Research articles for the 2020-06-09
A Comparative Analysis of Parsimonious Yield Curve Models with Focus on the Nelson-Siegel, Svensson and Bliss Models
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We empirically compare the Nelson-Siegel, Bliss and Svensson parsimonious yield curve models that are commonly used by central banks for monetary policy decisions and recommend the use of the former. Results shed light on the patterns of confounding effects in the Svensson model. We review estimation challenges and show implications of using different approaches for the initial values on the parameter stability and on the goodness of fit. Nelson-Siegel parameter estimates are more stable and conserve their intrinsic economical interpretation. The implications of excluding Treasury bills, constraining parameters and reducing clusters across time to maturity are also investigated.
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We empirically compare the Nelson-Siegel, Bliss and Svensson parsimonious yield curve models that are commonly used by central banks for monetary policy decisions and recommend the use of the former. Results shed light on the patterns of confounding effects in the Svensson model. We review estimation challenges and show implications of using different approaches for the initial values on the parameter stability and on the goodness of fit. Nelson-Siegel parameter estimates are more stable and conserve their intrinsic economical interpretation. The implications of excluding Treasury bills, constraining parameters and reducing clusters across time to maturity are also investigated.
A Coronavirus Asset Pricing Model: The Role of Skewness
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We study an equilibrium risk and return model to explore the effects of the coronavirus crisis and associated skewness. We derive the moment and equilibrium equations, specifying skewness price of risk as an additive component of the effect of variance on mean expected return. We estimate our model using the flexible skewed generalized error distribution, for which we derive the distribution of returns and the likelihood function. Using S&P 500 Index returns from January 1990 to mid-May 2020, our results show that the coronavirus crisis generated the most negative reaction in the skewness price of risk, more negative even than the subprime crisis.
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We study an equilibrium risk and return model to explore the effects of the coronavirus crisis and associated skewness. We derive the moment and equilibrium equations, specifying skewness price of risk as an additive component of the effect of variance on mean expected return. We estimate our model using the flexible skewed generalized error distribution, for which we derive the distribution of returns and the likelihood function. Using S&P 500 Index returns from January 1990 to mid-May 2020, our results show that the coronavirus crisis generated the most negative reaction in the skewness price of risk, more negative even than the subprime crisis.
A Game Theoretical Approach to Homothetic Robust Forward Investment Performance Processes in Stochastic Factor Models
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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.
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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.
A Study on Some Important Aspects of Working Capital Management in Selected Indian Industries
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WORKING CAPITAL MANAGEMENT (WCM) is the most dynamic financial decision making aspect of every business entity as it involves the management of ever-changing and dynamic current assets and adjusting them with the level of sales and market demands. WCM being a major revenue-generating activity is thus of prime importance for maintaining a healthy and wealthy business. Since its inception in late 1860s, the literature on WCM is replete with various empirical studies are either a case study or comparative or of a fact-finding nature or for developing a theory-based on empirical analysis. In the course of the literature review, it was observed that all the research studies focused on industries belonging to the manufacturing sector and it was very difficult to find a specific study with full-fledged focus on the nature of WCM in the Service Sector. Further, it was difficult to find a comprehensive study covering all the important aspects of WCM, i.e., working capital policy; current asset structure; current liabilities structure; liquidity management; wcm efficiency; working capital leverage; the impact of sales on working capital; the impact of WCL on ROTA; the impact of WCM on profitability even in the manufacturing sector with large samples. In the context of the above, the current study bridges this gap in the literature by examining many dimensions of WCM over a period of 16 years in the Indian service sector due to the growing importance of this sector in the Indian and world economy. This study would contribute to the existing literature by providing an insight into the WCM of the Non-Financial Service Industry (NFSI) in the Indian context.
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WORKING CAPITAL MANAGEMENT (WCM) is the most dynamic financial decision making aspect of every business entity as it involves the management of ever-changing and dynamic current assets and adjusting them with the level of sales and market demands. WCM being a major revenue-generating activity is thus of prime importance for maintaining a healthy and wealthy business. Since its inception in late 1860s, the literature on WCM is replete with various empirical studies are either a case study or comparative or of a fact-finding nature or for developing a theory-based on empirical analysis. In the course of the literature review, it was observed that all the research studies focused on industries belonging to the manufacturing sector and it was very difficult to find a specific study with full-fledged focus on the nature of WCM in the Service Sector. Further, it was difficult to find a comprehensive study covering all the important aspects of WCM, i.e., working capital policy; current asset structure; current liabilities structure; liquidity management; wcm efficiency; working capital leverage; the impact of sales on working capital; the impact of WCL on ROTA; the impact of WCM on profitability even in the manufacturing sector with large samples. In the context of the above, the current study bridges this gap in the literature by examining many dimensions of WCM over a period of 16 years in the Indian service sector due to the growing importance of this sector in the Indian and world economy. This study would contribute to the existing literature by providing an insight into the WCM of the Non-Financial Service Industry (NFSI) in the Indian context.
A Survey of Fintech Research and Policy Discussion
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The intersection of finance and technology, known as fintech, has resulted in the dramatic growth of innovations and has changed the entire financial landscape. While fintech has a critical role to play in democratizing credit access to the unbanked and thin-file consumers around the globe, those consumers who are currently well served also turn to fintech for faster services and greater transparency. Fintech, particularly the blockchain, has the potential to be disruptive to financial systems and intermediation. Our aim in this paper is to provide a comprehensive fintech literature survey with relevant research studies and policy discussion around the various aspects of fintech. The topics include marketplace and peer-to-peer lending, credit scoring, alternative data, distributed ledger technologies, blockchain, smart contracts, cryptocurrencies and initial coin offerings, central bank digital currency, robo-advising, quantitative investment and trading strategies, cybersecurity, identity theft, cloud computing, use of big data and artificial intelligence and machine learning, identity and fraud detection, anti-money laundering, Know Your Customers, natural language processing, regtech, insuretech, sandboxes, and fintech regulations.
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The intersection of finance and technology, known as fintech, has resulted in the dramatic growth of innovations and has changed the entire financial landscape. While fintech has a critical role to play in democratizing credit access to the unbanked and thin-file consumers around the globe, those consumers who are currently well served also turn to fintech for faster services and greater transparency. Fintech, particularly the blockchain, has the potential to be disruptive to financial systems and intermediation. Our aim in this paper is to provide a comprehensive fintech literature survey with relevant research studies and policy discussion around the various aspects of fintech. The topics include marketplace and peer-to-peer lending, credit scoring, alternative data, distributed ledger technologies, blockchain, smart contracts, cryptocurrencies and initial coin offerings, central bank digital currency, robo-advising, quantitative investment and trading strategies, cybersecurity, identity theft, cloud computing, use of big data and artificial intelligence and machine learning, identity and fraud detection, anti-money laundering, Know Your Customers, natural language processing, regtech, insuretech, sandboxes, and fintech regulations.
Adoption of IAS/IFRS, Liquidity Constraints, and Credit Rationing: The Case of the European Banking Industry
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With imperfections, theory suggests that banks dependent on external resources have greater difficulty refinancing their lending than banks with a lot of internal resources. Hence, there is an increased risk of credit rationing to these institutions. In this context, this empirical study tests the hypothesis that the adoption of the IAS/IFRS, deemed as of superior quality for economic decision-making, results in an increase in the amount of credit offered by banks with liquidity constraints. For a sample of European banks over the period of 2003â€"2008, we find that results are only partly consistent with this hypothesis. The results depend on the measure of the constraint, the bank size, and the enforcement regime. Our results show that the adoption (both voluntary and mandatory) of the IAS/IFRS lead to an increase in the credit supply only for small and constrained banks. These results are important with respect to the goal of banking stability and with the scarcity of credit observed in Europe since the financial crisis.
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With imperfections, theory suggests that banks dependent on external resources have greater difficulty refinancing their lending than banks with a lot of internal resources. Hence, there is an increased risk of credit rationing to these institutions. In this context, this empirical study tests the hypothesis that the adoption of the IAS/IFRS, deemed as of superior quality for economic decision-making, results in an increase in the amount of credit offered by banks with liquidity constraints. For a sample of European banks over the period of 2003â€"2008, we find that results are only partly consistent with this hypothesis. The results depend on the measure of the constraint, the bank size, and the enforcement regime. Our results show that the adoption (both voluntary and mandatory) of the IAS/IFRS lead to an increase in the credit supply only for small and constrained banks. These results are important with respect to the goal of banking stability and with the scarcity of credit observed in Europe since the financial crisis.
Are Bank Capital Requirements Optimally Set? Evidence from Researchers’ Views
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We survey 149 leading academic researchers on bank capital regulation. The median (average) respondent prefers a 10% (15%) minimum non-risk-weighted equity-to-assets ratio, which is considerably higher than the current requirement. North Americans prefer a significantly higher equity-to-assets ratio than Europeans. We find substantial support for the new forms of regulation introduced in Basel III, such as liquidity requirements. Views are most dispersed regarding the use of hybrid assets and bail-inable debt in capital regulation. 70% of experts would support an additional market-based capital requirement. When investigating factors driving capital requirement preferences, we find that the typical expert believes a five percentage points increase in capital requirements would “probably decrease†both the likelihood and social cost of a crisis with “minimal to no change†to loan volumes and economic activity. The best predictor of capital requirement preference is how strongly an expert believes that higher capital requirements would increase the cost of bank lending.
