Research articles for the 2020-01-04
A Comparative Study of Stock Screening Methodologies in Stock Exchanges of Bangladesh and Malaysia and Lessons to Be Learnt
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The study aims to compare and critically evaluate the stock screening practices between Bangladesh and Malaysia. The specific objectives determined to fulfill the aims are: (i) To review some of the Islamic equity market norms along with juristic views (ii) To review the prevalent practices of stock screening methods used by international index providers (iii) To evaluate critically and compare the stock screening methodology used by DSE, CSE and Bursa Malaysia. The study is descriptive in nature. Secondary data is utilized and collected from the books, standards, journal articles and relevant publications. AAOIFI standards, OIC Fiqh Academy resolutions etc. are referenced as needed. DSE, CSE and Bursa differs in formulating ratios, denominators, numerators and in determining benchmark. A stock can be categorized as Shari’ah compliant in Bursa, but may be non-Shari’ah compliant in DSE, and CSE. Though, there is a central authority in Malaysia, it follows the same guidelines throughout the country, but this is not the case for Bangladesh. A stock may be considered Shari’ah compliant in DSE but not in CSE and vice versa. After analyzing, it is clear that DSE and CSE may improve their ratios and it is also advisable to use single methodology at least in one jurisdictions to avoid the confusions among masses. The findings of the study will help the authority (BSEC) to look at the deep insight of the issue and update the current criteria.
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The study aims to compare and critically evaluate the stock screening practices between Bangladesh and Malaysia. The specific objectives determined to fulfill the aims are: (i) To review some of the Islamic equity market norms along with juristic views (ii) To review the prevalent practices of stock screening methods used by international index providers (iii) To evaluate critically and compare the stock screening methodology used by DSE, CSE and Bursa Malaysia. The study is descriptive in nature. Secondary data is utilized and collected from the books, standards, journal articles and relevant publications. AAOIFI standards, OIC Fiqh Academy resolutions etc. are referenced as needed. DSE, CSE and Bursa differs in formulating ratios, denominators, numerators and in determining benchmark. A stock can be categorized as Shari’ah compliant in Bursa, but may be non-Shari’ah compliant in DSE, and CSE. Though, there is a central authority in Malaysia, it follows the same guidelines throughout the country, but this is not the case for Bangladesh. A stock may be considered Shari’ah compliant in DSE but not in CSE and vice versa. After analyzing, it is clear that DSE and CSE may improve their ratios and it is also advisable to use single methodology at least in one jurisdictions to avoid the confusions among masses. The findings of the study will help the authority (BSEC) to look at the deep insight of the issue and update the current criteria.
A Risk-Assessment Framework for Art-Secured Lending
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We identify the three types of risks involved in an art-secured lending operation and present a framework to assess their combined effects via a Monte Carlo simulation. Also, we derive some useful closed-form expressions that are suitable when the collateral consists of only one painting. To help decision-makers and risk managers, we introduce a number of risk-related metrics that provide a detailed characterization of the lending operation risk profile. We conclude that with the customary LTV ratios currently prevalent in the art-based lending business (around 50%), the lender’s exposure is quite bounded. Moreover, the advantages of having a diversified collateral, from a risk perspective, are relevant. Finally, we find that the uncertainty related to the value of the painting is much more important than the uncertainty related to either the credit risk profile of the borrower, or, the artists’ returns during the period the loan remains outstanding.
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We identify the three types of risks involved in an art-secured lending operation and present a framework to assess their combined effects via a Monte Carlo simulation. Also, we derive some useful closed-form expressions that are suitable when the collateral consists of only one painting. To help decision-makers and risk managers, we introduce a number of risk-related metrics that provide a detailed characterization of the lending operation risk profile. We conclude that with the customary LTV ratios currently prevalent in the art-based lending business (around 50%), the lender’s exposure is quite bounded. Moreover, the advantages of having a diversified collateral, from a risk perspective, are relevant. Finally, we find that the uncertainty related to the value of the painting is much more important than the uncertainty related to either the credit risk profile of the borrower, or, the artists’ returns during the period the loan remains outstanding.
