Research articles for the 2020-05-19

A Flexible Stochastic Conditional Duration Model
Samuel Gingras,William J. McCausland

We introduce a new stochastic duration model for transaction times in asset markets. We argue that widely accepted rules for aggregating seemingly related trades mislead inference pertaining to durations between unrelated trades: while any two trades executed in the same second are probably related, it is extremely unlikely that all such pairs of trades are, in a typical sample. By placing uncertainty about which trades are related within our model, we improve inference for the distribution of durations between unrelated trades, especially near zero. We introduce a normalized conditional distribution for durations between unrelated trades that is both flexible and amenable to shrinkage towards an exponential distribution, which we argue is an appropriate first-order model. Thanks to highly efficient draws of state variables, numerical efficiency of posterior simulation is much higher than in previous studies. In an empirical application, we find that the conditional hazard function for durations between unrelated trades varies much less than what most studies find. We claim that this is because we avoid statistical artifacts that arise from deterministic trade-aggregation rules and unsuitable parametric distributions.

An Empirical Investigation of Cash Conversion Cycle of Manufacturing Firms and its Association with Firm Size and Profitability
Nusrat Jahan

The purpose of this empirical study is to investigate Cash Conversion Cycle of thirty manufacturing firms listed in Dhaka Stock Exchanges under six different categories, which are, Food and allied, Pharmaceuticals and chemical, Cement, Textile, Engineering and Miscellaneous. This paper sets industry average Cash Conversion Cycle for these six industries and examines the relationship of Cash Conversion Cycle with firm size and profitability. This study did not find statistically significant differences among the Cash Conversion Cycle of varying manufacturing industries. The result of this study indicates a statistically significant negative relationship between the Cash Conversion Cycle and profitability, especially in terms of Return on Equity. The result also shows that the Cash Conversion Cycle of manufacturing firm also has significant negative relationship with firm size, when measured in terms of net sales. The present study contributes to the literature on working capital management written in the context of Bangladesh.

An Investigation into the Equivalency of Three Performance Dimensions: Evidence from Commercial Banks in Bangladesh
Nusrat Jahan

This study evaluated the three dimensions of performance of commercial banks in Bangladesh by analyzing the trend of the Malmquist Productivity Index (MPI) of the Total Factor Productivity (TFP), Return on Asset (ROA) and Total Stock Return (TSR) over the period 2011 to 2015. The study developed an empirical framework with the intention to examine the equivalency of three dimensions of performance. Since, the measures of performance are different, they cannot be tested in their original form; hence, the growth rate of each category of performance measures were estimated and tested to examine the comparability among them. Evaluation of profitability revealed a decreasing trend and evaluation of stock performance suggests that investors are incurring losses on their investment over the selected period. Evaluation of productivity indicates that productivity regress was recorded initially but at the end of the studied period a modest productivity growth was recorded. Finally, this study was able to ascertain the anticipated equivalency of outcome of the three dimensions of performance.

Bail‐In Rules and the Pricing of Italian Bank Bonds
Crespi, Fabrizio,Giacomini, Emanuela,Mascia, Danilo V.
We analyze whether the introduction of the bail‐in tool in January 2016 affected the pricing of Italian bank bonds. Using a unique dataset of 1,798 fixed‐rate bonds issued during the period 2013–2016, we find an increase of the spread at issuance of bail‐inable bonds compared to non‐bail‐inable bonds. This increase also depends on the intrinsic characteristics of each bank. Large institutions, banks with lower ratings, profitability, capitalization, and higher liquidity faced a higher cost of issuing bail‐inable bonds. Overall, our results seem to support the hypothesis of an improved market discipline for the bank bond primary market.

Burned by Leverage? Flows and Fragility in Bond Mutual Funds
Vivar, Luis Molestina,Wedow, Michael,Weistroffer, Christian
Does leverage drive investor flows in bond mutual funds? Leverage can increase fund returns in good times, but it can also magnify investors’ losses and their response to bad performance. We study bond fund flows to provide new evidence for the link between mutual fund leverage and financial fragility. We find that outflows are greater in leveraged funds during stressed periods and after bad performance, compared with unleveraged funds. We provide supporting evidence that leverage exacerbates the negative externality in investors' redemption decisions. In this regard, we find that fund managers in leveraged funds react more procyclically to net outflows compared with fund managers in unleveraged funds. Such procyclical security sales in leveraged funds may increase investors’ first-mover advantages and their response to bad performance. These findings suggest that leverage amplifies fragility in the bond mutual fund sector.

COVID-19 and the Capital Market Chaos
Hamim, Md Tanvir
COVID-19 has taken away the regular way of the world. It is raging the whole world since late January 2020. 212 countries and territories around the world have been reportedly affected so far. Community transmission has viciously reached its peak. Almost every nation is fighting hard against this pandemic at a substantial economic cost. The state of economic normalcy is getting quite uncertain day after day as the contagion remains beyond control. Many capital markets around the world have already endured drastic declines due to this unprecedented crisis. The present paper analyzes the impact of COVID-19 on the Dhaka Stock Exchange (DSE), the premier bourse of Bangladesh, using recent market information. This paper also investigates the consequences that the market participants have been experiencing due to the mayhems of COVID-19. Finally, it recommends policy responses that can be the most appropriate undertakings to deal with the ongoing and imminent capital market chaos.