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We survey 149 leading academic researchers on bank capital regulation. The median (average) respondent prefers a 10% (15%) minimum non-risk-weighted equity-to-assets ratio, which is considerably higher than the current requirement. North Americans prefer a significantly higher equity-to-assets ratio than Europeans. We find substantial support for the new forms of regulation introduced in Basel III, such as liquidity requirements. Views are most dispersed regarding the use of hybrid assets and bail-inable debt in capital regulation. 70% of experts would support an additional market-based capital requirement. When investigating factors driving capital requirement preferences, we find that the typical expert believes a five percentage points increase in capital requirements would “probably decrease†both the likelihood and social cost of a crisis with “minimal to no change†to loan volumes and economic activity. The best predictor of capital requirement preference is how strongly an expert believes that higher capital requirements would increase the cost of bank lending.
Audit Choice, Regulatory Discipline and Financial Reporting in Banking: Insights from Examination Files
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Confidential examination files of 41 community banks that changed external audit status under internal controls show that their decisions respond to discipline imposed by regulators and that discipline seldom involves factors related to financial reporting. This suggests that empirical evidence linking external auditors to the extent of accounting discretion in the banking industry is suspect in the absence of a definitive and bank-specific measure of regulatory intensity. It is consistent with the idea that intensified regulatory scrutiny, coincident but otherwise unassociated with audits under internal controls, promotes accounting conservatism.
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Confidential examination files of 41 community banks that changed external audit status under internal controls show that their decisions respond to discipline imposed by regulators and that discipline seldom involves factors related to financial reporting. This suggests that empirical evidence linking external auditors to the extent of accounting discretion in the banking industry is suspect in the absence of a definitive and bank-specific measure of regulatory intensity. It is consistent with the idea that intensified regulatory scrutiny, coincident but otherwise unassociated with audits under internal controls, promotes accounting conservatism.
Bank Capital and Loan Liquidity
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Bank capital is an important determinant of secondary market liquidity of loans that a bank originates and syndicates. Higher bank capital is associated with significantly narrower loan bid-ask spreads. This effect is stronger when banks are subject to more external financing frictions and during the 2007:Q3 â€" 2009:Q4 financial crisis. Tests using exogenous shocks to bank capital generated by housing market exposures and the 2012 JPMorgan ‘London Whale’ incident are suggestive of causality. Our paper contributes to the research and policy debates on the efficacy of bank capital, and sheds new light on the link between intermediary capital and asset liquidity.
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Bank capital is an important determinant of secondary market liquidity of loans that a bank originates and syndicates. Higher bank capital is associated with significantly narrower loan bid-ask spreads. This effect is stronger when banks are subject to more external financing frictions and during the 2007:Q3 â€" 2009:Q4 financial crisis. Tests using exogenous shocks to bank capital generated by housing market exposures and the 2012 JPMorgan ‘London Whale’ incident are suggestive of causality. Our paper contributes to the research and policy debates on the efficacy of bank capital, and sheds new light on the link between intermediary capital and asset liquidity.
Banks’ Earnings: Empirical Evidence of the Influence of Economic and Financial Market Factors
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The structure of income is a foremost address within research on banks’ perfor- mance, especially with regard to effects on the resilience of banks’ earnings. Indeed, given their central position in the economy, banks shall thrive to generate sustainable earnings and control for their potential volatility. Existing studies mostly consider the weight of non-net interest income (nonNII) as opposed to the traditional NII income source. Such aggregated nonNII is found to increase earn- ings risk but more granular studies conflict. We propose an original investigation of the influence of economic and financial conditions on various income types, assuming that performance may actually be driven by both the income structure and external conditions. We focus European banks, which have long been allowed to diversify beyond retail banking. Out of a straight panel framework, we question if the influence of external conditions spreads to earnings components other than credit losses and trading income and if it does allow for diversification benefits among compo- nents. We find that each component actually evolves owing to its own equation. Furthermore, effects of single variables may cumulate over different components of earnings (e.g. GDP) or provide with diversification benefits. These effects are all the more important since they are not mitigated by operating expenses. Hence, over a regarded period, banks’ performance depends upon their structure of income and upon volatilities and correlations of influential variables. Besides con- trolling for ex-ante volatility, our approach shows that a given structure of income is not necessarily more resilient than others but that selected non-banking income may support a higher stability of Earnings.
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The structure of income is a foremost address within research on banks’ perfor- mance, especially with regard to effects on the resilience of banks’ earnings. Indeed, given their central position in the economy, banks shall thrive to generate sustainable earnings and control for their potential volatility. Existing studies mostly consider the weight of non-net interest income (nonNII) as opposed to the traditional NII income source. Such aggregated nonNII is found to increase earn- ings risk but more granular studies conflict. We propose an original investigation of the influence of economic and financial conditions on various income types, assuming that performance may actually be driven by both the income structure and external conditions. We focus European banks, which have long been allowed to diversify beyond retail banking. Out of a straight panel framework, we question if the influence of external conditions spreads to earnings components other than credit losses and trading income and if it does allow for diversification benefits among compo- nents. We find that each component actually evolves owing to its own equation. Furthermore, effects of single variables may cumulate over different components of earnings (e.g. GDP) or provide with diversification benefits. These effects are all the more important since they are not mitigated by operating expenses. Hence, over a regarded period, banks’ performance depends upon their structure of income and upon volatilities and correlations of influential variables. Besides con- trolling for ex-ante volatility, our approach shows that a given structure of income is not necessarily more resilient than others but that selected non-banking income may support a higher stability of Earnings.
COVID-19: Stock Market Reactions to the Shock and the Stimulus
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Using the WHO announcement on March 11, 2020 and the Federal Reserve Bank announcement on April 9, 2020 as two events that represent the shock and the stimulus, this study finds that COVID-19 caused a negative shock to the global stock markets, especially in emerging markets and for small firms. We find that the US stock market experienced positive abnormal returns from the Fed stimulus compared to other developed countries and emerging markets. We find that the positive abnormal returns from the stimulus were garnered by the US large firms instead of the small firms.
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Using the WHO announcement on March 11, 2020 and the Federal Reserve Bank announcement on April 9, 2020 as two events that represent the shock and the stimulus, this study finds that COVID-19 caused a negative shock to the global stock markets, especially in emerging markets and for small firms. We find that the US stock market experienced positive abnormal returns from the Fed stimulus compared to other developed countries and emerging markets. We find that the positive abnormal returns from the stimulus were garnered by the US large firms instead of the small firms.
Can the Market Take the Central Bank Hostage?
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Central banks have a material impact on asset markets by moving short-term interest rates and transacting from their own balance sheet. We propose and solve a two-period model in which the central bank has a preference for market intervention in a direction opposite to perceived shocks to economic fundamentals. Because market prices are noisy signals of the economic fundamentals, large strategic investors (who prefer high asset prices) find it optimal to temporarily and artificially depress asset prices in order to ``persuade'' the central bank to intervene and support market prices. The stronger is the anticipated central bank intervention ex post, the larger is the price depression ex ante, and the sharper is the post-intervention price reversal. Compared to a world without central bank intervention, a moderate central bank intervention reduces asset price volatility, but an aggressive central bank intervention increases it. Moreover, central bank intervention reduces the welfare of large investors. We conclude that even a well-intended central bank can be held hostage by the market, with potentially counterproductive consequences.
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Central banks have a material impact on asset markets by moving short-term interest rates and transacting from their own balance sheet. We propose and solve a two-period model in which the central bank has a preference for market intervention in a direction opposite to perceived shocks to economic fundamentals. Because market prices are noisy signals of the economic fundamentals, large strategic investors (who prefer high asset prices) find it optimal to temporarily and artificially depress asset prices in order to ``persuade'' the central bank to intervene and support market prices. The stronger is the anticipated central bank intervention ex post, the larger is the price depression ex ante, and the sharper is the post-intervention price reversal. Compared to a world without central bank intervention, a moderate central bank intervention reduces asset price volatility, but an aggressive central bank intervention increases it. Moreover, central bank intervention reduces the welfare of large investors. We conclude that even a well-intended central bank can be held hostage by the market, with potentially counterproductive consequences.
Consumer Willingness to Share Payments Data: Trust for Sale?
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The revised Payment Services Directive (PSD2) has opened the possibility for third parties to accessconsumers’ payment account in order to use their payments data. Such third-party access to data is a novum in network regulation. Its success depends on consumer preferences concerning the usage of this data. We study these preferences using a representative panel of Dutch consumers. In particular, we consider how consumer willingness to allow access to payments data depends on: (i) the type of data user: consumers’ own bank, another bank, or a BigTech; (ii) financial incentives; and (iii) trust in the data user. We research attitudes in case of a financial overview, a mortgage loan and a personal loan and obtain the following results. First, willingness to allow access is highest if the user is the consumer’s own bank. This holds irrespective of the type of service and the financial product. Second, the propensity to use account information services is driven by consumers’ trust in the providers of these services. Third, an explicit financial reward can tempt people to accept offers from other providers. BigTechs need to offer stronger incentives than other banks, because people trust them the least.
