Research articles for the 2019-12-16

6th World Pensions Forum held in London: Greening, Governance and Asset Ownership
Weeks, David,Firzli, M. Nicolas J.
The sixth annual World Pensions Forum was held on 23-24 February 2017 at the Queen's House in the Royal Borough of Greenwich.Over 120 representatives attended: from pension and sovereign funds, central banks and government agencies including financial regulators. Topics discussed included environmental, social and governance (‘ESG’) factors and the role of supranational institutions acting as facilitators, issuers and co-investors along- side pension funds.The Forum also addressed the economic implications of pension reform in Europe and the United States, the empowerment of employee-nominated pension trustees and women board members, and how ‘best-in-class pension investors’ from the US, Britain, Australia, Canada, France and the Netherlands can foster a more effective form of asset ownership: fiduciary capitalism.

A Binomial Asset Pricing Model in a Categorical Setting
Takanori Adachi,Katsushi Nakajima,Yoshihiro Ryu

Adachi and Ryu introduced a category Prob of probability spaces whose objects are all probability spaces and whose arrows correspond to measurable functions satisfying an absolutely continuous requirement in [Adachi and Ryu, 2019]. In this paper, we develop a binomial asset pricing model based on Prob. We introduce generalized filtrations with which we can represent situations such as some agents forget information at some specific time. We investigate the valuations of financial claims along this type of non-standard filtrations.

A natural experiment of the Chinese credit system with financial crisis and stimulus program
Yingli Wang,Qingpeng Zhang,Xiaoguang Yang

Examining the topological properties of networks formed by such guarantee relationships is critical for an in-depth understanding and effective regulations of the financial system. In this research, we analyzed the structure and evolution of the Chinese guarantee network with real-world data from 2007 to 2012. We identified the scale-free and power-law properties of the guarantee network and found the global financial crisis and follow-up economic stimulus program had a significant influence on the evolution of the guarantee network. In particular, both the growth and connectivity of the guarantee network was diminished by the 2008 financial crisis, and enhanced by the following stimulus program. This research presents data-driven insights on how the topological structure of the guarantee network is associated with economic policies.

An Economical Business-Cycle Model
Pascal Michaillat,Emmanuel Saez

In recent decades, in developed economies, slack on the product and labor markets has fluctuated a lot over the business cycle, while inflation has been very stable. At the same time, these economies have been prone to enter long-lasting liquidity traps with stable positive inflation and high unemployment. Motivated by these observations, this paper develops a simple policy-oriented business-cycle model in which (1) fluctuations in aggregate demand and supply lead to fluctuations in slack but not in inflation; and (2) the aggregate demand structure is consistent with permanent liquidity traps. The model extends the money-in-the-utility-function model by introducing matching frictions and including real wealth into the utility function. Matching frictions allow us to represent slack and to consider a general equilibrium with constant inflation. Wealth in the utility function enriches the aggregate demand structure to be consistent with permanent liquidity traps. We use the model to study the effects of various aggregate demand and supply shocks, and to analyze several stabilization policies---such as conventional monetary policy, helicopter drop of money, tax on wealth, and government spending.

Bank Intermediation Margin in Time of Negative Interest Rate Policy
Boungou, Whelsy,Mawusi, Charles
Based on 9946 banks in 59 countries over the period 2009â€"2018 and a Difference-in Differences estimator, this paper assesses the effects of negative interest rates on bank intermediation margin. We find that bank margins have contracted in countries where negative rates have been implemented. This effect, however, depends on bank-specific characteristics such as the size, the level of capitalization and the customer deposits. Moreover, we find that the effects of negative rates are stronger on interest expenses than on interest income.

Bankruptcy Prediction for Non-Financial Firms of Pakistan
Roomi, Muhammad Sohaib,Ahmad, Waqas,Ramzan, Muhammad,Zia ur Rehman, Dr. Muhammad
In this study we use two models for the measuring of financial status of the non-financial firms which are listed in the Karachi Stock Exchange. The Non-financial companies represent the biggest slice at the Karachi Stock Exchange. The non-financial companies of Pakistan are the total population and sample size is 25 higher and 25 lower capital companies. The technique which used in this study was Convenience sampling technique and all 50 non-financial listed companies at KSE were included to gain deeper insights into this study. The State Bank of Pakistan shows balance sheet analyses of companies, for compiling of data financial reports were used for the years 2007 to 2012. The results of the study showed that Abbas model and Altman‟s Z-Score model was a effective tool for checking the financial health of non-financial companies listed at Karachi stock exchange. This study further explores that lower capital firm have more financially distressed companies as compare to high capital non-financial companies listed at KSE.

Capturing Financial markets to apply Deep Reinforcement Learning
Souradeep Chakraborty

In this paper we explore the usage of deep reinforcement learning algorithms to automatically generate consistently profitable, robust, uncorrelated trading signals in any general financial market. In order to do this, we present a novel Markov decision process (MDP) model to capture the financial trading markets. We review and propose various modifications to existing approaches and explore different techniques like the usage of technical indicators, to succinctly capture the market dynamics to model the markets. We then go on to use deep reinforcement learning to enable the agent (the algorithm) to learn how to take profitable trades in any market on its own, while suggesting various methodology changes and leveraging the unique representation of the FMDP (financial MDP) to tackle the primary challenges faced in similar works. Through our experimentation results, we go on to show that our model could be easily extended to two very different financial markets and generates a positively robust performance in all conducted experiments.

Corporate Governance and Corporate Performance: Does Former Explains Latter in Corporate India?
Jacob, Sajit
This paper discusses the effects of Corporate Governance (CG) on corporate performance. This study investigates the nature and intensity of influence CG exercises on the firm performance. The main goal is to prove that CG is a determinant for firm performance. Main attention was paid to ANOVA based inferential statistics, coefficient of correlation and Ordinary Least Squares (OLS) based regression analysis to investigate the objective. This topic was chosen to examine whether the positive correlations between CG and firm performance in western studies are applicable in Indian context. OLS based econometric modelling identifies Equity Multiplier Ratio (EMR) and Times Interest Earned (TIE) as leading indicators of Economic Value Added (EVA) that needs CG attention. The major findings of the paper are, there are no statistically significant differences among the means of EVA on comparing across CGPI categories. However, there exist a positive correlations in all CGPI categories with EVA. The above findings suggest that by a financial value chain, CGPI activism on the leading indicators of EVA will culminate in the improvement of EVA itself.

