Research articles for the 2019-12-17

'Loans for the Little Fellow:' Credit, Crisis, and Recovery in the Great Depression
Quincy, Sarah
This paper studies how structural transformation exacerbates financial crises. Using newly collected data, I document the persistent effect of credit supply shocks on local economies during the Great Depression. Cities with access to an unusually generous branching network were no different from other California cities in the 1920s but had significantly smaller recessions and stronger recoveries in the 1930s. Linked worker-level data demonstrate local credit supply shifted workers out of agriculture and into nontradable employment, which was higher-skilled, creating a lingering barrier to convergence.

A Crisis Early Warning Model for Euro Area Countries
Gonzalez Minguez, José Manuel,Martinez-Carrascal, Carmen
The article summarises the findings obtained in the estimation of an economic crisis early warning model for the euro area countries. These findings show that monitoring five variables that may indicate the emergence of macro-financial imbalances â€" current account balance, unit labour costs relative to the rest of the euro area, household indebtedness, corporate indebtedness and sovereign risk premium â€" helps facilitate the early detection of downturns in the euro area countries. As expected, the model points to a widespread euro area-wide increase in the probability of a decline in activity towards the middle of the last decade, just before the start of the Great Recession. Compared with the core euro area economies, the increase in crisis probability was much more pronounced in the periphery countries, driven by a worsening of the current account balance, growing private sector indebtedness and deteriorating competitiveness. In several of these economies, the probability of downturn predicted by the model heightened in 2011-2012, coinciding with the successive sovereign debt crisis episodes. Since then the probabilities of downturn have moderated substantially and are now low in most countries, albeit in some cases still above those observed at the turn of the century.

A Multifactor Regime-Switching Model for Inter-Trade Durations in the Limit Order Market
li, zhicheng,Xing, Haipeng,Chen, Xinyun
This paper studies inter-trade durations in the NASDAQ limit order market and finds that inter-trade durations in ultra-high frequency have two modes. One mode is to the order of approximately 10^{-4} seconds, and the other is to the order of 10^0 seconds. This phenomenon and other empirical evidence suggest that there are two regimes associated with the dynamics of inter-trade durations, and the regime switchings are driven by the changes of high-frequency traders (HFTs) between providing and taking liquidity. To find how the two modes depend on information in the limit order book (LOB), we propose a two-state multi-factor regime-switching (MF-RSD) model for inter-trade durations, in which the probabilities transition matrices are time-varying and depend on some lagged LOB factors. The MF-RSD model has good in-sample fitness and the superior out-of-sample performance, compared with some benchmark duration models. Our findings of the effects of LOB factors on the inter-trade durations help to understand more about the high-frequency market micro-structure.

A Robust Predictive Model for Stock Price Prediction Using Deep Learning and Natural Language Processing
Sidra Mehtab,Jaydip Sen

Prediction of future movement of stock prices has been a subject matter of many research work. There is a gamut of literature of technical analysis of stock prices where the objective is to identify patterns in stock price movements and derive profit from it. Improving the prediction accuracy remains the single most challenge in this area of research. We propose a hybrid approach for stock price movement prediction using machine learning, deep learning, and natural language processing. We select the NIFTY 50 index values of the National Stock Exchange of India, and collect its daily price movement over a period of three years (2015 to 2017). Based on the data of 2015 to 2017, we build various predictive models using machine learning, and then use those models to predict the closing value of NIFTY 50 for the period January 2018 till June 2019 with a prediction horizon of one week. For predicting the price movement patterns, we use a number of classification techniques, while for predicting the actual closing price of the stock, various regression models have been used. We also build a Long and Short-Term Memory - based deep learning network for predicting the closing price of the stocks and compare the prediction accuracies of the machine learning models with the LSTM model. We further augment the predictive model by integrating a sentiment analysis module on twitter data to correlate the public sentiment of stock prices with the market sentiment. This has been done using twitter sentiment and previous week closing values to predict stock price movement for the next week. We tested our proposed scheme using a cross validation method based on Self Organizing Fuzzy Neural Networks and found extremely interesting results.

Acquisition for Sleep
Persson, Lars,Norbäck, Pehr-Johan,Olofsson, Charlotta
Within the policy debate, there is a fear that large incumbent firms buy small firms' inventions to ensure that they are not used in the market. We show that such "acquisitions for sleep" can occur if and only if the quality of a process invention is small; otherwise, the entry profit will be higher than the entry-deterring value. We then show that the incentive for acquiring for the purpose of putting a patent to sleep decreases when the intellectual property law is stricter because the profit for the entrant then increases more than the entry-deterring value does.

