Research articles for the 2020-02-12

A Bimodal Network Approach to Model Topic Dynamics
Luigi Di Caro,Marco Guerzoni,Massimiliano Nuccio,Giovanni Siragusa

This paper presents an intertemporal bimodal network to analyze the evolution of the semantic content of a scientific field within the framework of topic modeling, namely using the Latent Dirichlet Allocation (LDA). The main contribution is the conceptualization of the topic dynamics and its formalization and codification into an algorithm. To benchmark the effectiveness of this approach, we propose three indexes which track the transformation of topics over time, their rate of birth and death, and the novelty of their content. Applying the LDA, we test the algorithm both on a controlled experiment and on a corpus of several thousands of scientific papers over a period of more than 100 years which account for the history of the economic thought.

An Option Pricing Model with Probability Measure Ambiguity
Liu, Yu,Wang, Hao,Zhang, Lihong
This paper develops an option pricing model that admits probability measure ambiguity. It formulates the pricing kernel that transforms the reference probability measure of the Black-Scholes-Merton (BSM) model into the risk-ambiguity-neutral measure (equivalent martingale measure), and derives analytical pricing formula for European options. Introduction of probability measure ambiguity significantly improves model internal consistency, and remarkably alleviates volatility smile. In pricing the S&P 500 index options, it helps reduce the in-sample and 1-day (5-day) out-of-sample pricing errors of the BSM model by 80% and 66% (61%), respectively. The option-implied market ambiguity premium is counter-cyclical, and moderately correlated to the VIX and other market indices.

Answer to 'Supplemental Consultation on Spread and Term Adjustments, Including Final Parameters Thereof, for Fallbacks in Derivatives Referencing EUR LIBOR and EURIBOR, As Well as Other Less Widely Used IBORs' Issued by ISDA
Henrard, Marc P. A.
This note is an answer to the consultation published by ISDA regarding the amendment of documentation to implement fallbacks in derivatives referencing EUR-LIBOR and EUR-EURIBOR. The consultation is based on question similar to the previous consultations. The answers we provided to those consultation and the quantitative literature related to the same subject can be used to understand why the proposed solutions are not acceptable. To those generic answer, there are two EUR specific issues that should be emphasised. The first one is positive and is the existence of two benchmarks (EUR-LIBOR and EUR-EURIBOR) with one of them expected to outlast the other by several years. The surviving benchmark should be used as the first step of the fallback for the other benchmark. The second issue is negative and is due to the fact that the planned fallback benchmark, ESTR, has been published only since 1 October 2019. Data preceding that date are for some part not intended for use as benchmark by the administrator and regulator and for the older part not regulation compliant. The only ESTR data acceptable is the one officially published as a benchmark, i.e. data for dates after 1 October 2019.We suggest once more to ISDA to fundamentally review the decision to base the fallback on the compounding setting in arrears and historical mean approaches.

Bad Bank Resolutions and Bank Lending
Brei, Michael,Gambacorta, Leonardo,Lucchetta, Marcella,Parigi, Bruno Maria
The paper investigates whether impaired asset segregation tools, otherwise known as bad banks, and recapitalisation lead to a recovery in the originating banks' lending and a reduction in non-performing loans (NPLs). Results are based on a novel data set covering 135 banks from 15 European banking systems over the period 2000-16. The main finding is that bad bank segregations are effective in cleaning up balance sheets and promoting bank lending only if they combine recapitalisation with asset segregation. Used in isolation, neither tool will suffice to spur lending and reduce future NPLs. Exploiting the heterogeneity in asset segregation events, we find that asset segregation is more effective when: (i) asset purchases are funded privately; (ii) smaller shares of the originating bank's assets are segregated; and (iii) asset segregation occurs in countries with more efficient legal systems. Our results continue to hold when we address the potential endogeneity problem associated with the creation of a bad bank.

Bifurcations in economic growth model with distributed time delay transformed to ODE
Luca Guerrini,Adam Krawiec,Marek Szydlowski

We consider the model of economic growth with time delayed investment function. Assuming the investment is time distributed we can use the linear chain trick technique to transform delay differential equation system to equivalent system of ordinary differential system (ODE). The time delay parameter is a mean time delay of gamma distribution. We reduce the system with distribution delay to both three and four-dimensional ODEs. We study the Hopf bifurcation in these systems with respect to two parameters: the time delay parameter and the rate of growth parameter. We derive the results from the analytical as well as numerical investigations. From the former we obtain the sufficient criteria on the existence and stability of a limit cycle solution through the Hopf bifurcation. In numerical studies with the Dana and Malgrange investment function we found two Hopf bifurcations with respect to the rate growth parameter and detect the existence of stable long-period cycles in the economy. We find that depending on the time delay and adjustment speed parameters the range of admissible values of the rate of growth parameter breaks down into three intervals. First we have stable focus, then the limit cycle and again the stable solution with two Hopf bifurcations. Such behaviour appears for some middle interval of admissible range of values of the rate of growth parameter.

