Research articles for the 2020-06-11

A Note on the Profitability of African Banks: Islamic versus Conventional
Boungou, Whelsy
This paper aims to examine and compare the profitability of Islamic and conventional banks located in 20 African countries over the period 2009-2018. Based on a sample of 21 Islamic banks and 297 conventional banks, this study shows that Islamic banks perform better than conventional banks in Africa. This result is driven by large banks.

A Novel Algorithm for Generating GVKEY-CIK Link Table
Chu, K.C. Kenneth,Chen, Sipeng,Leung, Tommy
This paper presents a do-it-yourself algorithm to generate the historical GVKEY-CIK link table. The proposed algorithm features to pre-classify sample data into different treatment subgroups and utilizes historical firm information available from the source data to increase (reduce) matching efficiency (errors). Simulation results show that our algorithm is superior to applying only conventional name matching operations over the whole sample: 57.5 percent of the overall matching results are error-free ex-ante, and for the remaining 42.5 percent of data, records without Type I errors (with Type II errors) increase (decrease) by 34.0 percent (59.4 percent) when the optimal threshold is used.

AVM versus Appraisal-Based Underwriting in Refinance Mortgages: The Trade-off Between Noise and Bias.
Krivorotov, George,LaCour-Little, Michael
Extensive research has confirmed that there is significant anchoring bias in purchase mortgage appraisals, with appraisers setting the value at or above the contract price the vast majority of the time. However, understanding appraisal bias in refinance mortgages has been significantly more difficult due to the absence of a sales transaction value, with most research relying on noisy valuations from AVMs or mark-to-marketing prior transactions to provide a baseline of value. To circumvent this problem, this paper utilizes a novel dataset of 9 million recent refinance appraisals from 2013-2017 that contain the initial estimate of value provided by the homeowner/loan officer in the loan application, a value that is not permitted to be shared with the appraiser. We find a limited amount of anchoring bias on this initial estimate of home value, with around 7% of appraisals “hitting the mark” exactly. We analyze some of the potential drivers behind the bias and find that it is concentrated among certain appraisers and occurs more at higher LTVs. Loans with collateral valued by appraisers that routinely “hit the mark” are observed to have slightly higher default risk and slightly worse risk rank-ordering properties, controlling for all other observables, pointing to appraiser-specific effects on collateral valuation quality. However, even for “biased” loans, appraisal-based LTVs still perform largely similarly to LTVs derived from automated valuation models (AVMs) in risk rank-ordering ability, meaning that the bias from the appraisal and the noise in the AVM largely cancel each other out, in contrast to findings on purchase mortgages.

Access to Finance: Why Aren’t Women Leaning In?
Morsy, Hanan
Women are self-selecting out of the African credit market.

An Empirical Study of Jan Dhan - Aadhaar - Mobile Trinity and Financial Inclusion
Goel, Anusha
In a recent initiative, a new scheme combining Jan Dhan account, Aadhaar Card and mobile banking have been introduced by the government. The philosophy was that Jan Dhan accounts would be opened especially for neglected sections of society. The issue of unique identity proof of all citizens would be taken care of by Aadhaar Card. Mobile Banking would develop infrastructure for payments and withdrawals thereby resolving the problem of last-mile delivery of services (Economic Survey 2015; Srinivas & Kapur, 2018). We undertook a questionnaire-based study to seek perception about the level of inclusion and effectiveness of JAM scheme from 150 respondents in Delhi during July - September 2018. The study indicated that the level of financial inclusion varies widely among these households. Although banking services are available in the vicinity they barely use facilities like passbook, cheque book, debit card, mobile banking etc. With regard to JAM trinity, they are happy about the overall scheme but certain concerns persist. Demographics play a major role since the older generation, educated, working-class and high-income cadre have more positive perception among the entire group. Also, the perceived level of inclusion, the effectiveness of Jan Dhan Yojana, Aadhaar Card and mobile banking are found to be strongly correlated.