Calibration of Distributionally Robust Empirical Optimization Models
Jun-Ya Gotoh,Michael Jong Kim,Andrew E.B. Lim

We study the out-of-sample properties of robust empirical optimization problems with smooth $\phi$-divergence penalties and smooth concave objective functions, and develop a theory for data-driven calibration of the non-negative "robustness parameter" $\delta$ that controls the size of the deviations from the nominal model. Building on the intuition that robust optimization reduces the sensitivity of the expected reward to errors in the model by controlling the spread of the reward distribution, we show that the first-order benefit of ``little bit of robustness" (i.e., $\delta$ small, positive) is a significant reduction in the variance of the out-of-sample reward while the corresponding impact on the mean is almost an order of magnitude smaller. One implication is that substantial variance (sensitivity) reduction is possible at little cost if the robustness parameter is properly calibrated. To this end, we introduce the notion of a robust mean-variance frontier to select the robustness parameter and show that it can be approximated using resampling methods like the bootstrap. Our examples show that robust solutions resulting from "open loop" calibration methods (e.g., selecting a $90\%$ confidence level regardless of the data and objective function) can be very conservative out-of-sample, while those corresponding to the robustness parameter that optimizes an estimate of the out-of-sample expected reward (e.g., via the bootstrap) with no regard for the variance are often insufficiently robust.

Collective Reserving using Individual Claims Data
Delong, Lukasz,Lindholm, Mathias,Wuthrich, Mario V.
The aim of this paper is to operationalize claims reserving based on general insurance individual claims data. We design a modeling architecture that is based on six different neural networks. Each network is a separate module that serves a certain modeling purpose. We apply our architecture to individual claims data and predict their settlement processes on a monthly time grid. A proof of concept is provided by benchmarking the resulting claims reserves with the ones received from the classical chain-ladder method which uses much coarser (aggregated) data.

Contagion and Return Predictability in Asset Markets: An Experiment With Two Lucas Trees
, Charles Noussair,Popescu, Andreea Victoria
Using a laboratory experiment, we investigate whether contagion can emerge between two risky assets, even when their fundamentals are not correlated. To guide our experimental design, we use the ‘Two trees’ asset pricing model developed by Cochrane et al. (2007). The model makes time-series and cross-section return predictions following a shock to one of the two assets’ dividend distributions. As the model predicts, we observe (1) positive auto correlations in the shocked asset, (2) a positive contemporaneous correlation between the two assets, and (3) time-series and cross-sectional return predictability from the dividend price ratio. In line with the rational foundation of the model, the model’s predictions have stronger support in markets with relatively sophisticated agents.

Corporate Pandemic Bonds
Gao, Xiang
I examine corporate pandemic bonds, whose proceeds are committed to COVID-19 containing activities. I find an average cumulative abnormal return of 1.33â€"1.71% during the five trading days surrounding their issuance announcement. Also, their yield spread is 13.8â€"20.9 basis points lower than that of otherwise similar non-pandemic bonds. Additional evidence suggests that their issuances could facilitate COVID-19 containment. In mainland China, newly confirmed COVID-19 cases decrease by 1,217, recovered cases increase by 6,468, and the recovery rate increases by 6.9% following the issuance of a corporate pandemic bond.

Cost Implications of the Great Lockdown due to the Novel Coronavirus Outbreak
Taskinsoy, John
When the global economy hit the wall in 2007-08 (i.e. sub-prime mortgage debacle in 2006 followed by the 2008 global credit mayhem, originated in the U.S. before spreading to Europe as sovereign debt crisis), an extensive research by economists, scholars and academia compared and contrasted the Great Recession of 2008 with the Great Depression of the 1930s. Both crises were the byproduct of the endogenous risks plus banking systems both times were at the epicenter the crises as first line of defense. But this time is different, COVID-19 health crisis is in systemic nature but it is exogenous to the global banking system; therefore, the Fed using the same old policy remedy (i.e. injecting massive amounts of liquidity) will not work in the fight against the Great Pandemic. Since the Great Recession, systemically important banks worldwide have strengthened their capital positions substantially and as a result they are significantly more resilient to exogenous shocks. However, under an extreme but plausible scenario of a second or third wave of COVID-19 resurgence beyond 2020, most economies including the world’s biggest economy will be thrown into a state of coma, and then even ventilators will not help them survive.

