Research articles for the 2020-05-26

A Framework for Screening and Portfolio Selection in Corporate Venture Capital
Herberger, Tim Alexander,Reinle, Felix
Purpose â€" The purpose of this paper is to outline and demonstrate a method for screening and selection of potential portfolio companies (PCs) during the screening phase in corporate venture capital.Design/methodology/approach â€" The use of the data envelopment analysis (DEA) enables the consideration of individual, heterogeneous and multidimensional decision criteria in portfolio selection and the preceding screening process by the investor.Findings â€" The result of this method is a relative ranking of the PCs, with all the PCs considered serving as peer group. A weighting of individual criteria is not necessary because it is part of the functionality of DEA. The authors validate the proposed approach in a case study and show that it can be well combined with other models and theoretical frameworks.Practical implications â€" The method is particularly useful in two cases. First, if a highly specialized investor wishes to use a variety of individual selection criteria for portfolio selection. Second, if an Investor only has insufficient (financial) data on potential PCs, but still wants to make a (pre-) selection based on observable (qualitative) characteristics. This model helps to make consistent, inter-subjectively comprehensible decisions based on valid decision criteria and helps to optimize the decision-making process in the context of portfolio selection in CVC.Originality/value â€" This method allows the systematic selection of an attractive group from a large number of potential PCs, based on observable characteristics and taking into account individual strategic investment objectives, without having to make assumptions about underlying distributions or weights of decision criteria.

A Note on New Valuation Measures for Standard & Poor Composite Index Returns
Taran Grove,Michael Reyes,Andrey Sarantsev

Long-run total real returns of the stock market are approximately equal to long-run real earnings growth plus average dividend yield. However, earnings can be distributed to shareholders not only via dividends, but via buybacks and debt retirement. Thus the total returns minus earnings growth can be considered as implied dividend yield. This quantity must be stable in the long run. If the converse is true: this quantity is abnormally high in the last few years, then the market is overpriced. A measure of this bubble is (detrended) cumulative sum of differences. We regress next year's implied dividend yield upon this current bubble measure. We simulate future returns, starting from current market conditions. We reject the conventional wisdom that currently the market is overpriced. In our model the current market is undervalued and is likely to grow faster than historically.

Aggregate Alpha in the Hedge Fund Industry: A Further Look at Best Ideas
Amir-Ghassemi, Faryan,Papanicolaou, Andrew,Perlow, Michael
Our paper addresses the portfolio selection of hedge fund firms as a measure of abnormal skill. It further decomposes this skill through the lens of canonical `Best Ideas'. Both are achieved through the application of regulatory mandated position-level data from the SEC, colloquially known as 13F data. The approach aims to reduce common biases associated with traditional return database analysis while unlocking position-level portfolio analysis. Across a composite of hedge fund managers and twenty years of analysis, we find historically abnormal excess return associated with their security selection. However, there has been a significant decline in this abnormal return after the 2008 financial crisis. We examine this out-performance through portions of each manager’s portfolio, using ex ante methodologies to elicit Best Ideas. We find no significant difference in return characteristics between these Best Ideas relative to the aggregate portfolio positions of these hedge fund managers. These findings are broadly in contrast to similar studies conducted on mutual funds, demonstrating differences in portfolio behavior across the two classes of fund managers.

An Event Study of COVID-19 Central Bank Quantitative Easing in Advanced and Emerging Economies
Hartley, Jonathan,Rebucci, Alessandro
Amid the COVID-19 outbreak and related expected economic downturn, many developed and emerging market central banks around the world engaged in new long-term asset purchase programs, or so-called quantitative easing (QE) interventions. This paper conducts an event-study analysis of 20 COVID-19 QE announcements made by 17 global central banks on their local 10-year government bond yields. We find that the average developed market QE announcement had a statistically significant -0.14% 1-day impact, which is slightly smaller than past interventions during the Great Recession era. In contrast, the average impact of emerging market QE announcements was significantly larger, averaging -0.37% and -0.63% over 1-day and 3-day windows, respectively. Across developed and emerging bond markets, we estimate an overall average 1-day impact of -0.27%. We also show that all 10-year government bond yields in our sample rose sharply in mid-March 2020, but fell substantially after the period of QE announcements that we study in the paper.

Applying Kingdon’s Multiple Streams Framework in The Establishment of Legal Notice No.161of 2003 Concerning the Public Service Vehicles in Kenya
Ombagi, Cornelius
Purpose â€" Purpose of article to examine the establishment of the Legal Notice No. 161 of 2003 concerning Public Service Vehicles(PSVs) in Kenya using the Kingdon’s Multiple Streams Framework. This address the scarcity of knowledge on the application of this public policy process theory which was developed for the United States of America.Design/methodology/approach â€" The article employs qualitative methods. The underlying assumption of this article is that the selected case of establishment of the Legal Notice No.161. of 2003 provide all the conditions to adequately examine transport policy using the Multiple Streams Framework(MSF) in Kenya. Data were collected from multiple sources, which are well suited for examining a single case. All participants have many years of experiences in public service road transport sub-sector system. This permitted triangulation, can provide a rich source of evidence for the purposes of analysing an institution from various perspectives.Findings â€"The article reveal that three main factors that brought Public Service Vehicles(PSV) transport issues into the central government’s agenda encompass problem, policy, and politics. The change champion played the role a policy entrepreneur and combined public management strategies to realize the establishment of legal notice No.161 of 2003 as public policy change. Research limitations/implicationsâ€" the Multiple Streams Framework does not offer a comprehensive description and perception of the policy processes. The article fails to articulate the role of core beliefs of two different political formations a coalition and single party. The findings of the study cannot be generalized beyond the case study areas as the study covered.Practical implications â€" the article offer crucial policy implications for strengthening public policy making and implementation in Kenya to improve the efficacy of the transport policy.Originality/Value â€" The article examines the agenda setting and policy formulation of the Legal Notice No. 161 of 2003 concerning Public Service Vehicles(PSVs) in Kenya using the Kingdon’s Multiple Streams Framework.

