Research articles for the 2020-02-06
A Network Analysis of Information Diffusion in the Financial Sector
SSRN
We create and test two novel network-based measures of interconnectedness in the financial industry during 1996 to 2013. A network based on informed trading in financial firms predicts firm-specific risk and performance, while one formed on financial firm returns predicts future macroeconomic risk. The measure of informed trading is robust to variable order arrival rates more common in modern algorithmic trading. A trading strategy based on informed trading network centrality in the financial sector delivers an annualized risk-adjusted return of 7.73%. This risk-adjusted return shows that the network centrality has an economic impact that is relevant beyond the statistical results of the paper.
SSRN
We create and test two novel network-based measures of interconnectedness in the financial industry during 1996 to 2013. A network based on informed trading in financial firms predicts firm-specific risk and performance, while one formed on financial firm returns predicts future macroeconomic risk. The measure of informed trading is robust to variable order arrival rates more common in modern algorithmic trading. A trading strategy based on informed trading network centrality in the financial sector delivers an annualized risk-adjusted return of 7.73%. This risk-adjusted return shows that the network centrality has an economic impact that is relevant beyond the statistical results of the paper.
A Theoretical Review on Corporate Tax Avoidance: Shareholder Approach Versus Stakeholder Approach
SSRN
Objective - Although corporate tax avoidance is a widely discussed topic in the literature, conflicts do emerge when it is analyzed through the context of primary corporate duty. Should companies, in managing their taxes, solely honor their obligation to increase shareholders' wealth or should they cater to the interests of all their stakeholders? Such conflicts are especially evident in the inconsistent empirical observations on how corporate tax avoidance relate to corporate social responsibility (CSR), which makes the dearth of theoretical analysis on this issue even more conspicuous. Taking into account the socio-political nature and human elements in corporate tax avoidance, theoretical analyses from social sciences' perspectives are becoming markedly crucial.Methodology/Technique â€" This paper critically reviews the extant literature for discussions on how corporate tax avoidance is influenced by the dissenting approaches towards primary corporate duty.Findings â€" By allowing an insight into how people act and the world they live in, these analyses form a constructive tool to rationalize and foretell managerial actions towards shareholders and stakeholders alike.Novelty â€" It focuses particularly on the theories that are widely used to lend supports for such approaches. These theories are the agency theory, stakeholder theory, and legitimacy theory.Type of Paper - Review.
SSRN
Objective - Although corporate tax avoidance is a widely discussed topic in the literature, conflicts do emerge when it is analyzed through the context of primary corporate duty. Should companies, in managing their taxes, solely honor their obligation to increase shareholders' wealth or should they cater to the interests of all their stakeholders? Such conflicts are especially evident in the inconsistent empirical observations on how corporate tax avoidance relate to corporate social responsibility (CSR), which makes the dearth of theoretical analysis on this issue even more conspicuous. Taking into account the socio-political nature and human elements in corporate tax avoidance, theoretical analyses from social sciences' perspectives are becoming markedly crucial.Methodology/Technique â€" This paper critically reviews the extant literature for discussions on how corporate tax avoidance is influenced by the dissenting approaches towards primary corporate duty.Findings â€" By allowing an insight into how people act and the world they live in, these analyses form a constructive tool to rationalize and foretell managerial actions towards shareholders and stakeholders alike.Novelty â€" It focuses particularly on the theories that are widely used to lend supports for such approaches. These theories are the agency theory, stakeholder theory, and legitimacy theory.Type of Paper - Review.
Asset Pricing and Decarbonization: Diversification versus Climate Action
SSRN
Asset pricing and climate policy are analyzed in a global economy where consumption goods are produced by both a green and a carbon-intensive (dirty) sector. We allow for endogenous growth and three types of damages from global warming. It is shown that, initially, the desire to diversify assets in the portfolio complements the attempt to mitigate economic damages from climate change. In the long run, however, there is a trade-off between diversification and climate action. Therefore, in general, the carbon-intensive sector is not shut down completely. We derive the optimal carbon price, the equilibrium risk-free rate, and the risk premium of both assets. The risk-free rate is negatively affected by temperature, while the effect of temperature on the risk premiums depends on the type of damage specification. Climate disasters with an uncertain timing that rises with on temperature leads to a significant effect of climate change on asset prices.
SSRN
Asset pricing and climate policy are analyzed in a global economy where consumption goods are produced by both a green and a carbon-intensive (dirty) sector. We allow for endogenous growth and three types of damages from global warming. It is shown that, initially, the desire to diversify assets in the portfolio complements the attempt to mitigate economic damages from climate change. In the long run, however, there is a trade-off between diversification and climate action. Therefore, in general, the carbon-intensive sector is not shut down completely. We derive the optimal carbon price, the equilibrium risk-free rate, and the risk premium of both assets. The risk-free rate is negatively affected by temperature, while the effect of temperature on the risk premiums depends on the type of damage specification. Climate disasters with an uncertain timing that rises with on temperature leads to a significant effect of climate change on asset prices.
Banking Networks, Systemic Risk, and the Credit Cycle in Emerging Markets
SSRN
We undertake a large-scale empirical examination of systemic risk among 1048 financial institutions in a large sample of 23 emerging markets, broken down into 5 regions. This work extends the large literature on systemic risk in the US, Europe, and other developed countries to emerging markets, which is relatively under-researched. We present a novel systemic risk score for each financial system by region, across time. This measure is additively decomposable and attributable to each financial institution, and may be used as an objective and quantifiable measure of whether a bank is a SIFI (systemically important financial institution). The level and timing of systemic risk is heterogenous across the 5 regions, and this risk is concentrated in a few banks, more so pre-crisis than post-crisis. Credit and network effects account for over 2/3 of systemic risk (and in some cases, almost all of the risk), and the remaining comes from individual bank variables. Spillovers of systemic risks across regions are mostly contemporaneous within the quarter. A primary principal component (default level) accounts for 1/2 of the variation in systemic risk across the regions with the next two principal components (policy uncertainty and liquidity) accounting for 1/5 each. Aggregate default risk in a region is statistically predictable using our systemic risk metric, thereby supporting timely macro-prudential policy-making.
SSRN
We undertake a large-scale empirical examination of systemic risk among 1048 financial institutions in a large sample of 23 emerging markets, broken down into 5 regions. This work extends the large literature on systemic risk in the US, Europe, and other developed countries to emerging markets, which is relatively under-researched. We present a novel systemic risk score for each financial system by region, across time. This measure is additively decomposable and attributable to each financial institution, and may be used as an objective and quantifiable measure of whether a bank is a SIFI (systemically important financial institution). The level and timing of systemic risk is heterogenous across the 5 regions, and this risk is concentrated in a few banks, more so pre-crisis than post-crisis. Credit and network effects account for over 2/3 of systemic risk (and in some cases, almost all of the risk), and the remaining comes from individual bank variables. Spillovers of systemic risks across regions are mostly contemporaneous within the quarter. A primary principal component (default level) accounts for 1/2 of the variation in systemic risk across the regions with the next two principal components (policy uncertainty and liquidity) accounting for 1/5 each. Aggregate default risk in a region is statistically predictable using our systemic risk metric, thereby supporting timely macro-prudential policy-making.