All You Need is Cash: Corporate Cash Holdings and Investment after the Financial Crisis
Joseph, Andreas,Kneer, Christiane,van Horen, Neeltje,Saleheen, Jumana
Firms with high pre-crisis cash holdings invested significantly more than their cash-poor rivals during the global financial crisis and especially so during the recovery phase. This resulted in a persistent and growing investment gap between cash-rich and cash-poor firms. Cash especially benefitted young and small firms and firms in industries where rivals became more financially constrained. The amplification effect of cash was absent in the period preceding the crisis. The ability to continue to invest allowed cash-rich firms to gain market share and accumulate more profits over the long-run. Having a liquid balance sheet when the credit cycle turns thus gives firms a competitive edge that lasts far beyond the crisis years.

Analysis of the Risk-Sharing Principal-Agent problem through the Reverse-H{\"o}lder inequality
Jessica Martin,Anthony Réveillac

In this paper we provide an alternative framework to tackle the first-best Principal-Agent problem under CARA utilities. This framework leads to both a proof of existence and uniqueness of the solution to the Risk-Sharing problem under very general assumptions on the underlying contract space. Our analysis relies on an optimal decomposition of the expected utility of the Principal in terms of the reservation utility of the Agent and works both in a discrete time and continuous time setting. As a by-product this approach provides a novel way of characterizing the optimal contract in the CARA setting, which is as an alternative to the widely used Lagrangian method, and some analysis of the optimum.

Bank Loan Announcement Effects â€" Evidence from a Comprehensive 8-K Sample
Chen, Shuyue,Ho, Steven Wei,Liu, Clark
Using a comprehensive sample of over 10,000 bank loan announcements, we find results that differ from the findings of Maskara and Mullineaux (JFE 2011) and also that of Fields et al (JMCB 2006), which indicated that announcement effect of bank loans on borrower stocks disappeared as of late. We find bank loan announcements still have significant impact on borrowing firms' equity prices in our large sample, and our results are in-line with the findings of Billet et al (JF 1995), which was disputed by subsequent papers. Furthermore, we find that firms with lower abnormal spreads relative to the KMV-Merton default-risk model have higher announcements returns. We also document that, although information leakage (in terms of the run-up of borrowers' stock price prior to announcements) was quite significant in earlier sample periods, in recent periods there is much less information leakage prior to 8-K announcements of bank loans, and at least in this aspect the Dodd-Frank Act can be deemed as quite effective.

Banks and Corporate Income Taxation: A Review
Gawehn, Vanessa
In this paper, I review the empirical literature in the intersection of banks and corporate income taxation that emerged over the last two decades. To structure the included studies, I use a stakeholder approach and outline how corporate income taxation plays into the relation of banks and their four main stakeholders: bank regulators, customers, investors and tax authorities. My contribution to the literature is threefold: First, I contribute by providing, to the best of my knowledge, a first comprehensive review on this topic. Second, I point to areas for future research. Third, I deduce policy implications from the studies under review. In sum, the studies show that taxes distort banks’ pricing decisions, the relative attractiveness of debt and equity financing, the decision to report on or off the balance sheet and banks’ investment allocations. Empirical insights on how tax rules affect banks’ decision-making are helpful for policymakers to tailor suitable and sustainable tax legislation directed at banks.

Bond Volatility and CDS Auctions
Mace, Jennifer,Yu, Fan,Zhao, Ran
We document a higher bond return volatility around the time of default for bonds included in CDS auctions (especially cheapest-to-deliver bonds) versus those that are not, while controlling for firm fundamentals and bond illiquidity. This finding does not extend to time periods far ahead of default, and there is no significant difference between the idiosyncratic stock return volatility of CDS firms and non-CDS firms around the time of default. These results are more consistent with CDS buyers and sellers manipulating bond prices to achieve favorable CDS auction outcomes, rather than a spillover of price discovery by CDS traders into the stock and bond markets.

Boosting Portfolio Choice in the Big Data Era
Zhang, Hongwei,Jacobsen, Ben,de Roon, Frans,Jiang, Fuwei
Markowitz’s mean-variance portfolio optimization is either inefficient or impossible when the number of assets becomes relatively large. To overcome this difficulty, we propose several component-wise boosting learning methods that, in a linear regression specification, can iteratively select the assets (variables) with the largest contribution to the fit from a huge number of assets. Based on dataset consisting of 897 assets with 624 observations obtained from Ken French data library, we assess the performance of tangency portfolios estimated using our methods. We find that our methods substantially outperform the 1/N portfolio in terms of various popular metrics. For example, our component-wise LogitBoost can reach an out-of-sample Sharpe ratio of 1.03, while the 1/N portfolio only achieves a Sharpe ratio of 0.27.