Corporate Governance, Human Capital Resources, and Firm Performance: Exploring the Missing Links
Lajili, Kaouthar,Lin, Yu-Hsin,Rostamkalaei, Anoosheh
This study explores the associations between human capital resources, firm performance, and corporate governance mechanisms. Based on the survey results of the “50 most attractive employers” conducted by Universum Global 2010, human resource, performance, and governance data was collected for the period from 2007 to 2011. Drawing on the strategic human capital and resource management, international governance, and organizational literatures, this study examines the extent to which corporate governance mechanisms moderate the relationships between firm performance and human capital resources and posits that human resource performance is positively associated with corporate governance mechanisms that support and enhance strategic human resource management policies. Panel regression analyses are conducted to test the study’s hypotheses. The results show that human capital resources are positively related to firm performance, and that some corporate governance mechanisms may negatively affect performance when interacted with human capital variables. Furthermore, human resource performance is significantly related to some governance mechanisms, with interaction effects between human capital and other organizational attributes showing differential impacts. Overall, the results support a contingency-based view of strategic human resource management in the context of large and attractive global employers and highlight the importance of governance design in supporting investments and deploying human resources and capabilities at the firm and industry levels and across national boundaries.

CorrGAN: Sampling Realistic Financial Correlation Matrices Using Generative Adversarial Networks
Gautier Marti

We propose a novel approach for sampling realistic financial correlation matrices. This approach is based on generative adversarial networks. Experiments demonstrate that generative adversarial networks are able to recover most of the known stylized facts about empirical correlation matrices estimated on asset returns. This is the first time such results are documented in the literature. Practical financial applications range from trading strategies enhancement to risk and portfolio stress testing. Such generative models can also help ground empirical finance deeper into science by allowing for falsifiability of statements and more objective comparison of empirical methods.

De las tensiones financieras al fracaso: ¿cuáles son las oportunidades de supervivencia de una empresa? (From Financial Tensions to Failure: How Likely Is It That a Company Will Survive?)
Piñeiro-Sánchez, Carlos,de Llano-Monelos, Pablo,Rodríguez - López, Manuel
Spanish Abstract: El fracaso financiero no es un hecho súbito, sino el resultado de un conjunto de disfunciones financieras que se acumulan y agravan progresivamente. Este trabajo examina la relación entre el riesgo de insolvencia y el tiempo. El objetivo es dar respuesta a cuestiones como cuál es el ritmo al que progresan las deficiencias, o de cuánto tiempo disponen los directivos para introducir las acciones correctoras antes de que el deterioro sea irreversible.English Abstract: Financial failure is not a sudden event, but the result of a set of financial dysfunctions that gradually accumulate and aggravate. This paper examines the relationship between insolvency risk and time. The objective is to respond to questions such as the rate at which deficiencies progress, or how much time managers have to introduce corrective actions before the deterioration is irreversible.

Determinants of Corporate Governance Performance Based on Disclosures in Published Reports: Evidence from India
Jacob, Sajit
This paper investigates the state of Corporate Governance (CG) performance in India. The main goal is to ascertain the determinants of CG through content analysis. As part of this investigation, statistical significance of categories based on CG performance index (CGPI), possibility of selective improvement of themes and analysis for ascertaining scoping and focusing of limited attributes within a theme for improvement. While at a macro level categories used mean with standard deviation rules, but at micro level homogenous clusters were identified with k mean cluster analysis within a category to enable deeper profiling. For scoping of attributes; factor analysis with Principal Component Analysis and Varimax rotation is employed. Ordinary Least Squares (OLS) regression and Ordinal Logistic Regression (OLR) are utilized in this study for econometric modeling. This study help rate the progress of reforms, plan further reforms and enable investors to choose the right firms. Major findings of the paper are; there exists statistically significant differences among categories and across theme indices. High adjusted R square linear regressions and subsequent sensitivity analysis short listed critical attributes to focus. The above findings suggest high predictive ability of OLR-OLS system of equations highlighting the possibility of focusing on limited attributes within a theme, but need for holistic approach on CG with all themes as a requirement are the inferences.

Do Traders Become Rogues? or Do Rogues Become Traders? The Om of Jerome and The Karma of Kerviel…
Kashyap, Ravi
We present a case study of Jerome Kerviel, a trader at Society Generale, and how he racked up positions far exceeding his authorized risk limits resulting in a spectacular loss and in the process becoming the perpetrator of the biggest rogue trading scandal, thus far, in recorded history. We focus on many aspects of the financial markets and attempt to provide an appropriate context to the proceedings by considering some historical matters and providing an alternate definition for a rogue trader. We look at the organization structure, trading profits, risk management, regulation and the many conflicts that arise therein with some focus on Kerviel and his immediate environment. We provides a simple guide for the budding rogue trader that could also be helpful for the aspiring control agent. We conclude by delving deeper into the ethical issues regarding rogue trading and provide possible ways to mitigate if not resolve the many moral dilemmas that arise in business, life and everywhere else.Some of the topics we discuss are: A Joke at First and Also at Last; History: A Product Structured by Winners; Rogue One (Alone?) on Delta One; Depart-Mental Drill Down (?); Confessions of The Control Agents; A Slow Walk On A Tight Rope; The Glass Castle Called Basel; “e” for Everything, Everyone, Everywhere ... including Evolution, Education and Ethics; Sick Lesson from Nick Leeson; Rogue Trading Guide for Dummies; Mathematically Sophisticated Models or Merely Superior Morals?

Does Corporate Governance Associate with Productivity for Sustainable Growth? Indian Experience
Jacob, Sajit
This paper discusses importance of Corporate Governance on the productivity of the firm and this study in particular has chosen role of CG on Total Factor Productivity as the core of this paper. The main goal is to prove CG as the causal factor for TFP. Main attention was paid to Ordinary Least Squares based econometric modelling of TFP to identify the leading financial performance variables, that CG needs to focus. This topic was chosen because, unless productivity of firms improve the real macroeconomic growth remains a mirage. The major findings of the paper are CG needs to develop specific strategies to enhance Operating Cash flow to Sales, Debt Service Coverage and Return on Revenue to create significant impact on TFP. The above findings suggest that there exist a financial value chain that establishes logically and with correlation signs that CGPI is a critical causal factor for productivity.

Does Corporate Governance Causally Impact Firm Returns? The Case of India
Jacob, Sajit
This paper discusses stakeholder wealth maximization as the ultimate objective of Corporate Governance. This study investigates the role of CG in minimizing the total risk on the firm and maximizing the wealth. At the end, paper intends to examine possibility of CG as a sorting variable for style investing that can provide abnormal returns in the long run. The main goal is to prove the significance of CG in managing abnormal returns, systematic risk and idiosyncratic risk. Main attention was paid to ordinary least squares regression, correlation studies and creation of financial value chain. This study tries to find an answer to the question, does CG holds the ability to determine the market valuation of the firm? The major findings of the paper finds possibility of high CGPI firms finds higher firm specific risk. Despite that investors seek higher excess returns to compensate the total risk. In lower CGPI firms, study finds lower COV, but a higher FGV, that leads to higher market valuation. The financial value chain hypothesizes CG response to critical variables in CAPM creates impact on COV and FGV, that forms the basis of FSR that eventually generates MVA. There exist a value premium that is accumulating over time and grows beyond growth premium to conclude value portfolio has potential wealth generation ability.

