Research articles for the 2019-12-12

A Cost-effective Approach to Portfolio Construction with Range-based Risk Measures
Pun, Chi Seng,Wang, Lei
In this paper, we introduce a new class of risk measures and the corresponding risk minimizing portfolio optimization problem. Instead of measuring the expected deviation of a daily return from a single target value, we propose to measure its deviation from a range of values centered on the single target value. By relaxing the definition of deviation, the proposed risk measure is robust to the variation of data input and thus the resulting risk-minimizing portfolio has a lower turnover rate and is resilient to outliers. To construct a practical portfolio, we propose to impose an â„"2-norm constraint on the portfolio weights to stabilize the portfolio's out-of-sample performance. We show that for some cases of our proposed range-based risk measures, the corresponding portfolio optimization can be recast as a support vector regression problem. This allows us to tap into the machine learning literature on support vector regression and effectively solve the portfolio optimization problem even in high dimensions. Moreover, we present theoretical results on the robustness of our range-based risk minimizing portfolios. Simulation and empirical studies are conducted to examine the out-of-sample performance of the proposed portfolios.

A Dynamic MST- deltaCovar Model Of Systemic Risk In The European Insurance Sector
Anna Denkowska,Stanisław Wanat

This work is an answer to the EIOPA 2017 report. It follows from the latter that in order to assess the potential systemic risk we should take into account the build-up of risk and in particular the risk that arises in time, as well as the interlinkages in the financial sector and the whole economy. Our main tools used to analyse the systemic risk dynamics in the European insurance sector during the years 2005-2019 are the topological indices of minimum spanning trees (MST) and the deltaCoVaR measure. We address the following questions: 1) What is the contribution to systemic risk of each of the 28 largest European insurance companies whose list includes also those appearing on the G-SIIs list? 2) Does the analysis of the deltaCoVaR of those 28 insurance companies and the conclusions we draw agree with the our claims from our latest article [Wanat S., Denkowska A. 2019]. In clear: does the most important contribution to systemic risk come from the companies that have the highest betweenness centrality or the highest degree in the MST obtained?

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

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

Assessment of Financial Potential as a Determinant of Enterprise Development
Dmytro Zherlitsyn,Stanislav Levytskyi,Denys Mykhailyk,Victoriia Ogloblina

Financial potential is an important part of enterprise activities. The technique of the enterprise's financial potential assessment is offered in the paper. It is presented by particular stages, where each stage is related to a certain task. The characteristics of the company's financial potential, based on the analysis of the related literature, are determined. The implementation of each task is carried out. Thus, the study proposes a mechanism for managing the financial potential of enterprises, which allows to emphasize the elements that can be useful for economic development. It is based on the general strategic principles of the enterprise management. The study results can be used to assess enterprise purposes and develop the formation goals of its financial potential. It can also help to forecast and separate main directions of accumulation, formation, and distribution of financial resources. It should be noted, that analysis and control over the financial potential formation strategy, as well as the use of analysis results for specifying the strategic directions of the enterprise development, are of high importance. Therefore, the management of the financial potential is a system of rational management of business financing, which includes the formation of financial relations, emerging as a result of finance resources flow.

Bank Competition and Borrower Conservatism
Hou, Liya,Liang, Yi,Basu, Sudipta
We study the influence of bank competition on U.S. public borrowers’ accounting conservatism by exploiting the staggered adoption of the Riegle-Neal Interstate Banking and Branching Efficiency Act (IBBEA) of 1994, which increased the threat of new bank entrants. We find that borrowers’ conditional conservatism fell after IBBEA adoption, suggesting that IBBEA reduced banks’ bargaining power and their ability to demand conservatism. Conservatism fell more for firms located in states with weak incumbent banks, relying more on bank loans, and having fewer large shareholders and analysts to monitor them. Finally, we find that loans included fewer covenants after IBBEA.

Bank Restructuring without Government Intervention
Lucchetta, Marcella,Parigi, Bruno Maria,Rochet, Jean-Charles
When a bank is burdened with Non Performing Loans, an underinvestment problem may arise. Banking Authorities often take the initiative to segregate these Non Performing Loans into a Bad Bank (BB), so that the remaining part of the bank, the Good Bank, finds it profitable to make new loans. These BBs typically involve an injection of public funds. We propose a different type of bank break up that does not require any government subsidy. The idea is to give to the bank’s shareholders the option to create a BB on their own, and finance it ex-ante by requiring the bank to issue a bail-inable bond that is drawn down when the option is exercised. No tax payer money is involved. Such a restructuring differs from the bail-in regimes in the Bank Recovery and Resolution Directive in the EU and the Dodd-Frank Act in the USA in that it recognizes to the bank’s shareholders the information rents that result from their private information on the bank’s legacy loans.

