Research articles for the 2020-04-01

A Note on Solvable Time-Homogeneous Stochastic Volatility Models (Working Paper)
Lokvancic, Mahir
We revisit well-known stochastic volatility models with constant coefficients for single asset driven by one factor stochastic volatility as a homogeneous diffusion and demonstrate an alternative to the classifications provided in Albanese and Lawi, and Henry-Labord`ere, to deduce asset price distribution function, at a fixed time, in an analytic form.

Active Share and Bond Mutual Funds
Choi, Jaewon,Cremers, Martijn,Riley, Timothy B.
We examine how active share â€" the extent to which a portfolio’s holdings differ from its benchmark’s â€" affects the performance, risk management, and flows of bond mutual funds. Measuring active share at both the issue- and issuer-level, the average bond fund has an issue (issuer)-level active share of over 90% (60%). Funds with higher issuer-level active share persistently earn higher alphas, which helps explain the relatively slow growth of passively managed bond funds. Furthermore, funds with higher active share exhibit both lower downside risk and lower flow sensitivity to poor performance, suggesting that highly active bond fund management alleviates run risk.

Berkeley Law Visiting Scholars Program Workshop Presentation- Inequitable Subordination (Presentation Slides)
Rao, Jay
PowerPoint Presentation accompanying Berkeley Law Visiting Scholars Program Workshop on September 20, 2019. The presentation was entitled "Inequitable Subordination: Distressing Distressed Claims Purchasers by Propagating Subordination Benefit Elimination Theory," and focused on the intersection of equitable subordination and the modern bankruptcy claims market.

Board Size, Firm Type, and Stock Return Volatility
Merz, Alexander,Trabert, Sebastian
We analyze the association of board size and stock return volatility for different firm types. First, we find significant evidence that the association is non-linear over all firms. Second, we find that this differs for different firm types. While complex firms show a negative linear relationship between board size and volatility, research and development intensive firms exhibit a stronger u-shaped relationship. This shape is incompatible with the explanation in previous studies that larger boards experience communication and coordination problems which lead to lower volatility. Third, we provide evidence for an alternative explanation, namely that having more directors improves monitoring, but only up to a point. Our results hold for a battery of robustness checks, including a variety of endogeneity tests.

Boosted Credit Ratings in China: The Effects of Credit Enhancement on Bond Pricing
Gao, Haoyu,Huang, Yuting,Mo, Jingyuan
Using a comprehensive dataset of 7,626 enterprise bonds and corporate bonds issued between January 2009 and December 2019 in China, we find that 25.2% of bonds receive boosted credit ratings at issuance; among them 96.6% used credit enhancement. This paper empirically studies whether and how the credit enhancement structure in bond contracts affects bond pricing. First, our main findings show that the usage of credit enhancement at issuance can effectively help lower financing costs. Second, we use the propensity score matching procedure and instrumental variable analysis to control for the potential endogeneity of the usage of credit enhancement. Third, we find that the magnitude of cost reduction is larger for riskier firms, and when credit enhancement is provided by more reliable guarantors, which support the risk-sharing mechanism. The information production mechanism is also discussed and excluded. Last, we show that bond investors unsurprisingly discount bonds with boosted credit ratings.

Case Analysis: Enron; Ethics, Social Responsibility, and Ethical Accounting as Inferior Goods?
Rashid, Muhammad Mustafa
In 2001 soon after the Asian Crises of 1997-1998, the Dotcom Bubble, 9/11, the Enron crises triggered a fraud crisis in Wall Street that impacted the market to the core. Since then scandals such as the Lehman Brothers and WorldCom in 2007-2008 and the Great Recession have surpassed it, Enron still remains one of the most important cases of fraudulent accounting. In 2000’s even though the financial industry had become highly regulated, deregulation of the energy industry allowed companies to place bets on future prices. At the peak of the dotcom bubble Enron was named as a star innovator but when the dotcom bubble burst, Enron’s plan to build high speed internet did not flourish and investors started to realize losses. Furthermore, the financial losses of the operations were hid using the market to market accounting technique instead of book value and using special purpose entities to hide debt. The root cause that was identified as a company with a toxic corporate culture focused on officer compensation rather than social responsibility and hence faulty leadership. Is it possible then that; ethical accounting practices, social responsibility and ethics all become inferior goods as income rises in an ‘irrationally exuberant’ era?