At the Mercy of the Common Noise: Blow-ups in a Conditional McKean--Vlasov Problem
Sean Ledger,Andreas Sojmark

We extend a model of positive feedback and contagion in large mean-field systems, by introducing a common source of noise driven by Brownian motion. Although the driving dynamics are continuous, the positive feedback effect can lead to `blow-up' phenomena whereby solutions develop jump-discontinuities. Our main results are twofold and concern the conditional McKean--Vlasov formulation of the model. First and foremost, we show that there are global solutions to this McKean--Vlasov problem, which can be realised as limit points of a motivating particle system with common noise. Furthermore, we derive results on the occurrence of blow-ups, thereby showing how these events can be triggered or prevented by the pathwise realisations of the common noise.

Back to Fundamentals: The Accrualâ€"Cash Flow Correlation, the Inverted-U Pattern, and Stock Returns
AN, Ran,Chiu, Peng-Chia,Zhang, Yinglei
Economic and reporting development factors affect the timing and non-timing roles of accruals, which in turn affect the correlation between accruals and operating cash flows (CFO). We show that the strength of the accrual anomaly varies predictably with the economic determinants of the accruals-CFO relation, including intangible intensity, the length of operating cycles, extreme positive and negative financial performance, the magnitude of the non-timing-related accruals, and firm-specific estimation of the accruals-CFO relation in a cross-section analysis. Next, using variations in the correlation between accruals and CFO, we explain several seemingly unrelated empirical regularities of the accrual anomaly. First, we explain the stronger accrual anomaly among profit firms, large-sized firms, firms with higher covariation between accruals and the employment growth rate, and firms with higher earnings response coefficients. Second, we explain the inverted U-shape relation between accruals and future stock returns in the recent two decades and the time-series decline of abnormal returns of the accrual anomaly. Third, we further demonstrate that the strength of the return predictability of components of accruals depends on the strength of the correlation between individual accrual components and CFO. Finally, we extend our analysis to a large class of accounting-based return predictors that are related to accruals, and still find stronger return predictability for firms with more negative correlations between the predicting variables and CFO.

Bank Regulation/Supervision and Bank Auditing
Ghosh, Al (Aloke),Jarva, Henry,Ryan, Stephen G.
We investigate how overlapping activities of bank regulators and supervisors and bank auditors influence banks’ internal control quality, auditor-client contracting (audit fees and audit effort), and financial statement reliability. Using material weaknesses in internal controls as a proxy for internal control quality, we find that banks exhibit fewer internal control problems than do nonbanks. Using audit fees, earnings announcement lags and audit report lags as alternative proxies for audit effort, we find that auditors expend less effort in audits of banks than in audits of nonbanks. Despite the lower audit effort, we find that banks report fewer and less severe restatements of prior period financial statements than do nonbanks, suggesting that the aggregate efforts of bank regulators/supervisors and bank auditors generate more reliable financial reporting by banks. A notable implication of our study is that bank regulation and supervision alter the auditor-client contracting equilibrium, with a notable benefit being an increase in banks’ financial reporting quality.

Black to Negative: Embedded optionalities in commodities markets
Richard J. Martin,Aldous Birchall

We address the modelling of commodities that are supposed to have positive price but, on account of a possible failure in the physical delivery mechanism, may turn out not to. This is done by explicitly incorporating a `delivery liability' option into the contract. As such it is a simple generalisation of the established Black model.