Banks' Climate Commitments and Credit to Brown Industries: New Evidence for France
Mésonnier, Jean-Stéphane
In this paper, I investigate whether and how banks align green words with deeds in terms of credit allocation across more or less carbon-intensive industries in France. I use a rich dataset of bank credit exposures across some fifty industries and two size classes of borrowing firms for the main banking groups operating in France, which I merge with information on industries' greenhouse gas emission intensities and a score for banks' self-reported climate-related commitments over 2010-2017. I find evidence that higher levels of self-reported climate commitments by banks are associated with less lending to large corporates in the five brownest industries. However, lending to SMEs across more or less carbon-intensive industries remained unrelated to banks' commitments to green their business. Since SMEs are not required to report on their carbon emissions, while large firms are, these findings suggest that devising an appropriate carbon reporting framework for small firms is likely to enhance the decarbonization of bank lending.

Big Fish in Small Ponds: Human Capital Mobility and the Rise of Boutique Banks
Gao, Janet,Wang, Wenyu,Yu, Xiaoyun
We examine whether and how labor mobility in the M&A advisory industry contributes to the rise of boutique investment banks. Using a novel dataset containing individual investment bankers’ deal advising history and career paths, we find that high-performing bankers are more likely to migrate from large, bulge bracket banks to boutique banks, and that such migration is partly due to the cross-department subsidization within bulge bracket banks. The migration of high-profile bankers impairs (improves) the market share of losing (gaining) banks in those bankers’ specialized industries. These effects are not driven by bank characteristics or industry-level dynamics. Finally, we show that the rise of boutique banks is accompanied by a decline in diversifying mergers in the M&A market and higher returns to the clients they advise.

Brexit Risk Implied by the SABR Martingale Defect in the EUR-GBP Smile
Petteri Piiroinen,Lassi Roininen,Martin Simon

We construct a data-driven statistical indicator for quantifying the tail risk perceived by the EURGBP option market surrounding Brexit-related events. We show that under lognormal SABR dynamics this tail risk is closely related to the so-called martingale defect and provide a closed-form expression for this defect which can be computed by solving an inverse calibration problem. In order to cope with the the uncertainty which is inherent to this inverse problem, we adopt a Bayesian statistical parameter estimation perspective. We probe the resulting posterior densities with a combination of optimization and adaptive Markov chain Monte Carlo methods, thus providing a careful uncertainty estimation for all of the underlying parameters and the martingale defect indicator. Finally, to support the feasibility of the proposed method, we provide a Brexit "fever curve" for the year 2019.

Corporate Communication as a Governance Mechanism
Kolahgar, Sam,Babaghaderi, Azadeh,Bhabra, Harjeet S
We examine whether corporate communication is a stand-alone governance mechanism. By utilizing the content-analysis technique on more than 150,000 filings of 98 Canadian firms from 1999 to 2014, we find that firm's communication has governing power. Our findings confirm substitution-complementary relationship between corporate communication and board size, independence, education, expertise, CEO duality, frequency of board meetings, gender diversity, institutional ownership, and HHI. Moreover, we show that negative deviation from the expected transparency is associated with negative changes in Tobin’s Q. We also find that communication has an inverted U-shaped association with Tobin’s Q, and a U-shaped association with firm’s risk.Previous titles: Impact of Firms Communication and Disclosure on Risk and Value (2016 to 2018)Effect of Firm’s Investor Relation, Communication and Disclosure on Risk (2015)

Data-driven covariance estimators for high-dimensional minimum-variance portfolios
Sven Husmann,Antoniya Shivarova,Rick Steinert

Investors often prefer the global minimum-variance portfolio over the Markowitz portfolio as this allows the estimation risk to be confined to the covariance matrix of returns. For high-dimensional data, however, it is well-known that the sample covariance matrix is ill-conditioned and leads to suboptimal portfolios. To address this issue, we review recently proposed covariance matrix estimators and suggest a multi-fold cross-validation technique for selecting the necessary tuning parameters within each method. Conducting an extensive empirical analysis, we show how the data-driven choice of specific tuning parameters with the proposed cross-validation improves the out-of-sample performance of the global minimum-variance portfolio.

Differences Between Savings from Equity Issuance and Savings from Cash Flow
Duan, Yuejiao,Song, Frank M.,Zhang, Xiao,Zhou, Peng
What are the differences between savings from equity issuance and cash flow?McLean (2011) shows that firms save more from equity issuance than cash flow. We further find that firms have different choices of using equity issuance and cash flow to save at different times. To investigate the differences, we analyze the precautionary motives and the market timing theory from the following three perspectives: growth options, financial constraints, and equity overvaluation. We theoretically predict that higher growth options and equity overvaluation are associated with a higher savings rate of equity issuance. However, financial constraints increase the savings from cash flow. Using a sample of 91,930 U.S. firms for the period 1985â€"2016, we find that the empirical results are consistent with our predictions.