Cash Flow Sensitivities of Financial Decisions: Evidence from an Emerging Market
Erdogan, Aysa
This study investigates the sensitivity of financing, investment, and distribution decisions to changes in operating cash flow, and whether these sensitivities depend on whether or not firms are financially constrained. Using a sample of 2,650 firm-years of Turkish firms for the period 1996 to 2013, we find that an increase in the short-term cash flows is associated with an increase in cash balances, irrespective of whether or not firms are financially constrained. However, unconstrained firms hold a larger cash balance than constrained firms. Dividends are positively related to the short-term cash flows of both types of firms. Investments are not sensitive to cash flow for either type of firms. An increase in their short-term cash flow induces the financially constrained firms to reduce debt financing, but makes the unconstrained firms increase their debt financing and reduce equity financing. Although firms in general prefer to use part of the saved cash in the long term, they do not deplete their cash savings. Constrained firms resort to debt financing in response to an increase in their long-term cash flow.

Co-Operatives in Dakshina Kannada â€" An Overview
Hans, V. Basil,B., Kavitha
Cooperation means working together. The principle of cooperation is as old as human society. It is truly the basis of domestic and social life. Co-operative effort is ultimately the group instinct in man, which enables him to live together and help each other in times of stress and strain. Co-operative is always the child of necessity. This paper discusses the principles and progress of cooperatives in India. It also analyses the growth of cooperatives in Dakshina Kannada (DK) district. The analysis, based on organisations’ perspective, shows clearly the absence of a well-defined policy on employee training. Such an absence is responsible for the poor status of training in the co-operative system. Most of the beneficiaries are not getting benefits of Yashaswini scheme, because of some rigidity in this scheme. Yet, there is no other peoples’ organisation so potentially powerful and promising to build proactive leadership through democratic process as co-operative movement. Cooperatives alone can reach last person in society. In this regard, the paper makes some strategic suggestions to strengthen cooperatives in India in general and DK district in particular.

Corporate Textual Disclosure and Economic Growth
Lu, Minkang,Tan, Hongping,Yao, Li
Using proxies for the textual disclosure quality of Form 20-F filings by firms from 28 countries cross-listed in the U.S., we find that aggregate corporate textual disclosure quality predicts a country’s economic growth for up to two years, even after controlling for aggregate earnings growth and other macroeconomic indicators. The predictability of aggregate textual disclosure quality is more pronounced for home countries with weak institutions. Additional analyses suggest that textual disclosure quality enhances the informativeness of earnings and conveys information regarding operational activities, both of which help predict future economic growth. Our findings suggest that aggregate textual disclosure quality of firms from a given country serves as a leading indicator for economic growth in that country.

Craving for Financial Returns? Empirical Evidence from the Laboratory and the Field
Payzan-LeNestour, Elise,Doran, James
In a series of controlled laboratory experiments, we provide evidence for “Craving by Design” (CbD) theory, where people knowingly expose themselves to negative tail risk due to craving for monetary gains. We then document the “cheap call selling anomaly:” selling calls priced below 1Ams $ has consistently delivered negative long-term returns and negative skew, which is a puzzle when viewed from prevailing finance theories but a matter of course under CbD theory. These findings raise new questions about the motivations underlying investor decisions, the return properties of option markets, and the issue of problem gambling under repeated monetary gambles.

Cross-Border Currency Exposures. New Evidence Based on an Enhanced and Updated Dataset
Bénétrix, Agustín S.,Gautam, Deepali,Juvenal, Luciana,Schmitz, Martin
This paper provides a dataset on the currency composition of the international investment position for a group of 50 countries for the period 1990-2017. It improves available data based on estimates by incorporating actual data reported by statistical authorities and refining estimation methods. The paper illustrates current and new uses of these data, with particular focus on the evolution of currency exposures of cross-border positions.

Default Count-Based Network Models for Credit Contagion
Agosto, Arianna,Ahelegbey, Daniel Felix
Interconnectedness between economic institution and sectors, already recognised as a trigger of the great financial crisis in 2008-2009, is assuming growing importance in financial systems. In this paper we study contagion effects between corporate sectors using financial network models, in which the significant links are identified through conditional independence testing. While the existing financial network literature is mostly focused on Gaussian processes, our approach is based on discrete data. We indeed test dependence in the conditional mean (and volatility) of default counts in different economic sector estimated from Poisson autoregressive models, and in its shocks. Our empirical application to Italian corporate defaults in the 1996-2018 period reveals evidence of a high inter-sector vulnerability, especially at the onset of the global financial crisis in 2008 and in the following years. Many contagion effects between corporate sectors are indeed found in the shock component of the default count dynamics.

