Research articles for the 2020-03-10

A Comparative Performance Analysis of Islamic and Conventional Banks in Malaysia (2010- 2018)
Inayat Kassam, Sanah,Naghavi, Navaz
This paper explores the impact of bank-specific and macroeconomic variables, including the 2015-2018 Chinese stock market crash, on bank performance (ROA) of Conventional and Islamic banks in Malaysia, during the 9-year period (2010 to 2018). For this purpose, 5 Conventional and Islamic banks were selected based on Moody’s investor service and BNM statistics. The Empirical data for the banks was retrieved from individual annual reports and the Malaysian Department of Statistics. This paper performs a multiple linear regression analysis, and Pearson’s correlation (r) test to determine significance of each variable with bank’s Return on Assets (ROA), as a measure of profitability. The specific variables tested include Total deposits, Non-performing Loans, Noninterest income, Gender diversification in the board, while macroeconomic variables include Interest rate, Inflation, GDP and the 2015 China Stock Market Crash. The results concluded that Total deposits have a positive impact on bank profitability for conventional banks, while Noninterest income increases profitability for Islamic banks. Non-performing loans was found to have a significant negative relationship with bank profitability for both Islamic and conventional systems. None of the macroeconomic variables impacted Malaysia’s bank profitability for this time period, including the China stock market crash. Islamic banks were deemed better performing than Conventional banks, achieving a higher ROA throughout the time period analysed. The findings of this study can aid Malaysian banks, their investors and shareholders, as well as policymakers and the government in deciding initiatives to maximise banks performance, especially to fulfil Bank Negara Malaysia’s Banks Business Plan (BP) objectives in the coming decade.

A New Approach for Macroscopic Analysis in order to improve the Technical and Economic Impacts of Urban Interchanges on Traffic Networks -- A Case Study
Seyed Hassan Hosseini,Ahmad Mehrabian,Mohsen Momenitabar,Zhila Dehdari Ebrahimi,Mohammad Arani

Perusing three important elements (economic, safety and traffic) is the overall objective of decision evaluation across all transport projects. In this study, we investigate the feasibility of development of city interchanges, and road connections for network users. In order to achieve this goal, a series of smaller goals are required including determining benefits, costs of implementing new highway interchanges, quantifying the effective parameters, quantifying the increase in fuel consumption, quantifying the reduction in travel time and growth in travel speeds. In this study, geometric advancement of Hakim highway, and Yadegar-e-Emam highway was investigated just Macro from cloverleaf intersection with a low capacity to three-level directional intersection and enhanced cloverleaf. For this purpose, the simulation was done by EMME/2 software. The results of the method of net present value (NPV) were evaluated economically, and the benefit and cost of each one was stated precisely in different years (%28 improvement). The sensitivity analysis indicated that the cost of fuel, cost of travel time, cost of accidents and cost of pollutants have the highest impact factor in this assessment respectively.

A Systematic and Analytical Review of the Socioeconomic and Environmental Impact of the Deployed High-Speed Rail (HSR) Systems on the World
Mohsen Momenitabar,Raj Bridgelall,Zhila Dehdari Ebrahimi,Mohammad Arani

The installation of high-speed rail in the world during the last two decades resulted in significant socioeconomic and environmental changes. The U.S. has the longest rail network in the world, but the focus is on carrying a wide variety of loads including coal, farm crops, industrial products, commercial goods, and miscellaneous mixed shipments. Freight and passenger services in the U.S. dates to 1970, with both carried out by private railway companies. Railways were the main means of transport between cities from the late 19th century through the middle of the 20th century. However, rapid growth in production and improvements in technologies changed those dynamics. The fierce competition for comfortability and pleasantness in passenger travel and the proliferation of aviation services in the U.S. channeled federal and state budgets towards motor vehicle infrastructure, which brought demand for railroads to a halt in the 1950s. Presently, the U.S. has no high-speed trains, aside from sections of Amtrak s Acela line in the Northeast Corridor that can reach 150 mph for only 34 miles of its 457-mile span. The average speed between New York and Boston is about 65 mph. On the other hand, China has the world s fastest and largest high-speed rail network, with more than 19,000 miles, of which the vast majority was built in the past decade. Japan s bullet trains can reach nearly 200 miles per hour and dates to the 1960s. That system moved more than 9 billion people without a single passenger casualty. In this systematic review, we studied the effect of High-Speed Rail (HSR) on the U.S. and other countries including France, Japan, Germany, Italy, and China in terms of energy consumption, land use, economic development, travel behavior, time use, human health, and quality of life.

A tail dependence-based MST and their topological indicators in modelling systemic risk in the European insurance sector
Anna Denkowska,Stanisław Wanat

In the present work we analyse the dynamics of indirect connections between insurance companies that result from market price channels. In our analysis we assume that the stock quotations of insurance companies reflect market sentiments which constitute a very important systemic risk factor. Interlinkages between insurers and their dynamics have a direct impact on systemic risk contagion in the insurance sector. We propose herein a new hybrid approach to the analysis of interlinkages dynamics based on combining the copula-DCC-GARCH model and Minimum Spanning Trees (MST). Using the copula-DCC-GARCH model we determine the tail dependence coefficients. Then, for each analysed period we construct MST based on these coefficients. The dynamics is analysed by means of time series of selected topological indicators of the MSTs in the years 2005-2019. Our empirical results show the usefulness of the proposed approach to the analysis of systemic risk in the insurance sector. The times series obtained from the proposed hybrid approach reflect the phenomena occurring on the market. The analysed MST topological indicators can be considered as systemic risk predictors.

Advanced Quantitative Equity Portfolio Management System
Clermont, Dominic
Portfolio management is both complex and simple. It involves many steps and processes that leads to intended results: delivering excess returns within some risk budget. Each steps and processes is important and one needs to look at and improve each sub-system. Such Quantitative Equity Portfolio Management Systems require an extensive factor database, alpha forecasting system, risk modeling system, portfolio construction/optimization, risk monitoring, performance attribution, transaction cost modelling, and backtesting.