Does Corporate Governance Influences Enterprise Risk in India: An Analytical Study
Jacob, Sajit
This paper investigates the association between Corporate Governance (CG) performance and enterprise risk in India. Study also investigates the behavior of risk under different classifications. As part of this study, Risk is estimated through a Multifactor Estimation of VaR. with Cash Value Added being used as the covariate that represents the value of the firm. This study help rate the progress of enterprise risk governance reforms from the point of CG performance, plan further reforms and enable investors to choose the right firms. Policy makers will know where to focus, stakeholders will recognize their roles and responsibilities with respect to risk management and management will take informed operational decisions around the policies set. Major findings of the paper are; there exists significant risk on the extreme ends of the CGPI ordinal scale. CGPI influences CVA which in turn determines enterprise risk. CVA and risk analysis finds a significant role for industrial segments. Also the number of risk free companies in these extreme segments are the least. Manufacturing and service sectors carries maximum risk.

Does Government Report Readability Matter? Evidence from Market Reactions to AAERs
Kuang, Yu Flora,Lee, Gladys,Qin, Bo
We investigate whether market reactions to Accounting and Auditing Enforcement Releases (AAERs) of the U.S. Securities and Exchange Commission (SEC) vary with different levels of readability in the AAERs. After controlling for the complexity of an AAER report and the severity of the enforcement case, we find that when the AAER is more difficult to read, with readability measured based on the directives of the Plain Writing Act of 2010, markets react more negatively to the AAER announcement. Cross-sectional tests indicate that the effect of AAER readability is attenuated by investor sophistication and firm visibility, whereas the effect is more pronounced when AAER firms are exposed to greater uncertainty. Contrary to conventional wisdom that linguistically complex disclosures receive reduced market reactions, our results suggest that complex AAER announcements could trigger more negative stock price reactions, since investors under uncertainty and ambiguity tend to assume the worst and bid down the market value of AAER firms. Our study offers meaningful implications for regulators concerned with writing clarity in government documents.

Does Implementation of the Stewardship Code Affect Investors' Judgment and Decision-Making on Firm's Negative Information?
Shim, Haerin,Koo, JeongEun,Shim, Taesup
Since 2010, the Stewardship Code (SC) or similar regulations have been introduced to enhance the quality of institutional investors' engagement and to improve long-term firm value. Although some prior anecdotal or legal studies have expressed skepticism toward the effectiveness of the SC, there has been little empirical evidence regarding the effects of these policies. Accordingly, the purpose of this paper is to investigate how the implementation of the SC affects nonprofessional investors’ judgment and decision-making on an investee firm facing negative issues. Based on the results of a quasi-experiment with Korean nonprofessional investors, we show that the implementation of the SC may negatively impact nonprofessional investors' assessments of the firm, contrary to the intended purpose of SC adoption. This study provides timely implications for the future operation and development of the stewardship policies recently adopted in many countries.

Does Operating Risk Affect Portfolio Risk? Evidence from Insurers' Securities Holding
Chen, Xuanjuan,Sun, Zhenzhen,Yao, Tong,Yu, Tong
This study empirically examines, in the setting of insurance companies, the theory that investors facing more operating risk may behave as if they were more risk averse in investment decisions. Specifically, we study how operating risk from underwriting insurance policies affects insurers' risk taking behavior in their portfolio investments. We find that insurers with higher volatilities in underwriting incomes and cash flows are more conservative in their financial investment risk -- they have lower credit risk exposure in their bond investments, as well as lower portfolio weights on risky bonds and equities. Further, insurers' portfolio risk exposure is sensitive to the risk of permanent underwriting income shocks but insensitive to the risk of transitory shocks. Transitory operating risk, however, is significantly related to portfolio risk when insurers face tight financing constraints. Our findings suggest a substitutive effect of operating risk on investment decisions by financial institutions.

EU Economic Modelling System
Olga Ivanova,d'Artis Kancs,Mark Thissen

This is the first study that attempts to assess the regional economic impacts of the European Institute of Innovation and Technology (EIT) investments in a spatially explicit macroeconomic model, which allows us to take into account all key direct, indirect and spatial spillover effects of EIT investments via inter-regional trade and investment linkages and a spatial diffusion of technology via an endogenously determined global knowledge frontier with endogenous growth engines driven by investments in knowledge and human capital. Our simulation results of highly detailed EIT expenditure data suggest that, besides sizable direct effects in those regions that receive the EIT investment support, there are also significant spatial spillover effects to other (non-supported) EU regions. Taking into account all key indirect and spatial spillover effects is a particular strength of the adopted spatial general equilibrium methodology; our results suggest that they are important indeed and need to be taken into account when assessing the impacts of EIT investment policies on regional economies.

Effects of Macro Economic Forces on Corporate Governance Performance of Indian Companies: An Exploratory Study
Jacob, Sajit
This paper investigates the influence of macroeconomic forces on Corporate Governance (CG) performance in India. The main goal is to identify the macroeconomic factors and their nature of effects on CG through econometric analysis. As part of this investigation, statistical significance of corporate characteristics such as age, size and industry membership on CG performance index (CGPI) is examined. Joint effects and independent effects of corporate characteristics on CGPI are investigated. A list of macroeconomic variables identified from international studies are used to understand the factors influencing CGPI in different categories. Generalized Linear Model (GLM) and Ordinary Least Squares (OLS) regression are utilized in this study for econometric modeling. This study help rate the progress of economic reforms from the point of CG performance, plan further reforms and enable investors to choose the right firms. Major findings of the paper are; there exists statistically significant influence from age and size on the CG performance in every category of CGPI. OLS examination for identifying macroeconomic factors that influences CGPI reveals different sub-sets of the factors influencing different categories of CGPI. GLM analysis enables characterizing ideal high CGPI corporate as from services industry, with corporate age beyond 58 and market capitalization around INR 1430 crores with average CGPI of 66.

Federal Reserve Participation in Public Treasury Offerings
Garbade, Kenneth
This paper describes the evolution of Federal Reserve participation in public Treasury offerings. It covers the pre-1935 period, when the Fed participated on an equal footing with other investors in exchange offerings priced by Treasury officials, to its present-day practice of reinvesting the proceeds of maturing securities with “add-ons” priced in public auctions in which the Fed does not participate. The paper describes how the Federal Reserve System adapted its operating procedures to comply with the 1935 limitations on its Treasury purchases, how it modified its operating procedures from time to time in response to changes in Treasury funding techniques, and how the Federal Reserve and the Treasury worked together to improve the Treasury’s debt management and the Fed’s reinvestment operations.

Financial Frictions and the International Transmission of Shocks
Park, Woong Yong
This study presents a two-good, two-country model with financial frictions, where banks facing a borrowing constraint intermediate funds between households and firms. The endogenous fluctuations of international relative prices increase the business cycle co-movement across countries when combined with habit formation in consumption and investment adjustment costs. Financial frictions due to the borrowing constraint of the banks further amplify the effects of productivity and capital quality shocks within a country and across the two countries.

