Research articles for the 2020-02-27

BIST Kurumsal Yönetim Endeksindeki Şirketlerin Yönetim Kurulu Raporlamaları: Yeni Kurumsal Yönetim (KY) Uyum Raporları Kapsamında Bir İnceleme (Reporting of Board of Directors in BIST Corporate Governance Index Companies: An Examination in the Context of New Corporate Governance (CG) Compliance Reports)
Kartal, Mustafa Tevfik,Yilmaz, Banu BudayoÄŸlu
Turkish Abstract: Türkiye’de halka açık şirketlerin KY uygulamalarını düzenleyen Sermaye Piyasası Kurulu (SPK), 2019 yılı itibarıyla uygulanacak KY uyum raporlamasına yönelik çerçeveyi güncellemiştir. Bu kapsamda, halka açık şirketler 2018 yılına ilişkin KY Uyum Rapor Formatı (URF) ve KY Bilgi Formu (KYBF) olmak üzere iki ayrı rapor yayınlamışlardır. Bu çalışmada, BIST KY endeksinde yer alan şirketlerin UFR ve KYBF raporları kapsamında yaptıkları yönetim kurulu (YK) raporlamaları ele alınmıştır. Çalışma kapsamında, 09.08.2019 tarihi itibarıyla BIST KY endeksinde yer alan 48 şirketin YK raporlamaları incelenmiştir. Çalışmada, URF YK raporlaması kapsamında yer alan ilkelerde hatalı/yanlış raporlama yapıldığı belirlenmiştir. Bu husus göz önünde bulundurularak sonraki KY uyum raporlamalarının daha sağlıklı yapılması için URF ve KYBF raporlamasına ilişkin yükümlülüklerde güncelleme yapılarak tüm ilkelere ilişkin detay açıklama zorunluluğu getirilmesi, şirketlerin iç denetim bölümleri tarafından KY uyum raporlamaları ile ilgili güvence hizmeti sağlanması ve şirketlerin üst yönetimlerinin konuya daha fazla özen göstermesi önerilmektedir. Ayrıca URF ve KYBF şablonlarının birleştirilmesi ve tüm KY ilkelerinin raporlama şablonlarına dâhil edilmesi önerilmektedir. English Abstract: Capital Market Board (CMB), which regulates CG practices of publicly traded companies in Turkey, updates the CG compliance reporting scheme as of 2019. In this context, publicly traded companies issued two separate reports which are Compliance Report Format (CRF) and CG Information Form (CGIF). In this study, reporting of board of directors (BoD) in the context of CRF and CGIF in BIST CG Index companies is handled. Within the scope of the study, BoD reporting of 48 companies, which are in BIST CG Index as of 08.09.2019, is examined. It is determined that wrong/inaccurate reporting was made in CRF BoD reporting. Taking into consideration this issue, obligations related to CRF and CGIF reporting should be updated and making detailed disclosure for all principles should be required, assurance services related to CG compliance reporting by the companies' internal audit departments should be provided, and the senior management of companies should be paid more attention to the issue in order to ensure that subsequent CG compliance reporting is issued much more right. Also, they are recommended that CRF and CGIF reports should be combined and all CG principles should be included in the new reporting templates.

Corrupted Multidimensional Binary Search: Learning in the Presence of Irrational Agents
Akshay Krishnamurthy,Thodoris Lykouris,Chara Podimata

Standard game-theoretic formulations for settings like contextual pricing and security games assume that agents act in accordance with a specific behavioral model. In practice however, some agents may not prescribe to the dominant behavioral model or may act in ways that are arbitrarily inconsistent. Existing algorithms heavily depend on the model being (approximately) accurate for all agents and have poor performance in the presence of even a few such arbitrarily irrational agents. How do we design learning algorithms that are robust to the presence of arbitrarily irrational agents?

We address this question for a number of canonical game-theoretic applications by designing a robust algorithm for the fundamental problem of multidimensional binary search. The performance of our algorithm degrades gracefully with the number of corrupted rounds, which correspond to irrational agents and need not be known in advance. As binary search is the key primitive in algorithms for contextual pricing, Stackelberg Security Games, and other game-theoretic applications, we immediately obtain robust algorithms for these settings.

