Research articles for the 2020-03-06

A New Interval Type-2 Fuzzy Logic System Under Dynamic Environment: Application to Financial Investment
Takahashi, Akihiko,Takahashi, Soichiro
This paper proposes a new interval type-2 fuzzy logic system (IT2 FLS) for financial investment with time-varying parameters adaptive to real-time data streams by using an on-line learning method based on a state-space framework. Particularly, our state-space approach regards parameters of IT2 FLSs as state variables to sequentially learn by Bayesian filtering algorithms under dynamic environment, where time-series data are continuously observed with occasional structural changes. Moreover, our proposal is helpful for financial applications, which often involve various practical complex constraints, because general state-space model makes it possible to flexibly deal with non-linearities. In our empirical experiment with time-series data of financial assets, our approach is applied to on-line parameter learning of type-1 and type-2 FLSs for portfolio decision making. As a result, it is shown that the IT2 FLS holds its advantage against the type-1 FLS, even though the both type-1 and type-2 models have the adaptive time-varying parameters, which is an unexplored topic for empirical studies of this area.

An Unintended Consequence of Mortgage Financing Regulation - A Racial Disparity
Kau, James,Fang, Lu,Munneke, Henry J.
This study investigates whether mortgage financing regulation unintentionally leads to minorities paying a higher loan contract rate under a risk-based pricing system. We provide evidence that minority borrowers prepay less frequently than comparable non-minority borrowers and thus have lower termination risk. Racially neutral lending policies prohibit the lender from considering this reduced termination risk, resulting in a disparate impact from the overstatement of a minority borrower's termination risk. While we find little evidence of a rate differential among borrowers under the current regulatory structure, results show minorities pay a higher rate when the variation in termination risk is recognized.

Audit Regulation and the Cost of Equity Capital: Evidence From the PCAOB’s International Inspection Regime
Lamoreaux, Phillip T.,Newton, Nathan J.,Mauler, Landon M.
This study investigates the relation between audit regulation and the cost of equity capital. While a relation is intuitively appealing, there is a general lack of empirical evidence because changes in audit regulation are frequently accompanied by other major regulatory changes. We exploit variation in the timing of regulatory changes induced by foreign governments’ staggered allowance of PCAOB inspections. Using a difference-in-differences design, we find that foreign SEC registrants with auditors from countries that allow PCAOB inspections enjoy a lower cost of capital, relative to foreign SEC registrants with auditors from countries that prohibit inspections. Further, we find that this cost of capital effect is attenuated for companies with higher quality existing governance mechanisms. Finally, we document that inspection access is associated with higher quality analyst forecasts, which suggests that this change in audit regulation reduces information risk for market participants.

Bank Deregulation and Stock Price Crash Risk
Dang, Viet Anh,Lee, Edward,Liu, Yangke,Zeng, Cheng
This paper examines the relation between bank branch deregulation restrictions and stock price crash risk. Using a large sample of US public firms over the period of 1962-2001, we find robust evidence that the intrastate branching deregulation leads to lower future stock price crash risk. In addition, we show direct mitigating impact of bank branching deregulation on firms’ bad news hoarding. Our findings are consistent with the notion that branch reform improved bank monitoring efficiency and allowed banks to better constrain borrowers’ bad news hoarding behavior. Moreover, the negative association between bank branch deregulation and stock price crash risk is more pronounced for firms that are more dependent on external finance and lending relationships. Our findings suggest that, as a law aimed at removing restrictions on bank branch expansion, bank deregulation also helps protect shareholders’ wealth.

Bank Failure and Credit Ratings
Wang, Daphne
This study explores the role of credit ratings in predicting a bank failure in recent financial crisis. Both logistic regression and Cox proportion model confirm that credit ratings can predict the probability of bank failure, but only two quarters prior to bank failure, relatively sluggish compared to stock market returns, loan-loss provision and leverage variables. There is suspicion on the delay rating adjustment as the result of inflated credit ratings, issuers shop for favorable ratings, and window dressing by the bank managers. The Insight from these findings provides relevant implications to investors and regulators to utilize credit ratings as an alternative early warning system to prevent investment loss or social destruction in a subsequent bank run or contagion effect.

Cash Holdings and the Financialisation of Latin American Nonfinancial Corporations
Rabinovich, Joel,Artica, Rodrigo Perez
The growth in cash holdings by non-financial corporations in emerging economies in general and Latin American in particular has received less attention compared to their peers from advanced economies. Taking into account that cash holdings contain not only cash but also short-term, interest-bearing assets, we test whether financial profitability measured by the weight of financial income over total revenues was one motive behind the increase in this type of financial asset as it is claimed in analyses of the financialisation of the firm. We use a panel of nonfinancial firms from Argentina, Brazil, Chile, Colombia, Mexico and Peru to test this hypothesis and find supporting evidence for the Brazilian case only.

