Research articles for the 2020-02-05

A Semi-Systematic Review of the Perceived Cost of Mobile Payment in Sub-Sahara Africa
Coffie, Cephas P.K
Mobile payment has gain popularity worldwide due to the offer of convenience. In the sub-Sahara Africa, mobile money is the flagship offer with the highest diffusion rate in the mobile payment segment. Nonetheless, recent complaints from customers about the high cost associated with mobile money usage in the sub-region have gone under the radar of empirical studies simply due to the perceived ability of the mobile money to bring many out of poverty. Using a semi-systematic review of news articles and blogs in a content analysis, we explore the perceived cost of mobile money usage in the sub-region. Results from our study indicate that governments, businesses, individuals and other stakeholders in the sub-region all find mobile money charges to be high. Again, tax imposition by governments and the regressive structure of mobile money charges affect mostly the poor in society. These we believe are caused by the oligopolistic nature of the financial technology (FinTech) market dominated by foreign-owned telecos.

A Swedish Market for Sustainability-Related and Socially Labelled Bonds. Institutional Investors as Drivers
Nachemson-Ekwall, Sophie
The report examines the role that Swedish institutional investors might play in the development of a Swedish market for sustainability-related and socially labelled bonds. Engagement by the financial sector is seen as a necessity for society’s ability to cope with the growing stress on welfare systems and the demands presented in the 17 United Nations Sustainable Development Goals (SDGs). While Sweden has been in the foreground with green bonds, the country is lagging behind many other western liberal market economies on social bonds.A point of departure for this research has been to better understand SDG 11, on the development of sustainable cities and communities, and what are viewed in Sweden as run-down and socio-economically weak suburbs. Drawing on international experience of sustainability-related and socially labelled bonds as well as previous experience of Swedish impact investing, the report analyses the drivers of and forces constructing this virgin market, zooming in on the role taken of three parties: institutional investors and the issuers, mainly local governments and property developers, with the financial sector acting as intermediary.The report finds that the institutional investors have taken a variety of approaches to social bond investing, which is an indicator of a lack of guidance from both the individual investor-organizations’ boards as well as the Swedish public. In the few cases where investments have been made, previous experience of both green investing and foreign social bonds were used as stepping stone. Overall, knowledge is weak, in relation to both evaluating risk and return and understanding the impact metrics linked to the bonds’ use of proceeds. Furthermore, potential Swedish issuers are yet to come forward.As is the case in other western countries, Swedish public financial institutions â€" such as the export agency and a government sponsored mortgage lender, appears to be at the forefront. Nonetheless, Swedish local governments, which play a central role in the high-tax economy’s delivery of public services, remains hesitant, prevented by the limited successes of previous experimentation with social financial instruments such as public social investment funds and social impact bonds. This is compounded by restrictive accountancy practices, or- ganizational silos and a culture that shuns public-private collaborations.The report makes recommendations on how to help the socially labelled bond-market achieve take-off, such as enhancing the development of financial vehicles, private as well as government-sponsored, and speeding up the work with the development of standardized metrics. In addition, institutional investors need to step up, and be braver than they are currently â€" at least if they claim to take all the SDGs seriously. A key message to the issuers is not to ask for too much in relation to risk-sharing â€" socially labelled bonds must not be too complex in structure or too complicated to evaluate for investors. However, the grand message from the report, is just the spreading of knowledge of the value of developing a market for socially labelled bonds, and the role that domestic institutional investors can play, if they decide to increase their commitment.

Accessing Currency Returns Through Intelligence Currency Factors
Middleton, Amy
This paper presents a methodology for the construction of three “intelligent” currency beta factors based around the popular trading styles of carry, value, and trend/momentum together with a multi-style factor combining all three. The methodology is termed “intelligent” because we demonstrate how, in the case of the carry factor, applying a binary filter to determine risk environment and adjusting trade sizes in periods of risk aversion can lead to improved drawdown and enhanced performance statistics versus more naïve carry factors. In addition, for all three single-style factors we demonstrate how establishing a relationship between the resulting trade weight per currency and the magnitude of the underlying trade signal’s information coefficient can enhance performance versus other currency beta factors that apply an equal trading weight per currency regardless of the strength of signal.