Disaster Resilience and Asset Prices
Marco Pagano,Christian Wagner,Josef Zechner

This paper investigates whether security markets price the effect of social distancing on firms' operations. We document that firms that are more resilient to social distancing significantly outperformed those with lower resilience during the COVID-19 outbreak, even after controlling for the standard risk factors. Similar cross-sectional return differentials already emerged before the COVID-19 crisis: the 2014-19 cumulative return differential between more and less resilient firms is of similar size as during the outbreak, suggesting growing awareness of pandemic risk well in advance of its materialization. Finally, we use stock option prices to infer the market's return expectations after the onset of the pandemic: even at a two-year horizon, stocks of more pandemic-resilient firms are expected to yield significantly lower returns than less resilient ones, reflecting their lower exposure to disaster risk. Hence, going forward, markets appear to price exposure to a new risk factor, namely, pandemic risk.

Disaster Resilience and Asset Prices
Pagano, Marco,Wagner, Christian,Zechner, Josef
This paper investigates whether security markets price the effect of social distancing on firms’ operations. We document that firms that are more resilient to social distancing significantly outperformed those with lower resilience during the COVID-19 outbreak, even after controlling for the standard risk factors. Similar cross-sectional return differentials already emerged before the COVID-19 crisis: the 2014-19 cumulative return differential between more and less resilient firms is of similar size as during the outbreak, suggesting growing awareness of pandemic risk well in advance of its materialization. Finally, we use stock option prices to infer the market’s return expectations after the onset of the pandemic: even at a two-year horizon, stocks of more pandemic-resilient firms are expected to yield significantly lower returns than less resilient ones, reflecting their lower exposure to disaster risk. Hence, going forward, markets appear to price exposure to a new risk factor, namely, pandemic risk.

Dynkin games with incomplete and asymmetric information
Tiziano De Angelis,Erik Ekström,Kristoffer Glover

We study Nash equilibria for a two-player zero-sum optimal stopping game with incomplete and asymmetric information. In our set-up, the drift of the underlying diffusion process is unknown to one player (incomplete information feature), but known to the other one (asymmetric information feature). We formulate the problem and reduce it to a fully Markovian setup where the uninformed player optimises over stopping times and the informed one uses randomised stopping times in order to hide their informational advantage. Then we provide a general verification result which allows us to find Nash equilibria by solving suitable quasi-variational inequalities with some non-standard constraints. Finally, we study an example with linear payoffs, in which an explicit solution of the corresponding quasi-variational inequalities can be obtained.

Empirical Test of Pecking Order Theory for the US Listed Firms
Abdullazade, Zaur
This paper is aimed at examining the appropriateness of pecking order theory in the US financial market. One of the most popular models of firm’s capital structure driven by asymmetric information is the pecking order theory (POT) of Myers (1984). It is based on the argument that firms have preference ranking over sources of funds for financing based on the corresponding information asymmetry costs (Myers et al. 1984, p.15). In recent studies, many interesting discussions have been generated about the POT. These studies attempt to detect the extent to which POT describes the financing choices of firms. The results of relevant studies as well as recent evidence in the context of the US economy are presented in this research paper. Aggregated, disaggregated and controlled variable methods are employed for testing relevance of POT by using the sample of firms over three-year period. Results of the current research can help to understand how the US listed firms determine their optimal debt levels.

Examining the Joint Disclosure of Text and Numbers in Complex Financial Statement Notes
Ahn, Jaehan,Hoitash, Rani,Hoitash, Udi
This study investigates the combination of textual and numerical accounting disclosures, which are often examined in silos by prior research. Focusing on three inherently complicated footnotes, we construct the counts of words and numbers and the ratio of the two. Using comment letters (CLs) as a proxy for disclosure quality, we find that CL receipt likelihood increases with the count of words and numbers, suggesting that these counts surrogate for disclosure complexity. In contrast, the ratio of words to numbers is inversely associated with the receipt of a comment letter. These results suggest that the disclosure of more words to explain numbers in footnotes, wherein numerical disclosures are closely prescribed, captures an important dimension of disclosure quality. We further find that the ratio of words to numbers increases following a CL receipt and that it is associated with greater value relevance. The findings of the paper may suggest that to improve disclosures and reduce oversight and remediation costs, standards setters that typically focus on numerical disclosures should more closely prescribe textual disclosures.

Forward utilities and Mean-field games under relative performance concerns
Goncalo dos Reis,Vadim Platonov

We introduce the concept of mean field games for agents using Forward utilities to study a family of portfolio management problems under relative performance concerns. Under asset specialization of the fund managers, we solve the forward-utility finite player game and the forward-utility mean-field game. We study best response and equilibrium strategies in the single common stock asset and the asset specialization with common noise. As an application, we draw on the core features of the forward utility paradigm and discuss a problem of time-consistent mean-field dynamic model selection in sequential time-horizons.

Further Evidence on Middle East and North Africa Financial Markets Integration
Bakry, Walid,Al-Mohamad, Somar
This paper provides further evidence on financial integration among MENA and developed the US stock markets between 2000 and 2015. This paper employs Zivot and Andrews (1992) and Bai and Perron (2003) methods to test for single and multiple structural breaks in MENA markets, respectively, along with the autoregressive distributed lag (ARDL) and Granger causality techniques to examine the dynamic interaction among the aforementioned stock markets in both long and short-run. Results find that, in general, the Global Financial Crisis (GFC) to be the most significant event leading to structural change in almost all the MENA markets. Furthermore, MENA countries are cointegrated among each other, and with US stock market. Financial markets in the MENA region are not isolated from global events and global shocks such as the GFC and the European debt crisis are found to have at least the same impact as local and regional events on the financial systems in MENA countries.