Buy-and-Hold and Constant-Mix May Be Better Allocation Strategies than You Think
O'Brien, Thomas J.
This paper’s illustrations show a relatively low economic cost of using a simple allocation strategy, buy-and-hold or constant-mix, instead of optimal reallocation, given mean-reverting equity and interest rate uncertainty. The illustrations also show that for some investors, buy-and-hold is better than constant-mix, and a horizon-maturity fixed-income position is better than a sequence of short-maturity ones; the opposite holds for other investors.

Capital Regulations and the Management of Credit Commitments During Crisis Times
Pelzl, Paul,Valderrama, Maria Teresa
Drawdowns on credit commitments by firms reduce a bank's regulatory capital ratio. Using the Austrian Credit Register, we provide novel evidence that during the 2008-09 financial crisis, capital-constrained banks managed this concern by substantially cutting partly or fully unused credit commitments. Controlling for a bank's capital position, we also find that greater liquidity problems induced banks to considerably cut such credit commitments during the crisis. These results suggest that banks actively manage both capital and liquidity risk caused by undrawn credit commitments in periods of financial distress, but thereby reduce liquidity provision to firms exactly when they need it most.

Differences in Euro-Area Household Finances and their Relevance for Monetary-Policy Transmission
Hintermaier, Thomas,Koeniger, Winfried
This paper quantifies the extent of heterogeneity in consumption responses to changes in real interest rates and house prices in the four largest economies in the euro area: France, Germany, Italy, and Spain. We first calibrate a life-cycle incomplete-markets model with a financial asset and housing to match the large heterogeneity of households asset portfolios, observed in the Household Finance and Consumption Survey (HFCS) for these countries. We then show that the heterogeneity in household finances implies that responses of consumption to changes in the real interest rate and in house prices differ substantially across countries, and within countries by household characteristics such as age, housing tenure, and asset positions. The different consumption responses quantified in this paper point towards important heterogeneity in monetary-policy transmission in the euro area.

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 the Frequency of Trade Affect the Fund Performance?
Sultana, Ulfat
This Research examines the frequency of trade affects the fund performance and design the fund turnover in the existence of time-varying profit possibilities. Our design predicts positive regard between an active fund’s returns and its major standard modified return. We also find such some relative regards for value common resources. This time-series regards revenues as well as is more powerful than the cross-sectional regards, as the design forecasts.Also, as expected, the turnover-performance regards are more powerful for stocks trading less-liquid shares and assets likely to acquire greater expertise. Turnover is associated across mutual stocks. The common part of returns is favorably associated with proxy servers for stock mispricing. Turnover of similar resources helps estimate a fund’s efficiency and performance.

Estimating a Behavioral New Keynesian Model
Joaquim Andrade,Pedro Cordeiro,Guilherme Lambais

This paper analyzes identification issues of a behavorial New Keynesian model and estimates it using likelihood-based and limited-information methods with identification-robust confidence sets. The model presents some of the same difficulties that exist in simple benchmark DSGE models, but the analytical solution is able to indicate in what conditions the cognitive discounting parameter (attention to the future) can be identified and the robust estimation methods is able to confirm its importance for explaining the proposed behavioral model.

Euro Repo Market Functioning: Collateral is King
Schaffner, Patrick,Ranaldo, Angelo,Tsatsaronis, Kostas
Repo markets play a major role in redistributing liquidity and collateral between financial institutions. A unique transaction-level database reveals how the euro-denominated repo market has performed since the mid-2000s. We find that the market recovered strongly from periods of intense stress, even though it remains segmented according to the home country of the collateral used. In recent years, signs of segmentation have increased as the main motivation of repo market participants has shifted from funding to the trading of collateral.

Exploring Multi-Banking Customer-to-Customer Relations in AML Context with Poincar\'e Embeddings
Lucia Larise Stavarache,Donatas Narbutis,Toyotaro Suzumura,Ray Harishankar,Augustas Žaltauskas

In the recent years money laundering schemes have grown in complexity and speed of realization, affecting financial institutions and millions of customers globally. Strengthened privacy policies, along with in-country regulations, make it hard for banks to inner- and cross-share, and report suspicious activities for the AML (Anti-Money Laundering) measures. Existing topologies and models for AML analysis and information sharing are subject to major limitations, such as compliance with regulatory constraints, extended infrastructure to run high-computation algorithms, data quality and span, proving cumbersome and costly to execute, federate, and interpret. This paper proposes a new topology for exploring multi-banking customer social relations in AML context -- customer-to-customer, customer-to-transaction, and transaction-to-transaction -- using a 3D modeling topological algebra formulated through Poincar\'e embeddings.