Anti Aging Strategies in Current Era
Dumpala, Lakshmi Priya
As the most capacious organ of the body that is exposed to the outer environment, the skin suffers from both intrinsic and extrinsic aging factors. Skin aging is characterized by features such as wrinkling, loss of elasticity, laxity, and rough-textured appearance. This aging process is accompanied with phenotypic changes in cutaneous cells as well as structural and functional changes in extracellular matrix components such as collagens and elastin. With intrinsic aging, structural changes occur in the skin as a natural consequence of the biological changes over time and produce a certain number of histological, physiological, and biochemical modifications. Intrinsic aging is determined genetically (influence of gender and ethnic group), variable in function of skin site, and also influenced by hormonal changes. Visually it is characterized by fine wrinkles. By comparison, “photoaging” is the term used to describe the changes occurring in the skin, resulting from repetitive exposure to sunlight. The histological, physiological, and biochemical changes in the different layers of the skin are much more drastic. From a mechanical point of view, human skin appears as a layered composite containing the stiff thin cover layer presented by the stratum corneum, below which are the more compliant layers of viable epidermis and dermis and further below the much more compliant adjacent layer of subcutaneous white adipose tissue. Upon exposure to a strain, such a multi-layer system demonstrates structural instabilities in its stiffer layers, which in its simplest form is the wrinkling. These instabilities appear hierarchically when the mechanical strain in the skin exceeds some critical values. Their appearance is mainly dependent on the mismatch in mechanical properties between adjacent skin layers or between the skin and subcutaneous white adipose tissue, on the adhesive strength and thickness ratios between the layers, on their bending and tensile stiffness as well as on the value of the stress existing in single layers. Gradual reduction of elastic fibers in aging significantly reduces the skin’s ability to bend, prompting an up to 4-fold reduction of its stability against wrinkling, thereby explaining the role of these fibers in skin aging. Anti-aging medicine is practiced by physicians, scientists, and researchers dedicated to the belief that the process of physical aging in humans can be slowed, stopped, or even reversed through existing medical and scientific interventions. This specialty of medicine is based on the very early detection and prevention of age-related diseases. Physicians practicing anti-aging medicine seek to enhance the quality of life as well as its length, limiting the period of illness and disability toward the end of one’s life. Anti-aging medicine encompasses lifestyle changes (diet and exercise); hormone replacement therapies, as needed, determined by a physician through blood testing (DHEA, melatonin, thyroid, human growth hormone, estrogen, testosterone); antioxidants and vitamin supplements; and testing protocols that can measure not only hormone levels and blood chemistry but every metabolic factor right down to the cellular level.

Antitrust Damages in Financial Markets
Wald, John K.
I briefly review the standard regression methods used to estimate damages in antitrust actions, and I discuss how these would be applied to cases in financial markets. I consider applications to three different financial market cases. The first is the NASDAQ odd-eighths litigation, where existing antitrust methods closely resemble the analyses published in the academic literature on this issue. The second type of case is bond market antitrust litigation, where the expert faces an additional hurdle because they have to estimate bid-ask spreads. The third type of case is related to the LIBOR manipulation scandal. I discuss why existing methods provide a poor fit for the LIBOR damage calculations. Lastly, I discuss IPO issuance fees as an example of price clustering in financial markets which has not let to antitrust litigation.

Approximating intractable short ratemodel distribution with neural network
Anna Knezevic,Nikolai Dokuchaev

We propose an algorithm which predicts each subsequent time step relative to the previous timestep of intractable short rate model (when adjusted for drift and overall distribution of previous percentile result) and show that the method achieves superior outcomes to the unbiased estimate both on the trained dataset and different validation data.

Artificial intelligence approach to momentum risk-taking
Ivan Cherednik

We propose a mathematical model of momentum risk-taking, which is essentially real-time risk management, focused on short-term volatility of stock markets. Its implementation, an automated momentum equity trading system, proved to be successful in extensive historical and real-time experiments, discussed in the paper. Risk-taking is one of the key components of general decision-making, a challenge for artificial intelligence and machine learning. We begin with a relatively simple new algebraic-type theory of news impact on share-prices, which describes well their power growth, periodicity, logarithmic periodicity, and the market phenomena like price targets and profit-taking; Bessel and hypergeometric functions are used. Its discretization results in some tables of bids, expected returns for different investment horizons. This is a new approach; its preimage is a new contract card game presented at the end, a combination of bridge and poker. The relations to random processes and fractional Brownian motion are outlined. We provide a reasonably complete description of our AI-type trading system, but our ML procedures are not discussed much (a special version of those in neural networking is used).

Assessing the Structural Change in the Aggregate Earnings-Returns Relation
Curtis, Asher,Kim, Chang‐Jin,Oh, Hyung Il
We investigate the change in the aggregate earnings-returns relation from negative to positive. We first identify a gradual structural break around the second quarter of 1991. We then find evidence of three contributing factors to the change in the relation. They are: i) an increase in the relative importance of cash flow news in returns; ii) a decrease in the importance of discount rate news contained in unexpected aggregate earnings, which together increased the covariance between unexpected earnings and returns; and iii) a decrease in the persistence of expected aggregate earnings and expected returns which decreased the absolute value of the covariance between expected earnings and returns.