Deleveraging and Foreign Currency Loan Conversion Programs in Europe
Vidaházy, Viktória,Yesin, Pinar
This paper first reviews the developments in the size and composition of the European banking sectors’ balance sheets since the Global Financial Crisis, and then assesses the impact of foreign currency loan conversion programs on systemic risk. Aggregate data from 2009Q1 to 2019Q3 indicate three major developments. First, the deleveraging process in Europe has been sizeable, while credit growth may be hampered in several countries. Secondly, macroprudential measures and conversion programs have only partially achieved their goal of lowering financial dollarization in Central and Eastern Europe. Lastly, systemic risk remains elevated in the non- euro area.

Diseconomies of Scale in Mutual Funds: One-Step Inference and Random Weighted Bootstrap Method
Jiang, Lei,li, cuixia,Liao, Ying,Peng, Liang
The traditional two-step method not only underestimates diseconomies of scale for actively-managed mutual funds but also has the difficulty of quantifying the uncertainty. This paper proposes a one-step inference and a random weighted bootstrap method to avoid estimation bias. Simulations show that our proposed method outperforms the traditional one, especially when the number of time-series observations is small. Empirically, we find that the existing two-step method underestimates the uncertainty by about 36% for the three-factor and four-factor models.

Financial Markets and News about the Coronavirus
Mamaysky, Harry
I examine how financial markets interact with news about the coronavirus pandemic of 2020. Coronavirus news in the financial press can be classified into nine topics, which track the progression of narratives about the pandemic. Topical sentiment is contemporaneously related to changes in the SP500, VIX, and high-yield corporate bond indexes, and in US Treasury yields. A large fraction of daily price variation of these asset classes is explained by topical sentiment. The contemporaneous relationship between market prices and topical sentiment is stronger when the level of the VIX is higher. Markets Granger cause topical sentiment, and vice versa. Finally, financial markets do not covary contemporaneously with incidence of coronavirus cases, but do forecast future coronavirus cases. The overall picture is of hypersensitive, but largely rational, markets.

Grandpa, grandpa, tell me the one about Bitcoin being a safe haven: Evidence from the COVID-19 pandemics
Ladislav Kristoufek

Bitcoin being a safe haven asset is one of the traditional stories in the cryptocurrency community. However, during its existence and relevant presence, i.e. approximately since 2013, there has been no severe situation on the financial markets globally to prove or disprove this story until the COVID-19 pandemics. We study the quantile correlations of Bitcoin and two benchmarks -- S\&P500 and VIX -- and we make comparison with gold as the traditional safe haven asset. The Bitcoin safe haven story is shown and discussed to be unsubstantiated and far-fetched, while gold comes out as a clear winner in this contest.

How Does Household Spending Respond to an Epidemic? Consumption During the 2020 COVID-19 Pandemic
Baker, Scott R.,Farrokhnia, R.A.,Meyer, Steffen,Pagel, Michaela,Yannelis, Constantine
We explore how household consumption responds to epidemics, utilizing transaction-level household financial data to investigate the impact of the COVID-19 virus. As the number of cases grew, households began to radically alter their typical spending across a number of major categories. Initially spending increased sharply, particularly in retail, credit card spending and food items. This was followed by a sharp decrease in overall spending. Households responded most strongly in states with shelter-in-place orders in place by March 29th. We explore heterogeneity across partisan affiliation, demographics and income.

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

Implied Cost of Capital and Mutual Fund Performance
Hendriock, Mario
Which trading strategies differentiate skilled mutual fund managers from their unsuccessful peers? This study provides evidence for a positive association between holdings' implied cost of capital (ICC) and future fund performance. Consistent with large transaction costs of ICC-based investments impeding their exploitation, family-level trading efficiency positively correlates with fund-level ICC. A negative association between ICCs and mid-year risk shifting corroborates the notion of fund managers decisively choosing and relying on high-ICC strategies. Institutional investors able to identify funds with high ICCs direct their investments accordingly, whereas flows of retail funds are unaffected, consistent with limited investor attention and financial literacy.