Commercial Banking and Shadow Banking: The Accelerating Integration of Banks And Markets and its Implications for Regulation
Boot, Arnoud W. A.,Thakor, Anjan V.
This paper reviews the literature on how the evolution of banks and markets is blurring the distinction between them, and the implications of this for post-crisis regulation of banks and markets. Unanswered research questions are identified.

Debt Maturity and the Leverage Ratcheting Effect
Leland, Hayne E.,Hackbarth, Dirk
Admati, Demarzo, Hellwig, and Pfleiderer (ADHP, 2018) note that static models of optimal leverage have assumed firms have no prior debt. In this case, the leverage that maximizes firm value also maximizes value to the initial equity owners. However, using a simple two-period model with zero coupon debt and default possible only at maturity, ADHP prove two startling results: (i) when prior debt is extant, it will never benefit equity holders to retire debt, no matter how high the current leverage; and (ii) it will be in the equity owners’ interest to issue sequential rounds of additional debt, until all the tax advantages of debt are exhausted: the “Leverage Ratcheting Effect” (LRE). An immediate conclusion is that one-round (static) models of optimal debt issuance with no prior debt provide poor guidance as to a firm’s optimal leverage. We examine these contentions using an alternative model of debt, with rollover at a proportional rate m and average maturity = 1/m, introduced in Leland (1994a). We show that when the average maturity of debt is substantially longer than 5 years, considerable further debt will indeed be issued, although issuance ceases well before tax benefits are exhausted. With 5-year average maturity, very little additional debt is issued under reasonable calibrations. With 3-year average maturity, no additional debt is issued and it may actually be optimal for the firm to buy back debt, in contradiction to the LRE. We explain why our model gives differing results.

Debt and Financial Crises
Koh, Wee Chian,Kose, M. Ayhan,Nagle, Peter Stephen Oliver,Ohnsorge, Franziska,Sugawara, Naotaka
Emerging market and developing economies have experienced recurrent episodes of rapid debt accumulation over the past fifty years. This paper examines the consequences of debt accumulation using a three-pronged approach: an event study of debt accumulation episodes in 100 emerging market and developing economies since 1970; a series of econometric models examining the linkages between debt and the probability of financial crises; and a set of case studies of rapid debt buildup that ended in crises. The paper reports four main results. First, episodes of debt accumulation are common, with more than 500 episodes occurring since 1970. Second, around half of these episodes were associated with financial crises which typically had worse economic outcomes than those without crisesâ€"after 8 years output per capita was typically 6-10 percent lower and investment 15-22 percent weaker in crisis episodes. Third, a rapid buildup of debt, whether public or private, increased the likelihood of a financial crisis, as did a larger share of short-term external debt, higher debt service, and lower reserves cover. Fourth, countries that experienced financial crises frequently employed combinations of unsustainable fiscal, monetary and financial sector policies, and often suffered from structural and institutional weaknesses.