Bank Asset and Informational Quality
Kladakis, George
This paper examines the relationship between bank asset and informational quality. Literature argues that banks hide information from the public when they hold more opaque types of assets. This leads to disagreements between rating agencies regarding the creditworthiness of banks. However, this implies that the quality of risky assets can also play an important role in bank uncertainty. This study uses a diversified panel of 699 banks from 84 countries and measures opacity (lack of informational quality) with rating disagreements between issuer-specific ratings by three credit rating agencies. Results from panel ordered logit regressions show that poor asset quality increases the probability of greater credit rating disagreements. Considering that the recent regulatory frameworks require from banks to reduce the worrying levels of non-performing loans and to increase transparency in their risk-taking, the findings of this paper have important policy implications.

Bank Competition and Information Production
De Marco, Filippo,Petriconi, Silvio
We show that competition adversely affects the "specialness" of bank lending. In particular, we observe that the positive abnormal return on the borrowing firm's stock after the announcement of a bank loan is reduced in US states that deregulate interstate branching. The negative effect of competition on the value of bank loans is present only for ex-ante opaque firms (i.e., firms with few tangible assets and bank-dependent borrowers) and for banks that presumably rely more on "soft" information (i.e., small banks). Moreover, we find that the probability of a covenant violation in a syndicated deal and charge-off rates on small business loans are higher in deregulated states. Our results suggest that competition decreases loan quality because it reduces banks' incentives to invest in information.

Biases in CDS Spreads after the CDS Big Bang
Wang, Xinjie,Yan, Hongjun,Zhong, Zhaodong
The ISDA CDS standard model assumes a single flat hazard rate (default intensity) rather than a term structure of hazard rates. This assumption introduces biases into CDS spreads for empirical research after the CDS Big Bang. This paper is the first to document the biases and provide a simple correction scheme. We quantify the biases using a large panel of CDS data for the period from April 2010 to October 2016. The correction is important for measures based on differences in CDS spreads, such as CDS-bond basis.

California Senate Bill No. 826: List of Non-Compliant Firms
Greene, Daniel,Intintoli, Vincent,Kahle, Kathleen M.
We find that 16 firms are not in compliance with California Senate Bill No. 826 (SB 826), which requires all publicly held companies that trade on a major exchange with principal executive offices in California to have at least one female director on their board. The names of non-compliant firms and the location of their principal executive offices are provided in Table 1. To verify compliance, we search SEC filings and company websites. Statistics are provided as of January 13, 2020.

China's Rule of Law in New Era: The Rise of Regulation and Formalism
An, Jiafu,Hou, Wenxuan,Zhang, Yun
China’s financial development and economic growth is achieved under weak legal institutions. The literature attributes this counterexample of lawâ€"financeâ€"growth nexus to (a) alternative mechanisms in China such as incentives, reputation and relationships and (b) a well-functioning xinfang system with common law features. In recent years, China has made increasing efforts to strengthen its rule of law. The Communist Party of China (CPC) has taken the lead by launching a far-reaching campaign against corruption, establishing a system of inspection tours, and promulgating a large number of regulations. We argue that using regulations to complement laws is effective: CPC has enough bureaucratic prowess to crack down on corruption whereas the courts are subject to subversion by powerful interests. We also discuss the drawbacks of this approach: regulations aiming at ex ante control of corruption substantially increase procedural formalism and limit the discretion of local governments and state-owned enterprises.

Consumer Propensity to Adopt PSD2 Services: Trust for Sale?
Bijlsma, Michiel,van der Cruijsen, Carin,Jonker, Nicole
We study consumers’ attitudes towards sharing payments data with incumbent and new providers of payment and account information services, and using their services. This is important, in order to understand the possible impact of the revised Payment Services Directive (PSD2) on the functioning of the retail payments market. We do so using a representative panel of Dutch consumers. We obtain a number of results. First, consumers’ propensity to give consent for payments data usage is highest if the data user is their own bank. Only a minority would give consent to the usage of payments data to make a financial overview with personalised offers. Second, an explicit financial reward can tempt more people to use this service and to demand the service from a BigTech instead of one’s own bank.

Counterparty Credit Limits: An Effective Tool for Mitigating Counterparty Risk?
Martin D. Gould,Nikolaus Hautsch,Sam D. Howison,Mason A. Porter

A counterparty credit limit (CCL) is a limit imposed by a financial institution to cap its maximum possible exposure to a specified counterparty. Although CCLs are designed to help institutions mitigate counterparty risk by selective diversification of their exposures, their implementation restricts the liquidity that institutions can access in an otherwise centralized pool. We address the question of how this mechanism impacts trade prices and volatility, both empirically and via a new model of trading with CCLs. We find empirically that CCLs cause little impact on trade. However, our model highlights that in extreme situations, CCLs could serve to destabilize prices and thereby influence systemic risk.

Credit Risk Determinants: Evidence from the Bulgarian Banking System
Golitsis, Petros,Fassas, Athanasios,Lyutakova, Anna
The present study examines a wide set of credit risk determinants for the Bulgarian banking system. Using both monthly and quarterly data and employing two methodologies, Vector Autoregressive and Autoregressive Distributed Lag models, we test ninety-one possible determinants of the banks’ credit risk, as measured by non-performing loans, loan loss provisions and problematic loans. Our empirical findings show that both bank-specific and institutional, in addition to macroeconomic, factors have a significant impact on the credit risk of the banking system in the country.