Investment Syndication Networks and International Differences in Legal Enforcement and Culture
Cumming, Douglas J.,Mohammadi, Ali,Zambelli, Simona
Being part of an investment syndicate offers various network benefits, but also exposes risks that someone in the network acts in a manner that violates securities laws. These risks differ depending on the ways in which securities laws are enforced. Public enforcement, with strong investigative powers and strong group sanctions, discourages the formation of syndication networks. Private enforcement, with strong disclosure and liability standards, encourages the formation of syndication networks. We present evidence strongly consistent with the negative impact of public enforcement on network density, and partial support for the positive impact of private enforcement depending on cultural conditions.

Is Personal Savings Rate Priced in the Cross-section of Stock Returns?
Ince, Baris
I investigate the importance of personal savings rate in the cross-sectional pricing of individual stocks. I estimate each stock's monthly-varying sensitivity to the personal savings rate and show that stocks in the lowest savings rate beta quintile generate 6% more annualized risk-adjusted return compared to stocks in the highest savings beta quintile. I find that the savings premium is driven by the outperformance (underperformance) of stocks with negative (positive) savings rate beta. These results are robust to controls for various firm-specific characteristics and risk factors. Moreover, the alpha spread between the highest and the lowest savings rate beta stocks increases during high economic uncertainty, low credit availability, and high income risk periods. Finally, the results are consistent with the risk correction predictions of the Consumption-CAPM literature.

NetDP: An Industrial-Scale Distributed Network Representation Framework for Default Prediction in Ant Credit Pay
Jianbin Lin,Zhiqiang Zhang,Jun Zhou,Xiaolong Li,Jingli Fang,Yanming Fang,Quan Yu,Yuan Qi

Ant Credit Pay is a consumer credit service in Ant Financial Service Group. Similar to credit card, loan default is one of the major risks of this credit product. Hence, effective algorithm for default prediction is the key to losses reduction and profits increment for the company. However, the challenges facing in our scenario are different from those in conventional credit card service. The first one is scalability. The huge volume of users and their behaviors in Ant Financial requires the ability to process industrial-scale data and perform model training efficiently. The second challenges is the cold-start problem. Different from the manual review for credit card application in conventional banks, the credit limit of Ant Credit Pay is automatically offered to users based on the knowledge learned from big data. However, default prediction for new users is suffered from lack of enough credit behaviors. It requires that the proposal should leverage other new data source to alleviate the cold-start problem. Considering the above challenges and the special scenario in Ant Financial, we try to incorporate default prediction with network information to alleviate the cold-start problem. In this paper, we propose an industrial-scale distributed network representation framework, termed NetDP, for default prediction in Ant Credit Pay. The proposal explores network information generated by various interaction between users, and blends unsupervised and supervised network representation in a unified framework for default prediction problem. Moreover, we present a parameter-server-based distributed implement of our proposal to handle the scalability challenge. Experimental results demonstrate the effectiveness of our proposal, especially in cold-start problem, as well as the efficiency for industrial-scale dataset.

Optimal Deposit Insurance
Davila, Eduardo,Goldstein, Itay
This paper studies the optimal determination of deposit insurance (DI) when bank runs are possible. In a variety of environments, the welfare impact of changes in the level of deposit insurance coverage exclusively depends on three sufficient statistics: the sensitivity of the likelihood of bank failure with respect to the level of DI, the utility gain induced by preventing the marginal bank failure, which can be expressed in terms of the drop in depositors' consumption, and the direct social cost of intervention in bank failure scenarios, which can be expressed in terms of the probability of bank failure, the marginal cost of public funds, and the mass of partially insured depositors. The same expression applies a) when banks face perfect ex-ante regulation and b) when banks are not allowed to react to policy changes. Under imperfect regulation, because banks do not internalize the fiscal impact of their actions, changes in the behavior of banks induced by varying the level of DI (often referred to as moral hazard) only affect the level of optimal DI directly through a fiscal externality, but not independently. We characterize the wedges that determine the optimal ex-ante regulation, which map to liability-side regulation (e.g., deposit insurance premia) and asset-side regulation. Finally, we explore the quantitative implications of our approach through a direct measurement exercise and a model simulation.

