Research articles for the 2020-01-16

A Principal Component-Guided Sparse Regression Approach for the Determination of Bitcoin Returns
Panagiotidis, Theodore,Stengos, Thanasis,Vravosinos, Orestis
We examine the significance of fourty-one potential covariates of bitcoin returns for the period 2010â€"2018 (2,872 daily observations). The principal component-guided sparse regression is employed, introduced by Tay et al. (2018). We reveal that economic policy uncertainty and stock market volatility are among the most important variables for bitcoin. We also trace strong evidence of bubbly bitcoin behavior in the 2017-2018 period.

A Study on Ownership Structure and Financial Performance of Listed Beverage Food and Tobacco Companies in Sri Lanka
Balagobei, Saseela,Thirunavukkarasu, Velnampy
The relevant literature suggests that ownership structure is one of the main corporate governance mechanisms influencing the scope of financial performance. The aim of this study is to investigate the relationship between ownership structure and financial performance of listed beverage food and tobacco companies for the period of 2010-2015. This study also examines the impact of ownership structure on financial performance. The sample consists of 10 listed beverage food and tobacco companies in Sri Lanka. In this study, data was collected from secondary sources and hypotheses are examined by using Pearson's correlation and regression analysis. The results reveal that ownership concentration and foreign ownership structure are positively correlated with financial performance of listed beverage food and tobacco companies while institutional ownership structure isn't significantly correlated with financial performance. It is also found that there is a significant impact of foreign ownership structure on financial performance. Higher the foreign ownership structure in listed beverage food and tobacco companies, the higher the financial performance which is preferable for the shareholders and it improves the wealth of companies.

Banks and Borrower Networks: To Lend or Not to Lend?
Basu, Debarati,Mitra, Shabana,Verma, Nishant Kumar
Banks remain the most important credit source globally despite large-scale financial development. However, banking continues to be plagued by rising costs and information asymmetry. In this context, we show how an additional borrower characteristic, specifically the borrower’s network strength, helps reduce costs by altering the bank’s lending decisions. The literature on borrower network remains largely empirical and borrower-based. We fill this void by being the first to theoretically model the lender’s decision making problem with network effect. We specifically examine how a bank sets the interest rate when networks work as a default risk-mitigating attribute. We find that the interest rate reduces as network strength increases. As constraints set in and borrowing becomes more competitive, banks rely even more on network information to parse out better borrowers. Finally, bank’s substitute monitoring effort with network strength for a more feasible interest rate. This will increase lending, even to borrower’s outside the banks’ purview earlier. Thus, the proposed model can help banks alter their subjective lending decisions to maximize lending and profits. More so, in a data driven world. This has large-scale economic benefits for all stakeholders - banks and other financial institutions, borrowing firms and the economy at large.

Bounds on Multi-asset Derivatives via Neural Networks
Luca De Gennaro Aquino,Carole Bernard

Using neural networks, we compute bounds on the prices of multi-asset derivatives given information on prices of related payoffs. As a main example, we focus on European basket options and include information on the prices of other similar options, such as spread options and/or basket options on subindices. We show that, in most cases, adding further constraints gives rise to bounds that are considerably tighter and discuss the maximizing/minimizing copulas achieving such bounds. Our approach follows the literature on constrained optimal transport and, in particular, builds on a recent paper by Eckstein and Kupper (2019, Appl. Math. Optim.).

Brokered Private Placements: The Next Apple--Or The Next Debacle?
Yimfor, Emmanuel
Focusing on equity offerings by small private firms, I test whether broker intermediation mitigates adverse selection costs when investors are also uncertain about broker quality. After accounting for 1) the endogenous decision to hire a broker and 2) two-sided matching between firms and brokers, I find that broker intermediation increases equity investments in these firms by 35%. Relative to offerings intermediated by brokers with no past misconduct, offerings intermediated by brokers with past misconduct result in 12% lower offering proceeds. Broker intermediated offerings involve firms that have successful exits post-financing, irrespective of broker record. For the first time, I document the effect of broker intermediation in the market for early-stage financing. My results suggest that policymakers might alleviate the financing constraints of small firms by adopting policies that encourage broker intermediation in the market for early-stage funding.

CEO Risk Taking Equity Incentives and Workplace Misconduct
Chircop, Justin,Tarsalewska, Monika,Trzeciakiewicz, Agnieszka
This paper examines the relation between CEO risk taking stock option incentives, as captured by CEO vega, and workplace misconduct. Workplace misconduct includes health and safety violations, non-compliance with labour laws, and other violations broadly related to labour exploitation. Using regression analysis, matched sample tests, and a quasi-natural experiment we show a positive relation between CEO vega and workplace misconduct. These results suggest that CEO risk taking stock option incentives not only influence investment and financial decision making, but also affect operational decision making.