Are ETFs Making Some Asset Managers Too Interconnected To Fail?
Clements, Ryan
Exchange Traded Funds (ETF) are likely the most successful financial products since the 2008 global financial crisis (GFC). Despite numerous benefits, ETF’s success could be making some asset managers “too interconnected to fail.” Interconnection is a core element of systemic risk, and it played a material role in the transmission of economic shocks in the GFC. This article is the first, in a growing body of literature on ETFs, to provide a comprehensive inquiry into their systemic importance through the lens of interconnectivity. The article provides three unique contributions. First, it shows how ETFs are creating deep and complex interconnections between numerous market participants and service providers, extending to retail and institutional investors, and corporate behaviors and decisions. Second, it illustrates how ETF interconnection creates direct and indirect systemic risk transmission pathways, with unique factors not present in other managed asset products, like the reliance on key market-incentivized intermediaries in a crisis, crowd behaviors from correlated investment exposures, information cascades, runs, fire sales, and non-linear impacts. Finally, it shows how the effective monitoring of ETF systemic risk requires a cross-market analysis to assess the collective behaviors of numerous participants in a complex and interconnected operating ecosystem, and how both activity and entity-level oversight is prudent in this market. While ETF firms are distinct from banks and insurance companies, there’s merit in safeguarding large firm’s economic resilience given their centrality in a highly interconnected ecosystem. As such, ETFs illustrate the importance of considering financial markets as a “system” when designing supervisory frameworks.

Assessing Mutual Fund Performance in China
Cornell, Bradford ,Hsu, Jason C.,Kiefer, Patrick Christian,Wool, Phillip
Chinese fund manager performance is interesting because in a market dominated by speculative retail trading, we expect professional fund managers to have persistent edge. Using data on the Chinese mutual fund industry, the authors compute a new skill measure to identify exceptional funds with persistent performance. When an equity mutual fund is in the top 1% of their ranking in a particular 6-month period, the probability the fund will be among the top 10% in return in the following period is 22%. By comparison for funds which rank in the top 1% by past 6-month return, the probability of being a top 10% fund in the next 6 months is only modestly better than noise at 12%. The authors also find declining skill and performance persistence at the industry level, likely driven by the exodus of mutual fund managers to hedge funds. They provide evidence that most of the outperforming funds in China deliver excess performance, relative to peers, through market timing. Funds which reliably pick winning stocks often do not evidence performance. This may be related to a mutual fund management culture which emphasizes market timing for managing downside risk over a focus on relative performance.

Asset Pricing and Sustainability: A Teaching Note
Schoenmaker, Dirk,Schramade, Willem
In the transition to a sustainable economy, companies are increasingly adopting the goal of long-term value creation, which integrates financial, social and environmental value. However, investors struggle to invest for long-term value creation and perform the social function of finance. Conventional investment approaches, based on the neo-classical paradigm of portfolio theory and efficient markets, only capture financial value in their financial risk and return space. Attempts at sustainability integration through environmental, social and governance (ESG) ratings are typically too shallow to overcome this problem.This teaching note presents an alternative investment paradigm, based on adaptive markets and fundamental analysis, that is better able to pursue long-term value creation. This long-term investment approach includes active management that assesses companies’ transition preparedness, concentrated portfolios, and deep engagement.This teaching note can be used in courses on asset pricing. It complements asset pricing textbooks, which usually adopt the capital asset pricing model.

Asymptotics of the time-discretized log-normal SABR model: The implied volatility surface
Dan Pirjol,Lingjiong Zhu

We propose a novel time discretization for the log-normal SABR model which is a popular stochastic volatility model that is widely used in financial practice. Our time discretization is a variant of the Euler-Maruyama scheme. We study its asymptotic properties in the limit of a large number of time steps under a certain asymptotic regime which includes the case of finite maturity, small vol-of-vol and large initial volatility with fixed product of vol-of-vol and initial volatility. We derive an almost sure limit and a large deviations result for the log-asset price in the limit of large number of time steps. We derive an exact representation of the implied volatility surface for arbitrary maturity and strike in this regime. Using this representation we obtain analytical expansions of the implied volatility for small maturity and extreme strikes, which reproduce at leading order known asymptotic results for the continuous time model.

Bankruptcy Risk Among Indonesian Stock Exchange Listed Companies
Setiawan, Anton,Dalimunthe, Zuliani ,Rizkianto, Eko
Objective - This research analyses whether there was a change in bankruptcy risk of companies in Indonesia for the period between 2015â€"2018, during the first presidency period of Joko Widodo, when Indonesia experienced tremendous dynamic economic, political and technological change. Previous research generally discusses the predictability of bankruptcy models, whereas this study analyses how the dynamics of the bankruptcy risk of companies in Indonesia using the most widely known and recognized models.Methodology/Technique â€" We employed a Wilcoxon-rank test to evaluate whether there are differences in the bankruptcy risk of companies year to year for the overall company and for each sector. We evaluated 154 companies listed on the Indonesian Stock Exchange.Findings â€" We found that the number of companies categorized in the bankruptcy zone increased every year and almost doubled during the studied time period (49 companies in 2013 compared to 90 companies in 2018).Novelty â€" The analysis shows that there is a significant number of companies that experienced bankruptcy risk each year, except for the periods between 2013 to 2014 and 2016 to 2017. On average, when we look at more detail for sectors and each year, the results show statistically significant increasing bankruptcy risk in all sectors except the transportation sector.Type of Paper - Empirical.

Be Socially Responsible or Perish!
Ntim, Collins G.
Specifically, Friedman argued that the main objective of business leaders, such as finance directors and CEOs should be to make as much money as possible for their owners, whilst operating within the law. Friedman made a number of arguments in support of his view. For example, he argued that by maximizing profit, a firm will invariably be contributing to, and performing, its social responsibilities, if indeed it had any at all, in many ways, including creating jobs, providing essential goods and services, and paying more taxes. Similarly, Friedman argued that even if the corporation has social responsibilities, managers were ill-placed to identify the most urgent needs of society and therefore, any investments by business leaders may be misplaced. Managers may, for example, be biased in their choices â€" they may invest in issues that they are personally interested in or benefit from rather than those that society actually needs. Additionally and by contrast, government collects taxes, and therefore, it is not only the primary responsibility of the government to identify and meet the social needs of society, but they are also better placed to do so effectively and efficiently through political campaigns and elections. Consequently, Friedman argued that a business has no social responsibilities beyond complying with the law, such as faithfully paying its fair share of taxes.