Do Local Bank Branches Reduce SME Credit Constraints? Evidence from Public-Private Bank Interaction
Gustafsson, Anders,Manduchi, Agostino,Stephan, Andreas
In the past few decades, commercial banks have substantially reduced the number of their branch offices. We address the question of whether or not the increased distance from the lenders correspondingly faced by many small and medium sized enterprises (SMEs) translates into a lower volume of loans. We use a unique dataset on loans from a state owned Swedish bank designed to support credit-constrained SMEs and interact their loan portfolio with the number of nearby commercial bank offices at the firm level along with an IV strategy to account for endogeneity. The estimation results strongly indicate that a larger number of local bank offices increases the local credit supply, and decreases the credit constraints of nearby SMEs.

Do Markets Value ESG Risks in Sovereign Credit Curves?
Hübel, Benjamin
This paper investigates the role of countries’ environmental, social and governance (ESG) performance in sovereign debt markets. Based on a comprehensive data set of 60 countries from 2007 to 2017, we find that ESG matters for both the level and the slope of the term structure of sovereign credit spreads. Countries with superior ESG performance show lower credit default swap (CDS) spreads and a flatter term structure of CDS spreads indicating that ESG risks affect long-term credit risk even more than short-term credit risk. These results remain robust when considering various economic and financial control variables as well as credit ratings implying that CDS markets incorporate ESG information differently than credit rating agencies. From a portfolio management perspective, we find that considering ESG does not involve sacrificing financial performance. Indeed, investors can potentially benefit from ESG differences between countries with similar credit ratings.

Earnings Management and Stock Price Crashes: The Deteriorating Information Environment Post Cross-Delisting
Loureiro, Gilberto R.,Silva, Sónia
We test whether cross-delisted firms from the major U.S. stock exchanges experience an increase in crash risk associated with earnings management. Consistent with our prediction, we find that earnings management have a greater positive impact on stock price crash risk post-cross-delisting when compared to a control group of firms that remain cross-listed. Moreover, our results suggest that this effect is more pronounced for cross-delisted firms from countries with weaker investor protection and poorer quality of their information environment. Our findings are robust to alternative measures of earnings management, stock price crashes and information environment. We interpret our results as evidence of a “reverse bonding effect” following cross-delistings from U.S. stock exchanges.

Energy Based Estimation of the Shadow Economy: The Role of Governance Quality
Psychoyios, Dimitris,Missiou, Olympia,Dergiades, Theologos
The shadow economy (SE) is a pathological normalcy, not only in developing countries but also in developed ones, causing disagreeable distortions in the real economy. In this paper, we estimate the size of the informal sector in nineteen countries of the European Union (EU) by implementing three variations of the physical input approach (we use electricity consumption as input). All estimates show that EU countries experience high shadow economy levels with a decreasing trend. Moreover, we assess the explanatory power of three governance quality indicators of the informal sector using a set of panel regression specifications as well as a set of quantile regression specifications. Both approaches show that overall governance quality is the most prominent factor in determining the SE levels. Given the inherent advantage of quantile regression to identify impact differentiations across the conditional distribution of the dependent variable a significant policy action is revealed. In particular, countries with high shadow economy levels can reduce their informal sector, at an increasing rate, by improving governance quality.

Estimation of Conditional Asset Pricing Models with Integrated Variables in the Beta Specification
Antypas, Antonios,Caporale, Guglielmo Maria,Kourogenis, Nikolaos,Pittis, Nikitas
We introduce a methodology which deals with possibly integrated variables in the specification of the betas of conditional asset pricing models. In such a case, any model which is directly derived by a polynomial approximation of the functional form of the conditional beta will inherit a nonstationary right hand side. Our approach uses the cointegrating relationships between the integrated variables in order to maintain the stationarity of the right hand side of the estimated model, thus, avoiding the issues that arise in the case of an unbalanced regression. We present an example where our methodology is applied to the returns of funds-of-funds which are based on the Morningstar mutual fund ranking system. The results provide evidence that the residuals of possible cointegrating relationships between integrated variables in the specification of the conditional betas may reveal significant information concerning the dynamics of the betas.

Ethics, ESG, and ERISA::Ethical-Factor Investing of Savings and Retirement Benefits-Part I
Feuer, Albert
Ethical-factor investing is investment decision-making that takes into account ethical factors. It includes faith-based investing, Environmental, Social or Governance (ESG) investing, and sustainable investing. It is becoming more and more widespread. This has occurred despite a lack of widely accepted definitions, performance metrics, or ethical preferences. There is increasing broad agreement that some ethical factors highlight business risks and opportunities in a predictable fashion, such as the effects of climate change, human capital needs, or corporate governance. Thus, more and more investors and enterprises are seeking to profit (including mitigating risks) from these factors in the same way they do from all business risks and opportunities. There are three prudent approaches to ethical-factor investing. The most widely used is the Incorporation approach. Such investing uses the value of doing the right thing to decide how to improve financial returns. Also, quite common is the Tie-Breaker approach. Such investing does the right thing if there no financial cost to doing so. Least common is the concessionary approach. Such investing does the right thing if it does not cost too much. Each of these approaches can be socially beneficial, i.e., improve the norms and behavior of enterprises in a cost effective manner. Investors can generate such benefits by funding enterprises with thinly traded securities whose preferred ethical-factor activities would not otherwise occur, or by participating in engagement campaigns to change the policies of widely traded securities in which they invest.