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.

Factors Influencing the Investors’ Intention to Adopt Takaful (Islamic Insurance) Products: A Survey of Pakistan
Hassan, Hafiz Ali,Abbas, Sayyed Khawar
Purpose: The research paper is an effort to find out the behavior of Pakistani individuals toward usage of Takaful insurance. This paper aims to identify the factors, which influence investors’ intention toward the adoption of Takaful. Islamic finance is growing rapidly in the international market, especially in Islamic countries. Pakistan is an Islamic country, where the majority of the population is Muslim. Therefore, there is a great potential for Takaful exists in the country.Design/methodology/approach: Both explanatory and descriptive research designs used for the research framework. The theory of planned behavior is the base theory and the model incorporates several factors such as relative advantage, compatibility, social influence, awareness and religiosity that may influence the adoption of Takaful. The primary data collected through the distribution of self-administered survey-based questionnaire, containing 23 items scaled at a five-point Likert scale. The non-probability snowball sampling and judgmental sampling techniques are used due to the scarce of Takaful users. The sample consists of 345 individuals (127 Takaful users and 218 non-users) living in the three main cities, namely, Karachi, Lahore and Islamabad. The data are further analyzed and interpreted with IBM SPSS 21. The results are evaluated using descriptive statistics, reliability, confirmatory factor analysis, correlation and binary logistic regression models.Findings: The research findings reveal that factors such as relative advantage, compatibility, social influence, awareness and religiosity have a significant impact on the behavioral intention of Takaful among a depicted sample of Pakistani people. Similarly, Takaful has great potential in the Pakistani market, but due to lack of awareness, Takaful share is far behind than conventional insurance. It is further suggested that Takaful operators must devise some policies and plan to spread awareness about Takaful and come up with more innovative products.Practical implications: The Takaful operators must devise plans to aware people about Islamic insurance. The study provides implication to Takaful management; Takaful users; and more importantly, the regularity authorities to operate and successfully conduct Takaful applications. Further, they should advance Takaful operations and produce more innovative products. The study focuses on some factors while there are plenty of others, which should be studied accordingly. For future researchers and students, there is a great potential of other techniques and measures, which can be further used for analysis of Takaful business.Originality/value: This research is a first attempt to trace out the behavior of Pakistani people about Takaful, using the above discussed factors. The behavioral intention is studied using users and non-users combination, which is never done before in the current setting.

Forecasting Aluminum Prices with Commodity Currencies
Pincheira, Pablo M.,Hardy, Nicolas
In this paper we show that the exchange rates of some commodity exporter countries have the ability to predict the price of spot and future contracts of aluminum. This is shown with both insample and out-of-sample analyses. The theoretical underpinning of these results relies on the present-value model for exchange rate determination and on the tight connection between commodity prices and the currencies of commodity exporter countries. We show results using traditional statistical metrics of forecast accuracy: Mean Squared Prediction Error and Mean Directional Accuracy. We also show that the first principal component of our sample of exchange rates is a useful way to summarize the predictive information contained in our set of commodity currencies.

Foreign Ownership and Corporate Excess Perks
Chen, Lifang,Han, Minghui,Li, Yong,Megginson, William L.,Zhang, Hao
Using manually collected data on foreign investors in China from 32 countries from 2003 to 2018, we find that foreign ownership significantly reduces corporate excess perquisite consumption (perks). Our tests using a natural experiment and instrumental variable approach confirm the causal relationship. Foreign investors from strong corporate governance countries, independent foreign investors and Principles for Responsible Investment (PRI) signatory investors impose significantly more monitoring than do their counterparts. High foreign ownership, foreign direct investors and East Asia-based and North America-based foreign ownership also have significant disciplinary effects, but large cultural distances undermine these monitoring effects. The disciplinary role of foreign ownership is significant in weak governance, opaque and non-state-owned firms. Overall, we find that foreign investors reduce corporate excess perks and thereby enhance corporate operational performance.

