Research articles for the 2020-04-23

A multivariate micro-level insurance counts model with a Cox process approach
Benjamin Avanzi,Gregory Clive Taylor,Bernard Wong,Xinda Yang

In this paper, we focus on estimating ultimate claim counts in multiple insurance processes and thus extend the associated literature of micro-level stochastic reserving models to the multivariate context.

Specifically, we develop a multivariate Cox process to model the joint arrival process of insurance claims in multiple Lines of Business. The dependency structure is introduced via multivariate shot noise intensity processes which are connected with the help of L\'evy copulas. Such a construction is more parsimonious and tractable in higher dimensions than plain vanilla common shock models. We also consider practical implementation and explicitly incorporate known covariates, such as seasonality patterns and trends, which may explain some of the relationship between two insurance processes (or at least help tease out those relationships).

We develop a filtering algorithm based on the reversible-jump Markov Chain Monte Carlo (RJMCMC) method to estimate the unobservable stochastic intensities. Model calibration is illustrated using real data from the AUSI data set.

Bank-Affiliated Private Equity and Shocks to the Banking Sector
Lavery, Paul
This paper examines the differential impact of an unexpected regulatory banking sector shock on the portfolio companies of the private equity arms of affected and unaffected banks. Robust to a battery of checks, we find that portfolio companies of the private equity subsidiaries of banks affected by the 2011 EBA Capital Exercise suffer significantly weaker investment and financing at the onset of the shock, and subsequently poorer performance, relative to portfolio companies of unaffected banks. The results are amplified where the portfolio company is more likely to be financially constrained and where the private equity investor is less experienced. Our findings confirm recent literature's concerns over the approach to the capital regulation of banks and its impact on the real economy.

Capital Budgeting and Climate Change: Does Corporate Internal Carbon Pricing Reduce CO2 Emissions
Byrd, John W.,Cooperman, Elizabeth S.,Hickman, Kent
Internal carbon pricing by corporations is a relatively new tool in carbon management. Using a sample of 1,274 firms from 45 countries and across 43 industries reporting to the Carbon Disclosure Project (the CDP) during the years, 2015 to 2018, this study uses carbon emissions intensity ratios to compare the carbon emission reductions of firms that have engaged in carbon pricing for the most recent four years with other firms that do not employ internal carbon prices. Our univariate analysis for the entire sample shows no significant difference in either revenue or employee-based carbon intensities between firms using an internal carbon price and other firms. However, when we examine industry sectors with high CO2 emissions and which are capital-intensive, there is a significant difference: Carbon pricing firms reduce emissions more quickly based on both revenue intensity and employee-intensity measures. This subsample of firms is comprised of companies in the extractive, airline, ground transportation, cement manufacturing and utilities sectors, so represent firms that regularly make large capital investments. Our results are consistent with internal carbon pricing helping capital-intensive firms make investment decisions that lower carbon emissions. Multivariate regressions confirm that the effect of internal carbon pricing is additional to reductions realized from other carbon efficiency tactics pursued by sample firms. Our results are unaffected by the existence of national carbon tax plans.

Commercial Law Intersections
Castellano, Giuliano G.,Tosato, Andrea
Commercial law is not a single, monolithic entity. It has grown into a dense thicket of subject-specific branches that govern a broad range of transactions and corporate actions. When one of these events falls concurrently within the purview of two or more of these commercial law branches - such as corporate law, intellectual property law, secured transactions law, conduct and prudential regulation - an overlap materializes. We refer to this legal phenomenon as a commercial law intersection (CLI). Some notable examples of transactions that feature CLIs include bank loans secured by shares, supply chain financing arrangements, patent cross-licensing, and blockchain-based initial coin offerings.CLIs present a complex and multi-faceted challenge. The convergence of commercial law branches is frequently beset with failures in coordination that both distort incentives for market participants and increase transaction costs. Crucially, in the most severe cases, this affliction deters business actors from entering into the affected transactions altogether. The cries of scholars, judges, and practitioners lamenting these issues have grown ever louder yet methodical, comprehensive solutions remain elusive. This article endeavors to fill this void. First, it provides a comprehensive analysis of CLIs and their coordination failures. Drawing from systems theory and jurisprudence, it then identifies the deficiencies of the most common interpretative approaches used to reconcile tensions between commercial law branches, before advancing the concepts of “coherence” and “unity of purpose” as the key to addressing such shortcomings. Finally, it formulates a two-step interpretive method that unties the Gordian knot created by CLI coordination failures.

