Research articles for the 2020-01-29

A New Form of Banking -- Concept and Mathematical Model of Venture Banking
Brian P Hanley

This model contains concept, equations, and graphical results for venture banking. A system of 27 equations describes the behavior of the venture-bank and underwriter system allowing phase-space type graphs that show where profits and losses occur. These results confirm and expand those obtained from the original spreadsheet based model. An example investment in a castle at a loss is provided to clarify concept. This model requires that all investments are in enterprises that create new utility value. The assessed utility value created is the new money out of which the venture bank and underwriter are paid. The model presented chooses parameters that ensure that the venture-bank experiences losses before the underwriter does. Parameters are: DIN Premium, 0.05; Clawback lien fraction, 0.77; Clawback bonds and equity futures discount, 1.5 x (USA 12 month LIBOR); Range of clawback bonds sold, 0 to 100%; Range of equity futures sold 0 to 70%.

A Theory of Socially Responsible Investment
Oehmke, Martin,Opp, Marcus M.
We characterize necessary conditions for socially responsible investors to impact firm behavior in a setting in which firm production generates social costs and is subject to financing constraints. Impact requires a broad mandate, in that socially responsible investors need to internalize social costs irrespective of whether they are investors in a given firm. Impact is optimally achieved by enabling a scale increase for clean production. Socially responsible and financial investors are complementary: jointly they can achieve higher welfare than either investor type alone. When socially responsible capital is scarce, it should be allocated based on a social profitability index (SPI). This micro-founded ESG metric captures not only a firm's social status quo but also the counterfactual social costs produced in the absence of socially responsible investors.

Central Bank Digital Currency: Central Banking for All?
Fernández-Villaverde, Jesús,Sanches, Daniel R.,Schilling, Linda Marlene,Uhlig, Harald
The introduction of a central bank digital currency (CBDC) allows the central bank to engage in large-scale intermediation by competing with private financial intermediaries for deposits. Yet, since a central bank is not an investment expert, it cannot invest in long-term projects itself, but relies on investment banks to do so. We derive an equivalence result that shows that absent a banking panic, the set of allocations achieved with private financial intermediation will also be achieved with a CBDC. During a panic, however, we show that the rigidity of the central bank's contract with the investment banks has the capacity to deter runs. Thus, the central bank is more stable than the commercial banking sector. Depositors internalize this feature ex-ante, and the central bank arises as a deposit monopolist, attracting all deposits away from the commercial banking sector. This monopoly might endangered maturity transformation.

Corporate Profitability and the Global Persistence of Corruption
Ferris, Stephen,Hanousek, Jan,Tresl, Jiri
We examine the persistence of corporate corruption for a sample of privately-held firms from 12 Central and Eastern European countries over the period 2001 to 2015. Creating a proxy for corporate corruption based on a firm's internal inefficiency, we find that corruption enhances a firm's profitability. A channel analysis further reveals that inflating staff costs is the most common approach by which firms divert funds to finance corruption. We conclude that corruption persists because of its ability to improve a firm's return on assets, which we refer to as the Corporate Advantage Hypothesis.

Cross Currency Valuation and Hedging in the Multiple Curve Framework
Alessandro Gnoatto,Nicole Seiffert

We generalize the results of Bielecki and Rutkowski (2015) on funding and collateralization to a multi-currency framework and link their results with those of Piterbarg (2012), Moreni and Pallavicini (2017), and Fujii et al. (2010b).

In doing this, we provide a complete study of absence of arbitrage in a multi-currency market where, in each single monetary area, multiple interest rates coexist. We first characterize absence of arbitrage in the case without collateral.

After that we study collateralization schemes in a very general situation: the cash flows of the contingent claim and those associated to the collateral agreement can be specified in any currency. We study both segregation and rehypothecation and allow for cash and risky collateral in arbitrary currency specifications. Absence of arbitrage and pricing in the presence of collateral are discussed under all possible combinations of conventions.