Desafío En La Administración Del Capital De Trabajo: Estudio De Casos De Microempresas Mexicanas (Challenge in Working Capital Management: Case Study of Mexican Microenterprises)
García Pérez, Sara Lilia,Delgadillo Gómez, Patricia,Ruiz Reynoso, Adriana Mercedes
Spanish Abstract: Los microempresarios en México son emprendedores tenaces que establecen su propio negocio y generan empleos a la sociedad. El 95.4% de las empresas en el país, son microempresas que dan empleo al 39.8% del personal ocupado; sin embargo, su producción bruta es del 9.8%. Por lo que se requiere analizar cómo realizan sus operaciones diarias, para identificar oportunidades de mejora en su operación. El objetivo fue analizar las operaciones de 4 microempresas en el ámbito administrativo-financiero, operativo y contable-fiscal; para identificar sus problemáticas y establecer el manejo, seguimiento y control en la administración del capital de trabajo para mejorar la situación administrativa y financiera de la microempresa. Este estudio se realizó en el Estado de México, entidad federativa con mayor número de unidades económicas en el país; en el municipio de Ecatepec de Morelos, que posee el mayor número de empresas y población. La investigación fue cualitativa, se llevó a cabo durante 6 meses de observación en las microempresas. Se utilizó la entrevista a profundidad, observación y análisis de documentación. Los resultados obtenidos demuestran que la administración del capital de trabajo es útil para las microempresas, solo requiere adecuarse a las necesidades y características particulares del negocioEnglish Abstract: Micro entrepreneurs in Mexico are tenacious entrepreneurs who establish their own business and generate jobs for society. 95.4% of the companies in the country are microenterprises that employ 39.8% of the employed personnel; however, its gross production is 9.8%. Therefore, it is necessary to analyze how they perform their daily operations, to identify opportunities for improvement in their operation. The objective was to analyze the operations of 4 microenterprises in the administrative-financial, operational and accounting-fiscal areas; to identify their problems and establish management, monitoring and control in the working capital management to improve the administrative and financial situation of micro-enterprises. This study was conducted in the State of Mexico, the state with the largest number of economic units in the country; in the municipality of Ecatepec de Morelos, which has the largest number of companies and population. The research was qualitative; it was carried out during 6 months of observation in the microenterprises. The in-depth interview, observation and analysis of documentation was used. The results obtained show that the working capital management is useful for micro-enterprises; it only requires adapting to the needs and particular characteristics of the business.

Different No More: Country Spreads in Advanced and Emerging Economies
Born, Benjamin,Müller, Gernot J.,Pfeifer, Johannes,Wellmann, Susanne
Interest-rate spreads fluctuate widely across time and countries. We characterize their behavior using some 3,200 quarterly observations for 21 advanced and 17 emerging economies since the early 1990s. Before the financial crisis, spreads are 10 times more volatile in emerging economies than in advanced economies. Since 2008, the behavior of spreads has converged across country groups, largely because it has adjusted in advanced economies. We also provide evidence on the transmission of spread shocks and find it similar across sample periods and country groups. Spread shocks have become a more important source of output fluctuations in advanced economies after 2008.

Digitalization of Finances Instrument of Current Challenges at the Payment System
Manta, Otilia
Currently both in the field of finance, but especially in the payment system we are witnessing permanent challenges, given on the one hand by the technological solutions existing at the global level, and on the other hand as a result of the optimization of the processes at local level, respectively at the level of the final beneficiary. of the financial service. With this in mind, it is natural for us researchers to focus on the optimal model of innovation of the finance system, namely online / cash payments in the context of digitization. Therefore, as part of this paper, we propose on the one hand to present the determined factors in the digitization of finance, and on the other hand to present possible means of balancing the distribution of financial services to final consumers, based on existing initiatives at European level, especially at the level of the banking, online and non-banking payments system.

FX Spot and Swap Market Liquidity Spillovers
Krohn, Ingomar,Sushko, Vladyslav
We study the joint evolution of foreign exchange (FX) spot and swap market liquidity. Trading in FX swaps exceeds that of spot, yet this market segment has been largely ignored in prior research on liquidity in FX markets. We find strong co-movement in spot and swap market liquidity conditions and a strong link between FX funding and market liquidity, as gleaned from the pricing of both instruments. This link has strengthened over time with changes in dealer behaviour. Some of the largest dealers periodically pull back from pricing FX swaps and wider spreads attract smaller dealers. At the same time, liquidity in FX swaps remains impaired, which leads to adverse illiquidity spillovers to the spot market. Our findings suggest that funding liquidity has become a more important driver of spot market liquidity than it used to be.

Financial Knowledge and Portfolio Complexity in Singapore
Koh, Benedict S.,Mitchell, Olivia S.,Rohwedder, Susann
Financial literacy in Singapore has not been analyzed in much detail, despite the fact that this is one of the world’s most rapidly aging nations. Using the Singapore Life Panel®, we explore older Singaporeans’ levels of financial knowledge and compare them to those observed in the United States. We assess portfolio complexity for these older households, to examine how financial literacy is related to outcomes of interest. We show that older Singaporeans’ levels of financial literacy are comparable overall to those in the United States, even though older Singaporeans score slightly lower on some dimensions (knowledge of interest and inflation), and slightly higher on their knowledge of risk diversification. We document that women are less informed than men about stock diversification, and educated people tend to be more financially knowledgeable than their less educated counterparts. We also find that financial literacy is positively associated with respondents having both more wealth and more diversified and complex portfolios.