Finding the British Google: Relaxing the Prohibition of Dual-Class Stock from the Premium-Tier of the London Stock Exchange
Reddy, Bobby
There is a dearth of British tech-companies listing on the London Stock Exchange (LSE), and the LSE lacks a large, innovative tech-company such as Google. The UK-Government, concerned as to the loss of UK tech-companies to foreign acquirors, views the encouragement of UK tech-firm listings as a policy priority. Dual-class-stock, which is currently prohibited from the LSE Main Market’s premium-tier, allows founders to list their firms, and retain majority-control, while holding significantly less of the cash-flow rights in the company. In this article, the potential for dual-class-stock to attract UK tech-company listings will be broached, together with the benefits that such a structure can engender for UK tech-companies and their public shareholders. The risks of dual-class-structures will also be discussed, but it will be shown that in a UK-regulatory context, in relation to high-growth tech-companies, the risks may not be as severe as presumed, and easily moderated through judicious controls.

Follow the Money! Combining Household and Firm-Level Evidence to Unravel the Tax Elasticity of Dividends
Bach, Laurent,Bozio, Antoine,Fabre, Brice,Guillouzouic, Arthur,Leroy, Claire,Malgouyres, Clément
We estimate the tax elasticity of dividends using two recent French reforms: a hike in the dividend tax rate followed, five years later, by a cut. To follow the cash movements within the balance sheets of households and firms caused by these reforms, we use newly-accessible personal and corporate tax registries. Following the tax increase, the elasticity of dividends equals four and there is no shifting towards other personal income categories. We find instead an increase in companies’ spending. After the tax decrease, payouts revert to their initial level, but not enough to offset the amounts received during the high-tax period.

Gauge transformations in the dual space, and pricing and estimation in the long run in affine jump-diffusion models
Svetlana Boyarchenko,Sergei Levendorskiĭ

We suggest a simple reduction of pricing European options in affine jump-diffusion models to pricing options with modified payoffs in diffusion models. The procedure is based on the conjugation of the infinitesimal generator of the model with an operator of the form $e^{i\Phi(-i\dd_x)}$ (gauge transformation in the dual space). A general procedure for the calculation of the function $\Phi$ is given, with examples. As applications, we consider pricing in jump-diffusion models and their subordinated versions using the eigenfunction expansion technique, and estimation of the extremely rare jumps component. The beliefs of the market about yet unobserved extreme jumps and pricing kernel and can be recovered: the market prices allow one to see "the shape of things to come".

Gender, Race, and Entrepreneurship: A Randomized Field Experiment on Venture Capitalists and Angels
Gornall, Will,Strebulaev, Ilya A.
We study gender and race in high-impact entrepreneurship using a tightly controlled randomized field experiment. We sent out 80,000 pitch emails introducing promising but fictitious start-ups to 28,000 venture capitalists and angels. Each email was sent by a fictitious entrepreneur with a randomly selected gender (male or female) and race (Asian or White). Female entrepreneurs received a 9% higher rate of interested replies than male entrepreneurs pitching identical projects and Asian entrepreneurs received a 6% higher rate than their White counterparts. Our results suggest that investors do not discriminate against female or Asian entrepreneurs when evaluating unsolicited pitch emails.

Get the Money Somehow: The Effect of Missing Performance Goals on Insider Trading
Gao, Meng
This paper uses a regression discontinuity design to identify the effect of missing relative performance goals on insider trading. I find that CEOs who narrowly miss relative performance goals and hence receive a lower pay earn higher profits from their insider trades subsequent to the compensation shock than otherwise similar CEOs who narrowly beat the goals. I also find that CEOs who narrowly miss relative performance goals become less likely to provide earnings and sales guidance. These results suggest that managers can use insider trading to make up for the loss in compensation due to missing relative performance goals, which could reduce the incentive effect of performance-based pay.

In Search of Opportunistic Trades of Corporate Insiders: Evidence from the Us Market
Rasel Chowdhury, Abu Zakir Md.,Mollah, Sabur,Zaman, Mir A.,Farooque, Omar Al
This study investigates the opportunistic trading behaviour of core insiders’ group compared with that of non-core insiders’ group. Specifically, we investigate whether trades of these corporate insiders’ groups are driven by superior information or contrarian beliefs about firms’ future earnings, or both, in order to earn abnormal returns. We document that although both core and non-core insiders’ groups are equally motivated by contrarian beliefs, their motivational differences regarding opportunistic trades are primarily tied to preferential and favoured access to superior private information. In addition, we find evidence that information asymmetry and the Global Financial Crisis (GFC) have effects on their opportunistic trades. We also reveal that abnormal returns earned by core insiders’ group from their opportunistic trades are related to superior information about firms’ future earnings. Our findings have significant implications for opportunistic insider trading in the US market.

Indirect transactions and requirements
Husna Betul Coskun

The indirect transactions between sectors of an economic system has been a long-standing open problem. There have been numerous attempts to define and mathematically formulate this concept in various other scientific fields in literature as well. The existing indirect effects formulations, however, cannot quantify the indirect interactions and transactions between any two sectors of an economic system. Therefore, although the direct and total requirement matrices are formulated and used for economic system analysis, the indirect requirements matrices has never been formulated before. Based on the system decomposition theory, the indirect transactions between two sectors of an economic system and the corresponding indirect requirements matrices are introduced in the present article for the first time. This novel concept of the indirect transactions is also compared with some existing indirect effect formulations, and the theoretical advancements brought by the proposed methodology are discussed. It is shown theoretically and through illustrative examples that the proposed indirect transactions accurately describe and quantify the indirect interactions and transactions, unlike the current indirect effects formulations. The indirect requirements matrices for the US economy using aggregated input-output tables for multiple years are also presented and briefly analyzed.

Ingresos del Estado español: origen, distribución y sostenibilidad (Revenues of the Spanish State: Origin, Distribution and Sustainability)
Fernandez, Pablo,de Apellániz, Eduardo
Spanish Abstract: Este documento resume los datos principales a los que hemos tenido acceso. Las cuentas del Estado Español son muy poco claras. Es inaceptable que el Estado no presente sus cobros y sus pagos de forma clara y transparente.Los cuatro mayores impuestos (Seguridad Social, IVA, IRPF y Sociedades) supusieron un 80% de los Ingresos. Los ingresos del Estado proceden en su gran mayoría de la conjunción trabajo de las personas-empresas y que los pagan al Estado mayoritariamente las empresas. Es incorrecto (o mentira, según el caso) afirmar que el único impuesto que pagan las empresas es el impuesto sobre sociedades.De los 46,6 millones de españoles en 2017, sólo 13,3 pagaron por IRPF, 3 millones pagaron más de €8.000 y 80.000 españoles más de €80.000.La sostenibilidad de los Ingresos del Estado no es obvia: se proporcionan cuatro temas para analizar.English Abstract: This document summarizes the main data to which we have had access. The accounts of the Spanish State are very unclear. It is unacceptable that the State does not present its collections and payments clearly and transparently.The four highest taxes (Social Security, VAT, Personal Income Tax and Companies) accounted for 80% of Income.The income of the State comes in the great majority of the conjunction work of the people-companies and that the companies pay mostly to the State.It is incorrect to state that the only tax paid by companies is the corporate tax.Of the 46.6 million Spaniards in 2017, only 13.3 paid for personal income tax, 3 million paid more than € 8,000 and 80,000 Spaniards over € 80,000.The sustainability of State Revenue is not obvious: four topics are provided for analysis.