Capitalizing on Sustainability: The Value of Going Green
SSRN
We investigate how Corporate Environmental Responsibility (CER) actions affect firm value. First, we adopt an event studies approach using two 5-to-4 Supreme Court rulings and show that firms gain value when they are expected to increase their CER activities. Second, we examine the cross-sectional returns by forming portfolios based on firms’ engagement in the CER activities. A portfolio of firms that enhanced their environmental sustainability by adopting cleaner production practices earns alphas (4.43% annually for value-weighted returns). Firms that reduced toxic chemical emissions show positive earnings surprises, higher revenue and profitability, and greater capital inflow from institutional investors with longer horizons. These return patterns we find in the event studies and portfolio approaches are more pronounced among firms in regions with high levels of trust. In sum, we present empirical evidence consistent with the market viewing CER as leading to higher firm value.
SSRN
We investigate how Corporate Environmental Responsibility (CER) actions affect firm value. First, we adopt an event studies approach using two 5-to-4 Supreme Court rulings and show that firms gain value when they are expected to increase their CER activities. Second, we examine the cross-sectional returns by forming portfolios based on firms’ engagement in the CER activities. A portfolio of firms that enhanced their environmental sustainability by adopting cleaner production practices earns alphas (4.43% annually for value-weighted returns). Firms that reduced toxic chemical emissions show positive earnings surprises, higher revenue and profitability, and greater capital inflow from institutional investors with longer horizons. These return patterns we find in the event studies and portfolio approaches are more pronounced among firms in regions with high levels of trust. In sum, we present empirical evidence consistent with the market viewing CER as leading to higher firm value.
China's Rule of Law in New Era: The Rise of Regulation and Formalism
SSRN
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.
SSRN
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.
Credit Risk in Derivative Securities - A Simplified Approach
SSRN
The pricing of options and other derivatives which are subject to the default risk of the writer usually requires the calibration of a sophisticated model and substantial effort in determining the input parameters. In empirical research, this effort is often avoided, and a basic approach that assumes independence of credit risk and market risk is applied. In this note, we propose a very simple method to incorporate correlated credit risk in the pricing of vulnerable derivatives. The approach is based on some approximations of more sophisticated models and requires the correlation between the underlying of the derivative and its writer as the only additional input parameter. It is therefore easily applicable and maintains the accuracy of sophisticated models to a large extent, as shown in numerical studies for call options, put options, and discount certificates.
SSRN
The pricing of options and other derivatives which are subject to the default risk of the writer usually requires the calibration of a sophisticated model and substantial effort in determining the input parameters. In empirical research, this effort is often avoided, and a basic approach that assumes independence of credit risk and market risk is applied. In this note, we propose a very simple method to incorporate correlated credit risk in the pricing of vulnerable derivatives. The approach is based on some approximations of more sophisticated models and requires the correlation between the underlying of the derivative and its writer as the only additional input parameter. It is therefore easily applicable and maintains the accuracy of sophisticated models to a large extent, as shown in numerical studies for call options, put options, and discount certificates.
Crime and Output: Theory and Application to the Northern Triangle of Central America
SSRN
This paper presents a structural model of crime and output. Individuals make an occupationalchoice between criminal and legal activities. The return to becoming a criminal isendogenously determined in a general equilibrium together with the level of crime andeconomic activity. I calibrate the model to the Northern Triangle countries and conductseveral policy experiments. I find that for a country like Honduras crime reduces GDP byabout 3 percent through its negative effect on employment indirectly, in addition to directcosts of crime associated with material losses, which are in line with literature estimates.Also, the model generates a non-linear effect of crime on output and vice versa. On average Ifind that a one percent increase in output per capita implies about 1/2 percent decline in crime,while a decrease of about 5 percent in crime leads to about one percent increase in output percapita. These positive effects are larger if the initial level of crime is larger.
SSRN
This paper presents a structural model of crime and output. Individuals make an occupationalchoice between criminal and legal activities. The return to becoming a criminal isendogenously determined in a general equilibrium together with the level of crime andeconomic activity. I calibrate the model to the Northern Triangle countries and conductseveral policy experiments. I find that for a country like Honduras crime reduces GDP byabout 3 percent through its negative effect on employment indirectly, in addition to directcosts of crime associated with material losses, which are in line with literature estimates.Also, the model generates a non-linear effect of crime on output and vice versa. On average Ifind that a one percent increase in output per capita implies about 1/2 percent decline in crime,while a decrease of about 5 percent in crime leads to about one percent increase in output percapita. These positive effects are larger if the initial level of crime is larger.
Decomposing Factor Momentum
SSRN
The factor momentum portfolio is decomposed into a factor timing portfolio and a buy-and-hold portfolio, where the former collects the return from time-series predictability and the latter collects the return due to the cross-sectional dispersion of factor returns. Based on a large set of stock return factors, I document rich evidence that factor return predictability is empirically too weak to produce timing benefits. The buy-and-hold portfolio accounts for a dominant fraction of the factor momentum return and outperforms in risk-adjusted returns. This outperformance is robust to portfolio formation and survives post-publication decay of factor returns.
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The factor momentum portfolio is decomposed into a factor timing portfolio and a buy-and-hold portfolio, where the former collects the return from time-series predictability and the latter collects the return due to the cross-sectional dispersion of factor returns. Based on a large set of stock return factors, I document rich evidence that factor return predictability is empirically too weak to produce timing benefits. The buy-and-hold portfolio accounts for a dominant fraction of the factor momentum return and outperforms in risk-adjusted returns. This outperformance is robust to portfolio formation and survives post-publication decay of factor returns.
Detecting Changes in Asset Co-Movement Using the Autoencoder Reconstruction Ratio
arXiv
arXiv
Detecting changes in asset co-movements is of much importance to financial practitioners, with numerous risk management benefits arising from the timely detection of breakdowns in historical correlations. In this article, we propose a real-time indicator to detect temporary increases in asset co-movements, the Autoencoder Reconstruction Ratio, which measures how well a basket of asset returns can be modelled using a lower-dimensional set of latent variables. The ARR uses a deep sparse denoising autoencoder to perform the dimensionality reduction on the returns vector, which replaces the PCA approach of the standard Absorption Ratio, and provides a better model for non-Gaussian returns. Through a systemic risk application on forecasting on the CRSP US Total Market Index, we show that lower ARR values coincide with higher volatility and larger drawdowns, indicating that increased asset co-movement does correspond with periods of market weakness. We also demonstrate that short-term (i.e. 5-min and 1-hour) predictors for realised volatility and market crashes can be improved by including additional ARR inputs.
Determinants of Investment in Tangible and Intangible Fixed Assets
SSRN
We investigate which firm characteristics are associated with investment in tangible and intangible fixed assets, paying special attention to the case of R&D, and which funding sources are used for each type of investment. Regarding firm characteristics, we find that younger and more profitable firms tend to invest more in all asset types. In the case of size, larger firms invest more in R&D and intangibles but less in tangible fixed assets. In addition, there is a concave relationship between leverage and investment. Regarding funding sources, we find that cash flow is the most important source of funding for intangibles and R&D, whereas financial debt is the most important funding source for tangible fixed assets. Stock issues are used to fund R&D and, especially, tangible fixed assets. Firms use cash holdings to smooth investment in R&D.
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We investigate which firm characteristics are associated with investment in tangible and intangible fixed assets, paying special attention to the case of R&D, and which funding sources are used for each type of investment. Regarding firm characteristics, we find that younger and more profitable firms tend to invest more in all asset types. In the case of size, larger firms invest more in R&D and intangibles but less in tangible fixed assets. In addition, there is a concave relationship between leverage and investment. Regarding funding sources, we find that cash flow is the most important source of funding for intangibles and R&D, whereas financial debt is the most important funding source for tangible fixed assets. Stock issues are used to fund R&D and, especially, tangible fixed assets. Firms use cash holdings to smooth investment in R&D.