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The revised Payment Services Directive (PSD2) has opened the possibility for third parties to accessconsumers’ payment account in order to use their payments data. Such third-party access to data is a novum in network regulation. Its success depends on consumer preferences concerning the usage of this data. We study these preferences using a representative panel of Dutch consumers. In particular, we consider how consumer willingness to allow access to payments data depends on: (i) the type of data user: consumers’ own bank, another bank, or a BigTech; (ii) financial incentives; and (iii) trust in the data user. We research attitudes in case of a financial overview, a mortgage loan and a personal loan and obtain the following results. First, willingness to allow access is highest if the user is the consumer’s own bank. This holds irrespective of the type of service and the financial product. Second, the propensity to use account information services is driven by consumers’ trust in the providers of these services. Third, an explicit financial reward can tempt people to accept offers from other providers. BigTechs need to offer stronger incentives than other banks, because people trust them the least.
Corporate Governance Reporting: Compliance with Upper Limits for Severance Payments to Members of Executive Boards in Germany
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This paper examines how corporate governance reporting corresponds to actual conduct regarding severance payment caps for prematurely departing members of companies’ executive boards in Germany. For this purpose, we first evaluate the declarations of conformity for all companies listed in the CDAX between 2010 and 2014, which we use to determine conformity and deviation rates, and analyse reasons for deviation. In a further full survey, we assess the compensation amounts of all severance payments made and published by DAX companies to their executive board members who were prematurely terminated, which allows us to compare the respective severance ratio with the cap recommended by the German Corporate Governance Codex (GCGC). We find that more than 20% of companies listed in the CDAX declared deviation in the declaration of conformity, and one-third of all deviations were justified by a rejection of the normative decision of the recommendation. Moreover, in 57% of actual severance cases where DAX companies had previously declared their compliance, the cap was exceeded; yet, none of the companies that had exceeded the cap in a severance case disclosed this in the following declaration of conformity. In the years under review, for the majority of severance cases in companies listed in the DAX, the GCGC’s cap did not have any factual binding effect. Finally, in most cases the corporate reports deviated from reality and therefore could not serve as a suitable basis for decisions by the capital market.
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This paper examines how corporate governance reporting corresponds to actual conduct regarding severance payment caps for prematurely departing members of companies’ executive boards in Germany. For this purpose, we first evaluate the declarations of conformity for all companies listed in the CDAX between 2010 and 2014, which we use to determine conformity and deviation rates, and analyse reasons for deviation. In a further full survey, we assess the compensation amounts of all severance payments made and published by DAX companies to their executive board members who were prematurely terminated, which allows us to compare the respective severance ratio with the cap recommended by the German Corporate Governance Codex (GCGC). We find that more than 20% of companies listed in the CDAX declared deviation in the declaration of conformity, and one-third of all deviations were justified by a rejection of the normative decision of the recommendation. Moreover, in 57% of actual severance cases where DAX companies had previously declared their compliance, the cap was exceeded; yet, none of the companies that had exceeded the cap in a severance case disclosed this in the following declaration of conformity. In the years under review, for the majority of severance cases in companies listed in the DAX, the GCGC’s cap did not have any factual binding effect. Finally, in most cases the corporate reports deviated from reality and therefore could not serve as a suitable basis for decisions by the capital market.
Corporate Malpractice in Banks and The Price of Mistakes
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This paper explores the challenges of existing corporate governance, analyzing the existing policy, ownership structure, and Bank performance. In doing so, this paper attempts to investigate the pattern of ownership composition and ownership concentration scenario towards sponsorship in Banks, the relationship between the ownership structure, firm performance, and, finally, the impact of ownership structure on the bank's performance. Besides, it tries to investigate the leading causes of banks' poor performance, financial scams, Non-Performing Loans (NPLs) regarding the recent crisis understanding the feedback of bankers, depositors, and stakeholders. In this aspect, how corporate governance is practiced through ownership structure as well as how its loan policy is influenced by different ownership patterns is analyzed through a survey result conducted in State-Owned Commercial Banks (SOCBs) and Private Commercial Banks (PCBs) in Bangladesh. Thus, the main features of the existing corporate governance are identified, and some action plans are suggested in this paper to restore sound corporate governance in the banking sector of Bangladesh.
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This paper explores the challenges of existing corporate governance, analyzing the existing policy, ownership structure, and Bank performance. In doing so, this paper attempts to investigate the pattern of ownership composition and ownership concentration scenario towards sponsorship in Banks, the relationship between the ownership structure, firm performance, and, finally, the impact of ownership structure on the bank's performance. Besides, it tries to investigate the leading causes of banks' poor performance, financial scams, Non-Performing Loans (NPLs) regarding the recent crisis understanding the feedback of bankers, depositors, and stakeholders. In this aspect, how corporate governance is practiced through ownership structure as well as how its loan policy is influenced by different ownership patterns is analyzed through a survey result conducted in State-Owned Commercial Banks (SOCBs) and Private Commercial Banks (PCBs) in Bangladesh. Thus, the main features of the existing corporate governance are identified, and some action plans are suggested in this paper to restore sound corporate governance in the banking sector of Bangladesh.
De-Risking Through Equity Holdings: Bank and Insurer Behavior Under Capital Requirements
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Using a sample from 1980 to 2018, we find that banks and insurers in U.S. diversify financial risk through their equity holdings. They tend to offset the risk of increased leverage by lowering the leverage of the non-financial firms in which they take an equity stake. We attribute this finding to the impact of risk-based capital regulations. Facing the high cost of equity, financial institutions are well incentivized to comply with increased capital requirements by reducing asset risk. Our results demonstrate that the scope of the induced de-risking activities of these institutions is not limited to their credit portfolios but extends to their equity exposure as well. We also show that non-financial firms that are concerned about being dropped by these financial institutions could deleverage to deviate from their theoretically optimal capital structures. These novel empirical regularities need to be included in debates about capital regulations for banks and insurance companies.
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Using a sample from 1980 to 2018, we find that banks and insurers in U.S. diversify financial risk through their equity holdings. They tend to offset the risk of increased leverage by lowering the leverage of the non-financial firms in which they take an equity stake. We attribute this finding to the impact of risk-based capital regulations. Facing the high cost of equity, financial institutions are well incentivized to comply with increased capital requirements by reducing asset risk. Our results demonstrate that the scope of the induced de-risking activities of these institutions is not limited to their credit portfolios but extends to their equity exposure as well. We also show that non-financial firms that are concerned about being dropped by these financial institutions could deleverage to deviate from their theoretically optimal capital structures. These novel empirical regularities need to be included in debates about capital regulations for banks and insurance companies.
Debt De-Risking
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We examine the incentive of corporate bond fund managers to manipulate portfolio risk in response to competitive pressure. We find that bond funds engage in a reverse fund tournament in which laggard funds actively de-risk their portfolios, trading-off higher yields for more liquid and safer assets. De-risking is stronger for laggard funds that have a more concave sensitivity of flows-to-performance, in periods of market stress, and when bond yields are high. We provide evidence that debt de-risking also reduces ex post liquidation costs by mitigating the investors' incentive to run ex ante. We argue that, in the presence of de-risking behaviors, flexible NAVs (swing pricing) may be counter-productive and induce moral hazard.
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We examine the incentive of corporate bond fund managers to manipulate portfolio risk in response to competitive pressure. We find that bond funds engage in a reverse fund tournament in which laggard funds actively de-risk their portfolios, trading-off higher yields for more liquid and safer assets. De-risking is stronger for laggard funds that have a more concave sensitivity of flows-to-performance, in periods of market stress, and when bond yields are high. We provide evidence that debt de-risking also reduces ex post liquidation costs by mitigating the investors' incentive to run ex ante. We argue that, in the presence of de-risking behaviors, flexible NAVs (swing pricing) may be counter-productive and induce moral hazard.
Do Dual Discounting Equations Reconcile Exponential Banks with Their Hyperbolic Customers?
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There is an apparent rift between the way banks calculate and the way humans think.On the one hand, exponential discounting has played a centuries-long, lead role in financial analysis. On the other hand, experiments by behavioral economists demonstrate that hyperbolic discounting is better than exponential at explaining human inter-temporal behavior. The result is scope for misunderstanding between financial institutions and their customers because many financial products involve calculations alien to consumer thinking. Calls for improving consumer financial literacy are symptoms of this disconnect.This article queries past experimental results by examining the underlying theory using the concept of duality. Two dual expressions are derived: one expression is dual to the exponential discounting equation and the other is dual to the hyperbolic. Each dual contains the full array of interest rates implied by every root solving its source equation. An array includes the negative and complex-valued interest rates ignored for centuries on the grounds that they lack economic meaning. Recent research, however, demonstrates that an array of rates does possess economic meaning. This finding legitimizes the duals, removing a barrier to their inclusion in financial analysis. Duality offers possible reconciliation between the two approaches to discounting. The two dual expressions display a similarity and a difference. The similarity is in their structure, implying the two approaches to discounting are not as different as experimentalists suppose. The difference is in their components, this difference suggesting new experiments that may support or deny the proposed reconciliation.Dual equations also suggest policy advice.