Fisherian Asset Price Deflation and the Zero Lower Bound
Cao, Dan,Luo, Wenlan,Nie, Guangyu
How important is the effect of the interest rate Zero Lower Bound (ZLB) on the severity of the U.S. Great Recession? We tackle this question using an incomplete markets New Keynesian model, with a ZLB on the nominal interest rate and a borrowing constraint tied to asset price. We solve the model with recurrent aggregate shocks and the two occasionally binding constraints using a global method. The financial wedge, which is commonly assumed to be exogenous in the existing literature, corresponds to an endogenous multiplier on the borrowing constraint and is partly driven by the binding ZLB. The binding ZLB exacerbates the financial crisis through its interaction with the Fisherian asset price deflation and asset fire-sale vicious cycles, tightening the borrowing constraint and leading to a significant increase in the financial wedge. Our results offer a novel reinterpretation of the negligible effect of ZLB in the representative agent New Keynesian models with exogenous financial wedges.

Free Riding in Loan Approvals: Evidence from SME Lending in Peru
Arraiz, Irani,Bruhn, Miriam,Roth, Benjamin,Ruiz Ortega, Claudia,Stucchi, Rodolfo
We provide evidence that commercial lenders in Peru free ride off their peer’s screening efforts. Leveraging a discontinuity in the loan approval process of a large bank, we find competing lenders responded to additional loan approvals by issuing approvals of their own. Competing lenders captured almost three quarters of the new loans to previously financially excluded borrowers. Importantly, many of these borrowers never took a loan from our partner bank, even after our partner bank approved them. Lenders may therefore underinvest in screening new borrowers and expanding financial inclusion, as their competitors reap some of the benefit. Our results highlight that information spillovers between lenders may operate outside of credit registries.

Guiding the guiders: Foundations of a market-driven theory of disclosure
M. Gietzmann,A. J. Ostaszewski,M. H. G. Schröder

A foundational approach is developed for a mathematical theory of managerial disclosure in relation to asset pricing; this involves both the earnings guidance disclosed by firm management and market `trackers' pricing the firm's exposure to quotable risks.

Inattention, Agency Conflicts, and the Cost of Debt
El Ghoul, Sadok,Guedhami, Omrane,Mansi, Sattar,, Hyo Jin Yoon
We examine whether inattention in the equity market provides predictive information to investors in the bond market. Using a new measure of shareholder inattention based on exogenous industry shocks to institutional investor portfolios, we find a positive and significant relation between firms with distracted institutional shareholders and the cost of debt financing. This effect is stronger for firms with more powerful CEOs, firms with higher information asymmetries, and firms operating in less competitive product markets. Additional analysis suggests mechanisms that reduce the bondholder-shareholder conflict â€" namely, institutional dual holders and bond covenants â€" attenuate the increase in bond yield spreads resulting from greater shareholder distraction. In contrast to the institutional shareholder setting, we find little evidence of differences in yield spreads associated with retail investor inattention using search frequency in Google. Our findings are robust to controlling for the presence of other external monitors such as credit rating agencies, institutional investors, financial analysts, and Big 4 auditors. Overall, these results suggest that shareholder inattention in the equity market is consequential to investors in the bond market.

Inequality and Gender Economic Inclusion: The Moderating Role of Financial Access in Sub-Saharan Africa
Asongu, Simplice,Nnanna, Joseph,Acha-Anyi, Paul N.
This study assesses how financial access can be used to modulate the effect of income inequality on gender economic inclusion. The focus is on 42 countries in sub-Saharan Africa (SSA) for the period 2004-2014 and the empirical evidence is based on Generalised Method of Moments (GMM) and Fixed Effects (FE) regressions. Significant results are not apparent in the FE regressions. The following main findings are established from the GMM estimations. There is a negative net effect from the role of financial access in modulating the effect of the Palma ratio on female labour force participation while there is a positive net effect from the relevance of financial access in moderating the effect of the Gini coefficient on female unemployment. There are also net negative effects from the role of financial access in modulating the Gini coefficient and the Palma ratio for female employment. The unexpected findings are elucidated and implications are discussed in the light of challenges to Sustainable Development Goals in the sub-region. Inter alia: financial access is a necessary but not a sufficient moderator of income inequality for the enhancement of women’s participation in the formal economic sector.

Institutional Ownership and Governance
Franks, Julian R.
This paper describes different forms of ownership across countries and how these forms influence the way companies are governed. In most stock markets in the world, listed companies frequently have a controlling shareholder, usually a family. However, Japan, the UK, and to a lesser extent the US, are exceptions. In these three countries, ownership is frequently highly fragmented, where share stakes are held by different institutional owners, including asset managers, both active and passive, and by shareholder activists. The paper focuses in particular on the governance structure of different institutional shareholders, how they engage with target firms, and their effectiveness. The paper concludes with recommendations for regulators to enhance different forms of ownership.