Our techniques draw inspiration from learning theory, game theory, high-dimensional geometry, and convex analysis, and may be of independent algorithmic interest.

Cross-Border Portfolio Flows and News Media Coverage
Caporale, Guglielmo Maria,Ali, Faek,Spagnolo, Fabio,Spagnolo, Nicola
This paper investigates the dynamic linkages between portfolio flows and various news indices (based on both â€Å"positive� and â€Å"negative� news headlines collected from Bloomberg), whilst also controlling for a comprehensive set of push and pull factors. The monthly panel examined comprises 49 developed and developing countries in addition to the US (the â€Å"home economy�) and covers the period from January 2007 to October 2017; the econometric model includes fixed effects. The empirical results document the important role played by the news variables. More specifically, news pessimism and intensity affect bond flows more than equity flows, and US news appears to play a leading role in these portfolio flow dynamics. By contrast, changes in news pessimism and intensity have a more significant impact on equity flows, and again US news tend to have more sizeable effects. News sentiment is generally found to be an important driver of portfolio flows, whilst only US news disagreement has a significant effect, and only on bond inflows into the US. Most results are robust to the exclusion of the six financial centres from the full sample. As for push and pull factors, most of them (equity return differentials, interest rate spreads, the VIX index, capital controls, exchange rate regimes, CDS spreads, QE episodes, financial development and commodity prices) are significant and with the expected signs.

Directors Who Serve Multiple Pension Funds: Are They Conflicted or Skilled?
Ooi, Elizabeth
Directors who hold concurrent directorships within a single industry may have an information advantage or face conflicts of interest. This practice is permitted in the Australian pension fund industry, even between competing funds. Results show that funds with directors who hold competing board seats are associated with poor fund performance. Non-competing seats are associated with better fund performance in complex funds. Directors favor positions which align with personal and reputational incentives. Overall, the opposing arguments regarding the effect of multiple directorships are not mutually exclusive but dependent on cross-sectional variation in fund characteristics and the types of directorships held.

Does the price of strategic commodities respond to U.S. Partisan Conflict?
Yong Jiang,Yi-Shuai Ren,Chao-Qun Ma,Jiang-Long Liu,Basil Sharp

A noteworthy feature of U.S. politics in recent years is serious partisan conflict, which has led to intensifying polarization and exacerbating high policy uncertainty. The US is a significant player in oil and gold markets. Oil and gold also form the basis of important strategic reserves in the US. We investigate whether U.S. partisan conflict affects the returns and price volatility of oil and gold using a parametric test of Granger causality in quantiles. The empirical results suggest that U.S. partisan conflict has an effect on the returns of oil and gold, and the effects are concentrated at the tail of the conditional distribution of returns. More specifically, the partisan conflict mainly affects oil returns when the crude oil market is in a bearish state (lower quantiles). By contrast, partisan conflict matters for gold returns only when the gold market is in a bullish scenario (higher quantiles). In addition, for the volatility of oil and gold, the predictability of partisan conflict index virtually covers the entire distribution of volatility.

Empirical Analysis of Indirect Internal Conversions in Cryptocurrency Exchanges
Paz Grimberg,Tobias Lauinger,Damon McCoy

Algorithmic trading is well studied in traditional financial markets. However, it has received less attention in centralized cryptocurrency exchanges. The Commodity Futures Trading Commission (CFTC) attributed the $2010$ flash crash, one of the most turbulent periods in the history of financial markets that saw the Dow Jones Industrial Average lose $9\%$ of its value within minutes, to automated order "spoofing" algorithms. In this paper, we build a set of methodologies to characterize and empirically measure different algorithmic trading strategies in Binance, a large centralized cryptocurrency exchange, using a complete data set of historical trades. We find that a sub-strategy of triangular arbitrage is widespread, where bots convert between two coins through an intermediary coin, and obtain a favorable exchange rate compared to the direct one. We measure the profitability of this strategy, characterize its risks, and outline two strategies that algorithmic trading bots use to mitigate their losses. We find that this strategy yields an exchange ratio that is $0.144\%$, or $14.4$ basis points (bps) better than the direct exchange ratio. $2.71\%$ of all trades on Binance are attributable to this strategy.