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There is an apparent rift between the way banks calculate and the way humans think.On the one hand, exponential discounting has played a centuries-long, lead role in financial analysis. On the other hand, experiments by behavioral economists demonstrate that hyperbolic discounting is better than exponential at explaining human inter-temporal behavior. The result is scope for misunderstanding between financial institutions and their customers because many financial products involve calculations alien to consumer thinking. Calls for improving consumer financial literacy are symptoms of this disconnect.This article queries past experimental results by examining the underlying theory using the concept of duality. Two dual expressions are derived: one expression is dual to the exponential discounting equation and the other is dual to the hyperbolic. Each dual contains the full array of interest rates implied by every root solving its source equation. An array includes the negative and complex-valued interest rates ignored for centuries on the grounds that they lack economic meaning. Recent research, however, demonstrates that an array of rates does possess economic meaning. This finding legitimizes the duals, removing a barrier to their inclusion in financial analysis. Duality offers possible reconciliation between the two approaches to discounting. The two dual expressions display a similarity and a difference. The similarity is in their structure, implying the two approaches to discounting are not as different as experimentalists suppose. The difference is in their components, this difference suggesting new experiments that may support or deny the proposed reconciliation.Dual equations also suggest policy advice.
Drivers of Bank Default Risk: Bank Business Models, the Sovereign and Monetary Policy
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In this paper we empirically analyze the determinants of bank default risk (measured by the banks’ CDS spreads) for European banks during the period 2008-2018. We examine the effect of (1) bank business model characteristics, (2) sovereign default risk and (3) ECB monetary policy. We disentangle the effect of monetary policy in a direct channel and an indirect effect operating through a sovereign risk channel. In terms of business model variables, we find that the capital ratio and the reliance on stable deposits lowers the perceived default risk of banks, while non-performing loans significantly increase the CDS spreads. Hence, the CDS market distinguishes resilient banks from risky banks. In terms of monetary policy, we document that accommodative ECB actions in general lower bank default risk. We also show that the downward effect of monetary policy on bank risk is mainly transmitted through the sovereign risk channel. Our findings confirm the importance of the Basel 3 capital and stable funding rules and they suggest policy implications in terms of bank business model choices as well as approaches to tackle the bank-sovereign loop in Europe.
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In this paper we empirically analyze the determinants of bank default risk (measured by the banks’ CDS spreads) for European banks during the period 2008-2018. We examine the effect of (1) bank business model characteristics, (2) sovereign default risk and (3) ECB monetary policy. We disentangle the effect of monetary policy in a direct channel and an indirect effect operating through a sovereign risk channel. In terms of business model variables, we find that the capital ratio and the reliance on stable deposits lowers the perceived default risk of banks, while non-performing loans significantly increase the CDS spreads. Hence, the CDS market distinguishes resilient banks from risky banks. In terms of monetary policy, we document that accommodative ECB actions in general lower bank default risk. We also show that the downward effect of monetary policy on bank risk is mainly transmitted through the sovereign risk channel. Our findings confirm the importance of the Basel 3 capital and stable funding rules and they suggest policy implications in terms of bank business model choices as well as approaches to tackle the bank-sovereign loop in Europe.
Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Field
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Many economically important settings, from financial markets to consumer choice, involve dynamic decisions under risk. People are willing to accept risk as part of a sequence of choices---even when it is fair or has a negative expected value---while at the same time rejecting positive-expected value gambles offered in isolation. We use a unique brokerage dataset containing traders' ex-ante investment plans and their subsequent decisions (N=190,000) and two pre-registered experiments (N=940) to study what motivates decisions to take risk in dynamic environments. In both settings, people accept risk as part of a ``loss-exit'' strategy---planning to take more risk after gains and stop after losses. Notably, this strategy generates a positively-skewed outcome distribution that is not available when the same gambles are offered in isolation. People's actual behavior exhibits the reverse pattern, deviating from their intended strategy by cutting gains early and chasing losses. More individuals are willing to accept risk when offered a commitment to the initial strategy, which suggests at least partial sophistication about this dynamic inconsistency. We use our data to formally identify a model of decision-making that predicts both the observed deviations in planned versus actual behavior, as well as the discrepancy in risk-taking in static and dynamic environments. We then use this model to quantify the welfare costs of naivete in our setting. Together, our results have implications for evaluating the welfare consequences of behavioral biases in dynamic settings, such as the disposition effect, and highlight potentially unintended effects of regulation mandating non-binding commitment.
SSRN
Many economically important settings, from financial markets to consumer choice, involve dynamic decisions under risk. People are willing to accept risk as part of a sequence of choices---even when it is fair or has a negative expected value---while at the same time rejecting positive-expected value gambles offered in isolation. We use a unique brokerage dataset containing traders' ex-ante investment plans and their subsequent decisions (N=190,000) and two pre-registered experiments (N=940) to study what motivates decisions to take risk in dynamic environments. In both settings, people accept risk as part of a ``loss-exit'' strategy---planning to take more risk after gains and stop after losses. Notably, this strategy generates a positively-skewed outcome distribution that is not available when the same gambles are offered in isolation. People's actual behavior exhibits the reverse pattern, deviating from their intended strategy by cutting gains early and chasing losses. More individuals are willing to accept risk when offered a commitment to the initial strategy, which suggests at least partial sophistication about this dynamic inconsistency. We use our data to formally identify a model of decision-making that predicts both the observed deviations in planned versus actual behavior, as well as the discrepancy in risk-taking in static and dynamic environments. We then use this model to quantify the welfare costs of naivete in our setting. Together, our results have implications for evaluating the welfare consequences of behavioral biases in dynamic settings, such as the disposition effect, and highlight potentially unintended effects of regulation mandating non-binding commitment.
Earnings Expectations in the COVID Crisis
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We analyze firm-level analyst forecasts during the COVID crisis. First, we describe expectations dynamics about future corporate earnings. Downward revisions have been sharp, mostly focused on 2020, 2021 and 2022, but much less drastic than the lower bound estimated by Gormsen and Koijen (2020). Analyst forecasts do not exhibit evidence of over-reaction: As of mid-May, forecasts over 2020 earnings have progressively been reduced by 16%. Longer-run forecasts, as well as expected “Long-Term Growth†have reacted much less than short-run forecasts, and feature less disagreement. Second, we ask how much discount rate changes explain market dynamics, in an exercise similar to Shiller (1981). Given forecast revisions and price movements, we estimate an implicit discount rate going from 10% in mid-February, to 13% at the end of March, back down to their initial level in mid-May. We then decompose discount rate changes into three factors: changes in unlevered asset risk premium (0%), increased leverage (+1%) and interest rate reduction (-1%). Overall, analyst forecast revisions explain most of the decrease in equity values between January 2020 and mid May 2020, but they do not explain shorter term stock market movements.
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We analyze firm-level analyst forecasts during the COVID crisis. First, we describe expectations dynamics about future corporate earnings. Downward revisions have been sharp, mostly focused on 2020, 2021 and 2022, but much less drastic than the lower bound estimated by Gormsen and Koijen (2020). Analyst forecasts do not exhibit evidence of over-reaction: As of mid-May, forecasts over 2020 earnings have progressively been reduced by 16%. Longer-run forecasts, as well as expected “Long-Term Growth†have reacted much less than short-run forecasts, and feature less disagreement. Second, we ask how much discount rate changes explain market dynamics, in an exercise similar to Shiller (1981). Given forecast revisions and price movements, we estimate an implicit discount rate going from 10% in mid-February, to 13% at the end of March, back down to their initial level in mid-May. We then decompose discount rate changes into three factors: changes in unlevered asset risk premium (0%), increased leverage (+1%) and interest rate reduction (-1%). Overall, analyst forecast revisions explain most of the decrease in equity values between January 2020 and mid May 2020, but they do not explain shorter term stock market movements.
Economic Cycle Math
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In this short paper I would like to present a rigorous mathematical and yet heuristic description of modelling the economic cycles. The idea behind the cycles is that its dynamics could be decomposed into oscillation of two wave functions with low frequency (long-term cycle) and high frequency (short-term cycle). Finding the solution/s for these equations will be done with a use of a simple trigonometric functions such as sinâ¡wt and cosâ¡wt that lie at the heart of the wide amount of physical processes from Newtonian to quantum mechanics. Ultimately, we arrive at the energy equation â€" that is a driving force of this process.
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In this short paper I would like to present a rigorous mathematical and yet heuristic description of modelling the economic cycles. The idea behind the cycles is that its dynamics could be decomposed into oscillation of two wave functions with low frequency (long-term cycle) and high frequency (short-term cycle). Finding the solution/s for these equations will be done with a use of a simple trigonometric functions such as sinâ¡wt and cosâ¡wt that lie at the heart of the wide amount of physical processes from Newtonian to quantum mechanics. Ultimately, we arrive at the energy equation â€" that is a driving force of this process.