Intra-Horizon Expected Shortfall and Risk Structure in Models with Jumps
Walter Farkas,Ludovic Mathys,Nikola Vasiljević

The present article deals with intra-horizon risk in models with jumps. Our general understanding of intra-horizon risk is along the lines of the approach taken in Boudoukh, Richardson, Stanton and Whitelaw (2004), Rossello (2008), Bhattacharyya, Misra and Kodase (2009), Bakshi and Panayotov (2010), and Leippold and Vasiljevi\'c (2019). In particular, we believe that quantifying market risk by strictly relying on point-in-time measures cannot be deemed a satisfactory approach in general. Instead, we argue that complementing this approach by studying measures of risk that capture the magnitude of losses potentially incurred at any time of a trading horizon is necessary when dealing with (m)any financial position(s). To address this issue, we propose an intra-horizon analogue of the expected shortfall for general profit and loss processes and discuss its key properties. Our intra-horizon expected shortfall is well-defined for (m)any popular class(es) of L\'evy processes encountered when modeling market dynamics and constitutes a coherent measure of risk, as introduced in Cheridito, Delbaen and Kupper (2004). On the computational side, we provide a simple method to derive the intra-horizon risk inherent to popular L\'evy dynamics. Our general technique relies on results for maturity-randomized first-passage probabilities and allows for a derivation of diffusion and single jump risk contributions. These theoretical results are complemented with an empirical analysis, where popular L\'evy dynamics are calibrated to S&P 500 index data and an analysis of the resulting intra-horizon risk is presented.

Invariant measures for fractional stochastic volatility models
Balázs Gerencsér,Miklós Rásonyi

We establish that a large class of non-Markovian stochastic volatility models converge to an invariant measure as time tends to infinity. Our arguments are based on a novel coupling idea which is of interest on its own right.

Mandatory Disclosure In Primary Markets
Schwartz, Andrew A.
Mandatory disclosureâ€"the idea that companies must be legally required to disclose certain, specified information to public investorsâ€"is the first principle of modern securities law. Despite the high costs it imposes, mandatory disclosure has been well defended by legal scholars on two theoretical grounds: ‘Agency costs’ and ‘information underproduction.’ While these two concepts are a good fit for secondary markets (where investors trade securities with one another), this Article shows that they are largely irrelevant in the context of primary markets (where companies offer securities directly to investors). The surprising result is that primary offeringsâ€"such as an IPOâ€"may not require mandatory disclosure at all. This profound insight calls into question the fundamental premises of the Securities Act of 1933 and similar laws governing primary offerings around the world. Reform of these rules could lead to a new age of simplified, low-cost primary offerings to the public, something that is already happening in New Zealand through its equity crowdfunding market.

Network Structure and Pricing in the FX Market
Hasbrouck, Joel,Levich, Richard M.
Foreign exchange (FX) settlement data define a network, for which we may construct centrality measures and profit attributions. Our sample of settlement data from CLS Bank spans diverse currency pairs, participants and execution platforms over the Aprils of 2013 and 2016. We assign settlement members to (five) groups ranked by unweighted degree centrality. We define an average centrality differential as the return to the more-central counterparty in the trade, and model this as a function of the two counterparties’ centrality groups. Estimates of the average centrality differential are generally positive: the more-central counterparty receives a higher return. Additionally, the differential generally increases as the counterparties’ centralities diverge. These two results are consistent with a pervasive centrality premium. The estimates are robust to the choice of pre- or post-settlement benchmarks, to inclusion of settlement size interactions, and to grouping on volume-weighted degree centrality. Across currency pairs the centrality profit varies considerably, and typically amounts to about one-third of bid-ask half-spread. The centrality premium is consistent with the hypothesis that central agents exercise bargaining power. We also find, however, evidence suggesting that the premium is partially offset by losses that central agents incur in supplying liquidity.

No Arbitrage in Continuous Financial Markets
David Criens

We derive integral tests for the existence and absence of arbitrage in a financial market with one risky asset which is either modeled as stochastic exponential of an Ito process or a positive diffusion with Markov switching. In particular, we derive conditions for the existence of the minimal martingale measure. We also show that for Markov switching models the minimal martingale measure preserves the independence of the noise and we study how the minimal martingale measure can be modified to change the structure of the switching mechanism. Our main mathematical tools are new criteria for the martingale and strict local martingale property of certain stochastic exponentials.