Clustered Feature Importance (Presentation Slides)
Lopez de Prado, Marcos
A substitution effect takes place when two or more explanatory variables share a substantial amount of information (predictive power).Under the presence of substitution effects, feature importance methods may not be able to determine robustly which variables are significant.This presentation discusses the Clustered Feature Importance (CFI) method, which is robust to linear as well as non-linear substitution effects.

Contracting Costs and Reputational Contracts
Badoer, Dominique C.,Emin, Mustafa,James, Christopher M.
Reputational capital is a frequently cited attribute of private equity transactions. In this paper we construct a simple model to illustrate the relationship between reputational capital and covenants in the leveraged loan market. In our model, reputational capital is created through private equity (PE) firms engaging in repeated acquisitions that generate improvements to the operations of the firms they acquire. In contrast to standalone firms, a PE sponsored firm borrows against both its own assets and the sponsor’s reputational capital with creditors. Our model predicts that reliance on reputational capital varies inversely with the efficiency of the enforcement of formal contracts. Using a large sample of leveraged loans originated between 2005 and 2018, we find evidence consistent with the predictions of our model. Specifically, we find that poor performance of loans to firms backed by a sponsor is associated with an increase in the use of covenant-heavy loan structures for other loans backed by the same sponsor. We also find that spreads are significantly lower for covenant-lite term loans than for term loans with maintenance covenants.

Cyber Risk and Reputational Capital: Evidence from Private Lending Markets
Choi, ChangHwan,Kang , Jun-Koo ,Kim, Jungmin
We examine how lenders respond to borrowers’ exposure to cyber risk. We find that firms pay higher loan spreads and receive less bank debt following data breaches, but their covenant intensity remains unchanged. These adverse impacts are more evident when firms suffer larger reputation losses from breaches and when they invest less in reputational capital (i.e., poorer risk management and weaker durable bank relationship) prior to breaches, but are less evident when they invest more in post-breach reputation rebuilding actions (i.e., higher corporate social responsibility performance). Thus, banks incorporate borrowers’ cyber risk and reputational capital in new loan contracting.

Demand Shocks for Public Debt in the Eurozone
Lengyel, Andras,Giuliodori, Massimo
In this paper we use high-frequency (intraday) government bond futures price changes around German and Italian Treasury auctions to identify unexpected shifts in the demand for public debt. Estimates show that positive demand shocks lead to large and persistent negative movements in Treasury yields. There is also evidence of significant spillover effects into Treasury bond, equity and corporate bond markets of other euro area countries. We find interesting differences in the effects of demands shocks between the two countries, which are consistent with the “safe-haven” status of German bonds versus the “high-debt” status of Italian Treasuries. Results also suggest that these effects are stronger during periods of high financial stress.

Did Mandatory IFRS Adoption Affect the Cost of Capital in Latin American Countries?
Moura, André Aroldo Freitas de,Altuwaijri, Aljaohra,Gupta, Jairaj
This study investigates whether mandatory adoption of International Financial Reporting Standards (IFRS) has affected the long-term cost of equity and debt in Latin America, where the enforcement of accounting standards and investor protection mechanisms are weak in comparison to developed nations. Analyzing a sample of firms from Argentina, Brazil, Chile, Mexico, and Peru, we show that mandatory IFRS adoption led to reduction in the cost of equity even after controlling for firm-level reporting incentives. Test results also show that the cost of debt was reduced significantly after the IFRS adoption. Our results suggest that enhanced disclosure and comparability stemming from IFRS in comparison to previous domestic accounting standards helped to mitigate the information asymmetry problem, and resulted in positive economic consequences for Latin American firms.

Firm Debt Covenants and the Macroeconomy: The Interest Coverage Channel
Greenwald, Daniel
Interest coverage covenants, which set a maximum ratio of interest payments to earnings, are among the most popular provisions in firm debt contracts. For affected firms, the amount of additional debt that can be issued without violating these covenants is highly sensitive to interest rates. Combining a theoretical model with firm-level data, I find that interest coverage limits generate strong amplification from interest rates into firm borrowing and investment. Importantly, most firms that have interest coverage covenants also face a maximum on the ratio of the stock of debt to earnings. Simultaneously imposing these limits implies a novel source of state-dependence: when interest rates are high, interest coverage limits are tighter, amplifying the influence of interest rate changes and monetary policy. Conversely, in low-rate environments, debt-to-earnings covenants dominate and transmission is weakened.

