Research articles for the 2020-01-09

Bank Funding Costs and Solvency
Pancaro, Cosimo,Żochowski, Dawid,Arnould, Guillaume
This paper investigates the relationship between bank funding costs and solvency for a large sample of euro area banks using two proprietary ECB datasets for both wholesale funding costs and deposit rates. In particular, the paper studies the relationship between bank solvency, on the one hand, and senior bond yields, term deposit rates and overnight deposit rates, on the other. The analysis finds a significant negative relationship between bank solvency and the different types of funding costs. It also shows that this relationship is non-linear, namely convex, for senior bond yields and term deposit rates. It also identifies a positive realistic solvency threshold beyond which the effect of an increase in solvency on senior bond yields becomes positive. The paper also finds that senior bond yields are more sensitive to a change in solvency than deposit rates. Among the deposit rates, the interest rates of the overnight deposits are the least sensitive. Banks' asset quality, profitability and liquidity seem to play only a minor role in driving funding costs while the ECB monetary policy stance, sovereign risk and financial markets uncertainty appear to be material drivers.

China's First Workforce Skill Taxonomy
Weipan Xu,Xiaozhen Qin,Xun Li,Haohui"Caron" Chen,Morgan Frank,Alex Rutherford,Andrew Reeson,Iyad Rahwan

China is the world's second largest economy. After four decades of economic miracles, China's economy is transitioning into an advanced, knowledge-based economy. Yet, we still lack a detailed understanding of the skills that underly the Chinese labor force, and the development and spatial distribution of these skills. For example, the US standardized skill taxonomy O*NET played an important role in understanding the dynamics of manufacturing and knowledge-based work, as well as potential risks from automation and outsourcing. Here, we use Machine Learning techniques to bridge this gap, creating China's first workforce skill taxonomy, and map it to O*NET. This enables us to reveal workforce skill polarization into social-cognitive skills and sensory-physical skills, and to explore the China's regional inequality in light of workforce skills, and compare it to traditional metrics such as education. We build an online tool for the public and policy makers to explore the skill taxonomy: We will also make the taxonomy dataset publicly available for other researchers upon publication.

Clustering Approaches for Global Minimum Variance Portfolio
Jinwoo Park

The only input to attain the portfolio weights of global minimum variance portfolio (GMVP) is the covariance matrix of returns of assets being considered for investment. Since the population covariance matrix is not known, investors use historical data to estimate it. Even though sample covariance matrix is an unbiased estimator of the population covariance matrix, it includes a great amount of estimation error especially when the number of observed data is not much bigger than number of assets. As it is difficult to estimate the covariance matrix with high dimensionality all at once, clustering stocks is proposed to come up with covariance matrix in two steps: firstly, within a cluster and secondly, between clusters. It decreases the estimation error by reducing the number of features in the data matrix. The motivation of this dissertation is that the estimation error can still remain high even after clustering, if a large amount of stocks is clustered together in a single group. This research proposes to utilize a bounded clustering method in order to limit the maximum cluster size. The result of experiments shows that not only the gap between in-sample volatility and out-of-sample volatility decreases, but also the out-of-sample volatility gets reduced. It implies that we need a bounded clustering algorithm so that maximum clustering size can be precisely controlled to find the best portfolio performance.

Codependence (Presentation Slides)
Lopez de Prado, Marcos
Two random variables are codependent when knowing the value of one helps us determine the value of the other. This should not me confounded with the notion of causality.Correlation is perhaps the best known measure of codependence in econometric studies. Despite its popularity among economists, correlation has many known limitations in the contexts of financial studies.In this seminar we will explore more modern measures of codependence, based on information theory, which overcome some of the limitations of correlations.

