Research articles for the 2020-01-22

A Cautionary Note on Niu and Zeng (2018)
CAO, Ji,Rieger, Marc Oliver
We revisit the article by Niu and Zeng (FRL, 2018) on “Corporate financing with loss aversion and disagreement”. We find two problematic points in the mathematical derivation of their fundamental results and suggest ways to remedy these problems.

Anticipated impacts of Brexit scenarios on UK food prices and implications for policies on poverty and health: a structured expert judgement approach
Martine J Barons,Willy Aspinall

Food insecurity is associated with increased risk for several health conditions and with poor chronic disease management. Key determinants for household food insecurity are income and food costs. Whereas short-term household incomes are likely to remain static, increased food prices would be a significant driver of food insecurity. To investigate food price drivers for household food security and its health consequences in the UK under scenarios of Deal and No deal for Brexit . To estimate the 5\% and 95\% quantiles of the projected price distributions. Structured expert judgement elicitation, a well-established method for quantifying uncertainty, using experts. In July 2018, each expert estimated the median, 5\% and 95\% quantiles of changes in price for ten food categories under Brexit Deal and No-deal to June 2020 assuming Brexit had taken place on 29th March 2019. These were aggregated based on the accuracy and informativeness of the experts on calibration questions. Ten specialists in food procurement, retail, agriculture, economics, statistics and household food security. Results: when combined in proportions used to calculate Consumer Prices Index food basket costs, median food price change for Brexit with a Deal is expected to be +6.1\% [90\% credible interval:-3\%, +17\%] and with No deal +22.5\% [+1\%, +52\%]. The number of households experiencing food insecurity and its severity are likely to increase because of expected sizeable increases in median food prices after Brexit. Higher increases are more likely than lower rises and towards the upper limits, these would entail severe impacts. Research showing a low food budget leads to increasingly poor diet suggests that demand for health services in both the short and longer term is likely to increase due to the effects of food insecurity on the incidence and management of diet-sensitive conditions.

Assessing House Prices in Canada
Andrle, Michal,Plašil, Miroslav
This paper assesses house prices in 11 Canadian Census Metropolitan Areas (CMA) using the borrowing-capacity and the net-present-value approaches. The results indicate that by the end of 2018, house prices in most metropolitan areas are aligned with macroeconomic fundamentals. However, in Hamilton, Toronto, and Vancouver house prices have increased beyond the values implied by the fundamentals.

Assessing Macro-Financial Risks of Household Debt in China
Han, Fei,Jurzik, Emilia,Guo, Wei,He, Yun,Rendak, Nadia
High household indebtedness could constrain future consumption growth and increase financial stability risks. This paper uses household survey data to analyze both macroeconomic and finanical stability risks from the rapidly rising household debt in China. We find that rising household indebtedness could boost consumption in the short term, while reducing it in the medium-to-long term. By stress testing households' debt repayment capacity, we find that low-income households are most vulnerable to adverse income shocks which could lead to signficant defaults. Containing these risks would call for a strengthening of systemic risk assessment and macroprudential policies of the household sector. Other policies include improving the credit registry system and establishing a well-functioning personal insolvency framework.

Asset Quality & Risk Management Practices - An Analysis on Yes Bank
Manda, Vijaya Kittu,Polisetty, Aruna
Indian banks have a dual challenge of dealing with bad loans on one hand and hurrying to be fully BASEL III compliant on the other. Both the Reserve Bank of India (RBI) and the Government of India are using various approaches over the past two decades to help banks. Several different experiences are obtained by domestic and global banks in handling the non-performing loans (NPL) problem. Yes Bank Limited is India’s 4 th largest private sector bank. It has the industry-best NPA ratios and is renowned for its best practises in the banking industry. Can risk management practices and focus on asset quality help banks maintain loan quality and even stop loans from not slipping into the vicious Non-Performing Asset (NPA) cycle?Data from quarterly & annual reports and other reports is collected to understand management philosophy and asset quality dimensions such as NPA ratio, provisioning coverage ratio, concentration of NPAs, priority sector lending and restructuring of accounts. As the bank evolved from a mid-size bank into a large-size bank in the last 14 years, it gives an opportunity to pose the question - Will NPA size increase as bank transformed from a mid-sized bank to a large bank? Will knowledge-driven sectoral approach to assist customers in their business by lending and offering industry specific financial solutions help the bank? Can technology be used to predict and give early warnings before loans turns sour?