Betting Against Other Betas
Murray, Scott
Using several multi-factor models, I find strong "betting against beta'' effects - flat relations between betas and expected returns - for most non-market factors in US and international stock markets. "Arbitrage portfolios'' designed to profit from these effects earn average returns similar to those of the factors, with substantially reduced risk. Betas are persistent, indicating that the factor models successfully capture important dimensions of co-variation in returns. Previously-proposed explanations for the betting against market beta effect do not explain these results. These findings raise questions about the economic content of existing empirical factor models and the co-variance-based expected return paradigm.

Board Connections and CEO Succession
Wang, Joanna (Xiaoyu)
This paper studies the effects of the connections between firms’ CEO candidates and board members on new CEO selection decisions and the post-succession outcomes. I show that CEO candidates who have previous connections to the hiring firms’ board members are more likely to be hired as CEOs. For the firms that hire CEOs externally, such effect is weaker when the candidates are geographically closer to the hiring firm and when the candidates or boards have larger network size, but stronger when the candidates have working experiences in other industries. For the firms that hire CEOs internally, such effect is stronger when the firms have lower analyst coverage and when the firms’ board members have fewer external directorships. Moreover, candidate-board connections and firms’ post-succession operating performance are positively correlated for the firms that hire CEOs externally but negatively correlated for the firms that hire CEOs internally. Overall, in external succession, candidate-board connections provide valuable information regarding the quality of the CEO candidates and improve the matching efficiency among candidates and firms. In internal succession, candidate-board connections raise agency problems and cause suboptimal outcomes in post-succession period. Thus, for external and internal succession, this paper generates different implications for firms to select, monitor and advise CEOs.

Board Diversity, Corporate Governance, Performance and Executive Pay
Sarhan, Ahmed,Ntim, Collins G.,Al‐Najjar, Basil
Departing from previous studies, this paper investigates the impact of corporate board diversity on corporate performance and executive pay within the context of MENA countries. Our sample includes a balanced panel of 600 firm-year observations, consisting of 100 individual firms drawn from 5 Middle Eastern countries (Egypt, Jordan, Oman, Saudi Arabia and United Arab of Emirates) over the 2009â€"2014 period. The findings are three-fold. First, board diversity, as measured by director gender and nationality, has a positive effect on corporate financial performance. Second, the relationship between board diversity and corporate performance is stronger in better-governed firms than their poorly-governed counterparts. Finally, board diversity, as measured by director gender, ethnicity and nationality, enhances the pay-for-performance sensitivity, but not the actual executive pay. Our results suggest that decisions about board diversity are not merely influenced by moral values; they arise because of the cost-benefit considerations of what diversity can bring to the firm. The findings are robust to controlling for different alternatives of board diversity measures, corporate governance proxies, corporate outcomes and types of endogeneities.

Correlators of Polynomial Processes
Fred Espen Benth,Silvia Lavagnini

In the setting of polynomial jump-diffusion dynamics, we provide a formula for computing correlators, namely, cross-moments of the process at different time points along its path. The formula involves only linear combinations of the exponential of the so-called generator matrix, extending the well-known moment formula for polynomial processes. The developed framework allows to replace costly simulations with more accurate estimates, and it may be used for increasing the accuracy in financial pricing, such as for path-dependent options or in a stochastic volatility models context.

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

Debt-Equity Swap, Subsidy and Optimal Government Policy
Yang, Ei,Zheng, Shaoxuan
In 2016, the Chinese government proposed a one-time debt-equity swap (DES) program to assist firms in financial distress and to reduce the leverage ratio of non-financial firms. We use a dynamic capital structure model to study the effects of this program on firms with and without subsidy. A DES can increase a firm’s value by lowering its leverage ratio and reducing its expected bankruptcy cost. The subsidized firms initially take more debt and are thus more incentivized to undertake a DES. Notably, a firm’s undertaking a DES can have opposite effects on government value: on the one hand, it can increase government value from the tax-benefit channel, but on the other hand, it can reduce government value by extending the period of tax shields and subsidies granted to a firm. Consequently, we show that the optimal government policy depends on the characteristics of firms and the ultimate goals of government. In particular, the optimal policy for subsidized weak firms is a DES with subsidy removal, which introduces a tradeoff between a DES and a subsidy.

Distressed Firm Valuation: A Scenario Discounted Cash Flow Approach
Buttignon, Fabio
Valuation of a distressed company is a very tricky issue, for which many approaches and methods have been provided by the literature. Unfortunately, many of the more suitable proposals from a theoretical point of view (i.e., those based on option pricing theory, and even integrated with game theory) are very difficult to apply to real cases. To face the many contingencies emerging in a real case valuation, a scenario discounted cash flow (SDCF) model is provided here. The focus is on companies at an advanced stage of distress, where their ability to operate as a going concern is in question, and maintenance or the recovery of business continuity requires significant interventions in the firm’s strategic, operational, and financial structure. In this context, SDCF, with a number of arrangements elaborated here, appears useful for valuing assets, debt, and equity - from current or potential new investors - and the interactions between them, which are particularly critical for distressed companies. At the same time, SDCF takes into account a firm’s liquidation option, not only at the valuation date but even after a restructuring plan has been launched. Going-concern value including the liquidation option should be the reference point for judging the suitability of business continuity compared to liquidation. In presenting the model, the key concepts and methodology adopted are set out following a numerical example inspired by a real case.

Does Tax Deduction Relax Financial Constraints? Evidence from China’s Value-Added Tax Reform
Wang, Jingwen,Shen, Guangjun,Tang, Dunzhe
Financial constraint is a major obstacle for firm growth, especially in developing countries where credit is scarce. This paper explores the role of tax policy in relaxing firms’ financial constraints by exploiting the exogenous shocks from China’s value-added tax (VAT) reform in 2009. We find that VAT reform significantly reduces effective VAT rate, which in turn improves both internal and external financing capacity for firms through the increase in liquidity, cashflow and commercial credit, and through the decrease in borrowing cost as well. The findings are robust to alternative specifications but show heterogeneity across ownerships, firm sizes, regions and between export and non-export firms. Our analysis suggests tax deduction is useful to relax firms’ financial constraints.

Equations and Shape of the Optimal Band Strategy
Joachim de Lataillade,Ayman Chaouki

We consider the problem of the optimal trading strategy in the presence of a price predictor, linear trading costs and a quadratic risk control. The solution is known to be a band system, a policy that induces a no-trading zone in the positions space. Using a path-integral method introduced in a previous work, we give equations for the upper and lower edges of this band, and solve them explicitly in the case of an Ornstein-Uhlenbeck predictor. We then explore the shape of this solution and derive its asymptotic behavior for large values of the predictor, without requiring trading costs to be small.