Determinants of Social-economic Mobility in the Northern Region of Malaysia
Mukaramah Harun

Colleting the data through a survey in the Northern region of Malaysia; Kedah, Perlis, Penang and Perak, this study investigates intergenerational social mobility in Malaysia. We measure and analyzed the factors that influence social-economic mobility by using binary choice model (logit model). Social mobility can be measured in several ways, by income, education, occupation or social class. More often, economic research has focused on some measure of income. Social mobility variable is measured using the difference between educational achievement between a father and son. If there is a change of at least of two educational levels between a father and son, then this study will assign the value one which means that social mobility has occurred.

Do Shareholder Protection and Creditor Rights Have Distinct Effects on the Association Between Debt Maturity and Ownership Structure?
Martins, Henrique Castro,Schiehll, Eduardo,Terra, Paulo R. S.
This study examines the effects of the firm’s ownership concentration and its institutional environment on corporate debt maturity choices. As ownership concentration and debt maturity are alternative governance mechanisms, we theorize and investigate whether their association is influenced by country-level governance factors that enhance outside monitoring by minority shareholders and debtholders. Our investigation is based on a dataset of 50,599 firm-year observations from 38 countries. We use a propensity-score matching approach and find that the effect of ownership concentration on debt maturity is conditional to country-level governance attributes. Ownership concentration has a negative effect on debt maturity in countries where both shareholder protection and creditor rights are weak. Ownership concentration, however, tends to lengthen debt maturity as protection increases, and this positive effect on the length of debt maturity is stronger in countries enhancing protection towards debtholders (instead of shareholders). We also explore other characteristics of ownership structure, such as the identity the presence of controlling shareholders. These results corroborate the view that entrenched shareholders may use debt maturity opportunistically. Our study provides new insights into the interplay between firm- and country-level governance mechanisms and a deeper understanding of cross-country differences in the association between ownership structure and debt financing.

Does Corporate Governance Structures Predict Firm’s Market Value? Empirical Evidence from Ghana
Ahulu, Helena,MacCarthy, John
This paper examined the effect of corporate governance structures on the market value of firms in Ghana. Quantitative data was collected on thirty one firms listed on the Ghana stock exchange from 2009 to 2018 to predict the effect of corporate governance structures on the firm’s market value. Panel data regression analysis revealed that corporate governance structures accounted for 84.9% of the variation of a firm’s market value for the period. Furthermore, the study revealed a significant relationship between chief executive officer (CEO) duality, non-executive director, board size and firm’s profitability and value. The study concludes that firms should separate CEO position from board chairman position to enhance a firm’sprofitability and value.

Does the Spillover Index Reflect Systemic Shocks? A Bootstrap-Based Probabilistic Analysis
Greenwood‐Nimmo, Matthew,Kočenda, Evžen,Nguyen, Viet Hoang
The spillover index introduced by Diebold and Yilmaz (Economic Journal, 2009, vol. 119, pp. 158-171) is widely used in the analysis of financial market interlinkages. Abrupt increases in the spillover index are thought to be associated with systemic events but formal statistical support for this effect has yet to be provided. We develop a new bootstrap-based technique to evaluate the probability that the spillover index increases over an arbitrary time period following an exogenously defined event. Using the authors' original dataset, our results lend qualified support to the notion that the spillover index increases in a statistically significant manner in the wake of systemic shocks.

Estimating the Impact of GST Implementation on Cost of Production and Cost of Living in Malaysia
Mukaramah Harun

The implementation of Goods and Services Tax(GST) is often attributed as the main cause of the rising prices of goods and services. The main objective of this study is to estimate the extent of GST implementation impact on the costs of production, which in turn have implication on households living costs.

Financial Outcomes in Adolescence and Early Adulthood in Australian Longitudinal Data
Haisken-De New, John,Ribar, David C.,Ryan, Chris,Wong, Clement
This article describes and catalogues person-specific measures of financial outcomes that are available for adolescents and young adults in three large longitudinal Australian surveys: the Longitudinal Surveys of Australian Youth, the Longitudinal Study of Australian Children, and the Household, Income and Labour Dynamics in Australia Survey. It summarises international research that has been conducted on young people's financial outcomes, illustrating outcomes that have been investigated, research questions that have been asked, and distinctions that have been drawn between adolescents and young adults. It considers the strengths and weaknesses of the three surveys for extending this research into the Australian context.

