Research articles for the 2019-11-13

A Behavioral Approach of The Expectations Hypothesis of the Term Structure of Interest Rates
Bidias Menik, Hans Patrick,Kamdem, David
In its classical formulation, the expectation hypothesis suggests that the long term rate is a portfolio of current short rate and the expected short rates along the maturity of the long term rate. These short rates (current and expected) are supposed to have the same weight. In this study, we examine what will happen if we consider a theoretical model of the term structure of interest rates where, in the investors mind, as a consequence of some behavioral bias including anchoring and overconfidence, the short interest rates (current and expected) do not have the same weight, tough they still describe the long rate as a portfolio. The theoretical model developed was tested on US T-Bill secondary market data. The monthly rates of three months, six months and twelve months were used over the period from January 2010 to May 2017. The results show clearly that, while the long rate can be consider as a portfolio of shorts rates, the current short rate is overweighed by market participants, confirming the anchoring bias. Nevertheless, having in mind that agents are more preoccupied by interest rate variation direction than it absolute level, the policy maker in US should consider agents expectations for the short run while conducting the monetary policy.

A Study of Post-Demonetization Impact of Limited-Cash Retailing in Uttarakhand, India
Kandpal, Vinay,Mehrotra, Rajat,Gupta, Sumeet
Purpose of Study: The paper aims to assess the new face of retailing after demonetization with specific focus to the role of financial intermediaries and it also focuses on Long term solutions to drive the digital cash enabled retailing in India. Methodology: This study used a questionnaire for data collection among 250 retailers in Uttarakhand, India. The questionnaire was later on analyzed using SPSS. Qualitative data was gathered from the interview with the officials from 100 financial intermediaries from banks. Findings: The Indian retail market has been fostered by the cash dealings. The step of demonetization caught the black marketers, retailers and common people by surprise. The move was supported by the majority of people despite facing difficulties. After the demonetization, people started using the adoption of different forms of digital payment options. The trade in the market was affected and the retail sales witnessed a severe dip. The market is recovering but the actual recovery will depend on devising the substitute for the cash payments at all levels of retailers. Social implications: Financial inclusion is important for inclusive growth and bank to have a crucial role to play in financial literacy campaigns and should ensure that those deprived sections that come to exchange their old notes are properly taken care of. Banks could make unbanked people aware about the financial instruments available with banks and the importance of saving and putting their money in these instruments. This step would further help the economy move from unorganized to organized sector. The originality of Study: This study is original and first of its kind conducted in Uttarakhand, India.

A two-player price impact game
Moritz Voß

We study the competition of two strategic agents for liquidity in the benchmark portfolio tracking setup of Bank, Soner, Voss (2017), both facing common aggregated temporary and permanent price impact \`a la Almgren and Chriss (2001). The resulting stochastic linear quadratic differential game with terminal state constraints allows for an explicitly available open-loop Nash equilibrium in feedback form. Our results reveal how the equilibrium strategies of the two players take into account the other agent's trading targets: either in an exploitative intent or by providing liquidity to the competitor, depending on the ratio between temporary and permanent price impact. As a consequence, different behavioral patterns can emerge as optimal in equilibrium. These insights complement existing studies in the literature on predatory trading models examined in the context of optimal portfolio liquidation problems.

An Unethical Optimization Principle
Nicholas Beale,Heather Battey,Anthony C. Davison,Robert S. MacKay

If an artificial intelligence aims to maximise risk-adjusted return, then under mild conditions it is disproportionately likely to pick an unethical strategy unless the objective function allows sufficiently for this risk. Even if the proportion ${\eta}$ of available unethical strategies is small, the probability ${p_U}$ of picking an unethical strategy can become large; indeed unless returns are fat-tailed ${p_U}$ tends to unity as the strategy space becomes large. We define an Unethical Odds Ratio Upsilon (${\Upsilon}$) that allows us to calculate ${p_U}$ from ${\eta}$, and we derive a simple formula for the limit of ${\Upsilon}$ as the strategy space becomes large. We give an algorithm for estimating ${\Upsilon}$ and ${p_U}$ in finite cases and discuss how to deal with infinite strategy spaces. We show how this principle can be used to help detect unethical strategies and to estimate ${\eta}$. Finally we sketch some policy implications of this work.

Are Crowded Crowds Still Wise? Evidence from Financial Analysts' Geographic Diversity
Gerken, William Christopher,Painter, Marcus
We study the effect of geographically diverse information on sell-side research analysts' individual and consensus forecasts. Using data from satellite images of parking lots of US retailers, we first document that the car counts contain valuable information in aggregate. However, analysts tend to overweight their own forecast in the direction of local car counts relative to other analysts covering the same firm at the same time but in different locations. We find when firms have more geographically concentrated analyst coverage the consensus forecast error is higher, even after controlling for the number of analysts. Analyses using within-firm variation and exogenous shocks in geographic coverage due to brokerage closures suggest this relation is causal.