An Equity Duration-Based Rationale for the Default Risk Puzzle
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This paper investigates the cross-sectional implications of equity duration, the present-value weighted average time for shareholders to receive cash-flows from a firm. A portfolio that buys the top quintile and sells the bottom quintile of firms differing in the one-year ex-ante probability of bankruptcy earns a -3.36% (-1.95%) Fama and French (1993) three-factor alpha. In expectation, HDR firms take longer than LDR firms to generate cash-flows for shareholders because HDR firms may use most of their short-term cash-flows to ensure their survival. Consequently, equity duration for HDR firms is 4.03 years longer than that for LDR firms. An arbitrage portfolio that buys the top decile and sells the bottom decile of firms differing in equity duration reduces the default risk puzzle by 57% on the value-weighted arbitrage portfolio that buys the top quintile and sells the bottom quintile of default risk firms.
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This paper investigates the cross-sectional implications of equity duration, the present-value weighted average time for shareholders to receive cash-flows from a firm. A portfolio that buys the top quintile and sells the bottom quintile of firms differing in the one-year ex-ante probability of bankruptcy earns a -3.36% (-1.95%) Fama and French (1993) three-factor alpha. In expectation, HDR firms take longer than LDR firms to generate cash-flows for shareholders because HDR firms may use most of their short-term cash-flows to ensure their survival. Consequently, equity duration for HDR firms is 4.03 years longer than that for LDR firms. An arbitrage portfolio that buys the top decile and sells the bottom decile of firms differing in equity duration reduces the default risk puzzle by 57% on the value-weighted arbitrage portfolio that buys the top quintile and sells the bottom quintile of default risk firms.
Art as an Investment: Risk, Return and Portfolio Diversification in Major Painting Markets
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The present paper examines risk, return and the prospects for portfolio diversification among major painting and financial markets over the period 1976-2001. The art markets examined are Contemporary Masters, French Impressionists, Modern European, 19th Century European, Old Masters, Surrealists, 20th Century English and Modern US paintings. The financial markets comprise US Treasury bills, corporate and government bonds and small and large company stocks. In common with the published literature in this area, the present study finds that the returns on paintings are much lower and the risks much higher than conventional investment markets. Moreover, while low correlations of returns suggest that opportunities for portfolio diversification in art works alone and in conjunction with equity markets exist, the construction of Markowitz mean-variance efficient portfolios indicates that no diversification gains are provided by art in financial asset portfolios. However, diversification benefits in portfolios comprised solely of art works are possible, with Contemporary Masters, 19th Century European, Old Masters and 20th Century English paintings dominating the efficient frontier during the period in question.
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The present paper examines risk, return and the prospects for portfolio diversification among major painting and financial markets over the period 1976-2001. The art markets examined are Contemporary Masters, French Impressionists, Modern European, 19th Century European, Old Masters, Surrealists, 20th Century English and Modern US paintings. The financial markets comprise US Treasury bills, corporate and government bonds and small and large company stocks. In common with the published literature in this area, the present study finds that the returns on paintings are much lower and the risks much higher than conventional investment markets. Moreover, while low correlations of returns suggest that opportunities for portfolio diversification in art works alone and in conjunction with equity markets exist, the construction of Markowitz mean-variance efficient portfolios indicates that no diversification gains are provided by art in financial asset portfolios. However, diversification benefits in portfolios comprised solely of art works are possible, with Contemporary Masters, 19th Century European, Old Masters and 20th Century English paintings dominating the efficient frontier during the period in question.
Australian Art Market Prices during the Global Financial Crisis and Two Earlier Decades
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This study constructs a quarterly hedonic price index using 64,203 artworks, by seventy-one well-known modern and contemporary Australian artists, sold at auction houses over the period 1986-2009. The hedonic regression model includes characteristics such as name and living status of the artist, the size and medium of the painting, and the auction house, quarter and year in which the painting was sold. The resulting index indicates that returns on Australian fine-art averaged one percent in nominal terms over the period from quarter one 1986 to quarter four 2009 with a standard deviation of seventeen percent. During the global financial crisis spanning quarter one 2008 and quarter four 2009, the average art returns declined in nominal terms by close to six percent with a standard deviation of twenty-one percent. This study also shows that over the entire period the art market only marginally underperformed the stock and housing markets. The low correlations between these markets suggest the benefits of portfolio diversification.
