodal, multi-operator trips, resulting in stable cost allocations between competing network operators to provide MaaS for users. Algorithms are proposed to generate stability conditions for the stable outcome pricing model. Extensive computational experiments demonstrate the use of the model, and effectiveness of the proposed algorithm, to handling pricing responses of MaaS operators in technological and capacity changes, government acquisition, consolidation, and firm entry, using the classic Sioux Falls network.
arXiv
We describe a post hoc test for the Sharpe ratio, analogous to Tukey's test for pairwise equality of means. The test can be applied after rejection of the hypothesis that all population Signal-Noise ratios are equal. The test is applicable under a simple correlation structure among asset returns. Simulations indicate the test maintains nominal type I rate under a wide range of conditions and is moderately powerful under reasonable alternatives.
SSRN
Short sell bans are often imposed during a financial crisis as a desperate measure to stabilize financial markets. Yet, the impact of short sell bans on option pricing and hedging is not well quantitatively studied until very recently when Guo and Zhu (2017) and He and Zhu (2018) formulated a new pricing framework with the underlying being either completely or partially banned from short selling. However, no empirical results were provided to substantiate the usefulness of the formulae, as well as to deepen our understanding on the effects of short sell bans. This paper provides a comprehensive empirical study on the effects of short sell bans to the standard option pricing theory by carrying out both cross-sectional and options time series model calibration of the model devised by He and Zhu (2018). Overall, our empirical results indicate that the alternative option pricing formula considering short sell restrictions has the ability to capture highly-quoted implied volatility, with an evident improvement of 39% out-of-sample performance compared to the benchmark Black-Scholes model during the period of short sell ban.
SSRN
I present a model of cryptocurrency price formation that endogenizes both the financial market for coins and the fee-based market for blockchain space. A cryptocurrency has two distinct features: a price determined by the extent of its usage as money, and a blockchain structure that restricts settlement capacity. Limited settlement space creates competition between users of the currency, so speculative activity can crowd out monetary usage. This crowding-out undermines the ability of a cryptocurrency to act as a medium of payment, lowering its value. Higher speculative demand can reduce prices, contrary to standard economic models. Crowding-out also raises the riskiness of investing in cryptocurrency, explaining high observed price volatility.
SSRN
Climate finance is the study of local and global financing of public and private investment that seeks to support mitigation of and adaptation to climate change. In 2017, the Review of Financial Studies launched a competition among scholars to develop research proposals on the topic with the goal of publishing this special volume. We describe the competition, how the nine projects featured in this volume came to be published, and frame their findings within what we view as a broader climate finance research program.
SSRN
Existence and implications of credit rationing by lending institutions have been the subject of much research in recent decades. Although there are some empirical indications, there is no theoretical justification about how various forms of credit rationing manifest themselves in credit markets. This study offers a theoreti- cal decomposition of credit rationing within a model of equilibrium credit rationing that generalizes some of seminal models of equilibrium credit rationing. The study first theoretically establishes three distinct components of rationing, namely, low-type rationing, market-tightness rationing, and self-imposed rationing, and then exhibits empirical evidence on the magnitude of each of the three rationing components using a bi-annual survey data set on various forms of bank credit rationing collected by European Central Bank over the period 2009-2018.
SSRN
Home Bias refers to the tendency to invest more heavily in one’s domestic equity market than global market-value proportions would suggest. Whether or not home-biased investing makes sense, the fact is that people in pretty much every country do it. This article addresses the question of whether if everyone’s doing it, does it matter? Or if everyone equally over-weights their domestic market does it all wash out, with the over-weights cancelling out the under-weights? We propose a simple model to answer this question, which produces surprising results.
arXiv
We obtain a dual representation of the Kantorovich functional defined for functions on the Skorokhod space using quotient sets. Our representation takes the form of a Choquet capacity generated by martingale measures satisfying additional constraints to ensure compatibility with the quotient sets. These sets contain stochastic integrals defined pathwise and two such definitions starting with simple integrands are given. Another important ingredient of our analysis is a regularized version of Jakubowski's $S$-topology on the Skorokhod space.