Higher-Order Weak Schemes for the Heston Stochastic Volatility Model by Extrapolation
Zheng, Chao
We consider a time-discrete scheme for the Heston stochastic volatility model, which employs the stochastic trapezoidal rule to discretize the logarithmic asset process, provided that the variance process is simulated exactly. Zheng (2017, SIMUM) has proved that this scheme is of weak order two for the full parameter regime, with respect to any polynomial function of the log-asset process. We extend the result by proving that the weak error can be expanded in arbitrarily high powers of step size. This property allows us to build a high-order method of an arbitrary weak order by extrapolation. The result is also free of parameter restrictions.

Impact of E-Business on Business Association
Deshmukh, Sandip U.
The said research paper involves a study of the impact of Electronic Commerce on Business. The research study has highlighted the Management Information Systems, Finance and Accounting, Marketing and Computer Sciences of E-Commerce on Business. E-commerce is a way of conducting business over the Internet. Though it is a relatively new concept, it has the potential to alter the traditional form of economic activities. Already it affects such large sectors as communications, finance and retail trade and holds promises in areas such as education, health and government. The largest effects may be associated not with many of the impacts that command the most attention but with less visible, but potentially more pervasive, effects on routine business activities. The integration of Electronic Commerce and Business will bring a renaissance in marketing function. As it present opportunities to get close to the customer to bring the customer inside the company, to explore new product ideas and pretest them against real customers.

Implementing a Systematic Long-only Quality and Dividend (QAD) Strategy: Evidence from the Singapore Market
Raju, Rajan
With falling interest rates and bond yields, generating income for investors seeking regular cash flows has become increasingly difficult. Equity dividend strategies present a viable alternative for such investors. We believe, ceterius paribus, that a strategy based on selecting high quality companies which pay sustainable dividends should be attractive to investors. We construct a composite Quality and Dividend (QAD) score using 'off-the-shelf' criteria and publicly available financial data and show that an annual-rebalanced, long-only portfolio of top-quintile stocks selected using our score in Singapore outperforms the Straits Times Index (STI) - both in terms of absolute returns (by 7.34% pa) and risk adjusted returns - while having an moderate annual turnover (a mean turnover of 41.07%). We show that our QAD score predicts the persistence for up to 3 years and there is a weak relationship between the price multiple and the QAD score. We further show that a QAD portfolio performs better than a similar annually rebalanced, top quintile portfolio constructed based on maximising dividend yield. The systematic long-only QAD strategy using `off -the-shelf' criteria provides a practical, executable, systematic methodology that delivers quality dividends cash flow along with better total returns than the STI in the Singapore market.

Interest-Only Mortgages and Consumption Growth: Evidence from a Mortgage Market Reform
Bäckman, Claes,Khorunzhina, Natalia
We use detailed household-level data from Denmark to analyze how the introduction of interest-only mortgages affected consumption expenditure and borrowing. Four years after the reform interest-only mortgages constituted 40 percent of outstanding mortgage debt. Using an ex-ante measure of exposure motivated by financial constraints, we show households who are more likely to use an IO mortgage, increased consumption substantially following the reform. The increase in consumption is driven by borrowing at the time of refinancing and by borrowers with lower pre-reform leverage ratios. Our results show changes in the mortgage contract can have large impacts on consumption expenditure.

Long Horizon Portfolio Optimization under Log-Normal Return Assumptions
Sun, Jeff
Linear variance and covariance estimates can be a poor proxy for investment risk under log normal return assumptions over longer horizons. When applied over long holding periods, popular portfolio construction methods relying on linear return and variances could lead to incorrect portfolio choices that unfairly penalize assets with higher variance.

Machine Learning Portfolio Allocation
Pinelis, Michael,Ruppert, D.
We find economically and statistically significant gains from using machine learning to dynamically allocate between the market index and the risk-free asset. We model the market price of risk to determine the optimal weights in the portfolio: reward-risk market timing. This involves forecasting the direction of next month's excess return, which gives the reward, and constructing a dynamic volatility estimator that is optimized with a machine learning model, which gives the risk. Reward-risk timing with machine learning provides substantial improvements in investor utility, alphas, Sharpe ratios, and maximum drawdowns, after accounting for transaction costs, leverage constraints, and on a new out-of-sample test set. This paper provides a unifying framework for machine learning applied to both return- and volatility-timing.

