Research articles for the 2020-03-24

A Coronavirus Outbreak and Sector Stock Returns: The Tale from The First Ten Weeks of Year 2020
Nguyen, Khoa
This paper examines the early impact of the coronavirus disease (COVID-19) outbreak on stock returns of eleven sectors using the firm-level stock price data from ten countries.

A Darwinian Theory of Model Risk
Albanese, Claudio,Crepey, Stephane,Iabichino, Stefano
Performance assessment of derivative pricing models revolves around a comparative model-risk analysis. From among the plethora of econometrically unrealistic models, the ones that survive Darwinian selection tend to generate systematic short term profits while exposing the bank to long term risks. This article puts forward an ex ante methodology to analyse this pattern for the broad class of structures, whereby a dealer buys long-term convexity from investors and resells hedges to be used for risk management purposes. As a particular case, we consider callable range accruals in the US dollar, a product which has been traded in size in recent years and is currently being unwound. We find 3d animations useful to visualize sources of model risk.

A closed-form solution for optimal mean-reverting trading strategies
Alexander Lipton,Marcos Lopez de Prado

When prices reflect all available information, they oscillate around an equilibrium level. This oscillation is the result of the temporary market impact caused by waves of buyers and sellers. This price behavior can be approximated through an Ornstein-Uhlenbeck (O-U) process.

Market makers provide liquidity in an attempt to monetize this oscillation. They enter a long position when a security is priced below its estimated equilibrium level, and they enter a short position when a security is priced above its estimated equilibrium level. They hold that position until one of three outcomes occur: (1) they achieve the targeted profit; (2) they experience a maximum tolerated loss; (3) the position is held beyond a maximum tolerated horizon.

All market makers are confronted with the problem of defining profit-taking and stop-out levels. More generally, all execution traders acting on behalf of a client must determine at what levels an order must be fulfilled. Those optimal levels can be determined by maximizing the trader's Sharpe ratio in the context of O-U processes via Monte Carlo experiments. This paper develops an analytical framework and derives those optimal levels by using the method of heat potentials.

Are Equity Crowdfunding Investors Active Investors?
Hornuf, Lars,Schilling, Tobias,Schwienbacher, Armin
It is often assumed that entrepreneurs retain more control of their venture when they opt for equity crowdfunding as compared to venture capital, notably because crowd investors are passive. We study whether crowd investors are indeed passive by analysing the cash flow and control rights crowd investors receive in equity crowdfunding in Germany, where more flexible contracts are offered than in many other countries. We document that in Germany many of the rights used in venture capital investment contracts are also used in equity crowdfunding contracts. We find that crowd investors are asked to pay higher prices if they receive more cash flow and exit rights, consistent with the fact that these rights are valuable to the crowd. However, these rights have no meaningful economic impact, since they do not affect campaign outcome, the likelihood of securing follow-on funding, nor the likelihood of liquidation of the venture. These results are inconsistent with control rights theory that predicts positive impacts, in contrast to results documented for venture capital contracts. Rather, our results suggest that crowd investors are passive investors whose control rights are ineffective or not exercised.

Cascading Losses in Reinsurance Networks
Ariah Klages-Mundt,Andreea Minca

We develop a model for contagion in reinsurance networks by which primary insurers' losses are spread through the network. Our model handles general reinsurance contracts, such as typical excess of loss contracts. We show that simpler models existing in the literature--namely proportional reinsurance--greatly underestimate contagion risk. We characterize the fixed points of our model and develop efficient algorithms to compute contagion with guarantees on convergence and speed under conditions on network structure. We characterize exotic cases of problematic graph structure and nonlinearities, which cause network effects to dominate the overall payments in the system. We lastly apply our model to data on real world reinsurance networks. Our simulations demonstrate the following: (1) Reinsurance networks face extreme sensitivity to parameters. A firm can be wildly uncertain about its losses even under small network uncertainty. (2) Our sensitivity results reveal a new incentive for firms to cooperate to prevent fraud, as even small cases of fraud can have outsized effect on the losses across the network. (3) Nonlinearities from excess of loss contracts obfuscate risks and can cause excess costs in a real world system.