Fund Manager Skill in an Era of Globalization: Offshore Concentration and Mutual Fund Performance
Bai, John (Jianqiu),Tang, Yuehua,Wan, Chi,Yuksel, H. Zafer
We study how mutual fund managers gain an edge in selecting stocks in an era of globalization. We use textual analysis to construct a new measure that captures a mutual fund’s offshore exposure concentration through holding U.S. multinational firms. The proposed offshore concentration index (OCI) is distinct from existing measures of investment skills. More importantly, funds with a higher offshore concentration index are associated with significantly better fund performance, with the difference in four-factor alpha between the top and bottom OCI deciles amounting to 2.95% per annum. Fund managers’ overweighing of firms with operations in certain countries can be partly attributed to their foreign ethnicity. Our study uncovers an important source of fund manager skill, which is of particular importance in an era of globalization.

Funding Shortages, Expectations, and Forward Rate Risk Premium
Jarrow, Robert,Lamichhane, Sujan
This paper estimates term risk premium and expected future spot rates embedded in Treasury forward rates to study the impact of short-term funding shortages on these quantities. Our approach is consistent with dynamic equilibrium models and avoids the arbitrage-free dynamic inconsistency problems exhibited by traditional methods. We find that short-term funding shortages in money markets affect both expectations of spot rates and forward rate risk premium for all maturity forward rates. The leverage ratio of intermediaries (primary dealers) significantly affects term risk premium but not expectations of future spot rates. Yield curve inversion has no impact on the forward rate curve’s evolution.

Illiquidity in Intermediate Portfolios: Evidence from Large Hedge Funds
Barth, Daniel,Monin, Phillip
Evaporating liquidity is a central feature of many financial crises. Questions remain about the importance of illiquidity and the distribution of illiquidity exposure across financial market participants. We use regulatory data on hedge funds â€" who unlike public mutual funds often invest in illiquid markets â€" to address three empirical questions: how large is the illiquidity premium, how important is it for hedge fund returns, and who ultimately captures the premium, fund managers or investors? We estimate an annual illiquidity premium of 56 basis points for an additional log-day needed to sell assets without price impact, of which investors capture 77%. Portfolio illiquidity explains 27% of alpha, but share restrictions explain 55%. Consistent with compensation for undiversifiable illiquidity risk, managers of illiquid funds charge higher incentive fees. Our findings suggest the costs and risks associated with illiquid assets are substantial and require significant compensation. Moreover, the returns of some funds are highly dependent on the illiquidity premium, which may indicate these funds have significant exposures to illiquidity. However, through share restrictions much of this exposure is passed to fund investors, who are likely better able to diversity across many asset classes.

Leverage and Risk in Hedge Funds
Barth, Daniel,Hammond, Laurel,Monin, Phillip
The use of leverage is often considered a key potential systemic risk in hedge funds. Yet, data limitations have made empirical analyses of hedge fund leverage difficult. Traditional theories predict leverage and portfolio risk are positively linearly related. Alternatively, an emerging wave of theories of leverage constraints predict leverage and asset risk are negatively correlated, and therefore leverage and portfolio risk may be unrelated or even negatively related. Consistent with theories of leverage constraints, we find that hedge fund leverage and portfolio risk are weakly negatively correlated. This arises from a strong negative association between leverage and asset risk â€" in particular, market beta. The average market beta on funds' assets explains 20% of the cross-sectional variation in hedge fund leverage, and 47% for the subsample of equity-style funds. Also consistent with these theories, leverage and portfolio alpha are strongly positively related, but this relationship is entirely explained by market beta. Our findings suggest that the association between leverage and risk in hedge funds is nuanced, and that leverage is in part used to scale the payoffs of low-beta, high-alpha securities, resulting in an essentially flat relationship between leverage and portfolio risk.