Making Non-Financial Information Count: Accountability and Materiality in Sustainability Reporting
Mosca, Chiara,Picciau, Chiara
National and international lawmakers are increasingly focusing on sustainability reporting as a way to foster socially and environmentally responsible corporate conduct. Within the European Union, Directive 2014/95/EU has introduced reporting obligations for certain large enterprises on a variety of non-financial issues. Non-Financial disclosure is, however, just one of the legal strategies that the European lawmaker has put in place to foster sustainability. The European regulatory framework aims, in fact, at using shareholders and their monitoring power as a way to stir corporate behavior. Since corporate boards are accountable to shareholders only, if investors and financial intermediaries start paying attention to social and environmental issues in their investment decisions, corporate conduct should adjust accordingly. The key tool that makes this mechanism work is non-financial disclosure, which provides investors and market operators with the data to make informed, socially and environmentally responsible decisions. The content of the disclosure is significantly shaped by the notion of materiality, which has been traditionally employed to determine which financial information companies should disclose. This paper argues, however, that the concept of materiality in non-financial disclosure cannot and should not be a mere duplication of materiality in accounting, auditing and financial markets regulation. The relevant benchmark to assess materiality remains the “reasonable investor”, but for the purposes of non-financial disclosure the reasonable investor pays attention to the long-term risks and opportunities of sustainability policies and issues. As a result, we advocate for a forward-looking and investor-based criterion in order to determine whether the disclosure enables to understand the impact of the company’s activity on the environment, society and relevant stakeholders. This should lead to a more narrative and consequence-oriented reporting on the non-financial issues on which the company has, or is likely to have, the greatest impact.

More of the Same or Real Transformation: Does FinTech Warrant New Regulation?
Ofir, Moran,Sadeh, Ido
This Article examines how and why regulating FinTech is different. This question relates to the ongoing debate of whether FinTech is simply “more of the same”â€"primarily exacerbating existing failures and challenges and hence not requiring new regulationsâ€"or a radical transformation that poses unique challenges and thus requires tailored regulatory responses. The Article argues that when looking at each FinTech application individually, FinTech arguably does not create novel challenges and failures, but mainly exacerbate existing ones. When looking at the FinTech phenomenon from a broader perspective, however, it apparently introduces fundamental changes that require corresponding changes in financial regulation. The Article demonstrates this argument from three perspectives. From a transactional perspective, it shows that financial services increasingly rely on emerging technologies (e.g., artificial intelligence and big data) and novel business models (e.g., ICO, P2P lending) to disintermediate traditional financial functions and create new financial activities. From a structural perspective, it shows that the financial industry transformed from a homogenous industry dominated by few large financial institutes into a more dispersed industry that includes increasingly diverse types of market participants (FinTech startups, TechFin companies, and financial institutes). From a more abstract perspective, it shows that FinTech innovations tend to grow exponentially, creating new challenges related to the “pacing problem”. The Article argues that these broad, fundamental changes pose new regulatory challenges, as well as exacerbating existing ones, in a way that requires regulators to both reevaluate their existing regulatory strategies and develop new regulatory tools and approaches. It concludes by proposing tailored regulatory responses.

Mornitoring, Forecasting and Optimization Technique When Multi-Variables Shift With Time
Mao, Hong
In this paper, the quality control technique and the optimization of adjustment interval of one dimensional quality characteristic are extended to multi-dimensional case in which the vector of the quality characteristics or important financial indices of firms shifts with time. A special multivariate triangle control chart is proposed to control such kind of process. An application is illustrated to monitor and predict the soundness of insurers of U.S. Finally, 7 important issues for further study in future are presented.

New and Old Sorts: Implications for Asset Pricing
Baba Yara, Fahiz,Boons, Martijn,Tamoni, Andrea
We study the returns to characteristic-sorted portfolios up to five years after portfolio formation. Among a set of 56 characteristics, we find large pricing errors between the contemporaneous returns of new and old sorts, where new sorts use only the most recent observations of firm characteristics. These relative pricing errors are not captured by existing asset pricing models and have been overlooked by standard tests using only returns to new sorts. Thus, pricing errors across horizons provide new and powerful information to test asset pricing models. Further, we show that these pricing errors are strongly related to a characteristic's market beta and connected to the difference in return between new and old stocks in the characteristic-sorted portfolios. We argue that investors can improve the performance of characteristic-based strategies by considering past observations of firm characteristics.