Fractional Differencing Predictive Power in FOREX Market
Orquin-Serrano, Ismael
Efficient Market Hypothesis (EMH) states that all available information is immediately reflected in the price of any asset or financial instrument, so that it is impossible to predict its future values making it follow a pure stochastic process. Among all financial markets FOREX is usually addressed as one of the most efficient. This paper proposes a methodology to test the efficiency of the EURUSD pair taking only into consideration the price itself. A novel categorical classification of all possible single candlestick patterns is presented based on adaptive criteria. Candlestick patterns predictive power is evaluated from a statistical inference approach, where the mean of the average returns of the strategies in out-of-sample historical data is taken as test statistics. No net positive average returns are found in any case after taking into account transaction costs. More complex candlestick patterns are considered feeding supervised learning systems with the information of past bars. Fractional differences applied to close prices are found to be more informative than integer differences for all supervised learning systems studied (decision trees, random forest and AdaBoost) that are used as classifiers for learning the conditions for which winning trades happen. AdaBoost is found to reach the highest learning score among all three different classifiers employed.

If the Prospect of Some Occupations Are Stagnating With Technological Advancement? A Task Attribute Approach to Detect Employment Vulnerability
Iftekhairul Islam,Fahad Shaon

Two distinct trends can prove the existence of technological unemployment in the US. First, there are more open jobs than the number of unemployed persons looking for a job, and second, the shift of the Beveridge curve. There have been many attempts to find the cause of technological unemployment. However, all of these approaches fail when it comes to evaluating the impact of modern technologies on employment future. This study hypothesizes that rather than looking into skill requirement or routine non-routine discrimination of tasks, a holistic approach is required to predict which occupations are going to be vulnerable with the advent of this 4th industrial revolution, i.e., widespread application of AI, ML algorithms, and Robotics. Three critical attributes are considered: bottleneck, hazardous, and routine. Forty-five relevant attributes are chosen from the O*NET database that can define these three types of tasks. Performing Principal Axis Factor Analysis, and K-medoid clustering, the study discovers a list of 367 vulnerable occupations. The study further analyzes the last nine years of national employment data and finds that over the previous four years, the growth of vulnerable occupations is only half than that of non-vulnerable ones despite the long rally of economic expansion.

Institutions and China's comparative development
Paul Minard

Robust assessment of the institutionalist account of comparative development is hampered by problems of omitted variable bias and reverse causation, since institutional quality is not randomly assigned with respect to geographic and human capital endowments. A recent series of papers has applied spatial regression discontinuity designs to estimate the impact of institutions on incomes at international borders, drawing inference from the abrupt discontinuity in governance at borders, whereas other determinants of income vary smoothly across borders. I extend this literature by assessing the importance of sub-national variation in institutional quality at provincial borders in China. Employing nighttime lights emissions as a proxy for income, across multiple specifications I find no evidence in favour of an institutionalist account of the comparative development of Chinese provinces.

Investor Sentiment and the Expected Returns of Socially and Environmentally Responsible Firms
Azevedo, Vitor,Kaserer, Christoph,M. S. Campos, Lucila
Social and environmental investments tend to make firms' valuations more subjective, which can make their financial performance more vulnerable to the level of investor sentiment. We study whether investor sentiment drives the financial performance of socially as well as environmentally responsible firms compared to firms that do not meet these criteria. We find that socially responsible firms have a relative monthly excess return of 0.70% higher following periods of low investor sentiment level than periods of high, whereas environmentally responsible firms have 0.88%. Although standard risk factors do not fully explain the impact of investor sentiment level on subsequent risk-adjusted returns of environmentally and socially responsible firms, we find that a risk factor, estimated as the second component of portfolios sorted on qualitative issue areas, can explain this relation.

