Research articles for the 2019-11-27
'What to Expect when You Are Expecting' a European Crowdfunding Regulation: The Current ‘Bermuda Triangle’ and Future Scenarios for Marketplace Lending and Investing in Europe
SSRN
Marketplace lending and investing have been recently attracting increasing regulatory attention. However, regulatory responses to such phenomenon have been extremely varied, even in Europe, characterized by maximum harmonization in the field of financial regulation, continuous efforts in creating a single market and in centralizing supervision. Such fragmented framework poses the risk of different levels of investor protection in Europe, regulatory arbitrage, competition distortions, obstacles to cross-border activity and to existing EU passports. The European Commission, after an initial “wait-and-see†approach, adopted in March 2018 a proposal for a Regulation on European Crowdfunding Service Providers (ECSPs) for businesses. Such proposal, nonetheless, has undergone a number of significant revisions during the trilateral negotiations among the European Commission, the European Parliament and the Council of the European Union, underlying the ambiguous nature of crowdfunding and the difficulty in reaching a common view on the same. The three European Institutions seem in fact to have divergent views of crowdfunding and different ideas on how to regulate it, this delaying the approval of the proposed Regulation. Will crowdfunding eventually escape such Bermuda Triangle receiving adequate regulation or is it destined to die in the process? The present paper, after briefly describing crowdfunding main features and regulatory trends in Member States, will critically analyze the ECSPs Regulation Proposal, with respect to all the three different versions, inferring from each text a different vision (and consequent envisioned regulation) of crowdfunding and of financial regulation in general, underlying their pros and cons and proposing adjustments to reach a functional, tiered and proportional regulation. Finally, after mentioning certain recent revisions in national crowdfunding laws (e.g. in Italy, Belgium, UK and Germany), the paper will conclude trying to forecast the future direction of the ongoing trilateral negotiations and the possible impact of the European Regulation on national crowdfunding laws and the sector.
SSRN
Marketplace lending and investing have been recently attracting increasing regulatory attention. However, regulatory responses to such phenomenon have been extremely varied, even in Europe, characterized by maximum harmonization in the field of financial regulation, continuous efforts in creating a single market and in centralizing supervision. Such fragmented framework poses the risk of different levels of investor protection in Europe, regulatory arbitrage, competition distortions, obstacles to cross-border activity and to existing EU passports. The European Commission, after an initial “wait-and-see†approach, adopted in March 2018 a proposal for a Regulation on European Crowdfunding Service Providers (ECSPs) for businesses. Such proposal, nonetheless, has undergone a number of significant revisions during the trilateral negotiations among the European Commission, the European Parliament and the Council of the European Union, underlying the ambiguous nature of crowdfunding and the difficulty in reaching a common view on the same. The three European Institutions seem in fact to have divergent views of crowdfunding and different ideas on how to regulate it, this delaying the approval of the proposed Regulation. Will crowdfunding eventually escape such Bermuda Triangle receiving adequate regulation or is it destined to die in the process? The present paper, after briefly describing crowdfunding main features and regulatory trends in Member States, will critically analyze the ECSPs Regulation Proposal, with respect to all the three different versions, inferring from each text a different vision (and consequent envisioned regulation) of crowdfunding and of financial regulation in general, underlying their pros and cons and proposing adjustments to reach a functional, tiered and proportional regulation. Finally, after mentioning certain recent revisions in national crowdfunding laws (e.g. in Italy, Belgium, UK and Germany), the paper will conclude trying to forecast the future direction of the ongoing trilateral negotiations and the possible impact of the European Regulation on national crowdfunding laws and the sector.
A new set of cluster driven composite development indicators
arXiv
arXiv
Composite development indicators used in policy making often subjectively aggregate a restricted set of indicators. We show, using dimensionality reduction techniques, including Principal Component Analysis (PCA) and for the first time information filtering and hierarchical clustering, that these composite indicators miss key information on the relationship between different indicators. In particular, the grouping of indicators via topics is not reflected in the data at a global and local level. We overcome these issues by using the clustering of indicators to build a new set of cluster driven composite development indicators that are objective, data driven, comparable between countries, and retain interpretabilty. We discuss their consequences on informing policy makers about country development, comparing them with the top PageRank indicators as a benchmark. Finally, we demonstrate that our new set of composite development indicators outperforms the benchmark on a dataset reconstruction task.
Absent agency problems, can conflict emerge between a pre-existing angel investor, and an entering venture capitalist?
SSRN
Suppose absence of agency problems in interactions between a representative angel investor who already is invested in a project (a `pre-existing' angel investor), and a representative `entering' venture capitalist who provides a new infusion of capital into the same project. This study finds that there exist conditions in context of which conflict emerges, and this with possibility of nigh certainty, between the angel investor, and the venture capitalist (VC). Let the `conditional relative skewness' for a project be evident in the specific location of the project in the distribution of conditional skewness accruing to all projects that are located in the investment opportunity set of the pre-existing angel investor. Conditional on transformation of a project to a higher risk project by an entering VC, the probability of emergence of legitimate conflict is a decreasing function of conditional relative skewness. Refer to this probability as the `risk-induced probability of conflict'. The risk-induced probability of conflict increases with the extent to which the entering VC is characterized by either of preference for lotteries, or `information myopia', and asymptotically approaches one. The general equilibrium model shows maintenance of the risk profile that was established prior to participation of the VC ensures non-emergence of conflict between the entering VC, and the pre-existing angel investor.
SSRN
Suppose absence of agency problems in interactions between a representative angel investor who already is invested in a project (a `pre-existing' angel investor), and a representative `entering' venture capitalist who provides a new infusion of capital into the same project. This study finds that there exist conditions in context of which conflict emerges, and this with possibility of nigh certainty, between the angel investor, and the venture capitalist (VC). Let the `conditional relative skewness' for a project be evident in the specific location of the project in the distribution of conditional skewness accruing to all projects that are located in the investment opportunity set of the pre-existing angel investor. Conditional on transformation of a project to a higher risk project by an entering VC, the probability of emergence of legitimate conflict is a decreasing function of conditional relative skewness. Refer to this probability as the `risk-induced probability of conflict'. The risk-induced probability of conflict increases with the extent to which the entering VC is characterized by either of preference for lotteries, or `information myopia', and asymptotically approaches one. The general equilibrium model shows maintenance of the risk profile that was established prior to participation of the VC ensures non-emergence of conflict between the entering VC, and the pre-existing angel investor.
Asymmetric Information, Dynamic Debt Issuance, and the Term Structure of Credit Spreads
SSRN
We propose a tractable model of a firm’s dynamic debt and equity issuance policies in the presence of asymmetric information. Because â€Å"investment-grade� firms can access debt markets, managers who observe a bad private signal can both conceal this information and shield shareholders from infusing capital into the firm by issuing new debt to service existing debt, thus avoiding default. The implication is that the â€Å"asymmetric information channel� can generate jumps to default (from the creditors’ perspective) only for those "high-yield" firms that have exhausted their ability to borrow. Thus, our model deepens the â€Å"credit spread puzzle� for investment-grade firms.
SSRN
We propose a tractable model of a firm’s dynamic debt and equity issuance policies in the presence of asymmetric information. Because â€Å"investment-grade� firms can access debt markets, managers who observe a bad private signal can both conceal this information and shield shareholders from infusing capital into the firm by issuing new debt to service existing debt, thus avoiding default. The implication is that the â€Å"asymmetric information channel� can generate jumps to default (from the creditors’ perspective) only for those "high-yield" firms that have exhausted their ability to borrow. Thus, our model deepens the â€Å"credit spread puzzle� for investment-grade firms.
Bayesian Value-at-Risk Backtesting: The Case of Annuity Pricing
SSRN
We propose a new Unconditional Coverage backtest for VaR-forecasts under a Bayesian framework that significantly minimise the direct and indirect effects of p-hacking or other biased outcomes in decision-making, in general. Especially, after the global financial crisis of 2007-09, regulatory demands from Basel III and Solvency II have required a more strict assessment setting for the internal financial risk models. Here, we employ linear and nonlinear Bayesianised variants of two renowned mortality models to put the proposed backtesting technique into the context of annuity pricing. In this regard, we explore whether the stressed longevity scenarios are enough to capture the experienced liability over the foretasted time horizon. Most importantly, we conclude that our Bayesian decision theoretic framework quantitatively produce a strength of evidence favouring one decision over the other.
SSRN
We propose a new Unconditional Coverage backtest for VaR-forecasts under a Bayesian framework that significantly minimise the direct and indirect effects of p-hacking or other biased outcomes in decision-making, in general. Especially, after the global financial crisis of 2007-09, regulatory demands from Basel III and Solvency II have required a more strict assessment setting for the internal financial risk models. Here, we employ linear and nonlinear Bayesianised variants of two renowned mortality models to put the proposed backtesting technique into the context of annuity pricing. In this regard, we explore whether the stressed longevity scenarios are enough to capture the experienced liability over the foretasted time horizon. Most importantly, we conclude that our Bayesian decision theoretic framework quantitatively produce a strength of evidence favouring one decision over the other.