Banker Compensation, Relative Performance, and Bank Risk
Jarque, Arantxa,Prescott, Edward S.
A multi-agent, moral-hazard model of a bank operating under deposit insurance and limited liability is used to analyze the connection between compensation of bank employees (below CEO) and bank risk. Limited liability with deposit insurance is a force that distorts effort down. However, the need to increase compensation to risk-averse employees in order to compensate them for extra bank risk is a force that reduces this effect. Optimal contracts use relative performance and are implementable as a wage with bonuses tied to individual and firm performance. The connection between pay for performance and bank risk depends on correlation of returns. If employee returns are uncorrelated, the form of pay is irrelevant for risk. If returns are perfectly correlated, a low wage can indicate risk. Connections to compensation regulation and characteristics of organizations are discussed.

Beveridgean Unemployment Gap
Pascal Michaillat,Emmanuel Saez

This paper measures the unemployment gap (the difference between actual and efficient unemployment rates) using the Beveridge curve (the negative relationship between unemployment and job vacancies). We express the unemployment gap as a function of current unemployment and vacancy rates, and three sufficient statistics: elasticity of the Beveridge curve, recruiting cost, and nonpecuniary value of unemployment. In the United States, we find that the efficient unemployment rate started around 3% in the 1950s, steadily climbed to almost 6% in the 1980s, fell just below 4% in the early 1990s, and remained at that level until 2019. These variations are caused by changes in the level and elasticity of the Beveridge curve. Hence, the US unemployment gap is almost always positive and highly countercyclical---indicating that the labor market tends to be inefficiently slack, especially in slumps.

Bitcoin Coin Selection with Leverage
Daniel J. Diroff

We present a new Bitcoin coin selection algorithm, "coin selection with leverage", which aims to improve upon cost savings than that of standard knapsack like approaches. Parameters to the new algorithm are available to be tuned at the users discretion to address other goals of coin selection. Our approach naturally fits as a replacement for the standard knapsack ingredient of full coin selection procedures.

Bounds on Multi-asset Derivatives via Neural Networks
Luca De Gennaro Aquino,Carole Bernard

Using neural networks, we compute bounds on the prices of multi-asset derivatives given information on prices of related payoffs. As a main example, we focus on European basket options and include information on the prices of other similar options, such as spread options and/or basket options on subindices. We show that, in most cases, adding further constraints gives rise to bounds that are considerably tighter and discuss the maximizing/minimizing copulas achieving such bounds. Our approach follows the literature on constrained optimal transport and, in particular, builds on a recent paper by Eckstein and Kupper (2019, Appl. Math. Optim.).

Context-aware Dynamic Assets Selection for Online Portfolio Selection based on Contextual Bandit
Mengying Zhu,Xiaolin Zheng,Yan Wang,Yuyuan Li,Qianqiao Liang

Online portfolio selection is a sequential decision-making problem in financial engineering, aiming to construct a portfolio by optimizing the allocation of wealth across a set of assets to achieve the highest return. In this paper, we present a novel context-aware dynamic assets selection problem and propose two innovative online portfolio selection methods named Exp4.ONSE and Exp4.EGE respectively based on contextual bandit algorithms to adapt to the dynamic assets selection scenario. We also provide regret upper bounds for both methods which achieve sublinear regrets. In addition, we analyze the computational complexity of the proposed algorithms, which implies that the computational complexity can be significantly reduced to polynomial time. Extensive experiments demonstrate that our algorithms have marked superiority across representative real-world market datasets in term of efficiency and effectiveness.

Customers’ Perceptions of Selection Criteria Used by Islamic Bank Customers in Sudan: The Importance of Shariah Compliance
Mansour, Ilham Hassan Fathelrahman
This paper attempts to investigate the importance of Shariah compliance compared to other criteria that influence the selection of Islamic banks in Sudan, a total Islamic banking system in which the “Islamic” variable is supposed to be constant. Primary data collected by self-administered questionnaires distributed to a sample of 393 respondents from bank locations in the capital of Khartoum state. The perceptions on the importance of choice criteria ranked by the respondents were analyzed using mean analysis and independent t-test. Exploratory factor analysis is employed to provide a more holistic view of the bank choice criteria. The customers of Sudanese Islamic banks prioritized Shariah compliance factors over another selection criterion. We conclude that although all banks work under the Islamic system, consumers were most concerned with the extent to which their bank services are adhering to Islamic principles. Other factors deemed important were “Experience and third-party influence”, followed by staff competency, convenience, service quality, bank reputation, and customer care. Most studies have focused on countries with mixed conventional and Islamic banking systems (Arab and other Muslim countries). This study aims to contribute to the development of a better understanding of the determinants of Islamic bank selection in Sudan, an Arab African country characterized by a strong Islamic culture and a total Islamic banking system.