Financial Constraints of Entrepreneurs and the Self-Employed
Mikhed, Vyacheslav,Raina, Sahil,Scholnick, Barry
Growth-oriented entrepreneurial start-ups generate more economic growth than other self-employed businesses, yet they only constitute a small fraction of start-ups. We examine whether financial constraints impede these types of start-ups by exploiting lottery wins as exogenous wealth shocks. We find that lottery-win magnitude increases winners’ subsequent incorporation, implying that entrepreneurs face financial constraints, but not business registration, implying that financial constraints do not bind as much for the self-employed. Our results, that financial constraints bind for incorporations among men, for serial entrepreneurs, during economic booms, and in neighborhoods without local lenders, are important for understanding the financial impediments to entrepreneurial start-ups.

Financial Intermediation, Capital Accumulation and Crisis Recovery
Gersbach, Hans,Rochet, Jean-Charles,Scheffel, Martin
We integrate bank and bond financing into a two-sector neoclassical growth model to examine the stabilization effect of endogenous bank leverage adjustment. We show that although bank leverage amplifies shocks, the increase of leverage to a decline in bank equity is an automatic stabilizer in downturns, since it partially offsets the decline of bank lending to financially constrained firms. Regulatory capital limits and wage rigidities impair the re-allocation of capital between sectors and weaken the automatic stabilization channel. A quantitative analysis of the US in the Great Recession shows that the magnitude of automatic stabilization is significant and informs about potentially high costs of strict capital regulation or wage rigidities in banking crises.

Golden Geese or Black Sheep: Are Stakeholders the Saviors or Saboteurs of Financial Distress?
Dumitrescu, Ariadna,El Hefnawy, Menna,Zakriya, Mohammed
Is stakeholder management crucial for financial distress? Unlike the prior literature that shows the mitigating influence of corporate social responsibility (CSR) on distress risk, we find that social stakeholder initiatives can increase the likelihood of future financial distress. Using a quasi-experiment, we find that this relationship is likely to be causal. We further show that managerial focus and financial constraints are two possible channels through which the social dimension could impact distress. Investors should hence view firms' CSR investments with caution.

Home Equity in Retirement
Nakajima, Makoto,Telyukova, Irina A.
Retired homeowners dissave more slowly than renters, which suggests that homeownership affects retirees’ saving decisions. We investigate empirically and theoretically the life-cycle patterns of homeownership, housing and nonhousing assets in retirement. Using an estimated structural model of saving and housing decisions, we �nd, �rst, that homeowners dissave slowly because they prefer to stay in their house as long as possible but cannot easily borrow against it. Second, the 1996-2006 housing boom signi�cantly increased homeowners’ assets. These channels are quantitatively signi�cant; without considering homeownership, retirees’ net worth would be 28-44 percent lower, depending on age.

How Do Bond Investors Measure Performance? Evidence from Mutual Fund Flows
Dang, Thuy Duong,Hollstein, Fabian,Prokopczuk, Marcel
Which factor model do investors in corporate bonds use? We examine this question by tracking investors’ decisions to invest in actively managed corporate bond mutual funds with a revealed preference approach. Our main result is that all bond factor models are dominated by the simple Sharpe ratio. For all major corporate bond mutual fund styles, the Sharpe ratio explains fund flows better than alphas from bond factor models. Since the Sharpe ratio can be easily manipulated in bond markets, our findings have potentially severe implications for fund mangers as well as active traders and buy-and-hold corporate bond mutual fund investors.

How Machine Learning Mitigates Racial Bias in the U.S. Housing Market
Lu, Guangli
I examine racial bias in the most popular home valuation algorithm and study the algorithm’s impact on racial bias in transaction prices. I find statistically significant but economically small racial bias in the algorithm. For example, while Black buyers overpay by 9.3% in prices relative to White buyers for similar homes, the algorithm only overvalues the same transactions by 1.1%. The algorithm inadvertently learns racial bias from patterns in historical transaction prices. The algorithmic racial bias is small because the algorithm is designed to be insensitive to transitory pricing factors related to behavioral biases, sellers’ liquidity conditions, and buyer or seller race. Exploiting the staggered rollout of the algorithm in a neighboring ZIP Code setting, I find that if the algorithmic valuation is available for all the homes in an area, it reduces the overpayment of Black buyers relative to White buyers by 4.8%. The results suggest that the application of slightly biased machine learning algorithms can mitigate social bias if they are less biased than humans.