Beyond Myopia: Scarcity and Intertemporal Choice Reversals
SSRN
It is widely understood that scarcity focuses people on “here and now†problems, causing myopic, impulsive decisions. Our work challenges this basic premise and asks whether scarcity can ever lead to increased patience. We suggest that existing work that has inadvertently conflated resource scarcity with threatened needs that are temporally proximal. By disaggregating the role of scarcity and the temporal proximity of needs, we demonstrate the novel finding that scarcity can increase preferences for larger, later outcomes. Three preregistered, incentive compatible experiments demonstrate that the relationship between scarcity and intertemporal choice is more complex than previously understood. In addition to demonstrating a reversal of typical intertemporal preferences under scarcity, our findings offer a new interpretation of existing findings and suggest that responses to scarcity may be more in line with standard economic theory than currently believed.
SSRN
It is widely understood that scarcity focuses people on “here and now†problems, causing myopic, impulsive decisions. Our work challenges this basic premise and asks whether scarcity can ever lead to increased patience. We suggest that existing work that has inadvertently conflated resource scarcity with threatened needs that are temporally proximal. By disaggregating the role of scarcity and the temporal proximity of needs, we demonstrate the novel finding that scarcity can increase preferences for larger, later outcomes. Three preregistered, incentive compatible experiments demonstrate that the relationship between scarcity and intertemporal choice is more complex than previously understood. In addition to demonstrating a reversal of typical intertemporal preferences under scarcity, our findings offer a new interpretation of existing findings and suggest that responses to scarcity may be more in line with standard economic theory than currently believed.
Breakup and Default Risks in the Eurozone
SSRN
Since the burst of the sovereign debt crisis, investors perceive the concrete possibility of a breakup of the Eurozone. We start off CDS quotes in different currencies and for contracts with different clauses and estimate the network of breakup and default risk spillovers in the Eurozone isolating the relevant factors with shrinkage estimation techniques. We find that a small set of countries have the ability to propagate and infect other countries, increasing their redenomination and default risks. We isolate the expected euro depreciation component of redenomination shocks and show that it affects the default risks of most Eurozone members. Spillover effects increase with maturities up to five years.
SSRN
Since the burst of the sovereign debt crisis, investors perceive the concrete possibility of a breakup of the Eurozone. We start off CDS quotes in different currencies and for contracts with different clauses and estimate the network of breakup and default risk spillovers in the Eurozone isolating the relevant factors with shrinkage estimation techniques. We find that a small set of countries have the ability to propagate and infect other countries, increasing their redenomination and default risks. We isolate the expected euro depreciation component of redenomination shocks and show that it affects the default risks of most Eurozone members. Spillover effects increase with maturities up to five years.
Climate Policy, Stranded Assets, and Investors' Expectations
SSRN
Climate policies to keep global warming below 2℃ might render some of the world's fossil fuels and related infrastructure worthless prior to the end of their economic life time. Therefore, some energy-sector assets are at risk of becoming stranded. This paper investigates whether and how investors price in this risk of asset stranding. We exploit the gradual development of a German climate policy proposal aimed at reducing electricity production from coal and analyze its effect on the valuation of energy utilities. We find that investors take stranded asset risk into consideration, but that they also expect a financial compensation for their stranded assets.
SSRN
Climate policies to keep global warming below 2℃ might render some of the world's fossil fuels and related infrastructure worthless prior to the end of their economic life time. Therefore, some energy-sector assets are at risk of becoming stranded. This paper investigates whether and how investors price in this risk of asset stranding. We exploit the gradual development of a German climate policy proposal aimed at reducing electricity production from coal and analyze its effect on the valuation of energy utilities. We find that investors take stranded asset risk into consideration, but that they also expect a financial compensation for their stranded assets.
Computational Challenges for Value-at-Risk and Expected Shortfall: Chebyshev Interpolation to the Rescue?
SSRN
Computational challenges associated with calculating risk measures are inherent to many applications in financial institutions. An example is the need to revalue portfolios of trading positions hundreds or thousands of times to determine the future distribution of their present values. Established techniques to address this task are pricing approximations by means of Taylor expansion and the pre-calculation of grids of portfolio values, as a basis for interpolation. In recent years, the use of “smart grids†based on Chebyshev interpolation has been popularised. This paper reports on an exploratory study in which Chebyshev grids are compared to standard (uniform) grids as well as Taylor expansion when applied to computing a portfolio’s Value-at-Risk and Expected Shortfall. Using a variety of example portfolios it is illustrated that Chebyshev interpolation tends to perform better than standard grids but that it is also subject to similar drawbacks, such as difficult error control and the curse of dimensionality. In spite of advantageous properties Chebyshev grids are hence not yet seen to lead to a quantum leap in determining risk measures. Ongoing research focussing on sparse grids and their approximation quality, however, remains promising.
SSRN
Computational challenges associated with calculating risk measures are inherent to many applications in financial institutions. An example is the need to revalue portfolios of trading positions hundreds or thousands of times to determine the future distribution of their present values. Established techniques to address this task are pricing approximations by means of Taylor expansion and the pre-calculation of grids of portfolio values, as a basis for interpolation. In recent years, the use of “smart grids†based on Chebyshev interpolation has been popularised. This paper reports on an exploratory study in which Chebyshev grids are compared to standard (uniform) grids as well as Taylor expansion when applied to computing a portfolio’s Value-at-Risk and Expected Shortfall. Using a variety of example portfolios it is illustrated that Chebyshev interpolation tends to perform better than standard grids but that it is also subject to similar drawbacks, such as difficult error control and the curse of dimensionality. In spite of advantageous properties Chebyshev grids are hence not yet seen to lead to a quantum leap in determining risk measures. Ongoing research focussing on sparse grids and their approximation quality, however, remains promising.
Concentration of Control Rights in Leveraged Loan Syndicates
SSRN
We �nd that corporate loan contracts frequently concentrate control rights with a subset of lenders. Despite the rise in term loans without �nancial covenantsâ€â€so-called covenant-lite loansâ€â€borrowing �rms’ revolving lines of credit almost always retain traditional �nancial covenants. This split structure gives revolving lenders the exclusive right and ability to monitor and to renegotiate the �nancial covenants, and we con�rm that loans with split control rights are still subject to the discipline of �nancial covenants. We provide evidence that split control rights are designed to mitigate bargaining frictions that have arisen with the entry of nonbank lenders and became apparent during the �nancial crisis.
SSRN
We �nd that corporate loan contracts frequently concentrate control rights with a subset of lenders. Despite the rise in term loans without �nancial covenantsâ€â€so-called covenant-lite loansâ€â€borrowing �rms’ revolving lines of credit almost always retain traditional �nancial covenants. This split structure gives revolving lenders the exclusive right and ability to monitor and to renegotiate the �nancial covenants, and we con�rm that loans with split control rights are still subject to the discipline of �nancial covenants. We provide evidence that split control rights are designed to mitigate bargaining frictions that have arisen with the entry of nonbank lenders and became apparent during the �nancial crisis.
Crises in the Housing Market: Causes, Consequences, and Policy Lessons
SSRN
The global financial crisis of the past decade has shaken the research and policy worlds out of their belief that housing markets are mostly benign and immaterial for understanding economic cycles. Instead, a growing consensus recognizes the central role that housing plays in shaping economic activity, particularly during large boom and bust episodes. This article discusses the latest research regarding the causes, consequences, and policy implications of housing crises with a broad focus that includes empirical and structural analysis, insights from the 2000's experience in the United States, and perspectives from around the globe. Even with the significant degree of heterogeneity in legal environments, institutions, and economic fundamentals over time and across countries, several common themes emerge to guide current and future thinking in this area.
SSRN
The global financial crisis of the past decade has shaken the research and policy worlds out of their belief that housing markets are mostly benign and immaterial for understanding economic cycles. Instead, a growing consensus recognizes the central role that housing plays in shaping economic activity, particularly during large boom and bust episodes. This article discusses the latest research regarding the causes, consequences, and policy implications of housing crises with a broad focus that includes empirical and structural analysis, insights from the 2000's experience in the United States, and perspectives from around the globe. Even with the significant degree of heterogeneity in legal environments, institutions, and economic fundamentals over time and across countries, several common themes emerge to guide current and future thinking in this area.
Cryptocurrency Price Prediction and Trading Strategies Using Support Vector Machines
arXiv
arXiv
Few assets in financial history have been as notoriously volatile as cryptocurrencies. While the long term outlook for this asset class remains unclear, we are successful in making short term price predictions for several major crypto assets. Using historical data from July 2015 to November 2019, we develop a large number of technical indicators to capture patterns in the cryptocurrency market. We then test various classification methods to forecast short-term future price movements based on these indicators. On both PPV and NPV metrics, our classifiers do well in identifying up and down market moves over the next 1 hour. Beyond evaluating classification accuracy, we also develop a strategy for translating 1-hour-ahead class predictions into trading decisions, along with a backtester that simulates trading in a realistic environment. We find that support vector machines yield the most profitable trading strategies, which outperform the market on average for Bitcoin, Ethereum and Litecoin over the past 22 months, since January 2018.