Decomposing the Volatility Effect
Ehsani, Sina
A low variance (LV) strategy is a cross-sectional bet against variance plus a collection of time-series bets against common risk factor variances. I characterize and measure both components and show that the former produces profits while the latter generates volatility. The undesirable factor risk bets, however, secure the anomaly’s existence by acting as limits to arbitrage. LV earns alpha only when traders have to bear major factor risk to arbitrage it away. In other timesâ€"when low variance means low factor riskâ€"the cross-section does not exhibit mispricing. My results are consistent with models that rationalize anomalies by arbitrageurs reluctance to eliminate mispricing due to factor risk aversion. I use the findings to develop a dynamic strategy that instruments variance return trade-off of common factors in time-series to trade variance in the cross-section.

Determinant Factors of Consumers’ Bank Selection Decision in Sudan
Mansour, Ilham Hassan Fathelrahman
The purpose of this study is to identify the key determinant of the bank selection decision by Sudanese banks’ customers. The motivation for this paper is the lack of research that empirically studied bank selection criteria that influence customers' selection decisions on banking services in Sudan. Data were collected using self-administered questionnaires to a sample of 253 of Banks customers in Khartoum State. Their responses on the importance of 22 different selection criteria were rated and analyzed. Mean analysis and exploratory factor analysis is applied to rank the most important determinants of bank selection. The main results concluded that Corporal Efficiency is the most important determinant that has influenced the customer's selection decision. Other factors perceived to be important include bank marketing efforts, convenience and service delivery. Research on determinant factors of consumers’ bank selection decision is scarce in Sudan. This study contributes in that direction.

Do Analysts Cater to Investor Information Demand?
Hossain, Md Miran,Jansen, Benjamin,Taylor, Jon
We extend the literature by investigating whether analysts cater their coverage to investor information demand. Results suggest that analysts’ coverage is contemporaneously positively associated with investor information demand, and negatively associated with the previous time periods information demand. However, the magnitude of the contemporaneous positive association is greater than the magnitude of the proceeding negative association. This implies analyst following significantly increases on firms which have more retail and institutional information demand, but partially revert their coverage after the information demand shock. Furthermore, results suggest that analysts cater their coverage more towards institutional investors, relative to retail investors. These results suggest that analysts focus their coverage on companies that have garnered the most interest from investors, thus potentially maximizing the utility of the information the analyst disseminates.

Does the Value Premium Decline with Investor Interest in Value?
Löffler, Gunter
I approximate the interest that value investing attracts through the frequency with which terms such as “book to market ratio” appear in the corpus of books scanned by Google. Following the years in which investor interest in value is relatively high, the realized value premium is found to be below average. On the other hand, there is no evidence that secular trends in interest have an impact on the value premium. The results therefore do not support the hypothesis that the value effect disappears once investors have become aware of it.

Due Diligence by Analysts
Bhattacharya, Rajeev R.
I provide a general model of outsiders' forecasts about a firm as a function of publicly available information and the firm's private information, when the firm provides signals to the market as well. Due diligence would require the outsiders' recognizing how these signals were generated, whereas in the absence of due diligence, the outsider would naively take the signals as direct inputs into the generation of forecasts. I provide a methodology of testing due diligence versus naive models using the Hausman Specification Test. I provide a cardinal measure of such due diligence which provides a measure of the probability that an analyst subjected management signals to the required filter of skepticism in the generation of earnings forecasts. This probability is not a measure of whether the analyst was ex post correct, but I find that ex post accuracy -- measured by the negative of the absolute difference between forecast and actual EPS, normalized by actual EPS if positive -- is positively and significantly associated with this probability of due diligence. I also find that due diligence is increasing in stock return and market cap, and is lower for Nasdaq stocks.

Firm Value and Pyramidal Structures: New Evidence for Family Firms
Jara-Bertin, Mauricio,López-Iturriaga, Félix J.,Torres Cepeda, Juan Pablo
In this paper, we analyze what effects separating ownership and control have on the performance of a sample of 99 Chilean family-controlled firms for the period 2001â€"2014. Our results show an inverse U-shaped relationship between voting rights and cash flow rights divergence and firm value. This result suggests that excessive divergence of rights makes the firm’s value decline and can aggravate potential conflicts of interest inside family firms. We also find a positive moderating effect of business group affiliation, which highlights the ability of business groups to attenuate the negative impact of separating rights, particularly at high levels. We also find that family CEOs exert a beneficial effect on family firm performance at lower levels of divergence of rights, but that said effect disappears as the divergence of rights increases, suggesting that, when in control, family shareholders can ensure entrenchment by installing family member CEOs.