Get beyond policy uncertainty: Evidence from political connections
Cheng, Hua,Gawande, Kishore,Ongena, Steven,Qi, Shusen
Although policy uncertainty has drawn regulators’ attention in the aftermath of the global financial crisis, little is known on how to alleviate its adverse effects. In this paper, we examine the role of political connections in mitigating the detrimental impact of policy uncertainty on banks. Our estimates show that banks are more cautious when facing policy uncertainty, but that the effect is partially alleviated when banks are politically connected. For an increase of one standard deviation in policy uncertainty, connected banks maintain a loss provision to loan volume ratio that is almost seven percent lower compared to their unconnected peers. These findings are robust to a geographical regression discontinuity setting, as well as to a placebo test. Lastly, the mitigating role of political connections is driven mainly by smaller banks and periods of stricter banking regulations.

Identifying Corporate Venture Capital Investors â€" A Data-Cleaning Procedure
Röhm, Patrick,Merz, Markus,Kuckertz, Andreas
The majority of research on corporate venture capital (CVC) relies on data retrieved from secondary databases. The various databases however define CVC differently. Generally, researchers rely on the definition of the used database. As a result, empirical CVC research is not readily comparable, and replicability across databases is often impossible. This article examines the scope and consistency of the most popular databases in CVC research: Eikon from Thomson Reuters and Dow Jones’ VentureSource. The outcome is a replicable data-cleaning procedure based on an appropriate CVC definition. The article provides a necessary basis for the future discourse on CVC.

Internet Appendix for 'Trading Credit (Subsidies) for Votes: The Effect of Local Politics on Small Business Lending'
Raina, Sahil,Xu, Sheng-Jun
This internet appendix complements the paper “Trading Credit (Subsidies) for Votes: The Effect of Local Politics on Small Business Lending” and is organized as follows: Appendix A provides the main results of the paper under alternative regression discontinuity specifications, Appendix B provides additional results on the performance of SBA loans, Appendix C provides the benchmark results of the paper separately for the 504 and 7(a) loan programs, Appendix D provides analysis of alternative channels of government influence on the local economy, and Appendix E provides the regression discontinuity plots not presented in the main paper.

Intra‐Industry Bankruptcy Contagion: Evidence from the Pricing of Industry Recovery Rates
Chang, Yuanchen,Hsieh, Yi‐Ting,Liu, Wenchien,Miu, Peter
How does bankruptcy contagion propagate among industry peers? We study the debt recovery channel of industry contagion by examining whether the cost of a company's debt is affected by the observed recovery rates of its bankrupt industry peers. Our results show that lower industry recovery rates are associated with higher loan spreads, but only when the contracts were originated during industry bankruptcy waves. Consistent with the debt recovery channel of industry contagion, we find that the negative effects of industry recovery rates are significantly stronger under situations where the effect is expected to be more salient.

Multi-Period Liability Clearing via Convex Optimal Control
Shane Barratt,Stephen Boyd

We consider the problem of determining a sequence of payments among a set of entities that clear (if possible) the liabilities among them. We formulate this as an optimal control problem, which is convex when the objective function is, and therefore readily solved. For this optimal control problem, we give a number of useful and interesting convex costs and constraints that can be combined in any way for different applications. We describe a number of extensions, for example to handle unknown changes in cash and liabilities, to allow bailouts, to find the minimum time to clear the liabilities, or to minimize the number of non-cleared liabilities, when fully clearing the liabilities is impossible.

Non-Extensive Value-at-Risk Estimation During Times of Crisis
Ahmad Hajihasani,Ali Namaki,Nazanin Asadi,Reza Tehrani

Value-at-risk is one of the important subjects that extensively used by researchers and practitioners for measuring and managing uncertainty in financial markets. Although value-at-risk is a common risk control instrument, but there are criticisms about its performance. One of these cases, which has been studied in this research, is the value-at-risk underestimation during times of crisis. In these periods, the non-Gaussian behavior of markets intensifies and the estimated value-at-risks by normal models are lower than the real values. In fact, during times of crisis, the probability density of extreme values in financial return series increases and this heavy-tailed behavior of return series reduces the accuracy of the normal value-at-risk estimation models. A potential approach that can be used to describe non-Gaussian behavior of return series, is Tsallis entropy framework and non-extensive statistical methods. In this paper, we have used non-extensive value at risk model for analyzing the behavior of financial markets during times of crisis. By applying q-Gaussian probability density function, we can see a better value-at-risk estimation in comparison with the normal models, especially during times of crisis. We showed that q-Gaussian model estimates value-at-risk better than normal model. Also we saw in the mature markets, it is obvious that the difference of value-at-risk between normal condition and non-extensive approach increase more than one standard deviation during times of crisis, but in the emerging markets we cannot see a specific pattern.