Central Bank Policy Sets the Lower Bound on Bond Yields
Gagnon, Joseph,Jeanne, Olivier
This paper shows that the scope for bond yields to fall below zero is strictly limited by market expectations about how far below zero central banks are willing to set their short-term policy rates. If a central bank communicates a credible commitment to keeping its policy rate above a given level under all circumstances, then bond yields must be higher than that level. This result holds true even in a model in which central banks are able to depress the term premium in bond yields below zero via large-scale purchases of long-term bonds, also known as quantitative easing (QE). QE becomes less effective as bond yields approach their lower bound.

Climate Sin Stocks: Stock Price Reactions to Global Climate Strikes
Ramelli, Stefano,Ossola, Elisa,Rancan, Michela
The first Global Climate Strike on March 15, 2019 has represented a historical turn in climate activism. We investigate the cross-section of European stock price reactions to this event. Looking at a large sample of European firms, we find that the unanticipated success of this event caused a substantial stock price reaction on high-carbon intensity companies. These findings are likely driven by an update of investors' beliefs about the level of environmental social norms in the economy and the anticipation of future developments of climate regulation.

Competitive Insurance Markets with Unbounded Cost
Veiga, Andre,Levy, Yehuda
Azevedo and Gottlieb [2017] (AG) define a notion of equilibrium that always exists in the Rothschild and Stiglitz [1976] (RS) model of competitive insurance markets, provided costs are bounded. However, equilibrium predictions are sensitive to assumptions made about the upper bound of cost: introducing an infinitesimal mass of high cost individuals discretely increases all equilibrium prices and reduces coverage for all individuals. We measure model sensitivity to these assumptions by considering sequences of economies with increasing upper bounds of cost, and determining whether the sequence of their equilibria converges. We present sufficient conditions under which AG equilibrium exists when cost is unbounded. For simple insurance markets, we derive a condition which is necessary and sufficient for existence: surplus from insurance must increase faster than linearly with expected cost. This condition is empirically common. If this condition does not hold, a wider range of costs results in market unraveling because all prices increase without bound and, in the limit, an AG equilibrium does not exist. We use these results to show that the equilibrium for an insurance market with an unbounded continuum of types is characterised by a simple differential equation. We also provide examples of non- existence for lemons markets (where a single insurance product is available) with unbounded cost.

Determinants of Capital Structure: An Empirical Study of Selected Indian Manufacturing Companies
Sinha, Sandip
Research Problem: To re-examine the issue of non-linearity in capital structure choices of firms through the application of the hitherto un-applied technique of ‘panel data unconditional quantile regression’ with a view to indirectly ascertain the applicability of Trade-off Theory, Agency Cost theory and Pecking Order Theory through the analysis of the predictions of these theories on the firm-specific determinants of capital structure of Indian manufacturing firms.Research Objectives: (A) To choose the appropriate panel data model from three mutually exclusive panel data models ( Pooled Ordinary Least Squares Model, Fixed Effects Model and Random Effects Model ) for analysing the impact of firm-specific determinants of capital structure on the mean of the variable measuring capital structure ( say, “V”) in respect of Indian manufacturing companies listed on the Bombay Stock Exchange (BSE), with a view to indirectly assess the applicability of Trade-Off Theory (TOT), Agency Cost Theory (ACT) and Pecking Order Theory (POT) for an average company with mean (average) level of leverage. (B) To apply ‘unconditional quantile regression technique’ on the chosen panel data model for analysing the differential impact ( that is, non-linear behaviour) of the firm-specific determinants of capital structure over the entire unconditional distribution of the variable “V” in respect of Indian manufacturing companies listed on the Bombay Stock Exchange ( BSE ), with a view to assess indirectly the applicability of Trade-Offff Theory (TOT) , Agency Cost Theory (ACT) and Pecking Order Theory (POT) at different quantiles of the unconditional distribution of V, that is, for representative companies having varying (for example, ‘very low’, ‘low’, ‘moderate’, ‘high’ or ‘very high’) levels of leverage. A representative company at a particular quantile of leverage represents a company with the corresponding level of leverage, for instance, a representative company at the 50th quantile represents a company with median (or moderate) level of leverage, or a representative company at the 10th quantile may be said to represent a company with very low level of leverage.