Dissection of Corporate Social Responsibility (CSR) in SME’s Issues, Challenges, Myth & Reality, a Qualitative Study on Karachi Based SME’s
SSRN
Background: Corporate social responsibility is the concept which is now widely accepted in developed world. In Pakistan corporate sector is providing best examples of the socially responsible business but in SME sector this concept has not discussed yet. I have done detailed study for the findings CSR in SME’s & their reality.Objective: The main objectives of the study were to dissect the actual position, direction, issues & challenges of CSR activities & practices in SME’s of Karachi. As Karachi is an industrial hub of Pakistan so CSR if present in SME’s will be a good indicator of whole country. My objective was to determine the reality of CSR practices in SME’s & what they think about being a socially responsible.Results: We after study found very important & thoughtful results. We found that there is lack of awareness about the CSR concept & its voluntary guidelines in the SME sector. Many business owners know this concept but very limited approach they have about the topic.Lack of trust on GOP, wide gap between SMEDA & SME’s, absence of voluntary guidelines for CSR especially for SME’s, & misconception about the disclosure of CSR activities are the major causes responsible for the absence of socially responsible SME’s in Pakistan.Conclusion: Public & private partnership & cooperation is much necessary in SME sector for the better society in which business operates. Philosophy of earning with serving will have to be adopted by the SME sector of Karachi.
SSRN
Background: Corporate social responsibility is the concept which is now widely accepted in developed world. In Pakistan corporate sector is providing best examples of the socially responsible business but in SME sector this concept has not discussed yet. I have done detailed study for the findings CSR in SME’s & their reality.Objective: The main objectives of the study were to dissect the actual position, direction, issues & challenges of CSR activities & practices in SME’s of Karachi. As Karachi is an industrial hub of Pakistan so CSR if present in SME’s will be a good indicator of whole country. My objective was to determine the reality of CSR practices in SME’s & what they think about being a socially responsible.Results: We after study found very important & thoughtful results. We found that there is lack of awareness about the CSR concept & its voluntary guidelines in the SME sector. Many business owners know this concept but very limited approach they have about the topic.Lack of trust on GOP, wide gap between SMEDA & SME’s, absence of voluntary guidelines for CSR especially for SME’s, & misconception about the disclosure of CSR activities are the major causes responsible for the absence of socially responsible SME’s in Pakistan.Conclusion: Public & private partnership & cooperation is much necessary in SME sector for the better society in which business operates. Philosophy of earning with serving will have to be adopted by the SME sector of Karachi.
Do Stock Market Cycles affect Unlisted Firms' Investment Activities?
SSRN
We investigate the impact of stock market cycles on unlisted firms' investment activities. We find that bull markets is associated with increased capital expenditures, new establishments, and employment growth in the unlisted corporate sector, while bear markets is associated with a decrease in these investment activities. The favorable effect takes one year to materialize while the adverse effect takes place contemporaneously. Both effects are transitory and vanish after two years. The effects are stronger for unlisted firms with high capital requirements and facilitated in areas with a dense presence of listed firms. In addition, the magnitude of the effect is attenuated depending on the availability of alternative financing sources such as private equity and bank lending. We also find evidence suggesting stock market cycles partly impact the unlisted firm market through merger and acquisition activities by publicly listed firms.
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We investigate the impact of stock market cycles on unlisted firms' investment activities. We find that bull markets is associated with increased capital expenditures, new establishments, and employment growth in the unlisted corporate sector, while bear markets is associated with a decrease in these investment activities. The favorable effect takes one year to materialize while the adverse effect takes place contemporaneously. Both effects are transitory and vanish after two years. The effects are stronger for unlisted firms with high capital requirements and facilitated in areas with a dense presence of listed firms. In addition, the magnitude of the effect is attenuated depending on the availability of alternative financing sources such as private equity and bank lending. We also find evidence suggesting stock market cycles partly impact the unlisted firm market through merger and acquisition activities by publicly listed firms.
Does Asset Quality Matter in Relationship Between Bank Capital on Lending Growth?
SSRN
Mostly, loans are important source of income for banks and capital is used to absorb shocks during a bank’s worst periods. Credit risk is a major concern for the banking industry as the ratio of bad loans increases. The purpose of this research examines the effect of bank capital on lending growth with moderation of asset quality of banking sector listed in Indonesia Stock Exchange (IDX). This study used Fixed Effect Model. Data obtained from the company's financial report published in 2009- 2018 period. Dependent variable in this research is lending growth proxied with Net Loan Growth. Independent variable used bank capital proxied with Capital Adequacy Ratio (CAR). Moderating Variable in this research used asset quality proxied with Non Performing Loan (NPL). In addition, controlling variable in this study are liquidity level, firm size and bank performance. The results showed that bank capital has a significant positive effect on lending growth, while the bad asset quality mitigates the positive effect of bank capital on lending growth. This results are in line with policies that have been made by Otoritas Jasa Keuangan (OJK) about maintaning capital adequacy ratio and non performing loan.
SSRN
Mostly, loans are important source of income for banks and capital is used to absorb shocks during a bank’s worst periods. Credit risk is a major concern for the banking industry as the ratio of bad loans increases. The purpose of this research examines the effect of bank capital on lending growth with moderation of asset quality of banking sector listed in Indonesia Stock Exchange (IDX). This study used Fixed Effect Model. Data obtained from the company's financial report published in 2009- 2018 period. Dependent variable in this research is lending growth proxied with Net Loan Growth. Independent variable used bank capital proxied with Capital Adequacy Ratio (CAR). Moderating Variable in this research used asset quality proxied with Non Performing Loan (NPL). In addition, controlling variable in this study are liquidity level, firm size and bank performance. The results showed that bank capital has a significant positive effect on lending growth, while the bad asset quality mitigates the positive effect of bank capital on lending growth. This results are in line with policies that have been made by Otoritas Jasa Keuangan (OJK) about maintaning capital adequacy ratio and non performing loan.
Does Energy Efficiency Predict Mortgage Performance?
SSRN
We examine a unique micro-level data set on residential mortgages in the United Kingdom. Our analyses suggest that mortgages against energy-efficient properties are less frequently in payment arrears than mortgages against energy-inefficient properties. This result is robust when controlling for other relevant determinants of mortgage default including borrower income and the loan to value ratio of the mortgage. We conclude that energy efficiency is a relevant predictor of mortgage defaults.
SSRN
We examine a unique micro-level data set on residential mortgages in the United Kingdom. Our analyses suggest that mortgages against energy-efficient properties are less frequently in payment arrears than mortgages against energy-inefficient properties. This result is robust when controlling for other relevant determinants of mortgage default including borrower income and the loan to value ratio of the mortgage. We conclude that energy efficiency is a relevant predictor of mortgage defaults.
Does Skillful Use of Hard Information by Machines Outperform a Combination of Hard and Soft Information of Loan Officers in Lending Decisions?
SSRN
We ask whether an efficient use of hard information by machines can outperform a combination of hard and soft information used by the loan officers in loan decisions. We obtain loan application level data from an Indian bank. To perform the comparison within the constraints of the selective labels problem, we exploit the incentive driven within officer difference in leniency within a calendar month. We find that the ML algorithm is able to lend 39.6% more at loan officers' delinquency rate or achieve 91% lower delinquency rate at loan officers' approval rate. Higher profitability is achieved without compromising on equity.
SSRN
We ask whether an efficient use of hard information by machines can outperform a combination of hard and soft information used by the loan officers in loan decisions. We obtain loan application level data from an Indian bank. To perform the comparison within the constraints of the selective labels problem, we exploit the incentive driven within officer difference in leniency within a calendar month. We find that the ML algorithm is able to lend 39.6% more at loan officers' delinquency rate or achieve 91% lower delinquency rate at loan officers' approval rate. Higher profitability is achieved without compromising on equity.