Breaking the Bank? A Probabilistic Assessment of Euro Area Bank Profitability
Elekdag, Selim,Malik, Sheheryar,Mitra, Srobona
This paper explores the determinants of profitability across large euro area banks using a novel approach based on conditional profitability distributions. Real GDP growth and the NPL ratio are shown to be the most reliable determinants of bank profitability. However, the estimated conditional distributions reveal that, while higher growth would raise profits on average, a large swath of banks would most likely continue to struggle even amid a strong economic recovery. Therefore, for some banks, a determined reduction in NPLs combined with cost efficiency improvements and customized changes to their business models appears to be the most promising strategy for durably raising profitability.

Designing Central Bank Digital Currencies
Agur, Itai,Ari, Anil,Dell'Ariccia, Giovanni
We study the optimal design of a central bank digital currency (CBDC) in an environment where agents sort into cash, CBDC and bank deposits according to their preferences over anonymity and security; and where network effects make the convenience of payment instruments dependent on the number of their users. CBDC can be designed with attributes similar to cash or deposits, and can be interest-bearing: a CBDC that closely competes with deposits depresses bank credit and output, while a cash-like CBDC may lead to the disappearance of cash. Then, the optimal CBDC design trades off bank intermediation against the social value of maintaining diverse payment instruments. When network effects matter, an interest-bearing CBDC alleviates the central bank's tradeoff.

Finance As a Design
Borcuch, Artur
Critical finance approach implies a collection of heterogeneous elements, including finance, philosophy, ethics and art. In this regard design deserves special attention.

Financial Conditions and Growth at Risk in the ECCU
Komatsuzaki, Takuji,Brito, Steve
We study the growth determinants in the Eastern Caribbean Currency Union (ECCU), using the Growth at Risk (GaR) framework with a focus on financial variables. We find that excessive bank credit growth is associated with lower future real GDP growth in the medium term especially on the low quantiles of growth distribution. Moreover, worsening of both global financial conditions and external conditions are associated with lower future growth in the short term, especially at the high quantiles of growth distribution. Country-specific results are broadly in line with ECCU-wide results, with some variation potentially due to the strong Citizenship-By-Investment program inflows and lack of credit union data. The establishment of a macroprudential framework in the ECCU would need to pay close attention to credit growth not only of banks but also credit unions and continue to monitor global and external conditions.