Does a Local Bias Exist in Equity Crowdfunding?
Hornuf, Lars,Schmitt, Matthias,Stenzhorn, Eliza
We use hand-collected data of 20,460 investment decisions and two distinct portals to analyze whether investors in equity crowdfunding direct their investments to local firms. In line with agency theory, the results suggest that investors exhibit a local bias, even when we control for family and friends. In addition to the regular crowd, our sample includes angel-like investors, who invest considerable amounts and exhibit a larger local bias. Well-diversified investors are less likely to suffer from this behavioral anomaly. The data further show that portal design is important for attracting investors more prone to having a local bias. Overall, we find that investors who direct their investments to local firms more often pick start-ups that run into insolvency or are dissolved, which indicates that local investments in equity crowdfunding constitute a behavioral anomaly rather and a rational preference. Here again, however, portal design plays a crucial role.

Dynamic Competitive Persuasion
Mark Whitmeyer

We examine a dynamic game of competitive persuasion played between two long-lived sellers over $T \leq \infty$ periods. Each period, each seller provides information via a Blackwell experiment to a single short-lived buyer, who buys from the seller whose product has the highest expected quality. We solve for the unique subgame perfect equilibrium of this game, and conduct comparative statics: in particular we find that long horizons lead to less information.

Fragility of Financial Markets: The Italian Debt Not-So-Flash Crash
Flora, Maria,Renò, Roberto
Market inefficiency of flash-crash type is a new form of financial fragility which plagues economically central markets. We argue that this fragility is unambiguously signaled by explosive and fast-reverting trends. Using this intuition, we introduce a novel test for flash crash detection, and we apply it to a paradigmatic case study: the collapse of Italian sovereign bonds on May 29, 2018, triggered by political turmoil. Because of the misfunctioning of the secondary market in that week, we estimate that 450 million euros were transferred from Italian taxpayers to primary dealers. (Not-so-)Flash crashes can thus be a serious threat to financial stability

Geographic Proximity and Competition for Scarce Capital: Evidence from U.S. Reits
Wang, Chongyu,Cohen, Jeffrey,Glascock, John L.
The question of whether or not REITs compete for scarce capital across geographic space is deserving of attention. In this study we consider the issue of spatial competition among REITs across U.S. states in terms of the degree of interdependencies in financial capital demand. First, we motivate the issue with a theoretical model of cost minimization by a representative REIT in a given U.S. state and demonstrate that a priori it is unclear whether a REIT’s capital demand depends on capital demand of REITs in other states. Then we use spatial econometrics techniques and find empirically that REITs compete for financial capital with REITs in other states. We also find evidence of feedback (or indirect) effects, implying amplified crowding out of financial capital when other REITs in nearby states increase financial capital demand. Our findings are aligned with the Predation Hypothesis, which suggests that REIT managers might exploit neighboring REITs’ and/or investors’ financial distress as an opportunity to steal market share from them. Another key contribution of this study is that we focus on capital liquidity as opposed to stock liquidity.

High-Frequency Trading During Flash Crashes: Walk of Fame or Hall of Shame?
Bellia, Mario,Christensen, Kim,Kolokolov, Aleksey,Pelizzon, Loriana,Renò, Roberto
We show that High Frequency Traders (HFTs) are not beneficial to the stock market during flash crashes. They actually consume liquidity when it is most needed, even when they are rewarded by the exchange to provide immediacy. The behavior of HFTs exacerbate the transient price impact, unrelated to fundamentals, typically observed during a flash crash. Slow traders provide liquidity instead of HFTs, taking advantage of the discounted price. We thus uncover a trade-o↵ between the greater liquidity and efficiency provided by HFTs in normal times, and the disruptive consequences of their trading activity during distressed times.

