Research articles for the 2020-05-21

A Computational Approach to Hedging Credit Valuation Adjustment in a Jump-Diffusion Setting
T. van der Zwaard,L.A. Grzelak,C.W. Oosterlee

This study contributes to understanding Valuation Adjustments (xVA) by focussing on the dynamic hedging of Credit Valuation Adjustment (CVA), corresponding Profit & Loss (P&L) and the P&L explain. This is done in a Monte Carlo simulation setting, based on a theoretical hedging framework discussed in existing literature. We look at CVA hedging for a portfolio with European options on a stock, first in a Black-Scholes setting, then in a Merton jump-diffusion setting. Furthermore, we analyze the trading business at a bank after including xVAs in pricing. We provide insights into the hedging of derivatives and their xVAs by analyzing and visualizing the cash-flows of a portfolio from a desk structure perspective. The case study shows that not charging CVA at trade inception results in a guaranteed loss. Furthermore, hedging CVA is crucial to end up with a stable trading strategy. In the Black-Scholes setting this can be done using the underlying stock, whereas in the Merton jump-diffusion setting we need to add extra options to the hedge portfolio to properly hedge the jump risk. In addition to the simulation, we derive analytical results that explain our observations from the numerical experiments. Understanding the hedging of CVA helps to deal with xVAs in a practical setting.

A game theoretical approach to homothetic robust forward investment performance processes in stochastic factor models
Juan Li,Wenqiang Li,Gechun Liang

This paper studies an optimal forward investment problem in an incomplete market with model uncertainty, in which the dynamics of the underlying stocks depends on the correlated stochastic factors. The uncertainty stems from the probability measure chosen by an investor to evaluate the performance. We obtain directly the representation of the power robust forward performance process in factor-form by combining the zero-sum stochastic differential game and ergodic BSDE approach. We also establish the connections with the risk-sensitive zero-sum stochastic differential games over an infinite horizon with ergodic payoff criteria, as well as with the classical power robust expected utility for long time horizons.

Análisis de sentimiento del Informe de Estabilidad Financiera (Sentiment analysis of the Financial Stability Report)
Moreno, Angel Ivan,González Pedraz, Carlos
Spanish abstractEn este artículo se muestra una aplicación de la minería de textos para extraer información de documentos financieros y usar esta información para crear índices de sentimiento. En particular, el análisis se centra en los diferentes números del Informe de Estabilidad Financiera (IEF) del Banco de España desde 2002 hasta 2019 en su versión en español, y en la reacción de la prensa a este Informe. Para calcular los índices, se ha creado, hasta donde conocemos, el primer diccionario en español de palabras con connotación positiva, negativa o neutra dentro del contexto de la estabilidad financiera. Se analiza la robustez de los índices aplicándolos a distintas secciones del Informe, y usando diversas variaciones del diccionario y de la definición del índice. Finalmente, se mide también el sentimiento de las noticias de los periódicos los días siguientes a la publicación del Informe. Los resultados muestran que la lista de palabras recogida en el diccionario de referencia constituye una muestra robusta para estimar el sentimiento de estos textos. Esta herramienta constituye un valioso instrumento para analizar la repercusión del IEF, y también para cuantificar de forma objetiva el sentimiento que se está trasladando en él.English abstractThis article shows a text mining application to extract information from financial texts and use this information to create sentiment indices. In particular, the analysis focuses on the Banco de España’s financial stability reports from 2002 to 2019 in their Spanish version and on the reaction of the press to these reports. To calculate the indices, the first Spanish dictionary of words with a positive, negative or neutral connotation has been created, as far as we know, within the context of financial stability. The robustness of the indices is analyzed by applying them to different sections of the report, and using different variations of the dictionary and the definition of the index. Finally, sentiment is also measured for newspaper news in the days following the publication of the report. The results show that the list of words collected in the reference dictionary constitutes a robust sample to estimate the sentiment of these texts. This tool constitutes a valuable methodology to analyze the repercussion of financial stability reports, while objectively quantifying the sentiment that is being transferred in them. Keywords: text mining, sentiment analysis, natural language processing, central bank communications, financial stability.Note:Downloable document is in Spanish.