Labor in the Boardroom
JJäger, Simon,Schoefer, Benjamin,Heining, Joerg
We estimate the effects of a mandate allocating a third of corporate board seats to workers (shared governance). We study a reform in Germany that abruptly abolished this mandate for certain firms incorporated after August 1994 but locked it in for the older cohorts. In sharp contrast to the canonical hold-up hypothesis – that increasing labor’s power reduces owners’ capital investment –we find that granting formal control rights to workers raises capital formation. The capital stock, the capital-labor ratio, and the capital share all increase. Shared governance does not raise wage premia or rent sharing. It lowers outsourcing, while moderately shifting employment to skilled labor. Shared governance has no clear effect on profitability, leverage, or costs of debt. Overall, the evidence is consistent with richer models of industrial relations whereby shared governance raises capital by permitting workers to bargain over investment or by institutionalizing communication and repeated interactions between labor and capital.

Learning from Online Appraisal Information and Housing Prices
Lu, Guangli
This paper studies how housing prices react to an information shock due to the update in the most popular home valuation algorithm. I find that housing prices react gradually to the information shock: while the reaction in the first month is small, a 1% increase in the online appraisal leads to a 0.65% increase in sale prices 12 months after the shock. The magnitude of the reaction in a ZIP Code increases with its average trading volume over the sample period. In ZIP Codes with top 5% average trading volume, I find that a 1% increase in the online valuation leads to a 1.6% increase in sale prices 12 months after the shock, suggesting overreaction to the information shock. Findings in this paper indicate that machine-learning-based online valuations causally affect housing market transaction prices.

Liquidity Pricing in Emerging Market Corporate Bonds
Dekker, Lennart,De Jong, Frank
In this paper, we examine liquidity pricing in emerging market corporate bonds. We find average market-wide effective bid-ask spreads of 0.72%, which rise to 1.4% during the financial crisis. Turnover is closely linked to several liquidity characteristics such as issue size and age. Using portfolios based on these characteristics, we show that liquidity levels affect expected returns. However, evidence in favor of a priced liquidity risk factor is weak. The credit market risk premium is about 2% per year, consistent with evidence from developed markets.

Long-Run Implied Market Fundamentals: An Exploration
Zimmermann, Heinz
The paper studies the volatility and correlation pattern of the fundamental valuation parameters (growth rate and its determinants, discount rate) calculated from widely used valuation ratios using the Gordon formula and relate them to some well-known results from the asset pricing literature. Our results reveal a substantially different picture of the volatility and cyclicality of the implied valuation parameters compared to estimates from econometric models using historical returns. We argue, in the spirit of Campbell (2008), that implied Gordon parameters can be interpreted as empirical proxies for conditional steady-state market fundamentals, which is supported by our findings.

Mean-Field Games with Differing Beliefs for Algorithmic Trading
Philippe Casgrain,Sebastian Jaimungal

Even when confronted with the same data, agents often disagree on a model of the real-world. Here, we address the question of how interacting heterogenous agents, who disagree on what model the real-world follows, optimize their trading actions. The market has latent factors that drive prices, and agents account for the permanent impact they have on prices. This leads to a large stochastic game, where each agents' performance criteria are computed under a different probability measure. We analyse the mean-field game (MFG) limit of the stochastic game and show that the Nash equilibrium is given by the solution to a non-standard vector-valued forward-backward stochastic differential equation. Under some mild assumptions, we construct the solution in terms of expectations of the filtered states. Furthermore, we prove the MFG strategy forms an $\epsilon$-Nash equilibrium for the finite player game. Lastly, we present a least-squares Monte Carlo based algorithm for computing the equilibria and show through simulations that increasing disagreement may increase price volatility and trading activity.

Measuring distortions in international markets: The semiconductor value chain
This report builds on the OECD's longstanding work measuring government support in agriculture, fossil fuels, fisheries, and more recently in the aluminium value chain in order to estimate producer support and related market distortions in the semiconductor value chain. Results for 21 large firms operating across the semiconductor value chain indicate that total government support has exceeded USD 50 billion over the period 2014-18. Government support provided in the form of below-market debt and equity appears to be particularly large in the context of the semiconductor industry and concentrated in one jurisdiction. Other types of support identified include support for R&D and investment incentives, which benefitted all firms studied in this report. The report also discusses the implications that these findings have for trade rules, and in particular for subsidy disciplines in a context of growing government involvement in semiconductor production and poor transparency of support measures.

Multi-Asset Value Payoff: Is Recent Underperformance Cyclical?
Tokat-Acikel, Yesim,Aiolfi, Marco,Jin, Yiwen
Value is one of the most studied risk premia strategies across asset classes. Value factors, however, have struggled lately. To uncover the drivers of recent value factor underperformance, it is important to understand how value returns are affected by macroeconomic conditions. We build on the existing literature by directly measuring the macroeconomic characteristics of value factor portfolios, namely real economic growth and inflation exposures. By pairing methodologies commonly used to derive fundamental characteristics of equity portfolios, we are able to identify macro linkages that have not been previously made evident. Our holdings-based and factor-mimicking portfolio analyses provide insights into the behavior of value strategies across various asset classes, looking at both cyclical and idiosyncratic drivers.