Hierarchical adaptive sparse grids and quasi Monte Carlo for option pricing under the rough Bergomi model
Christian Bayer,Chiheb Ben Hammouda,Raul Tempone

The rough Bergomi (rBergomi) model, introduced recently in [5], is a promising rough volatility model in quantitative finance. It is a parsimonious model depending on only three parameters, and yet remarkably fits with empirical implied volatility surfaces. In the absence of analytical European option pricing methods for the model, and due to the non-Markovian nature of the fractional driver, the prevalent option is to use the Monte Carlo (MC) simulation for pricing. Despite recent advances in the MC method in this context, pricing under the rBergomi model is still a time-consuming task. To overcome this issue, we have designed a novel, hierarchical approach, based on i) adaptive sparse grids quadrature (ASGQ), and ii) quasi-Monte Carlo (QMC). Both techniques are coupled with a Brownian bridge construction and a Richardson extrapolation on the weak error. By uncovering the available regularity, our hierarchical methods demonstrate substantial computational gains with respect to the standard MC method, when reaching a sufficiently small relative error tolerance in the price estimates across different parameter constellations, even for very small values of the Hurst parameter. Our work opens a new research direction in this field, i.e., to investigate the performance of methods other than Monte Carlo for pricing and calibrating under the rBergomi model.

Hilbert transform, spectral filters and option pricing
Carolyn E. Phelan,Daniele Marazzina,Gianluca Fusai,Guido Germano

We show how spectral filters can improve the convergence of numerical schemes which use discrete Hilbert transforms based on a sinc function expansion, and thus ultimately on the fast Fourier transform. This is relevant, for example, for the computation of fluctuation identities, which give the distribution of the maximum or the minimum of a random path, or the joint distribution at maturity with the extrema staying below or above barriers. We use as examples the methods by Feng and Linetsky (2008) and Fusai, Germano and Marazzina (2016) to price discretely monitored barrier options where the underlying asset price is modelled by an exponential L\'evy process. Both methods show exponential convergence with respect to the number of grid points in most cases, but are limited to polynomial convergence under certain conditions. We relate these rates of convergence to the Gibbs phenomenon for Fourier transforms and achieve improved results with spectral filtering.

How Efficient is Sufficient: Applying the Concept of Market Efficiency in Litigation
Cornell, Bradford ,Haut, John
The concept of market efficiency has been adopted by courts in a variety of contexts. In reality, markets can never be perfectly efficient or inefficient, but exist somewhere in between depending on the facts and circumstances. Courts, therefore, face a problem in deciding how efficient is sufficient in any particular legal context. Because market prices incorporate the views of numerous market participants, courts have often been willing to presume that a market is efficient so long as the appropriate criteria are satisfied. However, those criteria are different for different types of cases, such as securities class actions, appraisal actions, and cram downs in bankruptcy.

How Is the Hospitality and Tourism Industry Different? An Empirical Test of Some Structural Characteristics
Singal, Manisha
Structural characteristics, such as competition, risk, leverage and capital intensity, directly impact the strategic management of firms operating within an industry. We provide an empirical test and formally compare the structural characteristics of the hospitality and tourism (HT) industry with other industries. Our results, based on a sample of firms from the S&P 1500 index over 21 years, show that the HT industry has higher leverage, higher risk, higher capital intensity and higher competitive rivalry than other industries in the U.S. economy. The formal identification and recognition of these differences provides justification for using the HT industry as a context for testing business theories, and can explain differences in decision-making and firm outcomes such as financial and social performance, as well as efficiency, growth, and survival of HT firms.

How the Interplay between Financial and Nonfinancial Measures Affects Management Forecasting Behavior
Brazel, Joseph F.,Lail, Bradley E.
This study examines how the interplay between financial and nonfinancial measures (NFMs) affects management forecasting behavior. Building on the knowledge that NFMs are typically aligned with actual earnings and are likely incorporated into earnings forecasts, we investigate if the level of divergence between changes in NFMs and contemporaneous changes in earnings influences management forecasting behavior. We hand collect company-specific NFMs disclosed in 10-K filings and describe how a greater divergence between NFMs and earnings (i.e., NFM changes substantially outpacing earnings growth, or vice versa) is associated with greater uncertainty about the underlying business. As such, in more divergent settings, we observe that management is less likely to issue guidance. Consistent with our theory, for managers that do provide guidance in more divergent settings, management forecast errors increase. Last, we provide evidence that external stakeholders can use the level of divergence to predict future management forecasting behavior.