Persistence in Equity Fund Performance in Brazil
Varga, Gyorgy,Berggrun, Luis,Umaña, Benito,Mongrut, Samuel A.
We examine performance persistence in the large and growing Brazilian equity fund market from 2000 to 2012. We find a significant risk-adjusted spread between a portfolio of top- and bottom-performing funds, which supports the idea that performance persists. This spread remains after controlling for market, size, distress, and momentum risk factors and tends to be larger and more significant for a set of small and retail funds. The spread is mostly driven by the underperformance of the bottom decile of funds, which is consistent with the existence of some fund managers with insufficient skills to recover investment costs.

Policy Uncertainty, Asset Acquisitions and Deal Structure
Ferguson, Andrew,Hu, Wei,Lam, Peter
This study investigates how policy uncertainty affects firms’ asset acquisitions and explores whether deal structure matters in mitigating uncertainty-related costs. Using a unique hand-collected sample of asset acquisitions with a mixture of staged and non-staged transactions, we document that, consistent with options theory, policy uncertainty deters non-staged acquisitions due to the irreversibility of large upfront capital commitments. However, policy uncertainty stimulates staged acquisitions that give acquirers growth options and flexibility over the timing of investment decisions to manage uncertainty. Further, stock market reactions to asset acquisitions reflect acquirers’ exposure to policy uncertainty at the deal-level. The stock market reacts more favourably to staged acquisitions than non-staged acquisitions when policy uncertainty increases. Our findings highlight the importance of transaction level choices through which managers mitigate the consequences of policy uncertainty.

Real Options Research Based on Parabolic Fuzzy Numbers
Lu, Ma,Gaoli, Hao
input parameters in traditional real option pricing formula is difficult to accurately determine the number ,so it is common to use some random number or given number , causing the results of error is very larger and affecting investment decisions. In this paper, in order to solve the problem, we consider to optimize the input parameters through a nonlinear parabolic fuzzy number. then, it is better for the risk of investment projects to amend Black-Scholes pricing formula . further, not only is the number of parabolic fuzzy in-depth research conducted, but also we propose a new fuzzy real option pricing model by changing parabolic fuzzy number into a trapezoidal fuzzy number, retaining a number of characteristic parameters effectively Finally, the validity of the model is tested and the advantages compared to the trapezoidal fuzzy numbers is to be proved by example.

Relationship between Type of Risks and Income of the Rural Households in the Pattani Province of Thailand
Mukaramah Harun

This study examines the relationship between type of risks and income of the rural households in Pattani province,Thailand using the standard multiple regression analysis.A multi-stage sampling technique is employed to select 600 households of 12 districts in the rural Pattani province and a structured questionnaire is used for data collection.Evidences from descriptive analysis show that the type of risks faced by households in rural Pattani province are job loss,reduction of salary,household member died,household members who work have accident,marital problem and infection of crops or livestock.In addition,result from the regression analysis suggests that job loss,household member died and marital problem have significant negative effects on the households income.The result suggests that job loss has adverse impact on households income.

Restoring the Promise of Federal Reserve Governance
Conti-Brown, Peter
The US Federal Reserve System (Fed) is famous for its organizational complexity. Overlooked in debates about the costs and benefits of this complexity for the Fed’s legitimacy, independence, and accountability is the congressional vision of what the Fed should be. The central bank is governed by a highly accountable seven-person Board of Governors to manage the rest of the system. Time and experience have eroded this authority as a matter of practice but not as a matter of law. The Fed governors are supposed to supervise the system, a legal aspiration that has increasingly been enervated by institutional drift. Using empirical and historical tools, this paper discusses the erosion of the Board of Governors over the Fed’s century-long history, including the substantial reduction in real compensation for the governors, their diminished participation in Federal Open Market Committee (FOMC) meetings, and the increased vacancies that recently have been driven by the political process. To address these problems, the paper suggests reforms across three divides: cultural, regulatory, and legislative. Remedies include changing norms of FOMC meeting participation to place nonvoting members of the FOMC as “observers”; clarifying the role of the Fed’s Board of Governors in supervising the Federal Reserve Banks, particularly with respect to the presidential search process; increasing attention to vacancies and promoting bipartisan interest in credible candidates; and increasing governor salaries to match those of their colleagues at the 12 Federal Reserve Banks, consistent with legislative intent from 1913.