Crowded Trades, Market Clustering, and Price Instability
van Kralingen, Marc,Garlaschelli, Diego,Scholtus, Karolina,van Lelyveld, Iman
Crowded trades by similarly trading peers influence the dynamics of asset prices, possibly creating systemic risk. We propose a market clustering measure using granular trading data. For each stock the clustering measure captures the degree of trading overlap among any two investors in that stock. We investigate the effect of crowded trades on stock price stability and show that market clustering has a causal effect on the properties of the tails of the stock return distribution, particularly the positive tail, even after controlling for commonly considered risk drivers. Reduced investor pool diversity could thus negatively affect stock price stability.

Designing a New Development Finance Institution for Infrastructure
Natarajan, Gulzar
India faces a massive challenge in its infrastructure mobilisation. Unfortunately, the conventional wisdom that PPPs and private investments will be able to do the heavy lifting in this effort is not borne out by experience of other countries. Designing policies in this pursuit, oblivious of the reality, is unlikely to get us much far in mobilising infrastructure to power the country’s economic growth.Accordingly, this paper has documented some important takeaways from the global experience of private participation in infrastructure and its financing from both developed and developing countries. One, only certain types of infrastructure assets are commercially viable and attractive enough for private investors. Two, many categories of infrastructure assets need public finance to de-risk and make them commercially attractive. Three, infrastructure projects in general are characterised by significant delays and cost overruns as well as renegotiations which end up generally benefiting private providers. Four, there is no evidence that, in general, private sector delivers greater value for money than public sector in the construction and management of infrastructure assets. Five, long-term infrastructure contracts are characterised by several problems â€" cutting corners on quality, skimping on investment obligations, asset-stripping, excessive dividend pay-outs etc. Six, infrastructure finance is increasingly characterised by the separation of asset ownership and its management, and constant changes in ownership, both of which pose problems of accountability and perverse incentives. Seven, the pool of long-term finance available, from both domestic and foreign sources, to invest in infrastructure is much limited than what is widely believed. Finally, the endeavour of public policy should be not to expand the envelope of available finance, but the envelope of infrastructure assets which can be de-risked and made commercially viable enough.Taken together, this means that public finance, direct and indirect, will have to be the major source of infrastructure financing, governments should bear a large share of the project risks for many categories of assets, and the private sector should be leveraged only as an instrumentality to deliver public goods. Further, given the widespread incentive distortions and problems associated with infrastructure contracts, public policy has an important role to play in setting the standards and benchmarks, as well as encouraging good practices in contract management. The DFIs have an important role to play in achieving both these objectives, as an instrument of indirect public finance. In simple terms, the objective of DFIs should be efficient mobilisation of infrastructure. However, the challenge is to perform this role effectively. The evidence of effectiveness of development banking in the Indian conditions is at best mixed. In fact, it is fair to say that the different models of DFIs that India has experimented with have played a limited role in efficient crowding-in of infrastructure. Instead of confining their role to addressing market failures, most DFIs, public and private, have mostly sought to compete with private investors to invest in commercially viable and de-risked categories of infrastructure assets.This requires DFIs which are publicly owned, and with access to both significant budgetary support as well as cheaper sources of capital. The DFIs should focus their efforts on efficient crowding-in of infrastructure itself, rather than be confined to crowding-in of just private capital. In certain types of commercially viable projects, it should confine its investments to play a strategic role in reinforcing standards and promoting good practices within the infrastructure markets. Its priority should be on the other categories of projects which need de-risking to be made commercially viable. It should focus on efficient deployment of scarce concessional capital to achieve this objective. It should refrain from competing with private investors and instead seek to alleviate market failures. Finally, as experience from previous efforts show, the biggest challenge in realizing this objective will come from governance issues. Good governance is not seen, just as bad governance becomes easily evident. The success of the DFI in achieving its objectives depends on how it manages its relationships with the government, markets, and the regulator. The onus is on the government to support the DFI with enabling regulations.

Diversification, Volatility, and Surprising Alpha
Banner, Adrian,Fernholz, Bob Robert,Papathanakos, Vassilios,Ruf, Johannes,Schofield, David
It has been widely observed that capitalization-weighted indexes can be beaten by surprisingly simple, systematic investment strategies. Indeed, in the U.S. stock market, equal-weighted portfolios, random-weighted portfolios, and other naïve, non-optimized portfolios tend to outperform a capitalization-weighted index over the long term. This outperformance is generally attributed to beneficial factor exposures. Here, we provide a deeper, more general explanation of this phenomenon by decomposing portfolio log-returns into an average growth and an excess growth component. Using a rank-based empirical study we argue that the excess growth component plays the major role in explaining the outperformance of naïve portfolios. In particular, individual stock growth rates are not as critical as is traditionally assumed.