Mergers Under the Microscope: Analysing Conference Call Transcripts
Dasgupta, Sudipto,Harford, Jarrad,Ma, Fangyuan,Wang, Daisy,Xie, Haojun
About half of all merger deals between public US acquirers and targets involve a conference call within 2 days of deal announcement, motivated to communicate information to both acquirer and target shareholders to garner voting support and avoid legal liability. Calls are associated with positive market reactions and higher likelihood of deal completion; however, for public targets, only the latter result holds after correcting for endogeneity. Using a probabilistic topic modelling approach, we identify 20 highly interpretable topics as prevalent in the presentations and discussions recorded in the transcripts. The relative importance of several of these in a deal transcript is associated with target characteristics (such as whether the target is a private or a public firm), the method of payment, and acquirer characteristics (e.g., governance). The importance of several topics is associated with significant abnormal returns on deal announcement, and deal completion likelihood.

Model order reduction for parametric high dimensional models in the analysis of financial risk
Andreas Binder,Onkar Jadhav,Volker Mehrmann

This paper presents a model order reduction (MOR) approach for high dimensional problems in the analysis of financial risk. To understand the financial risks and possible outcomes, we have to perform several thousand simulations of the underlying product. These simulations are expensive and create a need for efficient computational performance. Thus, to tackle this problem, we establish a MOR approach based on a proper orthogonal decomposition (POD) method. The study involves the computations of high dimensional parametric convection-diffusion reaction partial differential equations (PDEs). POD requires to solve the high dimensional model at some parameter values to generate a reduced-order basis. We propose an adaptive greedy sampling technique based on surrogate modeling for the selection of the sample parameter set that is analyzed, implemented, and tested on the industrial data. The results obtained for the numerical example of a floater with cap and floor under the Hull-White model indicate that the MOR approach works well for short-rate models.

On the extension property of dilatation monotone risk measures
Massoomeh Rahsepar,Foivos Xanthos

Let $\mathcal{X}$ be a subset of $L^1$ that contains the space of simple random variables $\mathcal{L}$ and $\rho: \mathcal{X} \rightarrow (-\infty,\infty]$ a dilatation monotone functional with the Fatou property. In this note, we show that $\rho$ extends uniquely to a $\sigma(L^1,\mathcal{L})$ lower semicontinuous and dilatation monotone functional $\overline{\rho}: L^1 \rightarrow (-\infty,\infty]$. Moreover, $\overline{\rho}$ preserves monotonicity, (quasi)convexity, and cash-additivity of $\rho$. Our findings complement recent extension results for quasiconvex law-invariant functionals proved in [17,20]. As an application of our results, we show that transformed norm risk measures on Orlicz hearts admit a natural extension to $L^1$ that retains the robust representations obtained in [4,6].

On-Site Inspecting Zombie Lending
Bonfim, Diana,Cerqueiro, Geraldo,Degryse, Hans,Ongena, Steven
Banks may have incentives to continue lending to “zombie” firms in order to avoid or delay the recognition of credit losses. In spite of growing regulatory pressure, there is evidence that “zombie lending” remains widespread, even in developed countries. We exploit information on a unique series of authoritative on-site inspections of bank credit portfolios in Portugal to investigate how such inspections affect banks’ future lending decisions. We find that following an inspection a bank becomes up to 9 percentage points less likely to refinance a firm with negative equity, implying a halving of the unconditional refinancing probability. Hence, banks structurally change their lending decisions following on-site inspections, suggesting that â€" even in the age of reg-tech â€" supervisory “reg-leg” can remain a potent tool to tackle zombie lending.

Politician Careers and SEC Enforcement Against Financial Misconduct
Mehta, Mihir N.,Zhao, Wanli
We document that corporate financial misconduct has significant consequences for politicians’ election outcomes and, in particular, those politicians that serve on U.S. congressional committees with SEC- relevant oversight responsibilities (“SEC-relevant politicians”). These politicians display a 31% greater likelihood of losing a reelection campaign after a local firm faces SEC enforcement for corporate financial misconduct. We also document that SEC-relevant politicians appear to influence the SEC to limit career effects due to the potential consequences from enforcement against local firms. First, the timing of enforcement action announcements around SEC-relevant politicians’ elections appears opportunistic. Second, firms in the districts of SEC-relevant politicians are less likely to receive SEC enforcement actions relative to other firms and, when faced with enforcement, receive smaller penalties. Collectively, these results are consistent with the argument that politicians’ career concerns impede the SEC’s enforcement efforts.