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This study constructs a quarterly hedonic price index using 64,203 artworks, by seventy-one well-known modern and contemporary Australian artists, sold at auction houses over the period 1986-2009. The hedonic regression model includes characteristics such as name and living status of the artist, the size and medium of the painting, and the auction house, quarter and year in which the painting was sold. The resulting index indicates that returns on Australian fine-art averaged one percent in nominal terms over the period from quarter one 1986 to quarter four 2009 with a standard deviation of seventeen percent. During the global financial crisis spanning quarter one 2008 and quarter four 2009, the average art returns declined in nominal terms by close to six percent with a standard deviation of twenty-one percent. This study also shows that over the entire period the art market only marginally underperformed the stock and housing markets. The low correlations between these markets suggest the benefits of portfolio diversification.
Banking Supervision, Monetary Policy and Risk-Taking: Big Data Evidence from 15 Credit Registers
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We analyse the effects of supranational versus national banking supervision on credit supply, and its interactions with monetary policy. For identification, we exploit: (i) a new, proprietary dataset based on 15 European credit registers; (ii) the institutional change leading to the centralisation of European banking supervision; (iii) high-frequency monetary policy surprises; (iv) differences across euro area countries, also vis-à -vis non-euro area countries. We show that supranational supervision reduces credit supply to firms with very high ex-ante and ex-post credit risk, while stimulating credit supply to firms without loan delinquencies. Moreover, the increased risk-sensitivity of credit supply driven by centralised supervision is stronger for banks operating in stressed countries. Exploiting heterogeneity across banks, we find that the mechanism driving the results is higher quantity and quality of human resources available to the supranational supervisor rather than changes in incentives due to the reallocation of supervisory responsibility to the new institution. Finally, there are crucial complementarities between supervision and monetary policy: centralised supervision offsets excessive bank risk-taking induced by a more accommodative monetary policy stance, but does not offset more productive risk-taking. Overall, we show that using multiple credit registers â€" first time in the literature â€" is crucial for external validity.
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We analyse the effects of supranational versus national banking supervision on credit supply, and its interactions with monetary policy. For identification, we exploit: (i) a new, proprietary dataset based on 15 European credit registers; (ii) the institutional change leading to the centralisation of European banking supervision; (iii) high-frequency monetary policy surprises; (iv) differences across euro area countries, also vis-à -vis non-euro area countries. We show that supranational supervision reduces credit supply to firms with very high ex-ante and ex-post credit risk, while stimulating credit supply to firms without loan delinquencies. Moreover, the increased risk-sensitivity of credit supply driven by centralised supervision is stronger for banks operating in stressed countries. Exploiting heterogeneity across banks, we find that the mechanism driving the results is higher quantity and quality of human resources available to the supranational supervisor rather than changes in incentives due to the reallocation of supervisory responsibility to the new institution. Finally, there are crucial complementarities between supervision and monetary policy: centralised supervision offsets excessive bank risk-taking induced by a more accommodative monetary policy stance, but does not offset more productive risk-taking. Overall, we show that using multiple credit registers â€" first time in the literature â€" is crucial for external validity.
Corporate Bond Defaults: Models and Simulations
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This thesis lies at the intersection of mathematics, finance and numerical methods. The financial question of how to model credit risk, specifically corporate bond defaults, and how to model correlations between defaults, motivates our study of the mathematics behind a specific kind of credit risk models called hazard rate models. We consider corporate bond defaults as random events and apply a probabilistic framework to pricing defaultable corporate bonds and to analyzing the case of multi-entity defaults and default correlations. Using the R programming language, we simulate different algorithms and discretization schemes of stochastic processes, checking our theoretical results with simulation results and numerically solving stochastic differential equations where we do not know the closed-form solutions. This motivates us to study and test performance of different simulation methods of stochastic differential equations. In the end, we give a short summary of the two other types of credit risk models as comparisons to think critically of hazard rate models so as to better answer the financial question of how to model credit risk.