Cost estimation for alternative aviation plans against potential radiation exposure associated with solar proton events for the airline industry
Yosuke A. Yamashiki,Moe Fujita,Tatsuhiko Sato,Hiroyuki Maehara,Yuta Notsu,Kazunari Shibata

We present a systematic approach to effectively evaluate potential risk cost caused by exposure to solar proton events (SPEs) from solar flares for the airline industry. We also evaluate associated health risks from radiation, to provide relevant alternative ways to minimize economic loss and opportunity. The estimated radiation dose induced by each SPE for the passengers of each flight is calculated using ExoKyoto and PHITS. We determine a few scenarios for the estimated dose limit at 1 and 20mSv, corresponding to the effective dose limit for the general public and occupational exposure, respectively, as well as a higher dose induced an extreme superflare. We set a hypothetical airline shutdown scenario at 1mSv for a single flight per passenger, due to legal restrictions under the potential radiation dose. In such a scenario, we calculate the potential loss in direct and opportunity cost under the cancelation of the flight. At the same time, we considered that, even under such a scenario, if the airplane flies at a slightly lower altitude (from 12 to 9.5km: atmospheric depth from 234 to 365g/cm$^{2}$), the total loss becomes much smaller than flight cancelation, and the estimated total dose goes down from 1.2 to 0.45mSv, which is below the effective dose limit for the general public. In case of flying at an even lower altitude (7km: atmospheric depth 484g/cm$^{2}$), the estimated total dose becomes much smaller, 0.12 mSv. If we assume the increase of fuel cost is proportional to the increase in atmospheric depth, the increase in cost becomes 1.56 and 2.07 for the case of flying at 9.5 km and at 7 km, respectively. Lower altitude flights provide more safety for the potential risk of radiation doses induced by severe SPEs. At the same time, since there is total loss caused by flight cancelation, we propose that considering lower flight altitude is the best protection against solar flares.

Dynamic Transmissions Between Oil Specific Shocks and Financial Stress: Evidence From the Euro Area
Polat, Onur
In this study, we investigate dynamic transmissions between oil market and Euro area financial stress by implementing the TVP-VAR model. Our data cover monthly WTI oil price, global oil production, the Kilian Index and a measure for financial stress for the Euro area (Composite Indicator of Systemic Stress, CISS) and range from September 2000 to December 2018. Empirical results of the study verify that, the TVP-VAR model captures dynamic nature of the structural shocks arisen from the global oil market to the Euro area financial stress consistently and robustly.

Efectul Turn-of-the-Year pe piaţa valutară din România (The Turn-of-the-Year Effect in the Romanian Foreign Exchange Market)
Stefanescu, Razvan,Dumitriu, Ramona
Romanian Abstract: Unele anomalii calendaristice care au fost detectate pe pieÅ£ele de acÅ£iuni pot fi, de asemenea, descoperite ÅŸi pe pieÅ£ele valutare. Această lucrare abordează prezenÅ£a Efectului Turn-of-the-Year în randamentele logaritmice ale valorilor zilnice ale ratei de schimb dintre leul românesc ÅŸi dolarul SUA într-o perioadă care începe în iulie 2005 ÅŸi se termină în Martie 2020. Rezultatele sugerează că la începutul ÅŸi sfârÅŸitul unui an moneda naÅ£ională a României tinde să se deprecieze consistent în raport cu dolarul SUA.English Abstract: Some calendar anomalies that were detected in the stock markets could be also found in the foreign exchange markets. This paper approaches the presence of Turn-of-the-Year Effect in the logarithmic returns of Romanian leu â€" US dollar exchange rate daily values for a period that starts in July 2005 and it ends in March 2020. The results suggest that at the beginning and the end of a year Romanian national currency tends to depreciate consistently against US dollar.

Estimating the Demand Factors and Willingness to Pay for Agricultural Insurance
Osman Gulseven

This article investigates the effect of prices and socio-demographic variables on the farmers decision to purchase agricultural insurance. A survey has been conducted to 200 farmers most of whom are engaged in diversified income-generating activities. The logistic estimation results suggest that education and household income from farming activities positively affect the likelihood of purchasing insurance. The demand for insurance is negatively correlated with the premium paid per insured value, suggesting that insurance is a normal good. Farmers are willing to pay (WTP) increasingly higher premiums for contracts with a higher coverage ratio. According to the valuation model, the WTP declines sharply for coverage ratios under 70%.