Effectiveness of Students’ Self-Regulated Learning during the COVID-19 Pandemic
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Self-regulated learning means that learners can set their own learning goals, determine content and progress, choose skills and methods, monitor the entire process, and conduct self-assessment. During the COVID-19 Pandemic, students’ self-regulated learning became the main learning method, but whether this learning method is effective remains to be tested. This study used 8th grade students from four middle schools in Changyuan County, Henan Province of China as objects, and explored the effects of self-regulated learning for students in special periods through educational experiments, and on this basis, proposed methods that would be more suitable for students self-regulated learning. A total of 2,536 students in the 8th-grade of the four middle schools, including 1,270 in the experimental group and 1,266 in the control group were selected. Through SPSS20.0, the pre- and post-test results of the two groups are analyzed and found: (i). Under a special period of background, self-regulated learning of some subjects is effective; (ii). Compared with self-regulated watching teachers live on the Internet platform Learning method, using protocol-guided learning for self-regulated learning, students learn better. Therefore, we suggest that: (i). Teachers should guide students to carry out self-regulated learning according to the characteristics of the discipline; (ii). Teachers should choose self-regulated learning materials and methods suitable for students according to their academic conditions.
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Self-regulated learning means that learners can set their own learning goals, determine content and progress, choose skills and methods, monitor the entire process, and conduct self-assessment. During the COVID-19 Pandemic, students’ self-regulated learning became the main learning method, but whether this learning method is effective remains to be tested. This study used 8th grade students from four middle schools in Changyuan County, Henan Province of China as objects, and explored the effects of self-regulated learning for students in special periods through educational experiments, and on this basis, proposed methods that would be more suitable for students self-regulated learning. A total of 2,536 students in the 8th-grade of the four middle schools, including 1,270 in the experimental group and 1,266 in the control group were selected. Through SPSS20.0, the pre- and post-test results of the two groups are analyzed and found: (i). Under a special period of background, self-regulated learning of some subjects is effective; (ii). Compared with self-regulated watching teachers live on the Internet platform Learning method, using protocol-guided learning for self-regulated learning, students learn better. Therefore, we suggest that: (i). Teachers should guide students to carry out self-regulated learning according to the characteristics of the discipline; (ii). Teachers should choose self-regulated learning materials and methods suitable for students according to their academic conditions.
Effects of the COVID-19 Pandemic on Worldwide Financial Markets and Opportunities for Increasing Wealth Levels
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This paper sets out to explore the consequences of the COVID-19 pandemic on worldwide stock, commodity and cryptocurrency markets. We investigate whether and in what direction these assets are linked with the number of patients and deaths caused by the COVID-19. Correlations of financial markets with the number of cases and deaths caused by COVID-19 provide evidence that the new virus has been mostly influential in a negative manner. Deaths from COVID-19 have triggered greater effects than the number of patients in stock markets of advanced European countries and the UK. This is also valid in rich but developing countries in Asia and the Middle East. Moreover, the largest European economies, the UK, the US, Australia and New Zealand, all Asian countries but also developing African and Middle East countries in a lesser extent exhibit negative linkages with COVID-19 cases and deaths. All commodities but gold that is a safe haven are negatively connected with the COVID-19 expansion while all cryptocurrencies present a positive nexus with the coronavirus.
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This paper sets out to explore the consequences of the COVID-19 pandemic on worldwide stock, commodity and cryptocurrency markets. We investigate whether and in what direction these assets are linked with the number of patients and deaths caused by the COVID-19. Correlations of financial markets with the number of cases and deaths caused by COVID-19 provide evidence that the new virus has been mostly influential in a negative manner. Deaths from COVID-19 have triggered greater effects than the number of patients in stock markets of advanced European countries and the UK. This is also valid in rich but developing countries in Asia and the Middle East. Moreover, the largest European economies, the UK, the US, Australia and New Zealand, all Asian countries but also developing African and Middle East countries in a lesser extent exhibit negative linkages with COVID-19 cases and deaths. All commodities but gold that is a safe haven are negatively connected with the COVID-19 expansion while all cryptocurrencies present a positive nexus with the coronavirus.
Equity Market Structure Regulation: Time to Start Over
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Over the past half century, the SEC’s regulations have gradually become key determinants of the way in which stocks trade and the fees that exchanges charge for their services. The current equity market structure rules are contained in the SEC’s Regulation NMS. The theory behind Regulation NMS is that a system of dispersed markets operating pursuant to SEC-mandated information and order routing links will provide the benefits of consolidation and competition simultaneously.This paper argues that Regulation NMS has failed in that quest. It discourages exchange innovation, provides insufficient incentives for traders to price orders aggressively, forces the SEC to act as a price regulator, requires brokers to act against their customers’ interests, and creates questionable incentives for market participants, possibly producing socially excessive investments in speed and secrecy.The paper contends that the SEC should replace Regulation NMS with three simple design principles â€" exchange autonomy, regulatory consistency, and issuer choice. These would allow market forces rather than regulatory mandates to determine the design and pricing of trading platforms and the trading strategies of broker-dealers. They would better align the private incentives of trading platforms with the social objectives of fostering liquidity and price discovery.
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Over the past half century, the SEC’s regulations have gradually become key determinants of the way in which stocks trade and the fees that exchanges charge for their services. The current equity market structure rules are contained in the SEC’s Regulation NMS. The theory behind Regulation NMS is that a system of dispersed markets operating pursuant to SEC-mandated information and order routing links will provide the benefits of consolidation and competition simultaneously.This paper argues that Regulation NMS has failed in that quest. It discourages exchange innovation, provides insufficient incentives for traders to price orders aggressively, forces the SEC to act as a price regulator, requires brokers to act against their customers’ interests, and creates questionable incentives for market participants, possibly producing socially excessive investments in speed and secrecy.The paper contends that the SEC should replace Regulation NMS with three simple design principles â€" exchange autonomy, regulatory consistency, and issuer choice. These would allow market forces rather than regulatory mandates to determine the design and pricing of trading platforms and the trading strategies of broker-dealers. They would better align the private incentives of trading platforms with the social objectives of fostering liquidity and price discovery.
Fintech and the Future of Financial Service: A Literature Review and Research Agenda
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The rise of Fintech in the past decade has received growing scholarly attention. This paper surveys Fintech-related articles published in leading finance, accounting, and management journals from 2010 to 2019. It aims to generate a taxonomy of Fintech and accumulate knowledge in the fields of text analytics, algorithmic trading, Fintech lending, blockchains, cryptocurrencies, and the use of artificial intelligence in financial services. Critical reflections are also presented, and future research agendas in Fintech are suggested.
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The rise of Fintech in the past decade has received growing scholarly attention. This paper surveys Fintech-related articles published in leading finance, accounting, and management journals from 2010 to 2019. It aims to generate a taxonomy of Fintech and accumulate knowledge in the fields of text analytics, algorithmic trading, Fintech lending, blockchains, cryptocurrencies, and the use of artificial intelligence in financial services. Critical reflections are also presented, and future research agendas in Fintech are suggested.
George Costanza at it Again: The Leveraged ETF Episode
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In understanding how leveraged ETFs perform, we’ll uncover an important lesson relevant to all investing: how your choice of investment size can be more important than your choice of investment. To summarize, highly leveraged long and short ETFs provide a perfect illustration of how overly-aggressive investment sizing can turn a good trade into a losing one. An investor who borrows money to take a leveraged position in an asset will need to keep trading the asset in order to maintain a constant level of leverage as the asset price fluctuates.
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In understanding how leveraged ETFs perform, we’ll uncover an important lesson relevant to all investing: how your choice of investment size can be more important than your choice of investment. To summarize, highly leveraged long and short ETFs provide a perfect illustration of how overly-aggressive investment sizing can turn a good trade into a losing one. An investor who borrows money to take a leveraged position in an asset will need to keep trading the asset in order to maintain a constant level of leverage as the asset price fluctuates.
Hedonic Brownian Motion Index for Morocco
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In this paper, we propose a new approach to modelling a real estate price index in Morocco, based on the hedonic approach. The basic idea of ​​this paper is to verify the importance of the characteristics of the real estate in the real estate price. Thus, based on data from the three major cities of the capital region of Morocco (RABAT Region), we estimated a hedonic model that takes into account spatial autocorrelation. The results obtained through this modelling generally confirm that the surface area and location of the real estate (land, house, villa and apartment) have a significant influence on the price of real estate. In addition, and because of the static nature of the database, which refers to one year, we have proposed a new approach to building the real estate price index, namely the stochastic Brownian motion approach. The results claim that this index is in perfect agreement with the real estate price index based on the repeat sales approach used and developed by the Central Bank.
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In this paper, we propose a new approach to modelling a real estate price index in Morocco, based on the hedonic approach. The basic idea of ​​this paper is to verify the importance of the characteristics of the real estate in the real estate price. Thus, based on data from the three major cities of the capital region of Morocco (RABAT Region), we estimated a hedonic model that takes into account spatial autocorrelation. The results obtained through this modelling generally confirm that the surface area and location of the real estate (land, house, villa and apartment) have a significant influence on the price of real estate. In addition, and because of the static nature of the database, which refers to one year, we have proposed a new approach to building the real estate price index, namely the stochastic Brownian motion approach. The results claim that this index is in perfect agreement with the real estate price index based on the repeat sales approach used and developed by the Central Bank.
Market-Wide Illiquidity and the Volatility of a Model-Free Stochastic Discount Factor
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We show that illiquidity risk matters for asset pricing independently of the specific functional form of the liquidity-based asset pricing model. Employing a non-parametric model-free stochastic discount factor (SDF), estimated using different sets of portfolio returns coming from both the stock and the corporate bond markets, we show that market-wide illiquidity affects positive and significantly the volatility of the SDF. This finding is robust to the use of alternative market-wide illiquidity metrics and persists after we control for GARCH effects on the short-term component of the SDF’s volatility. Overall, our analysis shows that market-wide illiquidity is a relevant driver of the time-varying behavior of the assets’ risk premium.