arXiv
This study explores the time-varying structure of market efficiency on the prewar Japanese stock market based on Lo's (2004) adaptive market hypothesis (AMH). In particular, we measure the time-varying degree of market efficiency using new datasets of the stock price index estimated by Hirayama (2017a,b, 2018, 2019a). The empirical results show that (1) the degree of market efficiency in the prewar Japanese stock market varied with time and that its variation corresponded with major historical events, (2) Lo's (2004) AMH is supported in the prewar Japanese stock market, (3) the difference in market efficiency between the old/new TSE shares and the EQPI depends on the manner in which the price index is constructed, and (4) the price control policy beginning in the early 1930s suppressed price volatility and improved market efficiency.
arXiv
What is motivation and how does it work? Where do goals come from and how do they vary within and between species and individuals? Why do we prefer some things over others? MEDO is a theoretical framework for understanding these questions in abstract terms, as well as for generating and evaluating specific hypotheses that seek to explain goal-oriented behavior. MEDO views preferences as selective pressures influencing the likelihood of particular outcomes. With respect to biological organisms, these patterns must compete and cooperate in shaping system evolution. To the extent that shaping processes are themselves altered by experience, this enables feedback relationships where histories of reward and punishment can impact future motivation. In this way, various biases can undergo either amplification or attenuation, resulting in preferences and behavioral orientations of varying degrees of inter-temporal and inter-situational stability. MEDO specifically models all shaping dynamics in terms of natural selection operating on multiple levels--genetic, neural, and cultural--and even considers aspects of development to themselves be evolutionary processes. Thus, MEDO reflects a kind of generalized Darwinism, in that it assumes that natural selection provides a common principle for understanding the emergence of complexity within all dynamical systems in which replication, variation, and selection occur. However, MEDO combines this evolutionary perspective with economic decision theory, which describes both the preferences underlying individual choices, as well as the preferences underlying choices made by engineers in designing optimized systems. In this way, MEDO uses economic decision theory to describe goal-oriented behaviors as well as the interacting evolutionary optimization processes from which they emerge. (Please note: this manuscript was written and finalized in 2012.)
SSRN
The general Pareto distribution (GPD) has been widely used a lot in the extreme value for example to model exceedance over a threshold. Feature of The GPD that when applied to real data sets depends substantially and clearly on the parameter estimation process. Mostly the estimation is preferred by maximum likelihood because have a consistent estimator with lowest bias and variance. The objective of the present study is to develop efficient estimation methods for the maximum likelihood estimator for the shape parameter or extreme value index. Which based on the numerical methods for maximizing the log-likelihood by introduce an algorithm for computing maximum likelihood estimate of The GPD parameters. Finally, a numerical examples are given to illustrate the obtained results, they are carried out to investigate the behavior of the method.
arXiv
We consider a price-maker company which generates electricity and sells it in the spot market. The company can increase its level of installed power by irreversible installations of solar panels. In absence of the company's economic activities, the spot electricity price evolves as an Ornstein-Uhlenbeck process, and therefore it has a mean-reverting behavior. The current level of the company's installed power has a permanent impact on the electricity price and affects its mean-reversion level. The company aims at maximizing the total expected profits from selling electricity in the market, net of the total expected proportional costs of installation. This problem is modeled as a two-dimensional degenerate singular stochastic control problem in which the installation strategy is identified as the company's control variable. We follow a guess-and-verify approach to solve the problem. We find that the optimal installation strategy is triggered by a curve which separates the waiting region, where it is not optimal to install additional panels, and the installation region, where it is. Such a curve depends on the current level of the company's installed power, and is the unique strictly increasing function which solves a first-order ordinary differential equation (ODE). Finally, our study is complemented by a numerical analysis of the dependency of the optimal installation strategy on the model's parameters.
SSRN
Which components of the order flow convey information and signal toxicity? We empirically show that the net flow of non-marketable orders conveys more information than the widely used trade-initiator-based order imbalance. The net order flow by HFTs rapidly loses information content with time aggregation, consistent with these traders trading on short-lived valuable signals. Updates of standing limit orders, mostly due to HFT, carry information beyond order submissions, suggesting that HFTs’ flickering quotes primarily reflect active risk management rather than manipulative practices. Finally, we find that the HFTs’ order flow, both marketable and non-marketable, signals toxicity, while the non-HFTs’ order flow does not. We conclude that market authorities should track the HFTs’ order flow at or near the best quotes to develop effective leading indicators of order flow toxicity and circuit breaking mechanisms.