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This thesis lies at the intersection of mathematics, finance and numerical methods. The financial question of how to model credit risk, specifically corporate bond defaults, and how to model correlations between defaults, motivates our study of the mathematics behind a specific kind of credit risk models called hazard rate models. We consider corporate bond defaults as random events and apply a probabilistic framework to pricing defaultable corporate bonds and to analyzing the case of multi-entity defaults and default correlations. Using the R programming language, we simulate different algorithms and discretization schemes of stochastic processes, checking our theoretical results with simulation results and numerically solving stochastic differential equations where we do not know the closed-form solutions. This motivates us to study and test performance of different simulation methods of stochastic differential equations. In the end, we give a short summary of the two other types of credit risk models as comparisons to think critically of hazard rate models so as to better answer the financial question of how to model credit risk.
Indoor Positioning Using WCL Based on RSSI
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This paper presents the use of RSSI (Received Signal Strength Indicator) in terms of Wi-Fi Signals for calculating the current position of the user. For Outdoor Navigation satellite signals are the best option but those are not sufficient for Indoor Positioning. There has been associate degree upward trend within the demand of indoor positioning systems victimization Bluetooth low energy (BLE), Wi-Fi and visual light weight communication. There are numerous centroid algorithms used to calculate the current position but the one which we are using over here is Weighted Centroid Localization (WCL) algorithm using RSSI values. This WCL is simulated and the results are calculated in terms of error rate.
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This paper presents the use of RSSI (Received Signal Strength Indicator) in terms of Wi-Fi Signals for calculating the current position of the user. For Outdoor Navigation satellite signals are the best option but those are not sufficient for Indoor Positioning. There has been associate degree upward trend within the demand of indoor positioning systems victimization Bluetooth low energy (BLE), Wi-Fi and visual light weight communication. There are numerous centroid algorithms used to calculate the current position but the one which we are using over here is Weighted Centroid Localization (WCL) algorithm using RSSI values. This WCL is simulated and the results are calculated in terms of error rate.
Inequitable Subordination: Distressing Distressed Purchasers by Propagating Subordination Benefit Elimination Theory
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This Article examines the application of equitable subordination under Title 11 of the United States Code to bankruptcy claims purchasing transactions that transpire after the occurrence of inequitable conduct by a third party. Although a significant issue with practical consequences, it has drawn relatively scant commentary. To the author’s knowledge, no scholarship to date has attempted to comprehensively discuss the issue or describe the indirect cleansing and washing of tainted claims resulting therefrom. While analyzing and criticizing the current state of the law, this Article introduces the concepts of the “subordination benefit,†“subordination benefit elimination theory,†and “limited subordination benefit theory†to facilitate and further conversations related to the intersection of equitable subordination and bankruptcy claims trading.This Article primarily aims to promote an active, fluid bankruptcy claims trading market to, on an ex post basis, benefit creditors and, on an ex ante basis, reduce the cost, and induce the extension, of credit in the primary capital markets, thereby supporting the broader economy. Additionally, this Article seeks to reduce indirect cleansing of tainted claims and indirect claims washing through the bankruptcy claims market.The subject matter is particularly timely and relevant, given the recent publication of the Final Report and Recommendations of the American Bankruptcy Institute Commission to Study the Reform of Chapter 11, the significant growth of the claims trading market and increasing activity and sophistication of distressed investors, and the recent formation of the American Bankruptcy Institute’s Claims Trading Committee.This Article argues that subordination benefit elimination theory, which represents the dominant theory propagated by courts and commentators, finds support in a misguided reading of caselaw and conflicts with sound economic policy and logic. Further, while acknowledging limited subordination benefit theory is a superior approach to subordination benefit elimination theory, this Article argues that limited subordination benefit theory also runs contrary to sound economic policy and logic. This Article requests commentators and courts halt and reverse the propagation of subordination benefit elimination theory and avoid disseminating limited subordination benefit theory. Instead, this Article proposes post-misconduct discounted claims purchasers be entitled to participate in the subordination benefit to the same extent as pre-misconduct claimholders.If commentators and courts are unready to abandon both theories and if required to make a suboptimal binary choice, this Article suggests limited subordination benefit theory be propagated and utilized in lieu of subordination benefit elimination theory.