Dealer Leverage and Exchange Rates: Heterogeneity Across Intermediaries
SSRN
In line with a growing literature on financial intermediary asset pricing, we find that changes in the leverage of primary dealers have predictive power in forecasting exchange rates. Unlike previous studies, we find that primary dealer heterogeneity matters for their role in asset pricing. The leverage of foreign-headquartered dealers in the United States entirely drive the predictive power on exchange rates, while the same measure for domestic U.S.-headquartered dealers is insignificant. The leverage of foreign-headquartered dealers also has more predictive power for some other assets. We argue that this heterogeneity is due to foreign broker-dealers having more balance sheet capacity relative to domestic dealers during the 2000s. This result conflicts with an assumption of homogeneity among intermediaries which is implicit in most modern intermediary asset pricing models. In addition, we find that currency market positions, including derivatives positions, are likely stronger than cross-border lending as the main channel through which leverage manifests itself in exchange rate changes.
SSRN
In line with a growing literature on financial intermediary asset pricing, we find that changes in the leverage of primary dealers have predictive power in forecasting exchange rates. Unlike previous studies, we find that primary dealer heterogeneity matters for their role in asset pricing. The leverage of foreign-headquartered dealers in the United States entirely drive the predictive power on exchange rates, while the same measure for domestic U.S.-headquartered dealers is insignificant. The leverage of foreign-headquartered dealers also has more predictive power for some other assets. We argue that this heterogeneity is due to foreign broker-dealers having more balance sheet capacity relative to domestic dealers during the 2000s. This result conflicts with an assumption of homogeneity among intermediaries which is implicit in most modern intermediary asset pricing models. In addition, we find that currency market positions, including derivatives positions, are likely stronger than cross-border lending as the main channel through which leverage manifests itself in exchange rate changes.
Do Venture Capitalists Stifle Competition?
SSRN
We find that common ownership leads venture capital (VC) firms to stifle competition among startups, but only in limited circumstances. Our evidence is from pharmaceutical startups, where common ownership is widespread: 39% of startups share a VC with a close competitor. After a startup sees a close competitor make progress on a new drug project, the startup is less likely to advance its own project, and less likely to obtain VC funding, if the two startups share a common VC. These anticompetitive effects, however, are concentrated in markets with few competitors, VCs with larger equity stakes, and projects with similar technologies.
SSRN
We find that common ownership leads venture capital (VC) firms to stifle competition among startups, but only in limited circumstances. Our evidence is from pharmaceutical startups, where common ownership is widespread: 39% of startups share a VC with a close competitor. After a startup sees a close competitor make progress on a new drug project, the startup is less likely to advance its own project, and less likely to obtain VC funding, if the two startups share a common VC. These anticompetitive effects, however, are concentrated in markets with few competitors, VCs with larger equity stakes, and projects with similar technologies.
Does Intergenerational Mobility Increase Corporate Profits?
SSRN
We find that firms located in areas with higher intergenerational mobility are more profitable. Building off the work of Chetty and Hendren (2018a and 2018b)â€â€who provide measures of intergenerational mobility for all commuting zones (essentially, metropolitan areas) within the U.S.â€â€we are the first to show the positive association between intergenerational mobility and corporate profitability. Our regressions compare firms in the same industry at the same point in time and fully control for time-varying state-level shocks. As such, our findings cannot be explained by either differences in industry composition across localities or by variation in state-level economic conditions; nor can our results be explained by differences in firm characteristics or by local economic conditions. Rather, we argue that our findings are best explained by intergenerational mobility influencing human capital formation. Areas with higher mobility do a better job in unlocking their residents’ innate talents, which in turn is associated with improved performance by locally headquartered firms. In essence, our results uncover a positive link between greater equality of opportunity and increased corporate profitability.
SSRN
We find that firms located in areas with higher intergenerational mobility are more profitable. Building off the work of Chetty and Hendren (2018a and 2018b)â€â€who provide measures of intergenerational mobility for all commuting zones (essentially, metropolitan areas) within the U.S.â€â€we are the first to show the positive association between intergenerational mobility and corporate profitability. Our regressions compare firms in the same industry at the same point in time and fully control for time-varying state-level shocks. As such, our findings cannot be explained by either differences in industry composition across localities or by variation in state-level economic conditions; nor can our results be explained by differences in firm characteristics or by local economic conditions. Rather, we argue that our findings are best explained by intergenerational mobility influencing human capital formation. Areas with higher mobility do a better job in unlocking their residents’ innate talents, which in turn is associated with improved performance by locally headquartered firms. In essence, our results uncover a positive link between greater equality of opportunity and increased corporate profitability.
Domestic Banks as Lightning Rods? Home Bias and Information During the Eurozone Crisis
SSRN
European banks have been criticized for holding excessive domestic government debt during the recent Eurozone crisis, which may have intensified the diabolic loop between sovereign and bank credit risks. By using a novel bank-level dataset covering the entire timeline of the Eurozone crisis, I first re-confirm that the crisis led to the reallocation of sovereign debt from foreign to domestic banks. In contrast to the recent literature focusing only on sovereign debt, I show that the banks' private sector exposures were (at least) equally affected by the rise in home bias. Consistent with this pattern, I propose a new debt reallocation channel based on informational frictions and show that the informationally closer foreign banks increase their relative exposures when the sovereign risk rises. The effect of informational closeness is economically meaningful and robust to the use of different information measures and controls for alternative channels of sovereign debt reallocation.
SSRN
European banks have been criticized for holding excessive domestic government debt during the recent Eurozone crisis, which may have intensified the diabolic loop between sovereign and bank credit risks. By using a novel bank-level dataset covering the entire timeline of the Eurozone crisis, I first re-confirm that the crisis led to the reallocation of sovereign debt from foreign to domestic banks. In contrast to the recent literature focusing only on sovereign debt, I show that the banks' private sector exposures were (at least) equally affected by the rise in home bias. Consistent with this pattern, I propose a new debt reallocation channel based on informational frictions and show that the informationally closer foreign banks increase their relative exposures when the sovereign risk rises. The effect of informational closeness is economically meaningful and robust to the use of different information measures and controls for alternative channels of sovereign debt reallocation.
Dynamic Optimality of Airline Fuel Cost Hedging
SSRN
Hedging creates value only when the policy is near optimal but can be harmful otherwise. This paper takes the US airline industry as an example and derives the optimal fuel cost hedging ratio as a function of firm-specific revenue and cost sensitivities, as well as the relative composition of demand and supply shocks in the oil price movement. We construct a market hedging demand index based on rolling-window regression of crude futures returns on equity index returns and use the index to capture the time-variation in the fuel cost hedging demand for a typical airline. By regressing the logarithm of Tobin's Q against the hedging ratio under different market conditions, we show that fuel cost hedging increases firm value only when the market hedging demand is high. More important, we use the time-series correlation between an airline's hedging ratio and the market hedging demand to measure the dynamic optimality of the airline's fuel hedging practice. Out of the 33 US airlines in our sample over a 25-year period, one third do not hedge at all, while the hedging ratios for more than another one third move in the opposite direction of the market hedging demand. Only less than one third of airlines show positive dynamic optimality for their hedging practice. The cross-sectional diversity of the optimality estimates highlights the inherent difficulty of implementing an optimal policy. Still, we find strong value in staying dynamically optimal in an airline's fuel cost hedging practice: The dynamic optimality of each airline's hedging practice strongly and positively predicts its valuation as measured by the logarithm of its Tobin's Q. The value increase comes from both reduced variation in its return on asset and increased average return. Airlines with negative hedging dynamic optimality not only are ineffective in reducing their return on asset variation, but also incur extra costs from setting up and maintaining a costly hedging program and from entering and exiting hedging positions. Such extra costs lower the airlines' average return and hurt their valuation. As a result, their average Tobin's Q is even lower than the average for airlines that do not hedge at all.
SSRN
Hedging creates value only when the policy is near optimal but can be harmful otherwise. This paper takes the US airline industry as an example and derives the optimal fuel cost hedging ratio as a function of firm-specific revenue and cost sensitivities, as well as the relative composition of demand and supply shocks in the oil price movement. We construct a market hedging demand index based on rolling-window regression of crude futures returns on equity index returns and use the index to capture the time-variation in the fuel cost hedging demand for a typical airline. By regressing the logarithm of Tobin's Q against the hedging ratio under different market conditions, we show that fuel cost hedging increases firm value only when the market hedging demand is high. More important, we use the time-series correlation between an airline's hedging ratio and the market hedging demand to measure the dynamic optimality of the airline's fuel hedging practice. Out of the 33 US airlines in our sample over a 25-year period, one third do not hedge at all, while the hedging ratios for more than another one third move in the opposite direction of the market hedging demand. Only less than one third of airlines show positive dynamic optimality for their hedging practice. The cross-sectional diversity of the optimality estimates highlights the inherent difficulty of implementing an optimal policy. Still, we find strong value in staying dynamically optimal in an airline's fuel cost hedging practice: The dynamic optimality of each airline's hedging practice strongly and positively predicts its valuation as measured by the logarithm of its Tobin's Q. The value increase comes from both reduced variation in its return on asset and increased average return. Airlines with negative hedging dynamic optimality not only are ineffective in reducing their return on asset variation, but also incur extra costs from setting up and maintaining a costly hedging program and from entering and exiting hedging positions. Such extra costs lower the airlines' average return and hurt their valuation. As a result, their average Tobin's Q is even lower than the average for airlines that do not hedge at all.