SSRN
We find that firms reduce net debt issuance (NDI, hereafter) when industry peers with the same credit rating were downgraded in the previous year, as opposed to an average NDI increase among all firms. This finding is consistent with the considerations of competition and contagion associated with relative strengths and weaknesses in credit quality. The peer effect on NDI reduction is ubiquitous across both speculative- and investment-grade firms, but is particularly strong for small size firms with speculative-grade ratings, and firms operating in concentrated industries, and in times when the economy is in expansion or outside financial crises. We also find that firms reduce leverage when their ratings are lower than the industry average, and that peer firms’ rating effects remain strong even when controlling for the lower-than-average effect.
SSRN
Established risk-adjusted investment performance measures such as the Sharpe, the Sortino or the Calmar Ratio have been developed with an exclusive focus on the mutual and hedge fund industries. Consequently, they are less suited for liability-driven investors such as life insurance companies, whose portfolio choice is materially affected by the substantial interest rate sensitivity of their long-term contractual obligations. In order to tackle this limitation, we introduce the Asset-Liability Sharpe Ratio, which is theoretically motivated, computable based on publicly-available data, incentive compatible, and relevant. Hence, it should be a valuable new tool for performance assessment in the life insurance industry.
arXiv
The probability of default (PD) estimation is an important process for financial institutions. The difficulty of the estimation depends on the correlations between borrowers. In this paper, we introduce a hierarchical Bayesian estimation method using the beta binomial distribution and consider a multi-year case with a temporal correlation. A phase transition occurs when the temporal correlation decays by power decay. When the power index is less than one, the PD estimator does not converge. It is difficult to estimate the PD with limited historical data. Conversely, when the power index is greater than one, the convergence is the same as that of the binomial distribution. We provide a condition for the estimation of the PD and discuss the universality class of the phase transition. We investigate the empirical default data history of rating agencies and their Fourier transformations to confirm the form of the correlation decay. The power spectrum of the decay history seems to be 1/f, which corresponds to a long memory. But the estimated power index is much greater than one. If we collect adequate historical data,the parameters can be estimated correctly.
SSRN
In this paper, we investigate a two-factor VIX model with infinite-activity jumps, which is a more realistic way to reduce errors in pricing VIX derivatives, compared with Menc\'ia and Sentana (2013). Our two-factor model features central tendency, stochastic volatility and infinite-activity pure jump L\'evy processes which include the variance gamma (VG) and the normal inverse Gaussian (NIG) processes as special cases. We find empirical evidence that the model with infinite-activity jumps is superior to the models with finite-activity jumps, particularly in pricing VIX options. As a result, infinite-activity jumps should not be ignored in pricing VIX derivatives.
arXiv
In this paper we present formulas for the valuation of debt and equity of firms in a financial network under comonotonic endowments. We demonstrate that the comonotonic setting provides a lower bound and Jensen's inequality provides an upper bound to the price of debt under Eisenberg-Noe financial networks with consistent marginal endowments. Such financial networks encode the interconnection of firms through debt claims. The proposed pricing formulas consider the realized, endogenous, recovery rate on debt claims. Special consideration is given to the CAPM setting in which firms invest in correlated portfolios; in the comonotonic framework this corresponds to the setting in which firms only invest in a risk-free bond and a common risky asset following a geometric Brownian motion.
arXiv
This paper aims to explore the mechanical effect of a company's share repurchase on earnings per share (EPS). In particular, while a share repurchase scheme will reduce the overall number of shares, suggesting that the EPS may increase, clearly the expenditure will reduce the net earnings of a company, introducing a trade-off between these competing effects. We first of all review accretive share repurchases, then characterise the increase in EPS as a function of price paid by the company. Subsequently, we analyse and quantify the estimated difference in earnings growth between a company's natural growth in the absence of buyback scheme to that with its earnings altered as a result of the buybacks. We conclude with an examination of the effect of share repurchases in two cases studies in the US stock-market.
arXiv
An investigation is presented of how a comprehensive choice of four most important measures of concordance (namely Spearman's rho, Kendall's tau, Spearman's footrule, and Gini's gamma) relate to the fifth one, i.e., the Blomqvist's beta. In order to work out these results we present a novel method of estimating the values of the four measures of concordance on a family of copulas with fixed value of beta. These results are primarily aimed at the community of practitioners trying to find the right copula to be employed on their data. However, the proposed method as such may be of independent interest from theoretical point of view.
