Research articles for the 2019-11-19

A Multicriteria Macroeconomic Model with Intertemporal Equity and Spatial Spillovers
Herb Kunze,Davide La Torre,Simone Marsiglio

We analyze a macroeconomic model with intergenerational equity considerations and spatial spillovers, which gives rise to a multicriteria optimization problem. Intergenerational equity requires to add in the definition of social welfare a long run sustainability criterion to the traditional discounted utilitarian criterion. The spatial structure allows for the possibility of heterogeneiity and spatial diffusion implies that all locations within the spatial domain are interconnected via spatial spillovers. We rely on different techniques (scalarization, $\epsilon$-constraint method and goal programming) to analyze such a spatial multicriteria problem, relying on numerical approaches to illustrate the nature of the trade-off between the discounted utilitarian and the sustainability criteria.

Artificial intelligence approach to momentum risk-taking
Ivan Cherednik

We propose a mathematical model of momentum risk-taking, which is real-time risk management, and discuss its implementation: an automated momentum equity trading system. Risk-taking is one of the key components of general decision-making, a challenge for artificial intelligence and machine learning. We begin with a simple continuous model of news impact and then perform its discretization, adjusting it to dealing with discontinuous functions. Stock charts are the main examples for us; stock markets are quite a test for any risk management theories. An entirely automated trading system based on our approach proved to be successful in extensive historical and real-time experiments. Its preimage is a new contract card game presented at the end of the paper.

Backward and Forward Integration Along Global Value Chains
Del Prete, Davide,Rungi, Armando
Backward and forward vertical integrations both shape the organization of Global Value Chains (GVCs). Yet, many studies make the unrealistic assumption that integration decisions are binary and one-directional, i.e., companies make the integration decision only once and they can go either backward or forward but not in both directions. The aim of this paper is to analyze the firm-level organization of GVCs when both vertical integration decisions are taken into account. Exploiting a global sample of more than 1.4 million firms, we first document how midstream parents actually integrate on both directions along the chain, and they are at least as common as downstream and upstream parents. Then, we find that parent companies prefer to integrate production stages with a relatively low elasticity of substitution and with a technological proximity on the supply chain. Finally, we provide evidence that more than one subsidiary in a given location can perform the same production stage.

Bidding in Smart Grid PDAs: Theory, Analysis and Strategy (Extended Version)
Susobhan Ghosh,Sujit Gujar,Praveen Paruchuri,Easwar Subramanian,Sanjay P. Bhat

Periodic Double Auctions (PDAs) are commonly used in the real world for trading, e.g. in stock markets to determine stock opening prices, and energy markets to trade energy in order to balance net demand in smart grids, involving trillions of dollars in the process. A bidder, participating in such PDAs, has to plan for bids in the current auction as well as for the future auctions, which highlights the necessity of good bidding strategies. In this paper, we perform an equilibrium analysis of single unit single-shot double auctions with a certain clearing price and payment rule, which we refer to as ACPR, and find it intractable to analyze as number of participating agents increase. We further derive the best response for a bidder with complete information in a single-shot double auction with ACPR. Leveraging the theory developed for single-shot double auction and taking the PowerTAC wholesale market PDA as our testbed, we proceed by modeling the PDA of PowerTAC as an MDP. We propose a novel bidding strategy, namely MDPLCPBS. We empirically show that MDPLCPBS follows the equilibrium strategy for double auctions that we previously analyze. In addition, we benchmark our strategy against the baseline and the state-of-the-art bidding strategies for the PowerTAC wholesale market PDAs, and show that MDPLCPBS outperforms most of them consistently.