Fast calibration of two-factor models for energy option pricing
Emanuele Fabbiani,Andrea Marziali,Giuseppe De Nicolao

A general method is presented to compute the variance of a linear stochastic process through a matrix Lyapunov differential equation. This approach, adopted from control theory, is alternative and easier with respect to the classical arguments found in quantitative finance literature and can be readily applied to high-dimensional models. Both analytical and numerical methods to solve the Lyapunov equation are discussed and compared in terms of computational efficiency. A practical application is presented, where numerical and analytical solutions for the variance of a two-factor mean-reverting model are embedded into the Black pricing framework and market calibration of model parameters is performed. It is shown that the availability of an analytical formula for the variance makes the calibration 14 times faster, thus proving the practical value of tractable and general methods to derive it.

Fuzzy Ideals and Fuzzy Dot Ideals on Bh-Algebras
Anitha, K. ,Kandaraj, Dr. N.
In this paper we introduce the notions of Fuzzy Ideals in BH-algebras and the notion of fuzzy dot Ideals of BH-algebras and investigate some of their results.

Global Opportunity Index 2020 : Focus on the GCC Countries
Lopez, Claude,Bendix, Joseph
Saudi Arabia’s presidency of the 2020 G20 and the Expo 2020 in Dubai offer a unique opportunity to showcase the region’s ongoing efforts to attract international investments.This report uses the Global Opportunity Index and its different categories to assess the region’s improvements in 2019. More specifically, it compares the Gulf Cooperation Council (GCC) countries' performances to those of a reference group, the upper-middle-income countries. The analysis provides a better understanding of the countries' economic development and readiness to welcome a more diversified pool of international investors.The GCC countries align with the upper-middle-income group performance in the cost of starting a business, the burden of labor regulation and taxes, the age and health of the working population, the efficiency of the legal system, and access to financial services and financial depth of the economy.However, their performance lags in four categories that affect foreign investors' potential interest in the region: • Protection of the investor, including the recovery and resolution process and investors’ rights • Transparency regarding the quality and quantity of information that can be easily collected from the public and private sectors • Workforce talent, including the qualifications of the labor force and its diversity • Economic openness, including trade agreements and tariffsAll of these categories are important. Yet, prioritizing the first two points would reassure investors as they relate directly to the rule of law â€" to their ability to recover part of their investment and to assess the quality of their investment. It would help diversify the pool of investors away from the local ones. Ultimately, it could also help diversify the economy away from oil.

Health Habits and Behavioral Biases
Patterson, Fernando,Shank, Corey A.
We examine the relationship between body mass index (BMI), health habits, and financial risk and time preferences. Using a sample of 128 undergraduate business students, we find that participants with higher BMI exhibit greater utility function curvature, greater loss aversion, and greater inability to delay gratification. Additionally, we find that higher fruit consumption and exercise are negatively related to loss aversion; whereas increased vegetable consumption is negatively related to giving stronger weights to payoffs that are closer to the present time (i.e. the present bias). Overall, our results demonstrate that individuals who engage in healthy habits, just as lower BMI, better diet, and exercise more, have a greater tendency to display rational financial decision-making compared to those who do not. These results have important broader implications for the current national and international discussions regarding the societal impact of rising levels of obesity and poor health habits throughout the world.

Hedging Longevity Risk in Defined Contribution Pension Schemes
Agarwal, Ankush,Ewald, Christian-Oliver,Wang, Yongjie
Pension schemes all over the world are under increasing pressure to efficiently hedge the longevity risk posed by ageing populations. In this work, we study an optimal investment problem for a defined contribution pension scheme which decides to hedge the longevity risk using a mortality-linked security, typically a longevity bond. The pension scheme invests in the risky assets available in the market, including the longevity bond, by using the contributions from a representative scheme member to ensure a minimum guarantee such that the member is able to purchase a lifetime annuity upon retirement. We transform this constrained optimal investment problem into an unconstrained problem by replicating a self-financing portfolio of future contributions from the member and the minimum guarantee provided by the scheme. We solve the resulting optimisation problem using the dynamic programming principle and through a series of numerical studies reveal that the longevity risk has an important impact on the performance of investment strategies. Our results provide mathematical evidence supporting the use of mortality-linked securities for efficient hedging of the longevity risk.

Informed trading, limit order book and implementation shortfall: equilibrium and asymptotics
Umut Çetin,Henri Waelbroeck

We propose a static equilibrium model for limit order book where profit-maximizing investors receive an information signal regarding the liquidation value of the asset and execute via a competitive dealer with random initial inventory, who trades against a competitive limit order book populated by liquidity suppliers. We show that an equilibrium exists for bounded signal distributions, obtain closed form solutions for Bernoulli-type signals and propose a straightforward iterative algorithm to compute the equilibrium order book for the general case. We obtain the exact analytic asymptotics for the market impact of large trades and show that the functional form depends on the tail distribution of the private signal of the insiders. In particular, the impact follows a power law if the signal has fat tails while the law is logarithmic in case of lighter tails. Moreover, the tail distribution of the trade volume in equilibrium obeys a power law in our model. We find that the liquidity suppliers charge a minimum bid-ask spread that is independent of the amount of `noise' trading but increasing in the degree of informational advantage of insiders in equilibrium. The model also predicts that the order book flattens as the amount of noise trading increases converging to a model with proportional transactions costs.. Competition among the insiders leads to aggressive trading causing the aggregate profit to vanish in the limiting case $N\to\infty$. The numerical results also show that the spread increases with the number of insiders keeping the other parameters fixed. Finally, an equilibrium may not exist if the liquidation value is unbounded. We conjecture that existence of equilibrium requires a sufficient amount of competition among insiders if the signal distribution exhibit fat tails.

Internal Models, Make Believe Prices, and Bond Market Cornering
Sen, Ishita,Sharma, Varun
We show that U.S. life insurers used internal models to over-report the value of a large fraction of corporate bonds during the financial crisis. Reported credit spreads of bonds valued using internal models were substantially lower by 220 bps, as compared to bonds that are otherwise similar but valued using external sources. Misreporting is higher for bonds that are likely to be impaired and negatively affect regulatory ratios, for insurers that have low regulatory capital, and for bonds that are held by few insurers. Using novel data on U.S. state regulators, we document that misreporting is negatively correlated with the degree of supervision at the state level, but only within bonds held by multiple insurers. In contrast, supervision has limited impact on misreporting when a bond has a single owner, as the lack of reference prices increases the search cost for regulators. Consistent with these incentives, we show that insurers "corner the market" by holding a large fraction of a bond's issue, as this allows them to bypass regulatory scrutiny and limit trading, factors that enable misreporting with internal models. Our findings have implications for the micro-structure of a segment of the corporate bond market and for properly assessing the fragility of financial institutions in bad times.