One More Case for Longer-Term Mortgages: Financial Stability
Feldman, Michael
Longer-term mortgages would enhance both consumer choice and financial stability, but regulatory changes are needed to help them develop into a significant part of the Canadian residential mortgage market, says a new report from the C.D. Howe Institute.In “One More Case for Longer-Term Mortgages: Financial Stability,” author Michael K. Feldman notes that according to the Bank of Canada only 2 percent of all Canadian mortgages issued in 2018 were fixed-rate loans with terms of longer than five years. He further suggests that encouraging 10-year or longer mortgages would increase options for borrowers while adding more stability to the housing market.

Pitching Research®: A Resource Kit for Research Training Instructors
Faff, Robert W.
To encourage wider adoption and dissemination of Faff’s (2015, 2019) Pitching Research framework, herein, I set out a carefully organized resource kit for instructors charged with the goal of research capacity building and/or research training. Targeted instructors include: “research process” course leaders; Honors year instructors; HDR course leaders and any other instructors with a research training remit. The Resource kit is organized under six broad headings: (1) Essential resources; (2) Recommended resources; (3) Supplementary resources; (4) Discipline-specific resources; (5) Suggested classes, activities and assessment; (6) Additional Pitching Research literature. Discipline specific areas covered include: Accounting; Finance; Information Systems; Management; Marketing; Strategy; Tourism; Science; Economics & Policy; Medicine & Health; Humanities & Social Sciences; Psychology; and Engineering. Additionally, I provide access to 35 language translations of the cued version of the pitching template.

Pricing the Economic Risk of Coronavirus: A Delay in Consumption or a Recession?
Bonaparte, Yosef
This paper prices the economic risk of coronavirus, which is ranging between partial delay of consumption (glitch) to a full scale of recession (due to disruption of supply chain and labor productivity shock). We present the lifecycle that the virus go through (Genesis, Acts and Resurrection), and suggest that the length of the life cycle determines the economic consequences. For certainty, corporates will miss this Q1/2020 earnings, yet if the coronavirus exhibits a robust declines by mid-April, companies will have outstanding guidelines and Q2 earnings, hence, partial delay in consumption from first quarter. If by mid-April, coronavirus turn to be pandemic, then we are going to recession due to labor shock. The optimal fiscal and monetary policies is intervention to fill in the GDP gap, with infrastructure projects and unemployment benefit for those who laid off after 3/15/2020, at a total level of $500 Billion or more. Finally, the Fed should purchase assets (not cut rates- pushing on a string). With these policies we expect a soft landing for the US economy and stock market.

Robust Leveraged ETF Portfolios Extending Classic 40/60 Portfolios and Portfolio Insurance
Smirnov, Mikhail,Smirnov, Alexander
Leveraged ETFs provide a convenient mechanism to dynamically change portfolio exposure and can be successfully used to construct robust portfolios that perform well during equity market drops. We start with a classical 60 percent Bonds/ 40 percent Stocks portfolio with monthly rebalancing that delivered 9.4 percent annually over since 1986. Its 120 percent leveraged cousin that is 72 percent Bonds/ 48 percent Stocks delivered 10.4 percent annually since 1986, same as stocks but with lower volatility and drawdowns. Instead of leveraging with borrowing at portfolio level we can use a portfolio of leveraged ETFs.We consider several balanced stocks/bonds portfolios created with leveraged ETFs but without borrowing money at portfolio level and show that they present a very attractive risk-adjusted alternative to just stock index and classical stocks/bonds portfolios without leverage. In particular portfolio of 40 percent TQQQ, 20 percent TMF, 40 percent TLT with monthly rebalancing proposed by us in 2017 paper as a leveraged ETF alternative to classical stocks/bonds portfolios performed well in 2018 and through beginning of Coronavirus crisis up to February 28, 2020. What happens to this portfolio as crisis continues still to be seen.A classical portfolio insurance strategy of Black-Jones-Perold can be easily implemented with leveraged ETFs. More complex dynamic portfolio strategies can also be implemented using leveraged ETFs.