Our work provides a reference for the analysis of wealth dynamics, we also provide valuation formulas that are a useful foundation for cross-currency curve construction techniques. Our framework provides also a solid foundation for the construction of multi-currency simulation models for the generation of exposure profiles in the context of xVA calculations.

Demand for Safety, Risky Loans: A Model of Securitization
Segura Velez, Anatoli,Villacorta, Alonso
We build a competitive equilibrium model of securitization in the presence of demand for safety by some investors. Securitization allows to create safe assets by pooling idiosyncratic risks from loan originators, leading to higher aggregate loan issuance. Yet, the distribution of loan risks out of their originators creates a moral hazard problem. An increase in the demand for safety leads to a securitization boom and riskier originated loans. When demand for safety is high, welfare is Pareto higher than in an economy with no securitization despite the origination of riskier loans. Aggregate lending expansions driven by demand for safety may, paradoxically, lead to riskier loan issuance than expansions driven by standard credit supply shocks.

Do Firms React to Uncertainty by Doing Good Deeds? Uncertainty and CSR Investment
Dai, Yunhao,Rau, P. Raghavendra,Tan, Weiqiang
We find that firms invest more to build up corporate social capital, as measured by corporate social responsibility (CSR) intensity, when facing high economic policy uncertainty (EPU). The results are robust to endogeneity concerns. The effects are more pronounced for firms in consumer-oriented industries, firms headquartered in high social capital regions, and for firms in industries with higher levels of irreversible investments. Overall, our results suggest that investment in social capital affects trust between a firm and its stakeholders and this provides a cushion when firms face high levels of uncertainty.

Econophysics Through Computation
Antika Sinha,Sudip Mukherjee,Bikas K Chakrabarti

We introduce here very briefly, through some selective choices of problems and through the sample computer simulation programs (following the request of the editor for this invited review in the Journal of Physics Through Computation), the newly developed field of econophysics. Though related attempts could be traced much earlier (see the Appendix), the formal researches in econophysics started in 1995. We hope, the readers (students \& researchers) can start themselves to enjoy the excitement, through the sample computer programs given, and eventually can undertake researches in the frontier problems, through the indicated survey literature provided.

Executive Compensation and Corporate Social Responsibility: Evidence from Chinese-listed SOEs
Li, Jiaxing,Shen , Jim Huangnan,Lee, Chien-Chiang
Based on annual data for Chinese-listed state-owned enterprises (SOEs) over the period 2013-2018, this research explores the effect of executive compensation on corporate social responsibility (CSR) performance. Our empirical results show that the executive compensation of SOEs has an inverted U-shaped effect on CSR fulfillment, and that the inverted U-shaped effect is robust to endogeneity corrections. Subsample analysis suggests that marginal contributions of executive compensation on CSR performance are different in the secondary industry and service industry. The ERG hierarchy of needs and the upper echelon theory help explain the non-linear effects. Based on the empirical results, this paper provides a new channel of unlocking the dynamics of CSR fulfillment.

Finance from the viewpoint of physics
A. Jakovac

In this note we review the basic mathematical ideas used in finance in the language of modern physics. We focus on discrete time formalism, derive path integral and Green's function formulas for pricing. We also discuss various risk mitigation methods.

Four Decades of Audit Committee Research: A Bibliometric Analysis (1977 â€" 2018)
Behrend, Joel,Eulerich, Marc
In the post-SOX era, research on audit committees (AC) has evolved into a distinct scientific domain devoted to the analysis of corporate oversight and its effect on financial reporting and internal control quality. Numerous studies have contributed to the identification of potential determinants of AC effectiveness and possible performance effects associated with the AC oversight process. Nevertheless, the scarcity of studies that offer a holistic view on AC research impedes a profound understanding of the antecedent elements and emerging themes in this field within recent decades. Applying a combination of citation, co-citation, and social network analysis to 92 articles published in six leading accounting journals, we comprehensively map the intellectual structure of AC research. Thus, we contribute to the literature by offering insights on major publication trends, chronological developments, and underlying relationships between different strands of the AC literature as part of the accounting discipline. Our findings reveal a high level of homogeneity in AC-related studies published in the leading accounting journals, especially when it comes to sample selection and methodological approaches.