Average Rates of Return, Working Capital, and Npv-Consistency in Project Appraisal: A Sensitivity Analysis Approach
Magni, Carlo Alberto,Marchioni, Andrea
In project appraisal under uncertainty, the economic reliability of a measure of financial efficiency depends on its strong NPV-consistency, meaning that the performance metric (i) supplies the same recommendation in accept-reject decisions as the NPV, (ii) ranks competing projects in the same way as the NPV, (iii) has the same sensitivity to perturbations in the input data as the NPV. In real-life projects, financial efficiency is greatly affected by the management of the working capital. Using a sensitivity analysis approach and taking into explicit account the role of working capital, we show that the average return on investment (ROI) is not strongly NPV-consistent in accept-reject decisions if the working capital is uncertain and changes under changes in revenues and costs. Also, it is not strongly NPV-consistent in project ranking. We also show that the internal rate of return (IRR) is not strongly NPV-consistent and economic analysis may even turn out to be impossible, owing to possible nonexistence and multiplicity caused by perturbations in the input data, as well as to possible shifts in the financial meaning of IRR under changes in the project’s value drivers. We introduce the straight-line rate of return (SLRR), based on the notion of average rate of change, which overcomes all the problems encountered by average ROI and IRR: It always exists, is unique, strongly NPV-consistent for both accept-reject decisions and project ranking, and has an unambiguous financial nature.

Board Gender Diversity: Debate and Practice
Cunningham, Lawrence A.
Public companies are besieged with requests to add women to their boards. Corporate directors are trained to listen carefully and advised to evaluate evidence. Most would welcome reasonable requests to advance gender diversity to their boards. Many, however, are frustrated by the sheer volume and tenor of advocacy on the subject. They and other participants in the debate would do well to reflect a bit more on the arguments and evidence. This essay is intended to help. In short, it advises advocates to avoid exaggerated claims about the economic payoffs from diversity, urging instead to focus on the fairness merits of the equation. That way, as progress on board gender diversity continues to be made, appointees can feel pride and be assessed on the merits, rather than serve under a cloud of stigma.

COVID-19 Infection of Australian Companies
Baur, Dirk G.,Trench, Allan
This paper analyzes the impact of the coronavirus pandemic on Australian companies' share prices. We use daily new infections as a risk factor and a proxy for the severity and costs of the pandemic. Based on the loading to this risk factor we categorize firms into (i) severely infected, (ii) infected and (iii) mildly or not infected. We find large differences across firms and sectors highlighting that the virus does not affect all firms and not in the same way. The increased cross-sectional dispersion of returns in the crisis suggests a sophisticated response of investors resulting in significant diversification benefits.

Clarifying Managerial Biases Using a Probabilistic Framework
Ellina, Polina,Mascarenhas, Briance,Theodossiou, Panayiotis
A unified probabilistic framework is developed to analyze and compare the impact of the psychological biases of overconfidence and underconfidence on managerial perceptions about the expected value, overall risk, downside risk, value-at-risk (VaR) and expected shortfall (ES) of decision-making economic variables. The results depict that overconfident managers overestimate their expected values and underestimate downside risk, VaR and ES of decision-making variables. Underconfident managers, on the other hand, underestimate their expected values and overestimate

Computation of Expected Shortfall by fast detection of worst scenarios
Bruno Bouchard,Adil Reghai,Benjamin Virrion

We consider a multi-step algorithm for the computation of the historical expected shortfall such as defined by the Basel Minimum Capital Requirements for Market Risk. At each step of the algorithm, we use Monte Carlo simulations to reduce the number of historical scenarios that potentially belong to the set of worst scenarios. The number of simulations increases as the number of candidate scenarios is reduced and the distance between them diminishes. For the most naive scheme, we show that the L p-error of the estimator of the Expected Shortfall is bounded by a linear combination of the probabilities of inversion of favorable and unfavorable scenarios at each step, and of the last step Monte Carlo error associated to each scenario. By using concentration inequalities, we then show that, for sub-gamma pricing errors, the probabilities of inversion converge at an exponential rate in the number of simulated paths. We then propose an adaptative version in which the algorithm improves step by step its knowledge on the unknown parameters of interest: mean and variance of the Monte Carlo estimators of the different scenarios. Both schemes can be optimized by using dynamic programming algorithms that can be solved off-line. To our knowledge, these are the first non-asymptotic bounds for such estimators. Our hypotheses are weak enough to allow for the use of estimators for the different scenarios and steps based on the same random variables, which, in practice, reduces considerably the computational effort. First numerical tests are performed.

Coronavirus Pandemic: The U.S. Induced Great Panic of the 21st Century
Taskinsoy, John
President Trump’s following remarks are insanely far from being serious "With this invisible enemy, we don't want airlines going out of business, we don't want people losing their jobs and not having money to live when they were doing well four weeks ago". His advisors must show him the latest initial jobless claims report, in just 9 weeks since March 21, already more than 40 million Americans have applied to receive some forms of unemployment benefits; moreover, households wealth worth over $10 trillion dollars have evaporated, as a result, millions of ordinary hard working Americans are poorer now than they were in February 2020. Since the emergence of China as a global power, the United States is struggling for dominance (China’s GDP in PPP overtook the U.S. in 2014); as a result, it has become increasingly more antagonistic on using indirect means reminiscence of the Cold War era to slowdown the fast rise and growing influence of China, i.e. psychological warfare, embargoes, trade war, sanctions, technological power, and lately COVID-19. The Trump administration blames China for either creating, reengineering, genetically manipulating, or failing to avoid the virus’ leak. Unlike the Great Recession of 2008 and the Great Depression of the 1930s, COVID-19 - coronavirus health crisis is for now exogenous to the banking system, but risks to the global banking system are still enormous and a severe recession is imminent which could easily turn into a more severe financial crisis than the antecedents; at this background, injecting massive amounts of liquidity by the Fed is a wrong policy remedy. Just like the trade war between the U.S. and China, the Fed induced Great Panic is not based on both reasonable and justifiable scientific or economic basis.

Did Banks Pay 'Fair' Return to Taxpayers on TARP?
Flanagan, Thomas,Purnanandam, Amiyatosh
Financial institutions received billions of dollars from the U.S. Treasury in the form of preferred equity under the Troubled Asset Relief Program (TARP) in 2008. Investments were made during a bad state, but the repayments came in a relatively good time. Comparing TARP’s realized returns to private market securities with similar or lower risk over the same time period, we show that the recipients paid considerably lower returns to the taxpayers than the benchmarks. The subsidy, defined as the difference in return between the benchmark and TARP investment, was especially high for riskier and larger banks. The ex-post renegotiation of TARP contract terms contributed to the subsidy. Banks that aggressively renegotiated their contracts paid much higher levels of dividends and CEO compensation soon after the repayment. Our study does not evaluate the net social benefit of TARP, rather it highlights an important cost which should be a key input in that evaluation.