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We show that illiquidity risk matters for asset pricing independently of the specific functional form of the liquidity-based asset pricing model. Employing a non-parametric model-free stochastic discount factor (SDF), estimated using different sets of portfolio returns coming from both the stock and the corporate bond markets, we show that market-wide illiquidity affects positive and significantly the volatility of the SDF. This finding is robust to the use of alternative market-wide illiquidity metrics and persists after we control for GARCH effects on the short-term component of the SDF’s volatility. Overall, our analysis shows that market-wide illiquidity is a relevant driver of the time-varying behavior of the assets’ risk premium.
MiFID II and Inducements: A Copernican Revolution in the Investment Services Ecosystem? Speculative Thoughts on the Inducements Regime After Two Years From MiFID II Introduction in the Light of the Recent ESMA Technical Advice
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The paper sheds light on MiFID II inducements regime and its application after two years from the entry into force of MiFID II. In this respect, the Authors analyse not only the regulatory framework applicable to inducements and investment firms but provide also a pragmatic overview on the extent to which such regime may impact the business model of both investment firms and asset managers. Ultimately, an overview on the recent ESMA Technical Advice on inducements disclosure is provided.As a conclusive remark, the Authors raise some interrogatives about the potential of FinTech and RegTech solutions for optimizing the current conflict of interests framework within the investment services industry.
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The paper sheds light on MiFID II inducements regime and its application after two years from the entry into force of MiFID II. In this respect, the Authors analyse not only the regulatory framework applicable to inducements and investment firms but provide also a pragmatic overview on the extent to which such regime may impact the business model of both investment firms and asset managers. Ultimately, an overview on the recent ESMA Technical Advice on inducements disclosure is provided.As a conclusive remark, the Authors raise some interrogatives about the potential of FinTech and RegTech solutions for optimizing the current conflict of interests framework within the investment services industry.
Modelling the Evolution of Wind and Solar Power Infeed Forecasts
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With the increasing integration of wind and photovoltaic power in the whole European power system, there is a longing for detecting how to trade energy in the ever-changing intraday market from electric power industries. The intraday trading becomes even more relevant in the wake of the European Cross-Border Intraday (XBID) project, which aims at integrating the electricity trading cross Europe. Therefore, optimal trading strategies to address renewables output forecast fluctuations are growingly required to be designed. In this study, we model, simulate and predict the evolution of wind and PV infeed forecasting errors updated every 15-minute, which participants in the intraday market typically incorporate in the adjustments of price bids. We employed several stochastic and probabilistic models and found a superior performance of the later to accurately predict 15-minute renewable forecasts. Since ex-ante updated forecasting errors of renewables infeed are usually not available to researchers, simulations based on our proposed models break the ground for further applications to intraday pricing and optimization.
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With the increasing integration of wind and photovoltaic power in the whole European power system, there is a longing for detecting how to trade energy in the ever-changing intraday market from electric power industries. The intraday trading becomes even more relevant in the wake of the European Cross-Border Intraday (XBID) project, which aims at integrating the electricity trading cross Europe. Therefore, optimal trading strategies to address renewables output forecast fluctuations are growingly required to be designed. In this study, we model, simulate and predict the evolution of wind and PV infeed forecasting errors updated every 15-minute, which participants in the intraday market typically incorporate in the adjustments of price bids. We employed several stochastic and probabilistic models and found a superior performance of the later to accurately predict 15-minute renewable forecasts. Since ex-ante updated forecasting errors of renewables infeed are usually not available to researchers, simulations based on our proposed models break the ground for further applications to intraday pricing and optimization.
Momentum Anomaly: Research In BIST100 Index
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Stock market anomalies are mispricings based on irrational investor behaviors. Investors can obtain abnormal return based on certain investment strategies in anomaly observed markets. The purpose of this study is to investigate the existence of momentum anomaly in BIST 100 index during the period July 2008 to June 2015. Jegadeesh and Titman (1993) J month / K month method were used. Findings reveal the existence of momentum anomaly in 9-month portfolio and 9-12-month investment strategies, in 12- month portfolio and 6- 9-12-month investment strategies when there is no time between formation period and investment period in BIST 100 Index. Results are significant in 9- 12-month momentum investment and 3-6-9-12-month investment strategies when 1- week lag between the formation period and investment period and these strategies produce more abnormal return.
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Stock market anomalies are mispricings based on irrational investor behaviors. Investors can obtain abnormal return based on certain investment strategies in anomaly observed markets. The purpose of this study is to investigate the existence of momentum anomaly in BIST 100 index during the period July 2008 to June 2015. Jegadeesh and Titman (1993) J month / K month method were used. Findings reveal the existence of momentum anomaly in 9-month portfolio and 9-12-month investment strategies, in 12- month portfolio and 6- 9-12-month investment strategies when there is no time between formation period and investment period in BIST 100 Index. Results are significant in 9- 12-month momentum investment and 3-6-9-12-month investment strategies when 1- week lag between the formation period and investment period and these strategies produce more abnormal return.
Monetary Policy and Intangible Investment
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We contrast how monetary policy affects intangible relative to tangible investment. We document that the stock prices of firms with more intangible assets react less to monetary policy shocks, as identified from Fed Funds futures movements around FOMC announcements. Consistent with the stock price results, instrumental variable local projections confirm that the total investment in firms with more intangible assets responds less to monetary policy, and that intangible investment responds less to monetary policy compared to tangible invest- ment. We identify two mechanisms behind these results. First, firms with intangible assets use less collateral, and therefore respond less to the credit channel of monetary policy. Second, intangible assets have higher depreciation rates, so same interest rate changes affect their user cost of capital less.
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We contrast how monetary policy affects intangible relative to tangible investment. We document that the stock prices of firms with more intangible assets react less to monetary policy shocks, as identified from Fed Funds futures movements around FOMC announcements. Consistent with the stock price results, instrumental variable local projections confirm that the total investment in firms with more intangible assets responds less to monetary policy, and that intangible investment responds less to monetary policy compared to tangible invest- ment. We identify two mechanisms behind these results. First, firms with intangible assets use less collateral, and therefore respond less to the credit channel of monetary policy. Second, intangible assets have higher depreciation rates, so same interest rate changes affect their user cost of capital less.
Revisiting the Duration Dependence in the US Stock Market Cycles
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There is a big controversy among both investment professionals and academics regarding the question of how the probability that a bull or bear market terminates depends on its age. Using more than two centuries of data on the broad US stock market index, in this paper we revisit the duration dependence in bull and bear markets. We find that for both bull and bear markets the duration dependence is a nonlinear function of the state age. Our results suggest that the duration dependence in bear markets is strictly positive. For 93% of bull markets the duration dependence is also positive. Only about 7% of the bull markets, those with the longest durations, do not exhibit positive duration dependence. We also compare a few selected theoretical distributions in describing the duration dependence in bull and bear markets. We find that the gamma distribution most often provides the best fit to both the survivor and hazard functions of bull and bear markets. However, our results reveal that none of the selected distributions correctly describes the right tail of the hazard functions.
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There is a big controversy among both investment professionals and academics regarding the question of how the probability that a bull or bear market terminates depends on its age. Using more than two centuries of data on the broad US stock market index, in this paper we revisit the duration dependence in bull and bear markets. We find that for both bull and bear markets the duration dependence is a nonlinear function of the state age. Our results suggest that the duration dependence in bear markets is strictly positive. For 93% of bull markets the duration dependence is also positive. Only about 7% of the bull markets, those with the longest durations, do not exhibit positive duration dependence. We also compare a few selected theoretical distributions in describing the duration dependence in bull and bear markets. We find that the gamma distribution most often provides the best fit to both the survivor and hazard functions of bull and bear markets. However, our results reveal that none of the selected distributions correctly describes the right tail of the hazard functions.
Shadow Bank Runs
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Short-term debt is commonly used to fund illiquid assets. A conventional view asserts that such arrangements are run-prone in part because redemptions must be processed on a first-come, first-served basis. This sequential service protocol, however, appears absent in the wholesale banking sector---and yet, shadow banks appear vulnerable to runs. We explain how banking arrangements that fund fixed-cost operations using short-term debt can be run-prone even in the absence of sequential service. Interventions designed to eliminate run risk may or may not improve depositor welfare. We describe how optimal policies vary under different conditions and compare these to recent policy interventions by the Security and Exchange Commission and the Federal Reserve. We conclude that the conventional view concerning the societal benefits of liquidity transformation and its recommendations for prudential policy extend far beyond their application to depository institutions.
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Short-term debt is commonly used to fund illiquid assets. A conventional view asserts that such arrangements are run-prone in part because redemptions must be processed on a first-come, first-served basis. This sequential service protocol, however, appears absent in the wholesale banking sector---and yet, shadow banks appear vulnerable to runs. We explain how banking arrangements that fund fixed-cost operations using short-term debt can be run-prone even in the absence of sequential service. Interventions designed to eliminate run risk may or may not improve depositor welfare. We describe how optimal policies vary under different conditions and compare these to recent policy interventions by the Security and Exchange Commission and the Federal Reserve. We conclude that the conventional view concerning the societal benefits of liquidity transformation and its recommendations for prudential policy extend far beyond their application to depository institutions.