Going Private and Innovation
Demir, Tolga,Mohammadi, Ali
In this paper, we investigate how going private affects corporate innovation activities. We compare the innovation activities of firms that went private to the innovation activities of firms that received a going-private offer but stayed as public for reasons unrelated to innovation. Using patent-based metrics, we find that the scale of innovation grows after going private. The most important innovations after going private have higher quality relative to the most important innovations before going private. Firms that go private also produce more influential patents in the following years after going private. In line with the predictions of agency theories, our results suggest that going private has a significant positive impact on the innovation performance of listed firms. We also find that, in public-to-private transactions, being acquired by a private equity (PE) firm does not bring an additional performance boost in terms of innovation in comparison to being acquired by a non-PE firm.

How Does Liquidity Constraint Affect Employment and Wages? Evidence from Danish Mortgage Reform
He, Alex Xi,le Maire, Daniel
This paper studies the effects of liquidity constraints on employment and earnings by exploiting a mortgage reform in Denmark in 1992, which for the first time allowed homeowners to borrow against housing equity for non-housing purposes. We find that liquidity-constrained homeowners extracted housing equity, increased debt levels and experienced higher earnings growth after the reform. In contrast, the reform had little impact on employment and earnings of homeowners with high liquid asset holdings. Consistent with models of job search with risk aversion, the option to borrow against housing equity allows individuals to seek jobs that have higher earnings growth but higher unemployment risks. This effect is larger for low-income and older individuals. The results imply that relaxing liquidity constraints can increase output, and policies restricting mortgage refinancing during economic distress may backfire in recessions.

How do scientific disciplines evolve in applied sciences? The properties of scientific fission and ambidextrous scientific drivers
Mario Coccia

One of the fundamental questions in science is how scientific disciplines evolve and sustain progress in society. No studies to date allows us to explain the endogenous processes that support the evolution of scientific disciplines and emergence of new scientific fields in applied sciences of physics. This study confronts this problem here by investigating the evolution of experimental physics to explain and generalize some characteristics of the dynamics of applied sciences. Empirical analysis suggests properties about the evolution of experimental physics and in general of applied sciences, such as: a) scientific fission, the evolution of scientific disciplines generates a process of division into two or more research fields that evolve as autonomous entities over time; b) ambidextrous drivers of science, the evolution of science via scientific fission is due to scientific discoveries or new technologies; c) new driving research fields, the drivers of scientific disciplines are new research fields rather than old ones; d) science driven by development of general purpose technologies, the evolution of experimental physics and applied sciences is due to the convergence of experimental and theoretical branches of physics associated with the development of computer, information systems and applied computational science. Results also reveal that average duration of the upwave of scientific production in scientific fields supporting experimental physics is about 80 years. Overall, then, this study begins the process of clarifying and generalizing, as far as possible, some characteristics of the evolutionary dynamics of scientific disciplines that can lay a foundation for the development of comprehensive properties explaining the evolution of science as a whole for supporting fruitful research policy implications directed to advancement of science and technological progress in society.

How to develop an effective transparent banking and financial system for developing countries in Africa
Tweneboah Senzu, Emmanuel
The desire of the modern economies is to be well structured and planned to innovatively attract foreign direct investment, which is the prime interest of governance of developing economies. This underpins the choice of the conference theme, "Building a resilient African economy through innovative financing, trade, and Investment for sustainable development of the continent", with the effort of this paper is to project a skeletal ex-post situation of Ghana's financial market which is synonymous to most quality performing financial market in developing countries on the continent of Africa with subjective recommendations for aspired progressive direction.

Is Firm-Level Political Exposure Priced?
Gorbatikov, Evgenii,van Lent, Laurence,Naik, Narayan Y.,Sharma, Varun,Tahoun, Ahmed
The effect of economy-wide political uncertainty on stock market returns is well documented in the literature. However, in order to take a stand on the relation between firm-specific political risk and the cross-section of stock returns, we need a measure independent of those returns. Using a machine-learning based firm-specific measure of political risk, we show that political risk is priced in the cross-section of stock returns. On average, a one standard deviation increase in a firm's political risk is associated with a 0.5% to 1.0% increase in their annual returns. Using a related non-price measure that captures the mean of a firm's political-shocks, we disentangle whether the asset pricing implications of political risk stem from news about the discount rate or future cash flows. We further show that political risk is priced only for firms that do not actively manage political risk. Finally, using a natural language processing (NLP) enabled measure of risk associated with political topics, we examine how (and to what extent) sub-components of political risk are priced.