Long-Term Investing by Pension Funds. How to Effectively Design and Implement Mandates: a Dutch Case Study.
Slager, Alfred,Jeucken, Marcel
Pension funds are increasingly trying to embed long-term investing choices within their portfolios. Many publications focus on the rationale for long term investing; however, it remains unclear what long term investing actually is, what sets it apart from the current way of investing, and how it should add value. The purpose of this paper is to provide a practical framework for pension fund trustees aiming to bolster and implement long term investing. In doing so, the paper’s contribution is that we choose the trustee’s perspective, build on different existing election and monitoring frameworks, and argue that pension boards have more instruments at hand to implement long-term investing.

Los servicios de pago en el contexto actual. Un reto estratégico para las entidades financieras (Payment Services in the Current Context. A Strategic Challenge for Financial Institutions)
Rodríguez - López, Manuel,de Llano-Monelos, Pablo,Piñeiro-Sánchez, Carlos
Spanish Abstract: Los servicios de pago en el negocio financiero están teniendo un gran impacto en los prestadores de servicios y en los distintos usuarios, por su carácter innovador y disruptivo y por la regulación en materia de protección de los consumidores. El posicionamiento en la prestación de estos servicios cobra especial protagonismo estratégico y operativo, debido a los bajos tipos de interés; tampoco puede obviarse la importancia de la información y vinculación que se obtiene por medio de esta operativa de pagos.English Abstract: Payment services in the financial business are having a great impact on service providers and different users, for their innovative and disruptive nature and for the regulation of consumer protection. The positioning in the provision of these services takes on special strategic and operational importance, due to the low interest rates; nor can the importance of the information and linkage obtained through this payment operation be ignored.

Mean-variance portfolio selection under partial information with drift uncertainty
Jie Xiong,Zuoquan Xu,Jiayu Zheng

This paper studies a mean-variance portfolio selection problem under partial information with drift uncertainty. It is proved that all the contingent claims in this model are attainable in the sense of Xiong and Zhou. Further, we propose a numerical scheme to approximate the optimal portfolio. Malliavin calculus and the strong law of large numbers play important roles in this scheme.

Negative Interest Rates May be More Psychologically Acceptable than Assumed: Implications for Savings
Efendic, Emir,D'Hondt, Catherine,De Winne, Rudy,Corneille, Olivier
The recent implementation of negative interest rates (NIR) by central and commercial banks invites empirical scrutiny of how people would react to this atypical financial policy where one has to pay to let money in the bank. Economic thinking on this issue posits that people would not tolerate NIR on their deposits, and would instead be motivated to spend or invest their money. In two experiments, we find that people, when the alternative is to take one’s savings out of the bank, show a large tolerance to NIR. This tolerance fluctuates as a function of the size of one’s savings (less tolerance for higher amounts), size of NIR (less tolerance for more negative rates), age (older people are less tolerant of NIR) and risk-taking inclinations (those that are more risk-seeking show less tolerance of NIR). The findings are discussed with regards to economic assumptions associated with NIR policy implementation and the psychological implications of this decision-making context.

Network Subgraphs of the heterogeneous Chinese credit system
Yingli Wang,Qingpeng Zhang,Xiaoguang Yang

In this study, we investigate the evolution of Chinese guarantee networks from the angle of sub-patterns. First, we find that the mutual, 2-out-stars and triangle sub-patterns are motifs in 2- and 3-node subgraphs. Considering the heterogeneous financial characteristics of nodes, we find that small firms tend to form a mutual guarantee relationship and large firms are likely to be the guarantors in 2-out-stars sub-patterns.

Neural network regression for Bermudan option pricing
Bernard Lapeyre,Jérôme Lelong

The pricing of Bermudan options amounts to solving a dynamic programming principle, in which the main difficulty, especially in high dimension, comes from the conditional expectation involved in the computation of the continuation value. These conditional expectations are classically computed by regression techniques on a finite dimensional vector space. In this work, we study neural networks approximations of conditional expectations. We prove the convergence of the well-known Longstaff and Schwartz algorithm when the standard least-square regression is replaced by a neural network approximation. We illustrate the numerical efficiency of neural networks as an alternative to standard regression methods for approximating conditional expectations on several numerical examples.

Opacity: Insurance and Fragility
Izumi, Ryuichiro
What are the effects of banks holding opaque, complex assets? Should regulators require bank assets to be more transparent? I study these questions in a model of financial intermediation where opacity determines how long the realized value of an asset remains unknown. By allowing a bank to sell assets before the realization is known, opacity provides insurance to the bank's depositors. However, higher opacity also increases depositors' incentives to join a bank run. In choosing the level of opacity, therefore, a bank faces a trade-off between providing insurance and increasing fragility. If depositors can accurately observe the level of opacity, banks will choose the socially-efficient level. If depositors are unable to observe this choice, however, banks will have an incentive to become overly opaque and regulation to limit opacity can improve welfare.

Operator splitting schemes for American options under the two-asset Merton jump-diffusion model
Lynn Boen,Karel J. in 't Hout

This paper deals with the efficient numerical solution of the two-dimensional partial integro-differential complementarity problem (PIDCP) that holds for the value of American-style options under the two-asset Merton jump-diffusion model. We consider the adaptation of various operator splitting schemes of both the implicit-explicit (IMEX) and the alternating direction implicit (ADI) kind that have recently been studied for partial integro-differential equations (PIDEs) in [3]. Each of these schemes conveniently treats the nonlocal integral part in an explicit manner. Their adaptation to PIDCPs is achieved through a combination with the Ikonen-Toivanen splitting technique [14] as well as with the penalty method [32]. The convergence behaviour and relative performance of the acquired eight operator splitting methods is investigated in extensive numerical experiments for American put-on-the-min and put-on-the-average options.