Finansal Piyasalar için Yenilik Türkiye için Bir Fırsat: Kitlesel Fonlama (An Innovation for Financial Markets an Opportunity for Turkey: Crowdfunding)
Cihangir, Çiğdem Kurt
Turkish Abstract: 2008 yılında yaşanan Küresel Finansal Kriz özellikle küçük ölçekli ve/veya başlangıç aşaması şirketler/girişimler için kaynak bulma sorununu derinleştirmiştir. Alternatif bir finansman kaynağı olarak ortaya çıkan Kitlesel Fonlama (Crowdfunding) kavramı dünya genelinde oldukça ilgi görmüştür. Kitle fonlaması, çok sayıda yatırımcının belirli amaçlar doğrultusunda internet üzerinden bir girişime kaynak oluşturması olarak tanımlanabilir. Küçük meblağlar yatıran yatırımcılar bağışçı olarak, ödül karşılığı, borç vererek ya da hissedar olarak finansal kaynak sağlayabilirler. Dünyada hızlı bir gelişme gösteren kitle fonlaması ile ilgili Türkiye’deki ilk düzenleme, Aralık 2017’de TBMM Genel Kurulu’nun çıkardığı torba kanunda Kitle Fonlama Platformlarının sermaye piyasası kurumları arasında kabul edilmesidir. Bundan sonraki aşamada etkili olacak SPK’nın ne tür bir sistem kuracağı ise henüz net değildir. Kurulacak olan bu yeni finansal yapı, gelişen bir ülke olarak yenilikçi endüstrilere ve girişimciliğe ihtiyacı olan Türkiye açısından oldukça önemlidir. İnovasyon ya da yenilik artık sadece işletmeler tarafından yapılmamakta, bireyler de fikirlerini ticarileştirebilme fırsatı bulmaktadırlar. Teknolojik içerikli olması ve sosyal fayda sağlaması olarak iki temel kavrama dayandırılan “kitlesel fonlama” ile yeni bir ekosistemin oluştuğu söylenebilir. Bu çalışmada, özellikle hisse bazlı kitlesel fonlama üzerinde durularak, yapılacak ikincil düzenlemeye ilişkin bir değerlendirme yapılmıştır.English Abstract: The Global Financial Crisis in 2008 deepened the problem of finding resources, especially for small-scale and/or initial-stage companies. The concept of Crowdfunding, which emerged as an alternative source of funding, has received considerable worldwide attention. Crowdfunding can be defined as the creation of a large number of investors through the Internet for specific purposes. Investors investing small amounts can provide financial resources as a reward-based, donation-based, debt-based and equity crowdfunding. In Turkey, according the first regulation on crowdfunding is accepted between the capital market institutions of Crowdfunding Platform in December 2017. It is not yet clear what kind of system the Capital Markets Board will have in the next stage. This new financial system which will be created, it is very important for Turkey that need innovative industries and entrepreneurship. Today, innovation is not only done by businesses, but individuals also have the opportunity to commercialize their ideas. It can be said that there is a new ecosystem with "crowdfunding" which is based on two basic concepts as technological content and social benefit. This paper focuses on equity crowdfunding. In this study, the secondary regulation related to equity crowdfunding is evaluated.

Governing Innovation: Director Job Security and Innovation Project Choices
Hsu, Po-Hsuan,Lü, Yiqing,Wu, Hong,Xuan, Yuhai
In this paper, we examine the influence of directors’ job security on firms’ risk-taking and innovations. Using the staggered enactment of majority voting legislation across different U.S. states as an exogenous threat to directors’ job security, we find an affected firm produces fewer patents, especially exploratory patents, and fewer forward citations after legislative changes. This effect is stronger when directors have fewer outside options and longer career and employment horizons, or when a firm is more actively traded by transient investors. Moreover, firms file fewer patents in and make fewer citations to fields related to directors’ prior working experiences after legislative changes, suggesting that directors who face greater job insecurity compromise their roles in advising firms engaged in risky innovation.

How Do Changing U.S. Interest Rates Affect Banks in the Gulf Cooperation Council (GCC) Countries?
Adedeji, Olumuyiwa,Alatrash, Yacoub,Kirti, Divya
Given their pegged exchange rate regimes, Gulf Cooperation Council (GCC) countries usually adjust their policy rates to match shifting U.S. monetary policy. This raises the important question of how changes in U.S. monetary policy affect banks in the GCC. We use bank-level panel data, exploiting variation across banks within countries, to isolate the impact of changing U.S. interest rates on GCC banks funding costs, asset rates, and profitability. We find stronger pass-through from U.S. monetary policy to liability rates than to asset rates and bank profitability, largely reflecting funding structures. In addition, we explore the role of shifts in the quantity of bank liabilities as policy rates change and the role of large banks with relatively stable funding costs to explain these findings.

Informality, Frictions, and Macroprudential Policy
Hassine, Moez Ben,Rebei, Nooman
We analyze the effects of macroprudential policies through the lens of an estimated dynamic stochastic general equilibrium (DSGE) model tailored to developing markets. In particular, we explicitly introduce informality in the labor and goods markets within a small open economy embedding financial frictions, nominal and real rigidities, labor search and matching, and an explicit banking sector. We use the estimated version of the model to run welfare analysis under optimized monetary and macroprudential rules. Results show that although informality reduces the efficiency of macroprudential policies following a convex fashion, combining the latter with an inflation targeting objective could be beneficial.