Financial Variables, Market Transactions, and Expectations as Functions of Risk
Olkhov, Victor
This paper develops methods and a framework of financial market theory. We model financial markets as a system of agents which perform market transactions with other agents under the action of numerous expectations. Agents’ expectations are formed of economic and financial variables, market transactions, the expectations of other agents, and other factors that impact financial markets. We use the risk ratings of agents as their coordinates and approximate a description of financial variables, market transactions, and expectations of numerous separate agents by density functions of aggregated agents in the economic domain. The motion of separate agents in the economic domain due to a change of agents’ risk rating produces collective financial flows of variables, transactions, and expectations. We derive equations on collective financial variables, market transactions, expectations, and their flows in the economic domain. These flows define the evolution of financial markets. As an example, we present a simple model with linear dependence between disturbances of volume and the cost of transactions on one hand, and disturbances of expectations that determine transactions on the other hand. Our model describes harmonique oscillations of these disturbances with numerous frequencies and allows an explicit form for fluctuations of price and return to be derived. These relations show a direct dependence between price, return, and volume perturbations.

Fragmentation and inefficiencies in US equity markets: Evidence from the Dow 30
Brian F. Tivnan,David Rushing Dewhurst,Colin M. Van Oort,John H. Ring IV,Tyler J. Gray,Brendan F. Tivnan,Matthew T. K. Koehler,Matthew T. McMahon,David Slater,Jason Veneman,Christopher M. Danforth

Using the most comprehensive source of commercially available data on the US National Market System, we analyze all quotes and trades associated with Dow 30 stocks in 2016 from the vantage point of a single and fixed frame of reference. We find that inefficiencies created in part by the fragmentation of the equity marketplace are relatively common and persist for longer than what physical constraints may suggest. Information feeds reported different prices for the same equity more than 120 million times, with almost 64 million dislocation segments featuring meaningfully longer duration and higher magnitude. During this period, roughly 22% of all trades occurred while the SIP and aggregated direct feeds were dislocated. The current market configuration resulted in a realized opportunity cost totaling over $160 million when compared with a single feed, single exchange alternative---a conservative estimate that does not take into account intra-day offsetting events.

Heterogeneous Spillovers of Housing Credit Policy
Pidkuyko, Myroslav
We study the spillovers from government intervention in the mortgage market on households’ consumption using the household survey data from the US. After an expansionary mortgage market operation, the increase in consumption of homeowners with mortgage debt is large and significant, while the consumption response of homeowners without the mortgage debt is small and insignificant. Non-homeowners also increase their consumption but less than mortgagors. We also find that expansionary policy significantly increases the consumption inequality of mortgagors. We explain these facts through the lens of a lifecycle model with incomplete markets and endogenous housing choice. Reduction in credit rates creates extra wealth for the mortgagors while a reduction in interest rates shifts this wealth towards consumption. An increase in wealth is bigger for those with a larger mortgage- this exacerbates consumption inequality.

Infinitesimal generators for two-dimensional L\'evy process-driven hypothesis testing
Michael Roberts,Indranil SenGupta

In this paper, we present the testing of four hypotheses on two streams of observations that are driven by L\'evy processes. This is applicable for sequential decision making on the state of two-sensor systems. In one case, each sensor receives or does not receive a signal obstructed by noise. In another, each sensor receives data-driven by L\'evy processes with large or small jumps. In either case, these give rise to four possibilities. Infinitesimal generators are presented and analyzed. Bounds for infinitesimal generators in terms of \emph{super-solutions} and \emph{sub-solutions} are computed. An application of this procedure for the stochastic model is also presented in relation to the financial market.

Information Environment, Systematic Volatility and Stock Return Synchronicity
Wei, Steven
In this paper, we first develop a model to show that systematic volatility, and hence the market model R2 both decline when there is greater corporate disclosure. We empirically test our model by comparing R2 obtained from the earnings announcement season to that from the non-earnings season, and find significantly lower R2s in the earnings announcement season. In addition, we find that the driving force of this drop in stock price synchronicity is the reduction of systematic volatility rather than the increase in idiosyncratic volatility. Furthermore, this pattern is less pronounced for firms with lower sensitivity to market factors. Overall, our paper provides new supporting evidence for the information interpretation of stock return asynchronicity.

Is There a Paradox of Pledgeability?
Bernhardt, Dan,Koufopoulos, Kostas,Trigilia, Giulio
Donaldson, Gromb and Piacentino (2019) argue that, in the presence of limited commitment, increasing the fraction of a firm’s cash flows that can be pledged as collateral might make the firm worse off. To the contrary, we show that in their framework the set of firms that are hurt by having greater pledgeable cash flows is empty. We also show that in their model the first-best can always be implemented by non-state contingent collateralized debt contracts that differ from the ones they consider.