Banking Without Deposits: Evidence from Shadow Bank Call Reports
Jiang, Erica,Matvos, Gregor,Piskorski, Tomasz,Seru, Amit
Is bank capital structure designed to extract deposit subsidies? We address this question by studying capital structure decisions of shadow banks: intermediaries that provide banking services but are not funded by deposits. We assemble, for the first time, call report data for shadow banks which originate one quarter of all US household debt. We document five facts. (1) Shadow banks use twice as much equity capital as equivalent banks, but are substantially more leveraged than non-financial firms. (2) Leverage across shadow banks is substantially more dispersed than leverage across banks. (3) Like banks, shadow banks finance themselves primarily with short-term debt and originate long-term loans. However, shadow bank debt is provided primarily by informed and concentrated lenders. (4) Shadow bank leverage increases substantially with size, and the capitalization of the largest shadow banks is similar to banks of comparable size. (5) Uninsured leverage, defined as uninsured debt funding to assets, increases with size and average interest rates on uninsured debt decline with size for both banks and shadow banks. Modern shadow bank capital structure choices resemble those of pre-deposit-insurance banks both in the U.S. and Germany, suggesting that the differences in capital structure with modern banks are likely due to banks’ ability to access insured deposits. Our results suggest that banks’ level of capitalization is pinned down by deposit subsidies and capital regulation at the margin, with small banks likely to be largest recipients of deposit subsidies. Models of financial intermediary capital structure then have to simultaneously explain high (uninsured) leverage, which increases with the size of the intermediary, and allow for substantial heterogeneity across capital structures of firms engaged in similar activities. Such models also need to explain high reliance on short-term debt of financial intermediaries.

Banks as Lenders of First Resort: Evidence from the COVID-19 Crisis
Li, Lei,Strahan, Philip E.,Zhang, Song
In March of 2020, banks faced the largest increase in liquidity demands ever observed. Firms drew funds on a massive scale from pre-existing credit lines and loan commitments in anticipation of cash flow disruptions from the economic shutdown designed to contain the COVID-19 crisis. The increase in liquidity demands was concentrated at the largest banks, who serve the largest firms. Pre-crisis financial condition did not limit banks’ liquidity supply. Coincident inflows of funds to banks from both the Federal Reserve’s liquidity injection programs and from depositors, along with strong pre-shock bank capital, explain why banks were able to accommodate these liquidity demands.

Competition Laws, Norms and Corporate Social Responsibility
Ding, Wenzhi,Levine, Ross,Lin, Chen,Xie, Wensi
Theory offers differing perspectives and predictions about the impact of product market competition on corporate social responsibility (CSR). Using firm-level data on CSR from 2002 through 2015 and panel data on competition laws in 48 countries, we discover that (1) intensifying competition induces firms to increase CSR activities, (2) the competition-CSR effect depends positively on society’s prioritization of the environment and treating others fairly, and (3) less financially-constrained firms boost CSR activities more in response to competition. The results are consistent with the stakeholder value maximization view that intensifying competition induces firms to invest in strengthening bonds with non-shareholder stakeholders (e.g., customers, workers, and suppliers).

Corporate Social Responsibility Contract and the Impact of the Rating on Company Performance and Risk
Zhao, Yuqing
In this paper, I determine the compensation component of the corporate social responsibility (CSR) contract that can improve CSR rating the most by considering two types of the contract. Based on my results, I find that for objective contracts and subjective contracts, the best-performing component is ethical conduct and social responsibility respectively. In addition, I study how the CSR performance affects firm financial performance and financial risk. From the regression results, I can conclude that both large and small firms with high CSR ratings tend to have a better financial performance, in terms of ROA, and the impact of CSR on small firms tend to be slightly higher. The relationship between CSR performance and risk is not significant, which may be explained by several reasons mentioned at the end of the paper.