Is the Stock Market Worried About Climate Change? Lessons from the 2010s
Cornell, Bradford
On Christmas Eve 2019 the MIT Technology Review published an article entitled, The 2010s were another lost decade on climate change. On New Year’s Day the Washington Post published a longer article with the same title. Both pieces told basically the same story, one repeated by many environmentalists and climate experts, the failure to take meaningful action on climate change in the 2010s had dramatically exacerbated the problem.This article investigates how the stock market reacted to the negative climate related news that emerged during the 2010s. The results reveal that at an aggregate level the stock market was unconcerned about the climate news implying that the market believed that climate change would not have a major impact on future macro economic growth. There is evidence, however, that the market concluded that climate issues would be a significant problem for fossil fuels companies.

Manipulation, Panic Runs, and the Short Selling Ban
Gao, Pingyang,Jiang, Xu,Lu, Jinzhi
This paper identifies conditions under which a short selling ban improves the ex-ante firm value. Short selling improves price discovery and enables stakeholders to make better investment decisions. However, manipulative short selling can arise as a self-fulfilling equilibrium, resulting in inefficient investment decisions. The adverse effect is amplified by the firm's vulnerability to panic runs. Overall, short selling reduces ex-ante firm value if the firm is very vulnerable to runs and the speculator's information quality is not too good. Our results contribute to understanding of the function of short selling in the capital markets and to the controversy around the regulation of short selling.

Maternity Risk and the Gender Gap in Entrepreneurship
Core, Fabrizio
I investigate how women’s participation in innovative and regular entrepreneurship responds to a shock to maternity risk. Exploiting the liberalization of an Emergency Contraception Pill in Italy in 2015, combined with spatial variation in access to abortion at the municipality level, I find that lower maternity risk leads to an increase in the number of young women who become entrepreneurs and in the equity stakes of new female entrepreneurs. The effects are larger for women who join more innovative firms, that become also more likely to be executives and the main owners of their firms. This suggests that easier management of maternity risk reduces the gender gap in entrepreneurship and that maternity risk is more important for women selecting in more innovative entrepreneurial projects.

Mispricing and the Cost of Capital: The Example of Tesla
Cornell, Bradford
Sentiment based mispricing of a common stock can be interpreted as a subsidy that reduces the cost of capital. The subsidy is provided by the investors who are willing to accept a lower return than the “true” cost capital. In the case of Tesla, I estimate the subsidy to be 248 basis points. To the extent that sentiment-based mispricing can be realized by issuing new shares at a lower effective cost of capital, Tesla has a significant competitive advantage over incumbent auto makers that is exacerbated by the capital-intensive nature of the business. This results in a feedback from stock market pricing to fundamental value. The feedback mechanism is a significant threat to traditional car makers.

Multilayer Network Analysis of the Drug Pipeline in the Global Pharmaceutical Industry
Hiromitsu Goto,Wataru Souma,Mari Jibu,Yuichi Ikeda

Generally, open innovation is a lucrative research topic within industries relying on innovation, such as the pharmaceutical industry, which are also known as knowledge-intensive industries. However, the dynamics of drug pipelines within a small-medium enterprise level in the global economy remains concerning. To reveal the actual situation of pharmaceutical innovation, we investigate the feature of knowledge flows between the licensor and licensee in the drug pipeline based on a multilayer network constructed with the drug pipeline, global supply chain, and ownership data. Thus, our results demonstrate proven similarities between the knowledge flows in the drug pipeline among the supply chains, which generally agrees with the situation of pharmaceutical innovation collaborated with other industries, such as the artificial intelligence industry.

Non-Performing Loans and Systemic Risk in Financial Networks
Bottazzi, Giulio,De Sanctis, Alessandro,Vanni, Fabio
In this paper we study the implications of non-performing loans (NPLs) for financial stability using a network-based approach. We start by combining loan-level data from DealScan and firm-level data from Orbis to reconstruct the empirical global financial network in the period 1991-2016 and identify a series of stylized facts. Based on these findings, we develop a model in which two types of agents, banks and firms, are linked in a network by their reciprocal claims and analyze how an increase in NPLs affects the stability of the system. We study the model analytically and with numerical simulations, deriving a synthetic measure of systemic risk and quantifying the threshold level of NPLs that triggers a systemic crisis. Our model shows that there exist a level of connectivity that maximizes the fragility of the financial system and that small changes in the initial NPLs shock can have very different consequences at the aggregate level.

Oil Price Dynamics and Currency-Hedging Behavior
Agudze, Komla,Ibhagui, Oyakhilome
For Korea, a major crude oil importer, we document that after crude oil prices spike, cross-currency basis swap spreads tend to tighten as the propensity to currency-hedge rises.

On the Consequences of Mandatory CEO Pay Ratio Disclosure
Knust, Lucas,Oesch, David
We examine the consequences of the highly anticipated and controversial Section 953(b) of the Dodd-Frank Act, which mandates companies to disclose the CEO-to-median employee pay ratio starting from 2018. We address endogeneity concerns by using a regression discontinuity design around the public float of companies. Contrary to one of the main arguments of the supporters of the rule, the disclosure requirement does not reduce CEO compensation. We also find no evidence that investors are substantially influenced by the disclosure since firms that disclose the ratio experience no change in investor attention and no change in say-on-pay voting outcomes.