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This Article examines the application of equitable subordination under Title 11 of the United States Code to bankruptcy claims purchasing transactions that transpire after the occurrence of inequitable conduct by a third party. Although a significant issue with practical consequences, it has drawn relatively scant commentary. To the author’s knowledge, no scholarship to date has attempted to comprehensively discuss the issue or describe the indirect cleansing and washing of tainted claims resulting therefrom. While analyzing and criticizing the current state of the law, this Article introduces the concepts of the “subordination benefit,†“subordination benefit elimination theory,†and “limited subordination benefit theory†to facilitate and further conversations related to the intersection of equitable subordination and bankruptcy claims trading.This Article primarily aims to promote an active, fluid bankruptcy claims trading market to, on an ex post basis, benefit creditors and, on an ex ante basis, reduce the cost, and induce the extension, of credit in the primary capital markets, thereby supporting the broader economy. Additionally, this Article seeks to reduce indirect cleansing of tainted claims and indirect claims washing through the bankruptcy claims market.The subject matter is particularly timely and relevant, given the recent publication of the Final Report and Recommendations of the American Bankruptcy Institute Commission to Study the Reform of Chapter 11, the significant growth of the claims trading market and increasing activity and sophistication of distressed investors, and the recent formation of the American Bankruptcy Institute’s Claims Trading Committee.This Article argues that subordination benefit elimination theory, which represents the dominant theory propagated by courts and commentators, finds support in a misguided reading of caselaw and conflicts with sound economic policy and logic. Further, while acknowledging limited subordination benefit theory is a superior approach to subordination benefit elimination theory, this Article argues that limited subordination benefit theory also runs contrary to sound economic policy and logic. This Article requests commentators and courts halt and reverse the propagation of subordination benefit elimination theory and avoid disseminating limited subordination benefit theory. Instead, this Article proposes post-misconduct discounted claims purchasers be entitled to participate in the subordination benefit to the same extent as pre-misconduct claimholders.If commentators and courts are unready to abandon both theories and if required to make a suboptimal binary choice, this Article suggests limited subordination benefit theory be propagated and utilized in lieu of subordination benefit elimination theory.
Information-Theoretic Approaches to Portfolio Selection
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Ever since modern portfolio theory was introduced by Harry Markowitz in 1952, a plethora of papers have been written on the mean-variance investment problem. However, due to the non-Gaussian nature of asset returns, the mean and variance statistics are insufficient to adequately represent their full distribution, which depends on higher moments too. Higher-moment portfolio selection is however more complex; a smaller literature has been dedicated to this problem and no consensus emerges about how investors should allocate their wealth when higher moments cannot be ignored. Among the proposed alternatives, researchers have recently considered information theory, and entropy in particular, as a new framework to tackle this problem. Entropy provides an appealing criterion as it measures the amount of randomness embedded in a random variable from the shape of its density function, thus accounting for all moments. The application of information theory to portfolio selection is however nascent and much remains to explore. Therefore, in this thesis, we aim to explore the portfolio-selection problem from an information-theoretic angle, accounting for higher moments. We review the relevant literature and mathematical concepts in Chapter 1. Then, we consider in Chapter 2 a natural alternative to the popular minimum-variance portfolio strategy using Rényi entropy as information-theoretic criterion. We show that the exponential Rényi entropy fulfills natural properties as a risk measure. However, although Rényi entropy has some nice features, we show that it can be an undesirable investment criterion because it may lead to portfolios with worse higher moments than minimizing the variance. For this reason, we turn in chapters 3 to 5 to different ways of applying entropy, thereby revisiting two popular frameworks -- risk parity and expected utility -- to account for higher moments. In Chapter 3, we investigate the factor-risk-parity portfolio -- a popular strategy among practitioners -- that aims to diversify the portfolio-return risk across uncorrelated factors underlying the asset returns. We show that although principal component analysis (PCA) is very useful for dimension reduction, its resulting factor-risk-parity portfolio is suboptimal. Indeed, PCA merely provides one choice of uncorrelated factors out of infinitely many others, and one would prefer to be diversified over independent factors rather than merely uncorrelated ones. Instead, thus, we propose to diversify the risk across maximally independent factors, provided by independent component analysis (ICA). We show theoretically that this solves the issues related to principal components and provides a natural way of reducing the kurtosis of portfolio returns. In Chapter 4, we apply ICA in a