Relación Impulso-Respuesta Entre Crecimiento Económico Y Dinámica Bursátil Sectorial, México 1998-2018 (Impulse-Response Relationship between Economic Growth and Sectorial Stock Market Dynamic, Mexico 1998-2018)
Aceves Mejía, Mario,Hernandez Contreras, Rufina Georgina,Louvier Hernández, Luis Alejandro,Martínez, José Francisco Tenorio,Nolasco Pérez, César Daniel
En la actualidad existe cierto debate teórico-empírico sobre la relación causal entre el crecimiento del sector financiero bursátil con respecto a la dinámica de crecimiento económico. Al respecto, en México es escaso el trabajo colegiado sobre el sector de las finanzas bursátiles, y en la mayoría de los casos de estudio, sólo es posible encontrar evidencia de relaciones de causalidad unilaterales, o en términos de consideración particular para determinados activos. Por consiguiente, el presente análisis tiene por objetivo integrar a la discusión un estudio en términos sectoriales, considerados por el mercado bursátil, sobre la existencia de relaciones de bicausalidad entre el crecimiento económico y el crecimiento bursátil desagregado para la economía mexicana, reparando en el uso de una metodología cortoplacista impulsorespuesta, por medio de modelos econométricos de vectores autorregresivos. At present, there exists a theoretical and empirical debate about causal relationships between growth of the stock market sector and the dynamics of economic growth. Most research finds evidence of unidirectional relationships or special considerations for certain assets. This paper presents a study in sectorial terms. We examine elements the existence of bidirectional relationship between economic growth and market growth disaggregated for the Mexican economy. We stress the use of a short-term impulseresponse methodology by a Vector Autoregressive Model (VAR).

Retirement Preparedness and Financial Literacy in Singapore: How Do the Self-Employed Compare?
Koh, Benedict S.,Mitchell, Olivia S.
Policymaker and media attention has recently focused on the rise of the so-called “gig” or freelance employment sector, where workers lack formal long-term relationships with one specific firm. This topic has captured public interest partly because of concern that those engaged in nontraditional work arrangements may lack the opportunity to save in formal retirement plans. This paper examines how the self-employed in Singapore compare to regular employees as well as the unemployed in terms of retirement preparedness, retirement saving, and portfolio diversification. We also investigate the extent to which differences in financial literacy can account for the different behaviors across types of workers. Overall, we find that the self-employed and employees save and invest remarkably similarly. Financial literacy is quite important: respondents scoring one additional correct answer on the FinLit questions have about 3% more net financial wealth, 2% more nonhousing net wealth, and 14% more total wealth than their less savvy counterparts. More financially literate individuals also hold better diversified portfolios over the life cycle.

Securitization and Accounting Quality: Evidence from Collateralized Loan Obligations
Hu, Xiaoli,Lin, Yupeng,Liu, Xin
Using a large sample of collateralized loan obligation (CLO) portfolios, we examine the role of borrowers’ accounting quality in corporate loan securitization. We find that loans from companies with higher ex-ante accounting quality are more likely to be purchased and securitized by CLOs. Further analyses show that such a positive association is mainly due to the role of accounting information in alleviating the adverse selection problem in the pre-securitization period. We also examine the role of accounting information in the post- securitization period. Using the state tax rate as an instrument for securitization, we find that accounting information does not affect the default sensitivity to CLO ownership, suggesting that CLOs do not utilize accounting information in the ex-post monitoring. Overall, our findings suggest that CLOs exert great effort and care in screening during the origination phase, but have limited incentives and the ability to monitor ex post.

Shocks and the Organization of the Firm: Who Pays the Bill?
Sforza, Alessandro
What happens to firms’ organizational structure when they are hit by a negative shock? By matching employer-employee data with firm loans and bank balance sheets, I study firms’ reactions to a credit shock–the global financial crisis—and compare it to a trade shock—the entry of China in the WTO. When hit by a credit supply shock, firms reduce employment of higher-skilled workers more than lower-skilled production workers, while no adjustment is found on the wages. In contrast, a trade shock affects the hierarchy of the firm from the bottom to the top: firms rescale the organization and reduce employment at all levels. Results support the existence of heterogenous complementarities between working capital and skills along the hierarchy of the firm. Abstracting from general equilibrium effects, I find that firms’ organization is a key channel in the transmission of credit shocks to the real economy.