Impact of Audit Committee on Organizational Performance of Listed Hotels and Travels in Sri Lanka
Balagobei, Saseela,Thirunavukkarasu, Velnampy
The audit committee is one of the key elements in the corporate governance structure that helps to control and monitor management in the organization. The aim of this study is to investigate the impact of audit committee on organizational performance of listed hotels and travels in Sri Lanka. The sample consists of 15 listed hotels and travels in Sri Lanka. In this study, data was collected from secondary sources and hypotheses are examined by using Pearson’s correlation and multiple regression analysis. The results reveal that audit committee attributes such as AC independence, AC experts and AC meetings have a significant impact on organizational performance of listed hotels and travels in Sri Lanka. Further audit committee size is not found to have a significant impact on the organizational performance. The findings could be useful to regulators in other jurisdiction who are looking at ways to enhance the effectiveness of AC, overall firm governance and enhance the organizational performance.

Impact of Institutional Ownership and Individual Ownership on Dividend Policy of Listed Plantation Companies in Sri Lanka
Balagobei, Saseela
Ownership structure is one of the main dimensions of corporate governance. The aim of this study is to examine the impact of institutional ownership and individual ownership on dividend policy of listed plantation companies in Sri Lanka. Fifteen listed plantation companies were selected as a sample by using random sample method and secondary data was collected from the annual report of listed plantation companies in Sri Lanka during the period of 2010-2014. This study considers institutional ownership and individual ownership as independent variables and dividend policy as dependent variable which is measured by dividend payout ratio. For the purpose of analysis, multiple regressions and Pearson’s correlation analysis were performed. The results reveal that institutional ownership and individual ownership have no impact on dividend policy.

Impact of Ownership Structure on Dividend Payout Policy: An Empirical Study on Listed Plantation Companies in Sri Lanka
Balagobei, Saseela,Thiruchchenthurnathan, Thiviya
Ownership structure is one of the main dimensions of corporate governance. The aim of the study is to examine the impact of ownership structure on dividend payout policy of listed plantation companies in Sri Lanka. Fifteen listed plantation companies were selected as sample by using random sample method and secondary data was collected from the annual report of listed plantation companies in Sri Lanka during the period of 2010-2014. This study considers the ownership structure as independent variable which is measured by individual ownership structure, institutional ownership structure and foreign ownership structure and dividend payout policy as dependent variable which is measured by dividend payout ratio. For the purpose of analysis multiple regressions and Pearson’s correlation analysis were performed. The results reveal that foreign ownership structure has a significant impact on dividend payout policy. The study also found that foreign ownership structure is positive significantly correlated with dividend payout policy of listed plantation companies. Further individual ownership structure and institutional ownership structure are not significantly correlated with dividend payout policy.Higher the foreign ownership structure in listed plantation companies, the higher the dividend payout which is preferable for investors and it improves the dividends.

Intangible Intensity and Stock Price Crash Risk
Wu, Kai,Lai, Seiwai
We evaluate the effect of intangible intensity on stock price crash risk for listed US firms from 1983 to 2017. We find that intangible-intensive firms are associated with significantly higher stock price crash risk. Decomposition of intangible intensity show that goodwill intensity is the driving force of crash risk, as it predicts future goodwill impairments, increases investors' opinion divergence and valuation uncertainty. The results support the information asymmetry being identified as the underlying channel. Furthermore, the effect of intangible intensity is stronger in firms facing high product market competition, CEO incentives, and external monitoring. Overall, our findings demonstrate the fragility of intangible assets and provide implications for financial regulation and portfolio risk management.

Integration of TTF, UTAUT, and ITM for Mobile Banking Adoption
Abbas, Sayyed Khawar,Hassan, Hafiz Ali,Asif, Jawad,Ahmed, Bilal,hassan, fahad,Haider, Syed Salman
The introduction of mobile banking facility has enabled customers to carry out banking transactions with the use of smartphones and other handheld devices from anywhere. It has become a luxurious and exclusive method of online payments. The recent growth of telecommunication sector and a tremendous increase in mobile usage has opened new doors for sparking future of banking sector industry. The following research is aimed to find out the mobile banking adoption attitudes with the integration of TTF, UTAUT, and ITM models.

Intellectual Capital Impact on Organizations’ Performance
Abbas, Sayyed Khawar,Hassan, Hafiz Ali,Hashmi, Zair Mahmood,Junaid, Hafiz Muhammad,Majid, Sikandar,Ijaz, Tanzila
The abundance of traditional financial evaluation methods reflects historical performances. It is necessary to consider such elements which add value off-balance sheet towards growth. It is argued that there is the difference between book value and market value of a firm, and that difference could be explained by intellectual capital profile. The study is proposed to investigate the impact of six intellectual capital elements human capital, structural capital, customer capital, technology capital, social capital and spiritual capital on the overall performance of the firms. The impact is diagnosed. A developed questionnaire is used to conduct the study. Correlation analysis depicts the data, OLS is used to conduct the analysis.