Extremal Connectedness and Systemic Risk of Hedge Funds
SSRN
In this paper, we study the connectedness between extreme losses of hedge funds, a crucial feature for systemic risk management. To do so, we exploit cross-sections of hedge funds monthly returns grouped by investment styles, and build a time-varying measure of tail dependence across styles. Relying on extreme value theory and regression techniques, we study the dynamics of the tail dependencies between fund styles conditional on factors reflecting the economic uncertainty and the stock market performance. The resulting tail dependence measures are used to construct a time-varying network between extreme losses of the various investment styles. We show that during a crisis period, while the extremal dependence between some pairs of investment styles remains stable, other pairs show a striking increase of their extremal connectedness. Our results highlight that a proactive regulatory framework should account for the dynamic nature of the tail dependence and its link with financial stress.
SSRN
In this paper, we study the connectedness between extreme losses of hedge funds, a crucial feature for systemic risk management. To do so, we exploit cross-sections of hedge funds monthly returns grouped by investment styles, and build a time-varying measure of tail dependence across styles. Relying on extreme value theory and regression techniques, we study the dynamics of the tail dependencies between fund styles conditional on factors reflecting the economic uncertainty and the stock market performance. The resulting tail dependence measures are used to construct a time-varying network between extreme losses of the various investment styles. We show that during a crisis period, while the extremal dependence between some pairs of investment styles remains stable, other pairs show a striking increase of their extremal connectedness. Our results highlight that a proactive regulatory framework should account for the dynamic nature of the tail dependence and its link with financial stress.
Feed-in Tariff Contract Schemes and Regulatory Uncertainty
arXiv
arXiv
This paper presents a novel analysis of two feed-in tariffs (FIT) under market and regulatory uncertainty, namely a sliding premium with cap and floor and a minimum price guarantee. Regulatory uncertainty is modeled with a Poisson process, whereby a jump event may reduce the tariff before the signature of the contract. Using a semi-analytical real options framework, we derive the project value, the optimal investment threshold, and the value of the investment opportunity for these schemes. Taking into consideration the optimal investment threshold, we also compare the two aforementioned FITs with the fixed-price FIT and the fixed-premium FIT, which are policy schemes that have been extensively studied in the literature. Our results show that increasing the likelihood of a jump event lowers the investment threshold for all the schemes; moreover, the investment threshold also decreases when the tariff reduction increases. We also compare the four schemes in terms of the corresponding optimal investment thresholds. For example, we find that the investment threshold of the sliding premium is lower than the minimum price guarantee. This result suggests that the first regime is a better policy than the latter because it accelerates the investment while avoiding excessive earnings to producers.
Financial and Human Capital of Microentrepreneurs and Financing by Microfinance Institutions (Mfis) in Cameroon
SSRN
Objective - This study determines the nature and the direction of how financial and human capital influence the financing of microentrepreneurs in Cameroon. Compared with past research, this work uses existing microentrepreneurs only, which are considered as the only ones having access to the financing of MFIs.Methodology/Technique â€" This study employs an explanatory approach and uses the Five Cs model and primary data to explain the influence of financial capital (capacity, collateral, capital and condition) and human capital (character) on the financing of microentrepreneurs by MFIs.Findings â€" On the one hand, the findings show that character, capacity and collateral significantly increase financing of microentrepreneurs by MFIs. On the other hand, the findings reveal that that condition is significant and has an inverse relationship with lending to microentrepreneurs. Collateral was found to be not significant.Novelty â€" Compared with past research, this work uses existing microentrepreneurs only, which are considered as the only ones having access to the financing of MFIs. This study examines the relationship between financial and human capital to capacity, collateral capital and condition and character of microentrepreneurs.Type of Paper - Empirical.
SSRN
Objective - This study determines the nature and the direction of how financial and human capital influence the financing of microentrepreneurs in Cameroon. Compared with past research, this work uses existing microentrepreneurs only, which are considered as the only ones having access to the financing of MFIs.Methodology/Technique â€" This study employs an explanatory approach and uses the Five Cs model and primary data to explain the influence of financial capital (capacity, collateral, capital and condition) and human capital (character) on the financing of microentrepreneurs by MFIs.Findings â€" On the one hand, the findings show that character, capacity and collateral significantly increase financing of microentrepreneurs by MFIs. On the other hand, the findings reveal that that condition is significant and has an inverse relationship with lending to microentrepreneurs. Collateral was found to be not significant.Novelty â€" Compared with past research, this work uses existing microentrepreneurs only, which are considered as the only ones having access to the financing of MFIs. This study examines the relationship between financial and human capital to capacity, collateral capital and condition and character of microentrepreneurs.Type of Paper - Empirical.
Firm Size as Moderator to Capital Structure-Its Determinants Relations
SSRN
Objective - Capital structure policy is a strategic decision related to the selection of funding sources. The best mixed of capital structure will produce a low cost of capital, which in turn can maximize the value of the company. This study aims to determine the effect of company size as a moderator on the relationship of capital structure and its determinant factors on manufacturing companies in Indonesia and Malaysia.Methodology/Technique â€" Data were collected from 40 manufacturing companies listed on the Indonesia Stock Exchange and 130 manufacturing companies listed on the Bursa Malaysia during 2008-2017. This study will analyze the determinants of capital structure consisting of liquidity, profitability, tangibility and efficiency as well as company size as a moderating variable. The research method uses panel data regression.Findings â€" The company size provides a moderating effect on the relationship between capital structure with liquidity, profitability, tangibility and efficiency, and this moderation effect is strengthened in large companies in Indonesia. Instead, this moderation effect is weakening for large companies in MalaysiaNovelty â€" Research shows that the "modified pecking order" model is better able to explain the capital structure, policies of manufacturing companies in Indonesia and Malaysia compared to the traditional pecking order and trade off theory models.Type of Paper - Empirical.
SSRN
Objective - Capital structure policy is a strategic decision related to the selection of funding sources. The best mixed of capital structure will produce a low cost of capital, which in turn can maximize the value of the company. This study aims to determine the effect of company size as a moderator on the relationship of capital structure and its determinant factors on manufacturing companies in Indonesia and Malaysia.Methodology/Technique â€" Data were collected from 40 manufacturing companies listed on the Indonesia Stock Exchange and 130 manufacturing companies listed on the Bursa Malaysia during 2008-2017. This study will analyze the determinants of capital structure consisting of liquidity, profitability, tangibility and efficiency as well as company size as a moderating variable. The research method uses panel data regression.Findings â€" The company size provides a moderating effect on the relationship between capital structure with liquidity, profitability, tangibility and efficiency, and this moderation effect is strengthened in large companies in Indonesia. Instead, this moderation effect is weakening for large companies in MalaysiaNovelty â€" Research shows that the "modified pecking order" model is better able to explain the capital structure, policies of manufacturing companies in Indonesia and Malaysia compared to the traditional pecking order and trade off theory models.Type of Paper - Empirical.
How Art Market Reacts to Financial Market Crisis?
SSRN
In this paper, by creating a high frequency index of Paris modern paintings market, we study the direct impact of 1929 financial market crash on the art market.
SSRN
In this paper, by creating a high frequency index of Paris modern paintings market, we study the direct impact of 1929 financial market crash on the art market.
How to Face Extreme Market With Stress Testing?
SSRN
The purpose of this paper is to describe stress testing analysis mechanism. A corporate could be said to be capable of against extreme market flows if it can make that market on the predictable situations or risk measurement. Finally, this paper explains two approaches of stress testing- they're sensitivity analysis and scenario analysis, its types and data flow.