Stress Testing in Latin America: A Comparison of Approaches and Methodologies
Settlements, Bank for International
This report describes how major Latin American central banks conduct and use stress tests in assessing the soundness of their banking systems. Methodologies are compared with the help of a common stress-testing exercise run by the central banks participating in the study group. In general, central banks use top-down solvency tests to assess similar risks, but their tests differ, among other things, in the severity of assumed scenarios, assumptions about bank reaction to shocks, data granularity, and how banking indicators are calculated, the latter due to the fact that countries follow different Basel standards. As highlighted by the common exercise, differences across tests can lead to very dissimilar results and policy implications. The report also discusses how stress tests are communicated. Most central banks make stress tests public, but usually only disclose aggregate results. Furthermore, central banks do not normally measure the effectiveness of communication since stress tests are not commonly used as a policy tool.

Target Date Funds and Portfolio Choice in 401(k) Plans
Mitchell, Olivia S.,Utkus, Stephen P.
Target date funds in corporate retirement plans grew from $5B in 2000 to $734B in 2018, partly because federal regulation sanctioned these as default investments in automatic enrollment plans. We show that adopters delegated pension investment decisions to fund managers selected by plan sponsors. Including these funds in retirement saving menus raised equity shares, boosted bond exposures, curtailed cash/company stock holdings, and reduced idiosyncratic risk. The adoption of low-cost target date funds may enhance retirement wealth by as much as 50 percent over a 30-year horizon.

The Corporate Finance of Multinational Firms
Erel, Isil,Jang, Yeejin,Weisbach, Michael S.
An increasing fraction of firms worldwide operate in multiple countries. We study the costs and benefits of being multinational in firms’ corporate financial decisions and survey the related academic evidence. We document that, among U.S. publicly traded firms, the prevalence of multinationals is approximately the same as domestic firms, using classification schemes relying on both income-based and a sales-based metrics. Outside the U.S., the fraction is lower but has been growing. Multinational firms are exposed to additional risks beyond those facing domestic firms coming from political factors and exchange rates. However, they are likely to benefit from diversification of cash flows and flexibility in capital sources. We show that multinational firms, indeed, have a better access to foreign capital markets and a lower cost of debt than otherwise identical domestic firms, but the evidence on the cost of equity is mixed.

The Economic Forces Driving Fintech Adoption Across Countries
Frost, Jon
Fintech is being adopted across markets worldwide - but not evenly. Why not? This paper reviews the evidence. In some economies, especially in the developing world, adoption is being driven by an unmet demand for financial services. Fintech promises to deliver greater financial inclusion. In other economies, adoption can be related to the high cost of traditional finance, a supportive regulatory environment, and other macroeconomic factors. Finally, demographics play an important role, as younger cohorts are more likely to trust and adopt fintech services. Where fintech helps to make the financial system more inclusive and efficient, this could benefit economic growth. Yet the market failures traditionally present in finance remain relevant, and may manifest themselves in new guises.

The Effects of the Aggregate Stock Market on Mergers and Acquisitions
Fos, Vyacheslav,Yang, Jun
We exploit changes in the aggregate stock market conditions as an exogenous shock to an individual M&A deal to explore the economic motivations behind these deals. Equity deals exposed to negative stock market returns after deal announcements are less likely to be completed and deliver lower abnormal returns for both acquirers and targets, especially when acquirers' market betas are high. In contrast, cash deals are not affected by the negative post-announcement market conditions. Further analyses indicate that synergies, rather than mispricing, are the leading motive behind deals affected by changes in stock market conditions.

The Role of Investor Attention in Seasoned Equity Offerings: Theory and Evidence
Chemmanur, Thomas J.,Simonyan, Karen,Wang, Yu (Yvonne),Zheng, Xiang
Models of seasoned equity offerings (SEOs) such as Myers and Majluf (1984) assume that all investors in the economy pay immediate attention to SEO announcements and the pricing of SEOs. In this paper, we analyze, theoretically and empirically, the implications of only a fraction of investors in the equity market paying immediate attention to SEO announcements. We first show theoretically that, in the above setting, the announcement effect of an SEO will be positively related to the fraction of investors paying attention to the announcement and that there will be a post-announcement stock-return drift that is negatively related to investor attention. In the second part of the paper, we test the above predictions using the media coverage of firms announcing SEOs as a proxy for investor attention, and find evidence consistent with the above predictions. In the third part of the paper, we develop and test various hypotheses relating investor attention paid to an issuing firm to various SEO characteristics. We empirically show that institutional investor participation in SEOs, the post-SEO equity market valuation of firms, SEO underpricing, and SEO valuation are all positively related to investor attention. The results of our identification tests show that the above results are causal.