Shareholder Return of the Euro Stoxx 50 Companies: 2004 â€" 2020
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We calculate the shareholder returns of the companies in the Euro Stoxx 50 in the period 2004 - April 2020. We analyze 62 companies: 47 that were in the Euro Stoxx 50 in April 2020 and had trading records since December 2004 and 15 companies that had been in the Euro Stoxx 50 in the period. In the period December 2004-April 30, 2020, 19 companies had negative return and the average annual return was 4,8%. In the first four months of 2020, 6 companies had positive return and the average return was -24,4%. In the period December 2018-April 30, 2020, 26 companies had positive return and the average return was -3,2%. The correlation of return (December 2004-April 30, 2020) and Market Cap. in 2004 was -38%. The correlation of return (December 2018-April 30, 2020) and Market Cap. in 2018 was 43%. 34 companies had a price decrease (including dividends received) in the period 2004 â€" April 30, 2020 higher than 60%, 46 companies higher than 50% and 55 companies higher than 40%.
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We calculate the shareholder returns of the companies in the Euro Stoxx 50 in the period 2004 - April 2020. We analyze 62 companies: 47 that were in the Euro Stoxx 50 in April 2020 and had trading records since December 2004 and 15 companies that had been in the Euro Stoxx 50 in the period. In the period December 2004-April 30, 2020, 19 companies had negative return and the average annual return was 4,8%. In the first four months of 2020, 6 companies had positive return and the average return was -24,4%. In the period December 2018-April 30, 2020, 26 companies had positive return and the average return was -3,2%. The correlation of return (December 2004-April 30, 2020) and Market Cap. in 2004 was -38%. The correlation of return (December 2018-April 30, 2020) and Market Cap. in 2018 was 43%. 34 companies had a price decrease (including dividends received) in the period 2004 â€" April 30, 2020 higher than 60%, 46 companies higher than 50% and 55 companies higher than 40%.
The Effectiveness of Macroprudential Policies and Capital Controls Against Volatile Capital Inflows
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This paper compares the effectiveness of macroprudential policies (MaPs) and capital controls (CCs) in influencing the volume and composition of capital inflows, and the probability of banking and currency crises. We distinguish between foreign exchange (FX)-based MaPs, which may be similar to some types of CCs, and non-FX-based MaPs. Using a panel of 83 countries over the period 2000-17, and a propensity score matching model to control for selection bias, we find that capital inflow volumes are lower where FX-based MaPs have been activated. The imposition of CCs does not have a significant effect on the volume or composition of capital inflows. Further, we find that the activation of MaPs is associated with a lower probability of banking crises and surges in capital inflows in the following three years.
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This paper compares the effectiveness of macroprudential policies (MaPs) and capital controls (CCs) in influencing the volume and composition of capital inflows, and the probability of banking and currency crises. We distinguish between foreign exchange (FX)-based MaPs, which may be similar to some types of CCs, and non-FX-based MaPs. Using a panel of 83 countries over the period 2000-17, and a propensity score matching model to control for selection bias, we find that capital inflow volumes are lower where FX-based MaPs have been activated. The imposition of CCs does not have a significant effect on the volume or composition of capital inflows. Further, we find that the activation of MaPs is associated with a lower probability of banking crises and surges in capital inflows in the following three years.
The Effects of Operating Cash Flow Disclosure on Earnings Comparability, Analysts’ Forecasts, and Firms’ Investment Decisions during the Pre-IFRS Era
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We examine the effects of the availability of operating cash flow (OCF) information disclosed by firms operating in 15 international countries during the pre-IFRS era on: (1) the comparability of these firms’ disaggregated earnings to those of U.S. firms for equity valuation purposes, (2) the properties of analysts’ earnings forecasts, and (3) the efficiency of firms’ investment decisions. We find that the comparability of disaggregated earnings improves after company-disclosed OCF information is available. We also find decreases in analysts’ forecast errors and dispersion and a decrease in firms’ tendency to over- or under-invest when they are predisposed to do so.
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We examine the effects of the availability of operating cash flow (OCF) information disclosed by firms operating in 15 international countries during the pre-IFRS era on: (1) the comparability of these firms’ disaggregated earnings to those of U.S. firms for equity valuation purposes, (2) the properties of analysts’ earnings forecasts, and (3) the efficiency of firms’ investment decisions. We find that the comparability of disaggregated earnings improves after company-disclosed OCF information is available. We also find decreases in analysts’ forecast errors and dispersion and a decrease in firms’ tendency to over- or under-invest when they are predisposed to do so.
The Effects of Terrorism Risk on Household Savings
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In view of the increasing intensity of terrorism worldwide, behavioral changes of households become visible. People tend to overvalue terror-related risks such that the subjective probability of terrorism events. Using microeconomic panel data of the elderly population from 13 European countries, this study analyzes the impact of terrorism risk on household savings patterns. Terrorism increases household savings to a significant and economically meaningful degree. Two terror variables â€" the number of attacks and the number of fatalities â€" analyze this effect in detail. While the impact of the number of attacks is negative, savings increase with the number of fatalities. We give a potential explanation for this difference. While the results for European countries are consistent, Israel is markedly different from the rest of the sample â€" an effect likely due to the different political situations in both regions. The reported findings have implications for both fiscal and monetary policy.
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In view of the increasing intensity of terrorism worldwide, behavioral changes of households become visible. People tend to overvalue terror-related risks such that the subjective probability of terrorism events. Using microeconomic panel data of the elderly population from 13 European countries, this study analyzes the impact of terrorism risk on household savings patterns. Terrorism increases household savings to a significant and economically meaningful degree. Two terror variables â€" the number of attacks and the number of fatalities â€" analyze this effect in detail. While the impact of the number of attacks is negative, savings increase with the number of fatalities. We give a potential explanation for this difference. While the results for European countries are consistent, Israel is markedly different from the rest of the sample â€" an effect likely due to the different political situations in both regions. The reported findings have implications for both fiscal and monetary policy.
The Impact of the COVID-19 Pandemic Crisis on the Travel and Tourism Sector: UK Evidence
SSRN
The COVID-19 pandemic has brought about unprecedented uncertainty and fear to the global economies. In this article, first, we discuss the impact of COVID-19 on the travel and tourism industry by examining the implications of the pandemic on the hospitality, leisure, and travel sub-sectors and conclude with recommendations to be adapted by firms to cope with the aftermath of the pandemic crisis. From the previous outbreaks of severe acute respiratory syndrome (SARS), bird and swine flu, it is evident that these outbreaks have had an impact on the tourism and travel sector. Overall, this paper provides some of the initial insights on the impact of the COVID-19 pandemic on the tourism and travel sector in the UK and proposes a five key point framework focussing on disaster and pandemic planning, sustainability, communication strategy, well-being of employees and investment in technology for coping with any future challenges arising from the aftermath of the pandemic crisis
SSRN
The COVID-19 pandemic has brought about unprecedented uncertainty and fear to the global economies. In this article, first, we discuss the impact of COVID-19 on the travel and tourism industry by examining the implications of the pandemic on the hospitality, leisure, and travel sub-sectors and conclude with recommendations to be adapted by firms to cope with the aftermath of the pandemic crisis. From the previous outbreaks of severe acute respiratory syndrome (SARS), bird and swine flu, it is evident that these outbreaks have had an impact on the tourism and travel sector. Overall, this paper provides some of the initial insights on the impact of the COVID-19 pandemic on the tourism and travel sector in the UK and proposes a five key point framework focussing on disaster and pandemic planning, sustainability, communication strategy, well-being of employees and investment in technology for coping with any future challenges arising from the aftermath of the pandemic crisis
The New Belgian Companies Code: A Primer
SSRN
Belgium significantly reformed its company law. The number of company forms has been reduced and the new Companies Code introduced a limitation on the directors' liability. Belgium also shifted from the real seat to the statutory seat. The legislator promotes the private limited liability company or “BV†as the most important form of company. The BV has no capital, but equity and can be structured according to the wishes of the founders. Further, companies can opt for a monistic or dualistic governance structure and voting rights can now be modulated. However, listed companies can only opt for double voting rights for loyal shareholders. The modernization of the Belgian company law must be welcomed, but the hasty introduction requires numerous technical corrections that the Belgian Parliament is currently preparing.
SSRN
Belgium significantly reformed its company law. The number of company forms has been reduced and the new Companies Code introduced a limitation on the directors' liability. Belgium also shifted from the real seat to the statutory seat. The legislator promotes the private limited liability company or “BV†as the most important form of company. The BV has no capital, but equity and can be structured according to the wishes of the founders. Further, companies can opt for a monistic or dualistic governance structure and voting rights can now be modulated. However, listed companies can only opt for double voting rights for loyal shareholders. The modernization of the Belgian company law must be welcomed, but the hasty introduction requires numerous technical corrections that the Belgian Parliament is currently preparing.