different way in order to obtain robust estimates of moment-based portfolios, such as those based on expected utility. It is well known that these portfolios are difficult to estimate, particularly in high dimensions, because the number of comoments quickly explodes with the number of assets. We propose to address this curse of dimensionality by projecting the asset returns on a small set of maximally independent factors provided by ICA, and neglecting their remaining dependence. In doing so, we obtain sparse approximations of the comoment tensors of asset returns. This drastically decreases the dimensionality of the problem and leads to well-performing and computationally efficient investment strategies with low turnover. In Chapter 5, we introduce an alternative approach to the utility function to capture investors' preferences. The latter is praised by academics but is difficult to specify when higher moments matter. Because investors ultimately care about the distribution of their portfolio returns, our proposal is to capture their preferences via a target-return distribution. The optimal portfolio is then the one whose distribution minimizes the Kullback-Leibler divergence with respect to the target distribution. Our theoretical exploration shows that Shannon entropy plays a central role as higher-moment criterion in this framework, and our empirical analysis confirms that this strategy outperforms mean-variance portfolios out of sample.
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Ever since modern portfolio theory was introduced by Harry Markowitz in 1952, a plethora of papers have been written on the mean-variance investment problem. However, due to the non-Gaussian nature of asset returns, the mean and variance statistics are insufficient to adequately represent their full distribution, which depends on higher moments too. Higher-moment portfolio selection is however more complex; a smaller literature has been dedicated to this problem and no consensus emerges about how investors should allocate their wealth when higher moments cannot be ignored. Among the proposed alternatives, researchers have recently considered information theory, and entropy in particular, as a new framework to tackle this problem. Entropy provides an appealing criterion as it measures the amount of randomness embedded in a random variable from the shape of its density function, thus accounting for all moments. The application of information theory to portfolio selection is however nascent and much remains to explore. Therefore, in this thesis, we aim to explore the portfolio-selection problem from an information-theoretic angle, accounting for higher moments. We review the relevant literature and mathematical concepts in Chapter 1. Then, we consider in Chapter 2 a natural alternative to the popular minimum-variance portfolio strategy using Rényi entropy as information-theoretic criterion. We show that the exponential Rényi entropy fulfills natural properties as a risk measure. However, although Rényi entropy has some nice features, we show that it can be an undesirable investment criterion because it may lead to portfolios with worse higher moments than minimizing the variance. For this reason, we turn in chapters 3 to 5 to different ways of applying entropy, thereby revisiting two popular frameworks -- risk parity and expected utility -- to account for higher moments. In Chapter 3, we investigate the factor-risk-parity portfolio -- a popular strategy among practitioners -- that aims to diversify the portfolio-return risk across uncorrelated factors underlying the asset returns. We show that although principal component analysis (PCA) is very useful for dimension reduction, its resulting factor-risk-parity portfolio is suboptimal. Indeed, PCA merely provides one choice of uncorrelated factors out of infinitely many others, and one would prefer to be diversified over independent factors rather than merely uncorrelated ones. Instead, thus, we propose to diversify the risk across maximally independent factors, provided by independent component analysis (ICA). We show theoretically that this solves the issues related to principal components and provides a natural way of reducing the kurtosis of portfolio returns. In Chapter 4, we apply ICA in a different way in order to obtain robust estimates of moment-based portfolios, such as those based on expected utility. It is well known that these portfolios are difficult to estimate, particularly in high dimensions, because the number of comoments quickly explodes with the number of assets. We propose to address this curse of dimensionality by projecting the asset returns on a small set of maximally independent factors provided by ICA, and neglecting their remaining dependence. In doing so, we obtain sparse approximations of the comoment tensors of asset returns. This drastically decreases the dimensionality of the problem and leads to well-performing and computationally efficient investment strategies with low turnover. In Chapter 5, we introduce an alternative approach to the utility function to capture investors' preferences. The latter is praised by academics but is difficult to specify when higher moments matter. Because investors ultimately care about the distribution of their portfolio returns, our proposal is to capture their preferences via a target-return distribution. The optimal portfolio is then the one whose distribution minimizes the Kullback-Leibler divergence with respect to the target distribution. Our theoretical exploration shows that Shannon entropy plays a central role as higher-moment criterion in this framework, and our empirical analysis confirms that this strategy outperforms mean-variance portfolios out of sample.