Macroprudential Policy in the EU â€"Reflections on Institutional Contexts and Governance Arrangements
Bengtsson, Elias
In response to the global financial crisis, macroprudential policy is now firmly established as a financial policy area to prevent excessive risk taking in the financial sector and mitigate its effects on the real economy. It has become thoroughly integrated in the work programmes of global standard setters and international organisations (FSB, BCBS, IOSCO, IMF, BIS etc.) and in financial regulation at the regional and national levels.However, for macroprudential policy to fulfil its role in curbing systemic risk, it needs to manage several challenges relating to its political sensitivity and institutional context. This policy note discusses these challenges, and maps the current policy debate on the most appropriate governance arrangements to manage them. Thereafter, it provides an overview of macroprudential policy in the EU, both in terms of EU-wide law and regulation, and at the national level. The policy note continues by discussing how institutional contexts and governance arrangements appear to have influenced the exertion of macroprudential policy across EU countries in the post crisis period.Drawing on these findings, this note ends with a presentation of a number of policy conclusions and contrast them with the current international policy debate on macroprudential policy:-Macroprudential policy makers’ inaction biases appear to be best counteracted by appointing a single macroprudential authority with strong transparency requirements. Single authorities display generally more intense policy stances, and are associated with stronger independence and accountability arrangements. Transparency matters since openness and transparency reduce political or other influences- Both accountability and independence arrangements appear to have weaker power to explain policy outcomes. This does not suggest they are unimportant, but rather that their interaction may matter more than individual effect. However, independence may also lead “self-interest capture” at the expense of public interest. - Policy frameworks that are multi-layered and complex pose conundrums on how to ensure sufficient institutional autonomy and policy capacity among macroprudential authorities. One such example is the Euro zone area, where the ECB has an overlay function in domestic macroprudential policy.- It is unlikely that there is panacea to the policy problems surrounding macroprudential policy. Additional debate, research and policy development in the field of macroprudential policy is especially warranted; not least given its distributional consequences and since it redefines the role of public authority over private interest.

Mergers and Managers: Manager-Specific Wage Premiums and Rent Extraction in M&As
He, Alex Xi,le Maire, Daniel
This paper shows that some managers pay higher wage premiums to their workers and these managers are targets of M&As. We use a manager-firm-worker matched dataset covering the population of Denmark from 1995 to 2011 and develop a novel framework to measure manager styles in wage-setting by tracking workers and managers across firms over time. We find that individual managers do matter for wages, and variation in manager fixed effects can explain a significant part of wage differences between firms. Establishments with high wage premiums due to generous managers are more likely to be acquired, and experience higher manager turnover and larger wage declines after acquisitions. Lower wages have little effect on firms’ productivity, and therefore represent a transfer from workers to shareholders. The replacement of high-paying managers accounts for almost all of the wage decline and about half the shareholder gains in all M&As, suggesting that rent extraction might be a major motive for merger transactions.

Negative Interest Rates, Recession and Gold
Peetz, Dietmar
What began to unveil in the beginning of 2018 has become a reality since mid-2019: the global economic slowdown. What is unusual is that it is taking place synchronously, similar to the situation during the financial crisis. How could that happen when the central banks have been trying to stimulate the economy with interest rates close to or below zero for years? What is also concerning is how openly the central banks are showing their helplessness. Is this the end of capitalism,as skeptics say, or is this just a short-term dip of endless economic growth? In this first section we want to examine the causes of the economic downturn and explain the consequences for investors.

Neural networks for option pricing and hedging: a literature review
Johannes Ruf,Weiguan Wang

Neural networks have been used as a nonparametric method for option pricing and hedging since the early 1990s. Far over a hundred papers have been published on this topic. This note intends to provide a comprehensive review. Papers are compared in terms of input features, output variables, benchmark models, performance measures, data partition methods, and underlying assets. Furthermore, related work and regularisation techniques are discussed.

Non-Alternative Collective Investment Schemes Connectedness and Systemic Risk
Losada, Ramiro,Laborda Herrero, Ricardo
This paper analyses the connectedness among non-alternative collective investment schemes and with their underlying securities markets. The results show that non-alternative investment collective schemes should not be taken as important in terms of propagation of shocks and they may play a limited role from a systemic point view. This result may be confirmed by the second main result of the paper. There does not exist a relationship in the long run (cointegration) between the connectedness from non-alternative collective schemes with their underlying markets and the financial systemic risk. On the other hand, in the short run, it is shown how a negative shock in the financial systemic risk causes an increase in the level of connectedness but it cannot be stated the opposite; a negative shock in the level of connectedness does not cause a rise in the measure of the financial systemic risk.