Optimal Dynamic Asset Allocation for DC Plan Accumulation/Decumulation: Ambition-CVAR
Forsyth, Peter
We consider the late accumulation stage, followed by the full decumulation stage, of an investor in a defined contribution (DC) pension plan. The investor's portfolio consists of a stock index and a bond index. As a measure of risk, we use conditional value at risk (CVAR) at the end of the decumulation stage. This is a measure of the risk of depleting the DC plan, which is primarily driven by sequence of return risk and asset allocation during the decumulation stage. As a measure of reward, we use Ambition, which we define to be the probability that the terminal wealth exceeds a specified level. We develop a method for computing the optimal dynamic asset allocation strategy which generates points on the efficient Ambition-CVAR frontier. By examining the Ambition-CVAR efficient frontier, we can determine points that are Median-CVAR optimal. We carry out numerical tests comparing the Median-CVAR optimal strategy to a benchmark constant proportion strategy. For a fixed median value (from the benchmark strategy) we find that the optimal Median-CVAR control significantly improves the CVAR. In addition, the median allocation to stocks at retirement is considerably smaller than the benchmark allocation to stocks.

Optimal Learning, Overvaluation and Overinvestment
Barbosa, António M.R.G.
Periods of technological revolution are usually associated with overvaluation of and over-investment by innovating firms. This paper develops a model that explains this behavior in a frictionless rational setting. When fully rational innovating firms face uncertainty about the returns to scale of their production functions, over-investment emerges as the optimal way to learn about the returns to scale. The optimal learning is also shown to produce overvaluation. The model is also able to generate what an observer ex-post would identify as bubbles followed by over-correction, negative excess returns in early periods, negative auto-correlation in excess returns and market-to-book and size effects.

Performance and Risk: Sime Darby Platation
Jiaolong, Chen
The purpose of this study is to analyze the performance of sime Darby platation a during five years. The analysis is applied on the sample of food industry company in Malaysia over the period between 2014 and 2018. This study using a descriptive analysis such as credit risk ,optional risk,liquidity risk and market risk as to against company’s performance. The finding show that the company profitability can be influenced by the operational risk whereas liquidity can have influenced by the economic environment which is exchange rate.

Political Attitudes, Partisanship, and Merger Activity
Duchin, Ran,Farroukh, Abed El Karim,Harford, Jarrad,Patel, Tarun
This paper provides novel evidence that similarity in employees’ political attitudes plays a role in mergers and acquisitions. Using detailed data on individual campaign contributions to Democrats and Republicans, our estimates show that firms are considerably more likely to announce a merger, complete a merger, and a have shorter time-to-completion when their political attitudes are closer. Furthermore, acquisition announcement returns and post-merger operating performance are significantly higher when the acquirer and the target have more similar political attitudes. The effects of political partisanship on mergers are stronger in more recent years, when the political polarization in the U.S. is greater. Overall, we provide estimates that political attitudes and polarization have real effects on the allocation of assets in the economy.

Post Macroeconomic Announcement Reversal
Niu, Zilong,Zhang, Terry
We document that the positive slope of the security market line on macroeconomic announcement days is reversed on two days after the announcement. On post-announcement days, stocks in the top beta decile return -5.13 basis points per day, completely erasing their gains from the announcement day. We find similar post-announcement reversal in market returns. Moreover, the reversal is predictable. If the market response on the announcement day is negative (i.e. after bad macroeconomic news), the market continues to decline by another 14 basis points and high-beta stocks lose 31 basis points on the next day. These findings suggest that the market does not immediately absorb macroeconomic news upon release and announcement-day returns may overestimate macroeconomic risk premium. We develop a model in which investors process bad news slowly. When good news is reflected in stock prices faster, unconditional returns are higher close to the announcement and, subsequently, become negative as bad news begins to dominate. Our model successfully explains the stock market behaviour on both announcement and post-announcement days.

Predicción de insolvencia y fracaso financiero: medio siglo después de Beaver (1966). Avances y nuevos resultados (Forecasting Insolvency and Financial Failure: Half a Century After Beaver (1966). Advances and New Results)
Rodríguez - López, Manuel,Piñeiro-Sánchez, Carlos,de Llano-Monelos, Pablo
Spanish Abstract: A lo largo de los últimos sesenta años, se han desarrollado distintos modelos de análisis y determinación de la solvencia empresarial. El objetivo es identificar las tensiones financieras antes de que ocurra el fracaso. De esta manera se mitigan los costes directos e indirectos propios del fracaso. Sin embargo, a lo largo de los años la filosofía de los modelos ha ido evolucionando, paralelamente a necesidades prácticas y a las herramientas matemáticas. Presentamos una revisión de la literatura relevante en esta materia.English Abstract: Over the last sixty years, different models of analysis and determination of business solvency have been developed. The objective is to identify financial tensions before the failure occurs. In this way the direct and indirect costs of failure are mitigated. However, over the years the philosophy of the models has evolved, in parallel with practical needs and mathematical tools. We present a review of the relevant literature in this area.

Predicting intraday jumps in stock prices using liquidity measures and technical indicators
Ao Kong,Hongliang Zhu,Robert Azencott

Predicting the intraday stock jumps is a significant but challenging problem in finance. Due to the instantaneity and imperceptibility characteristics of intraday stock jumps, relevant studies on their predictability remain limited. This paper proposes a data-driven approach to predict intraday stock jumps using the information embedded in liquidity measures and technical indicators. Specifically, a trading day is divided into a series of 5-minute intervals, and at the end of each interval, the candidate attributes defined by liquidity measures and technical indicators are input into machine learning algorithms to predict the arrival of a stock jump as well as its direction in the following 5-minute interval. Empirical study is conducted on the level-2 high-frequency data of 1271 stocks in the Shenzhen Stock Exchange of China to validate our approach. The result provides initial evidence of the predictability of jump arrivals and jump directions using level-2 stock data as well as the effectiveness of using a combination of liquidity measures and technical indicators in this prediction. We also reveal the superiority of using random forest compared to other machine learning algorithms in building prediction models. Importantly, our study provides a portable data-driven approach that exploits liquidity and technical information from level-2 stock data to predict intraday price jumps of individual stocks.

Pricing and Hedging Defaultable Participating Contracts with Regime Switching and Jump Risk
Le Courtois, Olivier,Quittard-Pinon, Francois,Su, Xiaoshan
This paper develops a transform-based approach for the pricing of participating life insurance contracts with a constant or floating guaranteed rate. Our analysis incorporates credit, market (jump), and economic (regime switching) risks, where the evolution of the reference portfolio is described by a regime switching double exponential jump diffusion model. We provide semi-analytical formulas for the contract value by using a Laplace or Laplace-Fourier transform that involves matrix Wiener-Hopf factors. Then, the price is obtained by implementing the matrix Wiener-Hopf factorization and by performing a numerical Laplace and Fourier inversion. By comparing the results with Monte-Carlo simulations, we show that our pricing method is easy to implement and accurate. We also show that the contract with a floating guaranteed rate is riskier but more profitable than the contract with a constant guaranteed rate. Two hedging strategies are introduced to hedge jump and regime switching risks in the participating contracts.