Gender Discrimination in Lending: Evidence from Bankers in the Lab
Brock, J. Michelle,De Haas, Ralph
We implement a lab-in-the-field experiment with 334 Turkish loan officers to test for the presence of gender discrimination in small business lending. Each officer reviews multiple loan applications in which we randomize the applicant's gender. While unconditional approval rates are the same for male and female applicants, we detect a more subtle form of discrimination. Loan officers are 30 percent more likely to make loan approval conditional on the presence of a guarantor when we present an application as coming from a female instead of a male entrepreneur. This gender discrimination is concentrated among young, inexperienced, and gender-biased loan officers. Discrimination is most pronounced for loans that perform well in real life, making it costly to the bank. Experimental variation in the available applicant information does not impact lending decisions, suggesting that discrimination is implicit rather than statistical.

Information Technology in Indian Banking Sector Some Recent Developments
Vijai, C.,Anitha, P.
The banking sector could be the backbone of the Indian economy. In today’s era, technology support is incredibly necessary for the triple-crown functioning of the banking sector. While not IT and communication, we tend to cannot accept the success and growth of the industry and economy, it’s enlarged the role of the banking sector within the Indian economy. Run batted in new rules and supporting new technology and innovation for the client within the banks. The Indian banking sector was introduced the RTGS, mobile banking, Digital Wallets, UPI, Blockchain Technology, computing, Cloud Banking, wearable Technology, Omnichannel Banking, the point of sale, square measure numerous innovations within the Indian banking sector. This paper highlights the information technology in the Indian banking sector. This paper is descriptive. Secondary information square measures collected from numerous websites, reports, and journals.

Interest Rate Swaps Clearing and Systemic Risk
Bakoush, Mohamed,Gerding, Enrico,Wolfe, Simon
We develop a model to analyze distress spillover from the OTC interest rate swaps (IRS) market into the interbank market due to central clearing and margin requirements. We show that margin procyclicality in the OTC IRS market derived by interest rate volatility can lead to the onset of systemic liquidity shortage in the interbank market. We also show that central clearing may increase systemic liquidity risk due to tight margin requirements.

Introducere în analiza anomaliilor calendaristice, Partea a doua (An Introduction to the Analysis of the Calendar Anomalies, Part 2)
Stefanescu, Razvan,Dumitriu, Ramona
Romanian Abstract: Această lucrare abordează câteva metode simple de identificare a anomaliilor calendaristice. Luând ca exemplu Efectul TOY, vom arăta cum pot fi aplicate testele t sau regresiile OLS pentru a detecta o componentă sezonieră a evoluţiei randamentelor activelor financiare.English Abstract: This paper approaches some simple methods for the calendar anomalies identification. Taking the TOY Effect as an example, we show how the t tests or the OLS regressions could be used to detect a seasonal component of the financial assets’ returns.

K-Returns to Education
Fagereng, Andreas,Guiso, Luigi,Holm, Martin Blomhoff,Pistaferri, Luigi
We exploit a school reform that increased the length of compulsory schooling in Norway in the 1960s to study the causal effect of formal general education on returns on wealth (k-returns). OLS estimates reveal a strong, positive and statistically significant correlation between education and returns on individual net worth. This effect disappears in IV regressions, implying that general education has no causal effect on individual performance in capital markets, whose heterogeneity largely reflects non-acquired ability. On the contrary, we find that education causes higher returns in the labor market (l-returns). We speculate about possible rationales for this important asymmetry.

Mean-variance portfolio selection under Volterra Heston model
Bingyan Han,Hoi Ying Wong

Motivated by empirical evidence for rough volatility models, this paper investigates continuous-time mean-variance (MV) portfolio selection under the Volterra Heston model. Due to the non-Markovian and non-semimartingale nature of the model, classic stochastic optimal control frameworks are not directly applicable to the associated optimization problem. By constructing an auxiliary stochastic process, we obtain the optimal investment strategy, which depends on the solution to a Riccati-Volterra equation. The MV efficient frontier is shown to maintain a quadratic curve. Numerical studies show that both roughness and volatility of volatility materially affect the optimal strategy.