Detecting and explaining changes in various assets' relationships in financial markets
Makoto Naraoka,Teruaki Hayashi,Yukio Ohsawa,Takaaki Yoshino,Toshiaki Sugie,Kota Takano

We study the method for detecting relationship changes in financial markets and providing human-interpretable network visualization to support the decision-making of fund managers dealing with multi-assets. First, we construct co-occurrence networks with each asset as a node and a pair with a strong relationship in price change as an edge at each time step. Second, we calculate Graph-Based Entropy to represent the variety of price changes based on the network. Third, we apply the Differential Network to finance, which is traditionally used in the field of bioinformatics. By the method described above, we can visualize when and what kind of changes are occurring in the financial market, and which assets play a central role in changes in financial markets. Experiments with multi-asset time-series data showed results that were well fit with actual events while maintaining high interpretability.

Do Minorities Pay More for Mortgages?
Bhutta, Neil,Hizmo, Aurel
We test for racial discrimination in the prices charged by mortgage lenders. We construct a unique dataset where we observe all three dimensions of a mortgage's price: the interest rate, discount points, and fees. While we find statistically significant gaps by race and ethnicity in interest rates, these gaps are offset by differences in discount points. We trace out point-rate schedules and show that minorities and whites face identical schedules, but sort to different locations on the schedule. Such sorting may reflect systematic differences in liquidity or preferences. Finally, we find no differences in total fees by race or ethnicity.

Do Not Torture the Data, Just…Listen to Them: An Alternative Value at Risk Approach
Vasileiou, Evangelos
Even though econometric and technological advances have contributed to the vast risk modelling literature, practitioners in most cases use the simplest and most conventional approaches in order to avoid algorithmic complexity and increased costs. In this study we present a new approach which adopts a volatility-based filtering data approach, and uses only the most representative data in order to achieve more accurate VaR estimations than the conventional historical VaR models do. In simple words, the Filtering Historical VaR method, listens to the market’s previously documented behavior and presents more accurate than the conventional approaches VaR estimations.

Does an artificial intelligence perform market manipulation with its own discretion? -- A genetic algorithm learns in an artificial market simulation
Takanobu Mizuta

Who should be charged with responsibility for an artificial intelligence performing market manipulation have been discussed. In this study, I constructed an artificial intelligence using a genetic algorithm that learns in an artificial market simulation, and investigated whether the artificial intelligence discovers market manipulation through learning with an artificial market simulation despite a builder of artificial intelligence has no intention of market manipulation. As a result, the artificial intelligence discovered market manipulation as an optimal investment strategy. This result suggests necessity of regulation, such as obligating builders of artificial intelligence to prevent artificial intelligence from performing market manipulation.

Does the Relative Importance of Push and Pull Factors of Foreign Capital Flows Vary Across Quantiles?
Yan, Cheng,Wang, Xichen
We empirically gauge the relative importance of global and domestic determinants of foreign flows to 51 Emerging Markets across quantiles. We propose a quantile regression dynamic panel model with fixed effects, to reconcile mixed results in the literature. We find that push factors are associated with the occurrence of extreme movements, and pull factors are significantly related to the magnitude of surges/stops. During stress episodes of low foreign inflows, we find strong evidence of investor differentiation among emerging economies according to their fundamentals. Such results call for monitoring capital flows’ sustainability and building strong fundamentals.

Down But Not Out: Plenty of Returns Available for Shorted Down Stocks
Galariotis, Emilios C.,Li, Bob,Chai, Daniel
Unlike in other developed equity markets, short sellers in Australia are required to report their covered short positions on a daily basis to the market regulator, who subsequently disseminates this information freely to the public in a very timely manner. If short selling contains negative information, a strategy that longs (shorts) stocks with low (high) short selling interest should result in positive returns. This study examines the profitability of such a strategy, named the short selling interest momentum trading strategy. The results indicate that significant returns can be made by following short sellers’ actions ex post. Further, stronger returns are made from price momentum winner stocks and short sellers behave rationally towards short selling activities. The findings from this study are robust to various controls relating to size, industry, price momentum and options.