FX Trade Execution: Complex and Highly Fragmented
Schrimpf, Andreas,Sushko, Vladyslav
The 2019 Triennial Survey shows that trade execution has undergone rapid change, with more diverse participants, new technologies and increasing complexity. Electronification advanced the fastest in dealer-to-customer trading. Dealers and customers navigated a highly fragmented market by leveraging technology to trade across electronic venues. Aspects of FX intermediation tilted more towards non-banks as new market-makers, albeit brokered by top dealers. Bank dealers continued to attract large flows to their own proprietary liquidity pools. Consequently, even though the market grew bigger as a whole, the share of trading activity 'visible' to the broader market declined.

FX and OTC Derivatives Markets Through the Lens of the Triennial Survey
Wooldridge, Philip D.
The 2019 BIS Triennial Central Bank Survey provided new insights about the boost that electronification gave to trading in FX and OTC derivatives markets, and the role of compression and clearing in containing the growth of outstanding derivatives exposures.

Financing Innovation: A Complex Nexus of Risk & Reward
Dutta, Sourish
The crucial and growing role performed by different financial intermediaries such as venture capitalists and angel investors as well as more traditional intermediaries such as commercial banks in developing entrepreneurial or innovative firms and boosting product market innovations has led to great research interest in the economics of innovation and entrepreneurial finance. Besides this, there are some important factors or developments which have affected the entrepreneurial finance in general as well as its influence upon different entrepreneurial or innovative firms. Indeed, it is also true that the financial and ownership structures of the different entrepreneurial firms and the legal as well as institutional environment, in which they operate, itself affects the product market innovations (Chemmanur and Fulghieri, 2014). .Therefore, in this paper I want to target a broad theme i.e. analysis of the mechanisms behind this scenario, especially, in the context of Indian market system.

From Creative Destruction To Destructive Creation
Savvides, Savvakis C.
The article underlines that uncontrolled and wasteful debt is the main culprit for a economic system that not only makes inequality in the world methodically more extreme, but also systematically misdirects economic resources. Mainstream economic thinking is plainly wrong in circumstances of extreme debt and it is only used as a veil for the wealthy to become wealthier at the expense of the economic agents of a country. Austerity policies that are usually prescribed as the solution in highly indebted countries only serve the interests of the bond holders and those who seek to gain from the misfortune of the country that finds itself sank in debt.

Goodwill and Stock Price Crash Risk: An International Study
He, Wen ,Kim, Jeong-Bon,Li, Chao Kevin,Si, Yi
Using data from 43 markets around the world, we document that firms with larger goodwill balances have a higher stock price crash risk in future years. The positive association between goodwill balances and future crash risk is stronger for firms with weaker incentives to provide transparent disclosure, in markets with poorer investor protection or weaker accounting and auditing enforcement, and after periodic goodwill amortization was replaced by fair-value- based goodwill impairment. Further evidence suggests that goodwill balances are positively related to a measure of bad news withholding. Overall, the results are consistent with the view that managers have greater tendency to withhold negative information about goodwill and delay the release of information about the economic impairments of goodwill, thereby leading to increasing the likelihood of stock price crash occurrences in the future.

How the Wealth Was Won: Factor Shares as Market Fundamentals
Greenwald, Daniel,Lettau, Martin,Ludvigson, Sydney C.
We provide novel evidence on the driving forcesbehind the sharp increase in equity values over the post-war era. From the beginning of 1989 to the end of 2017, 23 trillion dollars of real equity wealth was created by the nonfinancial corporate sector. We estimate that 54% of this increase was attributable to a reallocation of rents to shareholders in a decelerating economy. Economic growth accounts for just 24%, followed by lower interest rates (11%) and a lower risk premium (11%). From 1952 to 1988 less than half as much wealth was created, but economic growth accounted for 92% of it.