Neural Network for Pricing and Universal Static Hedging of Contingent Claims
Lokeshwar, Vikranth,Bhardawaj, Vikram,Jain, Shashi
We present here a regress later based Monte Carlo approach that uses neural networks for pricing high-dimensional contingent claims. The choice of specific architecture of the neural networks used in the proposed algorithm provides for interpretability of the model, a feature that is often desirable in the financial context. Specifically, the interpretation leads us to demonstrate that any contingent claim â€" possibly high dimensional and path-dependent â€" under Markovian and no- arbitrage assumptions, can be semi-statically hedged using a portfolio of short maturity options. We show how the method can be used to obtain an upper and lower bound to the true price, where the lower bound is obtained by following a sub-optimal policy, while the upper bound by exploiting the dual formulation. Unlike other duality based upper bounds where one typically has to resort to nested simulation for constructing super-martingales, the martingales in the current approach come at no extra cost, without the need for any sub-simulations. We demonstrate through numerical examples the simplicity and efficiency of the method for both pricing and semi-static hedging of path-dependent options.

On the Prevalence of Forest Fires in Spain
Boccard, Nicolas
We study the risk that a Spanish forest tree be lost to fire over a year. We first show that climate change over Spain makes this event more likely. Next, we document how risk grew dramatically from 1961 up to the democratic era (c. 1980) and has since receded to less than 2 trees lost per thousand. We offer a socio-economic explanation of this reversed trend. Our finding are shown to be commensurate with the same risk measured in other Mediterranean countries, albeit less precisely.

On the uniqueness of solutions of stochastic Volterra equations
Alexandre Pannier,Antoine Jacquier

We prove strong existence and uniqueness, and H\"older regularity, of a large class of stochastic Volterra equations, with singular kernels and non-Lipschitz diffusion coefficient. Extending Yamada-Watanabe's theorem, our proof relies on an approximation of the process by a sequence of semimartingales with regularised kernels. We apply these results to the rough Heston model, with square-root diffusion coefficient, recently proposed in Mathematical Finance to model the volatility of asset prices.

Optimal Stopping with Adapted Neural Networks
Dimitroff, Georgi,Hristov, Radoslav
We use temporally adapted neural networks to solve a generalization of the optimal exercise problem for a discrete set of possible exercise times. Versions based on convolutional and attention layers were implemented, tested and found to produce state of the art results on the fractional Brownian motion with various Hurst parameters. The approach is intuitive and fully agnostic with respect to the dependency structure of the underlying stochastic process.

Overfunding and Signaling Effects of Herding Behavior in Crowdfunding
Kapounek, Svatopluk,Kučerová, Zuzana
The paper employs a dynamic market-wide herding behavior measure of 117,166 lending-based campaigns in 119 online platforms in 37 countries that explores whether lenders follow each other in the whole crowdfunding market, within the groups of top platforms, within the specific category or platform, and within the specific category in the specific platform. We show that herding behavior plays an important signaling role in reducing opportunity costs if the auction does not receive enough monetary bids. Additionally, our threshold models identify significant herding behavior after funding goals are raised and highlight the controversial effects of signaling mechanisms on adverse selection in crowdfunding markets.

PELVE: Probability Equivalent Level of VaR and ES
Li, Hanson,Wang, Ruodu
As part of the revised Fundamental Review of the Trading Book (FRTB), the Basel Committee on Banking Supervision proposed the shift from the 99% Value-at-Risk (VaR) to the 97.5% Expected Shortfall (ES) for internal models in market risk assessment. Inspired by the above transition, we introduce a new distributional index, the probability equivalence level of VaR and ES (PELVE), which identifies the balancing point for the equivalence between VaR and ES. As a measure of variability, PELVE enjoys many desirable properties such as location-scale invariance, monotonicity under convex transformations, and quasi-convexity/concavity for unhedged porfolios. Analyzing PELVE for commonly used models in risk management, we find that, in general, PELVE distinguishes heavy-tailed distributions from light-tailed ones via a threshold e=2.72. Convergence properties and asymptotic normality of the empirical PELVE estimators are established. Applying PELVE to financial asset and portfolio data leads to observations of several features that are not captured by VaR or ES alone. As a general message of our findings, the transition from VaR to ES in the FRTB will lead to an increase in risk capital for single-asset portfolios, but for a well-diversified portfolio such as the 1/N portfolio, the capital requirement could remain almost unchanged. This leads to both a theoretical justification and an empirical evidence for that the use of ES rewards portfolio diversification more than the use of VaR.

Private Communication and Earnings Management
QI, Zhen,Zhou, Yixiao,Chen, Jian
This study conducts the first analysis of the influence of private communication on earnings management. Results show that private communication can curb earnings management; the constraining effect of private communication on earnings management is greater when the number of external participants, especially institutional investors, is larger. Further, the greater the depth and breadth of communication, the more earnings management is reduced. Our findings provide significant implications for investors and regulators that seek to curb earnings management.