Financial Literacy, Behavioral Factors, and Problematic Debt-Taking: An Empirical Analysis of Relationships in Australia
Tahir, Muhammad S.,Richards, Daniel W.,Ahmed, Abdullahi D.
Unpaid credit card debt can be problematic; people should avoid it where possible. Yet whether people with high financial literacy have less credit card debt remains unknown. This paper investigates the relationship between financial literacy and problematic debt-taking while considering behavioral factors in Australia, by analyzing the 2016 wave of the Household, Income and Labor Dynamics in Australia (HILDA) Survey. The findings show that higher financial literacy is associated with less problematic debt-taking, but this relationship is reduced when behavioral factors are considered. Our results imply that financial literacy curricula should also include behavioral factors to reduce problematic debt-taking.

How Much Liquidity Would a Liquidity-saving Mechanism Save if a Liquidity-saving Mechanism could Save Liquidity? A Simulation Approach for Canada’s Large-value Payment System
Byck, Shaun,Heijmans, Ronald
Canada’s Large Value Transfer System (LVTS) is in the process of being replaced by a real-time gross settlement (RTGS) system. A pure RTGS system typically requires participants to hold large amounts of intraday liquidity in order to settle their payment obligations. Implementing one or more liquidity-saving mechanisms (LSMs) can reduce the amount of liquidity participants need to hold. This paper investigates how much liquidity requirements can be reduced with the implementation of different LSMs in the Financial Network Analytics simulation engine using LVTS transaction data from 2018. These LSMs include: 1) Bilateral offsetting, 2) FIFO-Bypass, 3) Multilateral offsetting, and 4) a combination of all LSMs. We simulate two different scenarios. In the first scenario, all payments from Tranche 1, which are considered time-critical, are settled in a pure RTGS payment stream, while less time-critical Tranche 2 payments are settled in a payment stream with LSMs. In the second scenario, we settle all payments (Tranches 1 and 2) in the LSM stream. Our results show that when there is ample liquidity available in the system, there is minimal benefit from LSMs as payments are settled without much delayâ€"the effectiveness of LSMs increases as the amount of intraday liquidity decreases. A combination of LSMs shows a reduction in liquidity requirements that is larger than any one individual LSM.

Impact of Economic Policy Uncertainty on Disclosure and Pricing of Earnings News
Asthana, Sharad,Kalelkar, Rachana
In this paper, we examine the effect of economic policy uncertainty on reactions of capital market participants and the actions of corporate managers. In particular, we investigate two issues: 1) whether the economic policy uncertainty has a short-term and long-term impact on the interpretation of earnings news and 2) whether the managers strategically time the release of good/bad news to the uncertainty in economic policies. We use a sample of 2,973 unique firms from 1990 to 2016 and find that economic policy uncertainty lowers investors’ confidence in earnings, resulting in a lower earnings response coefficient. Further test shows that the adverse effect of economic policy uncertainty on earnings informativeness is long-lasting and cannot be explained by the publicly available pre-disclosure information. We also find that firms are more likely to disclose bad news and losses when the economic policy uncertainty is high. These findings are not explained by earnings management and persist even after controlling for commonly used proxies of earnings management. Finally, we show that economic policy uncertainty is distinct from firm-specific uncertainty and that they both have incremental effects on the earnings response coefficient.

Imposing Reserve Tax to Turkish Financial Institutions for Strengthening Reserves of The Central Bank of the Republic of Turkey
Kartal, Mustafa Tevfik,Tan, Ömer Faruk
Although foreign exchange rates (FER) and inflation increased slowly between from 2002 and 2013, they increased rapidly after that time and they have reached the highest level in 2018 on annual base since 2006. Adverse developments in indicators like FER make negative effects on economic actors by causing uncertainty and uneasiness. They also cause adverse effects on a variety of macroeconomic indicators such as foreign debt burden and interest payments. For this reason, it is important for countries to determine causes of increasing in FER and take measures to keep them under control. For this purpose, there are a lot of conventional tools like tight monetary policy, tight fiscal policy, implementation of harmonious policies and capital controls. In this context, reserves of CBRT are an important tool. However, it is necessary to have adequate reserves in order to use reserves to keep FER under control. Taking into consideration this fact, it is recommended to impose reserve tax liability to financial institutions so that reserves of CBRT could be increased.