Comment Letter of Professors Max M. Schanzenbach and Robert H. Sitkoff on the Securities and Exchange Commission’s Request for Comment on the Names Rule for Mutual Finds in Light of ESG Investing and Other Market Developments
Schanzenbach, Max M.,Sitkoff, Robert H.
In March 2020, the Securities and Exchange Commission asked for public comment on the names rule (rule 35d-1) for mutual funds in light of developments since the rule's adoption in 2001. Among such developments, the request for comment identifies burgeoning investor interest in environmental, social, and governance (“ESG”) investing and the corresponding proliferation of funds that purport to make use of ESG factors. This response to the SEC’s request for comment has two purposes: First, we provide clarifying context for the ESG investing phenomenon and a summary of the current state of theoretical and empirical literature in financial economics on it. Second, we discuss how this context informs the critical relationship between ESG disclosure by a mutual fund, both in the fund’s name and in its prospectus, and the rules (e.g., state trust law or ERISA) that govern the extent to which a trustee or other fiduciary may use ESG factors in fiduciary investment.We organize this response in four parts: (1) we provide a clarifying taxonomy on the meaning of ESG investing and the methods for implementing it; (2) we discuss the inherent subjectivity in identifying and applying ESG factors; (3) we assess the current theory and evidence on whether ESG investing can improve risk-adjusted returns; and (4) we identify four interrelated questions of regulatory policy stemming from growing investor interest in ESG investing, situating the request for comment toward potential revision of the names rule within that four-part framework. This response is largely but not entirely based on “Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee,” 72 Stanford Law Review 381 (2020),

Confidence sets for dynamic poverty indexes
Guglielmo D'Amico,Riccardo De Blasis,Philippe Regnault

In this study, we extend the research on the dynamic poverty indexes, namely the dynamic Headcount ratio, the dynamic income-gap ratio, the dynamic Gini and the dynamic Sen, proposed in D'Amico and Regnault (2018). The contribution is twofold. First, we extend the computation of the dynamic Gini index, thus the Sen index accordingly, with the inclusion of the inequality within each class of poverty where people are classified according to their income. Second, for each poverty index, we establish a central limit theorem that gives us the possibility to determine the confidence sets. An application to the Italian income data from 1998 to 2012 confirms the effectiveness of the considered approach and the possibility to determine the evolution of poverty and inequality in real economies.

Cyber Risks and Initial Coin Offerings: Evidence from the World
An, Jiafu,Duan, Tinghua,Hou, Wenxuan,Liu, Xianda
This paper examines the impact of cyber risks on ventures’ initial coin offerings (ICOs) results. We match novel data on national cyber-security with hand collected characteristics of 1,654 ICO projects and discover that cyber risks are negatively associated ICO success. We further find that institutional quality, such as the protection of investor rights and the function of the legal system, attenuates this relationship.

Efficient democratic decisions via nondeterministic proportional consensus
Jobst Heitzig,Forest W. Simmons

Are there voting methods which (i) give everyone, including minorities, an equal share of effective power even if voters act strategically, (ii) promote consensus rather than polarization and inequality, and (iii) do not favour the status quo or rely too much on chance?

We show the answer is yes by describing two nondeterministic voting methods, one based on automatic bargaining over lotteries, the other on conditional commitments to approve compromise options. Our theoretical analysis and agent-based simulation experiments suggest that with these, majorities cannot consistently suppress minorities as with deterministic methods, proponents of the status quo cannot block decisions as in consensus-based approaches, the resulting aggregate welfare is comparable to existing methods, and average randomness is lower than for other nondeterministic methods.

Estimation with Errors in Variables via the Characteristic Function
Malloch, Hamish,Philip, Richard,Satchell, Stephen E.
Errors in variables in linear regression continue to be a major empirical issue in financial econometrics. We propose a method using the characteristic function (CF) to obtain estimates for linear models with errors in the variables. By assuming that the explanatory variable follows a flexible double-gamma distribution, we obtain closed-form expressions for the analytic CF of the data generating process. Through simulations, we show that our method performs well relative to existing techniques that address EIVs, including the most sophisticated CF-based techniques, the continuum generalized method of moments and nonparametric methods based on empirical cumulants. We further extend our CF technique to a multivariate setting where it continues to produce accurate estimates. We also provide guidance on implementing CF methods and apply the technique to estimating betas based on the capital asset pricing model.