SSRN
The purpose of this paper is to describe stress testing analysis mechanism. A corporate could be said to be capable of against extreme market flows if it can make that market on the predictable situations or risk measurement. Finally, this paper explains two approaches of stress testing- they're sensitivity analysis and scenario analysis, its types and data flow.
Industrial Tail Exposure Risk and Cross-Section of Returns in REIT Market
SSRN
We examine whether systematic tail risk premium exists in the cross-section of real estate investment trusts. Using US equity REITs data from 1993 to 2018, we obtain systematic tail risk of REITs by estimating their industrial tail exposure risk (ITER) based on extreme value theory. We find that REITs in highest ITER decile outperforms REITs in lowest ITER decile by 11.5% per annum. The impact of ITER remains significant after controlling for well-kwon firm and return factors. The positive return premium is not explained by traditional systematic tail risk based on left-tail market return. Thus, our results suggest that REITs investors are averse to crash events, especially associated with multiple industries rather than aggregate market alone.
SSRN
We examine whether systematic tail risk premium exists in the cross-section of real estate investment trusts. Using US equity REITs data from 1993 to 2018, we obtain systematic tail risk of REITs by estimating their industrial tail exposure risk (ITER) based on extreme value theory. We find that REITs in highest ITER decile outperforms REITs in lowest ITER decile by 11.5% per annum. The impact of ITER remains significant after controlling for well-kwon firm and return factors. The positive return premium is not explained by traditional systematic tail risk based on left-tail market return. Thus, our results suggest that REITs investors are averse to crash events, especially associated with multiple industries rather than aggregate market alone.
International Relations: What Causes States to Pursue Free Trade
SSRN
International relations are ire interdisciplinary in the nature of this world as they blend with fields of political science, history, and economics in the examination of topics regarding global poverty, human rights, globalization, the political environment, and economics. Free trade is an engine of growth as it keeps on increasing on the global scale thus making it a significant contributor to the economic growth of a state. States which enact free trade policies can create their own economic dynamism, which allows them to foster increased opportunities and freedom for every individual. The governing on states highly relies on good international relations with other nations in a correlating manner where both parties may benefit immensely. Free trade is an essential factor in maintaining affirmative international relations among states, thus the dire need for states to pursue it.
SSRN
International relations are ire interdisciplinary in the nature of this world as they blend with fields of political science, history, and economics in the examination of topics regarding global poverty, human rights, globalization, the political environment, and economics. Free trade is an engine of growth as it keeps on increasing on the global scale thus making it a significant contributor to the economic growth of a state. States which enact free trade policies can create their own economic dynamism, which allows them to foster increased opportunities and freedom for every individual. The governing on states highly relies on good international relations with other nations in a correlating manner where both parties may benefit immensely. Free trade is an essential factor in maintaining affirmative international relations among states, thus the dire need for states to pursue it.
Intervention Under Inflation Targeting--When Could it Make Sense?
SSRN
We investigate the motives inflation-targeting central banks in emerging markets may have for intervening in foreign exchange markets and evaluate the case for such interventions based on the existing literature. Our findings suggest that the rationale for interventions depends on initial conditions and country-specific circumstances. The case is strongest in the presence of large currency mismatches or underdeveloped markets. While interventions can have benefits in the short-term, sustained over time they could entrench unfavorable initial conditions, though more work is needed to establish this empirically. A first effort to measure the cost of interventions to the credibility of policy frameworks suggests that the negative impact may be smaller than often assumed-at least for the set of more sophisticated inflation-targeting emerging-market central banks considered here.
SSRN
We investigate the motives inflation-targeting central banks in emerging markets may have for intervening in foreign exchange markets and evaluate the case for such interventions based on the existing literature. Our findings suggest that the rationale for interventions depends on initial conditions and country-specific circumstances. The case is strongest in the presence of large currency mismatches or underdeveloped markets. While interventions can have benefits in the short-term, sustained over time they could entrench unfavorable initial conditions, though more work is needed to establish this empirically. A first effort to measure the cost of interventions to the credibility of policy frameworks suggests that the negative impact may be smaller than often assumed-at least for the set of more sophisticated inflation-targeting emerging-market central banks considered here.
Lending Relationships and the Pricing of Syndicated Loans
SSRN
We provide evidence on how banks use information from prior lending relationships to facilitate price discovery in the primary market of syndicated loans under the originate-to-distribute (OTD) model. We find that a lead bank makes less adjustment to the initial pricing terms when it has a stronger relationship with a borrower. A stronger lead-borrower relationship shortens syndication time and reduces loan underpricing. Lending relationships also reduce lead banks’ reliance on information from syndicate members. Exogenous shocks to relationships caused by bank mergers and closures confirm our findings. The evidence suggests that relationship lending still adds value under the OTD model.
SSRN
We provide evidence on how banks use information from prior lending relationships to facilitate price discovery in the primary market of syndicated loans under the originate-to-distribute (OTD) model. We find that a lead bank makes less adjustment to the initial pricing terms when it has a stronger relationship with a borrower. A stronger lead-borrower relationship shortens syndication time and reduces loan underpricing. Lending relationships also reduce lead banks’ reliance on information from syndicate members. Exogenous shocks to relationships caused by bank mergers and closures confirm our findings. The evidence suggests that relationship lending still adds value under the OTD model.
Management Policies for the Prevention Technique of Social Engineering (SoE) Attacks in the Organization
SSRN
Information security in an organization will continue to face SoE attacking threat given the global paradigm in today’s digital economy. It is the responsibility of management to address the security issues by forming appropriate security policy for the prevention technique of SoE attacks in the organization. The matter of security implementation is complex and all stakeholders must be involved to understand and commit to the hierarchical relationship of the organization’s business objectives to its security policies down to procedures. Standards and guidelines must also be considered for their in security policy for the prevention technique of SoE attacks.
SSRN
Information security in an organization will continue to face SoE attacking threat given the global paradigm in today’s digital economy. It is the responsibility of management to address the security issues by forming appropriate security policy for the prevention technique of SoE attacks in the organization. The matter of security implementation is complex and all stakeholders must be involved to understand and commit to the hierarchical relationship of the organization’s business objectives to its security policies down to procedures. Standards and guidelines must also be considered for their in security policy for the prevention technique of SoE attacks.
Monetary Policy is Not Always Systematic and Data-Driven: Evidence from the Yield Curve
SSRN
Does monetary policy react systematically to macroeconomic innovations? In a sample of 16 countries - operating under various monetary regimes - we find that monetary policy decisions, as expressed in yield curve movements, do react to macroeconomic innovations and these reactions reflect the monetary policy regime. While we find evidence of the primacy of the price stability objective in the inflation targeting countries, links to inflation and the output gap are generally weaker and less systematic in money-targeting and multiple-objective countries.
SSRN
Does monetary policy react systematically to macroeconomic innovations? In a sample of 16 countries - operating under various monetary regimes - we find that monetary policy decisions, as expressed in yield curve movements, do react to macroeconomic innovations and these reactions reflect the monetary policy regime. While we find evidence of the primacy of the price stability objective in the inflation targeting countries, links to inflation and the output gap are generally weaker and less systematic in money-targeting and multiple-objective countries.
Money Creation in Fiat and Digital Currency Systems
SSRN
To support the understanding that banks' debt issuance means money creation, while centralized nonbank financial institutions' and decentralized bond market intermediary lending does not, the paper aims to convey two related points: First, the notion of money creation as a result of banks' loan creation is compatible with the notion of liquid funding needs in a multi-bank system, in which liquid fund (reserve) transfers across banks happen naturally. Second, interest rate-based monetary policy has a bearing on macroeconomic dynamics precisely due to that multi-bank structure. It would lose its impact in the hypothetical case that only one ('singular') commercial bank would exist. We link our discussion to the emergence and design of central bank digital currencies (CBDC), with a special focus on how loans would be granted in a CBDC world.