Did Congress trade ahead? Considering the reaction of US industries to COVID-19
Goodell, John W.,Huynh, Toan Luu Duc
During the ongoing COVID-19 pandemic in the US, there has been considerable media attention regarding several US legislators who traded stocks in late January through February 2020. The concern is that these legislators traded in anticipation of COVID-19 having a major impact on the financial markets, while publicly suggesting otherwise. We consider whether these legislator trades were in a time window and of a nature that would be consistent with trading ahead of the market. Towards this end, we assess the reactions of US industries to sudden COVID-related news announcements, concomitantly with an analysis of levels of investor attention to COVID. Results suggest that, at an industry-level, for legislator trading to be “ahead of the market” it needed to have been done prior to February 26, and involving the 15 industries we identify as having abnormal returns, especially medical and pharmaceutical products (positive); restaurants, hotels, and motels (negative); as well as services and utilities. These criteria are met by many of the legislator trades. Our results help to both parameterize concerns about this case of legislator trading; as well as provide insight into the reactions and expectations of investors toward COVID-19.

Does Firm Investment Respond to Peers' Investment?
Bustamante, Maria Cecilia,Frésard, Laurent
We study whether, how, and why the investment of a firm depends on the investment of other firms in the same product market. Using an instrumental variable based on the presence of local knowledge externalities, we find a sizeable complementarity of investment among product market peers, holding across a large majority of sectors. Peer effects are stronger in concentrated markets, featuring more heterogeneous firms, and for smaller firms with less precise information. Our findings are consistent with a model in which managers are imperfectly informed about fundamentals and use peers' investments as a source of information. Product market peer effects in investment could amplify shocks in production networks.

Does Floor Trading Matter?
Brogaard, Jonathan,Ringgenberg, Matthew,Rösch, Dominik
While algorithmic trading now dominates financial markets, some exchanges continue to use human floor traders. On March 23, 2020 the NYSE suspended floor trading because of COVID-19. Using a difference-in-differences analysis, we find that floor traders are important contributors to market quality, even in the age of algorithmic trading. The suspension of floor trading leads to higher effective spreads, volatility, and pricing errors. Moreover, consistent with theoretical predictions about automation, the effects are strongest during and immediately following the opening auction when complexity is highest. Our findings suggest that human floor traders improve market quality.

Entropy Martingale Optimal Transport and Nonlinear Pricing-Hedging Duality
Alessandro Doldi,Marco Frittelli

The objective of this paper is to develop a duality between a novel Martingale Entropy Optimal Transport problem (D) and an associated optimization problem (P). In (D) we follow the approach taken in the Entropy Optimal Transport (EOT) primal problem by (Liero et al. "Optimal entropy-transport problems and a new Hellinger-Kantorovic distance between positive measures", Invent. math. 2018) but we add the constraint, typical of Martingale Optimal Transport (MOT) theory, that the infimum of the cost functional is taken over martingale probability measures, instead of finite positive measures, as in Liero et al. The Problem (D) differs from the corresponding problem in Liero et al. not only by the martingale constraint, but also because we admit less restrictive relaxation terms D, which may not have a divergence formulation. In Problem (P) the objective functional, associated via Fenchel coniugacy to the terms D, is not any more linear, as in OT or in MOT. This leads to a novel optimization problem which also has a clear financial interpretation as a non linear subhedging value. Our results allow us to establish a novel nonlinear robust pricing-hedging duality in financial mathematics, which covers a wide range of known robust results in its generality.

Hedge Fund Activists: Value Creators or Stock Pickers?
Cremers, Martijn,Giambona, Erasmo,Sepe, Simone M.,Wang, Ye
We show that hedge fund activism is associated with positive abnormal stock returns in both the short term and the long term. Using matching procedures to mitigate selection effects, we find that activists’ targets do not outperform ex ante similar control firms; this suggests that activists are good stock pickers, not value creators. Activists also exhibit strong timing skills, generally selling (buying) stocks in targeted firms during periods in which these stocks outperform (underperform) and ahead of negative (positive) abnormal returns. These selection skills do not seem to benefit the buy-and-hold shareholders of the targeted firms.

How COVID-19 Affected the G7 Stock Markets: Early Evidence from a ST-HAR Model
Izzeldin, Marwan,Muradoglu, Yaz Gulnur,Pappas, Vasileios,Sivaprasad, Sheeja
Our paper investigates the impact of COVID-19 on stock markets across G7 countries (the US, the UK, Canada, France, Germany, Italy and Japan) and sectors (Consumer Goods, Consumer Services, Financials, Healthcare, Industrials, Materials, Oil & Gas, Technology, Telecommunications and Utilities) and highlight the synchronicity and severity of this unprecedented crisis. We find strong transition evidence to a crisis regime for all countries and all sectors suggesting the universal impact of COVID-19. However, not all business sectors were affected with the same intensity or at the same time. The Health Care and Consumer services sectors were the most severely affected; a reflection of the COVID-19 drug-race and the dire situation of the airlines. Technology were among those sectors that was hit the latest and least severely, as lock downed people were looking for distraction and entertainment elsewhere. Country-wise the UK and the US were hit the hardest, while exhibiting the highest heterogeneity in their business sectors’ response; a possible reflection on the financial markets of the ambiguity of these countries’ political response to the pandemic crisis.

Human Capital Equity Returns: Evidence from the National Football League
Moore, Jordan
Human capital comprises a substantial portion of global wealth, but equity claims to human capital are not publicly traded. I analyze ten transactions between April 2014 and July 2016 in which ten active players in the National Football League (NFL) sell equity claims to their future labor income. The proceeds from these equity contracts total more than $38 million and value the human capital of these athletes at more than $357 million. These transactions represent the largest, most transparent dealings in human capital equity contracts by private parties. I estimate the expected returns of these human capital initial public offerings (IPO) using NFL contract data and player performance statistics. The average expected return of these IPOs is 5.9% before expenses. Expected returns are larger for human capital equity investments in players from teams in smaller geographic markets.