SSRN
Using a novel collection of market characteristics from 40 countries, this paper test competing explanations behind five major anomalies classified in Hou, Xue, and Zhang (2015): momentum, value-growth, investment, profitability, and trading frictions. Results show that anomaly returns highly correlate with proxies for market efficiency, investor protection, limits-to-arbitrage, and investor irrationality. New to existing studies, results favor a limits-to-arbitrage explanation for momentum effect, and a mispricing explanation for value-growth and investment effects. Results also suggest that profitability effect may be a result of both rational risk pricing and market inefficiency while remain silent on the cause of trading frictions effect. These findings have new implications on return predictability in both U.S. and international markets.
SSRN
CCPs are planning a big bang approach for the change of PAI from EFFR to SOFR. This note describes the planned compensation mechanism from a quantitative perspective. The note also contain my reasoning on why this approach does not appear the best to achieve the transition and the valuation issues it represents.
SSRN
We show that public suppliers extend more trade credit than their private counterparts. The impact of stock market listing on accounts receivable is more pronounced among firms that are financially more constrained or more reliant on external finance. Moreover, firms significantly increase their trade credit provision following equity issuances in stock exchanges. These results are consistent with the argument that stock market listing status improves firms’ access to external sources of financing, especially equity capital, thus enhancing their ability to offer more trade credit to customers.
SSRN
This paper examines the impact of capital income taxation on the composition of foreign portfolio investment. Studying bilateral portfolio positions among a sample of 37 countries over the period 2001-2015, we find that capital gains and dividend taxation reduce the share of equities in foreign investments, while interest taxation increases this share. The results suggest that domestic capital income taxation affects the worldwide asset allocation of domestic investors. The estimated tax sensitivities imply a significant increase in country’s external wealth following a tax policy change that stimulates investors to hold higher-yielding equity investments.
SSRN
This research aims to investigate whether the stress-testing exercises affect credit supply, banks’ profitability and risk-taking behaviour. The granular confidential supervisory data of Euro Area banks allows for a quasi-natural experiment to identify this impact with a difference-in-differences matching estimator. We find that, as a consequence of the 2016 stress-testing exercises, treated banks increase their capital ratios by reducing their lending and risk-taking to households and non-financial corporates, implying a decrease in banks' profitability. Results support the hypothesis that the implementation of the stress-testing framework could have a positive disciplining effect by reducing banks' risk-taking while having also an adverse impact on the real economy through a temporary decrease in credit supply and profitability. Results are stable for different specifications and were validated by the parallel trend test and a supplementary regression approach. In addition, we provide an analysis focused on stress-testing results publicly available (versus not available), suggesting that the disclosure of the stress test results reinforces the supervisory and market discipline.
SSRN
We study the political economy of allocation decisions within a major state investment bank. Our focus is the European Investment Bank (EIB) - "The Bank of the EU" - which is the largest multilateral lending (and borrowing) institution in the world. We collect (and make available) information on the regions of origin of about 500 national representatives at the EIB's Board of Directors - the decisive body for loan approvals - since its foundation in 1959 and show that a representative's appointment increases the probability of her sub-national region receiving a loan by about 17 percentage points. This "home-bias" effect is driven by large loans financing infrastructure projects. We provide several pieces of evidence, which are consistent with the hypothesis that home-bias lending may lead to resource misallocation, however we cannot conclusively demonstrate this case of economic inefficiency.
arXiv
We study how news personalization affects policy polarization. In a two-candidate electoral competition model, an attention-maximizing infomediary aggregates information about candidate valence into news, whereas voters decide whether to consume news, trading off the expected utility gain from improved expressive voting against the attention cost. Broadcast news attracts a broad audience by offering a symmetric signal. Personalized news serves extreme voters with skewed signals featuring own-party bias and occasional big surprise. Rational news aggregation yields policy polarization even if candidates are office-motivated. Personalization makes extreme voters the disciplining entity for equilibrium polarization and increases polarization through occasional big surprise.