Is There Anybody Out There? Detecting Operational Outages from LVTS Transaction Data
Arjania, Neville,Heijmans, Ronald
Canadian Large Value Transfer System. We define an operational outage as either no or unusually low activity. We test our algorithm against a database of outages by participants reported in order to reduce false negatives. The false positives can be reduced by excluding “outages found” by the algorithm if a participant historically has no payment in a given five minute time interval. Additionally, we can test whether participants do indeed report all their operational outages. The results show that our algorithm works best for the largest participants as they send in payments continuously. Our method can be used by LVTS system operators and overseers to identify sources of operational risks.

Labor Skill and Income Smoothing
Jung, Boochun,Kim, Tae Wook,Noh, Minyoung,Park, You-il (Chris)
We examine whether, when, and to what extent the skilled labor required by firms affects managers’ income smoothing activities. Consistent with our hypothesis that managers smooth earnings to signal their diminished risk and improve long-term relationships with high-skill employees, we show that the level of labor skills required by firms is positively associated with managers’ income smoothing activities. We address endogeneity concerns by exploiting subsamples of firms with similar firms and industry characteristics and a quasi-experimental shock to labor markets led by Hurricane Katrina. The effect of labor skills on income smoothing is weaker for firms granting employee stock options and notably stronger for firms operating in competitive product markets. Finally, we document that future employment volatility decreases as a consequence of income smoothing, suggesting that managers’ income smoothing activities reduce the turnover of skilled employees and help to maintain their employment at a stable level.

Liquidity in Cryptocurrency Market and Commonalities across Anomalies
Dong, Bingbing,Jiang, Lei,Liu, Jinyu,Zhu, Yifeng
Testing the existence of the extensively identified stock-market-based anomalies in the cryptocurrency market, we examine the liquidity as a factor that affects the cryptocurrency market efficiency and commonalities in anomaly performance. Based on the unique features of cryptocurrencies, we build a model with anonymous traders valuing cryptocurrencies as payments for goods and assets for returns, and find that in the long-run equilibrium, less funding liquidity means lower asset liquidity in the cryptocurrency market in time series. Empirically, we find supportive evidence that the decrease of cryptocurrency liquidity enhances the hedge portfolio returns based on the anomalies, and hinders the cryptocurrency market to achieve efficiency.

Measuring Efficiency and Risk Preferences in Dynamic Portfolio Choice
Magnani, Jacopo,Rabanal, Jean Paul,Rud, Olga,Wang, Yabin
This paper uses non-parametric methods to study the efficiency (Dybvig, 1988) and risk-profile (Varian, 1988) of dynamic portfolio choices. We design an experiment which varies the number of states (complexity), and includes an equivalent static Arrow-Debreu problem. The results suggest that complexity reduces efficiency, as does lower cognitive ability. Efficiency is also lower in the static problem, and in the dynamic task it is mostly driven by a form of stop-loss strategy. Further, we find that a representative agent exhibits decreasing absolute risk aversion and constant relative risk aversion, despite significant individual heterogeneity.

On the multiplicity of the martingale condition: Spontaneous symmetry breaking in Quantum Finance
Ivan Arraut,Alan Au,Alan Ching-biu Tse

We demonstrate that the martingale condition in the stock market can be interpreted as a vacuum condition when we express the financial equations in the Hamiltonian form. We then show that the symmetry under the changes of the prices is spontaneously broken in general and the symmetry under changes in the volatility, for the case of the Merton-Garman (MG) equation, is also spontaneously broken. This reproduces a vacuum degeneracy for the system. In this way, we find the conditions under which, the martingale condition can be considered to be a non-degenerate vacuum. This gives us a surprising connection between spontaneous symmetry breaking and the flow of information through the boundaries for the financial systems. Subsequently, we find an extended martingale condition for the MG equation, depending not only prices but also on the volatility and finally, we show what happens if we include additional non-derivative terms on the Black Scholes and on the MG equations, breaking then some other symmetries of the system spontaneously.

Optimal execution with liquidity risk in a diffusive order book market
Hyoeun Lee,Kiseop Lee

We study the optimal order placement strategy with the presence of a liquidity cost. In this problem, a stock trader wishes to clear her large inventory by a predetermined time horizon $T$. A trader uses both limit and market orders, and a large market order faces an adverse price movement caused by the liquidity risk. First, we study a single period model where the trader places a limit order and/or a market order at the beginning. We show the behavior of optimal amount of market order, $m^*$, and optimal placement of limit order, $y^*$, under different market conditions. Next, we extend it to a multi-period model, where the trader makes sequential decisions of limit and market orders at multiple time points.