Impact of Demonetization on Stock Price Volatility of Public Sector Banks in India: Special Reference to BSE
Lingaraja, Kasilingam ,Veluchamy, Ramanujam,Eswaran, Lakshmanan ,Viswanathan, Thangaraj ,Dhayanand, Chellaswamy
This research paper investigates the impact of Demonetization on public sector banks stock price volatility in BSE. The purpose of the above objective, this study used the secondary daily closing stock price data of selected top five largest public sectors banks in India in 2018, based on their market capitalization, for the period of two years, after demonetization i.e., from 01st January 2017 to 31st December, 2018. The statistical tools and models such as descriptive statistics, ADF, GARCH (1,1) Model and graphical price movement diagram were used for estimating the public sector banks stock price movements and Volatility during the study period. It is found that all the sample public sector banking stocks may not be benefited from demonetization impact. Finally this study conclude that the stock prices of selected public sector banks initially, the effect of demonetization announcement was seen for a short duration but slowly the market recovered and bounced back to normal.

Institutional Setup and Banking Regulation: Evidence From Panel Data
Attila, Joseph,Miéra, Maxence
In this paper, we study the effects of different institutional setups on banking regulation and supervision. In-depth econometric analyses are carried out on panel data over the period 1975- 2005 on a large sample and account for the unobserved country-specific effects as well as time effects. Our results suggest strong evidence that both domestic and international institutions are significantly associated with banking regulation and supervision, though with differing impacts. Our analyses also show that democratic institutions negatively affect banking regulation, a result that suggests that such institutions might have a detrimental effect on the process of implementing effective banking supervision. Lastly, our results point to what can be called the “institutional paradox” of banking regulation and supervision in developed countries. These results emerge in both fixed-effects estimators and generalized method of moments (GMM) and are robust across different aspects of banking supervision.

Macro-Finance Decoupling: Robust Evaluations of Macro Asset Pricing Models
Cheng, Xu,Dou, Winston,Liao, Zhipeng
This paper shows that robust inference under weak identification is important to the evaluation of many influential macro asset pricing models, including long-run risk models, disaster risk models, and multi-factor linear asset pricing models. Building on recent developments in the conditional inference literature, we provide a new specification test by simulating the critical value conditional on a sufficient statistic. This sufficient statistic can be intuitively interpreted as a measure capturing the macroeconomic information decoupled from the underlying content of asset pricing theories. Macro-finance decoupling is an effective way to improve the power of our specification test when asset pricing theories are difficult to refute due to an imbalance in the information content about the key model parameters between macroeconomic moment restrictions and asset pricing cross-equation restrictions.The supplemental appendix can be found at:

Macroprudential Capital Requirements with Non-Bank Finance
Dempsey, Kyle
I analyze the impact of raising capital requirements on the quantity, composition, and riskiness of aggregate investment in a model in which firms borrow from both bank and non-bank lenders. The bank funds loans with insured deposits and costly equity, monitors borrowers, and must maintain a minimum capital to asset ratio. Non-banks have deep pockets and competitively price loans. A tight capital requirement on the bank reduces risk-shifting and decreases bank leverage, reducing the risk of costly bank failure. In response, though, the bank can change both price and non-price contract terms. This may induce firms to substitute out of bank finance, leading to a theoretically ambiguous effect on the profile of aggregate investment. Quantitatively, I find that the bank's incentive to insure itself against issuing costly equity and competition from the non-bank sector mutes the long run impact of raising capital requirements. Increasing the capital requirement from 8% to 26% eliminates bank failures with effectively no change in the quantity or riskiness of aggregate investment.

Marriage between Credit Cards and the Internet: Buying is Just a Click Away!
Basnet, Hem C.,Donou-Adonsou, Ficawoyi
This paper examines whether Internet access positively affects credit card balances. To that end, we compare the 2010 and 2013 Surveys of Consumer Finances, analyze the consistency of the results over time, and provide the rationale for any resulting differences. Using the censored techniques, our results indicate that Internet access has a positive effect on credit card balances, which suggests that consumers with Internet access are prone to higher balances compared to those without. The probability of carrying positive balances was larger in 2010 compared to 2013. Overall, the results suggest that, while the financial crisis might have contributed to higher balances in 2010, the economic recovery afterward seems to have eased the burden of credit card debt.

Mean-Variance Portfolio Management with Functional Optimization
Ka Wai Tsang,Zhaoyi He

This paper introduces a new functional optimization approach to portfolio optimization problems by treating the unknown weight vector as a function of past values instead of treating them as fixed unknown coefficients in the majority of studies. We first show that the optimal solution, in general, is not a constant function. We give the optimal conditions for a vector function to be the solution, and hence give the conditions for a plug-in solution (replacing the unknown mean and variance by certain estimates based on past values) to be optimal. After showing that the plug-in solutions are sub-optimal in general, we propose gradient-ascent algorithms to solve the functional optimization for mean-variance portfolio management with theorems for convergence provided. Simulations and empirical studies show that our approach can perform significantly better than the plug-in approach.

Media Coverage and Underreaction-Related Anomalies
Chen, Xin,He, Wei,Tao, Libin,Yu, Jianfeng
Recent studies have proposed a large set of powerful anomaly-based factors in the stock market.This study examines the role of investor inattention in the corresponding anomalies underlying these factors and other underreaction-related anomalies. Using media coverage as a proxy for investor attention, we show that the anomalies underlying many recently proposed prominent factors are much more pronounced among firms without media coverage in portfolio formation periods. In addition, we find many other prominent anomalies that previous literature has attributed to underreaction also tend to perform much better among firms without media coverage. The average Fama-French five-factor alpha spread of these anomalies is about 1.18% per month among firms without news coverage and only 0.32% per month among firms with news coverage. Moreover, most of the alpha spread comes from the short leg of the anomalies and from the firms that are more difficult to arbitrage. Overall, our evidence indicates that investor inattention at least partially drives many of the recently proposed factors.

Need for Speed: High-Speed Rail and Firm Performance
Kuang, Chun,Liu, Zijie,Zhu, Wenyu
Exploiting the staggered expansion of China's passenger-dedicated high-speed rail (HSR) network, we study the relationship between HSR connection and firm performance through substantial reductions in communication costs. By highlighting the importance of firm location and face-to-face interactions, we test the differential impact of HSR connection on the performance and growth of firms that differ in their dependence on communication and inter-city travel as production inputs. Our results confirm that firms in communication- and travel-intensive industries benefit more from the operation of the HSR, with the effect being persistent over time. Moreover, in examining the specific mechanisms at work, we find evidence consistent with the projections that the HSR promotes the performance and growth of communication-intensive firms through productivity boosts and market expansions. We also find evidence suggesting that the degree of impact is increasing in the saving from travel time and the strength of agglomeration economies.