Payday Before Mayday: CEO Compensation Contracting for Distressed Firms
Carter, Mary Ellen,Hotchkiss, Edith S.,Mohseni, Mahdi
Using a sample of more than 1,500 US public firms in the period 1998-2016, we examine how firms endogenously adjust CEO compensation contracts when they become financially distressed. The link between compensation and equity-based measures of firm performance is positive and strong prior to distress, but declines and becomes insignificant when firms are in distress. However, the relationship of pay to cash flow performance remains positive for distressed firms. Directly examining the ex-ante incentives provided in contracts rather than ex-post payouts, we provide evidence that firms respond to the onset of distress by providing incentives oriented toward improving cash flows. Specifically, distressed firms increase their use of performance-based pay but re-orient performance metrics towards cash flow related measures and set performance targets farther above prior performance. Further, these firms reduce equity-oriented incentives by increasing the proportion of expected performance-based compensation to be paid in cash rather than stock. These changes are economically most important for firms with the greatest need to replace out-of-the-money equity-based incentives, and in the years immediately preceding an actual default or bankruptcy. Overall, our findings are consistent with agency theory predicting that reduced incentives require contract realignment of managers with relevant stakeholders of distressed firms.

Portfolio Selection Under Systemic Risk
Lin, Weidong,Olmo, Jose,Taamouti, Abderrahim
This paper proposes a novel methodology to construct optimal portfolios that incorporates the occurrence of systemic events. Investors maximize a modified Sharpe ratio conditional on a systemic event. We solve the portfolio allocation problem analytically under the absence of short-selling restrictions and numerically when short-selling restrictions are imposed. This approach for obtaining an optimal portfolio allocation is made operational by embedding it in a multivariate dynamic setting using dynamic conditional correlation and copula models. We evaluate portfolio performance on the US stock market out-of-sample over the period 2007 to 2017 and show that our systemic risk portfolio outperforms mean-variance and equally-weighted portfolios.

Real Estate Taxes and Home Value: Winners and Losers of TCJA
Li, Wenli,Yu, Edison
In this paper, we examine the impact of changes in the federal tax treatment of local property taxes stemming from the implementation of the Tax Cuts and Jobs Act (TCJA) in January 2018 on local housing markets. Using county-level house price information and IRS tax data, we find that capping the federal tax deduction of real estate taxes at $10,000 has caused the growth rate of home value to decline by an annualized 0.8 percentage point, or 15 percent, in areas where real estate taxes as shares of taxable income exceeded the national median. Additionally, these areas with a high real estate tax burden suffered from reductions in market liquidity after the reform. Fewer houses were transacted either in absolute numbers or as shares of total listings, houses stayed on the market longer before being sold, and more houses were listed with price cuts. Importantly, we find that the housing market slowdown was accompanied by declines in local construction employment growth as well as multi-family building permits. Furthermore, on net more people moved out of these areas after the reform. Finally, we show that the act has already had political consequences. In the 2018 midterm Senate elections, more voters voted for Democratic candidates in areas with high real estate tax burden than they did for Republican candidates.

Redemption in Kind and Mutual Fund Liquidity Management
Shen, Ke,Ren, Honglin,Zhao, Haibei
Open-end mutual funds can use redemption in kind to satisfy investor redemption by delivering securities instead of cash. We find that funds that reserve their rights to redeem in kind experience less run-like behavior following poor performance. Evidence from actual in-kind transactions suggests that funds tend to deliver illiquid securities, and suffer less from the adverse impact of outflow on fund performance. Offsetting these benefits, redeeming investors bear the liquidation costs and generate significant price pressure on the underlying securities. Consequently, funds that reserve their rights to redeem in kind receive less investor capital allocation.