SSRN
To support the understanding that banks' debt issuance means money creation, while centralized nonbank financial institutions' and decentralized bond market intermediary lending does not, the paper aims to convey two related points: First, the notion of money creation as a result of banks' loan creation is compatible with the notion of liquid funding needs in a multi-bank system, in which liquid fund (reserve) transfers across banks happen naturally. Second, interest rate-based monetary policy has a bearing on macroeconomic dynamics precisely due to that multi-bank structure. It would lose its impact in the hypothetical case that only one ('singular') commercial bank would exist. We link our discussion to the emergence and design of central bank digital currencies (CBDC), with a special focus on how loans would be granted in a CBDC world.
Multiplicity of time scales in climate, matter, life, and economy
arXiv
arXiv
This topic review communicates working experiences regarding interaction of a multiplicity of processes. Our experiences come from climate change modelling, materials science, cell physiology and public health, and macroeconomic modelling. We look at the astonishing advances of recent years in broad-band temporal frequency sampling, multiscale modelling and fast large-scale numerical simulation of complex systems, but also the continuing uncertainty of many science-based results.
We describe and analyse properties that depend on the time scale of the measurement; structural instability; tipping points; thresholds; hysteresis; feedback mechanisms with runaways or stabilizations or delays. We point to grave disorientation in statistical sampling, the interpretation of observations and the design of control when neglecting the presence or emergence of multiple characteristic times.
We explain what these working experiences can demonstrate for environmental research.
No Brainer, Tackle Climate Change by 2030 or Await the Doomsday by 2100
SSRN
Vulnerability to climate change is the greatest challenge in the 21st century. Scientists agree with high confidence that global warming (+0.8-1.0 °C since 1900s) is directly linked to a fast acceleration of human activities in advanced nations and the increased burning of fossil fuels for energy and industrial processes, which resulted in a massive concentration of CO2 and other more potent GHGs in the atmosphere. As of 2017, China as the largest emitter released 10,877 MtCO₂e which was almost one-third of the world’s total GHG emissions of 37,077 MtCO₂e; furthermore, China’s emissions were more than the aggregate emissions of 185 countries. If the governments of industrialized economies and oil/gas producers put their political differences aside and agree on policy reforms to mitigate risks of global warming by 2030, climate change can cost economies worldwide up to $5 trillion by 2050 and $50 trillion by 2100. Rising sea levels, acceleration in melting of glaciers, thinning polar ice, shrinking and breaking off arctic ice, devastating massive floods, and the deadliest bushfires in recent memory are an incontrovertible evidence of a planetary-scale warming. There is enormous social injustice; while five largest GHG emitter countries (China, US, India, Russia, and Japan) account for 58.3% of the total global emissions and still enjoy high standards of living, the most vulnerable poor living in 200 countries bear the burden of climate change even though they contribute the least to its causes. To achieve win-win policies which are necessary for climate (carbon) stabilization as well as a sustainable global economic development path, governments collectively must do the following; phase out coal by no later than 2040; promote energy efficiency as top priority; remove all energy subsidies; establish new funds to assist the least developed and developing countries in their efforts to reduce GHG emissions; and achieve a systems approach to energy.
SSRN
Vulnerability to climate change is the greatest challenge in the 21st century. Scientists agree with high confidence that global warming (+0.8-1.0 °C since 1900s) is directly linked to a fast acceleration of human activities in advanced nations and the increased burning of fossil fuels for energy and industrial processes, which resulted in a massive concentration of CO2 and other more potent GHGs in the atmosphere. As of 2017, China as the largest emitter released 10,877 MtCO₂e which was almost one-third of the world’s total GHG emissions of 37,077 MtCO₂e; furthermore, China’s emissions were more than the aggregate emissions of 185 countries. If the governments of industrialized economies and oil/gas producers put their political differences aside and agree on policy reforms to mitigate risks of global warming by 2030, climate change can cost economies worldwide up to $5 trillion by 2050 and $50 trillion by 2100. Rising sea levels, acceleration in melting of glaciers, thinning polar ice, shrinking and breaking off arctic ice, devastating massive floods, and the deadliest bushfires in recent memory are an incontrovertible evidence of a planetary-scale warming. There is enormous social injustice; while five largest GHG emitter countries (China, US, India, Russia, and Japan) account for 58.3% of the total global emissions and still enjoy high standards of living, the most vulnerable poor living in 200 countries bear the burden of climate change even though they contribute the least to its causes. To achieve win-win policies which are necessary for climate (carbon) stabilization as well as a sustainable global economic development path, governments collectively must do the following; phase out coal by no later than 2040; promote energy efficiency as top priority; remove all energy subsidies; establish new funds to assist the least developed and developing countries in their efforts to reduce GHG emissions; and achieve a systems approach to energy.
Opioid Prescription Rates and Asset Prices â€" Assessment of Causal Effects
SSRN
We explore the link between county-level opioid prescription rates and asset prices, specifically, stock returns of firms headquartered in that county, as well as real estate prices. In order to establish the causal effects of opioid prescription rates on firm stock returns, we first apply an instrumental variable (IV) regression approach and use the number of clandestine drug laboratories in a county to be the instrumental variable. The results provide robust evidence that county-level opioid prescription rates have a negative causal effect on the equity returns of firms headquartered in that county. Furthermore, we analyze the effect of Medical Board of California's 2014 regulatory revision aimed at reducing controlled substance overdose due to prescriptions and implement a difference-in-differences (DiD) estimation. The DiD estimation results show that this policy change has a positive dynamic effect on Californian firms' equity returns. We also find that the opioid prescription reduction assistance program provided by California Health Care Foundation (CHCF) to certain counties in California helps to raise the median prices of existing single-family homes in those counties by $28,678 on average.
SSRN
We explore the link between county-level opioid prescription rates and asset prices, specifically, stock returns of firms headquartered in that county, as well as real estate prices. In order to establish the causal effects of opioid prescription rates on firm stock returns, we first apply an instrumental variable (IV) regression approach and use the number of clandestine drug laboratories in a county to be the instrumental variable. The results provide robust evidence that county-level opioid prescription rates have a negative causal effect on the equity returns of firms headquartered in that county. Furthermore, we analyze the effect of Medical Board of California's 2014 regulatory revision aimed at reducing controlled substance overdose due to prescriptions and implement a difference-in-differences (DiD) estimation. The DiD estimation results show that this policy change has a positive dynamic effect on Californian firms' equity returns. We also find that the opioid prescription reduction assistance program provided by California Health Care Foundation (CHCF) to certain counties in California helps to raise the median prices of existing single-family homes in those counties by $28,678 on average.
Political Patronage on Capital Structure in Indonesia
SSRN
Objective - The purpose of this research is to test the theory of capital structure by determining whether the relationship is affected by Political Patronage. The study will examine political support, capital structure and financial performance of the company.Methodology/Technique â€" The data in this research is in the form of financial ratios displayed in the financial report of each company listed from 2010 to 2016. The sample was selected using purposive sampling with as many as 70 companies indicated to have political support. The data was analysed using regression analysis.Findings â€" The results show that Political Patronage has an influence on capital structure and political Patronage has a weak effect on financial performance.Type of Paper - Empirical.