Does a Leopard Change its Spots? Auditors and Lawyers as Valuation Experts for Minority Shareholders in the Judicial Appraisal of Private Firms
Saastamoinen, Jani,Savolainen, Hanna
Agency theory suggests that minority shareholders in private firms are vulnerable to shareholder oppression, which necessitates shareholder protection. This paper investigates a form of shareholder protection, the special representative of minority shareholders, which is used in Finland and Sweden. The special representative is a valuation expert, typically an auditor or a lawyer, who assists minority shareholders in shareholder dissent cases which require judicial appraisal of the minority interest in a firm. The different codes of conduct associated with these professions may manifest themselves in their performance as valuation experts. We examine a comprehensive data set of judicial valuation cases of Finnish private firms, in which the judge learns the valuation estimates of the controlling shareholder, the minority shareholder and the special representative and then issues a verdict on the fair price of the firm’s shares. Our findings indicate that the special representative benefits minority shareholders by reducing the gap between the minority shareholders’ and the judge’s valuation estimates. Our results also suggest that the special representative’s professional background may affect how he or she values the company. We find that special representatives who are auditors propose more conservative valuation estimates than lawyers do.

Does the FOMC Cycle Affect Credit Risk?
Huang, Difang,Li, Yubin,Wang, Xinjie,Zhong, Zhaodong
This paper studies the returns of credit default swap (CDS) indices over the Federal Open Market Committee (FOMC) cycle from 2005 to 2017. We document that the CDS return is significantly higher in even weeks than in odd weeks of the FOMC cycle. This pattern is linked to the resolution of macroeconomic uncertainty by the biweekly schedules of the Fed Reserve internal Board of Governors meetings. We also provide evidence that the Fed affects the CDS market via unexpected information signal and monetary policy that lead to reductions in the risk premium. Finally, a simple trading strategy based on the biweekly pattern yields an annual return of 8.9%.

Edward I. Altman, PhD: Fifty Years of Z-Scores to Predict the Probability of Corporate Bankruptcy
Altman, Edward I.
Edward I. Altman is the Max L. Heine Professor of Finance, Emeritus at the Stern School of Business, New York University (NYU). He is also director of research in credit and debt markets at NYU’s Salomon Center for the Study of Financial Institutions. An internationally recognized expert on corporate bankruptcy, high yield bonds, distressed debt, and credit risk analysis, Altman has won multiple awards for his research and has served as an advisor to numerous government agencies and foreign central banks. His primary areas of research include bankruptcy analysis and prediction, credit and lending policies, and risk management and regulation in banking, corporate finance, and capital markets.In August 2019, Edward Altman spoke with members of the Journal of Investment Consulting Editorial Advisory Board about his Z-score model for predicting the probability of corporate bankruptcies, the more recently developed models and their applications, the evolution of the credit markets, and the current credit cycle.

Empirical Asset Pricing with Functional Factors
Nadler, Philip,Sancetta, Alessio
We propose a methodology to use functional factors in empirical asset pricing models. The term structure of interest rates and the implied volatility smile are just two common examples. Functional factors usually incorporate investors risk preferences that could be priced in the cross-section of stock returns. We derive a theory for pricing functional factors that encompasses the usual one for scalar valued factors. We then provide estimation algorithms for betas, risk prices and risk premia and show that they are asymptotically Gaussian and suggest the bootstrap as method to carry out inference. We apply our approach to extract additional information embedded in the implied variance curve. We argue that changes in the shape of the implied variance curve provide information about fear and uncertainty and we distinguish between the two. We show that convexity can be seen as a proxy for volatility uncertainty. This uncertainty could explain the premium earned by momentum strategies, which is seen as pricing anomaly in literature. The empirical results show that the S&P500 3-month implied variance curve is a pricing factor for momentum sorted portfolios and a positive risk premium is earned by the convexity of the implied variance curve.

Environmentally (Un-)Friendly Portfolio Construction
Kaiser, Lars,Schaller, Florian
This study sheds light on a new type of sustainable investment approach, namely environmental, social, and governance (ESG) momentum. We provide both a theoretical discussion and an empirical comparison of this new approach and put it in perspective to traditional weighting schemes considered by sustainable portfolio managers. In order to provide a clear basis for our argumentation and avoid any conflicting effects, we solely focus on the environmental aspect of ESG ratings in Europe and pay particular attention to strategies’ carbon footprint as a central measure of a portfolio’s environmental friendliness. Although the empirical results demonstrate inferior environmental ratings for ESG-momentum portfolios and mixed results in respect to risk-adjusted returns across alternative rating components, there might still be a case for investing in sustainable momentum stocks.