Segregation with Social Linkages: Evaluating Schelling's Model with Networked Individuals
Roy Cerqueti,Luca De Benedictis,Valerio Leone Sciabolazza

This paper generalizes the original Schelling (1969, 1971a,b, 2006) model of racial and residential segregation to a context of variable externalities due to social linkages. In a setting in which individuals' utility function is a convex combination of a heuristic function a la Schelling, of the distance to friends, and of the cost of moving, the prediction of the original model gets attenuated: the segregation equilibria are not the unique solutions. While the cost of distance has a monotonic pro-status-quo effect, equivalent to that of models of migration and gravity models, if friends and neighbours are formed following independent processes the location of friends in space generates an externality that reinforces the initial configuration if the distance to friends is minimal, and if the degree of each agent is high. The effect on segregation equilibria crucially depends on the role played by network externalities.

Short Selling, the Supply Side: Are Lenders Price Makers?
Casula, Daniel,De-Losso, Rodrigo
It is widely accepted in the literature that high lending fees predict negative returns because high fees capture the negative information that short sellers, on the demand side, detain. Traditionally, the supply side is seen as passive, with stock lenders acting as price takers. Recent studies, however, show that lenders are no longer passive. This study analyzes the Brazilian stock loan market, disentangling the shorting demand and supply curve shifts to understand the driving mechanism linking the supply side and stock returns. We also link the shorting supply curve with news announcements and verify how lenders react to new information in the market. Our results indicate that lenders decrease the loan supply when they predict negative future returns and use new information to change supply conditions, indicating that lenders are not price takers.

Sovereign Debt Crisis in Portugal and in Spain
Afonso, Antonio,Verdial, Nuno
The 2007-2008 financial crisis and the European sovereign debt crisis effects rippled through the financial system, banks and sovereign states. We analyze these events, focusing on the Portuguese and Spanish case after providing an insight into the Eurozone. We assessed the pricing of sovereign risk by performing an OLS/2SLS fixed effects panel analysis on a pool of Eurozone countries and a SUR regression with Portugal and Spain covering the period 1999:11 until 2019:6. Our results show that the pricing of sovereign risk changed with the crisis and the “whatever it takes” speech of Mario Draghi. Specifically, market pricing of the Eurozone credit risk, liquidity risk and the risk appetite increased after the crisis and it relaxed afterwards. We did not find evidence of specific pricing regime changes after the speech in the Portuguese and Spanish case.

Sovereign Indebtedness and Financial and Fiscal Conditions
Afonso, Antonio,Jalles, João Tovar
We empirically assess the magnitudes of sovereign indebtedness responses for a sample of 123 Advanced and Emerging Market Economies, between 1980 and 2018, taking into account the changing characteristics of financial markets, notably the Global and Financial Crisis. Our results show that when the financial conditions are more stressful, for instance, higher yield spreads or a heightened degree of financial stress, fiscal authorities use more actively their primary balance to reduce sovereign indebtedness, which is not the case when financial market conditions are more benign. This is notably true for the case of Emerging Market Economies sovereigns, who most likely then struggle more to fund themselves.