Optimizing the reliability of a bank with Logistic Regression and Particle Swarm Optimization
Vadlamani Ravi,Vadlamani Madhav

It is well-known that disciplines such as mechanical engineering, electrical engineering, civil engineering, aerospace engineering, chemical engineering and software engineering witnessed successful applications of reliability engineering concepts. However, the concept of reliability in its strict sense is missing in financial services. Therefore, in order to fill this gap, in a first-of-its-kind-study, we define the reliability of a bank/firm in terms of the financial ratios connoting the financial health of the bank to withstand the likelihood of insolvency or bankruptcy. For the purpose of estimating the reliability of a bank, we invoke a statistical and machine learning algorithm namely, logistic regression (LR). Once, the parameters are estimated in the 1st stage, we fix them and treat the financial ratios as decision variables. Thus, in the 1st stage, we accomplish the hitherto unknown way of estimating the reliability of a bank. Subsequently, in the 2nd stage, in order to maximize the reliability of the bank, we formulate an unconstrained optimization problem in a single-objective environment and solve it using the well-known particle swarm optimization (PSO) algorithm. Thus, in essence, these two stages correspond to predictive and prescriptive analytics respectively. The proposed 2-stage strategy of using them in tandem is beneficial to the decision-makers within a bank who can try to achieve the optimal or near-optimal values of the financial ratios in order to maximize the reliability which is tantamount to safeguarding their bank against solvency or bankruptcy.

Quantifying the Economic Impact of Extreme Shocks on Businesses using Human Mobility Data: a Bayesian Causal Inference Approach
Takahiro Yabe,Yunchang Zhang,Satish Ukkusuri

In recent years, extreme shocks, such as natural disasters, are increasing in both frequency and intensity, causing significant economic loss to many cities around the world. Quantifying the economic cost of local businesses after extreme shocks is important for post-disaster assessment and pre-disaster planning. Conventionally, surveys have been the primary source of data used to quantify damages inflicted on businesses by disasters. However, surveys often suffer from high cost and long time for implementation, spatio-temporal sparsity in observations, and limitations in scalability. Recently, large scale human mobility data (e.g. mobile phone GPS) have been used to observe and analyze human mobility patterns in an unprecedented spatio-temporal granularity and scale. In this work, we use location data collected from mobile phones to estimate and analyze the causal impact of hurricanes on business performance. To quantify the causal impact of the disaster, we use a Bayesian structural time series model to predict the counterfactual performances of affected businesses (what if the disaster did not occur?), which may use performances of other businesses outside the disaster areas as covariates. The method is tested to quantify the resilience of 635 businesses across 9 categories in Puerto Rico after Hurricane Maria. Furthermore, hierarchical Bayesian models are used to reveal the effect of business characteristics such as location and category on the long-term resilience of businesses. The study presents a novel and more efficient method to quantify business resilience, which could assist policy makers in disaster preparation and relief processes.

Robots, Labor Market Frictions, and Corporate Financial Policies
Liu, Yanguang
Using a novel dataset from the International Federation of Robotics (IFR), I find that robots can transform the labor market landscape and mitigate the impact of labor market frictions on financial policy decisions. Firms with more robots, which reduce labor adjustment costs and operational risk, have higher financial leverage and hold less cash. Such firms rely less on employees and attach less importance to gaining a bargaining advantage over unions. The effects of robots on corporate financial policies are stronger for firms with more blue-collar workers. When facing greater foreign competition, firms with more robots are able to adopt less conservative financial policies. The effects of minimum wage increases on corporate financial policies are weaker for firms with more robots.

Secular Stagnation and Low Interest Rates Under the Fear of a Government Debt Crisis
Kobayashi, Keiichiro ,Ueda, Kozo
In this study, we explain the driving forces behind the secular stagnation associated with a persistent decrease in interest rates. To do so, we employ a model that incorporates a crisis risk triggered by an accumulation of government debt. The model shows that the fear of large-scale taxation on capital and misallocations of capital in future debt crises explains almost half the economic slowdown in Japan over the past two decades. Over the same period, the government bond yield decreases, because the uncertainty in returns on capital makes investing in government bonds becomes less risky than investing in capital.