Old Age and the Decline in Investment Performance
Finke, Michael S.,Huston, Sandra J.
Retirees in industrialized societies are increasingly encouraged to fund their own spending in retirement through publicly-subsidized savings programs. Individuals are then responsible for investing these assets through retirement to support a lifestyle. Unfortunately, there is evidence that age-related cognitive decline has a negative impact on a retiree’s ability to manage an investment portfolio in later life. Individuals over age 60 exhibit a gradual decline in financial literacy that reduces observed decision-making quality. Older investors are not able to fully capture an equity risk premium that may be attributed to time varying risk preferences that erode investment performance. A lack of awareness of decline in financial capability also increases vulnerability to financial exploitation. Improved investor protections and the use of financial instruments that automate the management of retirement portfolios to produce lifetime income can improve the financial security of retirees.

Parisian excursion with capital injection for draw-down reflected Levy insurance risk process
Budhi Surya,Wenyuan Wang,Xianghua Zhao,Xiaowen Zhou

This paper discusses Parisian ruin problem with capital injection for Levy insurance risk process. Capital injection takes place at the draw-down time of the surplus process when it drops below a pre-specified function of its last record maximum. The capital is continuously paid to keep the surplus above the draw-down level until either the surplus process goes above the record high or a Parisian type ruin occurs, which is announced at the first instance the surplus process has undergone an excursion below the record for an independent exponential period of time consecutively since the time the capital was first injected. Some distributional identities concerning the excursion are presented. Firstly, we give the Parisian ruin probability and the joint Laplace transform (possibly killed at the first passage time above a fixed level of the surplus process) of the ruin time, surplus position at ruin, and the total capital injection at ruin. Secondly, we obtain the $q$-potential measure of the surplus process killed at Parisian ruin. Finally, we give expected present value of the total discounted capital payments up to the Parisian ruin time. The results are derived using recent developments in fluctuation and excursion theory of spectrally negative Levy process and are presented semi explicitly in terms of the scale function of the Levy process. Some numerical examples are given to facilitate the analysis of the impact of initial surplus and frequency of observation period to the ruin probability and to the expected total capital injection.

Patterns in demand side financial inclusion in India -- An inquiry using IHDS Panel Data
Vinay Reddy Venumuddala

In the following study, we inquire into the financial inclusion from a demand side perspective. Utilizing IHDS round-1 (2004-05) and round-2 (2011-12), starting from a broad picture of demand side access to finance at the country level, we venture into analysing the patterns at state level, and then lastly at district level. Particularly at district level, we focus on agriculture households in rural areas to identify if there is a shift in the demand side financial access towards non-agriculture households in certain parts of the country. In order to do this, we use District level 'Basic Statistical Returns of Scheduled Commercial Banks' for the years 2004 and 2011, made available by RBI, to first construct supply side financial inclusion indices, and then infer about a relative shift in access to formal finance away from agriculture households, using a logistic regression framework.

Price Change Attribution During the Settlement Window
Danger, Ken,Flagge, Matthew,Outen, James
This paper proposes a novel and simple measure for evaluating trader impact on prices during the settlement period of price-taking derivative contracts, which we call the Price Change Attribution (PCA). We discuss how to calculate this measure, and demonstrate how it could be used to inform an analysis of whether a trader potentially engaged in manipulative conduct. We also discuss potential shortfalls and extensions from this measure, and demonstrate how it evolves over time for a sample of traders and products.

Public Guarantees for Small Businesses in Italy during COVID-19
De Marco, Filippo
This paper assesses the public guarantee scheme for small businesses approved in Italy during the COVID-19 pandemic. In April 2020 the Italian government introduced a free 100% government guarantee on loans below €25.000 that requires no credit approval by banks. Using loan-level data from the Italian guarantee fund, we first show that the number of loans bunching at the €25.000 cutoff drastically increased in late April, suggesting that firms did participate in the program. Second, firms located in areas more affected by the pandemic or active in 6-digit sectors that were deemed non-essential were more likely to take the new government guaranteed loans compared to firms that used the public guarantee in 2019Q1 and 2020Q1. Moreover, firms with fewer employees and those with less cash on hand are more likely to participate in the program. Firms that have more pre-existing debt, either from banks or from their suppliers, are instead less likely to take the new loans. Taken together, these preliminary results suggest that areas, sectors and firms most affected by the pandemic obtained more government guaranteed loans. However, more data on loan applications, approvals and interest rates would be needed to assess the overall effectiveness of the program.