How Islamic finance contributes to achieving the Sustainable Development Goals
This report identifies the opportunities that Islamic finance presents for donors. To achieve these, Arab and OECD Development Assistance Committee donors need to mobilise innovative forms of financing and deliver the call to deepen the transformation of development finance systems. DAC members could do so by broadening and deepening exposure to alternative forms of financing, such as Islamic finance. Islamic finance represents USD 2.5 trillion – a share of which could be mobilised for development – and its tenets resonate across the member countries of the Organisation for Islamic Cooperation and beyond. Arab donors could harness Islamic finance, as a means to strengthen partnerships with DAC members, whilst increasing the effectiveness of existing aid flows in countries and contexts where they have considerable access. Doing so could create a more equitable and stable development finance order capable of delivering the SDGs and achieve greater impact in partner countries. Both communities would then be able to chart a path for all development actors, notably the private sector, development finance institutions and other bilateral donors. This report provides a set of action points for Arab and DAC donors, highlighting the benefits of engaging in and co-operating through Islamic finance.

How Much is your Strangle Worth? On the Relative Value of the delta-Symmetric Strangle under the Black-Scholes Model
Boukai, Ben
Trading option strangles is a highly popular strategy often used by market participants to mitigate volatility risks in their portfolios. In this paper we propose a measure of the relative value of a delta-Symmetric Strangle and compute it under the standard Black-Scholes option pricing model. This new measure accounts for the price of the strangle, relative to the Present Value of the spread between the two strikes, all expressed, after a natural re-parameterization, in terms of delta and a volatility parameter. We show that under the standard BS option pricing model, this measure of relative value is bounded by a simple function of delta only and is independent of the time to expiry, the price of the underlying security or the prevailing volatility used in the pricing model. We demonstrate how this bound can be used as a quick {\it benchmark} to assess, regardless the market volatility, the duration of the contract or the price of the underlying security, the market (relative) value of the $\delta-$strangle in comparison to its BS (relative) price. In fact, the explicit and simple expression for this measure and bound allows us to also study in detail the strangle's exit strategy and the corresponding {\it optimal} choice for a value of delta.

IMF Programs and Economic Growth in the DRC: Documentation, Impact and Prospects
Matata Ponyo Mapon,Jean-Paul K. Tsasa

At the end of 2012 the International Monetary Fund (IMF) has suspended its financial assistance to the Democratic Republic of the Congo (DRC). Due to inflationary pressures which occurred in the last quarter of 2016, several decision-makers called for a reopening of a formal cooperation with the IMF. This process was formally completed in December 2019. The restart of IMF programs was greeted with satisfaction by politicians and widely commented in the media. However, recent history shows that the DRC managed to achieve exceptional economic performance, between 2012 and 2016, without being in a formal cooperation with the IMF. Some people wonder whether IMF assistance is a curse for recipient countries? We argue that the underlying problem has nothing to do with accepting or not the IMF assistance, but rather in the ability of policy makers to establish effective leadership and good governance for the development and implementation supporting structural reforms.

Industry Heterogeneity in the Risk-Taking Channel
Delis, Manthos D.,Iosifidi, Maria,Mylonidis, Nikolaos
We examine the transmission of the risk-taking channel to different industries using syndicated loans to U.S. borrowers from 1984 to 2018. We find that a one percentage point decrease in the shadow rate increases loan spreads by more than 30 basis points in the mining & construction and manufacturing sectors. The equivalent effect is lower in the services and trade industries, whereas the effect on the transportation & utilities and finance industries is less pronounced. Our results survive in several sensitivity tests and are immune to time-varying demand-side explanations. The identified differences in the potency of the risk-taking channel explain a significant part of the inferior performance of highly affected sectors compared to less-affected sectors in the year after a loan origination.

Internet Appendix for Deep Learning in Asset Pricing
Chen, Luyang,Pelger, Markus,Zhu, Jason
The Internet Appendix collects multiple results that support the results in the main text. Among others it includes implementation details, the results for the benchmark approaches, additional robustness results and a detailed description of the data.