Industry Structure of Debt and Market Share Leadership Persistence
Paul, Donna L.,Zaynutdinova, Gulnara R.
This study investigates the relationship between the industry structure of debt and market share leadership persistence using a large sample of firms spanning the years 1961-2012. We construct unique variables that measure the structure of industry leverage and conduct tests for the relationship between these variables and the likelihood that firms retain market share leadership from year to year. Results show that firms in industries with high capital structure diversity are more likely to maintain market share leadership over time, indicating that heterogeneity in capital structure among industry incumbents facilitates the strategic use of leverage to secure and maintain a leadership position. We also find that firms with higher and more stable leverage ratios are more likely to maintain their leadership, suggesting that firms use debt financing to invest in market share growth. The results highlight the importance of firm- and industry-level debt structures in product market leadership positioning and provide a new perspective on intra-industry rivalry.

Internet Appendix for CEO Employee Approval and Firm Value: Evidence From Employees' Choice Awards
Barnes, Spencer
This file provides additional robustness checks for CEO Employee Approval and Firm Value: Evidence from Employees' Choice Awards. Section one presents a stylized model between CEO employee approval and firm outcomes. Section two describes sample construction for samples not in the data section of the paper. Section three provides the results of the additional tests. Section four includes the figures and tables for the internet appendix.

Launching with a Parachute: The Gig Economy and Entrepreneurial Entry
Barrios, John Manuel,Hochberg, Yael V.,Yi, Hanyi
The introduction of the gig economy creates opportunities for would-be entrepreneurs to supplement their income in downside states of the world, and provides insurance in the form of an income fallback in the event of failure. We present a conceptual framework supporting the notion that the gig economy may serve as an income supplement and as insurance against entrepreneurial-related income volatility, and utilize the arrival of the on-demand, platform-enabled gig economy in the form of the staggered rollout of ridehailing in U.S. cities to examine the effect of the arrival of the gig economy on entrepreneurial entry. The introduction of gig opportunities is associated with an increase of ~5% in the number of new business registrations in the local area, and a correspondingly-sized increase in small business lending to newly registered businesses. Internet searches for entrepreneurship-related keywords increase ~7%, lending further credence to the predictions of our conceptual framework. Both the income supplement and insurance channels are empirically supported: the increase in entry is larger in regions with lower average income and higher credit constraints, as well as in locations with higher ex ante economic uncertainty regarding future wage levels and wage growth.

Macroprudential and Monetary Policies with an Imperfectly Competitive Banking Sector
Segev, Nimrod
This paper studies the effect of bank competition on the optimal use of monetary and macroprudential policies. To this end, I develop a New Keynesian DSGE model with collateral constraints and an imperfect competitive banking sector. The results from the model demonstrate that the degree of competition in the banking sector has a sizable impact on the optimal mix of monetary and macroprudential policies. Specifically, the gains from a leaning-against-the-wind monetary policy are substantially smaller when the banking sector is less competitive. Results suggest that, from a policy perspective, monitoring the level of bank competition is crucial when the objective is to promote financial and economic stability.

Market structure dynamics during COVID-19 outbreak
Pier Francesco Procacci,Carolyn E. Phelan,Tomaso Aste

In this note, we discuss the impact of the COVID-19 outbreak from the perspective of the market-structure. We observe that the US market-structure has dramatically changed during the past four weeks and that the level of change has followed the number of infected cases reported in the USA. Presently, market-structure resembles most closely the structure during the middle of the 2008 crisis but there are signs that it may be starting to evolve into a new structure altogether. This is the first article of a series where we will be analyzing and discussing market-structure as it evolves to a state of further instability or, more optimistically, stabilization and recovery.