Rating und Bewertung von Immobilienfonds und -portfolios (Rating and Evaluation of Real Estate Funds and Portfolios)
Gleißner, Werner
German Abstract: Die (ex ante) Prognose und (ex post) Beurteilung der Performance eines geschlossenen Immobilienfonds sind wichtige Aufgaben sowohl für den Initiator wie auch (potenzielle) Investoren und die Gläubiger. Die Beurteilung der zu erwartenden bzw. bereits erreichten Leistung eines Immobilienfonds muss dabei dem unterschiedlichen Informationsstand und den unterschiedlichen wirtschaftlichen Zielen der genannten Interessengruppen gerecht werden. Im folgenden Text wird erläutert, wie mit einer Bewertung und einem Fondsrating eine Beurteilung sowohl aus Perspektiven der Investoren (Eigentümer) als auch der finanzierenden Kreditinstitute möglich ist.English Abstract: The (ex ante) forecast and (ex post) assessment of the performance of a closed-end real estate fund are important tasks for the initiator as well as (potential) investors and creditors. The assessment of the expected or already achieved performance of a real estate fund must take into account the different levels of information and the different economic objectives of the aforementioned interest groups. The following text explains how an evaluation and a fund rating can be used to make an assessment from the perspectives of both the investors (owners) and the financing credit institutions.

Regulating Central Bank Digital Currencies: Towards a Conceptual Framework
Hess, Simon
Central Bank Digital Currencies (CBDCs) are currently investigated by the majority of central banks worldwide. The regulatory requirements, however, remain unexplored. This paper develops a conceptual framework, which shows how access to CBDC can be regulated. Therefore, theoretical CBDC designs and existing regulations from selected jurisdictions are considered. The framework is able to classify CBDCs along different access options and five different levels of regulation. The levels of regulation indicate how legally binding the issuance of CBDC is for the central bank and potential involved third parties. In addition, this paper discusses the pros and cons of different regulatory options to find out how access to CBDC should be regulated. It concludes that only a right to CBDC is non-discriminatory and therefore favorable in view of consumers. Furthermore, direct access to CBDC, where the central bank only overtakes account-keeping or provides tokens while all remaining operational tasks are performed by third parties, is the most favorable tradeoff between direct and indirect access options.

Regulator-based risk statistics for portfolios
Xiaochuan Deng,Fei Sun

The portfolio are a critical factor not only in risk analysis, but also in insurance and financial applications. In this paper, we consider a special class of risk statistics from the perspective of regulator. This new risk statistic can be uesd for the quantification of portfolio risk. By further developing the properties related to regulator-based risk statistics, we are able to derive dual representation for them.

Reveal It or Conceal It: On the Value of Second Opinions in a Low-Entry-Barriers Credence Goods Market
Bindra, Parampreet Christopher,Kerschbamer, Rudolf,Neururer, Daniel,Sutter, Matthias
Credence goods markets with their asymmetric information between buyers and sellers are prone to large inefficiencies. In theory, poorly informed consumers can protect themselves from maltreatment through sellers by asking for second opinions from other sellers. Yet, empirical evidence whether this is a successful strategy is scarce. Here we present a natural field experiment in the market for computer repairs. We find that revealing a second opinion from another expert to the seller does neither increase the rate of successful repairs nor decrease the average repair price. We assess under which conditions gathering a second opinion can be valuable.

S&P 500 Index and COVID-19
Banjade, Dhruba
In this paper, I study the impact of the COVID-19 on S&P 500 index using daily data from January 1, 2020, to May 12, 2020. The result shows that the number of confirmed cases, the number of deaths, and the number of recovery cases are the main parameters that affect the S&P 500 index. The first corona case in the USA is found on January 21, 2020. During March, the S&P 500 price fell by almost 31% and reached $2,237.40. The result shows that as the number of daily cases increases, it severely affects the S&P 500 index. But, as the number of deaths increases, the S&P 500 index's reduction is more severe with the rise of new cases. However, there is a little bit of positive effect of the new recovery cases on the S&P 500 Index.

Searching for Safe-haven Assets During the COVID-19 Pandemic
Ji, Qiang,Zhang, Dayong,Zhao, Yuqian
The ongoing COVID-19 pandemic has shaken the global financial system and caused great turmoil. Facing unprecedented risks in the markets, people have increasing needs to find a safe haven for their investments. Given that the nature of this crisis is a combination of multiple problems, it is substantially different from all other financial crises known to us. It is therefore urgent to re-evaluate the safe-haven role of some traditional asset types, namely, gold, cryptocurrency, foreign exchange and commodities. This paper introduces a sequential monitoring procedure to detect changes in the left-quantiles of asset returns, and to assess whether a tail change in the equity index can be offset by introducing a safe-haven asset into a simple mean-variance portfolio. The sample studied covers a training period between August-December 2019 and a testing period of December 2019-March 2020. Furthermore, we calculate the cross-quantilogram between pair-wise asset returns and compare their directional predictability on left-quantiles in both normal market conditions and the COVID-19 period. The main results show that the role of safe haven becomes less effective for most of the assets considered in this paper, while gold and soybean commodity futures remain robust as safe-haven assets during this pandemic.