Leverage efficiency
Ole Peters,Alexander Adamou

Peters (2011a) defined an optimal leverage which maximizes the time-average growth rate of an investment held at constant leverage. It was hypothesized that this optimal leverage is attracted to 1, such that, e.g., leveraging an investment in the market portfolio cannot yield long-term outperformance. This places a strong constraint on the stochastic properties of prices of traded assets, which we call "leverage efficiency." Market conditions that deviate from leverage efficiency are unstable and may create leverage-driven bubbles. Here we expand on the hypothesis and its implications. These include a theory of noise that explains how systemic stability rules out smooth price changes at any pricing frequency; a resolution of the so-called equity premium puzzle; a protocol for central bank interest rate setting to avoid leverage-driven price instabilities; and a method for detecting fraudulent investment schemes by exploiting differences between the stochastic properties of their prices and those of legitimately-traded assets. To submit the hypothesis to a rigorous test we choose price data from different assets: the S&P500 index, Bitcoin, Berkshire Hathaway Inc., and Bernard L. Madoff Investment Securities LLC. Analysis of these data supports the hypothesis.

Live Fast, Die Young: Equilibrium and Survival in Large Economies
Beddock, Arthur,Jouini, Elyes
We model a continuous-time economy with a continuum of investors who differ both in belief and time preference rate and analyze the impact of these heterogeneities on the behavior of financial markets. In particular, we allow the two types of heterogeneity to be correlated: a negative correlation means that the most optimistic agents are also the most patient ones. We fully characterize the risk-free rate which is procyclical and the market price of risk which is countercyclical. When the two types of heterogeneity are negatively correlated, the former is higher and the latter lower compared to the standard case. A negative correlation also leads to a higher market volatility. Moreover, we find that the trading volume increases with the variance of the belief heterogeneity distribution. Finally, the surviving agent of this economy is not necessarily the one who maximizes her utility over her lifetime: a shorter life might be more rewarding than a longer one.

Neglecting Uncertainties Biases House-Elevation Decisions to Manage Riverine Flood Risks
Mahkameh Zarekarizi,Vivek Srikrishnan,Klaus Keller

Homeowners around the world elevate houses to manage flood risks. Deciding how high to elevate the house poses a nontrivial decision problem. The U.S. Federal Emergency Management Agency (FEMA) recommends elevating existing houses to the Base Flood Elevation (the elevation of the 100-yr flood) plus a freeboard. This recommendation neglects many uncertainties. Here we analyze a case-study of riverine flood risk management using a multi-objective robust decision-making framework in the face of deep uncertainties. While the quantitative results are location-specific, the approach and overall insights are generalizable. We find strong interactions between the economic, engineering, and Earth science uncertainties, illustrating the need for expanding on previous integrated analyses to further understand the nature and strength of these connections. We show that considering deep uncertainties surrounding flood hazards, the discount rate, the house lifetime, and the fragility increases the economically optimal house elevation to values well above FEMA recommendation.

Objective Myopia: Why Executives Fail to Secure the Creation of Maximum Shareholder Value and Sustainable Profitability in the Passage of Time and Change in the Economic Environment
Marquez, Marionito
The shareholder wealth maximization theory has been widely considered as the primary objective and performance measure of executives and the business organization they run on behalf of its shareholders around the world and yet many executives’ understandings of the primary objective can be observed myopic. What has been myopically understood by many executives is the primary objective of the shareholders for which they financed the company: To secure the creation of maximum shareholder value and sustainable profitability or to make money as much as possible regardless of the product, service, business, industry or market the company may operate in the passage of time and change in the economic environment as long as the primary objective will be legally achieved. Why? Because as we have shifted the global economy from barter to the use of currency, we are rich or poor according to the degree in which we can afford to enjoy the necessaries, conveniences, and amusements of human life using money. As Alfred Sloan Jr., the legendary CEO of General Motors, explained the primary objective of the company in his own words“The strategic aim of business is to earn a return on capital, and if in any particular case the return in the long run is not satisfactory, then the deficiency should be corrected, or the activity abandoned for a more favorable one.”From Alfred Sloan Jr.’s perspective, it is very clear that the business activity or product is just one of the means to make money in the world economy and it should be abandoned for a better alternative if the return on capital is no longer satisfactory or if the deficiency cannot be corrected such as in the case obsolescence.