Retornos reales de los fondos privados de pensiones en Colombia (Real Returns of Private Pension Funds in Colombia)
Salazar Guatibonza , Flor Esther
Spanish Abstract: Sobre el desempeño del sistema privado de pensiones en Colombia, Régimen de Ahorro Individual con solidaridad - RAIs, se suele resaltar los resultados en términos de rentabilidad, tesis defendida por la industria de Administradoras de fondos. Con el objetivo de evaluar qué tan significativos han sido los rendimientos generados por este esquema en términos reales, a partir de base de datos de movimientos diarios de los fondos de pensiones desde 1995 hasta diciembre de 2016 y usando la metodología establecida por la Superintendencia Financiera de Colombia (SFC) para el cálculo de rentabilidades, se determina la rentabilidad neta de costos de administración explícitos que debe asumir el afiliado y de ajuste por inflación. A partir del ejercicio realizado se encuentra que para el fondo moderado desde el inicio de operación de estos fondos la rentabilidad real desde la perspectiva del afiliado ha sido cercana a cero, igual ha sido la tendencia para los fondos conservador y de mayor riesgo que en los últimos años tienden a tornarse negativas. A partir de los resultados se discute sobre los beneficios que suelen atribuirse a los sistemas de capitalización individual en términos de altos retornos, mejores pensiones y protección de ahorros, que contrastan con las bajas pensiones o imposibilidad de pensión que se empieza a hacer evidente en los fondos de pensiones privados en Colombia. English Abstract: On the performance of the private pensions system in Colombia, Individual Savings Regime with Solidarity â€" RAIs (per its acronym in Spanish), the results are often highlighted in terms of profitability; a thesis upheld by the fund Managers industry. In order to evaluate how significant the real returns generated by this scheme have actually been, from a database of daily transactions by the pension funds from 1995 to December 2016, and using the methodology established by the Superintendencia Financiera de Colombia (SFC-Financial Superintendence of Colombia) for the calculation of returns, was determined the net return on explicit administration costs to be borne by the members and inflation adjustment. Such endeavor found that for the moderate, fund since they began operating, their actual profitability from the perspective of their affiliates has been close to zero, as has been the trend for conservative and higher risk funds, which in recent years tended to become negative. Based on these results, we discuss the benefits that are usually attributed to individual capitalization systems in terms of high returns, better pensions, and savings protection, which contrast with the low pensions, or impossibility attaining one, that is starting to become evident in private pension funds in Colombia.

SeLFIES: A-New(-ity) Look for Retirement
Muralidhar, Arun,Merton, Robert C.,Hogan, Paula
Individual investors, policy-makers, and members of the financial services industry are struggling to figure out how best to help individuals prepare for a financially secure retirement; namely, allowing individuals to continue their pre-retirement standard-of-living post retirement. We propose that an incorrect specification of the problem to be solved is leading, not surprisingly, to sub-optimal proposed solutions.1 When the retirement planning challenge is posed correctly, finance science suggests an elegantly simple solution - the creation of a simple new financial instrument that is a win-win-win for individuals, governments and the financial services industry.

Stochastic Volatility: A Tale of Co-Jumps, Non-Normality, GMM and High Frequency Data
Ewald, Christian-Oliver,Zou, Yihan
In this article we introduce a linear quadratic volatility model with co-jumps and show how to cal- ibrate this model to a rich dataset. We apply GMM and more specifically match the moments of realized power and multi-power variations, which are obtained from high-frequency stock market data. Our model incorporates two salient features: the setting of simultaneous jumps in both re- turn process and volatility process and the superposition structure of a continuous linear quadratic volatility process and a Lévy-driven Ornstein-Uhlenbeck process. We compare the quality of fit for several models, and show that our model outperforms the conventional jump diffusion or Bates model. Besides that, we find evidence that the jump sizes are not normal distributed and that our model performs best when the distribution of jump-sizes is only specified through certain (co-) mo- ment conditions. A Monte Carlo experiments is employed to confirm this.

The Efficiency of US Community Banks
Petropoulou, Athina,Pappas, Vasileios,Ongena, Steven,Gounopoulos, Dimitrios,Fairchild, Richard J.
Using a novel method to separate US community banks over the 1984-2013 period from their non-community counterparts we compare the two bank types on the basis of cost efficiency. We decompose cost efficiency into a persistent and a residual component; the former capturing the market structure and regulatory changes, the latter reflecting managerial performance. Our estimates show community banks to exhibit a 4.9% higher efficiency compared to their non-community counterparts. The decomposition further reveals that community banks benefit from superior managerial capabilities and from developments at the regulatory front. Size is non-linearly related to efficiency and large community banks are the most efficient. A strong positive link between profitability and efficiency exists for community banks, with the effect being muted in non-community banks. Participation in bank holding companies is harmful for community banks’ efficiency. Liquidity creation is positively (negatively) related to efficiency of (non-)community banks, and highlights the distinctiveness of the business models and the need for differentiated regulatory supervision. Community banks efficiency is positively (negatively) related to liquidity (credit) risk. Our results are robust to a series of salient checks.