Monetary Policy of Low Interest Rates and Bank Stability: The Role of Corporate Governance
Gaganis, Chrysovalantis,Lozano-Vivas, Ana,Papadimitri, Panagiota,Pasiouras, Fotios
Using a sample of around 340 banks from 48 countries, we examine whether and how corporate governance moderates the relationship between monetary policy interest rates and bank stability. Our results show that low interest rates reduce bank stability and have an adverse effect on risk-adjusted returns, and risk-adjusted capitalization; however, this effect can be mitigated by a bank’s commitment and effectiveness towards following corporate governance principles. The results also show that high values of corporate governance can completely offset the low rates’ adverse effects. Our findings are robust to the use of bank fixed effects and numerous variables that control for bank-specific and country-specific characteristics.

Rolling Over Equity Futures: A Study in Four Countries
Slivka, Ronald T.,Qin, Han,Ye, Kai
Near futures expiration days, market participants have a practical need to rollover positions to expirations at a later date. The most common form of market order for rolling over contracts is the calendar spread which dominates transaction volume. Despite this dominance, futures rollovers have been little studied in both developed and developing markets.In this paper, daily 2016 intra-market stock index futures calendar spread data for the US, UK, India and China markets formed the basis for comparing two commonly employed rollover strategies. These practitioner strategies were compared with newly devised optimal strategies based upon maximizing spread liquidity or minimizing volatility. For large positions, an optimal strategy consistently outperformed standard practitioner strategies in all four markets. For smaller initial futures positions no performance differences between strategies were expected or found. Practical guidelines for rolling futures positions and further research directions are discussed.

Security Design in Non-Exclusive Markets with Asymmetric Information
Asriyan, Vladimir,Vanasco, Victoria
We revisit the classic problem of a seller (e.g. firm) who is privately informed about her asset and needs to raise funds from uninformed buyers (e.g. investors) by issuing securities backed by her asset cash flows. In our setting, buyers post menus of contracts to screen the seller, but the seller cannot commit to accept contracts from only one buyer, i.e., markets are non-exclusive. We show that an equilibrium of this screening game always exists, it is unique and features semi-pooling allocations for a wide range of parameters. In equilibrium, the seller tranches her asset cash flows into a debt security (senior tranche) and a levered-equity security (junior tranche). Whereas the seller of a high quality asset only issues her senior tranche, the seller of a low quality asset issues both tranches but to distinct buyers. Consistent with this, whereas the senior tranche is priced at pooling valuation, the junior tranche is priced at low valuation. Our theory's positive predictions are consistent with recent empirical evidence on issuance and pricing of mortgage-backed securities, and we analyze its normative implications within the context of recent reforms aimed at enhancing transparency of financial markets.

Strategic Exits in Secondary Venture Capital Markets
Andrieu, Guillaume,Groh, Alexander Peter
The market for secondary venture capital transactions provides a way for investors to obtain liquidity if the investee start-up corporation has not yet reached sufficient maturity for an IPO. It also creates divestment opportunities for badly performing ventures that investors would rather abandon. We analyze the way in which the opportunistic behavior and liquidity constraints of venture capital funds channel deal flow into the secondary venture capital market. Such opportunistic behavior leads to the strategic exit of seed financing venture capitalists. These exits enlarge investors' opportunity set of strategies and therefore affect the deal terms with entrepreneurs. In this paper, we show that two contracts are possible in a world with financially constrained venture capital investors, staged investments, and premature divestment opportunities. Both contracts have their disadvantages. With the first, the venture capitalist will never liquidate a project, even if it is a lemon, but will instead engage in a secondary transaction. With the second contract, although lemons will be systematically abandoned, high-quality ventures may also be liquidated. Entrepreneurs need to consider these effects when aiming to maximize their benefits and must trade off the contract parameters accordingly. Our model provides guidance to entrepreneurs in this respect, helps to explain deal flow into the secondary venture capital market, and offers several empirical predictions.