Mean-field moral hazard for optimal energy demand response management
Romuald Elie,Emma Hubert,Thibaut Mastrolia,Dylan Possamaï

We study the problem of demand response contracts in electricity markets by quantifying the impact of considering a mean-field of consumers, whose consumption is impacted by a common noise. We formulate the problem as a Principal-Agent problem with moral hazard in which the Principal - she - is an electricity producer who observes continuously the consumption of a continuum of risk-averse consumers, and designs contracts in order to reduce her production costs. More precisely, the producer incentivises the consumers to reduce the average and the volatility of their consumption in different usages, without observing the efforts they make. We prove that the producer can benefit from considering the mean-field of consumers by indexing contracts on the consumption of one Agent and aggregate consumption statistics from the distribution of the entire population of consumers. In the case of linear energy valuation, we provide closed-form expression for this new type of optimal contracts that maximises the utility of the producer. In most cases, we show that this new type of contracts allows the Principal to choose the risks she wants to bear, and to reduce the problem at hand to an uncorrelated one.

Mutual Fund Performance at Long Horizons
Bessembinder, Hendrik,Cooper, Michael J.,Zhang, Feng
We study long horizon mutual fund performance, showing that measures constructed from long horizon returns contain notably different information than measures constructed from short horizon (monthly) returns. One prominent distinction is that the distribution of long horizon fund returns is strongly positively skewed, while such skewness is not evident in short horizon returns. As a consequence, the percentage of U.S. equity mutual funds that outperform the SPY ETF decreases from 46.9% in monthly returns to 39.9% in annual returns and 29.5% over the full 1991-2018 sample. More fundamentally, we show theoretically and empirically that alphas for short horizon returns need not have the same sign as alphas for long horizon returns. Compared to a benchmark of 40.9% obtained from monthly returns, the percentage of equity mutual funds with positive alpha estimates decreases to 12.4% (increases to 56.1%) at long horizons for funds with monthly betas greater (less) than one.

Non-asymptotic rates for the estimation of risk measures
Daniel Bartl,Ludovic Tangpi

Consider the problem of computing the riskiness $\rho(F(S))$ of a financial position $F$ written on the underlying $S$ with respect to a general law invariant risk measure $\rho$; for instance, $\rho$ can be the average value at risk. In practice the true distribution of $S$ is typically unknown and one needs to resort to historical data for the computation. In this article we investigate rates of convergence of $\rho(F(S_N))$ to $\rho(F(S))$, where $S_N$ is distributed as the empirical measure of $S$ with $N$ observations. We provide (sharp) non-asymptotic rates for both the deviation probability and the expectation of the estimation error. Our framework further allows for hedging, and the convergence rates we obtain depend neither on the dimension of the underlying stocks nor on the number of options available for trading.

Office Market in China: Scale Estimation, Price Determinants and Spatial Convergence
Wang, Shizhen
In this paper, we apply the Capital Depreciation Model to the estimation of office building scale in 35 major cities. The result shows that the China office market shows an average 40% increase in scale in the past 10 years. Economic growth is the key factors influence the office building price, the influence of scale on office building price is limited. The co-movement of office building prices in China is relatively weak, but the office market is getting more connected in past years.

On the Existence of Positive Equilibrium Profits in Competitive Screening Markets
Veiga, Andre,Levy, Yehuda
We assume a fixed number of symmetric firms, competition in prices, constant returns to scale and frictionless consumer choices. Consumers differ in their preferences and profitability (e.g., due to heterogeneous risk aversion and loss probabilities), which creates adverse selection. Firms can offer multiple contracts to screen individuals, in equilibrium and in any deviation. We show that equilibrium profits vanish if each consumer has a unique optimising bundle at equilibrium prices or, more generally, if there exists a linear ordering over of contracts that dictates the preferences of firms whenever consumers are indifferent between multiple optimal contracts. For instance, equilibrium profits vanish if the marginal rate of substitution of quality for price is sharper for profit than for utility. In particular, profit also vanishes if utility equals the sum of (negative) profit, and a surplus (eg, due to risk aversion). We pro- vide examples of economies where there exists an equilibrium with strictly positive profit and show that these examples are robust (hold for an open set of economies).