Eye in the Sky: Private Satellites and Government Macro Data
Mukherjee, Abhiroop,Panayotov, George,Shon, Janghoon
We develop an approach to identify whether recent technological advancements â€" such as the rise of commercial satellite-based macroeconomic estimates â€" can provide an effective alternative to government data. We measure the extent to which satellite estimates are affecting the value of government macro news using the asset price impact of scheduled announcements. Our identification relies on cloud cover, which prevents satellites from observing economic activity at a few key hubs. Applying our approach, we find that some satellite estimates are now so effective that markets are no longer surprised by government announcements. Our results point to a future in which the resolution of macro uncertainty is smoother, and governments have less control over macro information.

How Banks Respond to Distress: Shifting Risks in Europe's Banking Union
Mink, Mark,Ramcharan, Rodney ,van Lelyveld, Iman
This paper uses granular bond portfolio data to study how banking systems across the European Union (EU) adjust their asset holdings in response to regulatory solvency shocks. We also study the impact of these shocks at financial intermediaries on the prices of bonds in their portfolio. Despite the creation of a Single Supervisory Mechanism (SSM) in the EU, we find that risk-shifting interacts with regulatory arbitrage motives to explain how banks adjust their portfolios after adverse solvency shocks. After regulatory solvency declines, banks increase their exposure to domestic bonds, including higher yielding but zero risk-weight sovereign bonds. The increase in banking system risk might therefore be even larger than the decline in risk-weighted solvency ratios suggests. Distress in the banking system also feeds back onto bond prices. Bonds owned by less-well capitalized banking systems trade at a discount relative to otherwise similar bonds owned by better capitalized intermediaries.

Mellody Hobson: Diversifying Personnel As well As Portfolios
Hobson, Mellody
Mellody Hobson is president and co-chief executive officer of Ariel Investments, where she is responsible for firm-wide management and strategic planning, overseeing all operations outside of research and portfolio management. Additionally, she serves as chairman of the board of trustees for Ariel Investment Trust. In June 2018, Mellody Hobson spoke with members of the Journal of Investment Consulting Editorial Advisory Board about why diversification among corporate leaders and investment consultants is as vital as portfolio diversification.

On Shortfall Risk Minimization for Game Options
Yan Dolinsky

In this paper we study the existence of an optimal hedging strategy for the shortfall risk measure in the game options setup. We consider the continuous time Black--Scholes (BS) model. Our first result says that in the case where the game contingent claim (GCC) can be exercised only on a finite set of times, there exists an optimal strategy. Our second and main result is an example which demonstrates that for the case where the GCC can be stopped on the all time interval, optimal portfolio strategies need not always exist.

Optimal Stock Investment under Ambiguity about Ambiguity
Makarov, Dmitry
A prominent approach to modelling ambiguity about the distribution of stock returns is to assume that this distribution is itself random and distributed according to a certain second-order distribution. Realistically, the second-order distribution can also be ambiguous implying ambiguity about ambiguity, a long-debated idea dating back to classical works by Hume (1738), Reichenbach (1949) and Savage (1954). Unlike extensive research into ambiguity, we are yet to understand how ambiguity about ambiguity affects investor behavior. Our paper makes a first step in this direction. We consider a setting with a bond and a risky stock whose expected return is ambiguous. Our key novelty is that both the mean and the variance of the associated second-order distribution are also ambiguous. We derive analytically the investor’s optimal stock investment and examine its properties.

Overlapping Board Connections with Banker Directors and Corporate Loan Terms: Evidence from Syndicated Loans
Togan Egrican, Asli
I look at the relationship between corporate loan terms and connections of board members to bankers through employment on other boards, a connection less likely to be affected by confounding factors. Specifically, I examine whether loan terms such as pricing and maturity as well as other loan characteristics such as whether loan terms require secured tranches and whether loans are leveraged or not are affected by professional connections to bankers. Using syndicated loan data, I find that firms connected to bankers via other boards are more likely to borrow, and they receive cheaper pricing. However, maturity of loans is not different between the two groups. I further examine whether these results were different during the most recent 2007-2008 global financial crisis. Results show that loan availability declined during the financial crisis for all firms but connected firms continued to borrow. With respect to loan pricing, duringthe crisis, firms with overlapping professional connections continued to receive lower spreads. However, loan maturities during the crisis period do not show a differential effect for firms with connections. Overall, results suggest support for the importance of social connections in decreasing information asymmetry and reducing transaction costs between lenders and borrowers.

Predation or Self-Defense? Endogenous Competition and Financial Distress
Chen, Hui,Dou, Winston,Guo, Hongye,Ji, Yan
Firms tend to compete on prices more aggressively when they are in financial distress. The intensified competition in turn reduces firms' profit margins, pushing firms further into distress. To quantify the feedback effect between industry competition and financial distress and the predatory incentives, we incorporate supergames of price competition into a model of long-term debt and strategic default. We show that this feedback mechanism has important implications on asset prices and financial contagion. Depending on the heterogeneity in customer bases and financial conditions across firms in an industry as well as between incumbents and new entrants, firms can exhibit a rich variety of strategic interactions, including predation, self-defense, and collaboration. Finally, we provide empirical support for our model's predictions.