Selección óptima de portafolios basada en cadenas de Markov de primer y segundo orden (Optimal Portfolio Selection Based on First and Second Order Markov Chains)
Gómez, Juan,Jiménez Moscoso, José Alfredo
Spanish Abstract: En búsqueda de generar estrategias de inversión en pro de maximizar el rendimiento esperado y minimizar el riesgo, se estudian dos modelos de selección de portafolios óptimos. El primero se ajusta usando rendimientos logarítmicos, y en el segundo se emplea análisis de componentes principales (ACP) a estos rendimientos. Luego, para cada uno de ellos se establece su rendimiento ponderado y se crean unas medidas para establecer los estados de las cadenas de Markov de primer y segundo orden. Esto permite pronosticar si los portafolios conformados tendrán comportamientos alcistas o bajistas dadas las probabilidades de los estados de las cadenas de Markov. Se realiza una aplicación usando los retornos de precios de cierre diarios de 21 acciones del COLCAP, para el periodo comprendido desde enero de 2014 a octubre de 2017. Se concluye que en el mercado colombiano un portafolio conformado bajo ACP de los rendimientos tiene una mayor rentabilidad esperada y un menor riesgo a largo plazo, teniendo una precisión de pronóstico del modelo dados los vectores estacionarios de las cadenas de Markov.English Abstract: Searching for create investment strategies in pursuit of maximizing the expected return on investment and minimizing the risk two models of selection of optimal portfolios are studied. The first portfolio composition model is adjusted using logarithmic returns, and the other uses principal component analysis (PCA) at these returns. Then, for each of them its weighted performance is established and measures are created to establish the states of the first and second order Markov chains, this allows to predict whether the shaped portfolios will have bullish or bearish behaviors given the probabilities of the states of the Markov chains. An application is made using the daily closing price returns of 21 COLCAP shares for the period from January 2014 to October 2017. Concluding that in the Colombian Market a portfolio formed by PCA of the returns has a higher expected profitability and less risk in the long term, having an accuracy of model’s forecast according with the stationary vectors of the Markov chains.

Shareholder Rights
Armour, John
‘Shareholder rights’ are the legal entitlements of shareholders via-a-vis companies in which they invest. A large body of research has sought to investigate how shareholder rights foster accountability of controllers. The concern has been that without accountability, managers and dominant shareholders will use their power to further their own interests at the expense of outside investors. A contrasting concern is that strengthening shareholder rights may come at the expense of other parties, which may also lead to misallocation of corporate resources. A recently-emerging body of research suggests that the relationship between shareholder rights and social welfare is not monotonic, but rather inverse-U shaped. We argue that the calibration and impact of shareholder rights depends crucially on the institutional channel(s) through which they are implemented â€" voting, litigation, and/or market pricing. In particular, the market pricing channel intensifies the effects of shareholder rights in ways that can be excessive. This can harm not only other constituencies but also shareholders, as it can promote short-termism and systemic externalities. These problems are less pronounced for shareholder rights implemented through the voting channel.

State of Stablecoins (2019)
Hileman, Garrick
The report presents new insights and data on stablecoins, an innovative and rapidly evolving sector of the cryptocurrency ecosystem. Stablecoins, as the name suggests, are cryptocurrencies that are designed to minimize price volatility. The findings in this research study build on an earlier 2018 empirical study and are based on the analysis of a new data set for 57 individual stablecoins. Empirical data was gathered from both public and non-public sources. The total number of active projects makes stablecoins one of the largest cryptoasset categories, and as shown in the report stablecoins are also a leading category across a number of other key metrics (e.g., venture funding). The level of interest and resources devoted to stablecoins is striking and indicates that stablecoins are viewed as a very important part of the digital assets ecosystem. Indeed, stablecoins are often thought of as a foundational or infrastructure layer, one that could significantly expand the cryptoasset userbase from our current estimate of approximately 30-40 million individuals.New in this year's report: - new research primers on three leading stablecoins: Paxos Standard, Stasis and Reserve;- a new in-depth comparison of Paxos Standard, USD Coin and Gemini Dollar;- expanded data profiles for many stablecoins and new stablecoins added to the data set (the 2019 report is twice the length of its predecessor);- refreshed data and analysis across the full report to reflect the substantial changes observed over the last six months; and- an overview of how exposure by investors to the growing use of stablecoins is being obtained

Stock-Market Behavior on Ex-Dividend Dates: New Insights from German Tax-Free Dividend Stocks
Kreidl, Felix
We examine stock prices and number of stocks traded around ex-dividend dates of German stocks with tax-free dividends. Tax-free dividends are temporarily tax-exempt, as they reduce the initial purchasing price of a stock. This allows us to isolate tax effects from other potential effects on stock prices. Considering the tax equivalence, the tax clientele theory suggests that the drop in prices on ex-dividend dates should equal the dividend payment. We provide evidence that the stock-market behavior on ex-dividend dates is most consistent with the tax clientele theory. Our results indicate that prices decline, on average, by the amount of the dividend. Further, we do not find a significant relationship between a stock’s price-drop ratio and dividend yield. All trading venues in our sample show abnormal numbers of stocks traded around ex-dividend dates. For XETRA and the local exchanges, our analysis provides no significant correlation between a stock’s abnormal number of stocks traded and dividend yield.