On the equivalence between Value-at-Risk and Expected Shortfall in non-concave optimization
An Chen,Mitja Stadje,Fangyuan Zhang

This paper studies a non-concave optimization problem under a Value-at-Risk (VaR) or an Expected Shortfall (ES) constraint. The non-concavity of the problem stems from the non-linear payoff structure of the optimizing investor. We obtain the closed-form optimal wealth with an ES constraint as well as with a VaR constraint respectively, and explicitly calculate the optimal trading strategy for constant relative risk aversion (CRRA) utility functions. In our non-concave optimization problem, we find that with a not too strict regulation for any VaR-constraint with an arbitrary risk level, there exists an ES-constraint leading to the same investment strategy, which shows on some level the ineffectiveness of the ES-based regulation. This differs from the conclusion drawn in Basak and Shapiro (2001) for the concave optimization problem, where VaR and ES lead to different solutions and ES provides a better loss protection.

Performance of Shari’ah Based Investment: Evidence From Pakistani Listed Firms
Butt, Hilal,Sadaqat, Mohsin
The investment universe of Shariah Compliant (SC) equities is relatively smaller compared to the investment universe of Non-Shari’ah Complaint (NSC) equities due to the imposition of Shari’ah specific filters. Therefore, under the diversification theory, it is argued that portfolios constructed by using SC equities are sub-optimal. To empirically test this notion, the main purpose of this study is to investigate that either the SC portfolios (faith bound investors) forego some part of returns or hedged against market risks while fulfilling their religious obligations. To test the foregoing, we imply simple asset pricing techniques which are in vogue in conventional finance. Firstly, we segregate the firms listed at Pakistan Stock Exchange (PSX) into SC and NSC stocks. Then, we form two portfolios within each group based on market capitalization and volatility. The purpose is to analyze and compare the performance of these two groups while controlling for firms related characteristics such as size and volatility. The data coverage is from January 2004 until June 2016. Our results indicate that in most of the cases the risk-adjusted returns (alphas) for the returns differential between SC and NCS firms are positive. This is mainly because the SC firms in comparison to their counterparts in PSX, provides excess returns that are hedged against market, size and value based systematic risks factors. Overall, these results reconcile with one prevailing notion that the SC stocks that have lower financial leverage and higher investment in real assets are lesser exposed to market risks. Further, the SC firms that are more capitalized and lesser volatile, perform better than lower capitalized and higher volatile SC and NSC firms. To sum up our results, we do not find any substantial evidence for opportunity loss due to limited diversification opportunities in case of SC firms. This paper highlights that Islamic funds have potential to fulfill the demands of risk averse investors who are also faith bound.

Real Estate Return in Hong Kong and its Determinants: A Dynamic Gordon Model Analysis
Wang, Shizhen,Hartzell, David J.
The long-term upward trend in Hong Kong's housing price and its ever-increasing price-rent ratio has caused extensive concern from investors and researchers. Dynamic Gordon Model ties an asset's worth to the expected value of the future payoff stream accruing to the asset, and it has been widely used in the literature on finance and real estate asset. As far as we know, this model has not been applied to the research on the Hong Kong real estate market. In this paper, we used this model to analyze the quarterly date of Hong Kong housing prices and other economic indicators from 1999 to 2019.First, the real value of the housing investment return which includes the rent and the housing price increase is calculated, and it was spilled into rent growth, risk-free interest rate, housing investment premium. Then we tested if these three kinds of returns were influenced by unemployment, population growth, and real income growth. In the end, in the framework of Dynamic Gordon Model, we used the VAR approach to present how the expectation value of rent growth, risk-free interest rate, housing investment premium has influenced the price-rent ratio of this city. Here are our main findings:(1) The average real return rate of housing investment in Hong Kong is 2.87% in the quarter, with a first-order autoregressive coefficient of 0.571, show that housing return is positively influenced by its past market situation. (2) The risk-free rate is mainly influenced by its value in last period, the real estate rent rate is mainly influenced by the investment premium in last period and income growth, investment premium is affected by risk-free rate and unemployment. (3) The decline in the risk-free rate in Hong Kong is the main reason that the price-rent ratio went up from 20 to 40 in the last twenty years.As the real interest rate is so low for years, we think the housing market will suffer from great pressure if there comes an expectation in a risk-free rate increase.