Investing in Art: The Informational Content of Italian Painting Pre-Sale Estimates
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As the size of the art market increases and a growing number of investors are attracted by the high returns, the amount and quality of information available to market participants becomes increasingly relevant, especially for less experienced investors. One of the most relevant information sources in the art market is the price estimate provided by auction houses, that is the price that auctioneers believe a piece of art might bring at auction. Auction houses are regarded as providing additional valuable information to market participants. Thus pre-sale estimates could be useful reference points in the art valuation process, driving operators' investment and divestment decisions. However, as the price of each unique artwork is affected by inconstant and intangible factors, estimates are usually expressed as a range within which the experts forecast the final price will fall. The informational content of such estimates can be examined along two dimensions: the uncertainty and the accuracy of estimates in predicting sale prices. We test for any systematic differences in predicting hammer prices using a sample of 1,975 sales of Italian paintings which were sold all over the world at least twice during the 1985-2006 period. Three results emerge from the empirical evidence. First, pre-sale estimates are not good predictors of final sale prices. Second, uncertainty and accuracy in price prediction decreases and increases, respectively, when Italian paintings are auctioned in Italy, thus revealing a Country effect. Finally, the informational content of estimates is affected by past prices, thus revealing an anchoring effect.
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As the size of the art market increases and a growing number of investors are attracted by the high returns, the amount and quality of information available to market participants becomes increasingly relevant, especially for less experienced investors. One of the most relevant information sources in the art market is the price estimate provided by auction houses, that is the price that auctioneers believe a piece of art might bring at auction. Auction houses are regarded as providing additional valuable information to market participants. Thus pre-sale estimates could be useful reference points in the art valuation process, driving operators' investment and divestment decisions. However, as the price of each unique artwork is affected by inconstant and intangible factors, estimates are usually expressed as a range within which the experts forecast the final price will fall. The informational content of such estimates can be examined along two dimensions: the uncertainty and the accuracy of estimates in predicting sale prices. We test for any systematic differences in predicting hammer prices using a sample of 1,975 sales of Italian paintings which were sold all over the world at least twice during the 1985-2006 period. Three results emerge from the empirical evidence. First, pre-sale estimates are not good predictors of final sale prices. Second, uncertainty and accuracy in price prediction decreases and increases, respectively, when Italian paintings are auctioned in Italy, thus revealing a Country effect. Finally, the informational content of estimates is affected by past prices, thus revealing an anchoring effect.
Paintings and Numbers: An Econometric Investigation of Sales Rates, Prices and Returns in Latin American Art Auctions
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This paper uses a unique data set of Latin American paintings auctioned by Sotheby&apos's between 1995 and 2002 to investigate several puzzles from the recent auctions literature. Our results suggest that: (1) the reputation of an artist and the provenance of the artwork, omitted variables in most previous studies, seem to be more important determinants of the sale price of a painting than standard factors, such as medium and size, (2) the opinion of art experts seems to be of limited use in predicting whether or not an artwork sells at auction, (3) there is little supporting evidence for the widespread notion that the best or more expensive artworks tend to generate above average returns (the "masterpiece effect"), although (4) there is strong evidence in our data for the declining price anomaly, or "afternoon effect."
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This paper uses a unique data set of Latin American paintings auctioned by Sotheby&apos's between 1995 and 2002 to investigate several puzzles from the recent auctions literature. Our results suggest that: (1) the reputation of an artist and the provenance of the artwork, omitted variables in most previous studies, seem to be more important determinants of the sale price of a painting than standard factors, such as medium and size, (2) the opinion of art experts seems to be of limited use in predicting whether or not an artwork sells at auction, (3) there is little supporting evidence for the widespread notion that the best or more expensive artworks tend to generate above average returns (the "masterpiece effect"), although (4) there is strong evidence in our data for the declining price anomaly, or "afternoon effect."