SSRN
Objective - The purpose of this research is to test the theory of capital structure by determining whether the relationship is affected by Political Patronage. The study will examine political support, capital structure and financial performance of the company.Methodology/Technique â€" The data in this research is in the form of financial ratios displayed in the financial report of each company listed from 2010 to 2016. The sample was selected using purposive sampling with as many as 70 companies indicated to have political support. The data was analysed using regression analysis.Findings â€" The results show that Political Patronage has an influence on capital structure and political Patronage has a weak effect on financial performance.Type of Paper - Empirical.
Predicting Bank Loan Default with Extreme Gradient Boosting
arXiv
arXiv
Loan default prediction is one of the most important and critical problems faced by banks and other financial institutions as it has a huge effect on profit. Although many traditional methods exist for mining information about a loan application, most of these methods seem to be under-performing as there have been reported increases in the number of bad loans. In this paper, we use an Extreme Gradient Boosting algorithm called XGBoost for loan default prediction. The prediction is based on a loan data from a leading bank taking into consideration data sets from both the loan application and the demographic of the applicant. We also present important evaluation metrics such as Accuracy, Recall, precision, F1-Score and ROC area of the analysis. This paper provides an effective basis for loan credit approval in order to identify risky customers from a large number of loan applications using predictive modeling.
Rank monotonicity and the eigenvector method
arXiv
arXiv
Pairwise comparisons are used in a wide variety of decision situations when the importance of alternatives should be measured on a numerical scale. One popular method to derive the priorities is based on the right eigenvector of a multiplicative pairwise comparison matrix. We introduce an axiom called rank monotonicity: increasing an arbitrary entry of a pairwise comparison matrix is not allowed to result in a counter-intuitive rank reversal, that is, the favoured alternative in the corresponding row cannot be ranked lower than any other alternative if this was not the case before the change. The property is proved to be satisfied by the geometric mean method but violated by the eigenvector method. The axiom does not uniquely determine the geometric mean. We also investigate the relationship between rank monotonicity and the Saaty inconsistency index for the eigenvector method. The violation of this property turns out not to be a usual problem even for heavily inconsistent matrices. Nonetheless, all decision-makers should be informed about the possible occurrence of an unexpected rank reversal when a matrix entry is increased because this shortcoming can lead to improper implications in some settings such as sports applications.
Social Collateral and Repayment Performance: Evidence from Islamic Micro Finance
SSRN
A superior knowledge of determinants of repayment performance can contribute significantly to the development of microfinance in Pakistan. In this study we designed to test the remarkable repayment performance of Akhuwat; most successful Islamic Microfinance Institution (IMFI) in Pakistan. Akhuwat offers interest free loans in order to improve the quality of life and alleviate poverty in Pakistan. The model of Akhuwat is based on Muakhaat (brotherhood) and Qard-e-Hasan (offering financial assistance to somebody in need without interest). The primary objective of this study was to investigate the determinants of microfinance repayment performance. The study examined the borrowers’ characteristics, loan attributes, lender/institutional characteristics and the social collateral characteristics related to the Akhuwat. In order to verify these relationships, data is obtained from microfinance programs carried out on continuous basis by Akhuwat. Data of 387 borrowers was collected and logistic regression was used for data analysis. The findings depicted that among the socio-demographic factors like gender, marital status, number of dependents and number of previous loans are significantly and positively associated with loan repayment performance. However, previous loan default and religion are significantly and inversely associated with the loan repayment performance. Further, institutional characteristics e.g. branch location and amount of processing fees are significantly and positively associated with repayment performance. On the other hand, late fees penalty is significantly and inversely related to the loan repayment performance. Loan related characteristics like amount of loan and ease in repayment are significantly and positively related to the repayment performance. The findings of the study supported the role of social ties in improving repayment performance and hold key insights and directions about microfinance policy making in Pakistan.
SSRN
A superior knowledge of determinants of repayment performance can contribute significantly to the development of microfinance in Pakistan. In this study we designed to test the remarkable repayment performance of Akhuwat; most successful Islamic Microfinance Institution (IMFI) in Pakistan. Akhuwat offers interest free loans in order to improve the quality of life and alleviate poverty in Pakistan. The model of Akhuwat is based on Muakhaat (brotherhood) and Qard-e-Hasan (offering financial assistance to somebody in need without interest). The primary objective of this study was to investigate the determinants of microfinance repayment performance. The study examined the borrowers’ characteristics, loan attributes, lender/institutional characteristics and the social collateral characteristics related to the Akhuwat. In order to verify these relationships, data is obtained from microfinance programs carried out on continuous basis by Akhuwat. Data of 387 borrowers was collected and logistic regression was used for data analysis. The findings depicted that among the socio-demographic factors like gender, marital status, number of dependents and number of previous loans are significantly and positively associated with loan repayment performance. However, previous loan default and religion are significantly and inversely associated with the loan repayment performance. Further, institutional characteristics e.g. branch location and amount of processing fees are significantly and positively associated with repayment performance. On the other hand, late fees penalty is significantly and inversely related to the loan repayment performance. Loan related characteristics like amount of loan and ease in repayment are significantly and positively related to the repayment performance. The findings of the study supported the role of social ties in improving repayment performance and hold key insights and directions about microfinance policy making in Pakistan.
Sovereign Exposures of European Banks: It Is Not All Doom
SSRN
In this paper we investigate whether or not observed changes in the composition of the sovereign bond portfolios of European banks are determined by a risk-return trade-off. Banks have been shown to disproportionally invest in bonds issued by their domestic sovereign, causing a negative bank-sovereign doom loop. Several motivations for such behavior have been demonstrated in the extant literature, such as e.g., search for yield or moral suasion, which from an investment perspective all involve some degree of irrational behavior. We depart from this approach and investigate the risk-return trade-off in the bank sovereign bond portfolios. We use data from all stress tests and transparency exercises conducted by the EBA between 2011 and 2018 for a sample of 76 European banks. Using the Sharpe ratio for the risk-return assessment, we find that over the entire period banks’ investments and divestments of sovereign bonds are characterized by rational risk-return considerations. Moreover, both bond risk (measured by the standard deviation of bond returns) as well as sovereign risk (sovereign CDS spreads) are negatively related to bond buying, implying that, on average, banks do not engage in excessive risk-taking behavior in their sovereign bond portfolios. Our main conclusion is that over the 2011-2018 period banks may have exhibited spells of excessive risk behavior in their sovereign bond buying, but over the entire period their sovereign bond investments exhibit a sound risk-return trade-off. These findings have implications for policy initiatives to tackle concentrations in sovereign bond holdings by European banks.
SSRN
In this paper we investigate whether or not observed changes in the composition of the sovereign bond portfolios of European banks are determined by a risk-return trade-off. Banks have been shown to disproportionally invest in bonds issued by their domestic sovereign, causing a negative bank-sovereign doom loop. Several motivations for such behavior have been demonstrated in the extant literature, such as e.g., search for yield or moral suasion, which from an investment perspective all involve some degree of irrational behavior. We depart from this approach and investigate the risk-return trade-off in the bank sovereign bond portfolios. We use data from all stress tests and transparency exercises conducted by the EBA between 2011 and 2018 for a sample of 76 European banks. Using the Sharpe ratio for the risk-return assessment, we find that over the entire period banks’ investments and divestments of sovereign bonds are characterized by rational risk-return considerations. Moreover, both bond risk (measured by the standard deviation of bond returns) as well as sovereign risk (sovereign CDS spreads) are negatively related to bond buying, implying that, on average, banks do not engage in excessive risk-taking behavior in their sovereign bond portfolios. Our main conclusion is that over the 2011-2018 period banks may have exhibited spells of excessive risk behavior in their sovereign bond buying, but over the entire period their sovereign bond investments exhibit a sound risk-return trade-off. These findings have implications for policy initiatives to tackle concentrations in sovereign bond holdings by European banks.