Some Applications of Lie Groups in Theory of Technical Progress
Le Anh Vu,Duong Quang Hoa,Nguyen Minh Tri,Ha Van Hieu

In recent decades, we have known some interesting applications of Lie theory in the theory of technological progress. Firstly, we will discuss some results of R. Saito in \cite{rS1980} and \cite{rS1981} about the application modeling of Lie groups in the theory of technical progress. Next, we will describe the result on Romanian economy of G. Zaman and Z. Goschin in \cite{ZG2010}. Finally, by using Sato's results and applying the method of G. Zaman and Z. Goschin, we give an estimation of the GDP function of Viet Nam for the 1995-2018 period and give several important observations about the impact of technical progress on economic growth of Viet Nam.

Speculation and Price Indeterminacy in Financial Markets: An Experimental Study,
Hirota, Shinichi,Huber, Juergen,Stockl, Thomas,Sunder, Shyam
To explore how speculative trading influences prices in financial markets, we conduct a laboratory market experiment with speculating investors (who do not collect dividends and trade only for capital gains) and dividend-collecting investors. Moreover, we operate markets at two different levels of money supply. We find that in phases with only speculating investors present (i) price deviations from fundamentals are larger; (ii) prices are more volatile; (iii) mispricing increases with the number of transfers until maturity; and (iv) speculative trading pushes prices upward (downward) when the supply of money is high (low). These results suggest that controlling the money supply can help to stabilize asset prices.

The Advisory and Monitoring Roles of the Board - Evidence from Disruptive Events
Croci, Ettore,Hertig, Gerard ,Khoja, Layla,Lan, Luh Luh
We study the contribution of directors to firm resilience by assessing the relative importance of their advisory and monitoring roles at times of crisis. Based on manually collected US data, we document that four bord-related variables affect market reactions around disruptive events. Board independence and the presence of directors with industry expertise exacerbate the negative share price effect, whereas the converse is true for director busyness and board size. These reactions imply that, in times of crisis, advice-oriented boards fare better than monitoring-oriented boards.

The Divergence Between Industrial Infrastructure and Research Output among the GCC Member States
Osman Gulseven,Abdulrahman Elmi,Odai Bataineh

In this article, we provide a comparative analysis of the industry, communication, and research infrastructure among the GCC member states as measured by the United Nations sustainable development goal 9. SDG 9 provides a clear framework for measuring the performance of nations in achieving sustainable industrialization. Three pillars of this goal are defined as quality logistics and efficient transportation, availability of mobile-cellular network with high-speed internet access, and quality research output. Based on the data from both the United Nations' SDG database and the Bertelsmann Stiftung SDG-index, our results suggest that while most of the sub-goals in SDG 9 are achieved, significant challenges remain ahead. Notably, the research output of the GCC member states is not in par with that of the developed world. We suggest the GCC decisionmakers initiate national and supranational research schemes in order to boost research and development in the region.

The European Union’s Short Selling Regulation and Its Impact on CDS Spreads
Lleshaj, Denisa,Kocian, Jannik
The European Union introduced Regulation 236/2012 in 2012 to address short selling and certain aspects of credit default swaps (CDS). Consequently, a uniform short position disclosure regime was developed, which is used in this paper to examine CDS spreads as a proxy for credit risk around public short sale announcements and evaluate the disclosure policy’s relevance from the debtholder’s perspective. Existing literature documents short selling regulations’ impacts on the stock market, but no evidence exists from the CDS market. Therefore, we first conduct an event study to examine the effects of different short sale events on corresponding firms’ CDS spreads between 2012 and 2018. Moreover, we use regression analyses to control for several credit risk determinants that may also affect CDS spreads. Our evidence suggests that opening and increasing short positions are perceived as negative information, and in this regard lead to higher CDS spreads. In contrast, CDS spreads tend to be lower if short positions decrease or close. Additionally, we find that negative information ceteris paribus more strongly affects CDS spreads than positive information. Finally, we investigate certain anticipatory reactions when negative news enters the CDS market.

The Inadequacy of Capital Adequacy: Bank Failures in Complex Systems
McKeever, Daniel
I provide simulation evidence that the complex systems framework is well-suited for explaining the distribution of commercial bank failure cascades observed in the U.S. since the Great Depression. Within this framework, I test the performance of a class of common bank-level risk metrics, and find that their performance is highly contingent on network structure. I also use this framework to test the efficacy of bank-level capital adequacy regulations, and find that, with even a small fire-sale discount applied to the troubled assets of under-capitalized banks, these requirements actually have the effect of increasing the likelihood of large failure cascades.