Payment Methods and the Disposition Effect: Evidences from Indonesian Mutual Fund Trading
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The entire research on alternative payment methods focuses on buyers of goods and services, however there are no similar studies on financial investors. Using a unique dataset, we explore the effects of different transaction mechanisms amongst mutual fund traders in the emerging economy of Indonesia. Our results show that, as with common buyers, alternative payment methods influence traders too. In particular, we find that certain types of payment mechanism reduce people’s Disposition Effect: the bias to realize gains more readily than the losses. Additionally, we also find that different investing methods affect the reluctance to realize losses while alternative divesting systems influence the propensity to lock in winners.
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The entire research on alternative payment methods focuses on buyers of goods and services, however there are no similar studies on financial investors. Using a unique dataset, we explore the effects of different transaction mechanisms amongst mutual fund traders in the emerging economy of Indonesia. Our results show that, as with common buyers, alternative payment methods influence traders too. In particular, we find that certain types of payment mechanism reduce people’s Disposition Effect: the bias to realize gains more readily than the losses. Additionally, we also find that different investing methods affect the reluctance to realize losses while alternative divesting systems influence the propensity to lock in winners.
Tiered Cbdc and the Financial System
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IT progress and its application to the financial industry have inspired central banks and academics to analyse the merits of central bank digital currencies (CBDC) accessible to the broad public. This paper first reviews the advantages and risks of such CBDC. It then discusses two prominent arguments against CBDC, namely (i) risk of structural disintermediation of banks and centralization of the credit allocation process within the central bank and (ii) risk of facilitation systemic runs on banks in crisis situations. Two-tier remuneration of CBDC is proposed as solution to both issues, and a comparison is provided with a simple cap solution and the solution of Kumhof and Noone (2018). Finally, the paper compares the financial account implications of CBDC with the ones of crypto assets, Stablecoins, and narrow bank digital money, in a domestic and international context.
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IT progress and its application to the financial industry have inspired central banks and academics to analyse the merits of central bank digital currencies (CBDC) accessible to the broad public. This paper first reviews the advantages and risks of such CBDC. It then discusses two prominent arguments against CBDC, namely (i) risk of structural disintermediation of banks and centralization of the credit allocation process within the central bank and (ii) risk of facilitation systemic runs on banks in crisis situations. Two-tier remuneration of CBDC is proposed as solution to both issues, and a comparison is provided with a simple cap solution and the solution of Kumhof and Noone (2018). Finally, the paper compares the financial account implications of CBDC with the ones of crypto assets, Stablecoins, and narrow bank digital money, in a domestic and international context.
Unconventional Monetary Policy and Funding Liquidity Risk
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This paper investigates the efficiency of various monetary policy instruments to stabilize asset prices in a liquidity crisis. We propose a macro-finance model featuring both traditional and shadow banks subject to funding risk. When banks are well capitalized, they have access to money markets and efficiently mitigate funding shocks. When aggregate bank capital is low, a vicious cycle arises between declining asset prices and funding risks. The central bank can partially counter these dynamics. Increasing the supply of reserves reduces liquidity risk in the traditional banking sector, but fails to reach the shadow banking sector. When the shadow banking sector is large, as in the US in 2008, the central bank can further stabilize asset prices by directly purchasing illiquid securities.
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This paper investigates the efficiency of various monetary policy instruments to stabilize asset prices in a liquidity crisis. We propose a macro-finance model featuring both traditional and shadow banks subject to funding risk. When banks are well capitalized, they have access to money markets and efficiently mitigate funding shocks. When aggregate bank capital is low, a vicious cycle arises between declining asset prices and funding risks. The central bank can partially counter these dynamics. Increasing the supply of reserves reduces liquidity risk in the traditional banking sector, but fails to reach the shadow banking sector. When the shadow banking sector is large, as in the US in 2008, the central bank can further stabilize asset prices by directly purchasing illiquid securities.