Stationary Heston model: Calibration and Pricing of exotics using Product Recursive Quantization
Vincent Lemaire,Thibaut Montes,Gilles Pagès

A major drawback of the Standard Heston model is that its implied volatility surface does not produce a steep enough smile when looking at short maturities. For that reason, we introduce the Stationary Heston model where we replace the deterministic initial condition of the volatility by its invariant measure and show, based on calibrated parameters, that this model produce a steeper smile for short maturities than the Standard Heston model. We also present numerical solution based on Product Recursive Quantization for the evaluation of exotic options (Bermudan and Barrier options).

The Value of Renewable Energy and Subsidies: An Investor's Perspective
Kronies, Alexander
I provide a novel theoretical approach to value wind energy investments. It allows to adjust for a number of risk parameters, including wind speeds, electricity price forecasts, discount rates, and uncertainty in subsidies. I use this approach to model wind energy investments under two different subsidy schemes in Denmark through a numerical Monte Carlo simulation. Moreover, I model wind energy investments under the assumption of a subsidy-free asset class. I compare the three systems and expose them to various sources of uncertainty through which I provide more clarity on which risk parameters matter most to wind energy investors and how the three systems compare to each other.

Using Networks and Partial Differential Equations to Predict Bitcoin Price
Yufang Wang,Haiyan Wang

Over the past decade, the blockchain technology and its Bitcoin cryptocurrency have received considerable attention. Bitcoin has experienced significant price swings in daily and long-term valuations. In this paper, we propose a partial differential equation (PDE) model on the bitcoin transaction network for predicting bitcoin price. Through analysis of bitcoin subgraphs or chainlets, the PDE model captures the influence of transaction patterns on bitcoin price over time and combines the effect of all chainlet clusters. In addition, Google Trends Index is incorporated to the PDE model to reflect the effect of bitcoin market sentiment. The experiment shows that the average accuracy of daily bitcoin price prediction is 0.82 for 362 consecutive days in 2017. The results demonstrate the PDE model is capable of predicting bitcoin price. The paper is the first attempt to apply a PDE model to the bitcoin transaction network for predicting bitcoin price.

When Does Attention Matter? The Effect of Investor Attention on Stock Market Volatility Around News Releases
Ballinari, Daniele,Audrino, Francesco,Sigrist, Fabio
Empirical and theoretical studies have shown that measures of investor attention have a positive impact on future stock market volatility and trading volume. In this study, we present evidence that the nature of this relationship changes strongly depending on whether firm-specific news is released and also depending on the timing and type of news releases. We construct attention measures from two online social media platforms for 360 US stocks in the S&P 500 universe. Our results show that attention measures are more informative for next day's volatility when news and earning reports are released. The impact of investor attention is particularly large when news articles are published after trading hours and when unexpected news as well as news about a company's fundamentals is released. These effects are not only statistically significant but also sizeable in economic terms and can lead to an overperformance as large as dozens of basis points.

Алтернативи за запазване жизнеспособността на предприятието в следкризисния му етап (Alternatives for Maintaining the Viability of the Enterprise in Post-Crisis Phase)
Zafirova, Tzveta,Bachvarova, Margarita
Bulgarian Abstract: Целта на тази статия е да се проучат алтернативите за излизане от кризата във всяко предприятие, за да се запази жизнеспособността му. Разгледани са различни подходи в специализираната литература в областта на мениджмънта. Изследвани са правните аспекти на тези алтернативи и добрите международни практики в тази област. Изследван и систематизиран е достатъчен брой литературни източници, описващи теорията и практиката на организационните кризи. Резултатите ще помогнат на управлението на бизнеса да направи правилния избор за преодоляване на кризата.English Abstract: The purpose of this article is to investigate the alternatives for getting out of the crisis in each enterprise to maintain its viability. Different approaches in the specialized literature in the field of management are explored. The legal aspects of these alternatives and good international practices in the field have been explored. A sufficient number of literature sources describing the theory and practice of organizational crises have been studied and systematized. The results will help business management to make the right choice to overcome the crisis.