The Return of Poison Pills: A First Look at “Crisis Pills”
Eldar, Ofer,Wittry, Michael D.
The poison pill, arguably the most effective anti-takeover device, is making a comeback in the wake of the coronavirus (COVID-19) crisis. The sharp decline in stock prices as the virus has spread around the globe has made corporations particularly vulnerable to takeovers and interventions by hedge fund activists. In response to this development, as of April 21, 2020, at least 45 public corporations have adopted poison pills. Consistent with previous literature, we find that on average pill adoptions follow a decline in market valuations and that there is no meaningful stock price effect after adoption. However, we uncover different patterns for firms that belong to industries that have high exposure to the crisis and firms that belong to industries with low or moderate exposures. The high exposure firms adopt the pill following a much steeper decline in market value than the low-to-moderate exposure firms. Following adoption, the high exposure firms experience a dramatic positive stock price effect of 5% on the day of adoption and 12.8% after 10 days, whereas the low-to-moderate exposure firms experience a large negative stock price effect in most event windows.

The Trading Response of Individual Investors to Local Bankruptcies
Laudenbach, Christine,Loos, Benjamin,Pirschel, Jenny,Wohlfart, Johannes
We use data from a German online brokerage and a survey to show that retail investors sharply reduce risk-taking in response to nearby firm bankruptcies, which are not predictive of returns. The effects on trading are spatially highly concentrated, immediate and not persistent. They seem to operate through more pessimistic expected returns and increased risk aversion and do not reflect wealth effects or changes in background risks. Investors learn about bankruptcies through immediate coverage in local newspapers. Our findings suggest that non-informative local experiences that make downside risks of stock investment more salient contribute to idiosyncratic short-term fluctuations in trading.

The new methods for equity fund selection and optimal portfolio construction
Yi Cao

We relook at the classic equity fund selection and portfolio construction problems from a new perspective and propose an easy-to-implement framework to tackle the problem in practical investment. Rather than the conventional way by constructing a long only portfolio from a big universe of stocks or macro factors, we show how to produce a long-short portfolio from a smaller pool of stocks from mutual fund top holdings and generate impressive results. As these methods are based on statistical evidence, we need closely monitoring the model validity, and prepare repair strategies.

Time Variation in Extrapolation and Anomalies
He, Wei,Wang, Yuehan,Yu, Jianfeng
We find that the degree of extrapolative weighting in investors' belief (DOX) proposed by Cassella and Gulen (2018) has strong predictive power for a broad set of overreaction-related anomalies in the stock market. The average return spread of these anomalies is about 0.81% per month following high DOX periods, and -0.22% per month following low DOX periods. In sharp contrast, DOX has opposite, but weaker, predictive power for under-reaction-related anomalies. In addition, the predictive power of DOX is robust after controlling for a broad set of economic forces including investor sentiment and the consumption surplus ratio. Moreover, most of the DOX effect on long-short anomaly returns derives from the short legs of these overreaction-related anomalies, suggesting that time variation in DOX leads to more time variation in overpricing than in under-pricing, probably because of short-sale impediments.

Trading characteristics of member firms on the Korea Exchange
Min-Young Lee,Woo-Sung Jung,Gabjin Oh

In this paper, we study the characteristics of the member firms on the Korea Exchange. The member firms intermediate between the market participants and the exchange, and all the participants should trade stocks through members. To identify the characteristics of member firms, all member firms are categorized into three groups, such as the domestic members similar to individuals (DIMs), the domestic members similar to institutions (DSMs), and the foreign members (FRMs), in terms of the type of investor. We examine the dynamics of the member firms. The trading characteristics of members are revealed through the directionality and trend. While FRMs tend to trade one-way and move with the price change, DIMs are the opposite. In the market, DIMs and DSMs do herd and the herding moves in the opposite direction of the price change. One the other hand, FRMs do herd in the direction of the price change. The network analysis supports that the members are clustered into three groups similar to DIMs, DSMs, and FRMs. Finally, random matrix theory and a cross-sectional regression show that the inventory variation of members possesses significant information about stock prices and that member herding helps to price the stocks.