Enterprise Risk Management in Walmart and Target
Asperti, Nico,Vedovati, Gabriele ,Vuerich, Luca
The purpose of this paper is to analyse and discuss the main differences between the Enterprise Risk Management systems of two of the most important retailers in the United States, namely Target Corporation and Walmart Inc.Firstly, the authors will briefly introduce the two companies, focusing on the different types of business strategies implemented and their history, considering then the main risk factors that characterize each company such as competitive and reputational, operational and investment, security and data privacy, supply chain and finally a short introduction about financial risks that will be the subject of deeper analysis afterwards. Likewise, the authors will evaluate the distinctive features of the financial structures and the strategic and tactical risk management processes of both companies, starting from the top level of the strategic planning to get to selected tools by the firms in order to face both financial and business risks that affect their activities.After that, it will be provided a deep analysis about the risk factors faced by Target and Walmart during their activities, with a main focus on financial risks that emerge from their financial structures, also considering derivative contracts to address the interest rate risk and the performance and cost of hedging interest rate risk.Moreover, the authors will underline differences and similarities among the two retailers in order to facilitate the comparison and the evaluation of the two ERM systems, but even further considerations highlighted in the paper.

Financial Inclusion: A Strong Critique
Ozili, Peterson K
This article presents some criticisms of financial inclusion. It notes that (i) financial inclusion is an invitation to live by finance and leads to the financialisation of poverty; (ii) some of the benefits of financial inclusion disappears after a few years; (iii) financial inclusion ignores how poverty affects financial decision making, (iv) it promotes digital money which is difficult to understand, (v) financial inclusion promotes the use of transaction accounts; (vi) financial literacy does not improve financial inclusion in a significant way; and that (vii) some financial inclusion efforts bear a resemblance to a campaign against having cash-in-hand. This study will help policymakers in their assessment of the economic, social, political and cultural factors that hinder financial inclusion as well as the consequence of financial inclusion for society. For academics, this study will provide a critical perspective to on-going financial inclusion debates in the large positivist literature on financial inclusion.

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.

Hedging longevity risk in defined contribution pension schemes
Ankush Agarwal,Christian-Oliver Ewald,Yongjie Wang

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

Household Debt and House Prices-at-Risk: A Tale of Two Countries
Alter, Adrian,Mahoney, Elizabeth M.
To identify and quantify downside risks to housing markets, we apply the house price-at-risk methodology to a sample of 37 cities across the United States and Canada using quarterly data from 1983 to 2018. This paper finds that downside risks to housing markets in the United States have seemingly fallen over the past decade, while having increased in Canada. Supply-side drivers, valuation, household debt, and financial conditions jointly play a key role in forecasting house price risks. In addition, capital flows are found to be significantly associated with future downside risks to major housing markets, but the net effect depends on the type of flows and varies across cities and forecast horizons. Using micro-level data, we identify households vulnerable to potential housing shocks and assess the riskiness of household debt.

Internet Appendix to Accompany ‘Does the Relative Importance of Push and Pull Factors of Foreign Capital Flows Vary Across Quantiles?’
Yan, Cheng,Wang, Xichen
This document is the Internet Appendix for “Does the relative importance of push and pull factors of foreign capital flows vary across quantiles?”.

Inverse Selection
Brunnermeier, Markus K.,Lamba, Rohit,Segura-Rodriguez, Carlos
Big data, machine learning and AI inverts adverse selection problems. It allows insurers to infer statistical information and thereby reverses information advantage from the insuree to the insurer. In a setting with two-dimensional type space whose correlation can be inferred with big data we derive three results: First, a novel tradeoff between a belief gap and price discrimination emerges. The insurer tries to protect its statistical information by offering only a few screening contracts. Second, we show that forcing the insurance company to reveal its statistical information can be welfare improving. Third, we show in a setting with naïve agents that do not perfectly infer statistical information from the price of offered contracts, price discrimination significantly boosts insurer’s profits. We also discuss the significance of our analysis through three stylized facts: the rise of data brokers, the importance of consumer activism and regulatory forbearance, and merits of a public data repository.

Is the COVID-19 Pandemic a Financial Disaster for G7 Countries? Evidence from a Fourier Cointegration Test
Pata, Ugur Korkut
The rapid increase in the number of cases of COVID-19 and deaths caused by the pandemic has had a significant impact on the stock markets of developed countries. In this context, this study examines the effects of the pandemic on stock markets in G7 countries. To this end, the study employs the Fourier-Shin cointegration test from 15 January 2020 to 24 April 2020. The findings reveal that the COVID-19 pandemic has had a negative effect on the stock markets. Of the seven stock markets studied, the pandemic has affected the FTSE MIB the most, and the Nikkei 500 the least.