The P-E Ratio, the Business Cycle, and Timing the Stock Market
Park, Sangkyun
Using monthly stock-market data covering 1871-2020, this paper analyzes how the P-E ratio is related with future stock-market performance and whether mispricing produces opportunities to time the stock market. The P-E ratio is found to be inversely related with the future stock market performance measured by a realized equity premium. The P-E ratio also shows a positive relationship with stock-market fundamentals measured by a fair P-E ratio. These findings suggest that the P-E ration may reflect both mispricing and rational expectation of investors. The cyclically adjusted P-E ratio seems to better reflect mispricing, while the conventional P-E ratio better reflects investors' expectation. Mispricing indicated by the P-E ratio does not appear to be significant and systematic enough to produce clear market-timing opportunities. Timing the stock market based on the business cycle, however, appears to be quite lucrative. Typically, stock prices plunge shortly before or during recession and quickly rebound over the next 2 years or so, creating opportunities to time the market. The potential profit is large, and the risk is moderate. It is hard to explain the overreaction of the stock market to recession within the context of market efficiency.

Time-Series Efficient Factors
Ehsani, Sina,Linnainmaa, Juhani T.
Factors in prominent asset pricing models are positively serially correlated. We derive the optimal allocation that transforms an auto-correlated factor to a "time-series efficient" factor. The key determinant of the value of factor timing is the ratio of a factor's auto-correlation to its Sharpe ratio. Time-series efficient factors earn significantly higher Sharpe ratios than the original factors and contain all the information found in the original factors. Momentum strategies profit by timing auto-correlated factors; they pick up factor "inefficiencies." We show that, rather than augmenting models with the momentum factor, each factor can instead be made time-series efficient. An asset pricing model with time-series efficient factors, such as an efficient Fama-French five-factor model, prices momentum. Time-series efficient factors also explain more of the co-variance structure of returns; they describe the cross section better than the standard factors and align more closely with the true SDF.

Time-varying volatility in Bitcoin market and information flow at minute-level frequency
Irena Barjašić,Nino Antulov-Fantulin

In this paper, we analyze the time-series of minute price returns on the Bitcoin market through the statistical models of generalized autoregressive conditional heteroskedasticity (GARCH) family. Several mathematical models have been proposed in finance, to model the dynamics of price returns, each of them introducing a different perspective on the problem, but none without shortcomings. We combine an approach that uses historical values of returns and their volatilities - GARCH family of models, with a so-called "Mixture of Distribution Hypothesis", which states that the dynamics of price returns are governed by the information flow about the market. Using time-series of Bitcoin-related tweets and volume of transactions as external information, we test for improvement in volatility prediction of several GARCH model variants on a minute level Bitcoin price time series. Statistical tests show that the simplest GARCH(1,1) reacts the best to the addition of external signal to model volatility process on out-of-sample data.

When Bitcoin Has the Flu: On Bitcoin’s Performance to Hedge Equity Risk in the Early Wake of the COVID-19 Outbreak
Grobys, Klaus
Using the coronavirus COVID-19 outbreak as a set-up for a quasi-experiment, this study derives novel insights on the dynamic correlation between Bitcoin and U.S. stocks. Given the unprecedented scale of infections and the nature of the virus, the potential impact on the dynamic correlation was unpredictable and therefore uncertain. Using a difference-in-differences setting, the dynamic correlation between Bitcoin and stocks is controlled for the dynamic correlation between gold and stocks. This study finds that Bitcoin performed poorly in hedging this tail risk.

‘The Effect of Announcement As the Host of XVIII Asian Games on the Indonesian Stock Market’
, Andreas,Gumanti, Tatang Ary,Nurjannah, Uliya,Awwaliyah, Intan Nurul
In 2014, Indonesia was announced to be the host the 2018 XVIII Asian Games, the biggest sports event in Asia. This announcement is expected to positively impact the country’s economy and investors as there would be thousands of spectators from both the country and overseas. A direct impact of the event is that Indonesia would prepare the entire venue. This study examines whether the capital market participants react to the announcement. For this purpose it tests a total of 25 companies in the infrastructure, utility, and transportation sectors listed on the Indonesia Stock Exchange. A standard event study methodology is employed to examine the existence of abnormal returns around the event. The results show the abnormal returns on two days before and two days after the announcement. However, overall, there are no significant abnormal returns before and after the announcement. The study does not find a significant difference of abnormal returns before and after the announcement. Besides, there was no difference in trading volume activity before and after the announcement as the host of the XVIII Asian Games. In summary, the capital market participants do not consider the event to be a significant issue that determines their investment decision in the capital market.