Optical Proof of Work
Michael Dubrovsky,Marshall Ball,Bogdan Penkovsky

Most cryptocurrencies rely on Proof-of-Work (PoW) "mining" for resistance to Sybil and double-spending attacks, as well as a mechanism for currency issuance. Hashcash PoW has successfully secured the Bitcoin network since its inception, however, as the network has expanded to take on additional value storage and transaction volume, Bitcoin PoW's heavy reliance on electricity has created scalability issues, environmental concerns, and systemic risks. Mining efforts have concentrated in areas with low electricity costs, creating single points of failure. Although PoW security properties rely on imposing a trivially verifiable economic cost on miners, there is no fundamental reason for it to consist primarily of electricity cost. The authors propose a novel PoW algorithm, Optical Proof of Work (oPoW), to eliminate energy as the primary cost of mining. Proposed algorithm imposes economic difficulty on the miners, however, the cost is concentrated in hardware (capital expense-CAPEX) rather than electricity (operating expenses-OPEX). The oPoW scheme involves minimal modifications to Hashcash-like PoW schemes, inheriting safety/security properties from such schemes.

Rapid growth and improvement in silicon photonics over the last two decades has led to the commercialization of silicon photonic co-processors (integrated circuits that use photons instead of electrons to perform specialized computing tasks) for low-energy deep learning. oPoW is optimized for this technology such that miners are incentivized to use specialized, energy-efficient photonics for computation. Beyond providing energy savings, oPoW has the potential to improve network scalability, enable decentralized mining outside of low electricity cost areas, and democratize issuance. Due to the CAPEX dominance of mining costs, oPoW hashrate will be significantly less sensitive to underlying coin price declines.

Phantom Menace: Role of Pseudo Peers in CEO Compensation
Kalpathy, Swaminathan L.,Nanda, Vikram K.,Zhao, Yabo
We study pay spillovers within the network of peer compensation benchmarking and show that these can reconcile growth differences and convergence in CEO compensation. Specifically, compensation of a small group of prominent, highly-central network firms is shown to have a substantial spillover effect on pay growth at other firms, especially peripheral firms for which the high-centrality firms are seldom compensation peers (hence, “pseudo peers”). The pseudo peer effect is prevalent in firms with agency problems and is mitigated by stronger governance. Better governed firms hire reputable compensation consultants that help determine compensation peers, mitigating the pseudo peer effect and enhancing firm performance. Interestingly, pay spillovers from prominent firms with large size and high compensation are displaced by spillovers from pseudo peers, after SEC requires firms to begin disclosing their compensation peers.

Privacy Concerns in Insurance Markets: Implications for Market Equilibria and Social Welfare
Gemmo, Irina,Browne, Mark J.,Gründl, Helmut
Telemonitoring devices can be used to screen consumer characteristics and mitigate information asymmetries that lead to adverse selection in insurance markets. Nevertheless, some consumers value their privacy and dislike sharing private information with insurers. In a second-best efficient Miyazaki-Wilson-Spence (MWS) framework, we allow consumers to reveal their risk type for an individual subjective cost and show analytically how this affects insurance market equilibria as well as social welfare. We find that information disclosure can substitute deductibles for consumers whose transparency aversion is sufficiently low. This can lead to a Pareto improvement of social welfare. Yet, if all consumers are offered cross-subsidizing contracts, the introduction of a screening contract decreases or even eliminates cross-subsidies. Given the prior existence of a cross-subsidizing MWS equilibrium, utility is shifted from individuals who do not reveal their private information to those who choose to reveal. Our analysis informs the discussion on consumer protection in the context of digitalization. It shows that new technologies challenge cross-subsidization in insurance markets, and it stresses the negative externalities that digitalization has on consumers who are unwilling to take part in this development.

Quantization-based Bermudan option pricing in the $FX$ world
Jean-Michel Fayolle,Vincent Lemaire,Thibaut Montes,Gilles Pagès

This paper proposes two numerical solution based on Product Optimal Quantization for the pricing of Foreign Echange (FX) linked long term Bermudan options e.g. Bermudan Power Reverse Dual Currency options, where we take into account stochastic domestic and foreign interest rates on top of stochastic FX rate, hence we consider a 3-factor model. For these two numerical methods, we give an estimation of the $L^2$-error induced by such approximations and we illustrate them with market-based examples that highlight the speed of such methods.