Jumps in the Convenience Yield of Crude Oil
Mason, Charles F.,Wilmot, Neil A.
The potential presence of jumps and time-varying volatility in convenience yields can lead to abnormally fat tails, which has implications for investment in storage capacity, leasing and drilling for crude oil. In this paper we evaluate the potential for these features in convenience yields. To that end, we analyze the rate of change in convenience yields for five futures prices time horizons (1, 3-, 6-, 9- and 12-month ahead), allowing for the both jumps and time-varying volatility. We find that both features exert a statistically important effect on convenience yields, for each of the five time horizons. We also calculate the implied probability that at least one jump would occur on any date, which reveals a period of relative calm at the start of the fracking boom, when large stockpiles built up at the trading hub forWest Texas Intermediate, and a period of considerable churn, after the ban on exporting crude oil was lifted. Both elements underscore a linkage between inventory holdings and convenience yields.

Leaks and Takeovers
Szydlowski, Martin
I present a cheap talk model of information leaks in takeovers. Takeover targets strategically leak information about the value of synergies to attract an additional bidder. Targets with high synergies leak exaggerated information, cause a runup, and are sold in an auction. Targets with low synergies do not leak and are sold to a single acquirer. Traditional takeover defenses backfire, by increasing the likelihood that the target is sold to a single acquirer, while toeholds increase the acquirer's revenue by discouraging leaks. Enforcement of insider trading reduces the likelihood of leaks, reduces runups, and increases efficiency in the takeover market.

Local Employment Opportunities and Corporate Retention Policies
Lee, Kyeong Hun,Thorburn, Karin S.,Xu, Qianying(Emma)
We construct a measure of employees’ outside opportunities within the local labor market and examine how firms choose policies to retain employees with such opportunities. We find that firms grant more rank and file stock options, provide a more employee-friendly work environment, and maintain higher levels of financial flexibility (higher cash balances and lower financial leverage) when employees have more outside options in the local labor market. These relations are stronger among firms relying more on high skill workers and investing more in research and development. In a quasi-natural experiment involving employee mobility shocks following the adoption of Inevitable Disclosure Doctrine by U.S. state courts, we further show that the recognition of the doctrine attenuates the effects of our measure of employees’ outside opportunities on the retention policies.

Ownership Structure Variation and Firm Efficiency
Sallahuddin Hassan,Zalila Othman,Mukaramah Harun

Firms with different ownership structures could be argued to have different levels of efficiency.Highly concentrated firms are expected to be more efficient as this type of ownership structure may alleviate the conflict of interest between managers and shareholders.In Malaysia, public-listed firms have been found to have highly concentrated ownership structure.However, whether this evidence holds for every industry has not been established.Hence, the objective of this paper is to investigate whether there are variations in ownership structure and firm's efficiency across sectors.To achieve this objective, the frequency distributions of ownership structure were calculated and firms efficiency scores for consumer products, industrial products, construction and trading/services sectors were measured.Data Envelopment Analysis(DEA) under the assumptions of constant returns to scale(CRS) and variable returns to scale(VRS) was employed to estimate firms efficiency scores.A sample of 156 firms listed on the Kuala Lumpur Stock Exchange(KLSE) was selected using the stratified random sampling method. The findings have shown that there are variations in firm ownership structure and efficiency across sectors.

Price Discovery and Microstructure in Ether Spot and Derivative Markets
Alexander, Carol,Choi, Jaehyuk,Massie, Hamish,Sohn, Sungbin
Ethereum is an important blockchain, being the first and most popular public platform for the smart contracts underpinning financial transactions, time-stamping of supply chains, decentralized applications and initial coin offerings. Ethereum's cryptocurrency, ether, is actively traded on centralized exchanges, second only to bitcoin. But - unlike bitcoin - ether has more than just a speculative value. It has an intrinsic value for fueling smart contract transactions on the Ethereum blockchain. We ask whether off-chain trading on ether derivatives plays a dominant role in ether spot price discovery, thereby driving ether's utility value for on-chain activity. Using minute-by-minute data we find that the ether perpetual swap on BitMEX, an unregulated cryptocurrency derivative exchange, has dominant trading volume and price discovery over the major spot exchanges. Furthermore, we identify interesting hour-of-day and day-of-week effects in trading volume on the spot exchanges, and these indicate that more informed institutional players are trading ether spot and derivatives.