Innovate to Lead or Innovate to Prevail: When Do Monopolistic Rents Induce Growth?
Piazza, Roberto,Zheng, Yu
This paper extends the Schumpeterian model of creative destruction by allowing followers' cost of innovation to increase in their technological distance from the leader. This assumption is motivated by the observation the more technologically ad- vanced the leader is, the harder it is for a follower to leapfrog without incurring extra cost for using leader's patented knowledge. Under this R&D cost structure, leaders innovate to increase their technological advantage so that followers will eventually stop innovating, allowing leadership to prevail. A new steady state then emerges featuring both leaders and followers innovating in few industries with low aggregate growth.

Integrating Solvency and Liquidity Stress Tests: The Use of Markov Regime-Switching Models
Han, Fei,Leika, Mindaugas
The paper presents a framework to integrate liquidity and solvency stress tests. An empirical study based on European bond trading data finds that asset sales haircuts depend on the total amount of assets sold and general liquidity conditions in the market. To account for variations in market liquidity, the study uses Markov regime-switching models and links haircuts with market volatility and the amount of securities sold by banks. The framework is accompanied by a Matlab program and an Excel-based tool, which allow the calculations to be replicated for any type of traded security and to be used for liquidity and solvency stress testing.

Investor Experiences and International Capital Flows
Ulrike Malmendier,Demian Pouzo,Victoria Vanasco

We propose a novel explanation for classic international macro puzzles regarding capital flows and portfolio investment, which builds on modern macro-finance models of experience-based belief formation. Individual experiences of past macroeconomic outcomes have been shown to exert a long-lasting influence on beliefs about future realizations, and to explain domestic stock-market investment. We argue that experience effects can explain the tendency of investors to hold an over proportional fraction of their equity wealth in domestic stocks (home bias), to invest in domestic equity markets in periods of domestic crises (retrenchment), and to withdraw capital from foreign equity markets in periods of foreign crises (fickleness). Experience-based learning generates additional implications regarding the strength of these puzzles in times of higher or lower economic activity and depending on the demographic composition of market participants. We test and confirm these predictions in the data.

Legal Regulation of Multiculturalism in the Modern Migration Legislation of Norway
Shestak, Viktor,Sventitskaia, Mariia
The authors briefly reviewed the experience of the Kingdom of Norway in the field of legal regulation of multiculturalism. The results of the implementation of the integration policy, migrants who arrived in the Norwegian state are analyzed. The positive and negative consequences of the applied legal method of assimilation of immigrant culture are highlighted.

Malaysia: 'Crouching Tiger, Hidden Dragon'
Taskinsoy, John
This paper metaphorically suggests that Malaysia could have been the 5th Asian Tiger if it were able to discover its special hidden talents as the idiom from the Chinese mythology “Crouching Tiger, Hidden Dragon” infers. Malaysia’s astounding economic track record (1985-96) underpinned by tamed inflation and high future prospects fell short of expectations in the late 1990s. Malaysia’s autocratic leaders and their instability-inflicting policies augmented uncertainty and undermined any potential recovery efforts in the aftermath of the homegrown Asian crisis of 1997-98. As a result, Malaysia’s promising outlook had abruptly shifted from being a model for the future to Asian myth. Malaysia’s GDP contracted mindboggling -7.4% in 1998 after averaging 9.2% in the period of 1992-96. The unthinkable shrinkage in the steady state output amounted to a loss of about $30 billion, the country’s GDP declined from $101 billion in 1996 to $72.2 billion in 1998. Malaysian people become a lot poorer after the crisis; the per capita income was $4,797 in 1996 as opposed to $3,264 in 1998, a decline of $1,533 in per capita income. Malaysia managed to escape the severe impacts of the near global financial meltdown with a minor dent; unlike the contraction observed in 1998 (-7.4%), Malaysia’s GDP dropped from 6.3% to 4.83% (2007-08) before contracting -1.51% in 2009. Despite the transparent and open economy (ranked 16th place in 2008 GCI) plus fast rise in the Human Development Index ranking (61st out of 190 countries in 2018), Malaysia’s heavy reliance on exports and its elongated addiction to the U.S. dollar made it become more prone to financial, currency, trade, and economic crises. The propagation of contemporaneous crises since the late 1990s have distinctly proved that Malaysia is hardly immune to shocks resulting from the slower economic growth in China and monetary normalizations in Europe and the U.S. which are causing interest rates to rise and exchange rate pressures to increase. Although the remarkable transition of Malaysia into a middle-income country was rather easy fostered by unusually favorable macroeconomic environment, but it seems to have been stuck in the middle-income trap and the next major economic leap to achieve a high-income status will require so much more than cheap labor and “mobilization of resources” based on “perspiration rather than inspiration”. Malaysia is struggling to figure out how to develop comprehensive skills which are essential to support future economic growth. Another problem is that educational institutions in Malaysia are not well aligned with industries to meet their demands; furthermore, a seamless coordination as well as collaboration between them is missing. Accordingly, a decade after the 2008 global financial crisis, Malaysia ranks 44th in pillar 4 (Health and Primary Education) and 41st in pillar 5 (Higher Education and Training). Malaysia also ranks 43rd in pillar 9 (Technological Readiness) due to a lack of lifelong learning programs, weakness in Technical and Vocational Education and Training (TVET), and unready for disruptive technologies. Without significant improvements in these, Malaysia will remain in the middle-income trap.