Dynamic Portfolio Management with Reinforcement Learning
arXiv
arXiv
Dynamic Portfolio Management is a domain that concerns the continuous redistribution of assets within a portfolio to maximize the total return in a given period of time. With the recent advancement in machine learning and artificial intelligence, many efforts have been put in designing and discovering efficient algorithmic ways to manage the portfolio. This paper presents two different reinforcement learning agents, policy gradient actor-critic and evolution strategy. The performance of the two agents is compared during backtesting. We also discuss the problem set up from state space design, to state value function approximator and policy control design. We include the short position to give the agent more flexibility during assets redistribution and a constant trading cost of 0.25%. The agent is able to achieve 5% return in 10 days daily trading despite 0.25% trading cost.
Economics of Nuclear Power Plant Investment: Monte Carlo Simulations of Generation III/III+ Investment Projects
SSRN
This paper analyzes nuclear power plant investments using Monte Carlo simulations of economic indicators such as net present value (NPV) and levelized cost of electricity (LCOE). In times of liberalized electricity markets, largescale decarbonization and climate change considerations, this topic is gaining momentum and requires fundamental analysis of cost drivers. We adopt the private investors’ perspective and ask: What are the investors’ economics of nuclear power, or - stated differently - would a private investor consider nuclear power as an investment option in the context of a competitive power market? By focusing on the perspective of an investor, we leave aside the public policy perspective, such as externalities, cost-benefit analysis, proliferation issues, etc. Instead, we apply a conventional economic perspective, such as proposed by Rothwell (2016) to calculate NPV and LCOE. We base our analysis on a stochastic Monte Carlo simulation to nuclear power plant investments of generation III/III+, i.e. available technologies with some experience and an extensive scrutiny of cost data. We define and estimate the main drivers of our model, i.e. overnight construction costs, wholesale electricity prices, and weighted average cost of capital, and discuss reasonable ranges and distributions of those parameters. We apply the model to recent and ongoing investment projects in the Western world, i.e. Europe and the United States; cases in non-market economies such as China and Russia, and other non-established technologies (Generation IV reactors and small modular reactors) are excluded from the analysis due to data issues. Model runs suggest that investing in nuclear power plants is not profitable, i.e. expected net present values are highly negative, mainly driven by high construction costs, including capital costs, and uncertain and low revenues. Even extending reactor lifetimes from currently 40 years to 60 years does not improve the results significantly. We conclude that the economics of nuclear power plants are not favorable to future investments, even though additional costs (decommissioning, long-term storage) and the social costs of accidents are not even considered.
SSRN
This paper analyzes nuclear power plant investments using Monte Carlo simulations of economic indicators such as net present value (NPV) and levelized cost of electricity (LCOE). In times of liberalized electricity markets, largescale decarbonization and climate change considerations, this topic is gaining momentum and requires fundamental analysis of cost drivers. We adopt the private investors’ perspective and ask: What are the investors’ economics of nuclear power, or - stated differently - would a private investor consider nuclear power as an investment option in the context of a competitive power market? By focusing on the perspective of an investor, we leave aside the public policy perspective, such as externalities, cost-benefit analysis, proliferation issues, etc. Instead, we apply a conventional economic perspective, such as proposed by Rothwell (2016) to calculate NPV and LCOE. We base our analysis on a stochastic Monte Carlo simulation to nuclear power plant investments of generation III/III+, i.e. available technologies with some experience and an extensive scrutiny of cost data. We define and estimate the main drivers of our model, i.e. overnight construction costs, wholesale electricity prices, and weighted average cost of capital, and discuss reasonable ranges and distributions of those parameters. We apply the model to recent and ongoing investment projects in the Western world, i.e. Europe and the United States; cases in non-market economies such as China and Russia, and other non-established technologies (Generation IV reactors and small modular reactors) are excluded from the analysis due to data issues. Model runs suggest that investing in nuclear power plants is not profitable, i.e. expected net present values are highly negative, mainly driven by high construction costs, including capital costs, and uncertain and low revenues. Even extending reactor lifetimes from currently 40 years to 60 years does not improve the results significantly. We conclude that the economics of nuclear power plants are not favorable to future investments, even though additional costs (decommissioning, long-term storage) and the social costs of accidents are not even considered.
Embedded Supervision: How to Build Regulation into Blockchain Finance
SSRN
The spread of distributed ledger technology (DLT) in finance could help to improve the efficiency and quality of supervision. This paper makes the case for embedded supervision, i.e., a regulatory framework that provides for compliance in tokenized markets to be automatically monitored by reading the market’s ledger, thus reducing the need for firms to actively collect, verify and deliver data. After sketching out a design for such schemes, the paper explores the conditions under which distributed ledger data might be used to monitor compliance. To this end, a decentralized market is modelled that replaces today’s intermediary-based verification of legal data with blockchain-enabled data credibility based on economic consensus. The key results set out the conditions under which the market’s economic consensus would be strong enough to guarantee that transactions are economically final, so that supervisors can trust the distributed ledger’s data. The paper concludes with a discussion of the legislative and operational requirements that would promote low-cost supervision and a level playing field for small and large firms.
SSRN
The spread of distributed ledger technology (DLT) in finance could help to improve the efficiency and quality of supervision. This paper makes the case for embedded supervision, i.e., a regulatory framework that provides for compliance in tokenized markets to be automatically monitored by reading the market’s ledger, thus reducing the need for firms to actively collect, verify and deliver data. After sketching out a design for such schemes, the paper explores the conditions under which distributed ledger data might be used to monitor compliance. To this end, a decentralized market is modelled that replaces today’s intermediary-based verification of legal data with blockchain-enabled data credibility based on economic consensus. The key results set out the conditions under which the market’s economic consensus would be strong enough to guarantee that transactions are economically final, so that supervisors can trust the distributed ledger’s data. The paper concludes with a discussion of the legislative and operational requirements that would promote low-cost supervision and a level playing field for small and large firms.
Empirical Studies of Common Ownership-Effects on Product Markets & Innovation (Presentation Slides)
SSRN
This slide deck reviews the extant empirical literature on common ownership concentration on firm behavior, innovation, and product market outcomes, as presented at the FTC hearings on common ownership and competition in December 2018. It is primarily based on this literature review: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3046829.
SSRN
This slide deck reviews the extant empirical literature on common ownership concentration on firm behavior, innovation, and product market outcomes, as presented at the FTC hearings on common ownership and competition in December 2018. It is primarily based on this literature review: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3046829.
Estimation and simulation of the transaction arrival process in intraday electricity markets
arXiv
arXiv
We examine the novel problem of the estimation of transaction arrival processes in the intraday electricity markets. We model the inter-arrivals using multiple time-varying parametric densities based on the generalized F distribution estimated by maximum likelihood. We analyse both the in-sample characteristics and the probabilistic forecasting performance. In a rolling window forecasting study, we simulate many trajectories to evaluate the forecasts and gain significant insights into the model fit. The prediction accuracy is evaluated by a functional version of the MAE (mean absolute error), RMSE (root mean squared error) and CRPS (continuous ranked probability score) for the simulated count processes. This paper fills the gap in the literature regarding the intensity estimation of transaction arrivals and is a major contribution to the topic, yet leaves much of the field for further development. The study presented in this paper is conducted based on the German Intraday Continuous electricity market data, but this method can be easily applied to any other continuous intraday electricity market. For the German market, a specific generalized gamma distribution setup explains the overall behaviour significantly best, especially as the tail behaviour of the process is well covered.
Fintech Lending and Mortgage Credit Access
SSRN
Following the 2008 financial crisis, mortgage credit tightened and banks lost significant mortgage market share to nonbank lenders, including to fintech firms recently. Have fintech firms expanded credit access, or are their customers similar to those of traditional lenders? Unlike in small business and unsecured consumers lending, fintech mortgage lenders do not have the same incentives or flexibility to use alternative data for credit decisions because of stringent mortgage origination requirements. Fintech loans are broadly similar to those made by traditional lenders, despite innovations in the marketing and the application process. However, nonbanks market to consumers with weaker credit scores than do banks, and fintech lenders have greater market shares in areas with lower credit scores and higher mortgage denial rates.
SSRN
Following the 2008 financial crisis, mortgage credit tightened and banks lost significant mortgage market share to nonbank lenders, including to fintech firms recently. Have fintech firms expanded credit access, or are their customers similar to those of traditional lenders? Unlike in small business and unsecured consumers lending, fintech mortgage lenders do not have the same incentives or flexibility to use alternative data for credit decisions because of stringent mortgage origination requirements. Fintech loans are broadly similar to those made by traditional lenders, despite innovations in the marketing and the application process. However, nonbanks market to consumers with weaker credit scores than do banks, and fintech lenders have greater market shares in areas with lower credit scores and higher mortgage denial rates.
Heterogeneity in Decentralized Asset Markets
SSRN
We study a search and bargaining model of asset markets in which investors’ heterogeneous valuations for the asset are drawn from an arbitrary distribution. We present a solution technique that makes the model fully tractable, and allows us to provide a complete characterization of the unique equilibrium, in closed form, both in and out of steady state. Using this characterization, we derive several novel implications that highlight the importance of heterogeneity. In particular, we show how some investors endogenously emerge as intermediaries, even though they have no advantage in contacting other agents or holding inventory; and we show how heterogeneity magnifies the impact of search frictions on asset prices, misallocation, and welfare.