Sovereign Risk, Cross-Currency Basis and Equity Markets: A Cross-Market Dynamic Interaction
SSRN
To explore the propagation of shocks across markets, this paper examines the dynamic connections between three distinct markets: credit default swaps (CDS), equities, and cross-currency basis swaps (CCBS) of four major individual economies: Eurozone, UK, Australia, and Japan. We use CDS spreads, CCBS spreads and stock market returns to capture sovereign credit risk, dollar funding liquidity and stock market performance, respectively. Our results show there is a feedback mechanism connecting these markets, for most of these economies. We document that higher CDS spreads induce wider CCBS spreads and declines in stock market returns. We equally show that positive shocks to CCBS spreads lessen CDS spreads and enhance stock market returns. Finally, we show that positive shocks to the stock market are associated with lower CDS spreads and tighter CCBS spreads. These findings are supported by Granger-causality analysis and are robust across subperiods and empirical specifications. Underpinning the feedback mechanism is the role of CDS as an indicator of potential default on obligations in the financial markets.
SSRN
To explore the propagation of shocks across markets, this paper examines the dynamic connections between three distinct markets: credit default swaps (CDS), equities, and cross-currency basis swaps (CCBS) of four major individual economies: Eurozone, UK, Australia, and Japan. We use CDS spreads, CCBS spreads and stock market returns to capture sovereign credit risk, dollar funding liquidity and stock market performance, respectively. Our results show there is a feedback mechanism connecting these markets, for most of these economies. We document that higher CDS spreads induce wider CCBS spreads and declines in stock market returns. We equally show that positive shocks to CCBS spreads lessen CDS spreads and enhance stock market returns. Finally, we show that positive shocks to the stock market are associated with lower CDS spreads and tighter CCBS spreads. These findings are supported by Granger-causality analysis and are robust across subperiods and empirical specifications. Underpinning the feedback mechanism is the role of CDS as an indicator of potential default on obligations in the financial markets.
Supply and Demand Side Determinants of Board Gender Imbalance: The U.S. Evidence
SSRN
Women are heavily underrepresented in U.S. boardrooms at a time when many countries are introducing policies such as gender quotas to achieve greater gender balance in boards. To understand why, we examine how successful women are, relative to men, in finding a second board appointment after an initial appointment. We find that women do better than comparable men in terms of the quality, likelihood, and speed of the second appointment. Examining first appointments, we find that women who obtain board seats generally have significantly less leadership and work experience in quoted firms than men, but (after controlling for observable attributes) are appointed at larger firms. Our findings are consistent with the under-representation of women being more a consequence of supply-side factors: in particular, a lack of opportunities for women to rise up the corporate ladder so that only a small number of exceptionally capable women manage to be on the radar of nomination committees. We find little evidence that boards engage in either taste-based or statistical discrimination against women
SSRN
Women are heavily underrepresented in U.S. boardrooms at a time when many countries are introducing policies such as gender quotas to achieve greater gender balance in boards. To understand why, we examine how successful women are, relative to men, in finding a second board appointment after an initial appointment. We find that women do better than comparable men in terms of the quality, likelihood, and speed of the second appointment. Examining first appointments, we find that women who obtain board seats generally have significantly less leadership and work experience in quoted firms than men, but (after controlling for observable attributes) are appointed at larger firms. Our findings are consistent with the under-representation of women being more a consequence of supply-side factors: in particular, a lack of opportunities for women to rise up the corporate ladder so that only a small number of exceptionally capable women manage to be on the radar of nomination committees. We find little evidence that boards engage in either taste-based or statistical discrimination against women
Text-based crude oil price forecasting
arXiv
arXiv
Crude oil price forecasting has attracted substantial attention in the field of forecasting. Recently, the research on text-based crude oil price forecasting has advanced. To improve accuracy, some studies have added as many covariates as possible, such as textual and nontextual factors, to their models, leading to unnecessary human intervention and computational costs. Moreover, some methods are only designed for crude oil forecasting and cannot be well transferred to the forecasting of other similar futures commodities. In contrast, this article proposes a text-based forecasting framework for futures commodities that uses only future news headlines obtained from Investing.com to forecast crude oil prices. Two marketing indexes, the sentiment index and the topic intensity index, are extracted from these news headlines. Considering that the public's sentiment changes over time, the time factor is innovatively applied to the construction of the sentiment index. Taking the nature of the short news headlines into consideration, a short text topic model called SeaNMF is used to calculate the topic intensity of the futures market more accurately. Two methods, VAR and RFE, are used for lag order judgment and feature selection, respectively, at the model construction stage. The experimental results show that the Ada-text model outperforms the Adaboost.RT baseline model and the other benchmarks.
The Privilege of Eligibility: Announcement Effects and Spillovers of the ECB's Corporate Sector Purchase Program
SSRN
This paper examines the immediate impact that the unexpected announcement of the ECB's Corporate Sector Purchase Program on March 10, 2016 had on corporate bond prices. Employing a differences-in-differences specification augmented to a spatial autoregressive model, the impact of the CSPP announcement is disentangled from three other ECB measures introduced on the same day, while accounting for spillovers to the control group of non-eligible bonds. The introduction of the CSPP is estimated to have decreased the yield spread of eligible corporate bonds by 12bp (10% relative change) within two trading days after the announcement. While the results are in line with the notion of a strong portfolio rebalancing channel, as intended by the ECB, the analysis at the same time also documents persistently heterogeneous effects between eligible and non-eligible bonds, hinting at the formation of a more permanent price premium following the announcement.
SSRN
This paper examines the immediate impact that the unexpected announcement of the ECB's Corporate Sector Purchase Program on March 10, 2016 had on corporate bond prices. Employing a differences-in-differences specification augmented to a spatial autoregressive model, the impact of the CSPP announcement is disentangled from three other ECB measures introduced on the same day, while accounting for spillovers to the control group of non-eligible bonds. The introduction of the CSPP is estimated to have decreased the yield spread of eligible corporate bonds by 12bp (10% relative change) within two trading days after the announcement. While the results are in line with the notion of a strong portfolio rebalancing channel, as intended by the ECB, the analysis at the same time also documents persistently heterogeneous effects between eligible and non-eligible bonds, hinting at the formation of a more permanent price premium following the announcement.
Unbundling execution and research services and its impact on analysts’ performance: An empirical examination of MiFID II
SSRN
The European Commission passed MiFID II, in part, to unbundle brokers’ execution and research services. We find that the trading volume generated by brokers issuing recommendations declined significantly after the enactment of MiFID II. Further, MiFID II appears to have had a positive effect on the informativeness of analysts’ recommendations and no discernible impact on forecast accuracy while narrowing the forecast accuracy and bias differential between analysts employed by brokers and non-brokers. Finally, we find that MiFID II coincided with a significant decline in the supply of analysts’ research activity (e.g. coverage, frequency), indicating a “chilling effect†of MiFID II.
SSRN
The European Commission passed MiFID II, in part, to unbundle brokers’ execution and research services. We find that the trading volume generated by brokers issuing recommendations declined significantly after the enactment of MiFID II. Further, MiFID II appears to have had a positive effect on the informativeness of analysts’ recommendations and no discernible impact on forecast accuracy while narrowing the forecast accuracy and bias differential between analysts employed by brokers and non-brokers. Finally, we find that MiFID II coincided with a significant decline in the supply of analysts’ research activity (e.g. coverage, frequency), indicating a “chilling effect†of MiFID II.