Probabilistic Approach to Mean Field Games and Mean Field Type Control Problems with Multiple Populations
Masaaki Fujii

In this work, we systematically investigate mean field games and mean field type control problems with multiple populations using a coupled system of forward-backward stochastic differential equations of McKean-Vlasov type stemming from Pontryagin's stochastic maximum principle. Although the same cost functions as well as the coefficient functions of the state dynamics are shared among the agents within each population, they can be different population by population. We study the mean field limit for the three different situations; (i) every agent is non-cooperative; (ii) the agents within each population are cooperative; and (iii) the agents in some populations are cooperative but those in the other populations are not. We provide several sets of sufficient conditions for the existence of a mean field equilibrium for each of these cases. Furthermore, under appropriate conditions, we show that the mean field solution to each of these problems actually provides an approximate Nash equilibrium for the corresponding game with a large but finite number of agents.

Rebalancing With Transaction Costs: Theory, Simulations, and Actual Data
El Bernoussi, Rim,Rockinger, Michael
In the absence of transaction costs and the presence of independent returns, a buy-and-hold strategy can be shown to generate higher expected returns than a fixed-weight strategy, where the portfolio weights are regularly readjusted/rebalanced to some initial level. This higher expected return comes, however, at a cost: higher volatility. The resulting trade-off leads to different rankings of the Sharpe ratio depending on the statistical moments of the assets. We theoretically discuss causes affecting the ranking of the Sharpe ratio, and we introduce an easy-to-implement methodology to deal with proportional transaction costs. Under transaction costs, the buy-and-hold strategy as the cheaper approach should be the winner. In various simulation experiments, we investigate the relevance of transaction costs on rebalancing strategies. Eventually, we consider a realistic portfolio with a risk-free asset, bonds, and various stock indices that allows us to demonstrate that in practice, as long as transaction costs remain small, rebalancing has value for realistic portfolios.

Rethinking Production Under Uncertainty
Cochrane, John H.
Conventional models of production under uncertainty specify that output is produced in fixed proportions across states of nature. I investigate a representation of technology that allows firms to transform output from one state to another. I allow the firm to choose the distribution of its random productivity from a convex set of such distributions, described by a limit on a moment of productivity scaled by a natural productivity shock. The model produces a simple discount factor linked to productivity, which can be used to price any asset, without regard to preferences.

Robustness and sensitivity analyses for stochastic volatility models under uncertain data structure
Jan Pospíšil,Tomáš Sobotka,Philipp Ziegler

In this paper we perform robustness and sensitivity analysis of several continuous-time stochastic volatility (SV) models with respect to the process of market calibration. The analyses should validate the hypothesis on importance of the jump part in the underlying model dynamics. Also an impact of the long memory parameter is measured for the approximative fractional SV model. For the first time, the robustness of calibrated models is measured using bootstrapping methods on market data and Monte-Carlo filtering techniques. In contrast to several other sensitivity analysis approaches for SV models, the newly proposed methodology does not require independence of calibrated parameters - an assumption that is typically not satisfied in practice. Empirical study is performed on data sets of Apple Inc. equity options traded in April and May 2015.

Scaling Limits for Super--replication with Transient Price Impact
Peter Bank,Yan Dolinsky

We prove a scaling limit theorem for the super-replication cost of options in a Cox--Ross--Rubinstein binomial model with transient price impact. The correct scaling turns out to keep the market depth parameter constant while resilience over fixed periods of time grows in inverse proportion with the duration between trading times. For vanilla options, the scaling limit is found to coincide with the one obtained by PDE methods in [12] for models with purely temporary price impact. These models are a special case of our framework and so our probabilistic scaling limit argument allows one to expand the scope of the scaling limit result to path-dependent options.

Set-Valued Risk Measures as Backward Stochastic Difference Inclusions and Equations
Çağın Ararat,Zachary Feinstein

Scalar dynamic risk measures in continuous time are commonly represented as backward stochastic differential equations. There are two possible extensions for scalar backward stochastic differential equations for the set-valued framework: (1) backward stochastic differential inclusions; or (2) set-valued backward stochastic differential equations. In this work, the discrete-time setting is investigated with difference inclusions and difference equations in order to provide insights for such differential representations for set-valued dynamic risk measures.

Soft Dollars, Hard Choices: Reconciling US and EU Policies on Sell-Side Research
Mahoney, Paul G.
Investors use research provided by broker-dealers, also known as sell-side research, to help formulate trading ideas and strategies. Investors normally pay for sell-side research through brokerage commissions. Recent European Union regulations require some institutional investment managers to unbundle, or pay separately for research and trade execution. Unbundling might subject a U.S. broker-dealer to regulation under the Investment Advisers Act of 1940, significantly affecting the broker’s business practices. The Securities and Exchange Commission provided temporary no-action relief to avoid potential conflicts between U.S. and EU law while it considers whether to engage in rulemaking on the issue. The outcome could have a substantial effect on the quality of the securities markets. This article argues that investors should have the option to bundle or unbundle payment for sell-side research without affecting the broker’s regulatory status and suggests ways to achieve that outcome.

Study of Direct Relationship Determinants on the Selection of Musyarakah Mutanaqisah (MM) Products
Zakaria Bahari, Zakaria,Nor Hatizal, Hatizal, Nor,Doktoralina, Caturida Meiwanto
This study analyses the direct relationship of determinants â€" both intrinsic and extrinsic factors â€" affecting the selection of Musyārakat Mutanāqiá¹£at (MM) house financing products. Intrinsic factors include factors of confidence in sharia compliance value and factors regarding the knowledge level of potential customers. Extrinsic factors include MM product characteristics such as service quality, costs, product benefits and promotions. MM products are emphasised in this study because of their many benefits, including lowering the burden of customers’ monthly payloads, a relatively shorter monthly payment period and increased benefits and profits for both banks and customers. Data was collected from 100 MM customers in Malaysia via the Internet (Facebook) and analysed using Structural Equation Modeling (SEM- SMART PLS) and the Statistical Package of Social Sciences (SPSS) software. The findings show that only the factors of promotion and religious compliance are significant when selecting MM products; in fact, the influence of promotional factors had a greater impact than the influence of religious compliance. Therefore, Islamic banks are urged to increase their promotional strategies in order to provide information about the role of religious law in selecting Islamic banking products, thus helping customers choose MM products that satisfy their needs while also meeting religious demands.

Style Investment: A Comparative Performance Analysis of Different Styles- Recent Evidence on FTSE250 Index
Jacob, Sajit
This is a unique attempt to compare the performance of multiple styles on a long term basis in FTSE250 market. Value and growth portfolios are classified with single variable sorting and dual variable sorting. Winner and loser portfolios are classified based on three year holding period abnormal returns. At the end of 24 years (1981-2004) book-to-market ratio based value-growth strategy provided highest cumulative returns, then from strategy based on EPS growth rate cum E/P ratio, contrarian profit and dividend yield in that sequence. Study finds that growth premium and momentum profits are not general features of UK stock market. Value and growth portfolios are similarly risky while loser portfolio is highly risky. Two-factor regression finds sorting variable related risk factor together with market risk can better explain the returns of the strategy.