SSRN
We study a search and bargaining model of asset markets in which investors’ heterogeneous valuations for the asset are drawn from an arbitrary distribution. We present a solution technique that makes the model fully tractable, and allows us to provide a complete characterization of the unique equilibrium, in closed form, both in and out of steady state. Using this characterization, we derive several novel implications that highlight the importance of heterogeneity. In particular, we show how some investors endogenously emerge as intermediaries, even though they have no advantage in contacting other agents or holding inventory; and we show how heterogeneity magnifies the impact of search frictions on asset prices, misallocation, and welfare.
How Efficiently Do Investors Allocate Capital to Active Mutual Funds?
SSRN
I show that investors misallocate a substantial amount of capital in the active mutual fund industry. To this end, I develop a novel structural identification strategy to estimate the returns to scale in active management and the time-varying fund skills. A median fund is over-allocated by $29 million, so the majority of funds are expected to underperform. The industry can host more capital, but additional capital should go to a small fraction of funds. In particular, funds with the highest skills are severely under-allocated and account for most of the missing capital. In the time-series, under-allocated funds can outperform their benchmarks for three years. My findings suggest the active mutual fund industry is not always in a frictionless rational expectations equilibrium. The disequilibrium implies the existence of profit opportunities to informed investors and thus rationalizes the popularity of active management.
SSRN
I show that investors misallocate a substantial amount of capital in the active mutual fund industry. To this end, I develop a novel structural identification strategy to estimate the returns to scale in active management and the time-varying fund skills. A median fund is over-allocated by $29 million, so the majority of funds are expected to underperform. The industry can host more capital, but additional capital should go to a small fraction of funds. In particular, funds with the highest skills are severely under-allocated and account for most of the missing capital. In the time-series, under-allocated funds can outperform their benchmarks for three years. My findings suggest the active mutual fund industry is not always in a frictionless rational expectations equilibrium. The disequilibrium implies the existence of profit opportunities to informed investors and thus rationalizes the popularity of active management.
Institutional Investors and the U.S. Housing Recovery
SSRN
We study the house price recovery in the U.S. single-family residential housing market since the outbreak of the mortgage crisis, which, in contrast to the preceding housing boom, was not accompanied by a rise in homeownership rates. Using comprehensive property-level transaction data, we show that this phenomenon is largely explained by the emergence of institutional investors. By exploiting heterogeneity in a county’s exposure to local lending conditions and to government programs that affected investors’ access to residential properties, we estimate that the increasing presence of institutions in the housing market explains over half of the increase in real house price appreciation rates between 2006 and 2014. We further demonstrate that institutional investors contribute to the improvement of the local housing market by reducing vacancy rates as they shorten the amount of time distressed properties stay in REO. Additionally, institutional investors help lower local unemployment rates by increasing local construction employment. However, institutional investors are responsible for most of the declines in the homeownership rates.
SSRN
We study the house price recovery in the U.S. single-family residential housing market since the outbreak of the mortgage crisis, which, in contrast to the preceding housing boom, was not accompanied by a rise in homeownership rates. Using comprehensive property-level transaction data, we show that this phenomenon is largely explained by the emergence of institutional investors. By exploiting heterogeneity in a county’s exposure to local lending conditions and to government programs that affected investors’ access to residential properties, we estimate that the increasing presence of institutions in the housing market explains over half of the increase in real house price appreciation rates between 2006 and 2014. We further demonstrate that institutional investors contribute to the improvement of the local housing market by reducing vacancy rates as they shorten the amount of time distressed properties stay in REO. Additionally, institutional investors help lower local unemployment rates by increasing local construction employment. However, institutional investors are responsible for most of the declines in the homeownership rates.
Intermediary Segmentation in the Commercial Real Estate Market
SSRN
Banks, life insurers, and commercial mortgage-backed securities (CMBS) lenders originate the vast majority of U.S. commercial real estate (CRE) loans. While these lenders compete in the same market, they differ in how they are funded and regulated, and therefore specialize in loans with different characteristics. We harmonize loan-level data across the lenders and review how their CRE portfolios differ. We then exploit cross-sectional differences in loan portfolios to estimate a simple model of frictional substitution across lender types. The substitution patterns in the model match well the observed shift of borrowers away from CMBS when CMBS spreads rose in 2016.
SSRN
Banks, life insurers, and commercial mortgage-backed securities (CMBS) lenders originate the vast majority of U.S. commercial real estate (CRE) loans. While these lenders compete in the same market, they differ in how they are funded and regulated, and therefore specialize in loans with different characteristics. We harmonize loan-level data across the lenders and review how their CRE portfolios differ. We then exploit cross-sectional differences in loan portfolios to estimate a simple model of frictional substitution across lender types. The substitution patterns in the model match well the observed shift of borrowers away from CMBS when CMBS spreads rose in 2016.
Intermediary Segmentation in the Commercial Real Estate Market
SSRN
Banks, life insurers, and commercial mortgage-backed securities (CMBS) lenders originate the vast majority of U.S. commercial real estate (CRE) loans. While these lenders compete in the same market, they differ in how they are funded and regulated, and therefore specialize in loans with different characteristics. We harmonize loan-level data across the lenders and review how their CRE portfolios differ. We then exploit cross-sectional differences in loan portfolios to estimate a simple model of frictional substitution across lender types. The substitution patterns in the model match well the observed shift of borrowers away from CMBS when CMBS spreads rose in 2016.
SSRN
Banks, life insurers, and commercial mortgage-backed securities (CMBS) lenders originate the vast majority of U.S. commercial real estate (CRE) loans. While these lenders compete in the same market, they differ in how they are funded and regulated, and therefore specialize in loans with different characteristics. We harmonize loan-level data across the lenders and review how their CRE portfolios differ. We then exploit cross-sectional differences in loan portfolios to estimate a simple model of frictional substitution across lender types. The substitution patterns in the model match well the observed shift of borrowers away from CMBS when CMBS spreads rose in 2016.
Introduction to Solving Quant Finance Problems with Time-Stepped FBSDE and Deep Learning
arXiv
arXiv
In this introductory paper, we discuss how quantitative finance problems under some common risk factor dynamics for some common instruments and approaches can be formulated as time-continuous or time-discrete forward-backward stochastic differential equations (FBSDE) final-value or control problems, how these final value problems can be turned into control problems, how time-continuous problems can be turned into time-discrete problems, and how the forward and backward stochastic differential equations (SDE) can be time-stepped. We obtain both forward and backward time-stepped time-discrete stochastic control problems (where forward and backward indicate in which direction the Y SDE is time-stepped) that we will solve with optimization approaches using deep neural networks for the controls and stochastic gradient and other deep learning methods for the actual optimization/learning. We close with examples for the forward and backward methods for an European option pricing problem. Several methods and approaches are new.
Leverage Over the Firm Life Cycle, Firm Growth, and Aggregate Fluctuations
SSRN
We study the leverage of U.S. firms over their life cycles and the connection between firm leverage, firm growth, and aggregate shocks. We construct a new dataset that combines private and public firms’ balance sheets with firm-level data from U.S. Census Bureau’s Longitudinal Business Database for the period 2005–12. Public and private firms exhibit different leverage dynamics over their life cycles. Firm age and size are systematically related to leverage for private firms but not for public firms. We show that private firms, but not public ones, deleveraged during the Great Recession and that this deleveraging is associated with a reduction in firm revenue and employment growth. Exploiting sectoral variation, we find that the leverage dynamics of firms is also relevant for aggregate fluctuations.
SSRN
We study the leverage of U.S. firms over their life cycles and the connection between firm leverage, firm growth, and aggregate shocks. We construct a new dataset that combines private and public firms’ balance sheets with firm-level data from U.S. Census Bureau’s Longitudinal Business Database for the period 2005–12. Public and private firms exhibit different leverage dynamics over their life cycles. Firm age and size are systematically related to leverage for private firms but not for public firms. We show that private firms, but not public ones, deleveraged during the Great Recession and that this deleveraging is associated with a reduction in firm revenue and employment growth. Exploiting sectoral variation, we find that the leverage dynamics of firms is also relevant for aggregate fluctuations.
Maritime Financial Instability and Supply Chain Management Effects
SSRN
The paper investigates the offshore crisis 2015â€"2017 and its impact on central international offshore oil and gas related maritime cluster, the Blue Maritime Cluster, located at the North-Western coast of Norway.This complete maritime cluster, heavily involved in offshore petroleum operations, it experienced an almost devastating blow, as it lost almost one-third of its employees as its value added contracted by 39 percent.When the crises is basically seen as a result of falling of oil prices and lower activity and squeezed profit margins, this paper investigates the crisis in the light of financial instability and reactions down the maritime supply chain.By collecting data from the Blue Maritime Cluster and the Norwegian central company register one is able both to trace the fall in the activity due to the crisis and measures of financial strength. The study approaches the data by using a structural time series analysis in order to map cycles as deviations from polynomial trends.The findings ascertain that financial instability was dominant within the Blue Maritime Cluster during its boom before the crisis. Debt ratios and thereby gearing (leverage) were high. Thus, the companies could not meet their obligations when the crisis hit. The paper also finds that narrow focused supply chain management made the cluster fall deep into the abyss. Companies with a more diversified portfolio were able to meet the hard years better than others.