Quants' Quandary: Crossing the Chasm
Roche, Rick
Contrary to the mainstream media’s portrayal that adoption of quantitative fund investing is widespread, only a small portion of individual and institutional dollars has been allocated to quantitative strategists. The amount of quant-managed fund allocations and the general potential benefits and drawbacks of quantitative investment are described. Results of a survey of more than forty financial advisors and analysts concerning their recommendations on quantitative investment are shared. Everett M. Rogers’ Diffusion of Innovations (1995) model is applied to explain the slow diffusion of quantitative investment. Additional models of innovation resistance are also discussed in order to understand reluctance and resistance to investment in quantitative strategies. Included is management consultant Geoffrey A. Moore’s Crossing the Chasm (2013) model to illustrate where quantitative investment currently lies on the “Adopter Categorization” S-curve. Practical recommendations for due diligence are included along with suggestions for promotion of quantitative investing where appropriate for suitable investors.

Rational Belief Bubbles
Sohn, H.,Sornette, Didier
We propose an extension of the class of rational expectations bubbles (REBs) to the more general rational beliefs setting of \cite{Kurz:1994,Kurz:1994a}. In a potentially non-stationary but stationarizable environment, among an heterogenous population of agents, it is possible to hold more than one ``rational'' expectation. When rational but diverse beliefs converge (``correlated beliefs''), they do not cancel each other out in aggregate anymore. This can make them an object of rational speculation. Accounting for the fact that market efficiency has an intrinsic time dimension, we show that diverse but correlated beliefs can thus account for speculative bubbles, without the need for irrational agents or limits to arbitrage. Many of the shortcomings of REBs that make rational bubbles implausible can be overcome once we relax the ergodicity requirement. In particular, we argue that the hitherto unexplained ``bubble component'' of REBs corresponds to an extension of the state space in \citet{Kurz:2011}.

Relationship Life Cycle and Firm’s Payout Policy
Nguyen, Giang
This paper examines the effect of relationship duration with major customer on supplier’s payout policies. I find that firm which remains the relation with major customer in a longer period pays higher dividend. This finding is unbiased by the substitutional effect between dividend and repurchase and robust in different model specifications. Digging deeper, I find that the positive effect of relationship duration with major customer on supplier dividend payout is contributable to the reduction in adverse effect of cash flow volatility, dependence on major customer and the increase in knowledge spillovers from customer.

Rental Housing Spot Markets: How Online Information Exchanges Can Supplement Transacted-Rents Data
Geoff Boeing,Jake Wegmann,Junfeng Jiao

Traditional US rental housing data sources such as the American Community Survey and the American Housing Survey report on the transacted market - what existing renters pay each month. They do not explicitly tell us about the spot market - i.e., the asking rents that current homeseekers must pay to acquire housing - though they are routinely used as a proxy. This study compares governmental data to millions of contemporaneous rental listings and finds that asking rents diverge substantially from these most recent estimates. Conventional housing data understate current market conditions and affordability challenges, especially in cities with tight and expensive rental markets.

Risk Loadings in Classification Ratemaking
Liang Yang,Zhengxiao Li,Shengwang Meng

The risk premium of a policy is the sum of the pure premium and the risk loading. In the classification ratemaking process, generalized linear models are usually used to calculate pure premiums, and various premium principles are applied to derive the risk loadings. No matter which premium principle is used, some risk loading parameters should be given in advance subjectively. To overcome this subjective problem and calculate the risk premium more reasonably and objectively, we propose a top-down method to calculate these risk loading parameters. First, we implement the bootstrap method to calculate the total risk premium of the portfolio. Then, under the constraint that the portfolio's total risk premium should equal the sum of the risk premiums of each policy, the risk loading parameters are determined. During this process, besides using generalized linear models, three kinds of quantile regression models are also applied, namely, traditional quantile regression model, fully parametric quantile regression model, and quantile regression model with coefficient functions. The empirical result shows that the risk premiums calculated by the method proposed in this study can reasonably differentiate the heterogeneity of different risk classes.

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.