The Cross-Section of Returns: A Non-Parametric Approach
Struck, Clemens C.,Cheng, Enoch
To which extent are financial market returns predictable? Standard linear approaches à la Fama & French (1992) are widespread. Yet, they have difficulties in addressing this question as strong parametric assumptions undermine their return predicting potential. We employ tree-based methods to overcome these limitations and attempt to empirically approximate an upper bound for the predictability of returns in commodities futures markets. Our fixed set of futures is close to the efficient market ideal of information transparency, high liquidity and low trading costs. It further avoids problems that arise from survivorship bias. Out-of-sample, we find that up to 3.74% of one-month ahead returns are predictable â€" more than a 10-fold increase from linear risk factor approaches. Our findings hint at the importance multi-way interactions and non-linearities acquire in the data. They imply that new factors should be tested on their ability to add explanatory power to an ensemble of existing factors.

The Dynamics of Corporate Ownership on Corporate Governance: Indian Evidence
Jacob, Sajit
This paper discusses the influence of ownership segments and disciplining devices on the quality of Corporate Governance (CG) in the Indian context. The ultimate objective of the study is to identify the determinant ownership segment and their disciplining device that would explain the CG performance of the firm. The main goal is to prove the influence of majority shareholding segment in influencing the CG quality. Main attention was paid to usage of Herfindahl-Hirschman Index to find the combined ownership concentration of minority shareholder segments. Ordinary Least Squares (OLS) regression is the predominant technique that finds application to determine critical ownership segment and disciplining device. This topic was chosen because of the evergreen ambiguity on the role and intensity of shareholders on CG in India. The major findings of the paper are, there exists no statistical evidence to prove that CGPI is under the influence of any ownership segment. With coalition majority HHI dominates in most CG categories except category 5. HHI displays support for debt as controlling device in most CGPI categories. However, study also finds HHI supporting dividend in top two categories including CG category 1 and IP also favoring the same device for the same two categories. The above findings suggest that in totality HHI favors debt and IP supports dividend.

The Impact of Cross-Delisting From the U.S. on Firms’ Financial Constraints
Loureiro, Gilberto R.,Silva, Sónia
We investigate the impact of cross-delisting on firms’ financial constraints. We find that firms that cross-delisted from a U.S. stock exchange face stronger post-delisting financial constraints than their cross-listed counterparts, as measured by investment-to-cash flow and cash-to-cash flow sensitivities. Following a delisting, the sensitivity of investment to cash flow increases significantly, and firms also tend to save more cash out of cash flows. These effects are mainly driven by cross-delisted firms from countries with weaker investor protection and are more predominant after the passage of Rule 12h-6 (of 2007), which made it easier for foreign firms to leave U.S. markets.

The SEC Filing Review Process: Insights from Accounting Research
Cunningham, Lauren M.,Leidner, Jacob Justus
As part of the goal of enhancing the quality of information available to investors, the United States Securities and Exchange Commission (SEC) reviews filings to identify disclosures or accounting applications that appear materially incorrect or require additional clarification. When concerns arise, it issues a comment letter to the company. The company must then respond in a timely manner, involving the immediate attention of senior management, and oftentimes, lawyers and auditors. Because of an increasing public interest in this filing review process and its substantial costs involved, to both the SEC in reviewing and to public companies in responding, a growing body of literature examines the determinants and outcomes of this process. In this paper, we introduce a framework for reviewing the current literature and identify significant gaps that should be addressed in future research. We further detail the institutional features of the SEC filing review process that affect research design for academic studies and provide example SAS codes. Our findings should be of interest to researchers and those interested in evidence-based regulation, particularly countries who have implemented, or are considering implementation of, a filing review process.

The Social Internetwork and Stock Returns
Al Guindy, M.,Riordan, Ryan
We construct the network of U.S. firms implied by social media. We identify connections between firms and use these to construct a network that we call The Social Internetwork. The Social Internetwork describes deep, non-obvious links between firms that subsume product-supplier, industry, or news implied networks â€" thereby providing a more complete representation of the U.S. economy. Using own and peer stock returns, we show that information in the form of earnings surprises, and noise in the form of transitory stock returns, are transmitted across the network. Stock price changes at the most central firms in the economy ripple outwards to the most peripheral firms. We show that 17% of firms are linked directly and 92% of firms are linked indirectly through one other firm â€" suggesting that the economy may be more interconnected and potentially riskier and more prone to contagion than initially thought. Our Social Internetwork provides an accurate depiction of the network of firms as seen by a broad cross-section of the public, and may therefore be more accurate, timely, and dynamic than other measures.

Theory and Implementation of Black-Scholes and Binomial Options Pricing Models
Abdullazade, Zaur
In this paper, author describes the project on binomial options pricing model (BOPM) and its application for security pricing. BOPM is explained for both one and multiple periods and price calculations are programmed with functions in Excel, the results are compared from Excel program to online Black-Scholes calculator. The paper informs about European call and put options. Evaluation of American options requires more complex approaches, and it is left outside of the scope of this project. The main goals of this paper highlighting the project are to accurately model the Black-Scholes formula with BOPM, and show-case the original Black-Scholes formula is only intended for the European options. There are many papers that argue it is almost never beneficial to exercise American option earlier than its maturity date except under specific conditions. The author will not be providing details on that point in this paper.

Unearthing Zombies
Kulkarni, Nirupama,Ritadhi, S.K.,Vij, Siddharth,Waldock, Katherine
The secular rise of "zombie" borrowers, insolvent firms sustained by continued extension of credit by complicit banks, has been a source of concern for mature and emerging economies alike. Using supervisory data on the universe of large bank-borrower relationships in India, we introduce a novel method for identifying zombies. Although there was widespread non-disclosure of zombies in India in 2014, the beginning of the sample period, there have been major improvements since. We examine changes in zombie reporting around two key policy changes: an overhaul of the bankruptcy code and a regulatory intervention removing lender discretion in bad loan recognition. Increases in reporting were modest after the bankruptcy reform but there was a sizable jump in the recognition of zombies after the regulatory intervention. Post-intervention results show that lending has been reallocated to large, healthy borrowers. However, under-reporting still exists, particularly among public-sector banks. Overall, our results indicate that regulatory action might be necessary, above and beyond bankruptcy reform, to target "zombie" lending.

Weak existence and uniqueness for affine stochastic Volterra equations with L1-kernels
Eduardo Abi Jaber

We provide existence, uniqueness and stability results for affine stochastic Volterra equations with $L^1$-kernels. Such equations arise as scaling limits of branching processes in population genetics and self-exciting Hawkes processes in mathematical finance. The strategy we adopt for the existence part is based on approximations using stochastic Volterra equations with $L^2$-kernels. Most importantly, we establish weak uniqueness using a duality argument on the Fourier-Laplace transform via a deterministic Riccati-Volterra integral equation. We illustrate the applicability of our results on a class of hyper-rough Volterra Heston models with a Hurst index $H \in (-1/2, 1/2]$.