SSRN
The paper investigates the offshore crisis 2015â€"2017 and its impact on central international offshore oil and gas related maritime cluster, the Blue Maritime Cluster, located at the North-Western coast of Norway.This complete maritime cluster, heavily involved in offshore petroleum operations, it experienced an almost devastating blow, as it lost almost one-third of its employees as its value added contracted by 39 percent.When the crises is basically seen as a result of falling of oil prices and lower activity and squeezed profit margins, this paper investigates the crisis in the light of financial instability and reactions down the maritime supply chain.By collecting data from the Blue Maritime Cluster and the Norwegian central company register one is able both to trace the fall in the activity due to the crisis and measures of financial strength. The study approaches the data by using a structural time series analysis in order to map cycles as deviations from polynomial trends.The findings ascertain that financial instability was dominant within the Blue Maritime Cluster during its boom before the crisis. Debt ratios and thereby gearing (leverage) were high. Thus, the companies could not meet their obligations when the crisis hit. The paper also finds that narrow focused supply chain management made the cluster fall deep into the abyss. Companies with a more diversified portfolio were able to meet the hard years better than others.
Momentum Effects in the Cryptocurrency Market after One-Day Abnormal Returns
SSRN
This paper examines whether there exists a momentum effect after one-day abnormal returns in the cryptocurrency market. For this purpose a number of hypotheses of interest are tested for the BitCoin, Ethereum and LiteCoin exchange rates vis-Ã -vis the US dollar over the period 01.01.2017-01.09.2019, specifically whether or not: H1) the intraday behaviour of hourly returns is different on overreaction days compared to normal days; H2) there is a momentum effect on overreaction days, and H3) after one-day abnormal returns. The methods used for the analysis include a number of statistical methods as well as a trading simulation approach. The results suggest that hourly returns during the day of positive/negative overreactions are significantly higher/lower than those during the average positive/negative day. Overreactions can usually be detected before the day ends by estimating specific timing parameters. Prices tend to move in the direction of the overreaction till the end of the day when it occurs, which implies the existence of a momentum effect on that day giving rise to exploitable profit opportunities. This effect (together with profit opportunities) is also observed on the following day. In two cases (BTCUSD positive overreactions and ETHUSD negative overreactions) a contrarian effect is detected instead.
SSRN
This paper examines whether there exists a momentum effect after one-day abnormal returns in the cryptocurrency market. For this purpose a number of hypotheses of interest are tested for the BitCoin, Ethereum and LiteCoin exchange rates vis-Ã -vis the US dollar over the period 01.01.2017-01.09.2019, specifically whether or not: H1) the intraday behaviour of hourly returns is different on overreaction days compared to normal days; H2) there is a momentum effect on overreaction days, and H3) after one-day abnormal returns. The methods used for the analysis include a number of statistical methods as well as a trading simulation approach. The results suggest that hourly returns during the day of positive/negative overreactions are significantly higher/lower than those during the average positive/negative day. Overreactions can usually be detected before the day ends by estimating specific timing parameters. Prices tend to move in the direction of the overreaction till the end of the day when it occurs, which implies the existence of a momentum effect on that day giving rise to exploitable profit opportunities. This effect (together with profit opportunities) is also observed on the following day. In two cases (BTCUSD positive overreactions and ETHUSD negative overreactions) a contrarian effect is detected instead.
New Technology-Based Firms and Venture Capital Policy in Nigeria
SSRN
The development of high growth New Technology-Based Firms (NTBFs) in Silicon Valley, Israel, Bangalore and UK is attributed to Venture Capital. Evidence of Nigeria focused or based Venture Capital investment in new technology based firms (NTBFs) is surveyed. This study attempted defining what NTBFs is with Nigeria in context; utilizing established classification such as OECD in assessing the kinds of technology-based firms (TBFs) around. Despite the importance of NTBFs, government incentives and VC investments to grow them have been minimal in Nigeria. Using open (unstructured) questions interviews of members of the Venture Capital Association of Nigeria (VCAN) and some executives in technology-based firms, their assessment of the Nigerian business environment shows a need for policy changes to encourage an upsurge of VC investment in NTBFs. This paper relied on secondary source material.
SSRN
The development of high growth New Technology-Based Firms (NTBFs) in Silicon Valley, Israel, Bangalore and UK is attributed to Venture Capital. Evidence of Nigeria focused or based Venture Capital investment in new technology based firms (NTBFs) is surveyed. This study attempted defining what NTBFs is with Nigeria in context; utilizing established classification such as OECD in assessing the kinds of technology-based firms (TBFs) around. Despite the importance of NTBFs, government incentives and VC investments to grow them have been minimal in Nigeria. Using open (unstructured) questions interviews of members of the Venture Capital Association of Nigeria (VCAN) and some executives in technology-based firms, their assessment of the Nigerian business environment shows a need for policy changes to encourage an upsurge of VC investment in NTBFs. This paper relied on secondary source material.
Playing with the Devil? Organizational Voids within Corporate Venture Capital Dyads
SSRN
When acting as an intermediary, corporate venture capital (CVC) units must balance two different institutional settings: the rigid corporate world and the advancing startup ecosystem. As a result, CVC units are faced with multiple voids that influence their organizational orientation toward one environment. This study employs text analysis on a unique sample of 22 CVC dyads to introduce a novel empirical way of measuring isomorphic variation over time. Following a mixed-method approach, the quantitative results are used to shed light on potential drivers of isomorphism, compiled by semi-structured interviews. The findings demonstrate that the degree of isomorphism is not only determined by decisions made during the initial phase of a CVC unit, but also from mimetic processes that occur within the lifespan of such investment vehicles. The study thereby contributes to the ongoing academic discussion by elucidating potential drivers of isomorphism and provides researchers with a novel way to measure isomorphic tendencies based on organizational text excerpts.
SSRN
When acting as an intermediary, corporate venture capital (CVC) units must balance two different institutional settings: the rigid corporate world and the advancing startup ecosystem. As a result, CVC units are faced with multiple voids that influence their organizational orientation toward one environment. This study employs text analysis on a unique sample of 22 CVC dyads to introduce a novel empirical way of measuring isomorphic variation over time. Following a mixed-method approach, the quantitative results are used to shed light on potential drivers of isomorphism, compiled by semi-structured interviews. The findings demonstrate that the degree of isomorphism is not only determined by decisions made during the initial phase of a CVC unit, but also from mimetic processes that occur within the lifespan of such investment vehicles. The study thereby contributes to the ongoing academic discussion by elucidating potential drivers of isomorphism and provides researchers with a novel way to measure isomorphic tendencies based on organizational text excerpts.
Policy Interventions in Sovereign Debt Restructurings
SSRN
The wave of sovereign defaults in the early 1980s and the string of debt crises in the decades that followed have fostered proposals involving policy interventions in sovereign debt restructurings. A key question about these proposals that has proved hard to handle is how they in influence the behavior of creditors and debtors. We address such challenge by incorporating these policy proposals into a quantitative model in the tradition of Eaton and Gersovitz (1981) that includes renegotiation in sovereign debt restructurings. Critically, the model also endogenizes the choice of debt maturity, an essential aspect of sovereign defaults and restructurings. We evaluate several policy interventions, and we identify the crucial features that matter to improve the outcome of distressed debt restructurings and reduce the frequency of debt distress events.
SSRN
The wave of sovereign defaults in the early 1980s and the string of debt crises in the decades that followed have fostered proposals involving policy interventions in sovereign debt restructurings. A key question about these proposals that has proved hard to handle is how they in influence the behavior of creditors and debtors. We address such challenge by incorporating these policy proposals into a quantitative model in the tradition of Eaton and Gersovitz (1981) that includes renegotiation in sovereign debt restructurings. Critically, the model also endogenizes the choice of debt maturity, an essential aspect of sovereign defaults and restructurings. We evaluate several policy interventions, and we identify the crucial features that matter to improve the outcome of distressed debt restructurings and reduce the frequency of debt distress events.
Rational Apathy: The Curse of Shareholder Empowerment in Uncontested Board Elections
SSRN
In contrast to popular belief, this paper shows that there does not exist an unambiguous positive relation between shareholders’ voting power and the quality of corporate governance. I utilize a 2010 SEC policy change that increased shareholders’ voting power in uncontested board elections, and, to establish the causality, I take advantage of the exogenous election cycles for director elections. I find that shareholders’ voting power will worsen some measures of corporate governance (CEO pay-performance sensitivity and probability of removing poison pills). I show that this is due to shareholders’ decreased participation in either the sponsorship of governance proposals and active voting in annual meetings. I argue that the negative relation between shareholders’ voting power and their participation is due to a free-rider problem.
SSRN
In contrast to popular belief, this paper shows that there does not exist an unambiguous positive relation between shareholders’ voting power and the quality of corporate governance. I utilize a 2010 SEC policy change that increased shareholders’ voting power in uncontested board elections, and, to establish the causality, I take advantage of the exogenous election cycles for director elections. I find that shareholders’ voting power will worsen some measures of corporate governance (CEO pay-performance sensitivity and probability of removing poison pills). I show that this is due to shareholders’ decreased participation in either the sponsorship of governance proposals and active voting in annual meetings. I argue that the negative relation between shareholders’ voting power and their participation is due to a free-rider problem.