R&D Investments and Forward-Looking Disclosures
Dube, Svenja
Since proprietary costs discourage managers from providing R&D-specific disclosures, I examine whether firms with higher R&D intensity provide more nonproprietary forward-looking disclosures to decrease information asymmetry. To address endogeneity concerns, I use R&D state tax credit rates as instrumental variable for R&D intensity. I find that firms with higher instrumented R&D intensity guide more frequently and provide more forward-looking statements in earnings announcement press releases. Examining guidance horizon, firms provide more quarterly guidance but less annual guidance as R&D intensity increases. Because R&D intensity also increases managers’ uncertainty about future earnings and managers guide less as uncertainty increases, I test whether earnings volatility alters the relation between R&D intensity and guidance. Indeed, firms provide less annual guidance only if they have high earnings volatility while quarterly guidance is unaffected by earnings volatility. To examine whether the findings are consistent with firms guiding more in response to deteriorating information asymmetry, I conduct difference-in differences analyses around unexpected R&D jumps. Consistent with this information asymmetry channel, I find that firms guide significantly more immediately after such R&D jumps.

Recreating Banking Networks under Decreasing Fixed Costs
Maringer, Dietmar G.,Craig, Ben R.,Paterlini, Sandra
Theory emphasizes the central role of the structure of networks in the behavior of financial systems and their response to policy. Real-world networks, however, are rarely directly observable: Banks’ assets and liabilities are typically known, but not who is lending how much and to whom. We first show how to simulate realistic networks that are based on balance-sheet information by minimizing costs where there is a fixed cost to forming a link. Second, we also show how to do this for a model with fixed costs that are decreasing in the number of links. To approach the optimization problem, we develop a new algorithm based on the transportation planning literature. Computational experiments find that the resulting networks are not only consistent with the balance sheets, but also resemble real-world financial networks in their density (which is sparse but not minimally dense) and in their core-periphery and disassortative structure.

Search for the Theological Grounds to Develop Inclusive Islamic Interpretations: Some Insights from Rationalistic Islamic Maturidite Theology
Zhussipbek, Galym,Satershinov, Bakhytzhan
Inclusive religious interpretations accept that a salvation beyond their teachings can be found. Whether Islam accepts inclusive religious interpretations or not, constitutes one of the most debated issues related to Islam in our days. In this paper it is argued that, although al-Maturidi’s views can hardly be described as inclusive, the dynamic rationalistic Maturidite theology (socalled Maturidite “software”) may help produce inclusive Islamic interpretations. In addition to the key two principles of rationalistic Maturidite theology, especially the Maturidite understanding of the fate of people not exposed to divine mission, may be understood as accepting that the people may reach faith which is similar to valid through their reason, and they may be saved hereafter, although they do not believe in Islamic teachings in a strict sense. This Maturidite position can also be used to justify the inclusive understanding of Quranic verses. By and large, Maturidite theological views analyzed in this article can be seen as factors laying the grounds to develop inclusive Islamic interpretations.

The Dark Side of Digital Financial Transformation: The New Risks of FinTech and the Rise of TechRisk
Buckley, Ross P.,Arner, Douglas W.,Zetzsche, Dirk A.,Selga, Eriks
Over the past decade a long-term process of digitization of finance has increasingly combined with datafication and new technologies including cloud computing, blockchain, big data and artificial intelligence in a new era of FinTech (“financial technology”). This process of digitization and datafication combined with new technologies is taking place in developed global markets and at times even faster in emerging and developing markets. The result: cybersecurity and technological risks are now evolving into major threats to financial stability and national security. In addition, the entry of major technology firms into finance â€" TechFins â€" brings two new issues. The first arises in the context of new forms of potentially systemically important infrastructure (such as data and cloud services providers). The second arises because data â€" like finance â€" benefits from economies of scope and scale and from network effects and â€" even more than finance â€" tends towards monopolistic or oligopolistic outcomes, resulting in the potential for systemic risk from new forms of “Too Big to Fail” and “Too Connected to Fail” phenomena. To conclude, we suggest some basic principles about how such risks can be monitored and addressed, focusing in particular on the role of regulatory technology (“RegTech”).

The Macroeconomy and the Cross-Section of International Equity Index Returns: A Machine Learning Approach
Popescu, Andreea Victoria
The paper evaluates the out-of-sample predictive ability of machine learning methods in the cross-section of international equity index returns using both firm fundamentals and macroeconomic predictors. The study performs a horserace between classical forecasting methods and the machine learning repertoire, including principal component analysis, partial least squares, and neural networks. Macroeconomic signals seem to substantially improve out-of-sample performance, especially when non-linear features are incorporated via neural networks.