On the Causes and Consequences of Deviations from Rational Behavior
Dainis Zegners,Uwe Sunde,Anthony Strittmatter

This paper presents novel evidence for the prevalence of deviations from rational behavior in human decision making - and for the corresponding causes and consequences. The analysis is based on move-by-move data from chess tournaments and an identification strategy that compares behavior of professional chess players to a rational behavioral benchmark that is constructed using modern chess engines. The evidence documents the existence of several distinct dimensions in which human players deviate from a rational benchmark. In particular, the results show deviations related to loss aversion, time pressure, fatigue, and cognitive limitations. The results also demonstrate that deviations do not necessarily lead to worse performance. Consistent with an important influence of intuition and experience, faster decisions are associated with more frequent deviations from the rational benchmark, yet they are also associated with better performance.

Optimal Investment Management for Prospect Theory Investors
Moore, Jordan
Suppose an investment manager has discretion to allocate the timing of client contributions or management fees over a calendar year. If her client has prospect theory preferences and anchors gains and losses to the previous account balance, then the manager's optimal timing of account inflows and outflows can increase client satisfaction. The optimal strategies allocate contributions to offset small portfolio losses and charge fees to offset large portfolio gains. I compare the optimal strategies to strategies that allocate contributions or charge fees equally every quarter or month. The client is indifferent between contributing 1.4% to 1.6% allocated equally and contributing 1% allocated optimally. The client is indifferent between paying fees of 0.58% to 0.70% assessed equally and paying fees of 1% assessed optimally. Investment managers who structure contributions and fees to target prospect theory preferences and the anchoring effect can increase individual investor savings and institutional management fees.

Ownership Structure and Bank Risktaking: The Case of Vietnam
LE, Long Hau ,PHAM, Thanh Hoang ,LE, Tan Nghiem
This study is to analyze the impact of ownership concentration and of various types of shareholders on the risk-taking behavior of Vietnamese joint-stock commercial banks using a panel data of the period 2010-2017. In line with the literature, results from a panel regression with fixed effects show that as the ownership concentration increases, the risk-taking behavior of the bank also increases. With regard to the impact of various types of shareholders, the results show that the institutional and foreign shareholders ownership can reduce the bank risk-taking behavior. CEO and individual shareholder ownership also seem to have a negative impact on the bank risk-taking behavior, however the statistical test does not support for this relation. Findings from this study are supported by the real situation of the Vietnamese economy. From these results, a number of policy recommendations are put forward.

Quantitative Easing, Investment, and Safe Assets: The Corporate-Bond Lending Channel
Giambona, Erasmo,Matta, Rafael,Peydro , Jose-Luis,Wang, Ye
We show that Quantitative Easing (QE) stimulates investment via a corporate-bond lending channel. Fed's large-scale asset purchases of MBS and treasuries through QE creates a vacuum of safe assets, prompting safer firms to invest more by issuing relatively "safe'' bonds. Using micro-data around QE, we find that QE increases firm-level investment by 7.4 percentage points for firms with bond market access. This growth is financed with senior bonds. We find no evidence of higher shareholders' payouts associated to QE. The robust findings are consistent with a model in which reducing the supply of government debt lowers "safe'' corporate bond yields, stimulating investment.

Range Value-at-Risk: Multivariate and Extreme Values
Roba Bairakdar,Lu Cao,Melina Mailhot

The concept of univariate Range Value-at-Risk, presented by Cont et al. (2010), is extended in the multidimensional setting. Traditional risk measures are not well suited when dealing with heavy-tail distributions and infinite tail expectations. The multivariate definitions of robust truncated tail expectations are provided to overcome this problem. Robustness and other properties as well as empirical estimators are derived. Closed-form expressions and special cases in the extreme value framework are also discussed. Numerical and graphical examples are provided to examine the accuracy of the empirical estimators.

Robust risk aggregation with neural networks
Stephan Eckstein,Michael Kupper,Mathias Pohl

We consider settings in which the distribution of a multivariate random variable is partly ambiguous. We assume the ambiguity lies on the level of the dependence structure, and that the marginal distributions are known. Furthermore, a current best guess for the distribution, called reference measure, is available. We work with the set of distributions that are both close to the given reference measure in a transportation distance (e.g. the Wasserstein distance), and additionally have the correct marginal structure. The goal is to find upper and lower bounds for integrals of interest with respect to distributions in this set. The described problem appears naturally in the context of risk aggregation. When aggregating different risks, the marginal distributions of these risks are known and the task is to quantify their joint effect on a given system. This is typically done by applying a meaningful risk measure to the sum of the individual risks. For this purpose, the stochastic interdependencies between the risks need to be specified. In practice the models of this dependence structure are however subject to relatively high model ambiguity. The contribution of this paper is twofold: Firstly, we derive a dual representation of the considered problem and prove that strong duality holds. Secondly, we propose a generally applicable and computationally feasible method, which relies on neural networks, in order to numerically solve the derived dual problem. The latter method is tested on a number of toy examples, before it is finally applied to perform robust risk aggregation in a real world instance.

Runs and Interventions in the Time of COVID-19: Evidence from Money Funds
Li, Lei,Li, Yi,Macchiavelli, Marco,Zhou, Xing (Alex)
Liquidity restrictions, like the redemption gates and fees introduced in the 2016 Money Market Fund reform, are meant to improve stability during runs. However, we find evidence that they may have inadvertently exacerbated the run on prime funds during the COVID-19 crisis. Severe ouflows from prime funds amid frozen short-term funding markets led the Federal Reserve to intervene with the Money Market Mutual Fund Liquidity Facility (MMLF). By providing "liquidity of last resort'', the MMLF successfully stopped the run on prime funds and gradually improved conditions in funding markets, lowering funding costs and resuming the supply of funding to corporations.