The Collateral Channel of Monetary Policy: Evidence from China
Fang, Hanming,Wang, Yongqin,Wu, Xian
Collateral-based monetary policy tools have been used extensively by major central banks. Lack of proper policy counterfactuals, however, makes it difficult to empirically identify their causal effects on the financial market and the real economy. We exploit a quasi-natural ex-periment in China, where dual-listed bonds are traded in two mostly segmented markets: the interbank market regulated by the Central Bank, and the exchange market regulated by the securities regulator. During a policy shift in our study period, China’s Central Bank included a class of previously ineligible bonds in the interbank market to become eligible collateral for financial institutions to borrow money from its Medium-Term Lending Facility (MLF). This policy shift allows us to implement a triple-difference strategy to estimate the causal impact of the collateral-based unconventional monetary policy. We find that in the secondary market the policy reduced the spreads of the newly collateralizable bonds in the treatment market (the interbank market) by 42-62 basis points. We also find that there is a pass-through effect from the secondary market to the primary market: the spreads of the treated bonds newly issued in the interbank market were reduced by 54 basis points.

The Contribution of Shareholder Primacy to the Racial Wealth Gap
Palladino, Lenore
The US racial economic gap is substantial and growing, stemming from a history of racism and the importance of intergenerational transmission to wealth accumulation (Darity and Hamilton 2012); (Chiteji and Stafford 1999). Wealth equity is important because wealth permits economic freedom: the ability to invest in one’s future and the future of one’s children (Darity and Hamilton 2012). This article investigates the role of corporate equities and mutual fund ownership in increasing the racial wealth gap over time. As of the third quarter of 2019, 92.1 percent of corporate equity and mutual fund value was owned by white households. Black households owned 1.5 percent, while Hispanic households owned 1.9 percent. I use the Federal Reserve’s Distributional Financial Accounts to determine the changing impact of the corporate equity gap on the racial wealth gap, and to measure how shareholder paymentsâ€"dividends and stock buybacksâ€"are divided by race and ethnicity. This original analysis contributes to policy discussions about how to structure the rules for corporate equity ownership in society, and how to end wealth equities that are a legacy of the US’s shameful history of slavery, racism, and xenophobia.

The Cost of Fraud Prediction Errors
Beneish, Messod D.,Vorst, Patrick
The paper provides a cost-based explanation for decision makers’ reluctance to use fraud prediction models, particularly as these models have nearly doubled their success at identifying fraud (true positive rates) when compared to the initial models in Beneish (1997, 1999). We estimate the costs of fraud prediction errors from the perspective of auditors, investors, and regulators, and find that the costs of errors differ both within and across fraud/non-fraud groups. Because metrics commonly used to compare models assume costs equality within or across classes, we propose a cost-based measure for model comparison that nets the costs avoided by correctly anticipating instances of fraud (true positives), against the costs borne by incorrectly flagging non-fraud firms (false positives). We find that the higher true positive rates in recent models come at the cost of higher false positive rates, and that even the better models trade false to true positives at rates exceeding 100:1. Indeed, the high number of false positives makes all seven models we consider too costly for auditors or regulators to implement. For investors, M-Score and, in some cases, the F-Score are the only models providing a net benefit. This is because the main component of investors’ false positive costs is the profit foregone (or the loss avoided) by not investing in a falsely flagged firm, and these models are based on fundamental signals that have been shown to predict future earnings and returns. In sum, our evidence shows that as the number of false positives increases, the use of fraud prediction models becomes a value-destroying proposition. Hence, it suggests that researchers focus on lowering the false positive rates of their models rather than pursuing higher true positive rates.