Solo Self-Employed Individuals and Bootstrap Financing in the COVID-19 Crisis
Block, Jorn H.,Fisch, Christian,Hirschmann, Mirko
Solo self-employed individuals have been gravely affected by the COVID-19 crisis. Many of them have lost substantial revenue and are having serious problems with maintaining liquidity. Using a dataset of 11,662 solo self-employed individuals in Germany, we analyze factors that examine the usage of boot-strap financing measures during the COVID-19 pandemic. Not surprisingly, there is a positive relation-ship between the severity of the crisis and the use of bootstrapping. Our regression analysis shows that the length of the self-employment experience of the individual has a positive effect on bootstrapping, whereas the age of the self-employed individual has a negative effect. Education level, risk attitude, and household size have no effects. We further find that acceptance of government support and bootstrap-ping are positively related. Our study contributes to a better understanding of how solo self-employed individuals deal with liquidity problems in crisis situations. Our findings also contribute to the literature on bootstrap financing. Finally, our study sheds light on the effects of the COVID-19 pandemic on entrepreneurs and aids policymakers in developing targeted policies to help solo self-employed individ-uals overcome crisis-related liquidity problems.

Stochastische Unternehmensmodelle als Kern innovativer Ratingsysteme (Stochastic Business Models As the Core of Innovative Rating Systems)
Gleißner, Werner,Blum, Ulrich,Leibbrand, Frank Michael
German Abstract: In unserem Beitrag analysieren wir, basierend auf einer neuen Ratingmethodik, 105 Unternehmen aus Sachsen hinsichtlich ihrer Fähigkeit, ihren finanziellen Verpflichtungen nachzukommen. Sie basiert auf einem klassischen bilanziellen Ansatz, einer direkten Einbeziehung des Risikos und einem stochastischen Simulationsmodell der Unternehmensentwicklung. Die Ergebnisse zeigen, dass die verwendete Methode den bisher verwendeten Ansätzen überlegen ist und unser Wissen über die Unternehmensentwicklung erweitert. Über ihre Basel-II-Anwendbarkeit hinaus ist sie ein Instrument zur Analyse individueller Entwicklungsstrategien von Unternehmen.English Abstract: In our paper, we analyze, based on a new rating methodology, 105 enterprises from Saxony with respect to their ability to meet their financial obligations. It is based on classical financial-statement approach, a direct inclusion of risk and a stochastic simulation model of enterprise development. The results show that the method used is superior to presently used approaches and that it extends our knowledge of enterprise development. On and above its Basel-II applicability, it is a tool to analyze individual development strategies of firms.

Stock Return Comovement When Investors are Distracted: More, and More Homogeneous
Ehrmann , Michael,Jansen, David-Jan
This paper tests whether fluctuations in investors' attention affect stock return comovement with national and global markets, and which stocks are most affected. We measure fluctuations in investor attention using 59 high-profile soccer matches played during stock market trading hours at the three editions of the FIFA World Cup between 2010 and 2018. Using intraday data for more than 750 firms in 19 countries, we find that distracted investors shift attention away from firm-specific and from global news. When movements in global stock markets are large, the pricing of global news reverts back to normal, but firm-specific news keep being priced less, leading to increased comovement of stock returns with the national stock market. This increase is economically large, and particularly strong for those stocks that typically comove little with the national market, thereby leading to a convergence in betas across stocks.

Temporal mixture ensemble models for intraday volume forecasting in cryptocurrency exchange markets
Nino Antulov-Fantulin,Tian Guo,Fabrizio Lillo

We study the problem of the intraday short-term volume forecasting in cryptocurrency exchange markets. The predictions are built by using transaction and order book data from different markets where the exchange takes place. Methodologically, we propose a temporal mixture ensemble model, capable of adaptively exploiting, for the forecasting, different sources of data and providing a volume point estimate, as well as its uncertainty. We provide evidence of the outperformance of our model by comparing its outcomes with those obtained with different time series and machine learning methods. Finally, we discuss the difficulty of volume forecasting when large quantities are abruptly traded.

The Effect of Investors’ Perceptions and Entrepreneurs Physical Displays on Firm Forecasts, Valuation, Investment, and Survival
Davila, Tony,Guasch, Martí
We study how investor perceptions of entrepreneurs’ personal characteristics and physical display relate to firm financial projections, proposed firm valuation, firm survival, and equity investment. We videotaped a sample of 155 entrepreneurs pitching their business idea to an audience of early stage investors, and obtain perceived personal characteristics measures and physical coordinates of entrepreneurs’ nonverbal displays. We show that presence â€" a component capturing passion and dominance â€" and attractiveness correlate with higher forecast errors and proposed firm valuations, lower rates of survival, yet higher likelihood of equity funding. We also use computer vision to construct an objective measure of physical expansiveness (an attribute commonly found in passionate, dominant, and attractive individuals), and confirm the above findings. Altogether, we argue that investors’ perceptions of entrepreneurs are informative of firm forecasting, valuation, survival and financing success; which are important factors in the assessment of early stage investment opportunities, deal structure, and ex-post monitoring.

The Effects of Smartphones on Well-Being: Theoretical Integration and Research Agenda
Kostadin Kushlev,Matthew R Leitao

As smartphones become ever more integrated in peoples lives, a burgeoning new area of research has emerged on their well-being effects. We propose that disparate strands of research and apparently contradictory findings can be integrated under three basic hypotheses, positing that smartphones influence well-being by (1) replacing other activities (displacement hypothesis), (2) interfering with concurrent activities (interference hypothesis), and (3) affording access to information and activities that would otherwise be unavailable (complementarity hypothesis). Using this framework, we highlight methodological issues and go beyond net effects to examine how and when phones boost versus hurt well-being. We examine both psychological and contextual mediators and moderators of the effects, thus outlining an agenda for future research.