The Payout Policy of Politically Connected Firms: Tunnelling vs. Reputation
López-Iturriaga, Félix J.,Santana‐Martín, Domingo J. J.
Using the firms’ directors who have a background in politics as a measure of political connections, we analyze the relationship between political ties and dividend policy in a sample of listed Spanish firms. We find that political connections are positively related with cash dividends. This result is consistent with a concern about the interests of minority shareholders in the politically connected firms or with the less financial constraints of these firms. We also find a positive relationship between political connections and share repurchases, a way of shareholder compensation that is gaining popularity. This result could be related to the valuation of politically connected firms. Our results are robust to alternative empirical specifications such as the propensity score matching procedure, different metrics of payout policy, and different levels of political connections. Interestingly, the recent financial crisis has not changed the preferences of connected firms for shareholders compensation with dividends and share repurchases.

The Swiss National Bank â€" a Central Bank or a Hedge Fund?
Ganchev, Alexander
The paper examines the investment activities of Swiss National Bank during last years and especially what is the nature of these activities, what is their scope, what are their financial grounds, what possible consequences could they lead to, and why are they so disconcerting for the financial world. The study finds that the Swiss National Bank operates as a quasi-government hedge fund following the global macro investment strategy. In fact the SNB is increasing the Swiss francs in circulation in order to make investments in foreign debt instrument and stocks. The study states that such kind of interventions from the leading central banks in the world in the pricing mechanism of global financial markets can reduce the scope of operations of portfolio managers and turn investing into a constant game of guesswork and tracking the behaviour of certain central banks or juggling with investment assets which actual value is unknown and immeasurable and more impornant - to lead to investment bubbles, financial and economic crises.

Underreaction, Overreaction, and Dynamic Autocorrelation of Stock Returns
Hongye, Guo
I document that in the US, the aggregate monthly stock returns correlate positively with past returns 2/3 of the times, and negatively 1/3 of the times. While the two arms of correlation are separately strong, they cancel with each other, leading to an average autocorrelation that is only weakly positive. I argue this pattern of aggregate return predictability will be generated if investors fail to see the time varying autocorrelation structure of earnings news. In this model, investors act as if they have underreacted to past news 2/3 of the time, and overracted to past news 1/3 of the times. I then look out-of-sample and find affirmative evidence in the cross section and the international stock markets. The paper shows that the traditional views on stock return autocorrelation misses important information which is it varies over time.

Unlocking Trapped Foreign Cash, Investor Types, and Firm Payout Policy
Olson, Erik
I study whether trapped foreign cash levels and investor type explain variation in US-based multinationals’ payout policy responses to tax-repatriation-driven cash windfalls. To do so, I use the deemed mandatory repatriation of trapped foreign cash included in the 2017 Tax Cuts and Jobs Act (TCJA). I find my measure of the level of “unlocked” trapped foreign cash (UTC) is related to increases in repurchases and dividends observed post-TCJA. Motivated by prior research, I examine whether this increase in payout varies with institutional investor type: transient, dedicated, and quasi-indexers (Bushee 2001). I find that firms with high UTC and low (high) dedicated ownership see an increase (no change) in repurchases post-TCJA. I do not observe similar variation with investor type for dividends.

VCRIX - A Volatility Index for Crypto-Currencies
Kim, Alisa,Trimborn, Simon,Härdle, Wolfgang K.
Public interest, explosive returns, and diversification opportunities gave stimulus to the adoption of traditional financial tools to crypto-currencies. While the CRIX index offered the first scientifically-backed proxy to the cryptomarket (analogous to S&P 500), the introduction of Bitcoin futures by Cboe became the milestone in the creation of the derivatives market for cryptocurrencies. Following the intuition of the "fear index" VIX for the American stock market, the VCRIX volatility index was created to capture the investor expectations about the crypto-currency ecosystem. VCRIX is built based on CRIX and offers a forecast for the mean annualized volatility of the next 30 days, re-estimated daily. The model was back-tested for its forecasting power, resulting in low MSE performance and further examined by the simulation of VIX (resulting in a correlation of 78% between the actual VIX and VIX estimated with the VCRIX model). VCRIX provides forecasting functionality and serves as a proxy for the investors’ expectations in the absence of the developed derivatives market. These features provide enhanced decision making capacities for market monitoring, trading strategies, and potentially option pricing.

Working-Capital and Capital Structure
Flannery , Mark J.,Öztekin, Özde
Survey evidence suggests that a firm's operating features affect its financial leverage (Graham and Harvey, 2001). We document the effect on leverage of a company's working capital â€" its inventory, receivables, and payables. Higher inventories and receivables tend to reduce a firm's asset risk, which is conducive to higher leverage, better credit ratings, more long-term debt and fewer equity issuances. Higher payables provide a fixed, senior claim on firm earnings and substitute for interest-bearing debt. Increases in payables reduce leverage, credit ratings, and short-term debt issuances, but increase equity issuances. Our findings imply strong influences of working-capital on corporate capital structures.