Sharpe Ratio in High Dimensions: Cases of Maximum Out of Sample, Constrained Maximum, and Optimal Portfolio Choice
Mehmet Caner,Marcelo Medeiros,Gabriel Vasconcelos

In this paper, we analyze maximum Sharpe ratio when the number of assets in a portfolio is larger than its time span. One obstacle in this large dimensional setup is the singularity of the sample covariance matrix of the excess asset returns. To solve this issue, we benefit from a technique called nodewise regression, which was developed by Meinshausen and Buhlmann (2006). It provides a sparse/weakly sparse and consistent estimate of the precision matrix, using the Lasso method. We analyze three issues. One of the key results in our paper is that mean-variance efficiency for the portfolios in large dimensions is established. Then tied to that result, we also show that the maximum out-of-sample Sharpe ratio can be consistently estimated in this large portfolio of assets. Furthermore, we provide convergence rates and see that the number of assets slow down the convergence up to a logarithmic factor. Then, we provide consistency of maximum Sharpe Ratio when the portfolio weights add up to one, and also provide a new formula and an estimate for constrained maximum Sharpe ratio. Finally, we provide consistent estimates of the Sharpe ratios of global minimum variance portfolio and Markowitz's (1952) mean variance portfolio. In terms of assumptions, we allow for time series data. Simulation and out-of-sample forecasting exercise shows that our new method performs well compared to factor and shrinkage based techniques.

The Future of Work and Employee Job Attitudes and Well-Being
Makridis, Christos,Han, Joo
Increasing evidence suggests that technological change will have significant effects on the tasks and interactions in the workplace. Although technological change may displace some jobs, it will also affect employees’ experiences of the jobs that remain and the new ones that are created. First, this paper introduces a new measure of technological change at the county-level by drawing upon measures of the growth in the stock of intellectual property (IP) across industries. Second, we use this new measure, together with proprietary data on millions of employees between 2008 and 2018, to investigate the quantitative effects of technological change on employee attitudes about work and well-being. Our results suggest that technological change is associated with robust positive effects on self-efficacy and well-being. While we find the effect is strongest in workplaces with trust, we find that managers who behave more as a boss, rather than a partner, help workers buffer against technological change.

The Madness Of Crowds And The Likelihood Of Bubbles
Chinco, Alex
The limits-to-arbitrage framework explains how a speculative bubble can be sustained. But, it does not explain how often you should expect one to occur. To do that, you need to model the on/off switch which sporadically amplifies speculator biases, causing arbitrageur constraints to bind and a bubble to form. I propose a first such model with an on/off switch based on social interactions between speculators. In the model, bubbles occur more often when small increases in past returns make an asset’s speculators much more persuasive to their peers. I use industry-level stock returns to empirically verify this ex ante prediction about bubble likelihoods. And, in the process, I show it is possible to test such predictions even in the presence of ex post disagreement about how to define a speculative bubble.

The Price of Higher Order Catastrophe Insurance: The Case of VIX Options
Eraker, Bjorn,Yang, Aoxiang
We develop an equilibrium pricing model aimed at explaining observed characteristics in equity returns, VIX futures and VIX options data. To derive our model we first specify a general framework based on affine jump-diffusive state-dynamics and representative agent endowed with Duffie-Epstein recursive utility. This allows us to derive moments of equity returns under the objective and risk-neutral measures, and subsequently semi-closed form solutions to prices of equity options, VIX futures, and VIX options. We calibrate this model to fit the salient features of the data, including moments of consumption and equity returns, variance premium, and various features of VIX derivatives data. The model matches the extremely right-skewed volatility smiles seen in VIX options, a downward-sloping term structure of implied Black'76 volatilities, large negative rates of return on VIX futures, and large VIX option risk premia. It also matches other characteristics of VIX options data, including time-variation in the shape of implied volatilities.

Time-consistent conditional expectation under probability distortion
Jin Ma,Ting-Kam Leonard Wong,Jianfeng Zhang

We introduce a new notion of conditional nonlinear expectation under probability distortion. Such a distorted nonlinear expectation is not sub-additive in general, so it is beyond the scope of Peng's framework of nonlinear expectations. A ore fundamental problem when extending the distorted expectation to a dynamic setting is {\it time-inconsistency}, that is, the usual "tower property" fails. By localizing the probability distortion and restricting to a smaller class of random variables, we introduce a so-called distorted probability and construct a conditional expectation in such a way that it coincides with the original nonlinear expectation at time zero, but has a time-consistent dynamics in the sense that the tower property remains valid. Furthermore, we show that in the continuous time model this conditional expectation corresponds to a parabolic differential equation whose coefficient involves the law of the underlying diffusion. This work is the first step towards a new understanding of nonlinear expectations under probability distortion, and will potentially be a helpful tool for solving time-inconsistent stochastic optimization problems.

Voluntary Private Pension Funds and Capital Market Development in Turkey
Togan Egrican, Asli,Kayhan, Fatih
We look at voluntary private pension funds and its relationship to capital market development in Turkey. First, we describe the voluntary pension fund market development in Turkey since 2003, and then analyze certain indicators of capital markets once the voluntary private pension funds are introduced. Overall, our findings indicate that the introduction of voluntary private pension plans are positively associated with indicators of capital market development such as market capitalization, market depth and liquidity in Turkey in both debt and equity markets. We also observe that in addition to debt and equity markets, other more recently established markets’ development indicators are positively associated with the introduction of voluntary pension plans. The results analyzing the introduction of state contributions in 2013 are not robust to alternative specifications even though they show a positive association with certain indicators.