Learning Undirected Graphs in Financial Markets
José Vinícius de Miranda Cardoso,Daniel P. Palomar

We investigate the problem of learning undirected graphical models under Laplacian structural constraints from the point of view of financial market data. We show that Laplacian constraints have meaningful physical interpretations related to the market index factor and to the conditional correlations between stocks. Those interpretations lead to a set of guidelines that users should be aware of when estimating graphs in financial markets. In addition, we propose algorithms to learn undirected graphs that account for stylized facts and tasks intrinsic to financial data such as non-stationarity and stock clustering.

Limited Diversification, Portfolio Inertia, and Ambiguous Correlation
Jiang, Julia,Liu, Jun,Tian, Weidong,Zeng, Xudong
We study the effects of correlation ambiguity on portfolio choice in a market with multiple risky assets. We find that the optimal portfolio contains only a fraction of risky assets under correlation ambiguity, and in particular, just one risky asset enters the optimal portfolio if the level of correlation ambiguity is substantial. We demonstrate that the optimal portfolio does not change when assets’ Sharpe ratios change within a range. Our ambiguity-aversion model on correlation explains both the limited diversification property and the portfolio inertia property in household portfolios and retirement accounts. We further provide simulation evidences of the limited diversification and portfolio inertia feature of the optimal portfolio by a broad set of stocks. This paper suggests that correlation ambiguity has important implications for portfolio choice.

Ownership, Compensation and Board Diversity as Innovation Drivers: A Comparison of U.S. and Canadian Firms
Atallah, Gamal,De Fuentes, Claudia,Panasian, Christine
Using a large sample of North American firms, from 1999 to 2016, we investigate the effect of corporate governance structures, specifically ownership, board characteristics, and executive compensation contracts on innovation intensity and output. We consider both R&D expenditures and patents as innovation proxies and evaluate consequences of the economic downturns of 2000 and 2008. We find that R&D investment increases with ownership by institutional blockholders and with the number of institutional owners, confirming the key role institutions play in innovation activities of firms. We observe higher R&D levels for firms with more independent boards, more females board members and more outside directorships held by directors. We report that firms with CEO/chair of the board duality have lower R&D intensity, as do firms with higher ownership by directors and with a higher mean board age. Innovation is negatively related to CEO salary levels, but positively related to the ratio of incentives to total compensation, confirming that incentives contribute to aligning shareholders and management interests, which leads to better long-term decisions. However, those incentives reduce the number of patents. We do not find any systematic changes in R&D for the 2000 recession, however there is an increase for the 2008 financial crisis.

Policy Uncertainty and Investment Goods Price Adjustment: Evidence from China’s Land Leasing Market
LIANG, Mo,Li, Xiaoyang,YANG, Jidong
Economic policy uncertainty has prominent effect on investment and output. We constructed a simple model revealing that policy uncertainty reduces the total value of investment via both the quantity adjustment channel and the price adjustment channel. Using unique transaction level land leasing data in China, we distinguish the latter channel from the former. On average, 1% increase in policy uncertainty level reduces the land transaction premium by around 3.91%. The impact of policy uncertainty is more profound for firms with tighter financial constraints and lands located in cities with lower rent-to-price ratio. The influence of policy uncertainty becomes weaker after the anti-corruption campaign in China, especially in provinces scrutinized by the teams of disciplinary inspectors from central government, implying that improvements in political environment alleviates the impact of policy uncertainty.