Relationship Networks in Banking Around a Sovereign Default and Currency Crisis
SSRN
We study how banks’ exposure to a sovereign crisis gets transmitted onto the corporate sector. To do so we use data on the universe of banks and �rms in Argentina during the crisis of 2001. We build a model characterized by matching frictions in which �rms establish (long-term) relationships with banks that are subject to balance sheet disruptions. Credit relationships with banks more exposed to the crisis suffer the most. However, this relationship-level effect overstates the true cost of the crisis since profitable �rms (e.g., exporters after a devaluation) might �nd it optimal to switch lenders, reducing the negative impact on overall credit and activity. Using linked bank-�rm and �rm-level data we �nd evidence largely consistent with our theory.
SSRN
We study how banks’ exposure to a sovereign crisis gets transmitted onto the corporate sector. To do so we use data on the universe of banks and �rms in Argentina during the crisis of 2001. We build a model characterized by matching frictions in which �rms establish (long-term) relationships with banks that are subject to balance sheet disruptions. Credit relationships with banks more exposed to the crisis suffer the most. However, this relationship-level effect overstates the true cost of the crisis since profitable �rms (e.g., exporters after a devaluation) might �nd it optimal to switch lenders, reducing the negative impact on overall credit and activity. Using linked bank-�rm and �rm-level data we �nd evidence largely consistent with our theory.
Substance and Form Adoption of International Financial Reporting Standards and Financial Statement Comparability: Evidence From South Africa
SSRN
We investigate whether the comparability of the financial statements change following the switch from International Financial Reporting Standards (IFRS) in substance (the content of IFRS) to IFRS in substance and form (IFRS as issued by the IASB). Therefore, while the substance of the accounting standards remain the same, form is added to the adoption in that it is now formally referred to as IFRS as issued by the IASB. We use data from South Africa, a country whose local Generally Accepted Accounting Practices (GAAP) was word-for-word the same as IFRS prior to the adoption of IFRS as issued by the IASB in 2005. We compare South African firms with two different groups, namely other mandatory IFRS adopters and non-adopters. We find evidence of an increase in comparability of financial statements of South African firms with both adopters and non-adopters. In addition, we find a global increase in comparability of firms’ financial statements consistent with market changes unrelated to IFRS adoption. However, an incremental increase in the comparability of financial statements of South African firms with the adoption of IFRS relative to non-adopting firms is consistent with benefits from South Africa’s addition of form to its existing in-substance adoption of IFRS. This increased comparability is also consistent with benefits from the accounting amounts of firms from other adopting countries becoming more comparable to the accounting amounts of South African firms.
SSRN
We investigate whether the comparability of the financial statements change following the switch from International Financial Reporting Standards (IFRS) in substance (the content of IFRS) to IFRS in substance and form (IFRS as issued by the IASB). Therefore, while the substance of the accounting standards remain the same, form is added to the adoption in that it is now formally referred to as IFRS as issued by the IASB. We use data from South Africa, a country whose local Generally Accepted Accounting Practices (GAAP) was word-for-word the same as IFRS prior to the adoption of IFRS as issued by the IASB in 2005. We compare South African firms with two different groups, namely other mandatory IFRS adopters and non-adopters. We find evidence of an increase in comparability of financial statements of South African firms with both adopters and non-adopters. In addition, we find a global increase in comparability of firms’ financial statements consistent with market changes unrelated to IFRS adoption. However, an incremental increase in the comparability of financial statements of South African firms with the adoption of IFRS relative to non-adopting firms is consistent with benefits from South Africa’s addition of form to its existing in-substance adoption of IFRS. This increased comparability is also consistent with benefits from the accounting amounts of firms from other adopting countries becoming more comparable to the accounting amounts of South African firms.
Talking About the Weather: Availabilty, Affect and the Demand for Green Investments
SSRN
In 2014, numerous adverse weather events occurred throughout Sweden. In their wake, some investors dramatically overweighted the probability of future adverse climate scenarios, holding views far outside the generally accepted scientific consensus. We combine survey evidence with individual registry data to study how exposure to climate calamities has driven these miscalibrated individuals to make “green†choices. These individuals are more likely to say they recycle more than their neighbors, are willing to pay extra for environmentally friendly products, think green investments outperform, and are willing to pay higher fees for green mutual funds. They also trade their retirement portfolios into investments that tout environmentalsustainability.
SSRN
In 2014, numerous adverse weather events occurred throughout Sweden. In their wake, some investors dramatically overweighted the probability of future adverse climate scenarios, holding views far outside the generally accepted scientific consensus. We combine survey evidence with individual registry data to study how exposure to climate calamities has driven these miscalibrated individuals to make “green†choices. These individuals are more likely to say they recycle more than their neighbors, are willing to pay extra for environmentally friendly products, think green investments outperform, and are willing to pay higher fees for green mutual funds. They also trade their retirement portfolios into investments that tout environmentalsustainability.
The Concentration of Cleared Derivatives: Can Access to Direct Ccp Clearing for End-Users Address the Challenge?
SSRN
Cleared derivatives contracts are now concentrated among a small and dwindling number of institutions. Many policymakers and regulators have argued that this concentration has adverse consequences, some of which may have systemic risk implications. The authors explore the benefits and challenges of encouraging major end-users of derivatives to become direct clearing members of central counterparties (CCPs). If done prudently, increasing and diversifying the pool of clearing members and redistributing outstanding derivatives contracts across them may help CCPs become more resilient.
SSRN
Cleared derivatives contracts are now concentrated among a small and dwindling number of institutions. Many policymakers and regulators have argued that this concentration has adverse consequences, some of which may have systemic risk implications. The authors explore the benefits and challenges of encouraging major end-users of derivatives to become direct clearing members of central counterparties (CCPs). If done prudently, increasing and diversifying the pool of clearing members and redistributing outstanding derivatives contracts across them may help CCPs become more resilient.
The Effect of U.S. Stress Tests on Monetary Policy Spillovers to Emerging Markets
SSRN
This paper shows that monetary policy and prudential policies interact. U.S. banks issue more commercial and industrial loans to emerging market borrowers when U.S. monetary policy eases. The effect is less pronounced for banks that are more constrained through the U.S. bank stress tests, reflected in a lower minimum capital ratio in the severely adverse scenario. This suggests that monetary policy spillovers depend on banks’ capital constraints. In particular, during a period of quantitative easing when liquidity is abundant, banks are more flexible, and the scope for adjusting lending is larger when they have a bigger capital buffer. We conjecture that bank lending to emerging markets during the zero-lower bound period would have been even higher had the United States not introduced stress tests for their banks.
SSRN
This paper shows that monetary policy and prudential policies interact. U.S. banks issue more commercial and industrial loans to emerging market borrowers when U.S. monetary policy eases. The effect is less pronounced for banks that are more constrained through the U.S. bank stress tests, reflected in a lower minimum capital ratio in the severely adverse scenario. This suggests that monetary policy spillovers depend on banks’ capital constraints. In particular, during a period of quantitative easing when liquidity is abundant, banks are more flexible, and the scope for adjusting lending is larger when they have a bigger capital buffer. We conjecture that bank lending to emerging markets during the zero-lower bound period would have been even higher had the United States not introduced stress tests for their banks.
The Effect of U.S. Stress Tests on Monetary Policy Spillovers to Emerging Markets
SSRN
This paper shows that monetary policy and prudential policies interact. U.S. banks issue more commercial and industrial loans to emerging market borrowers when U.S. monetary policy eases. The effect is less pronounced for banks that are more constrained through the U.S. bank stress tests, reflected in a lower minimum capital ratio in the severely adverse scenario. This suggests that monetary policy spillovers depend on banks’ capital constraints. In particular, during a period of quantitative easing when liquidity is abundant, banks are more flexible, and the scope for adjusting lending is larger when they have a bigger capital buffer. We conjecture that bank lending to emerging markets during the zero-lower bound period would have been even higher had the United States not introduced stress tests for their banks.
SSRN
This paper shows that monetary policy and prudential policies interact. U.S. banks issue more commercial and industrial loans to emerging market borrowers when U.S. monetary policy eases. The effect is less pronounced for banks that are more constrained through the U.S. bank stress tests, reflected in a lower minimum capital ratio in the severely adverse scenario. This suggests that monetary policy spillovers depend on banks’ capital constraints. In particular, during a period of quantitative easing when liquidity is abundant, banks are more flexible, and the scope for adjusting lending is larger when they have a bigger capital buffer. We conjecture that bank lending to emerging markets during the zero-lower bound period would have been even higher had the United States not introduced stress tests for their banks.
The Extended Friday the 13th Effect in the London Stock Exchange
SSRN
The extended Friday the 13th Effect is a calendar anomaly consisting in abnormal stock returns that occur in a time interval that starts some trading days before the supposed unlucky day of Friday the 13th and it ends some trading days after. This paper approaches the presence of such patterns in the evolution of the closed values of five indexes from the London Stock Exchange: FTSE 100, FTSE 250, FTSE 350, FTSE SmallCap and FTSE All-Share. This investigation is performed for two periods: the first from January 1998 to December 2006 and the second from January 2007 to July 2019. While the first one could be considered as relative quiet, the second one was more turbulent. In the case of first period the results revealed, for four indexes, that in the trading day that follows Friday the 13th the returns were significant higher than the average. Instead, in the case of second period, we found, for the same four indexes, that two trading days before the Friday the 13th the returns were significant lower than the average. We conclude that, like many other calendar anomalies, extended Friday the 13th Effect is not persistent in time.