Study on Corporate Governance in Emerging Markets: A Focus on Compliance of South African and South Korean Listed Companies
Ahialey, Joseph-Kwaku,Kang, Ho-Jung
Purpose â€" First, this study contextually examines the governance codes of South Africa and South Korea. Second, it analyzes board features of South African (JSE) Mainboard and South Korean (KRX) KOSPI-listed companies.Design/methodology â€" This review is qualitative and uses data from the annual reports of the selected markets’ companies, respective exchanges’ official web sites and corporate governance-related web sites in order to examine the corporate governance practices in the two markets. In addition, Nvivo is employed in analyzing the content of the corporate governance codes of the selected countries. Findings â€" Our analysis indicates that the corporate governance codes of the two countries are evolving to keep up with the international trend of principles-based approach. The composition of the board of directors (BODs) of non-financial companies of both South Africa and South Korea shows no significant variation between the companies with regards to the executive (inside) and nonexecutive (outside) directors. On the contrary, there is a significant variation between South African and South Korean listed companies with respect to diversity. Originality/value â€" While previous studies are centered on the impact of governance codes on performance, this study intends to contextually evaluate the codes and features of South Africa and South Korea listed companies. This is essential and timely for regulators and policy makers given the importance of corporate governance features such as board independence and diversity in recent times.

Style and Skill: Hedge Funds, Mutual Funds, and Momentum
Grinblatt, Mark,Jostova, Gergana,Petrasek, Lubomir,Philipov, Alexander
Classifying mandatory 13F stock-holding filings by manager type reveals that hedge fund strategies are mostly contrarian, while mutual fund strategies are largely trend following. The only institutional performers â€" the 2/3 of hedge fund managers that are contrarian â€" earn alpha of 2.4% per year. Contrarian hedge fund managers tend to trade profitably with all other manager types, especially when purchasing stocks from momentum-oriented hedge and mutual fund managers. Superior contrarian hedge fund performance exhibits persistence and stems from stock-picking ability rather than liquidity provision. Aggregate short sales further support these conclusions about the style and skill of various fund manager types.

The 2020 Presidential Election: A Race Against Mortality
Wilson, Linus
A year from the inauguration, four of the top five Democratic 2020 U.S. Presidential election candidates in the polls are in their seventies. Using actuarial data and the history of Presidential assassinations, the top two contenders, Former Vice President Joe Biden and Vermont Senator Bernie Sanders, have a 24 to 29 percent chance of not surviving to the end of a hypothetical first term. The 77 and 78-year-old men’s chances of dying before the end of a second term as POTUS are between 46 and 56 percent.

The Good, the Bad, and the Complex: Product Design with Asymmetric Information
Asriyan, Vladimir,Foarta, Dana,Vanasco, Victoria
This paper explores the incentives of product designers to complexify products, and the resulting implications for overall product quality. In our model, a consumer can accept or reject a product proposed by a designer, who can affect the quality and the complexity of the product. While the product's quality determines the direct benefits of the product to the consumer, the product's complexity affects how costly it is for this Bayesian consumer to extract information about the product's quality. Examples include banks that design financial products that they later offer to retail investors, or policymakers who propose policies for approval by voters. We find that complexity is not necessarily a feature of low quality products. While an increase in alignment between the consumer and the designer leads to more complex but better quality products, higher product demand or lower competition among designers leads to more complex and lower quality products. Our findings produce novel empirical implications on the relationship between quality and complexity of financial products and regulatory policies, which are consistent with recent evidence.

The Quadratic Rough Heston Model and the Joint S&P 500/VIX Smile Calibration Problem
Gatheral, Jim,Jusselin, Paul,Rosenbaum, Mathieu
Fitting simultaneously SPX and VIX smiles is known to be one of the most challenging problems in volatility modeling. A long-standing conjecture due to Julien Guyon is that it may not be possible to calibrate jointly these two quantities with a model with continuous sample-paths. We present the quadratic rough Heston model as a counterexample to this conjecture. The key idea is the combination of rough volatility together with a price-feedback (Zumbach) effect.