Production networks and epidemic spreading: How to restart the UK economy?
Anton Pichler,Marco Pangallo,R. Maria del Rio-Chanona,François Lafond,J. Doyne Farmer

We analyse the economics and epidemiology of different scenarios for a phased restart of the UK economy. Our economic model is designed to address the unique features of the COVID-19 pandemic. Social distancing measures affect both supply and demand, and input-output constraints play a key role in restricting economic output. Standard models for production functions are not adequate to model the short-term effects of lockdown. A survey of industry analysts conducted by IHS Markit allows us to evaluate which inputs for each industry are absolutely necessary for production over a two month period. Our model also includes inventory dynamics and feedback between unemployment and consumption. We demonstrate that economic outcomes are very sensitive to the choice of production function, show how supply constraints cause strong network effects, and find some counter-intuitive effects, such as that reopening only a few industries can actually lower aggregate output. Occupation-specific data and contact surveys allow us to estimate how different industries affect the transmission rate of the disease. We investigate six different re-opening scenarios, presenting our best estimates for the increase in R0 and the increase in GDP. Our results suggest that there is a reasonable compromise that yields a relatively small increase in R0 and delivers a substantial boost in economic output. This corresponds to a situation in which all non-consumer facing industries reopen, schools are open only for workers who need childcare, and everyone who can work from home continues to work from home.

Public Debt and Crowding-out: The Role of Housing Wealth
Camilli, Andrea,Giagheddu, Marta
We investigate the role of housing wealth concentration for the transmission of macroeconomic shocks in high-debt economies. We build a general equilibrium model with housing and heterogeneous agents who differ in their savings and investment opportunities. Banks optimizing their portfolio between mortgages and sovereign securities are characterized by financial frictions operating as a transmission mechanism, as households’ collateralized debt links sovereign debt with the real economy, through interest rates and housing prices. We find that the more concentrated wealth is the worse the recession is, however associated with less consumption inequality due to a smaller crowding out of households’ lending. We also show that a similar positive effect across agents can be obtained at different levels of inequality through financial repression and that a relevant distributional trade-off between macroprudential policy and household collateral requirements is present.

Recipes for hedging exotics with illiquid vanillas
Joaquin Fernandez-Tapia,Olivier Guéant

In this paper, we address the question of the optimal Delta and Vega hedging of a book of exotic options when there are execution costs associated with the trading of vanilla options. In a framework where exotic options are priced using a market model (e.g. a local volatility model recalibrated continuously to vanilla option prices) and vanilla options prices are driven by a stochastic volatility model, we show that, using simple approximations, the optimal dynamic Delta and Vega hedging strategies can be computed easily using variational techniques.

The Asymmetry in Responsible Investing Preferences
Humphrey, Jacquelyn,Kogan, Shimon,Sagi, Jacob S.,Starks, Laura T.
We conduct an experiment designed to understand how social preferences affect investment decisions by observing subjects’ stock allocations and probability assessments. Key to the design is that subjects’ investment outcomes are treated by neutral, negative or positive payoff externalities on social causes. Our findings of asymmetric responses in probability perceptions and allocations suggest negative, but not positive, responsible investment (RI) externalities have significant effects. Thus, a taste for RI leads to significantly different investment choices, consistent with RI theory. Moreover, our results on probability perceptions and asymmetries between positive and negative treatments suggest important directions for accurately modeling RI tastes.

The European Crowdfunding Service Providers Regulation and the Future of Marketplace Lending and Investing in Europe: The ‘Crowdfunding Nature’ Dilemma
Macchiavello, Eugenia
The European Commission’s Proposal for a Regulation on European Crowdfunding Service Providers (ECSPs) for businesses, since its presentation, has faced difficult trilateral negotiations among the European Commission, the European Parliament and the Council of the European Union. The length of the legislative process can be explained not only by the insurgence of nationalisms and the uncertainty related to Brexit negotiations, but also because of the different views of the three European Institutions about crowdfunding and on how to regulate it. Nonetheless, they eventually reached an agreement in December 2019 but the Regulation is still waiting for its formal adoption. The present paper, after briefly describing crowdfunding main features, will critically and analytically analyze the main aspects of the proposed ECSPs Regulation, with respect to all existing versions, underlying their pros and cons and proposing adjustments to reach a functional, tiered and proportional regulation and shed light on the nature and future of financial-return crowdfunding in Europe.