Online Appendix of 'Does it Pay Off to Compete on Social Purpose?'
Lattanzio, Gabriele,Litov, Lubomir P.
This appendix contains supplementary material to the analyses reported in the paper. Appendix Section I presents the variation in the principal KLD-based measures of corporate social responsibility. Appendix Section II defines the key variables. Appendix Section III reports a summary of the most commonly-used KLD-based measures of corporate social responsibility engagements. Appendix Section IV reports a detailed description of the mathematical derivation of the Relative Social Responsibility Score (RSR Score hereinafter). Appendix Section V reports an augmented version of Table III in which firm-year observations not included in the TRI dataset are assumed to have zero toxic-emissions. Appendix Section VI reports a replication of Table III, Panel C, in the paper, in which we orthogonalize commonly-used CSR scores against the RSR score, and we regress firms’ toxic emissions on the former and the resulting residuals. Appendix Section VII replicates our Tobin’s Q results in Table VI by using the Total Q measure developed in Peters and Taylor (2017). Appendix Section VIII reports a replication of Table VI in which we orthogonalize commonly-used CSR scores against the RSR score, and we regress Tobin’s Q on the former and the relevant residuals. Finally, Section IX includes an orthogonalization test for the materiality-based RSR score and other commonly-used CSR scores in the framework of our baseline Tobin’s Q regression.

Optimal trade strategy of a regional economy by food exports
M. Okimoto

This paper examines the export promotion of processed foods by a regional economy and regional vitalisation policy. We employ Bertrand models that contain a major home producer and a home producer in a local area. In our model, growth in the profit of one producer does not result in an increase in the profit of the other, despite strategic complements. We show that the profit of the producer in the local area decreases because of the deterioration of a location condition, and its profit increases through the reinforcement of the administrative guidance. Furthermore, when the inefficiency of the location worsens, the local government should optimally decrease the level of administrative guidance. Hence, the local government should strategically eliminate this inefficiency to maintain a sufficient effect of administrative guidance.

Political Beta
Fisman, Raymond J.,Knill, April M.,Mityakov, Sergey,Portnykh, Margarita
Using a framework akin to portfolio theory in asset pricing, we introduce the concept of “political beta” to model firm-level export diversification in response to global political risk. The main implication of our model is that a firm is less responsive to changes in political relations with a destination market when that country contributes less (has lower political beta) or even hedges against (has negative political beta) the firm’s total political risk. This result follows the diversification logic of portfolio theory, in which an investor values a given asset depending on the asset’s contribution to (comovement with) his/her overall investment portfolio. We find patterns consistent with our model using disaggregated Russian firm-by-destination-country data during 1999-2011: trade is positively correlated with political relations, though the effect is far weaker for trading partners whose political relations with Russia are relatively uncorrelated with those of other partners in a firm’s export portfolio. Our results highlight the importance of viewing firms’ political relations as an undiversifiable source of risk, and more generally points to the value of modeling firms’ treatment of risks as a portfolio diversification problem.

Pricing Interest Rate Derivatives under Volatility Uncertainty
Julian Hölzermann

We study the pricing of contracts in fixed income markets in the presence of volatility uncertainty. We consider an arbitrage-free bond market under volatility uncertainty. The uncertainty about the volatility is modeled by a G-Brownian motion, which drives the forward rate dynamics. The absence of arbitrage is ensured by a drift condition. In such a setting we obtain a sublinear pricing measure for additional contracts. Similar to the forward measure approach, we define a forward sublinear expectation to simplify the valuation of cashflows. Under the forward sublinear expectation, we obtain a robust version of the expectations hypothesis and a valuation method for bond options. With these tools, we derive robust pricing rules for the most common interest rate derivatives: fixed coupon bonds, floating rate notes, interest rate swaps, swaptions, caps, and floors. For fixed coupon bonds, floating rate notes, and interest rate swaps, we obtain a single price, which is the same as in traditional models. For swaptions, caps, and floors, we obtain a range of prices, which is bounded by the prices from traditional models with the highest and lowest possible volatility. Due to these pricing formulas, the model naturally exhibits unspanned stochastic volatility.

Private Information Communication and IPO Pricing: Evidence From Individual Investment Bankers
Brockman, Paul,He, Xianjie,Sun, Shuwei,Zou, Huan
Information flows are of critical importance for IPO pricing. We posit that individual investment bankers use personal social capital to address information problems during IPOs. Using a unique database of mutual fund bids in the Chinese IPO market, we find that when an investment banker has a social connection with a mutual fund manager, this manager is significantly more likely to (1) participate in the IPO, (2) submit higher than average bid prices, and (3) realize lower first-day and short-term post-IPO returns. Further evidence shows that social connections between individual investment bankers and fund managers reduce IPO underpricing. Overall, our findings confirm that private information communication plays a significant role during the IPO process.

Quantifying Financial Risk with Monte Carlo Simulations
Selto, Frank H.
Many organizations use financial models to forecast, organize, analyze and report the likely impacts of the future’s unknowns on financial outcomes. Financial models cannot replace the manager, but an effective model can complement and improve professional judgment. Many educational programs feature some financial modeling (e.g., with spreadsheet software such as Excel®). However, many of these educational applications fail to fully use the ability of spreadsheet models to address risk beyond limited forecasting impacts of a few, possible variable realizations via sensitivity or scenario analyses. On the other hand, extending financial models to Monte Carlo simulations can quantify risk as the expected odds of an adverse outcome, such as failing to meet a contractually required financial ratio. The purpose of this applied research note is to describe how to develop financial models that use Monte Carlo simulations to quantify financial risk. This note concludes with a classroom-tested case example.

Reflections on the G-7 New Alliance Partnership: Value Added Lessons, the Malawi Case
Mponda-Banda, Victor
The G-7 returns to Camp David, in June 2020 where the the New Alliance for Food Security and Nutrition partnership was born in 2012 at the back of global food price crisis. The New Alliance partnership presented a novel approach to tackling the persistent problem of food security and nutrition in the Sub Saharan Africa region. Among other things, the partnership enabled the participation of private sector investment in the cause to achieve food and nutrition security.The participating 10 African countries in the partnership have varied experiences depending on country situational landscape, since joining the compact. One common denominator is the fact that the initiative was able to bring together key stakeholders including the private sector. Further, the partnership enabled acceleration of policy reform process, which ordinarily is slow and protracted. This piece presents an account of Malawi as a participating country in the partnership. It presents key lessons, which could be used to perfect the partnership or in future initiatives. The New Alliance partnership has withered away from the policy dialogue,so much that as the G-7 sits again in June 2020, it is not certain if the initiative's evaluation or performance, would make it to the agenda. However, policymakers and stakeholders need not ‘throw away the baby, alongside with bath water’ as the African saying goes. The future of development cooperation and partnerships may just belong to such maverick initiatives. Through the account of Malawi’s experience as a participating country, a reflection is worthwhile in this piece.