Information Asymmetry and Dividend Policy Around the Sarbanes-Oxley Act
Harakeh, Mostafa,Matar, Ghida,Sayour, Nagham
The literature of financial economics documents a causal relationship between the level of information asymmetry in the firm and its dividend policy. The agency theory and the pecking order theory show that the problem of cash over-retention inside the firm exacerbates in the presence of high asymmetric information. At the same time, when managers increase dividend payments, the level of asymmetric information decreases. This reverse causality between information asymmetry and dividend policy has been a challenge for financial economists. To overcome this econometric issue, we employ the enactment of the Sarbanes-Oxley Act (SOX) in the US in 2002 as a source of an exogenous variation in the level of information asymmetry to study the potential effect that this variation might have on the dividend policy. In doing so, we utilize a difference-in-differences research design, in which the treatment group is US publicly traded firms that were exposed to the policy and the control group is publicly traded companies in the UK where SOX was not enacted. Both countries have similar institutional settings and enforcement of laws, which makes them comparable in our research context. Our findings show that, compared to UK companies, US firms increase their dividend payments following a reduction in asymmetric information as a result of the SOX enactment. Our study contributes to the literature of financial economics by showing that policy makers can mitigate agency conflicts and protect shareholders by improving the corporate information environment and reducing asymmetric information.

Investing In The S&P 500 Index: Can Anything Beat The Buy-And-Hold Strategy?
Dichtl, Hubert
Determining whether investment strategies exist that provide higher (risk-adjusted) returns than buying and holding the S&P 500 stock market index is not only highly relevant for finance theory, but also for the asset management industry. This study conducts a comprehensive test using realistic investment strategies based on monthly seasonalities, technical indicators, and fundamental factors (over 4,100 strategies in total). To assess statistical significance, we use Hansen’s (2005) data-snooping-resistant SPA test. The results show that only investment strategies trying to exploit underreaction and overreaction effects with technical indicators dominate the buy-and-hold strategy in some simulation setups. These investment strategies are clearly superior to the strategies based on seasonalities and fundamental factors. Given that underreaction and overreaction effects are mainly justified with cognitive biases, our results support the economic relevance of behavioral finance insights.

Law Firm Expertise and Shareholder Wealth
Schweizer, Denis,Wu, Ge
This paper examines the impact of law firm expertise on bidder and target shareholder wealth gains during mergers and acquisitions. After controlling for endogeneity in the matching between the mandating firm (bidder or target firm) and the law firm, we find that top-tier law firms increase the wealth of bidder shareholders by an average of 0.98% ($15.09 million), but not that of target firm shareholders. Interestingly, we also find no evidence that the reputation of the investment bank that neither advises the bidder nor the target firm is related to shareholder wealth gains. Our findings are consistent with Krishnan and Masulis (2013), and suggest that top-tier lawyers are effective “transaction cost engineers.” They create value for their clients by structuring deals to minimize transaction and regulatory costs, and by achieving a higher completion probability.

OTC Derivatives: Euro Exposures Rise and Central Clearing Advances
Aramonte, Sirio,Huang, Wenqian
The composition of amounts outstanding in over-the-counter derivatives shifted towards the euro and cleared instruments. Since the Great Financial Crisis, increases in central clearing rates have helped shape growth in amounts outstanding. Derivatives subject to regulatory clearing mandates were approaching full clearing, while clearing rates were low for certain products, including some with short maturities or liquid bilateral markets.

Offshore Markets Drive Trading of Emerging Market Currencies
Patel, Nikhil,Xia, Fan Dora
FX markets for the currencies of emerging market economies grew more rapidly than those for major currencies between 2016 and 2019, rising from 19% to almost 25% of global turnover. At the same time, these currencies attracted a wider range of participants and saw a rapid increase in offshore trading activity. Offshore markets tended to drive onshore markets during times of global market stress.

On Inference When Using State Corporate Laws for Identification
Spamann, Holger
A popular research design identifies the effects of corporate governance by (changes in) state laws, clustering standard errors by state of incorporation. Using Monte-Carlo simulations, this paper shows that conventional statistical tests based on these standard errors dramatically overreject: in a typical design, randomly generated “placebo laws” are “significant” at the 1/5/10% level 9/21/30% of the time. This poor coverage is due to the extremely unequal cluster sizes, especially Delaware's concentration of half of all incorporations. Fixes recommended in the literature fail, including degrees-of-freedom corrections and the cluster wild bootstrap. The paper proposes a permutation test for valid inference.

On the Design of Sovereign Bond-Backed Securities
Barucci, Emilio,Brigo, Damiano,Francischello, Marco,Marazzina, Daniele
We analyze Sovereign Bond-Backed Securities, concentrating our attention on the return of the different tranches and on their risk. We show that as the correlation level among defaults increases, the yield rate of senior tranches increases while the yield rate of junior tranches decreases. A similar effect is observed when introducing a block dependence structure with high correlation among states belonging to the same block. Introducing a non-zero recovery rate, as opposed to a null recovery rate, decreases the yield rate of senior tranches and increases the yield rate of junior tranches. We compute the loss distribution and the Value at Risk (VaR) associated with the market risk of detaining the different tranches of the bond. We also analyze the possibility of reaching a safe asset through pooling tranches of government bonds of different States. In summary, we show that the issue in reaching a comprehensive and safe offering through the securitization of government bonds is not the safety of senior tranches but the risk of the junior ones.