The New Small Business Bankruptcy Game: Strategies for Creditors Under the Small Business Reorganization Act
Bradley, Christopher G.
In late 2019, Congress enacted the Small Business Reorganizations Act. The Act’s timing is fortuitous: Weeks after it went into force in February, 2020, the Covid-19 pandemic damaged countless small businessesâ€"enterprises that the Act may provide an opportunity to save. The Act provides businesses with powerful options to reorganize under a new “subchapter V” of Chapter 11 of the Bankruptcy Code. Subchapter V eases the requirements for confirmation of plans that creditors don’t approve by simply requiring debtors to project their “disposable income” and pay it to creditors for three to five years; provides incentives for the parties to reach agreement on reorganization plans; lowers the debtor’s disclosure obligations; eliminates the regular appointment of an official committee of creditors; requires the appointment of a trustee to aid in plan negotiations; and permits modification of loans secured by a mortgage on a debtor’s primary residence.Creditors will have to develop a new playbook for subchapter V cases. Most scholarship has emphasized debtors’ new options, but this Article presents an analysis from the perspective of creditors. Of course, creditors are not created equal; strategies will only be useful to creditors with claims substantial enough to justify the investment of time and money. Well-positioned creditors will extract whatever strategic gains they can at the expense of the debtor and of less privileged creditors. The game is multilateral, not simply creditor vs. debtor. The Article suggests strategies for variously positioned creditors to protect their interests.The Article suggests seven major strategies: 1) Creditors should seek influence or control a debtor’s entry into subchapter V by making agreements with debtors concerning the election, using financial maneuvers to work around subchapter V’s debt limits, or challenging the debtor’s eligibility for entry.2) Creditors should monitor and make use of trustees as circumstances warrant, whether by cultivating and working closely with them, by seeking to minimize their role and save expenses, or, at the extreme, by opposing them and seeking their removal. 3) To combat debtors’ tendency to delay, creditors should apply pressure on the debtor by emphasizing the statutory emphasis on speed, scrutinizing the debtor’s required disclosures, and enlisting the trustee and court where possible.4) Creditors should avoid holding general unsecured claims, and, if eligible, should take the election offered by §1111(b) of the Code. 5) Subchapter V places a premium on plans being approved by creditors, so those whose votes are needed for confirmation should extract concessions in exchange for their vote. For those privileged creditors, this should be a major point of leverage.6) Creditors should look to obtain information at every opportunity, including at the required meeting of creditors and status conference early in the case, in the disclosures and filings made by the debtor, and through formal discovery. 7) Creditors extending credit secured by a residence should designing lending practices to ensure that they cannot be “modified” by debtors in bankruptcy. Many of the strategies above will be of keen interest to secured and other privileged classes of creditors. The Article predicts that with these and other strategies in hand, such creditors will not lose much ground under subchapter V. But the law lowers protections for general unsecured creditors, particularly those who remain passive. A number of the strategic tools presented in this Article can aid disfavored general unsecured creditors as wellâ€"but frequently, they will have too little at stake to make it worth putting their energy into the new small business bankruptcy game.

The Retirement Puzzle
Ruthbah, Ummul
The present-day retirees may not be as well off as they expect to be during their retired life. Given the current state of the world â€" higher life expectancy, close to zero real interest rate and the economic turmoil caused by the Covid-19 pandemic, a superannuation fund as large as $545,000 may not be enough to support a comfortable lifestyle. The rules of means-tested age pension provide incentives for a broad spectrum of people to deplete their superannuation in the early years of retirement, with significant negative consequences for government finances. Spending at retirement does not increase proportionally with assets. For some range of superannuation balances, the net present value of spending could increase more than the increase in assets, as the net present value of the age pension does not decline at par with increases in assets. In other asset levels, the opposite happens. The distributional impact of the age pension is unequal across different asset levels and is regressive to some extent.

The Risk Tolerance Measure in the 2016 Survey of Consumer Finances: New, but is it Improved?
Kim, Kyoung Tae,Hanna, Sherman D.,Ying, Dongyue
The Survey of Consumer Finances (SCF) has included a 4-level risk tolerance measure since 1983. In 2016, the SCF also included an 11-level risk tolerance measure. We compare the two measures, and develop suggestions for using the new measure. While the new measure is seemingly simpler than the old measure, we demonstrate that it does not have a monotonic relationship with owning stock assets, with a pattern similar to the relationship of the old measure to stock ownership. We also identify complex patterns of factors related to different levels of the new measure, for instance education has a negative relationship at one level but positive at another level. Those using the new measure should consider the complex patterns we demonstrate.