Reverse Stress Testing
Albanese, Claudio,Crepey, Stephane,Iabichino, Stefano
This article outlines a framework for the analysis of extreme events based on forward-looking reverse stress testing. We carry out a portfolio simulation and identify stress scenarios which are critical for bank solvency as the ones contributing the most to cost of capital, as expressed by KVA scenario differentials. Applications include model validation, trading limits, model risk management and hedging. A pricing model is invalid if it breaks on a path leading to stress conditions, causing alpha leaks that go undetected in market risk models such as value-at-risk (VaR), expected shortfall and stressed VaR. Trading limits are best predicated on incremental cost of capital and model risk capital can be assessed by computing cost of capital with Bayesian averages. Stress scenarios also have the potential to suggest risk-reducing hedges.

Review of Company Law on Merger and Acquisition in India Using SCP Paradigm
Ghosh, Kaushik,Mukhopadhyay, Mayukh
The role of government in Mergers and Acquisitions (M&A) and governance with respect to the same need to be re-defined as M&A gains cutting edge phenomena. The paper intends to review, summarize and discuss various institutional laws regarding mergers and acquisitions (M&A) in India and thereby recommend fruitful policy guidelines for institutions and managers participating in merger and acquisition deals. This paper provides a review of the Report of the expert committee on company law on M&A published by Ministry of Corporate Affairs (MCA). The paper on M&A by MCA has summed up thirty-four points which can be classified under five broad aspects 1. Structure and Objective, 2. Implementation, 3. Potential Benefits, 4. Potential Constraints and 5. Proposed Remedies. These are further analyzed in the light of Structure, Conduct and Performance (SCP) paradigm.

Risk Analysis of Bitcoin Inverse Futures
Deng, Jun,Pan, Huifeng,Zhang, Shuyu,Zou, Bin
We focus on the risk analysis of Bitcoin inverse futures, with variance or volatility taken as the risk measure. We derive explicit representations for the expectation and variance of the returns on Bitcoin inverse futures and obtain their first-order approximations. The empirical studies show that Bitcoin inverse futures are more (resp. less) risky than standard futures when the market is in backwardation (resp. contango). We further find that Bitcoin inverse futures bear higher downside risk, as measured by semi-deviation, than standard futures.

D'Acunto, Francesco,Rossi, Alberto G.
In this chapter, we first discuss the limitations of traditional financial advice, which led to the emergence of robo-advising. We then describe the main features of robo-advising and propose a taxonomy of robo-advisors based on four defining dimensions: personalization, discretion, involvement, and human interaction. Building on these premises, we delve into the theoretical and empirical evidence on the design and effects of robo-advisors on two major sets of financial decisions, that is, investment choices (for both short- or long-term horizons) and the allocation if financial resources between spending and saving. We conclude by elaborating on five broadly open issues in robo-advising, which beget theoretical and empirical research by scholars in economics, finance, psychology, law, philosophy, as well as regulators and industry practitioners.

Stock Market Openness and Market Quality: Evidence from the Shanghai-Hong Kong Stock Connect Program
Xu, Ke,Zheng, Xinwei,Pan, Deng,Xing, Li,Zhang, Xuekui
This paper studies the impact of capital market openness on high frequency market quality in China. The Shanghai-Hong Kong Stock Connect (SHHKConnect) program opens China's stock market to foreign investors and offers a natural experiment to investigate this question. Using a difference-in-differences approach, we find that market liberalization leads to lower bid-ask spread, lower effective spread, lower market depth and higher short-term volatility. Our findings imply that opening the markets to more sophisticated foreign investors is associated with higher competition and more cross-market arbitrage activities, narrowing the spread and reducing liquidity providers' profits, but increasing the price impact and short-term volatility of connected stocks.