Online Appendix for 'Fragmented Securities Regulation: Neglected Insider Trading in Stand-Alone Banks'
Kim, Sehwa,Kim, Seil
This is an Online Appendix to "Fragmented Securities Regulation: Neglected Insider Trading in Stand-Alone Banks", available at:

Out of Sync: Disagreement Among Short Sellers and the Correction of Mispricing
Gargano, Antonio,Sotes-Paladino, Juan M.,Verwijmeren, Patrick
How much are short sellers in agreement with one another? Using a unique dataset on the distribution of mark-to-market profits across a stock's short positions, we find evidence of substantial disagreement among short sellers about when to enter a position. Consistent with this disagreement reflecting "synchronization risk,'' i.e., uncertainty about when other short sellers will trade, greater disagreement signals (i) greater stock overpricing; and (ii) longer delays in price correction. Moreover, these effects are stronger among stocks with fewer synchronizing news events. Overall, our findings provide novel cross-sectional evidence of limits to arbitrage among short sellers.

Reservation Prices in Shareholders’ Response to Freeze-Out Tender Offers
Hamdani, Assaf,Lauterbach, Beni,Mugerman, Yevgeny
We employ a sample of 201 freeze-out tender offers (offers of controlling shareholders to buy all public shares) in Israel to examine how investors’ decision (to accept or reject the offer) is influenced by alternative reference prices, some of which are commonly specified in freeze-out offers. Our findings reveal that average purchase price is the key reservation price - when freeze-out offer price exceeds our novel estimate of the minority shareholders’ average purchase price of the shares, offer acceptance probability increases significantly. Thus, purchase price appears as a more fundamental behavioral anchor than its main competitor - the past 52-weeks high.

Rural Transformation, Inequality, and the Origins of Microfinance
Wolf, Nikolaus,Suesse, Marvin
What determines the development of rural financial markets? Starting from a simple theoretical framework, we derive the factors shaping the market entry of rural microfinance institutions across time and space. We provide empirical evidence for these determinants using the expansion of credit cooperatives in the 236 eastern counties of Prussia between 1852 and 1913. This setting is attractive as it provides a

Signaling Safety
Rossi, Stefano,Weber, Michael,Michaely, Roni
Contrary to signaling models' central predictions, changes in the level of cash flows do not empirically follow changes in dividends. We use the Campbell (1991) decomposition to construct cash-flow and discount-rate news from returns and find the following: (1) Both dividend changes and repurchase announcements signal changes in cash-flow volatility (in opposite direction); (2) larger cash-flow volatility changes come with larger announcement returns; and (3) neither discount-rate news, nor the level of cash-flow news, nor total stock return volatility change following dividend changes. We conclude cash-flow news--and not discount-rate news--drive payout policy, and payout policy conveys information about future cash-flow volatility.

Sizing Up Global Foreign Exchange Markets
Schrimpf, Andreas,Sushko, Vladyslav
The latest BIS Triennial Survey shows that global foreign exchange trading increased to more than $6 trillion per day. Trading bounced back strongly following a dip in 2016, buoyed by increased trading with financial clients such as lower-tier banks, hedge funds and principal trading firms. Prime brokerage volumes recovered in tandem. These developments were driven in large part by the greater use of FX swaps for managing funding and greater electronification of customer trading. They led to further concentration of trading in a few financial hubs.

Sustainable Investing in Equilibrium
Pastor, Lubos,Stambaugh, Robert F.,Taylor, Lucian A.
We present a model of investing based on environmental, social, and governance (ESG) criteria. In equilibrium, green assets have negative alphas, whereas brown assets have positive alphas. The ESG investment industry is at its largest, and the alphas of ESG-motivated investors are at their lowest, when there is large dispersion in investors' ESG preferences. When this dispersion shrinks, so does the ESG industry, even if all investors' ESG preferences are strong. Greener assets are more exposed to an ESG risk factor, which captures shifts in customers' tastes for green products or investors' tastes for green holdings. Under plausible conditions, the latter tastes produce positive social impact.