Some pricing tools for the Variance Gamma model
Jean-Philippe Aguilar

We establish several closed pricing formula for various path-independent payoffs, under an exponential L\'evy model driven by the Variance Gamma process. These formulas take the form of quickly convergent series and are obtained via tools from Mellin transform theory as well as from multidimensional complex analysis. Particular focus is made on the symmetric process, but extension to the asymmetric process is also provided. Speed of convergence and comparison with numerical methods are also discussed; notable feature is the accelerated convergence of the series for short term options, which constitutes an interesting improvement of numerical Fourier inversion techniques.

Spillover Effects of Patent Litigation Initiated by Non-Practicing Entities: Evidence from the Capital Market
Chen, Feng,Hou, Yu,Richardson, Gordon
We analyze the potential spillover effects from patent-infringement litigation initiated by non-practicing entities (NPEs). When a firm is sued by NPEs, its at-risk technology peers also experience significant market value losses around the litigation filing date, losses that are much greater than those around patent litigations initiated by practicing entities. We also show that state anti-troll laws mitigate the spillover effects. Technology peers that are not subsequently sued by NPEs experience negative operational impacts, including a decline in R&D innovation efficiency following NPE litigations. Overall, our evidence suggests that there are more big losers from NPE litigation than what has been identified in the existing NPE litigation literature.

Taxation and the Life Cycle of Firms
Erosa, Andrés,González, Beatriz
The Hopenhayn and Rogerson (1993) framework is extended to understand how different forms of taxing capital income affect firms’ investment and financial policies over their life cycle. Corporate income taxation slows down firm growth over the life cycle by reducing after-tax profits available for reinvesting, and it distorts optimal firms’ size. Dividend income taxation reduces external equity financing, but it does not affect size at maturity. Capital gains taxes make firms start larger, so that internal growth is lower. With these mechanisms in mind, we calibrate our economy to the US and discuss different revenue-neutral tax reforms that might lead to increases in aggregate output and capital.

The CESD Assessment on the 2019 State Budget Project
Breban, Dan,Mukhtarov, Elmir,Jafarov, Jafar
The current external macroeconomic conditions observed throughout the year of 2018, such as increasing rates by FED/ECB, exerts certain pressure on the economies of developing nations. Despite hovering well-over its predicted value for most of the year, the recent decline in the price of oil once again puts question marks for the future of the commodity. Considering all of the above mentioned facts in mind, dependence of 2019 state budget of Azerbaijan on oil, where 50.4% of revenues directly come from the oil sector further makes the country more vulnerable to oil price fluctuations. The largest hike is observed in the amount of revenues collected through the excise taxes while the biggest decline is in income taxes, reflecting the new amendments to the tax code. Expenditures of the state budget are going to be 7.3% higher in 2019, with the most significant boost observed in construction sector. This fact undermines the efficiency of the public funds, as the expenditures towards construction are more likely to become subject of mismanagement.

The ECB After the Crisis: Existing Synergies Among Monetary Policy, Macroprudential Policies and Banking Supervision
Cassola, Nuno,Kok, Christoffer,Mongelli, Francesco Paolo
The prolonged crisis exposed the vulnerability of a monetary union without a banking union. The Single Supervisory Mechanism (SSM), which started operating in November 2014, is an essential step towards restoring banks to health and rebuilding trust in the banking system. The ECB is today responsible for setting a single monetary policy applicable throughout the euro area and for supervising all euro area banks in order to ensure their safety and soundness, some directly and some indirectly. Its role in the area of financial stability has also expanded through the conferral of macroprudential tasks and tools that include tightening national measures when necessary. It thus carries out these complementary functions, while its primary objective of pursuing price stability remains unchanged. What are the working arrangements of this enlarged ECB, and what are the similarities and existing synergies among these functions? In the following pages, focusing on the organisational implications of the “new” ECB, we show the relative degrees of centralisation and decentralisation that exist in discharging these functions, the cycles of policy preparation and the rules governing interaction between them.

The Foreign Exchange Risk Premium in the Cross-Section of Stock Returns: International Evidence
Krapl, Alain A.,Varmaz, Armin
Using the framework of the International Capital Asset Pricing (ICAPM), we explore two central topics associated with equity foreign exchange (FX) risk premia. First, we estimate ICAPM-consistent FX risk premia for a large cross-section of firms. Second, we study the diversifiability of FX risk. Using equity data from six major financial markets, we find support for FX risk being a priced factor in the unconditional setting. Empirical estimates of FX risk premia are negative and economically meaningful for firms in most of the sample markets. Further, we observe that FX risk does not appear to be fully diversifiable from four major currency perspectives.