L\'evy-Ito Models in Finance
George Bouzianis,Lane P. Hughston,Sebastian Jaimungal,Leandro Sánchez-Betancourt

We propose a class of financial models in which the prices of assets are L\'evy-Ito processes driven by Brownian motion and a dynamic Poisson random measure. Each such model consists of a pricing kernel, a money market account, and one or more risky assets. The Poisson random measure is associated with an $n$-dimensional L\'evy process. We show that the excess rate of return of a risky asset in a pure-jump model is given by an integral of the product of a term representing the riskiness of the asset and a term representing the level of market risk aversion. The integral is over the state space of the Poisson random measure and is taken with respect to the L\'evy measure associated with the $n$-dimensional L\'evy process. The resulting framework is applied to a variety of different asset classes, allowing one to construct new models as well as non-trivial generalizations of familiar models.

Merton's portfolio problem under Volterra Heston model
Bingyan Han,Hoi Ying Wong

This paper investigates Merton's portfolio problem in a rough stochastic environment described by Volterra Heston model. The model has a non-Markovian and non-semimartingale structure. By considering an auxiliary random process, we solve the portfolio optimization problem with the martingale optimality principle. Optimal strategies for power and exponential utilities are derived in semi-closed form solutions depending on the respective Riccati-Volterra equations. We numerically examine the relationship between investment demand and volatility roughness.

Native and First Foreign Language Negative Interference Upon Second Foreign Language Teaching (Отрицательная интерференция родного и первого иностранного языка при обучении второму иностранному языку)
Novikova, Nina
English Abstract: This article relates to studying of native and first foreign language negative interference upon second foreign language teaching and ways to override this effect. The analysis bases on German language examination of students. One of the reasons of mistakes is cross-language interference, which may have either negative or positive effect.The report analyzes the nature of errors (linguistic and, more widely culturological) that happen in the study of German as a second foreign language and the mechanisms to correct them.Russian Abstract: Как известно, одной из причин возникновения ошибок является межъязыковая интерференция, которая может носить как отрицательный, так и положительный характер. Ð"анная статья посвящена проблеме отрицательной интерференции родного и первого иностранного языка при обучении второму иностранному языку и способам преодоления этого явления. Объектом исследования являлись ошибки студентов, допускаемые ими в процессе овладения иноязычной компетенцией.

Optimal Arbitrage under Limits to Arbitrage: The Case of Convergence Trade
Xu, Jing
As a popular arbitrage strategy, convergence trades aim to exploit relative mispricing between two closely related assets. We examine optimal convergence trade strategies when short-selling and funding are both costly. It turns out that the optimal allocation rules are piecewise linear functions of the mispricing level, allowing the trader to better balance the profits and costs incurred when she trades on mispricing. We also find that these limits to arbitrage have a stronger deterrence effect on short-selling than on purchasing, driving the optimal trading strategy significantly away from a delta-neutral one. This may partially explain the empirical finding that one-sided trades correct most of the mispricing in dual-class shares. Moreover, the impact of performance-based fund liquidation on optimal convergence trade strategies is examined.

PMFBY - A Financial Inclusion Initiate for Farmers’ Development
Singhal, Parmod,Mittal, Vivek
Agriculture is the base of any country. The agriculture is a risky activity because it is done in open field and it takes time to be ready. Risk is an important aspect of the farming business. The people involved in the agriculture lives in uncertainties. The uncertainties inherent in weather, yields, prices, Government policies, global markets, and other factors that impact farming can cause wide swings in farm income. There is an important role of the farmer in the economy of a country. We are the large exporter of rice especially of Basmati rice and the large producers of wheat. So, we have to protect the farmers from the various risk associated with the agriculture. This paper is based on the both primary and secondary data. The primary data is collected from the farmers with the aim to know about their views on the Pradhan Mantri Fasal Bima Yojana (PMFBY) and secondary data is collected from various sources.