Solution of option pricing equations using orthogonal polynomial expansion
Falko Baustian,Kateřina Filipová,Jan Pospíšil

In this paper we study both analytic and numerical solutions of option pricing equations using systems of orthogonal polynomials. Using a Galerkin-based method, we solve the parabolic partial diferential equation for the Black-Scholes model using Hermite polynomials and for the Heston model using Hermite and Laguerre polynomials. We compare obtained solutions to existing semi-closed pricing formulas. Special attention is paid to the solution of Heston model at the boundary with vanishing volatility.

The Hedge Fund Industry Is Bigger (and Has Performed Better) Than You Think
Barth, Daniel,Joenväärä, Juha,Kauppila, Mikko,Wermers, Russ
Of first-order importance to the study of potential systemic risks in hedge funds is the aggregate size of the industry. The worldwide hedge fund industry has been estimated by regulators and industry experts as having total net assets under management of $2.3 - 3.7 trillion as of the end of 2016. Using a newly combined database of several hedge fund information vendors, augmented by the first detailed, systematic regulatory collection of data on large hedge funds in the United States, we estimate that the worldwide net assets under management were at least $5.2 trillion in 2016, over 40% larger than the most generous estimate. Gross assets, which represent the balance sheet value of hedge fund assets, exceeds $8.5 trillion. We further decompose hedge fund assets by their self-reported strategy and by fund domicile. We also show that the total returns earned by funds that report to the public databases are significantly lower than the returns of funds that report only on regulatory filings, both in aggregate and within nearly every fund strategy. This difference appears to be driven entirely by alpha, rather than by differences in exposures to systematic risk factors. However, net investor flows are considerably higher for funds reporting publicly, suggesting previous estimates of the flow-performance relationship are likely biased. Our new, and much larger, estimates of the size of the hedge fund industry should help regulators and prudential authorities to better gauge the systemic risks posed by the industry, and to better evaluate potential data gaps in private funds. Our results also suggest that systematic risk is roughly similar in publicly and non-publicly reporting funds.

The Illusory Promise of Stakeholder Governance
Bebchuk, Lucian A.,Tallarita, Roberto
Corporate purpose is now the focus of a fundamental and heated debate, with rapidly growing support for the proposition that corporations should move from shareholder value maximization to “stakeholder governance” and “stakeholder capitalism.” This Article critically examines the increasingly influential “stakeholderism” view, according to which corporate leaders should give weight not only to the interests of shareholders but also to those of all other corporate constituencies (including employees, customers, suppliers, and the environment). We conduct a conceptual, economic, and empirical analysis of stakeholderism and its expected consequences. We conclude that this view should be rejected, including by those who care deeply about the welfare of stakeholders. Stakeholderism, we demonstrate, would not benefit stakeholders as its supporters claim. To examine the expected consequences of stakeholderism, we analyze the incentives of corporate leaders, empirically investigate whether they have in the past used their discretion to protect stakeholders, and examine whether recent commitments to adopt stakeholderism can be expected to bring about a meaningful change. Our analysis concludes that acceptance of stakeholderism should not be expected to make stakeholders better off. Furthermore, we show that embracing stakeholderism could well impose substantial costs on shareholders, stakeholders, and society at large. Stakeholderism would increase the insulation of corporate leaders from shareholders, reduce their accountability, and hurt economic performance. In addition, by raising illusory hopes that corporate leaders would on their own provide substantial protection to stakeholders, stakeholderism would impede or delay reforms that could bring meaningful protection to stakeholders. Stakeholderism would therefore be contrary to the interests of the stakeholders it purports to serve and should be opposed by those who take stakeholder interests seriously.

Unsmoothing Returns of Illiquid Funds
Couts, Spencer,Gonçalves, Andrei,Rossi, Andrea
Funds that invest in illiquid assets report returns with spurious autocorrelation. Consequently, investors need to unsmooth returns when evaluating the risk exposures of these funds. We show that funds investing in similar assets have a common source of spurious autocorrelation, which is not addressed by commonly-used unsmoothing methods, leading to underestimation of systematic risk. To address this issue, we propose a generalization of these unsmoothing techniques and apply it to hedge funds and commercial real estate funds. Our empirical results indicate our method significantly improves the measurement of risk exposures and risk-adjusted performance, with stronger results for more illiquid funds.