Venturing the Definition of Green Energy Transition: A systematic literature review
Pedro V Hernandez Serrano,Amrapali Zaveri

The issue of climate change has become increasingly noteworthy in the past years, the transition towards a renewable energy system is a priority in the transition to a sustainable society. In this document, we explore the definition of green energy transition, how it is reached, and what are the driven factors to achieve it. To answer that firstly, we have conducted a literature review discovering definitions from different disciplines, secondly, gathering the key factors that are drivers for energy transition, finally, an analysis of the factors is conducted within the context of European Union data. Preliminary results have shown that household net income and governmental legal actions related to environmental issues are potential candidates to predict energy transition within countries. With this research, we intend to spark new research directions in order to get a common social and scientific understanding of green energy transition.

Where Are You? The Problem of Location During Emergencies
Lucchese, Elena
Rapid response to an emergency call is crucial to its outcome, but little is known about the determinants of response time. Using a difference-in-differences strategy, it is shown that the time it takes to find the patient’s location accounts for 30% of the response time. The analysis compares the time required to cover each segment of the ambulance trip â€" from the hospital to the patient’s location and then back to the hospital â€" according to whether the patient is at home or at some other location that responders can more easily locate. The magnitude of the effect does not appear to be affected by the distance traveled. It is suggested that introducing a technology that gives care providers precise information about a patient’s location would substantially improve performance at a minimal cost.

Withholding Taxes and Foreign Portfolio Investment
Jacob, Martin,Todtenhaupt, Maximilian
We examine the role of withholding taxes on foreign portfolio investment (FPI) using data on U.S. mutual fund holdings and on bilateral FPI. Exploiting variation in withholding tax rates for 38 investor countries and 115 issuer countries over 2008â€"2015, we find that, conversely to the intended design of the international tax system, withholding taxes adversely affect FPI. We show that this is due to compliance frictions in claiming foreign tax credits. We further provide evidence that frictions in claiming foreign tax credits are reflected in lower stock returns in the setting of American Depositary Receipts.

İplikten Kurumsal Yönetim Anlayışına (From Wool Fibres to the Corporate Governance Approach)
Erdogan, Oral
Turkish Abstract: İpliğin kalitesinde başlıca unsur, kullanılan hammaddedir. Örneğin yünden yapılan iplik viskona ve akriliğe ve diğer ürünlere göre ayrıcalıklıdır. Avusturalya’nın merinos yünü özellikle iklim şartları ve doğanın bir sonucu olarak rakiplerine karşı rekabet üstünlüğünü göstermektedir. Bugün birçok işletmeye, kuruma, devlete örnek teşkil edecek bir yönetim anlayışını 60 bin merinos yün üreticisinin bulunduğu kar amaçsız Australian Wool Innovation'a ait The Woolmark Şirketi sergiliyor. Ürünün kendine has özelliğini bütüncül ve tek sesli yönetim anlayışı ile ortaya koyduğunuzda rekabet üstünlüğü kendiliğinden gerçekleşiyor. OECD’nin 1997 yılına doğru karar almasına yol açarak bugün dünyada birçok ülkenin yasalar çıkarmış olduğu Kurumsal Yönetim İlkeleri de tasadüfen ortaya çıkmamıştır. Dünyada örnekleri az da olsa bazı işletmeler ve kurumlar “bütünlük ve tek seslilik” anlayışlarına odaklanarak başarıyı, sürdürülebilirliği ve itibarı kazanmaktadır. Önümüzdeki dönemde büyük hamleler yapmasını arzu ettiğimiz Türkiye ekonomisinde lokomotif olacak şirketler ve kurumların daha da geç kalmadan gerekli adımları atmasını zaruri olarak değerlendiriyoruz.English Abstract: The main element for the quality of the fibre is the raw material. For example, the wool fibre is privileged to the viscon and acryic. Merinos wool of Australia has a competitive advantage to others thanks to the nature and climate conditions. Today, The Woolmark Inc owned by Australian Wool Innovation has been a role model of ideal corporate governance for many companies and public institutions. The comparative advantage of its production comes out with the unique nature of the raw material and with the corporate governance understanding based on the integrity and one word. As a matter of fact the OECD Corporate Governance Principles of 1997 were not introduced by chance to cause many countries to raise new rules and articles for the companies. In short, some firms have been successful, sustainable and reputable by adapting the "integrity and one word approach". We believe that both private and public companies in Turkey should give more importance to this approach for the Turkish economic improvement.