The Cross-Section of Returns: A Non-Parametric Approach
Cheng, Enoch,Struck, Clemens C.
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 ability. 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 arguably close to the efficient market ideal of information transparency, high liquidity, and low trading costs. It also avoids issues 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 Effect of Capital Market Concerns on Specific Investments in the Supply Chain
Chen, Hui,Pfeiffer, Thomas
The financial market gives significant consideration to supply chain activities of publicly-listed firms, who could in turn use their investments in the supply chain to manage market expectations. We study the effects of the capital market concerns of a publicly-traded retailer that collaborates with a privately-owned supplier in a supply chain. The firms each undertake a relation-specific investment and then bargain over the joint surplus generated by the collaboration. The retailer's market concerns make it a more aggressive bargainer, and able to obtain a higher share of the joint surplus. The investments of both firms increase with the retailer's market concerns when the retailer's investment is sufficiently important for the collaboration. In this case, the retailer benefits from its market concerns. When the supplier's investment is sufficiently important, both firms invest less and the retailer suffers from its market concerns. From the perspective of the whole supply chain, the retailer's market concerns could mitigate or exacerbate the hold-up problem between the two firms and thus could be either beneficial or detrimental. In the extension, we also discuss the observability of the firms' investment decisions as well as the case of two symmetric firms that are both publicly traded.

The Evolution of OTC Interest Rate Derivatives Markets
Ehlers, Torsten,Hardy, Bryan
The trading of interest rate derivatives in over-the-counter (OTC) markets more than doubled between 2016 and 2019, significantly outpacing the growth of trading on exchanges. This rapid expansion was driven by three factors. First, non-market facing trades, such as back-to-back deals and compression trades, increased and were more comprehensively reported in the BIS Triennial Survey. Second, technological developments reduced transaction costs in OTC markets and spurred trading, including more trading by investment funds. And third, changing expectations about US short-term interest rates fuelled hedging and speculative activity. In general, structural developments like clearing, compression and automation remade OTC markets so that they more closely resembled exchanges and led to a relative shift in trading from exchanges to OTC markets. Further market changes due to benchmark rate reforms may be on the horizon.

The Optimism and Accuracy of Bank-Affiliated Analysts’ Forecasts
Song, Kyojik,Lee, Jong Eun,Kim, Hyunseok
This paper studies the effect of commercial bank affiliation on analysts’ forecasts using the Korean data over the 2000-2015 period. We find that the median EPS forecast error of 2.88% made by independent analysts is significantly larger than the median error of 2.47% made by bank-affiliated analysts. The difference in the optimism and accuracy of independent vs. bank-affiliated analysts is significant only for non-chaebol companies. We also find that capital markets respond to more positively (or more negatively) to stock recommendation changes that bank-affiliated analysts make, and that the responses are larger for non-chaebol companies. The results are consistent with our conjecture that bank-affiliated analysts make more informative forecasts by sharing the information generated by commercial banks under bank conglomerates, their information advantage is salient for non-chaebol companies, and capital markets give value to the information advantage.

The State as Owner -- China's Experience
Milhaupt, Curtis J.
This essay explores China’s experience with state ownership of business enterprise. After a short historical survey of the rise, fall, and re-emergence of the state-owned enterprise (SOE) as a form of business organization, the essay describes the creation, ownership structure, and role of SOEs under Chinese state capitalism. It further discusses the government’s ongoing efforts to reform its SOEs. These efforts are illuminating because they highlight the serious tension inherent in the party-state’s dual goals of maintaining SOEs as a tool for advancing non-financial social and industrial policy goals, and addressing the corporate governance challenges of these enterprises. The essay concludes by examining implications from the preceding analysis â€" for China’s domestic economy, for policy makers outside China, and for the corporate form itself.

The Term Structure of Mutual Fund Herding
Liu, Xin,Zheng, Weinan
This paper investigates herding behaviors in U.S treasury markets. We document novel evidence that mutual funds exhibit strong herding behaviors on trading long-term treasuries. This “term-structure” herding is only pronounced for buy herding, not sell herding. The relationship between herding and time-to-maturity is stronger for funds with high fund flow volatility. Such behaviors also exist for Treasury Inflation Protected Securities (TIPS) and for treasuries with both high and low coupon rates, suggesting that herding is not driven by correlated inflation expectations. Similar results are obtained for investment-grade corporate bonds as well. Overall, our results suggest that mutual funds’ short investment horizons contribute to the term-structure herding behaviors in the bond markets.