The Role of the Media in Hedge Fund Activism
Wang, Xinjie,Wu, Ge
Using a large set of hedge fund 13D filing and news data for the period of 2000 to 2019, we document that firms with more negative media sentiment are more likely to be targeted by hedge funds. The media sentiment of target firms reverts to normal level after the 13D filing dates. Our analysis of media sentiment for different corporate events shows that event-specific media sentiment is associated with the specific objectives of activism campaigns. The firm’s fundamental information captured by media sentiment drives the hedge fund targeting event and such targeting generates higher long-term stock returns. Our findings suggest that negative public perception is a key factor driving activists' selection of targets.

The optimal investment strategy of a DC pension plan under deposit loan spread and the O-U process
Xiao Xu

This paper is devoted to invest an optimal investment strategy for a defined-contribution (DC) pension plan under the Ornstein-Uhlenbeck (O-U) process and the loan. By considering risk-free asset, a risky asset driven by O-U process and a loan in the financial market, we firstly set up the dynamic equation and the asset market model which are instrumental in achieving the expected utility of ultimate wealth at retirement. Secondly, the corresponding Hamilton-Jacobi-Bellman(HJB) equation is derived by means of dynamic programming principle. The explicit expression for the optimal investment strategy is obtained by Legendre transform method. Finally, different parameters are selected to simulate the explicit solution and the financial interpretation of the optimal investment strategy is given.

Using the Epps effect to detect discrete data generating processes
Patrick Chang,Etienne Pienaar,Tim Gebbie

On different time-intervals it can be useful to empirically determine whether the measurement process being observed is fundamental and representative of actual discrete events, or whether these measurements can still be faithfully represented as random samples of some underlying continuous process. As sampling time-scales become smaller for a continuous-time process one can expect to be able to continue to measure correlations, even as the sampling intervals become very small. However, with a discrete event process one can expect the correlation measurements to quickly break-down. This is a theoretically well explored problem. Here we concern ourselves with a simulation based empirical investigation that uses the Epps effect as a discriminator between situations where the underlying system is discrete e.g. a D-type Hawkes process, and when it can still be appropriate to represent the problem with a continuous-time random process that is being asynchronously sampled e.g. an asynchronously sampled set of correlated Brownian motions. We derive a method aimed to compensate for the Epps effect from asynchrony and then use this to discriminate. We are able to compare the correction on a simple continuous Brownian price path model with a Hawkes price model when the sampling is either a simple homogeneous Poisson Process or a Hawkes sampling process. This suggests that Epps curves can sometimes provide insight into whether discrete data are in fact observables realised from fundamental co-dependent discrete processes, or when they are merely samples of some correlated continuous-time process.

« OEconomicae et pecuniariae quaestiones », une tentative de lecture à partir des fonctions de Merton (‘OEconomicae et pecuniariae quaestiones’: A Reading Attempt From Merton’s Functions)
Lemeunier, Sebastien Michel
French Abstract: L’Eglise a publié un texte de référence sur la finance « OEconomicae et pecuniariae quaestiones » qui vise notamment à pointer les faiblesses du système financier et à proposer des solutions. Afin d’éprouver ces arguments, nous les avons distribuées dans les fonctions du système financier de Merton (1995) et nous avons cherché à vérifier si ces critiques les remettaient effectivement en question. Nous trouvons que l’Eglise concentre ses reproches sur les fonctions de gestion des risques et des conflits d’intérêts. Elle recommande d’être vigilant sur la fonction liée à l’information. Finalement, en regroupant les solutions proposées nous faisons émerger une approche cohérente et complémentaire au système financier basée sur la transparence de l’information. English Abstract: The Church has published a text of reference related to Finance "OEconomicae et pecuniariae quaestiones" which aims to point out the weaknesses of the financial system and to propose solutions. In order to test these arguments, we distributed them in the Merton’s (1995) functions for the financial system and we verify whether these critics actually challenge them. We find that the Church focuses its criticisms on the functions of risk management and conflicts of interest. It recommends being vigilant about the information function. Finally, by grouping the solutions, it emerges a coherent and complementary approach to the financial system based on the transparency of information.