Quadratic Hedging and Optimization of Option Exercise Policies in Incomplete Markets and Discrete Time
Nicola Secomandi

This paper extends quadratic hedging from European to Bermudan options in discrete time when markets are incomplete and investigates its use for supporting exercise policy optimization. The key idea is to construct date specific approximate replicating portfolios. Hedging any given exercise policy can be done by solving a collection of stochastic dynamic programs. Optimizing the exercise policy based on the resulting martingale measure requires care. If this measure is risk neutral (RN), the value of an optimal such policy, which can be obtained by augmenting the hedging model with an exercise policy optimization step, is a no arbitrage one. Otherwise this approach must be refined by imposing time consistency on exercise policies, although the value of the resulting exercise policy may not be arbitrage free. Following the common pragmatic strategy of specifying quadratic hedging under an RN measure, e.g., one calibrated to market prices, avoids these issues. In particular, it provides a simple hedging policy with immediate practical applicability and is equivalent to exercise policy optimization under RN valuation, thus complementing it with a consistent hedging policy. A simple numerical example shows that this procedure generates effective hedging policies.

Quantifying Risks to Sovereign Market Access: Methods and Challenges
Zigraiova, Diana,Erce, Aitor,Jiang, Xu
In this paper we use data from the euro area to study episodes when sovereigns lose market access. We construct a detailed dataset with potential indicators of market access tensions, and evaluate their ability to forecast episodes when market access is lost, using various econometric approaches. We find that factors associated with high market access tensions are not limited to financial markets, but also encompass developments in global demand, macroeconomic conditions and the fiscal stance. Using the top-performing indicators, we construct a number of market tension indices and use them as single predictors of market access tensions. While such indices are helpful in capturing worsening conditions, they do not yield satisfactory out-of-sample results. On the other hand, using the same top- performing indicators in various multivariate models generates good forecasts of upcoming difficulties in accessing sovereign bond markets. Our results thus point to a trade-off between communicability and accuracy that policymakers face in the search for tools to evaluate risks to market access.

Refinance Incidence and Information Loss in Predicting Prepayment Risk
Tzioumis, Konstantinos
This paper uses loan-level data to investigate heterogeneity in loan prepayment incidence, and argues that refinancing is affected by a mortgage pricing convention that underestimates co-borrowers' actual creditworthiness. Specifically, we find a substantial difference in prepayment incidence between sole borrowers and co-borrowers. We also find this difference to vary across sub-sets of co-borrowers in a predictable manner. To address endogeneity concerns, we exploit the variation across time in mortgage rates to confirm that the difference in prepayment incidence exists only during a period of declining mortgage rates. At an aggregate level, we find that geographic areas with higher concentration of co-borrowers are having a higher prepayment rate. These results are directly relevant to the valuation of mortgage-backed securities by offering an additional explanation for the observed variation in refinancing decisions that is related to institutional aspects of the loan process.

Restructuring Sovereign Bonds: Holdouts, Haircuts and the Effectiveness of Cacs
Schumacher, Julian,Trebesch, Christoph,Fang, Chuck
Sovereign debt crises are difficult to solve. This paper studies the “holdout problem”, meaning the risk that creditors refuse to participate in a debt restructuring. We document a large variation in holdout rates, based on a comprehensive new dataset of 23 bond restructurings with external creditors since 1994. We then study the determinants of holdouts and find that the size of creditor losses (haircuts) is among the best predictors at the bond level. In a restructuring, bonds with higher haircuts see higher holdout rates, and the same is true for small bonds and those issued under foreign law. Collective action clauses (CACs) are effective in reducing holdout risks. However, classic CACs, with bond-by-bond voting, are not sufficient to assure high participation rates. Only the strongest form of CACs, with single-limb aggregate voting, minimizes the holdout problem according to our simulations. The results help to inform theory as well as current policy initiatives on reforming sovereign bond markets.

Risk On-Risk Off: A Regime Switching Model for Active Portfolio Management
Dapena, José Pablo,Serur, Juan A.,Siri, Julián Ricardo
Unlike passive management, where investors almost do not buy and sell securities, active management involves a set of trading rules that govern investment decisions regarding mainly market timing. In this paper, we take the basics of active management and the two fund separation approach, to exploit the fact that an investor can switch between the market portfolio and the risk free asset according to the perceived state of the nature. Our purpose is to evaluate if there is an active management premium by testing performance with our own non-conventional multifactor model, constructed with a Hidden Markov Model which depending on the market states signaled by the level of volatility spread. We have documented that effectively, there is present a premium for actively manage the strategies, giving evidence against the idea that “active managers” destroy capital. We then propose the volatility spread as the active management factor into the Carhart's model used to evaluate trading strategies with respect to a benchmark portfolio.