SSRN
Purpose â€" Financial ratios are an instrumental tool in the world of finance and hence comprehensive knowledge of its various aspects is mandated for its user. This study aims at providing the aforesaid comprehensive knowledge by highlighting the areas in which ratios can be used, limitation of ratios and methods to deal with the limitation.Design/methodology/approach â€" The study is qualitative in nature and thus utilizes the past studies and researches to exhibit the various facets of financial ratios. The study incorporates all the researches that have used ratios as a tool for their study or ratios as the subject matter of study.Findings â€" The study was able to identify and categorise past studies into areas of Financial evaluation, Insolvency Prediction, Valuation, Inter-linkage studies, Benchmarking & Decision making, Technical Analysis. Limitations of ratios identified from the literature are Proliferation of ratios, Lack of Normality and Accounting framework impact.Originality/value â€" The study has assimilated unique exhaustive literature on financial ratios and presented the same in a categorized manner.
SSRN
Russian Abstract: иÑÑледуютÑÑ Ð¿Ñ€Ð¾Ð±Ð»ÐµÐ¼Ñ‹, возникающие при внеÑении вопроÑов в повеÑтку Ð´Ð½Ñ Ð¾Ð±Ñ‰ÐµÐ³Ð¾ ÑÐ¾Ð±Ñ€Ð°Ð½Ð¸Ñ Ð°ÐºÑ†Ð¸Ð¾Ð½ÐµÑ€Ð¾Ð² и выдвижении кандидатов Ð´Ð»Ñ Ð¸Ð·Ð±Ñ€Ð°Ð½Ð¸Ñ Ð² органы общеÑтва. Ð' чаÑтноÑти , что означает ÑовмеÑтное выдвижение кандидатов в органы общеÑтва, неÑколькими акционерами, возможен ли отзыв выдвинутого кандидата и замена его другим кандидатом, правовые поÑледÑÑ‚Ð²Ð¸Ñ Ð¾Ñ‚ÑутÑÑ‚Ð²Ð¸Ñ ÑоглаÑÐ¸Ñ ÐºÐ°Ð½Ð´Ð¸Ð´Ð°Ñ‚Ð° и «Ñамоотвод» кандидата, можно ли в уÑтаве общеÑтва уÑтанавливать дополнительные Ñ‚Ñ€ÐµÐ±Ð¾Ð²Ð°Ð½Ð¸Ñ Ðº кандидатам в органы общеÑтва, правовое значение даты внеÑÐµÐ½Ð¸Ñ Ð¿Ñ€ÐµÐ´Ð»Ð¾Ð¶ÐµÐ½Ð¸Ñ Ð¸ даты поÑÑ‚ÑƒÐ¿Ð»ÐµÐ½Ð¸Ñ Ð¿Ñ€ÐµÐ´Ð»Ð¾Ð¶ÐµÐ½Ð¸Ñ Ð² повеÑтку Ð´Ð½Ñ Ð¾Ð±Ñ‰ÐµÐ³Ð¾ ÑобраниÑ, ограничение права акционера на внеÑение вопроÑов в повеÑтку общего ÑÐ¾Ð±Ñ€Ð°Ð½Ð¸Ñ Ð°ÐºÑ†Ð¸Ð¾Ð½ÐµÑ€Ð¾Ð².English Abstract: The problems that arise when making questions on the agenda of the general meeting of shareholders and nominating candidates for election to the company’s bodies are investigated. In particular, what does it mean to jointly nominate candidates to the company’s bodies, by several shareholders, is it possible to recall the nominated candidate and replace him with another candidate, the legal consequences of the lack of consent of the candidate and “self-withdrawal†of the candidate, can additional requirements for candidates to the company’s bodies be established in the company's charter, the legal value of the date of the proposal and the date of receipt of the proposal on the agenda of the general meeting, limitation of the shareholder’s right to include issues on the agenda of the general meeting.