Semiparametric Regression for Dual Population Mortality
Venter, Gary,Şahin , Şule
Parameter shrinkage applied optimally can always reduce error and projection variances from those of maximum likelihood estimation. Many variables that actuaries use are on numerical scales, like age or year, which require parameters at each point. Rather than shrinking these towards zero, nearby parameters are better shrunk towards each other. Semiparametric regression is a statistical discipline for building curves across parameter classes using shrinkage methodology. It is similar to but more parsimonious than cubic splines. We introduce it in the context of Bayesian shrinkage and apply it to joint mortality modeling for related populations. Bayesian shrinkage of slope changes of linear splines is an approach to semiparametric modeling that evolved in the actuarial literature. It has some theoretical and practical advantages, like closed-form curves, direct and transparent determination of degree of shrinkage and of placing knots for the splines, and quantifying goodness of fit. It is also relatively easy to apply to the many nonlinear models that arise in actuarial work.

Stock Market Liberalization and Firm-level Stock Price Crash Risk â€" Evidence from 'Shanghai-Hong Kong Stock Connect' Scheme
Zhong, Kai,Sun, Changling,Wang, Huacheng,Wei, Steven
This paper examines how the “Shanghai-Hong Kong Stock Connect” scheme affects firm-level stock price crash risk in the A-share market of Shanghai. Using a difference-in-differences approach, we find that crash risk of connected firms is lower than that of non-connected ones after implementation of the scheme. Further analyses show that the crash risk reduction effect is more pronounced for firms with poor information environment or weak corporate governance. This information view of stock market liberalization is also evidenced by higher demand and supply for firm-level information. This implies that stock market liberalization is beneficial to emerging economies.

The Impact of Open Data on Public Procurement
Duguay, Raphael,Rauter, Thomas,Samuels, Delphine
We examine how the increased accessibility of public purchasing data affects competition, prices, contract allocations, and contract performance in government procurement. The European Union recently made its already public but difficult-to-access information about the process and outcomes of procurement awards available for bulk download in a user-friendly format. Comparing government contracts above EU publication thresholds with contracts that are not, we find that increasing the public accessibility of procurement data raises the likelihood of having competitive bidding processes, increases the number of bids per contract, and facilitates market entry by new vendors. Following the open data initiative, procurement prices decrease and EU government agencies are more likely to award contracts to the lowest bidder. However, the increased competition comes at a cost â"€ firms execute government contracts with more delays and ex-post price renegotiations. These effects are stronger for new vendors, complex procurement projects, and contracts awarded solely based on price. Overall, our results suggest that open procurement data facilitates competition and lowers ex-ante procurement prices but does not necessarily increase allocative efficiency in government contracting.

The Informational Role of Analysts' Qualitative Research Outputs
Miwa, Kotaro
Several studies have indicated that textual tones in analysts’ reports, a representative qualitative output of analysts’ reports, possess informational value. In this study, I clarify incremental information in the report tone. I predict a report tone as holding fundamental information that analysts have a weak incentive to incorporate into their forecasts regarding company performance. Consistent with my prediction, I find that the report tones contain incremental earnings and sales information beyond their earnings and sales forecasts. Specifically, report tones of sell-side analysts, who are reluctant to incorporate negative information into quantitative output, contain incremental negative information; in contrast, report tones of media analysts, who have a weak incentive to incorporate positive information, contain incremental positive information. Finally, the result reveals that prices underreact to sell-side analysts’ negative tone and media analysts’ positive tone, suggesting that the gradual incorporation of the fundamental information into quantitative outputs affects prices by inducing a delay in investor’s reaction to the information.

The Telegraph and Modern Banking Development
Lin, Chen,Ma, Chicheng,Sun, Yuchen,Xu, Yuchen
The telegraph was introduced to China in the late 19th century, a time when China also saw the rise of modern banks. This unique historical context allows us to examine the role of information technology in banking development. We find that telegraph significantly increased the number of banks. This effect becomes greater when we instrument the distribution of telegraph stations using the shortest distance to the military telegraph trunk built before the emergence of modern banks (1897). By increasing inter-regional information flow, the telegraph enabled banks to expand their branches to distant areas.