Measuring the Input Rank in Global Supply Networks
Armando Rungi,Loredana Fattorini,Kenan Huremovic

In this paper, we introduce the Input Rank as a measure to study the organization of global supply networks at the firm level. We model the case of a firm that needs assessing the technological relevance of each direct and indirect supplier on a network-like production function with labor and intermediate inputs. In our framework, an input is technologically more relevant if a shock on that upstream market can hit harder the marginal costs of a downstream buyer, considering the topology of the supply structure. A higher labor intensity at each stage buffers the transmission of upstream shocks in the network. In addition, we provide for the possibility that producers have limited knowledge of inputs in the supply network, hence they can underestimate the relevance of more distant inputs. After applications, the Input Rank returns a matrix of technological centralities that order any direct or indirect input for a representative firm in any output industry. We compute the Input Rank on U.S. and world input-output tables. Finally, we test how it correlates with choices of vertical integration made by 20,489 U.S. parent companies controlling 154,836 affiliates worldwide. We find that a higher Input Rank is positively associated with higher odds that that input is vertically integrated, relatively more when final demand is elastic. A supplier's Input Rank remains a significant predictor of a firm's decision to integrate even after controlling for the relative positions on upstreamness(downstreamness) segments.

News-Based Sentiment Indicators
Huang, Chengyu,Simpson, Sean
We construct sentiment indices for 20 countries from 1980 to 2019. Relying on computational text analysis, we capture specific language like 'fear', 'risk', 'hedging', 'opinion', and, 'crisis', as well as 'positive' and 'negative' sentiments, in news articles from the Financial Times. We assess the performance of our sentiment indices as 'news-based' early warning indicators (EWIs) for financial crises. We find that sentiment indices spike and/or trend up ahead of financial crises.

Per-Customer Quantity Limit and Price Discrimination: Evidence from the U.S. Residential Mortgage Market
Ma, Chao
Theoretically, if firms face a regulatory per-customer quantity limit, they should have an incentive to discriminatively charge high-demand customers higher prices and make them just willing to buy a quantity equal to the limit. In the U.S. residential mortgage industry, mortgages with origination balances above the conforming loan limits cannot be guaranteed by Government-Sponsored Enterprises, which make lenders face a per-customer quantity limit. This paper finds that borrowers bunching at the limit pay higher interest rates due to price discrimination. This study rules out the alternative explanation that those borrowers are of higher risk (lending cost) than other borrowers.