Supermartingale deflators in the absence of a num\'eraire
Chong Liu,Ariel Neufeld,Philipp Harms

In this paper we study arbitrage theory of financial markets in the absence of a num\'eraire both in discrete and continuous time. In our main results, we provide a generalization of the classical equivalence between no unbounded profits with bounded risk (NUPBR) and the existence of a supermartingale deflator. To obtain the desired results, we introduce a new approach based on disintegration of the underlying probability space into spaces where the market crashes at deterministic times.

Takaful Models: Origin, Progression and Future
Hassan, Hafiz Ali
Purpose: The concept of Takaful has a long history. It is linked with the era of Prophet Muhammad 1,400 years ago. The globalization and development of socio-economic systems have made business activities more complex in response to emerging human needs and requirements. Similarly, Takaful insurance has fully commercialized and become an important indicator of the international financial market. The purpose of this study is to understand the Takaful mechanism and progression of its procedures to date since its inception.Design/methodology/approach: This study seeks to examine the origin, evolution and historical developments of Takaful mechanism, operations, models and governing framework with extant literature review from previous studies and current practices.Findings: The modern Takaful insurance first began in Sudan back in 1979. The Takaful operations must abide by the Sharia laws and work under the supervision of the Sharia Supervisory Board. Since its evolution, Sharia scholars have introduced various Takaful models that are going to be explained in this study. Moreover, several Islamic organizations, including the “Islamic Financial Services Board” and the “Accounting and Auditing Organization for Islamic Financial Institutions,” have provided guidelines and supervision to develop and strengthen the Takaful industry further. The study acknowledges Takaful as a growing insurance industry with huge potential and promising future in both Pakistan and the international market.Practical implications: During the analysis, various deficiencies and loopholes were identified, which are responsible for the unmatched growth of conventional insurance. They can be eliminated with the joint efforts of industrial players, Sharia scholars and Takaful insurance companies. Hence, Islamic scholars and academic researchers are encouraged to develop and modify the current practices of Takaful mechanism according to current market demands and consumer approach. The research efforts will help Takaful operators to develop more innovative Takaful products adhering Sharia compliance. Consequently, it will help to access more consumer market and further enhances the Takaful growth.Originality/value: This study is an effort to provide a basic understanding of the mechanism of Takaful models. The study helps to comprehend how Takaful models have evolved and been modified over the course of time. Moreover, it provides a base for further development and improvement in current practices of Takaful models, which will result in increased progress for the Takaful industry.

Temporal Effects of Financial Globalization on Income Inequality
Khan, Haris,Shehzad, Choudhry Tanveer,Ahmad, Ferhana
Using parametric accelerated failure time survival analysis, on a panel of 120 countries for 1970-2018, we find empirical evidence that time to upsurge in income inequality declines after a country liberalizes capital flows across its borders. We also find empirical evidence of a non-monotonic hazard rate of upsurge that accumulates with time to reach a peak, beyond which surviving economies experience a Lindy effect (Taleb, 2012) wherein surviving economies experience fewer possibilities of upsurge as time increases. This declining impact of financial globalization is robust to distributional assumptions, alternative measurement of financial globalization and income inequality, sample restriction to pre-crisis period and residual heteroskedasticity, and reflects income inequality upsurging effect of capital account openness to occur through the channel of capital-skill complementarity (see e.g., Krusell et. al, 2000), and of foreign direct investment to occur through the channel of wage inequality in favor of the high-skilled labor (see, e.g., Cragg and Epelbaum, 1996 and Figini and Go¨rg, 2011). Given that we handle issues of imputation and cross-country standardization in contemporary income inequality data and use an extensive panel of 120 developed and developing economies, with representation from each income group and geographical region classified by World Bank, for almost half a century, we believe that our result about the time-varying effect of financial globalization on income inequality upsurge is generalizable across economies.

The Dynamic Effect of Uncertainty on Corporate Investment through Internal and External Financing
Inoue, Hitoshi,Kani, Masayo,Nakashima, Kiyotaka
Using firm-level data on the Japanese manufacturing industry, this study identifies the causal effect of uncertainty on the dynamic relation between corporate investment and financing conditions. It demonstrates that the cautionary effect is increasingly dominant under high uncertainty irrespective of the type of corporate investment - capital investment and R&D - and that this result remains even in the weak instrument robust inference. Hence, the dominance of the cautionary effect over the financing constraint effect makes actual corporate investment decisions under high uncertainty indifferent to the firm's financing conditions.