Seasoned Equity Offerings, Technological Changes, and Employment
Kim, E. Han,Li, Bruce Yuan,Lu, Yao,Shi, Xinzheng
We study how the infusion of capital through SEOs affects employment through a technology channel. Using exogenous shocks on the eligibility to issue SEOs in China, we find that SEOs lead to more expenditures on technology-related assets, more high skill workers, and fewer low skill workers. Low skill workers decrease more than the increase of high skill workers, resulting in a net decline in employment at the firm level. Employment declines more when firms invest more in technology post-SEO. The impacts on technology and employment are greater for more financially constrained firms pre-SEO. Average wages increase because of the higher skill composition of employees; however, total wages remain unchanged because fewer employees remain. Finally, we find that firm profitability and productivity improve following SEOs. These findings illustrate how SEOs can change firms that have an opportunity to adopt productivity-improving technologies.

Short-Run Disequilibrium Adjustment and Long-Run Equilibrium in the International Stock Markets: A Network-Based Approach
Chen, Yanhua,Li, Youwei,Pantelous, Athanasios A.,Stanley, H. Eugene
In this paper, we propose a network-based analytical framework that exploits cointegration and the error correction model to systematically investigate the directional interconnectedness of the short-run disequilibrium adjustment towards long-run equilibrium affecting the international stock market during the period of 5 January 2007 to 30 June 2017. Under this setting, we investigate whether and how the cross-border directional interconnectedness within the world's 23 developed and 23 emerging stock markets altered during the 2007-2009 Global Financial Crisis, 2010-2012 European Sovereign Debt Crisis, and the entire period of 2007-2017. The main results indicate that changes in directional interconnectedness within stock markets worldwide did occur under the impact of the recent financial crises. The extent of the short-run disequilibrium adjustment towards long-run equilibrium for individual stock markets is not homogeneous over different time scales. The derived networks of stock markets interconnectedness allow us to visually characterize how specific stock markets from different regions form interconnected groups when exhibiting similar behaviours, which none the less provides significant information for strategic portfolio and risk management.

Supplemental Appendix to Macro-Finance Decoupling: Robust Evaluations of Macro Asset Pricing Models
Cheng, Xu,Dou, Winston,Liao, Zhipeng
This supplemental appendix contains additional technical details of Cheng, Dou, and Liao (2020). Section SA provides the proofs of several lemmas on the asymptotic convergence of the random components in the test statistic T and the conditional critical value. Section SB verifies the bounded Lipschitz properties of the test statistic and the conditional critical value, which are used to show their weak convergence in large sample. Section SC includes some auxiliary lemmas. Section SD derives the Euler equations that serve as the asset pricing moments in the long-run risk model and the disaster risk model. Section SE considers the long-run risk model and shows that the Gaussian limit is an innocuous assumption.The full-text version of this paper can be found at:

The Bail-in Beyond Unpredictability: Creditors’ Incentives and Market Discipline
Martino, Edoardo
Market Discipline of creditors on risk-taking behaviours of borrowing banks represents a long-lasting debate. Such a debate gained new attention after the post-crisis stream of reforms concerning resolution policy: creditors should be incentivized to take optimal effort in monitoring their borrowers and, at the same time, their interests have been aligned with the social ones. Many commentators criticized such an expectation especially in the European context, arguing that the lack of credibility and excessive complexity of the resolution mechanism impairs the ability and willingness of creditors to exert disciplining role. This paper aims at taking a step forward in this scientific debate, investigating whether the ability to exert disciplining activity is inherently impaired by the design of the Directive. In other words, this research wants to assess if, assuming an ideal environment, creditors would have optimal incentives to monitor the bank’s behaviours and react accordingly. To do so, the paper reviews the literature on Market Discipline, then carries out a legal analysis of the Bank Recovery and Resolution Directive (BRRD), focusing on those norms shaping the market for bail-inable securities. Eventually, the incentives stemming from those norms are discussed, assuming an ideal environment where bail-in is certain and credible and the market for bail-inable securities works smoothly. The analysis highlight that the incentives of creditors toward market discipline are inherently diluted by the BRRD legal design because of competing policy objectives pursued by the Directive. The direct normative consequence of such a finding is that enhancing information and predictability, though desirable in principle, will never lead to optimal monitoring effort, leaving the floor to alternative rule-based strategies.

The Effect of Pandemics on Domestic Credit: A Cross-country Analysis
Danisman, Gamze Ozturk,Demir, Ender
Using a panel of 140 countries covering the period 1996-2018, this paper examines how pandemics influence the lending behavior of banks. We take advantage of a new index developed by Ahir et al. (2020) which measures discussions about pandemics at the country level. The results of the fixed-effects and the system GMM estimations reveal that pandemics significantly hamper domestic credits. Moreover, this negative effect of pandemics is observed only in low-income & emerging economies and non-OECD countries. The findings of the analysis can provide insights for predicting the effect of recent COVID-19 pandemic on the behavior of credit market participants.

The Impact of Quantitative Easing on Liquidity Creation
Kapoor, Supriya,Peia, Oana
We study the effects of the US Federal Reserve’s large-scale asset purchase programs during 2008-2014 on bank liquidity creation. Banks create liquidity when they transform the liquid reserves resulted from quantitative easing into illiquid assets. As the composition of banks’ loan portfolio affects the amount of liquidity it creates, the impact of quantitative easing on liquidity creation is not a priori clear. Using a difference-in-difference identification strategy, we find that banks that were more exposed to the policy increased lending relative to a control group. However, while the increase in lending was present across all three rounds of quantitative easing, we only find a strong effect on liquidity creation during the last round. This suggests, that during the first two rounds, affected banks transformed the reserves created through the asset purchase program into less illiquid assets, such as real estate mortgages, pointing to a weaker impact of the policy on the real economy.

The Impact of Social Capital on Individual Responses to COVID-19 Pandemic: Evidence from Social Distancing
Bai, John (Jianqiu),Jin, Wang,Wan, Chi
We use the COVID-19 pandemic as an empirical setting to test the roles of civic norms and social networks in shaping human behavior. By exploiting daily mobile GPS location data, we provide strong evidence that while civic norms have a positive effect, social networks have a negative impact on social distancing as measured by the time spent at home. These results are consistent with a nuanced view of constituents of social capital: civic norms facilitate collective action and self-sacrifice for the common good, social networks likely cultivate inertia in social gathering, resulting in opposite effects on social distancing. Our results also underscore the importance of the usage of information technology in discovering and solving social problems.