The Social Media Risk Premium
Hosseini, Amin,Jostova, Gergana,Philipov, Alexander,Savickas, Robert
Using novel corporate Twitter data on all U.S. public firms, we show that firms with a Twitter account earn 50 basis points per month higher returns than similar firms without a Twitter account. This `Twitter premium' is higher among smaller firms and firms with higher fundamentals uncertainty, and is not explained by existing risk-factor models. Having a Twitter account presents opportunities for value creation but also raises social media risks. We show that a social media risk factor is priced in the cross-section of U.S. stock returns and carries a premium of 30 to 75 basis points per month controlling for other risk factors.

The Space-Time Elasticity and the Vacuum - At the Edge the Universe is Increased Exponentially
Challoumis, Constantinos
This paper shows the concept of the space-time and the issue of elasticity. The theme of elasticity of space-time comes as result from the Creation Theory, where showed that the universes come from traps of energy between the light space-time and the dimensional space-time. The theme of elasticity is that creates an exponential velocity to the universe. The result is that, at the edge of the universe the velocity is increased with exponential way. Also, this theory shows how we can understand how far from the center and the edges of our universe we are located.

Thermo-Finance: The Link Between Financial Engineering and Financial Stability
Fassal, Omar
Schinckus (2010) defines econophysics as a new approach which applies physics concepts to understand economic and financial phenomena; this paper belongs to the school of econophysics. The goal of this paper is to apply the three principles of thermodynamics into the field of finance. The qualitative results obtained are the three principles of financial engineering which describe the evolution, the dispersion, and the measure of risk inside the financial system. We push further the reasoning to describe the three axiomatic laws of finance which put the three principles observed into motion. Finally, we describe the three financial engineering construction rules that have to be respected, in order to create financial engineering products and solutions that are sustainable over time, thereby enhancing systemic financial stability.

Tighter Credit and Consumer Bankruptcy Insurance
Antunes, António,Cavalcanti, Tiago,Mendicino, Caterina,Peruffo, Marcel,Villamil, Anne
How does bankruptcy protection affect household balance sheet adjustments and aggregate consumption when credit tightens? Using a tractable model of unsecured consumer credit we quantify the trade-off between the insurance and the creditworthiness effects of bankruptcy in response to tighter credit. We show that bankruptcy dampens the effect of tighter credit on aggregate consumption on impact. This is because it allows borrowers to sustain consumption against severe financial distress. However, by leading to consumers' exclusion from the credit market for a certain period, bankruptcy also reduces their ability to smooth consumption over time, implying a slower recovery. The bankruptcy code establishes how costly it is to default, and, thus, plays a crucial role in determining consumers' bankruptcy decisions and

Two Different Ways to Calculate Net Borrowing in FCFE Perpetuity
Serra, Ricardo Goulart
When finance textbooks address net borrowing calculation in free cash flow to equity perpetuity, they predominantly do it as the proportion of firm net investment financed by debt (Alternative 1). This method does not apply to all scenarios and requires a peculiar debt ratio. Alternatively, one can calculate net borrowing by applying sustainable growth rate to existing debt (Alternative 2). This method is broader and of simpler implementation. Alternative 1 can lead students, instructors and practitioners to confusion and, therefore, to misapplication and/or misuse. I suggest that neglected Alternative 2 becomes the standard method.

Who presents and where? An analysis of research seminars in US economics departments
Asier Minondo

Using a large dataset of research seminars held at US economics departments in 2018, I explore the factors that determine who is invited to present at a research seminar and whether the invitation is accepted. I find that high-quality scholars have a higher probability of being invited than low-quality scholars, and researchers are more likely to accept an invitation if it is issued by a top economics department. The probability of being invited increases with the size of the host department and if the scholar belongs to it. Having a coauthor in the host department increases the probability of being invited and accepting the invitation, whereas the distance between the host department and invited scholar reduces the probability of being invited and accepting the invitation. Female scholars have a lower probability of being invited to give a research seminar than male scholars.