The market nanostructure origin of asset price time reversal asymmetry
Marcus Cordi,Damien Challet,Serge Kassibrakis

We introduce a framework to infer lead-lag networks between the states of elements of complex systems, determined at different timescales. As such networks encode the causal structure of a system, infering lead-lag networks for many pairs of timescales provides a global picture of the mutual influence between timescales. We apply our method to two trader-resolved FX data sets and document strong and complex asymmetric influence of timescales on the structure of lead-lag networks. Expectedly, this asymmetry extends to trader activity: for institutional clients in our dataset, past activity on timescales longer than 3 hours is more correlated with future activity at shorter timescales than the opposite (Zumbach effect), while a reverse Zumbach effect is found for past timescales shorter than 3 hours; retail clients have a totally different, and much more intricate, structure of asymmetric timescale influence. The causality structures are clearly caused by markedly different behaviors of the two types of traders. Hence, market nanostructure, i.e., market dynamics at the individual trader level, provides an unprecedented insight into the causality structure of financial markets, which is much more complex than previously thought.

Time-inhomogeneous Gaussian stochastic volatility models: Large deviations and super roughness
Archil Gulisashvili

We introduce time-inhomogeneous stochastic volatility models, in which the volatility is described by a positive function of a Volterra type continuous Gaussian process that may have extremely rough sample paths. The drift function and the volatility function are assumed to be time-dependent and locally $\omega$-continuous for some modulus of continuity $\omega$. The main result obtained in the paper is a sample path large deviation principle for the log-price process in a Gaussian model under very mild restrictions. We apply this result to study the first exit time of the log-price process from an open interval.

Transient Institutional Ownership, Costly External Finance, and Corporate Cash Holdings
Im, Hyun Joong,Park, Heungju,Pathan, Shams,Faff, Robert W.
We investigate how transient institutional ownership influences the level and value of cash holdings. We show that transient institutional ownership has a positive effect on cash holdings, and this linkage is more pronounced when stock and credit market conditions are less favorable. Using a regression discontinuity design exploiting the Russell 1000/2000 index reconstitution as an exogenous shock to transient institutional ownership, we show that the effects are causal. Transient institutions exacerbate debt-holder-shareholder conflicts (e.g., short-termism) and increase stock price crash risk, thereby increasing the cost of debt. Overall, our results suggest that transient institutions make cash holdings more valuable because financing by debt becomes more costly.

Trust and Retirement Preparedness: Evidence from Singapore
Koh, Benedict S.,Mitchell, Olivia S.,Fong, Joelle H.
Trust is an essential component of the financial system, and distrust can undermine saving and economic growth. Accordingly, prior research has shown that survey responses to a question about ‘trust in people’ are associated with household willingness to invest in the stock market. Nevertheless, little is known about how trust shapes economic behaviors predictive of retirement preparedness. Our study draws on the Singapore Life Panel (SLP®), a high-frequency internet survey of people age 50-70, to assess how trust ties to older respondents’ (1) pension plan participation and withdrawals; (2) life, health and long-term care insurance purchases; and (3) stock market engagement. We show that the ‘trust in people’ question often used in prior studies is uncorrelated with household behaviors related to retirement preparedness. Nevertheless, trust in financial and public-sector representatives is positively associated with pension savings, investments, and insurance purchases. Financial literacy also has a consistent and important role in explaining who saves for retirement and other economic behaviors driving retirement readiness.

What Influences the Real Estate Price Volatility in Hong Kong: An ARMA-GARCH Analysis
Wang, Shizhen,Hartzell, David J.
In this paper, we apply the ARMA-GARCH model to Hong Kong real estate market. We analyzed the monthly data of housing, office retail and factories from February 1993 to February 2019. The result of ARCH LM test indicates that volatility clustering is shown in there four kinds of real estate. The price volatility of housing is influenced by foreign exchange rate, especially the USD exchange rate. The commercial real estate market shows different, they are all influenced by unemployment. All these real estate shows limited inflation hedging ability in a short period. The result of the EGARCH model shows there were np asymmetric effects in the real estate market.

Why Does Equity Capital Flow Out of High Tobin’s q Industries?
Lee, Dong Wook,Shin, Hyun-Han,Stulz, René M.
High Tobin’s q industries receive more funding from capital markets than low Tobin’s q industries from 1971 to 1996. Since then, the opposite is true. The key to understanding this shift is that large firms for which q is more a proxy for rents than for investment opportunities have become more important within industries. For these firms, repurchases increase with q but capital expenditures do not, so that q explains more the variation of repurchases than of capital expenditures. Consequently, equity capital flows out of high q industries because, for these industries, stock repurchases are high and issuances are low.