The Race between Technological Progress and Female Advancement: Changes in Gender and Skill Premia in OECD Countries
Hiroya Taniguchi,Ken Yamada

In recent decades, the male-female wage gap has fallen, while the skilled-unskilled wage gap has risen in advanced countries. The rate of decline in the gender wage gap has tended to be greater for unskilled than skilled workers, while the rate of increase in the skill wage gap has tended to be greater for male than female workers. To account for these trends, we develop an aggregate production function extended to allow for gender-specific capital-skill complementarity, and estimate it using shift-hare instruments and cross-country panel data from OECD countries. We confirm that information and communication technology (ICT) equipment is not only more complementary to skilled than unskilled workers but also more complementary to female than male workers. Our results show that changes in gender and skill premia are the outcome of the race between progress in ICT and advances in female educational attainment and employment.

The Trend Premium Around the World: Evidence from the Stock Market
Lin, Hai,Liu, Pengfei,Zhang, Cheng
This paper studies the predictive power of the trend strategy in the international stock market. Using data from 49 markets, we find that a trend signal exploiting the short-, intermediate-, and long-term price information can predict stock returns cross-sectionally in the international market. The significance of the trend strategy is associated with market-level characteristics such as macroeconomic conditions, culture, and the information environment. The trend premium is more pronounced in markets with a more advanced macroeconomic status, a higher level of information uncertainty and individualism, and better accessibility to foreign investors. Nevertheless, the trend strategy only outperforms the momentum strategy in a relatively short horizon.

The best way to select features?
Xin Man,Ernest Chan

Feature selection in machine learning is subject to the intrinsic randomness of the feature selection algorithms (for example, random permutations during MDA). Stability of selected features with respect to such randomness is essential to the human interpretability of a machine learning algorithm. We proposes a rank based stability metric called instability index to compare the stabilities of three feature selection algorithms MDA, LIME, and SHAP as applied to random forests. Typically, features are selected by averaging many random iterations of a selection algorithm. Though we find that the variability of the selected features does decrease as the number of iterations increases, it does not go to zero, and the features selected by the three algorithms do not necessarily converge to the same set. We find LIME and SHAP to be more stable than MDA, and LIME is at least as stable as SHAP for the top ranked features. Hence overall LIME is best suited for human interpretability. However, the selected set of features from all three algorithms significantly improves various predictive metrics out of sample, and their predictive performances do not differ significantly. Experiments were conducted on synthetic datasets, two public benchmark datasets, and on proprietary data from an active investment strategy.

Time-Series Properties of Quarterly Aggregate Earnings
Jo, Koren M.,Cready, William M.
This analysis examines the time-series properties of quarterly aggregate earnings. We find that when aggregated, quarterly earnings can be fairly well described as following a simple random walk (RW) process. That is, the best historical time-series predictor for quarterly aggregated earnings is aggregated earnings from the prior quarter and this specification, in particular, outperforms a seasonal random walk (SRW) specification. Hence, unlike firm level earnings, the seasonal earnings lag is not the best single value predictor for aggregate earnings. When we consider more complicated multi-variable RW changes specifications, we find that the use of first or second order autocorrelation provides some improvement in specification. Finally, drawing on prior work by Sadka and Sadka (2009), we demonstrate the empirical relevance of the choice between an RW and an SRW “surprise” specification by identifying substantive differences in how each is predicted by lagged market returns.

Toward a Quantitative General Equilibrium Asset Pricing Model with Strategic Competition
Dou, Winston,Ji, Yan,Wu, Wei
We develop a novel general-equilibrium framework with concentrated industries, consumer inertia, and strategic competition, in which competition intensity endogenously intensifies as the expected growth declines or the discount rate rises, because firms compete more aggressively for current cash flows by undercutting each other as the present value of future cooperation decreases. We quantitatively decompose the beta of stock returns with the consumption risk into two components, reflecting news about the expected growth and discount rate. In equilibrium, more profitable industries have higher exposure to the discount-rate component of consumption risk because of higher consumer inertia, while value industries have higher exposure to the expected-growth component. More important, after controlling for the book-to-market ratio, the gross profitability premium becomes more pronounced. Finally, we exploit exogenous variation in market structures and growth loadings, such as large tariff cuts and natural disasters, to test the core competition and growth mechanisms directly.

Twin Default Crises
Mendicino, Caterina,Nikolov, Kalin,Supera, Dominik,Ramirez, Juan-Rubio
We study the interaction between borrowers' and banks' solvency in a quantitative macroeconomic model with financial frictions in which bank assets are a portfolio of defaultable loans. We show that ex-ante imperfect diversification of bank lending generates bank asset returns with limited upside but significant downside risk. The asymmetric distribution of these returns and their implications for the evolution of bank net worth are important for capturing the frequency and severity of twin default crises â€" simultaneous rises in firm and bank defaults associated with sizeable negative effects on economic activity. As a result, our model implies higher optimal capital requirements than common specifications of bank asset returns, which neglect or underestimate the impact of borrower default on bank solvency.

Using Network Interbank Contagion in Bank Default Prediction
Riccardo Doyle

Interbank contagion can theoretically exacerbate losses in a financial system and lead to additional cascade defaults during downturn. In this paper we produce default analysis using both regression and neural network models to verify whether interbank contagion offers any predictive explanatory power on default events. We predict defaults of U.S. domiciled commercial banks in the first quarter of 2010 using data from the preceding four quarters. A number of established predictors (such as Tier 1 Capital Ratio and Return on Equity) are included alongside contagion to gauge if the latter adds significance. Based on this methodology, we conclude that interbank contagion is extremely explanatory in default prediction, often outperforming more established metrics, in both regression and neural network models. These findings have sizeable implications for the future use of interbank contagion as a variable of interest for stress testing, bank issued bond valuation and wider bank default prediction.

Virus At The Gates
Mathur, Vipul
In this work I try to understand the micro-implications of the COVID shock at the level of households. Using CMIE database, I create a metric of vulnerability and resilience of households, by analyzing the (wage) income, (consumption) expenditure, (liquid) assets and (short-term) liabilities of the households. Vulnerability can be interpreted as the extent of financial exposure to an adverse shock and Resilience is the capacity of the household to weather such an adverse shock.The analysis suggests that around 14.4% of the households are the most robust with low-mid vulnerability and mid-high resilience. On the other hand, about 48.4% of the households are the most fragile, falling in high-mid vulnerability region with low-mid resilience. About 37.2% households fall in between the two extremes and have a mixed exposure with muddled resilience.I also consider two hypothetical scenarios, where I consider an aggregate shock to employment and prices to determine the impact at the margin. The analysis suggest that upon a 10% and 25% shock, approximately 23 and 75 million individuals may be find themselves at the margin of financial distress, respectively.Policy Implication: Fiscal transfers are a scarce resource. This study attempts to inform the policy on fiscal transfers by proposing a way to fine-tune both the quantum and the sequence of such transfers by identifying and segregating the households in the two dimensional array of vulnerability and resilience. First, it charters out a possible sequencing path for fiscal transfers. For instance, in the order of sequence, the fiscal support will be most productive for households which rank the highest on vulnerability and lowest on resilience. Second, depending upon the vulnerability and resilience of a household, the optimal quantum of fiscal support needed will vary across households. To be most effective, the amount of household level fiscal transfers could be made conditional on the extent of exposure and capacity of a household to the economic shock.