SSRN
The extended Friday the 13th Effect is a calendar anomaly consisting in abnormal stock returns that occur in a time interval that starts some trading days before the supposed unlucky day of Friday the 13th and it ends some trading days after. This paper approaches the presence of such patterns in the evolution of the closed values of five indexes from the London Stock Exchange: FTSE 100, FTSE 250, FTSE 350, FTSE SmallCap and FTSE All-Share. This investigation is performed for two periods: the first from January 1998 to December 2006 and the second from January 2007 to July 2019. While the first one could be considered as relative quiet, the second one was more turbulent. In the case of first period the results revealed, for four indexes, that in the trading day that follows Friday the 13th the returns were significant higher than the average. Instead, in the case of second period, we found, for the same four indexes, that two trading days before the Friday the 13th the returns were significant lower than the average. We conclude that, like many other calendar anomalies, extended Friday the 13th Effect is not persistent in time.
The Impact of Open Data on Public Procurement
SSRN
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 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.
SSRN
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 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 Role of Factor Strength and Pricing Errors for Estimation and Inference in Asset Pricing Models
SSRN
In this paper we are concerned with the role of factor strength and pricing errors in asset pricing models, and their implications for identification and estimation of risk premia. We establish an explicit relationship between the pricing errors and the presence of weak factors that are correlated with stochastic discount factor. We introduce a measure of factor strength, and distinguish between observed factors and unobserved factors. We show that unobserved factors matter for pricing if they are correlated with the discount factor, and relate the strength of the weak factors to the strength (pervasiveness) of non-zero pricing errors. We then show, that even when the factor loadings are known, the risk premia of a factor can be consistently estimated only if it is strong and if the pricing errors are weak. Similar results hold when factor loadings are estimated, irrespective of whether individual returns or portfolio returns are used. We derive distributional results for two pass estimators of risk premia, allowing for non-zero pricing errors. We show that for inference on risk premia the pricing errors must be sufficiently weak. We consider both when n (the number of securities) is large and T (the number of time periods) is short, and the case of large n and T. Large n is required for consistent estimation of risk premia, whereas the choice of short T is intended to reduce the possibility of time variations in the factor loadings. We provide monthly rolling estimates of the factor strengths for the three Fama-French factors over the period 1989-2018.
SSRN
In this paper we are concerned with the role of factor strength and pricing errors in asset pricing models, and their implications for identification and estimation of risk premia. We establish an explicit relationship between the pricing errors and the presence of weak factors that are correlated with stochastic discount factor. We introduce a measure of factor strength, and distinguish between observed factors and unobserved factors. We show that unobserved factors matter for pricing if they are correlated with the discount factor, and relate the strength of the weak factors to the strength (pervasiveness) of non-zero pricing errors. We then show, that even when the factor loadings are known, the risk premia of a factor can be consistently estimated only if it is strong and if the pricing errors are weak. Similar results hold when factor loadings are estimated, irrespective of whether individual returns or portfolio returns are used. We derive distributional results for two pass estimators of risk premia, allowing for non-zero pricing errors. We show that for inference on risk premia the pricing errors must be sufficiently weak. We consider both when n (the number of securities) is large and T (the number of time periods) is short, and the case of large n and T. Large n is required for consistent estimation of risk premia, whereas the choice of short T is intended to reduce the possibility of time variations in the factor loadings. We provide monthly rolling estimates of the factor strengths for the three Fama-French factors over the period 1989-2018.
The Statutory Liberalization of Trust Law Across 152 Jurisdictions: Leaders, Laggards and the Market for Fiduciary Services
SSRN
This article reports the findings of the first systematic overview of the statutory liberalization of trust law worldwide. Using a groundbreaking, manually collected, database of the trust legislation of every jurisdiction which has a trust regime respecting 22 trust law variables, I hand coded each jurisdiction’s treatments of each variable since 1925 for their relative liberality. Aggregating all jurisdictions’ scores regarding all variables, I produced a “trust liberality score†for each jurisdiction/year, expressing the extent to which trust law has been liberalized by each jurisdiction by each year. Results show the United States to be the global leader in trust law liberality: 17 of the 20 jurisdictions which have the most liberal trust laws are American states. Trust law liberalization in the U.S. is a result of the widespread adoption of the Uniform Trust Code, which includes many highly liberal positions, among the states, as well as of many states having followed an offshore dynamic in adopting highly permissive positions in order to draw users from out of state to resident service providers. The trust laws of many American states are more liberal than those of small offshore island jurisdictions. Even the laws of such relatively conservative American states, on trust matters, as New York and California are quite liberal by global standards. Much of the recent global increase in trust law liberality occurred between 1988-2016. Multivariate regression analysis of U.S. data shows that the statutory liberalization of trust law has had no effect on several indicia for the success of service provision to trusts as a commercial enterprise. It is especially clear that reforms seen as pandering to trust users’ interests at great social cost, such as self-settled spendthrift trusts and perpetual trusts, all in order to create or sustain demand for professional services in the trust context, have had no impact on any of these indicia. As an exception to the general finding of a null result, some findings with marginal statistical significance may show that law reforms which reduced trustees’ exposure to liability and entrenched their entitlement to remuneration led to a decline in their earnings per trust. Those reforms are also weakly associated with an increase in trust income. It is therefore possible that reforms widely seen as preferring trustees over their clients have resulted in trustees providing a better service at lower cost.
SSRN
This article reports the findings of the first systematic overview of the statutory liberalization of trust law worldwide. Using a groundbreaking, manually collected, database of the trust legislation of every jurisdiction which has a trust regime respecting 22 trust law variables, I hand coded each jurisdiction’s treatments of each variable since 1925 for their relative liberality. Aggregating all jurisdictions’ scores regarding all variables, I produced a “trust liberality score†for each jurisdiction/year, expressing the extent to which trust law has been liberalized by each jurisdiction by each year. Results show the United States to be the global leader in trust law liberality: 17 of the 20 jurisdictions which have the most liberal trust laws are American states. Trust law liberalization in the U.S. is a result of the widespread adoption of the Uniform Trust Code, which includes many highly liberal positions, among the states, as well as of many states having followed an offshore dynamic in adopting highly permissive positions in order to draw users from out of state to resident service providers. The trust laws of many American states are more liberal than those of small offshore island jurisdictions. Even the laws of such relatively conservative American states, on trust matters, as New York and California are quite liberal by global standards. Much of the recent global increase in trust law liberality occurred between 1988-2016. Multivariate regression analysis of U.S. data shows that the statutory liberalization of trust law has had no effect on several indicia for the success of service provision to trusts as a commercial enterprise. It is especially clear that reforms seen as pandering to trust users’ interests at great social cost, such as self-settled spendthrift trusts and perpetual trusts, all in order to create or sustain demand for professional services in the trust context, have had no impact on any of these indicia. As an exception to the general finding of a null result, some findings with marginal statistical significance may show that law reforms which reduced trustees’ exposure to liability and entrenched their entitlement to remuneration led to a decline in their earnings per trust. Those reforms are also weakly associated with an increase in trust income. It is therefore possible that reforms widely seen as preferring trustees over their clients have resulted in trustees providing a better service at lower cost.
Trends in Household Portfolio Composition
SSRN
We use data from the Federal Reserve Board’s Survey of Consumer Finances (SCF) to explore how household asset portfolios in the United States evolved between 1989 and 2016. Throughout this period, two key assets  housing and financial market assets  drove the household balance sheet evolution; however, we find a great heterogeneity in the balance sheets that averages and aggregates conceal. We observe that ownership of assets has become more concentrated over time, and we show that nearly all of the time series variation in financial vulnerabilities in family balance sheets is due to middle-income families, who hold most of their assets in housing and are often the most highly leveraged income group in the housing market. Tracking the evolution of wealth over time among birth-year cohorts, we observe the standard life-cycle asset accumulation processes among low-, middle-, and high-income families.
SSRN
We use data from the Federal Reserve Board’s Survey of Consumer Finances (SCF) to explore how household asset portfolios in the United States evolved between 1989 and 2016. Throughout this period, two key assets  housing and financial market assets  drove the household balance sheet evolution; however, we find a great heterogeneity in the balance sheets that averages and aggregates conceal. We observe that ownership of assets has become more concentrated over time, and we show that nearly all of the time series variation in financial vulnerabilities in family balance sheets is due to middle-income families, who hold most of their assets in housing and are often the most highly leveraged income group in the housing market. Tracking the evolution of wealth over time among birth-year cohorts, we observe the standard life-cycle asset accumulation processes among low-, middle-, and high-income families.
With or without replacement? Sampling uncertainty in Shepp's urn scheme
arXiv
arXiv
We introduce a variant of Shepp's classical urn problem in which the optimal stopper does not know whether sampling from the urn is done with or without replacement. By considering the problem's continuous-time analog, we provide bounds on the value function and in the case of a balanced urn (with an equal number of each ball type) an explicit solution is found. Surprisingly, the optimal strategy for the balanced urn is the same as in the classical urn problem.