The Real Effects of Environment and Social Scandals on the Corporate Sector
SSRN
We employ a large sample of adverse firm-specific environmental and social-related (henceforth, E&S) incidents to explore the impact of corporate social irresponsibility on corporate policies. We find that firms reduce cash holdings and issue more debt following negative E&S incidents, suggesting sizeable costs to managing E&S scandals. For financially constrained firms that are cash poor or are not able to tap the debt markets, E&S scandals lead to reductions in capital expenditure, thus hurting the firm’s core business. Firms with higher Environment, Social and Governance (ESG) reputation ex-ante weather the negative effect of E&S scandals better. This is consistent with the notion that ESG initiatives provide reputation capital, which helps buffer against future negative E&S incidents.
SSRN
We employ a large sample of adverse firm-specific environmental and social-related (henceforth, E&S) incidents to explore the impact of corporate social irresponsibility on corporate policies. We find that firms reduce cash holdings and issue more debt following negative E&S incidents, suggesting sizeable costs to managing E&S scandals. For financially constrained firms that are cash poor or are not able to tap the debt markets, E&S scandals lead to reductions in capital expenditure, thus hurting the firm’s core business. Firms with higher Environment, Social and Governance (ESG) reputation ex-ante weather the negative effect of E&S scandals better. This is consistent with the notion that ESG initiatives provide reputation capital, which helps buffer against future negative E&S incidents.
Theory of Government Venture Capital
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Government-sponsored venture capitalists (GVCs) play an important role in most successful venture capital (VC) markets. This paper offers the first theory on GVCs. We investigate the role of government in VC markets, where private venture capitalists (PVCs) dominate. We find that PVCs offer better incentives, while GVCs address risks better; PVCs are more efficient in financing superior ventures, while GVCs are more efficient in financing inferior ventures; and there are ventures that are socially no-viable if financed by PVCs but are socially viable if financed by GVCs.
SSRN
Government-sponsored venture capitalists (GVCs) play an important role in most successful venture capital (VC) markets. This paper offers the first theory on GVCs. We investigate the role of government in VC markets, where private venture capitalists (PVCs) dominate. We find that PVCs offer better incentives, while GVCs address risks better; PVCs are more efficient in financing superior ventures, while GVCs are more efficient in financing inferior ventures; and there are ventures that are socially no-viable if financed by PVCs but are socially viable if financed by GVCs.
To Be or Not to Be? The Questionable Benefits of Mutual Clearing Agreements for Derivatives
SSRN
Recently, for standard asset classes, the first mutual clearing agreements between Central Coun- terparties (CCPs) have come into existence. There are already global concerns over the unique threats and benefits which arise from these situations, and further concern for an extension of agree- ments to derivatives CCPs. This paper applies the current mutual agreement framework to credit default swaps (derivatives) CCPs and compares this to clearing without any such agreement. Key results concern: The magnitude of price dispersion between multiple CCPs (as trading moves asset prices away from fundamental value), the magnitude of default contagion, the price impact of pre- dation, and the disciplinary mechanism inherent in the mutual cross-margin fund (between CCPs). Current regulatory debate, concerning the safety of permitting use of the default fund to meet inter-CCP shortfalls, is settled. Finally, a large-scale dynamic simulation models the price process â€" through variation margin exchange â€" and provides real-world policy/regulatory implications for a variety of market liquidity states.
SSRN
Recently, for standard asset classes, the first mutual clearing agreements between Central Coun- terparties (CCPs) have come into existence. There are already global concerns over the unique threats and benefits which arise from these situations, and further concern for an extension of agree- ments to derivatives CCPs. This paper applies the current mutual agreement framework to credit default swaps (derivatives) CCPs and compares this to clearing without any such agreement. Key results concern: The magnitude of price dispersion between multiple CCPs (as trading moves asset prices away from fundamental value), the magnitude of default contagion, the price impact of pre- dation, and the disciplinary mechanism inherent in the mutual cross-margin fund (between CCPs). Current regulatory debate, concerning the safety of permitting use of the default fund to meet inter-CCP shortfalls, is settled. Finally, a large-scale dynamic simulation models the price process â€" through variation margin exchange â€" and provides real-world policy/regulatory implications for a variety of market liquidity states.
Trade Secrets Protection and Stock Price Crash Risk
SSRN
This paper examines the effect of trade secrets protection on stock price crash risk. Using an experimental setting with the Uniform Trade Secrets Act (UTSA), we find that firms headquartered in states with the UTSA tend to have higher stock price crash risk. The results are robust to controlling for other trade secrets laws and the choice of crash risk measures, and they are more pronounced in small firms and firms with high market-to-book and low leverage ratios. A detailed analysis of economic mechanisms reveals that increased crash risk for firms under the UTSA could be primarily associated with higher information asymmetry, low reporting quality, and more negative news withheld following the UTSA. Overall, our results highlight that trade secrets protection leads to the unexpected, negative consequence of elevated stock price crash risk.
SSRN
This paper examines the effect of trade secrets protection on stock price crash risk. Using an experimental setting with the Uniform Trade Secrets Act (UTSA), we find that firms headquartered in states with the UTSA tend to have higher stock price crash risk. The results are robust to controlling for other trade secrets laws and the choice of crash risk measures, and they are more pronounced in small firms and firms with high market-to-book and low leverage ratios. A detailed analysis of economic mechanisms reveals that increased crash risk for firms under the UTSA could be primarily associated with higher information asymmetry, low reporting quality, and more negative news withheld following the UTSA. Overall, our results highlight that trade secrets protection leads to the unexpected, negative consequence of elevated stock price crash risk.
Trade-Offs Between Asset Location and Proximity to Home: Evidence From REIT Property Sell-Offs
SSRN
We examine property sell-offs by real estate investment trusts (REITs) and find that investors respond favorably to sales of properties located close to a sell-off firm’s headquarters. The negative relationship between the distance from headquarters and cumulative abnormal returns (CARs) that we document exists only in non-gateway markets, though; there is no such relationship in gateway markets. This finding suggests that the positive effects of selling assets in small markets with high perceived risk and limited growth opportunities dominate the negative effects of the efficiency loss brought about by holding assets far away from home. This is the first study to simultaneously examine the proximity of a firm’s underlying assets to its headquarters and the location of individual assets in the context of asset sales. Our results are robust to several measures of proximity (using geographic distance, in miles, between a firm’s headquarters and its underlying assets or a nearby dummy for below-median distance), to alternative market classifications, to the inclusion of various fixed effects and controls for geographic concentrations (the Herfindahl index of how close to one another the properties are located) and property performance, and to bargaining power and business cycles.
SSRN
We examine property sell-offs by real estate investment trusts (REITs) and find that investors respond favorably to sales of properties located close to a sell-off firm’s headquarters. The negative relationship between the distance from headquarters and cumulative abnormal returns (CARs) that we document exists only in non-gateway markets, though; there is no such relationship in gateway markets. This finding suggests that the positive effects of selling assets in small markets with high perceived risk and limited growth opportunities dominate the negative effects of the efficiency loss brought about by holding assets far away from home. This is the first study to simultaneously examine the proximity of a firm’s underlying assets to its headquarters and the location of individual assets in the context of asset sales. Our results are robust to several measures of proximity (using geographic distance, in miles, between a firm’s headquarters and its underlying assets or a nearby dummy for below-median distance), to alternative market classifications, to the inclusion of various fixed effects and controls for geographic concentrations (the Herfindahl index of how close to one another the properties are located) and property performance, and to bargaining power and business cycles.
US Risk Premia under Emerging Markets Constraints
SSRN
USA market is the benchmark for empirical finance and considered the closest example of how an efficient market should behave. On the other hand, divergent results from the observed in the USA are often associated with unreliable and due deviations from efficient hypothesis. However, how would the US market results behave had the data the same constraints as an emerging market economy? To answer that question we analyze the risk premia market estimation under the typical constraints from emerging equity markets: the small number of assets and the short time-series sample available for estimation. We use parameters of time-series length, number of assets and accounting variables distribution from the Brazilian equity market. Surprisingly, we conclude that the US market risk premia convey the same data features as the Brazilian risk premia if under the same time constraints. Then, we evaluate two potential causes of problems in risk premia estimations with small T: i) small sample bias on betas, and ii) divergence between ex-post and ex-ante risk premia. Through Monte Carlo simulations, we conclude that for the T around 5 years the beta estimates are no longer a problem. However, it is necessary to analyze a time-series sample exceeding 40 years to obtain robust ex-ante risk premia.
SSRN
USA market is the benchmark for empirical finance and considered the closest example of how an efficient market should behave. On the other hand, divergent results from the observed in the USA are often associated with unreliable and due deviations from efficient hypothesis. However, how would the US market results behave had the data the same constraints as an emerging market economy? To answer that question we analyze the risk premia market estimation under the typical constraints from emerging equity markets: the small number of assets and the short time-series sample available for estimation. We use parameters of time-series length, number of assets and accounting variables distribution from the Brazilian equity market. Surprisingly, we conclude that the US market risk premia convey the same data features as the Brazilian risk premia if under the same time constraints. Then, we evaluate two potential causes of problems in risk premia estimations with small T: i) small sample bias on betas, and ii) divergence between ex-post and ex-ante risk premia. Through Monte Carlo simulations, we conclude that for the T around 5 years the beta estimates are no longer a problem. However, it is necessary to analyze a time-series sample exceeding 40 years to obtain robust ex-ante risk premia.