Sustainable Investing in Equilibrium
Pastor, Lubos,Stambaugh, Robert F.,Taylor, Lucian A.
We present a model of investing based on environmental, social, and governance (ESG) criteria. In equilibrium, green assets have negative CAPM alphas, whereas brown assets have positive alphas. Green assets' negative alphas stem from investors' preference for green holdings and from green stocks' ability to hedge climate risk. Green assets can nevertheless outperform brown ones during good performance of the ESG factor, which captures shifts in customers' tastes for green products and investors' tastes for green holdings. The latter tastes produce positive social impact by making rms greener and shifting real investment from brown to green rms. The ESG investment industry is at its largest, and the alphas of ESG-motivated investors are at their lowest, when there is large dispersion in investors' ESG preferences.

The Second Worldwide Wave of Interest in Coronavirus since the COVID-19 Outbreaks in South Korea, Italy and Iran: A Google Trends Study
Artur Strzelecki

The recent emergence of a new coronavirus, COVID-19, has gained extensive coverage in public media and global news. As of 24 March 2020, the virus has caused viral pneumonia in tens of thousands of people in Wuhan, China, and thousands of cases in 184 other countries and territories. This study explores the potential use of Google Trends (GT) to monitor worldwide interest in this COVID-19 epidemic. GT was chosen as a source of reverse engineering data, given the interest in the topic. Current data on COVID-19 is retrieved from (GT) using one main search topic: Coronavirus. Geographical settings for GT are worldwide, China, South Korea, Italy and Iran. The reported period is 15 January 2020 to 24 March 2020. The results show that the highest worldwide peak in the first wave of demand for information was on 31 January 2020. After the first peak, the number of new cases reported daily rose for 6 days. A second wave started on 21 February 2020 after the outbreaks were reported in Italy, with the highest peak on 16 March 2020. The second wave is six times as big as the first wave. The number of new cases reported daily is rising day by day. This short communication gives a brief introduction to how the demand for information on coronavirus epidemic is reported through GT.

Towards Explainability of Machine Learning Models in Insurance Pricing
Kevin Kuo,Daniel Lupton

Machine learning methods have garnered increasing interest among actuaries in recent years. However, their adoption by practitioners has been limited, partly due to the lack of transparency of these methods, as compared to generalized linear models. In this paper, we discuss the need for model interpretability in property & casualty insurance ratemaking, propose a framework for explaining models, and present a case study to illustrate the framework.

When FinTech Competes for Payment Flows
Parlour, Christine A.,Rajan, Uday,Zhu, Haoxiang
We study the impact of FinTech competition in payment services when banks rely on consumers' payment data to obtain information about their credit quality. Competition from FinTech payment providers disrupts this information spillover to the credit market, reducing the bank's profit and the quality of its loans. Consumers with weak bank affinity benefit from FinTech competition (financial inclusion improves), whereas consumers with strong bank affinity may instead be worse off. Information from payment data flows back into the credit market if FinTech firms either directly make loans or sell consumer data to the bank, or if consumers themselves port their data to the bank. All three regimes improve the quality of loans, although their effects for bank profit and consumer welfare are ambiguous. Our results highlight the important and complex trade-off between consumer welfare and the stability of banks following FinTech competition in payment.

Where Should I Publish to Get Promoted? A Finance Journal Ranking Based on Business School Promotions
Bajo, Emanuele,Barbi, Massimiliano,Hillier, David
Hiring and promotion committees consider a broad range of journals and the relative importance of journal titles is highly subjective. In this paper, we present a novel approach to objective Finance journal ranking by considering the impact of journal publications on career advancement. While the top three journals (Journal of Finance, Journal of Financial Economics, Review of Financial Studies) are significant drivers of promotion success, other journals are nearly as important, particularly for business schools outside of the top tier. In rank order, these are the Journal of Banking and Finance, the Journal of Financial and Quantitative Analysis, the Journal of Corporate Finance, and the Review of Finance.