Revenue allocation in Formula One: a pairwise comparison approach
Dóra Gréta Petróczy,László Csató

A model is proposed to allocate Formula One World Championship prize money among the constructors. The methodology is based on pairwise comparison matrices, allows for the use of any weighting method, and makes possible to tune the level of inequality. We introduce an axiom called scale invariance, which requires the ranking of the teams to be independent of the parameter controlling inequality. The eigenvector method is revealed to violate this condition in our dataset, while the row geometric mean method always satisfies it. The revenue allocation is not influenced by the arbitrary valuation given to the race prizes in the official points scoring system of Formula One and takes the intensity of pairwise preferences into account, contrary to the standard Condorcet method. Our suggestion can be used to share revenues among groups when group members are ranked several times.

Sharing of Longevity Basis Risk in Pension Schemes With Income-Drawdown Guarantees
Agarwal, Ankush,Ewald, Christian-Oliver,Wang, Yongjie
This work studies a stochastic optimal control problem for a pension scheme which provides an income-drawdown policy to its members after their retirement. To manage the scheme efficiently, the manager and members agree to share the investment risk based on a pre-decided risk-sharing rule. The objective is to maximise both sides' utilities by controlling the manager's investment in risky assets and members' benefit withdrawals. We use stochastic affine class models to describe the force of mortality of the members' population and consider a longevity bond whose coupon payment is linked to a survival index. In our framework, we also investigate the longevity basis risk, which arises when the members' and the longevity bond's reference populations show different mortality behaviours. By applying the dynamic programming principle to solve the corresponding HJB equations, we derive optimal solutions for the single- and sub-population cases. Our numerical results show that by sharing the risk, both manager and members increase their utility. Moreover, even in the presence of longevity basis risk, we demonstrate that the longevity bond acts as an effective hedging instrument.

Signaling, Random Assignment, and Causal Effect Estimation
Hennessy, Christopher,Chemla, Gilles
Causal estimates from randomization are commonly viewed as ideal. However, their primacy for many real-world decisions is questionable. This is because random assignment, in eliminating self-selection, also eliminates signaling. However, outside experiments, agents make discretionary decisions, generating signaling content which alters beliefs, payoffs, and causal effects. Therefore, if the objective is informing optimal discretionary decisions, rather than predicting outcomes under forced actions or noisy mistakes, random assignment can be misleading. In applications from finance, labor, and macroeconomics, we show signaling can amplify, attenuate, or reverse the sign of causal effects derived from random assignment, with corresponding implications for optimal actions.

Strategic Raw Materials, International Mining Firms and the Democratic Republic of the Congo
Soufi, Yasid
The Democratic Republic of the Congo represents one of the world’s most important sites for mining activities. Strategic raw materials, such as cobalt and tantalum, fuel the global electromobility movement and high-tech industries. Located in the heart of Africa multinational firms from Canada, China and other countries do currently find themselves in a run for resources. Quantifications of interdependencies between disruptions in the former Belgian colony and associated real and financial economic values of international scale are largely nonexistent and aimed for in this study. Using SVAR models and the classical event study methodology we find that risk in the Congo and events, influencing the local competitive structure of multinational firms, do significantly influence prices of strategic raw materials and internationally listed stocks.

The Beauty of Ethics: Towards Re-Establishing Trust in the Financial Sector
Blair, Sir William,Barbiani, Clara
There is beauty in ethics, which in one of its declinations can be translated into this concept: there is beauty in undertaking the right action, even when nobody is watching. Within this, we can see an antidote to past failures, and an element necessary to attract the change that laws and regulations can only ever be partially successful in achieving. What would a client look for in the financial system in order to hold it trustworthy? The underlying question to be addressed is to what extent laws and regulation are adequate in furthering ethical conduct and decision-making within the financial industry upon which trust rests. The focus is on the importance of ethical decision-making to uphold a client’s rights. The paper considers the role of ethics within financial institutions, and how codes of conduct encourage ethical behavior, explaining the nexus that often exists between a firm’s culture and a country’s tradition and ideologies. The last section discusses the role of ethics at the individual level, focusing on the conduct of the professionals working in the industry.

The Challenges of Mobilising Triple Helix Stakeholders
Todeva, Emanuela
The first volume of this Series is on The Role of Government / Academia / Industry in Building Innovation-Based Cities and Nations and aims to present a group of cases of successful Triple Helix engagement which demonstrate the benefits and the costs of multi-stakeholder management at regional, national and international level. Articles present different sectoral and regional triple helix constellations in different country contexts â€" comparing actors, their strategic aims, and how these coalign, how they act together, and what is the tangible and intangible impact of such a triple helix mobilization. The editorial article synthesizes across all cases and introduces a generalized view on different models proposed for the scale-up of the impact from the collaboration between government - industry, and academia. The cases in the first volume were sourced from the applications for the Triple Helix International Medal Award 2018, A triple Helix Association Award, launched at the II International Triple Helix Summit, 10-13 November 2018 Dubai.

The Effect of Board Structure and Ownership Structure on Risk Disclosure Quality
Elshandidy, Tamer,Gan, Mengyun
This paper examines how board structure (i.e., board size, board independence, and Chief Executive Officer (CEO) duality) and ownership structure (i.e., ownership concentration) influence risk disclosure quality (RDQ) of FTSE 100 non-financial firms. RDQ is captured by integrating five dimensions including Quantity, Depth_Quantitative, Depth_Qualitative, Future and Coverage of risk information. We find that firms with more independent directors on the board and those with less insider ownership are likely to provide considerably higher quality risk information than other firms. The strength of firms governance (based on board efficiency) is an important factor to consider so as to observe corporate governance factors’ effects. Specifically, we find that our previous results are predominantly driven by strongly rather than weakly governed firms. Our results also suggest that both board structure and ownership structure have similar (different) effects on risk disclosure quality to those observed on the quantitative and qualitative (quantitative, future and coverage) dimensions. The results can help regulators optimize risk report systems and encourage firms to provide high quality risk information so that investors can make better decisions.

The Effect of Ownership Structure, Cash Holding and Tax Avoidance on Income Smoothing
Alexander, Nico
Objective - This study aims to undertake an empirical study of the influence of ownership structure, cash holding, and tax avoidance on income smoothing.Methodology/Technique â€" Ownership structure in this research is measured by public ownership and managerial ownership. The population of this research are manufacturing companies listed on the Indonesian Stock Exchange (IDX) between 2015-2017 and there are 50 companies that meet the criteria and serve as the research sample. The sample selection in this study uses purposive sampling and the hypotheses were tested using binary logistics.Findings â€" The results of this study show that managerial ownership and public ownership, cash holding by companies and tax avoidance do not have influence on income smoothing. These results show that managerial ownership and public ownership do not affect income smoothing because there are same interest, to improve their wealth. Similarly, neither how much cash is held by a company nor tax avoidance behavior effect income smoothing.Type of Paper - Empirical.