Promotion through Connections: Favors or Information?
Yann Bramoullé,Kenan Huremović

Connections appear to be helpful in many contexts such as obtaining a job, a promotion, a grant, a loan or publishing a paper. This may be due to favoritism or to information conveyed by connections. Attempts at identifying both effects have relied on measures of true quality, generally built from data collected long after promotion. This empirical strategy faces important limitations. Building on earlier work on discrimination, we propose a new method to identify favors and information from classical data collected at time of promotion. Under natural assumptions, we show that promotion decisions look more random for connected candidates, due to the information channel. We obtain new identification results and show how probit models with heteroscedasticity can be used to estimate the strength of the two effects. We apply our method to the data on academic promotions in Spain studied in Zinovyeva & Bagues (2015). We find evidence of both favors and information effects at work. Empirical results are consistent with evidence obtained from quality measures collected five years after promotion.

Public or Private? Sharing Audio-Visual Documentation of the Arts-in-Action
Marontate, Jan
New technologies for creating and disseminating images, text and sound offer unprecedented possibilities for interactive audio-visual communications that are particularly appealing for researchers interested in studying the visual and performing arts ― in action. This paper examines some unexpected challenges related to decision-making about what can be made public and how such audio-visual materials can be shared. It examines theories about criteria used in the designation of cultural heritage and raises questions about issues surrounding the potential designation of audio-visual documentation of art worlds as artistic heritage.

Recent Shifts in Capital Flow Patterns in Korea: An Investor Base Perspective
Hansen, Niels-Jakob,Krogstrup, Signe
Koreas cross border capital flows have tended to respond negatively in global risk-off episodes, resulting in volatility in the foreign exchange market and occasional policy responses in the form of foreign exchange interventions. We study the relationship between Korean capital flows and global volatility up to 2018. The response of capital flows during risk-off episodes have become more muted over time, and occasional safe-haven type flows into Korean bond markets have helped counterbalance the tendency for portfolio investors to leave. We describe these changing patterns and relate them to shifts in Korea's domestic investor base. We discuss whether they reflect a sustained shift in the sensitivity of Koreas capital flow pressures to global risk-off episodes, and implications for monetary and exchange rate policies.

Relative Bound and Asymptotic Comparison of Expectile with Respect to Expected Shortfall
Samuel Drapeau,Mekonnen Tadese

Expectile bears some interesting properties in comparison to the industry wide expected shortfall in terms of assessment of tail risk. We study the relationship between expectile and expected shortfall using duality results and the link to optimized certainty equivalent. Lower and upper bounds of expectile are derived in terms of expected shortfall as well as a characterization of expectile in terms of expected shortfall. Further, we study the asymptotic behavior of expectile with respect to expected shortfall as the confidence level goes to $1$ in terms of extreme value distributions. We use concentration inequalities to illustrate how the empirical estimation of tail index using expectile versus expected shortfall is better than expectile versus quantile for fat tail distributions. Illustrating the formulation of expectile in terms of expected shortfall, we also provide explicit or semi-explicit expressions of expectile and some simulation results for some classical distributions.

Sovereign Asset and Liability Management in Emerging Market Countries: The Case of Uruguay
Amante, Andre,Anderson, Phillip,Jonasson, Thordur,Kamil, Herman,Papaioannou, Michael G.
This paper provides an overview of the strategic and operational issues as well as institutional challenges, related to the implementation of the Sovereign Asset and Liability Management (SALM) approach. Application of an SALM framework allows the authorities to identify and monitor sovereign exposure mismatches; increase resilience to foreign currency and interest rate risks; and thus, strengthen financial stability; and implement more cost-effective management of the public-sector debt. The analysis is based on emerging market (EM) countries and illustrated by the experience of Uruguay, using data as of end-2017.

Sovereign Risk in Macroprudential Solvency Stress Testing
Jobst, Andreas (Andy),Oura, Hiroko
This paper explains the treatment of sovereign risk in macroprudential solvency stress testing, based on the experiences in the Financial Sector Assessment Program (FSAP). We discuss four essential steps in assessing the system-wide impact of sovereign risk: scope, loss estimation, shock calibration, and capital impact calculation. Most importantly, a market-consistent valuation approach lies at the heart of assessing the resilience of the financial sector in a tail risk scenario with sovereign distress. We present a flexible, closed-form approach to calibrating haircuts based on changes in expected sovereign defaults affecting bank solvency during adverse macroeconomic conditions. This paper demonstrates the effectiveness of using extreme value theory (EVT) in this context, with empirical examples from past FSAPs.