The Rise of Multiple Institutional Affiliations
Hanna Hottenrott,Michael Rose,Cornelia Lawson

The affiliation to an institution provides prestige and identity to researchers and determines access to resources and infrastructure. Institutions in turn seek to affiliate researchers to secure their knowledge and skills, benefiting the research conducted within these institutions and their position in national and international rankings. This study documents the phenomenon of researchers having multiple affiliations and discusses potential causes and consequences. We analyze affiliation information of 8.5M authors from 40 countries, who published 8.9M scientific articles in 14 disciplines since 1996. We find that multiple affiliations occur both within countries as well as across borders, and that more than 60% are within the academic research sector. The share of authors with multiple affiliations increased substantially over the past two decades and particularly since the mid-2000s. The increase is particularly pronounced in countries whose funding structures became more competitive. The rise of multiple affiliations points to fundamental changes in the organisation of science and challenges our measurements of where scientific activity takes place.

The Role of Target Termination Fees in REIT Mergers
Gogineni, Sridhar,Jain, Pawan
Target termination fee provisions are widely used in merger agreements and require the target firm to pay the bidder a fixed cash fee in the event the target firm backs out of the agreement. We examine the determinants and consequences of target termination fee provisions in REIT mergers and test the competing agency and efficient contracting hypothesis. We find that target termination fee provisions are more likely in hard to value targets, that is, in deals involving large targets, targets with high leverage, and firms that were not targets of a takeover attempt in the recent past. Our results also suggest that target termination fee provisions are associated with higher offer premiums, announcement period returns, and higher deal completion rates. Collectively, our results indicate that termination fee provisions are used as effective contractual devices in REIT mergers to further target shareholder interests.

Trading Transparency: At What Speed and Cost?
Jones, Charles M.,Kurtz, Annalyn
This paper summarizes the discussions that took place at a recent one-day listening conference on this and related questions hosted by Columbia Business School's Program for Financial Studies and sponsored by a grant from Norges Bank Investment Management under the Norwegian Finance Initiative (NFI). It was held on June 14, 2018 in New York.The conference was structured as a series of panels that were moderated by academics and comprised regulators, researchers and market participants from the buy side and sell side. There were separate panels on the fixed income markets, equity markets, public versus private markets, technology and innovation, clearing and settlement, and regulation, and the discussions took place under Chatham House rules.

U Disappeared: Indexing and the Shift of Diurnal Patterns
Jiang, Wenxi,Yao, Chen
We find that the well-documented U-shaped diurnal pattern of stock liquidity does not hold in recent years: stocks' bid-ask spread appears to decrease, not increase, towards the closing of the trading day. This pattern shift is driven by the rise of index-tracking investors, who need to trade at the closing price to minimize tracking errors. The sharply increased trading from passive indexers improves stock liquidity at the close of trading. We find that stocks with high index fund ownership tend to have a higher trading volume, smaller bid-ask spreads, and lower price volatility over the last 5-minute trading window relative to its intraday average, compared to stocks held less by index funds. Causal evidence is established by exploiting the switches between Russell 1000/2000 stock indexes. Last, we discuss the implications to market efficiency and the cost of indexing.

U.S. Coins Market: Historical Performance and Anomalies
Obaid, Khaled,Pukthuanthong, Kuntara,Maslar, David A.
In this paper, we document the historical performance of collectable coins from 1967 to 2015. Collectable coins have a 9.7% annualized nominal return and a 5.5% real return over this period. We show collectable coins provide large diversification benefits based on their Sharpe ratios and are effective at countering both anticipated and unanticipated inflation. Lastly, we document cross-sectional and time series momentum and newly issued coin underpricing, anomalies in the market for collectable coins that are typically associated with stocks.

Volatility Term Structures in Commodity Markets
Hollstein, Fabian,Prokopczuk, Marcel,Wuersig, Christoph
In this study, we comprehensively examine the volatility term structures in commodity markets. We model state-dependent spillovers in principal components (PCs) of the volatility term structures of different commodities, as well as that of the equity market. We detect strong economic links and a substantial interconnectedness of the volatility term structures of commodities. Accounting for intra-commodity-market spillovers significantly improves out-of-sample forecasts of the components of the volatility term structure. Spillovers following macroeconomic news announcements account for a large proportion of this forecast power. There thus seems to be substantial information transmission between different commodity markets.

Why Islamic Banks Focus More on Debt-Based Financing Than Equity-Based Which Is More Shariah Compliant?
Maikabara, Abdullateef Abdulqadir
Financing is an integral part of banking system to consolidate operational activities. Small and medium enterprises (SMEs) are one of the backbones for socio-economic development as it require sufficient financial stand in order to implement several business plans. However, Islamic bank plays a prominent role just like its conventional counterpart by providing financing through two modes which are: debt and equity based although the latter seems to be the lesser mode being applied due to several issues in spite being more Shariah compliant. This paper objects to address the issues and challenges behind reluctance of Islamic banks on equity based mode. The paper also provides some suggestions for the promotion of equity based mode for socio-economic development and sustainability.