The Structure of Cryptocurrency Returns
Shams, Amin
This paper documents a persistent structure in cryptocurrency returns and analyzes a broad set of characteristics that explain this structure. The results show that similarities in size, trading volume, age, consensus mechanism, and token industries drive the structure of cryptocurrency returns. But the highest variation is explained by a “connectivity” measure that proxies for similarity in cryptocurrencies’ investor bases using their trading location. Currencies connected to other currencies that perform well generate sizably higher returns than the cross-section both contemporaneously and in the future. I examine three potential channels for these results. First, evidence from new exchange listings and a quasi-natural experiment shows that unobservable characteristics cannot explain the effect of connectivity. Second, decomposition of the order flows suggests that connectivity captures strong exchange-specific commonalities in crypto investors’ demand that also spills over to other exchanges. Finally, analysis of social media data suggests that these demand shocks are a first order driver of cryptocurrency returns, largely because they can be perceived as a sign of user adoption.

The cost of Bitcoin mining has never really increased
Yo-Der Song,Tomaso Aste

The Bitcoin network is burning a large amount of energy for mining. In this paper we estimate the lower bound for the global energy cost for a period of ten years from 2010, taking into account changing oil costs, improvements in hashing technologies and hashing activity. Despite a ten-billion-fold increase in hashing activity and a ten-million-fold increase in total energy consumption, we find the cost relative to the volume of transactions has not increased nor decreased since 2010. This is consistent with the perspective that, in order to keep a the Blockchain system secure from double spending attacks, the proof or work must cost a sizable fraction of the value that can be transferred through the network. We estimate that in the Bitcoin network this fraction is of the order of 1%.

Time-Varying Dependence in European Equity Markets: A Contagion and Investor Sentiment Driven Analysis
Niţoi, Mihai,Pochea, Miruna
In the light of the global financial crisis and sovereign debt crisis, this paper investigates the dependence patterns in 24 European equity markets from January 5, 2004 to July 1, 2016. We further examine whether these stressful events trigger contagion. Given that investors tend to behave irrationally in turmoil periods, we add to the literature by studying the effect of investor sentiment on markets correlations. Our results reveal heterogeneity in the time-varying dependence and across markets. Contagion is confirmed in turbulent times, a spillover effect from periphery euro area being detected. We find that similar sentiments increase correlations, especially in crises, suggesting that investors’ perceptions are an important channel of moving markets in the same direction. Furthermore, negative sentiments, such as fear or pessimism, amplify the linkages between markets. Our results offer useful insights to policy makers for reacting timely to financial shocks and for designing a more integrated market.

Understanding the Effects of Tennessee's Open Covid-19 Testing Policy: Bounding Policy Effects with Nonrandomly Missing Data
Brantly Callaway,Tong Li

Increased testing for Covid-19 is seen as one of the most important steps to be implemented to re-open the economy. The current paper considers Tennessee's ``open-testing'' policy where the state substantially increased the number of available tests while opening testing to all individuals that wanted a test; this is unlike most other states that have required that individuals must be showing specific symptoms in order to be tested. In the current paper, we examine whether Tennessee's policy has affected (i) the number of confirmed Covid-19 cases, (ii) the number of trips to work, and (iii) the (unobserved) number of actual Covid-19 cases. To study these effects, we employ standard identifying assumptions in the policy evaluation literature, but this strategy is greatly complicated by the non-random nature of the tests. We construct bounds on the policy effects of interest. We find suggestive evidence that Tennessee's open-testing policy has led to a reduction in the number of confirmed and total cases as well as reduced travel in counties that have experienced relatively large increases in confirmed cases.

Volatility Indices and Implied Uncertainty Measures of European Government Bond Futures
Baran, Jaroslav,Vorisek, Jan
Implied volatility and other forward-looking measures of option-implied uncertainty help investors carefully evaluate market sentiment and expectations. We construct several measures of implied uncertainty in European government bond futures. In the first part, we create new volatility indices, which reflect market pricing of subsequently realised volatility of underlying bond futures. We express volatility indices in both price and basis points, the latter being more intuitive to interpret; we document their empirical properties, and discuss their possible applications. In the second part, we fit the volatility smile using the SABR model, and recover option-implied probability distribution of possible outcomes of bond futures prices. We analyse shapes of the implied distribution, track its quantiles over time, calculate its skewness and kurtosis, and infer probabilities of a given upside or downside move in the price of bond futures or in the yield of their underlying CTD bond. We illustrate these complementary measures throughout the note using Bund futures as an example, and show the results for Schatz, Bobl, OAT, and BTP futures in the annex. Such forward-looking measures help market participants quantify the degree of future market uncertainty and thoroughly assess what risks are priced in.