İSLAMİ FİNANSAL ENSTRÜMANLARDAN BİRİSİ OLARAK SUKUK: HİBRİD SUKUK İÇERİSİNDE YER ALAN MURABAHA SÖZLEŞMELERİNİN İSLAMİ HÜKÜMLERE UYGUNLUK YÖNÜNDEN İNCELENMESİ (Sukuk as One the Islamic Financial Instrumentes: Investigation of the Murabahah Contracts in the Hybrid Sukuk in Terms of Compliance With the Islamic Provision)
KAZAK, Hasan
Turkish abstract: Sukuk, İslami finansta kullanılmak üzere geliştirilen faizsiz sermaye piyasası araçlarıdır. Sukuk, geleneksel tahvillere alternatif olarak geliştirilen ve yapı itibariyle geleneksel finansal piyasa araçları olan bono ve tahvillerden, varlığa dayalı menkul kıymet ve gelir ortaklığı senetlerinden farklı özelliklere sahip varlığa dayalı olarak çıkarılan ve varlıklar üzerinde ortak mülkiyet hakkını temsil eden İslam’a uygun sertifikalardır. Yatırımcısı tarafından ihtiyaç duyulan finansmanın sağlanması amacıyla piyasaya sürülen sukuk sertifikaları bir yönüyle tahvillere benzer gibi görünmektedir. Ancak tahviller yapı itibariyle borç senedi hükmünde olup yatırımcısına faiz geliri sunmakta iken, sukuk bir borç enstrümanı değildir, mutlaka bir varlığa dayalı olmak zorundadır ve yatırımcısına sabit bir faiz geliri değil dayanak varlıktan elde edilecek gelirden istifade hakkı sunmaktadır. Sukuk diğer yandan şirketlere ortaklık ve yönetim hakkı tanıyan şirket hisse senetlerinden de farklıdır. Sukuk sertifika sahiplerine sukuka konu edilen dayanak varlıklar üzerinde mülkiyet hakkı tanımakla birlikte bu mülkiyet hakkı, dayanak varlıklar üzerinde yönetim vb. haklar içermeyen sınırlı bir hak yapısına sahiptir.Bu çalışmada öncelikle olarak Sukuk kavramından ve öneminden bahsedilmiş, geleneksel finansal piyasa araçları arasındaki farklar ortaya konmuştur. Daha sonra Dünya ve Türkiye’deki sukuk ihraçlarından ve bu ihraçların çeşitlerinden bahsedilmiştir. Çalışmanın amacı; sukuk türlerinden birisi olan ve hem Dünya’da hem de ülkemizde büyük rakamlarla ihraç edilen hibrid (hybrid) (diğer adlarıyla melez ya da karma) sukuk içerisinde yer alan murabaha sözleşmelerinin İslam’a uygunluk yönünün incelenmesidir. Yaptığımız bu çalışmada hibrid sukuk içerisine murabaha sözleşmelerinin konulması ve buna rağmen ikinci el piyasalarda işlem görebilmesinin İslam açısından uygun olduğu ile ilgili tutarlı bir fıkhi dayanak tespit edilememiştir. Buna göre önemli bir finansman kaynağı olan hibrid sukuka dayanak varlık sepeti içerisine ikinci el piyasalarda işlem görme sorunu yaşanacağından murabaha sözleşmeleri konulmamalıdır. Murabahaya dayalı sukuk ayrı bir şekilde ihraç edilmeli ve bu sertifikalar ikinci el piyasalarda işlem görmemelidir.Sonuç olarak; Hibrit sukuk içerisine murabaha sözleşmelerinin konulması ikinci el piyasalarda işlem görme yasağı oluşturacağından uygun değildir. İslami finans konusunda çalışma yapan başta İslami bankacılık faaliyetleri olmak üzere tüm tarafların bu konuda daha hassas olmaları İslami finans piyasasının geleceği açısından oldukça önemlidirEnglish abstract: Sukuk is an interest-free Capital market tool developed for use in Islamic finance. Sukuk is an Islamic compliant certificate, which is developed as an alternative to traditional bonds and which is based on asset-based securities with different characteristics from bond-based securities and revenueshare certificates, which are traditional financial market instruments by structure. It is seen that sukuk certificates resemble bonds in order to provide the financing required by the investor. However, while bonds are indebted to the structure while investors offer interest income, sukuk is not a debt instrument, but should be based on an asset and its investor, not a fixed interest income, but right to benefit from the income from the underlying asset. Sukuk, on the other hand, is also different from the company shares that give the company the right to partnership and management. Although the sukuk may grant the right of ownership to the holders of the underlying rights subject to sukuk, this right of ownership has a limited rights structure that does not contain any management exc. rights on the underlying assets. In this study, firstly, types of sukuk and its importance are mentioned and the differences between the traditional financial market instruments are revealed. Then, it is mentioned about the issue sukuk and types of issues in the World and Turkey. Purpose of the study; one of the types of sukuk, and both in the World and in our country is issued with large numbers of hybrid sukuk which is including in murabahah sukuk are examined the direction of conformity to Islam. In this study, it was found that there was no consistent legal basis for the use of murabahah in the hybrid sukuk and the fact that it was/was not suitable for Islam in the secondary markets. According to this, an important financial source hybrid sukuk based asset pool in the secondary markets will be experienced in the process of trading problems should not be placed in murabahah contracts. Murabahah sukuk should be issued separately and these murabahah certificates should not be traded in the secondary markets. As a result; The insertion of murabahah contracts into hybrid sukuk is not appropriate as it will create a ban on trading in the secondary markets. The fact that all parties, especially Islamic Banking activities are more sensitive about this issue is very important for the future of Islamic financial market.