The Dynamics of Non-Performing Loans During Banking Crises: A New Database
Ari, Anil,Chen, Sophia,Ratnovski, Lev
This paper presents a new dataset on the dynamics of non-performing loans (NPLs) during 88 banking crises since 1990. The data show similarities across crises during NPL build-ups but less so during NPL resolutions. We find a close relationship between NPL problems-elevated and unresolved NPLs-and the severity of post-crisis recessions. A machine learning approach identifies a set of pre-crisis predictors of NPL problems related to weak macroeconomic, institutional, corporate, and banking sector conditions. Our findings suggest that reducing pre-crisis vulnerabilities and promptly addressing NPL problems during a crisis are important for post-crisis output recovery.

The Probability Frontier or, Covariance Crunch: A New Paradigm for Mean-Variance Optimization
Stock, Robert D.
Three innovative concepts are combined here to create a new and unique framework for optimizing a portfolio of investments or bets. These inventions are:1) The Probability Frontier, a generalization of the Markowitz Efficient Frontier;2) The Positive Probability Estimate, which estimates the chance of a market to move up in the coming period, regardless of the magnitude of the move; and3) The Directional Covariance, which measures the tendency of markets to move together, regardless of the size of the moves.Looking at both market moves and their covariances in terms of pure directionality, treating their magnitudes as “noise” on the premise (demonstrated decisively in this paper) that direction is more robustly predictable, dramatically improves the optimized system performance. Indeed, if our estimates can’t even get market directions right, what’s the point of quibbling over tenths of a percentage point? Don’t shrink that covariance matrix; crush it!

Tourism in Belize: Ensuring Sustained Growth
Chow, Julian T.S.
Belize's tourism sector has witnessed impressive growth in recent years with overnight tourist arrivals registering double digit annual growth rates since 2016. To guide the development of the tourism sector from 2012 to 2030, the government endorsed a National Sustainable Tourism Master Plan in 2011, setting various initiatives and targets for the immediate and medium terms. Using a panel regression analysis on twelve Caribbean countries, this paper finds that accelerating structural reforms, fortifying governance frameworks, reducing crime, and mitigating the impact of natural disasters will help sustain tourism growth in Belize and contribute to economic well-being. This is in addition to tackling infrastructure bottlenecks and mitigating concerns relating to the 'shared economy'.

What is Real and What is Not in the Global FDI Network?
Damgaard, Jannick,Elkjaer, Thomas,Johannesen, Niels
Macro statistics on foreign direct investment (FDI) are blurred by offshore centers withenormous inward and outward investment positions. This paper uses several new datasources, both macro and micro, to estimate the global FDI network while disentangling realinvestment and phantom investment and allocating real investment to ultimate investoreconomies. We find that phantom investment into corporate shells with no substance and noreal links to the local economy may account for almost 40 percent of global FDI. Ignoringphantom investment and allocating real investment to ultimate investors increases theexplanatory power of standard gravity variables by around 25 percent.

Which Factors Are Over-Owned? or, Supply and Demand: A Possible Roadmap to Solving the Factor Timing Problem
Stock, Robert D.
Recent difficulties with certain factor models have increased interest in finding methods to “time” factor investing better. So far, however, the consensus is that factor timing is difficult. As inspiration for a possible solution, this paper reviews one of the best long-term return prediction models for the S&P 500 â€" the level of equity ownership in investor portfolios â€" which handily outperforms commonly-cited valuation-based forecast methods by relying on the more fundamental dynamics of supply and demand. Indeed, it has been called the “greatest predictor of future stock market returns” you’ve (probably) never heard of! For example, it can explain the earnings-less bull market of the 1980s, and overcomes the negative-PE problem of the 2008 Financial Crisis for which the traditional methods masked a good buying opportunity. The first section of the paper recreates and compares the various long-term S&P 500 forecasting methods, using our own robust fitting procedures. This paper then suggests a roadmap for applying this methodology to factor forecasting, since it is already known that standard valuation (or other) methods are not good estimators of factor performance.