The Effects of Short Selling Mechanism on Corporate Cash Holding â€" Evidence in China
Chen, Crystal Xiaobei,He, Qinan
Abstract: The short-selling mechanism is an important decision to improve the efficiency of the capital market. China began implementing the short-selling policy in 2010. This paper selects the sample of all A-board listed companies from 2007 to 2016. By comparing the cash holdings of the enterprises that have not joined the short selling policy, it is found that the cash holdings of the enterprises participating in the short selling policy are significantly lower than those without the short selling policy. It is also found that this effect has different effects on enterprises with different characteristics. For enterprises with worse internal governance before participating in the short selling mechanism, the effect of cash holdings reduction is more obvious. Secondly, the effect of the reduction on cash holdings is only significant in the sample group with smaller financing constraints. Finally, in areas with low market level, the short selling policy does not significantly reduce the amount of cash holdings, but in higher market areas, this effect is more significant.

The Performance of Passively-Managed Hedged ETFs
Cheng, Jason M. K. ,Fung, Joseph K. W.,Lam, FY Eric
This study provides early evidence on the performance of passively-managed hedged exchange-traded funds (HETFs) introduced rather recently in late 2006. The data covers surviving HETFs in 2017 under global macro and long-short classifications. Using Fung and Hsieh’s (2004) 7-factor model and Edelman, Fung and Hsieh’s (2012) revised 8-factor framework, the study finds significant negative alphas for the HETFs despite the survivorship bias. The study extends the literature on mutual fund performance and provides incremental evidence on the differential performance between global macro and long-short HETFs. The poor performance of the HETFs overall can be attributed to their high expense ratio and tracking error.

Time consistency of the mean-risk problem
Gabriela Kováčová,Birgit Rudloff

Choosing a portfolio of risky assets over time that maximizes the expected return at the same time as it minimizes portfolio risk is a classical problem in Mathematical Finance and is referred to as the dynamic Markowitz problem (when the risk is measured by variance) or more generally, the dynamic mean-risk problem. In most of the literature, the mean-risk problem is scalarized and it is well known that this scalarized problem does not satisfy the (scalar) Bellman's principle. Thus, the classical dynamic programming methods are not applicable. For the purpose of this paper we focus on the discrete time setup, and we will use a time consistent dynamic convex risk measure to evaluate the risk of a portfolio.

We will show that when we do not scalarize the problem, but leave it in its original form as a vector optimization problem, the upper images, whose boundary contains the efficient frontier, recurse backwards in time under very mild assumptions. Thus, the dynamic mean-risk problem does satisfy a Bellman's principle, but a more general one, that seems more appropriate for a vector optimization problem: a set-valued Bellman's principle.

We will present conditions under which this recursion can be exploited directly to compute a solution in the spirit of dynamic programming. Numerical examples illustrate the proposed method. The obtained results open the door for a new branch in mathematics: dynamic multivariate programming.

When Mutual Fund Managers Write Confidently
Du, Qianzhou,Jiao, Yawen,Ye, Pengfei,Fan, Weiguo
This paper studies the information content of a subtle writing style, the expression of confidence. We use unsupervised machine learning to generate new lexicons for three aspects of a writer’s level of confidence in expressing opinions: certainty, intensity of expression, and emotional overstatement. Using them to capture mutual fund managers’ confidence in letters to shareholders, we show confidence contains important information about skill: underperforming managers writing with strong certainty significantly outperform other underperforming managers in the next six months, whereas top performing managers writing with strong intensity or emotional overstatement underperform. Further analyses reveal our confidence measures are informationally distinct from the human-based confidence measure and tone. Analyses of investors’ capital flows show they are largely incapable of detecting the information embedded in textual confidence. Our findings suggest that writing styles contain import forward-looking information.

Who Does Not Have a Bank Account in Hungary Today?
Horn, Daniel,Kiss, Hubert Janos
Based on a representative sample, the study examines how regional variables and variables related to settlement type as well as demographic (gender, age), social (qualifications, income) and labour market characteristics (unemployment, public sector) and individual preferences (risk-taking and patience) are correlated with the fact that the respondent has a bank account or bank card or not. The authors find that having a bank account or bank card is not influenced by whether someone works in the public sector or not or by the individual’s gender, while the effect of the preferences depends on the financial service. The impact of the other variables (age, education, income, unemployment) is in line with expectations and is significant separately as well as if they are taken into account simultaneously. The analysis shows that regional impacts and ones related to settlement type are also significant.