The U.S.-Chinese Trade War: An Event Study of Stock-Market Responses
Egger, Peter H.,Zhu, Jiaqing
At the beginning of 2018, President Trump started taking protective tariff measures against products from China in a sequence of events which started a "trade war" between the United States (U.S.) and China. As the value of trade flows affected on both sides rose to a significant amount, this episode will become an interesting research object in the future. A thorough analysis of many outcomes of interest is at this point in time -- and even will be in the next few years -- impossible due to a lack of data which will only become available at a later point. However, as is customary with historical preferential liberalizations in trade agreements and potentially the opposite of it through Brexit, it is possible to gauge consequences of this "trade war" or "trade dispute" when focusing on the stocks of listed companies around related tariff-change announcements or implementations by the U.S. and China in the relevant time span. This paper proposes such an analysis and finds, very much consistent with the rumors from business, that the associated protectionist tariffs appear to have done to a large extent the opposite of what was intended: they hurt domestic firms in targeted and also other, untargeted sectors of an acting country, and they affect third countries and territories which are not even party to the "trade war" or "dispute".

Theory of Cryptocurrency Interest Rates
Dorje C. Brody,Lane P. Hughston,Bernhard K. Meister

A term structure model in which the short rate is zero is developed as a candidate for a theory of cryptocurrency interest rates. The price processes of crypto discount bonds are worked out, along with expressions for the instantaneous forward rates and the prices of interest-rate derivatives. The model admits functional degrees of freedom that can be calibrated to the initial yield curve and other market data. Our analysis suggests that strict local martingales can be used for modelling the pricing kernels associated with virtual currencies based on distributed ledger technologies.

Thresholds of Income Inequality That Mitigate the Role of Gender Inclusive Education in Promoting Gender Economic Inclusion in Sub-Saharan Africa
Asongu, Simplice,Odhiambo, Nicholas
This study provides thresholds of inequality that should not be exceeded if gender inclusive education is to enhance gender inclusive formal economic participation in sub-Saharan Africa. The empirical evidence is based on the Generalized Method of Moments and data from 42 countries during the period 2004-2014. The following findings are established. First, inclusive tertiary education unconditionally promotes gender economic inclusion while the interaction between tertiary education and inequality is unfavorable to gender economic inclusion. Second, a Gini coefficient that nullifies the positive incidence of inclusive tertiary education on female labor force participation is 0.562. Second, the Gini coefficient and the Palma ratio that crowd-out the negative unconditional effects of inclusive tertiary education on female unemployment are 0.547 and 6.118, respectively. Third, a 0.578 Gini coefficient, a 0.680 Atkinson index and a 6.557 Palma ratio are critical masses that wipe-out the positive unconditional effects of inclusive tertiary education on female employment. Findings associated with lower levels of education are not significant. As the main policy implication, income inequality should not be tolerated above the established thresholds in order for gender inclusive education to promote gender inclusive formal economic participation. Other implications are discussed in the light of Sustainable Development Goals. This research complements the existing literature by providing inequality thresholds that should not be exceeded in order for gender inclusive education to promote the involvement of women in the formal economic sector.

Trade Networks and Firm Value: Evidence from the Us-China Trade War
Huang, Yi,Lin, Chen,Liu, Sibo,Tang, Heiwai
This paper evaluates the financial implications of policy shocks for global production networks. We use the announcements of tariff increases on a wide range of goods by the US and Chinese governments in 2018-2019 as events, starting with the presidential memorandum issued by the Trump administration on March 22, 2018, to study the impact of trade policy shocks on firms' stock market performance. Using various novel datasets, we document significantly heterogeneous responses by firms to the announcements. We also show that these responses are determined by the degree to which firms are directly and indirectly exposed to US-China trade through the global value chains. In particular, US firms that are more dependent on exports to and imports from China have lower stock returns and higher default risk around the announcement dates, whereas the reduced import competition from China has a limited effect on the firms. We also find consistent patterns of stock market reactions by Chinese firms. Two reverse experiments in 2019 further validate how the complex structure of global trade shapes stock market reactions to policy shocks.

Using Machine Learning to Detect Misstatements
Bertomeu, Jeremy,Cheynel, Edwige,Floyd, Eric,Pan, Wenqiang
Machine learning offers empirical methods to sift through accounting data sets with a large number of variables and limited a priori knowledge about functional forms. In this study, we show that these methods help detect and interpret patterns present in ongoing accounting misstatements. We use a wide set of variables from accounting, capital markets, governance, and auditing datasets to detect material misstatements. A primary insight of our analysis is that accounting variables, while they do not detect misstatements well on their own, become most important with suitable interactions with audit and market variables. We also analyze differences between misstatements and irregularities, compare algorithms, examine one-year and twoyear ahead predictions, and interpret groups at greater risk of misstatements.