The Financial Origins of the Rise and Fall of American Inflation
Drechsler, Itamar,Savov, Alexi,Schnabl, Philipp
We propose and test a new explanation for the rise and fall of the Great Inflation, a defining event in macroeconomics. We argue that its rise was due to the imposition of binding deposit rate ceilings under the law known as Regulation Q, and that its fall was due to the removal of these ceilings once the law was repealed. Deposits were the dominant form of saving at the time, hence Regulation Q suppressed the return to saving. This drove up aggregate demand, which pushed up inflation and further lowered the real return to saving, setting off an inflation spiral. The repeal of Regulation Q broke the spiral by sending deposit rates sharply higher. We document that the rise and fall of the Great Inflation lines up closely with the imposition and repeal of Regulation Q and the enormous changes in deposit rates and quantities it produced. We further test this explanation in the cross section using detailed data on local deposit markets and inflation. By exploiting four different sources of geographic variation, we show that the degree to which Regulation Q was binding has a large impact on local inflation, consistent with the hypothesis that Regulation Q explains the observed variation in aggregate inflation. We conclude that in the presence of financial frictions the Fed may be unable to control inflation regardless of its policy rule.

The Option-Implied Ex-Dividend Drop
Guerrero, Robert
Several recent studies have used option-implied dividends to investigate the term structure of equity. A crucial question is whether these dividend strips need to be adjusted to take into account the difference in taxation between dividends and capital gains. Unlike prior research, we find an option-implied ex-day decline that is less than the cash dividend and of a similar magnitude to the overnight ex-day stock price decline. In addition, we use put-call arbitrage to identify several option mispricing factors. Our method for calculating market expectations of dividends is useful for research topics including dividend policy, analyst forecasts, and asset pricing.

The Relationship Between Corporate Governance Mechanisms and the Performance of Saudi Listed Firms
Al-Faryan, Mamdouh Abdulaziz Saleh
This paper gauges, both qualitatively and quantitatively, the pertinent variables to corporate governance practices and their relationship to business productivity in the context of the Kingdom of Saudi Arabia. This study was conducted in response to the limited literature in this context. A new code of corporate governance was issued by the Saudi Arabian Capital Market Authority as a direct consequence of the 2006 stock market crash; in 2010, the code was made mandatory for listed firms. Rigorous empirical studies are practical not only for Saudi Arabia and its policy makers but also potentially for solving global investment issues and ensuring security. This study found two variables to have a significant negative relation: chief executive officer turnover and independent board members. Thus, greater rates of chief executive officer turnover are associated with negative firm performance. In addition, independent board directors’ negative value was found to be very close to zero and significant only at the 10% level. Consequently, some caution is required when considering this result.

The Relevance of ‘Other Surprises’ in Explaining Earnings Announcement Returns
Bilinski, Pawel
Previous research documents two puzzling findings that cast doubt on the usefulness of accounting information to investors: the declining power of street EPS in explaining earnings announcement returns and the increasing price reactions to earnings announcements. I show this evidence is due to omitting non-street EPS surprises from the earnings announcement analysis. When I control for ‘other surprises’ based on I/B/E/S forecasts for sales, gross margin, EBITDA, operating and net income, GAAP earnings and cash flows, the adjusted R2 increases over fourfold and street EPS lose explanatory power. The ‘other surprises’ are useful on their own and help interpret street EPS surprises, particularly small street EPS surprises, and earnings news of high accrual and growth stocks, and of high institutional ownership firms. Overall, the study identifies an important set of previously omitted variables that investors use in assessing earnings announcement information.

The Shrinkage After the Enlargement? The Effects of Crises and New Members’ Inclusion on Financial Integration in the Euro Area
Giofré, Maela,Sokolenko, Oleksandra
The EMU common currency effect on bilateral foreign portfolio equity (FPE) after 2007 has shrunk by 40 percent. While both the crisis and the EMU enlargement are potentially responsible of this abrupt and persistent decline in financial integration, our work recognizes a major role for the crisis. The worsening of institutional standards is a potential driver of this shrinkage. In particular, the deterioration of the control of corruption mechanisms in Euro periphery economies during the crisis can be at the root of the abrupt fall in bilateral FPE within the Euro area.

Time Delay in Stochastic Volatility Model
Bae, Hyeong-Ohk,Ha, Seung-Yeal,Kang, Myeongju,Kim, Yongsik,Lim, Hyuncheul,Yoo, Jane
Time delay in communication(information) flow is often found in many network systems. Inspired by volatility spillovers and clustering explained by “flocking” mechanism, we study the effect of the time delay in our model system of heterogeneous stock returns’ volatilities. Our model is a stochastic multi-volatility model in which a volatility’s dynamics is conditional on its value relative to others. Due to the finite speed of propagation, the dynamics is updated by volatilities’ one-to-one relationship with a short time delay. Our theoretical framework is sufficient to show the exponential convergence of volatilities toward the constant asymptotic value. When time delay is considered, convergence happens faster with lower variance than that in the model without time delay.

Two-Period Model of Insider Trading With Correlated Signals
Daher, Wassim,Mirman, Leonard J.,Saleeby, Elias G.
In this article, we extend the one-period model of Jain and Mirman (1999) for asset trading with two correlated signals to a two period model. We then prove the existence and uniqueness of the Bayesian linear equilibrium. Finally, we perform comparative statics analysis with respect to Kyle (1985). Our findings reveal that adding another correlated signal (the real signal) to the total order flow of Kyle (1985), increases the amount of information incorporated in the stock price at each period and decreases the insider’s expected profits at each period.

Wealth Taxes and Capital Markets
Stowe, John D.
Wealth taxes have been adopted or considered as an adjunct to existing tax systems such as income taxes, property taxes, and consumption taxes. Discussions about a wealth tax are usually a mixture of political, social, and economic issues, with many of the published papers designed to serve an author’s agenda. The purpose of this note is to leave many of these issues behind and to focus on the effects of a wealth tax on capital markets.