The Effect of U.S. Protectionist Trade Policy on Foreign Ownership: A Study of Korea’s Data Set
Jung, Hyun-Uk,Mun, Tae-Hyoung
Purpose â€" This study analyzed the effect of the Trump Government’s protectionist trade policies on foreign ownership. Specifically, this study empirically analyzes the hypothesis that foreign ownership will decrease after the Trump Government rather than before the Trump Government. Design/methodology â€" The hypothesis of this study is based on the expectation that US protection trade policy will negatively affect the profitability of Korean companies. The dependent variable in this study is the foreign ownership ratio, and the independent variable is a dummy variable representing before and after the Trump Government. Multiple regression analysis was performed, including the control variables suggested in previous studies related to foreign ownership. Findings â€" As a result, foreign ownership increased after the Trump Government rather than before the Trump Government. This study further analyzes whether the main variables affecting foreign investor’s decision-making are differences before and after Trump Government. The export ratio, profitability and dividends did not differ before and after Trump Government. However, the level of information asymmetry decreased after the Trump Government than before the Trump Government. This suggests that US protection trade policies do not adversely affect the profitability of Korean companies. However, Korean firms are improving their information environment because US protectionist trade policies can lower profitability and negatively impact capital raising. In this regard, the foreign ownership ratio seems to differ before and after the Trump Government. Originality/value â€" This study contributes in that it presents data that US protectionist policies can affect Korean corporate governance. This study has implications from the short-term analysis of US protection trade policy.

The Market Events of Mid-September 2019
Afonso, Gara,Cipriani, Marco,Copeland, Adam M.,Kovner, Anna,La Spada, Gabriele,Martin, Antoine
This paper studies the mid-September 2019 stress in U.S. money markets: On September 16 and 17, unsecured and secured funding rates spiked up and, on September 17, the effective federal funds rate broke the ceiling of the Federal Open Market Committee (FOMC) target range. We highlight two factors that may have contributed to these events. First, reserves may have become scarce for at least some depository institutions, in the sense that these institutions’ reserve holdings may have been close to, or lower than, their desired level. Moreover, frictions in the interbank market may have prevented the efficient allocation of reserves across institutions, so that although aggregate reserves may have been higher than the sum of reserves demanded by each institution, they were still scarce given the market’s inability to allocate reserves efficiently. Second, we provide evidence that some large domestic dealers likely experienced an increase in intermediation costs, which led them to charge higher spreads to ultimate cash borrowers. This increase was due to a temporary reduction in lending from money market mutual funds, including through the Fixed Income Clearing Corporation’s (FICC’s) sponsored repo program.

The Meeting Clustering Effect in a Civil-Law Country: Evidence from Spain
Pardo Tornero, Ángel,Santandreu, Eddie
Recent studies focused on countries whose legal tradition is based on common-laws, such as the US and the UK, have revealed significant (positive or negative) associations between the clustering of annual general meetings and monthly stock returns. Following Ball et al. (2000), the informational role of general meetings should be smaller in civil-law countries compared with common-law ones. This paper studies the relationship between the clustering of annual general meetings and stock returns in the Spanish Stock Exchange (SSE), which is based on civil-code rules. Unlike previous empirical papers, no significant relationship has been found between the monthly frequency of meeting clustering and stock returns. However, we do show that meeting clustering exists and that some months exhibit significant and positive additional returns related to the holding of ordinary or extraordinary general meetings. Furthermore, we have explored some possible explanations for the meeting clustering effect, such as a potential link with the “Halloween” effect or the presence of higher-than-normal levels of volatility, trading volumes or investor attention. However, none of these can explain the meeting clustering effect that emerges as a new anomaly in the SSE.

U.S. Political Corruption and Audit Fees
Jha, Anand,Kulchania, Manoj,Smith, Jared D.
Using data on corruption convictions from the U.S. Department of Justice, we find that auditors charge higher fees when a firm is headquartered in a more corrupt district. This result is robust to a wide range of time and location fixed effects, using capital city isolation as an instrument, and propensity score matching. We also find that, relative to those in non-corrupt districts, firms in corrupt districts are more likely to have weak internal controls and to restate earnings and that their auditors exert greater effort. This evidence suggests that auditing firms in corrupt areas entails additional risk, which auditors price into fees.

When to Own Stocks and When to Own Gold
Peterson, Timothy
We show that dynamic investment portfolio asset allocation based on secular market cycles outperforms a buy-and-hold portfolio of equities and outperforms a buy-and-hold portfolio of gold over long periods. An objective definition of secular market enables identification of an appropriate ex-ante risk-on or risk-off posture for a portfolio. We construct an objective measure which we term a “secular market indicator (SMI)” using a modified Shiller Cyclically Adjusted Price-Earnings (CAPE) ratio with gold as a reference point. This SMI has slightly greater predictive power than Shiller’s CAPE Ratio in that it provides a consistent threshold signal for secular macroeconomic reversals. Finally, we use the SMI to create a simple decision rule to shift asset allocation between equity and gold depending on the secular market cycle. The resulting portfolio outperforms an all-equity portfolio and an all-gold portfolio over holding periods of 10+ years about 70% of the time, and produces superior risk-adjusted performance about 80% of the time.