Optimal Group Size in Microlending
Philip Protter,Alejandra Quintos

This paper uses a mathematical model with appropriate assumptions, to model and to determine the optimal group size for microfinance loans. An optimal size is defined to be the size which maximizes the probability of no default of the group

Path-dependent Kyle equilibrium model
Giulia Di Nunno,José M. Corcuera

We consider an auction type equilibrium model with an insider in line with the one originally introduced by Kyle in 1985 and then extended to the continuous time setting by Back in 1992. The novelty introduced with this paper is that we deal with a general price functional depending on the whole past of the aggregate demand, i.e. we work with path-dependency. By using the functional It\^o calculus, we provide necessary and sufficient conditions for the existence of an equilibrium. Furthermore, we consider both the cases of a risk-neutral and a risk-averse insider.

Policy Uncertainty, Technological Competition, and Industry Dynamism
Keum, Daniel
We examine how policy uncertainty affects firm innovation and industry dynamism. In R&D races, the gap in the rate of innovation, rather than the absolute rate, determines the winner. As a result, periods of depressed innovation and investment from policy uncertainty present a window for laggards to challenge and overtake leaders. Using the index of economic policy uncertainty from Baker et al. (2018), we find that policy uncertainty increases the rate of innovation by laggards relative to leaders, accelerates the pace of upward reversion in laggards’ performance, and decreases industry concentration. When policy uncertainty is high, technological competition intensifies even as the overall level of innovation and investment declines. Our findings introduce competitive interactions as a microeconomic channel through which uncertainty affects firm investment and industry dynamism beyond prior considerations of the options effect.

Rational Choice Hypothesis as X-point of Utility Function and Norm Function
Takeshi Kato,Yasuyuki Kudo,Junichi Miyakoshi,Jun Otsuka,Hayato Saigo,Kaori Karasawa,Hiroyuki Yamaguchi,Yasuo Deguchi

Towards the realization of a sustainable, fair and inclusive society, we proposed a novel decision-making model that incorporates social norms in a rational choice model from the standpoints of deontology and utilitarianism. We proposed a hypothesis that interprets choice of action as the X-point for individual utility function that increases with actions and social norm function that decreases with actions. This hypothesis is based on humans psychologically balancing the value of utility and norms in selecting actions. Using the hypothesis and approximation, we were able to isolate and infer utility function and norm function from real-world measurement data of actions on environmental conditions and elucidate the interaction between the both functions that led from current status to target actions. As examples of collective data that aggregate decision-making of individuals, we looked at the changes in power usage before and after the Great East Japan Earthquake and the correlation between national GDP and CO2 emission in different countries. The first example showed that the perceived benefits of power (i.e., utility of power usage) was stronger than the power usage restrictions imposed by norms after the earthquake, contrary to our expectation. The second example showed that a reduction of CO2 emission in each country was not related to utility derived from GDP but to norms related to CO2 emission. Going forward, we will apply this new X-point model to actual social practices involving normative problems, and design the approaches for the diagnosis, prognosis and intervention of social systems by IT systems.

Re-evaluating cryptocurrencies' contribution to portfolio diversification -- A portfolio analysis with special focus on German investors
Tim Schmitz,Ingo Hoffmann

In this paper, we investigate whether mixing cryptocurrencies to a German investor portfolio improves portfolio diversification. We analyse this research question by applying a (mean variance) portfolio analysis using a toolbox consisting of (i) the comparison of descriptive statistics, (ii) graphical methods and (iii) econometric spanning tests. In contrast to most of the former studies we use a (broad) customized, Equally-Weighted Cryptocurrency Index (EWCI) to capture the average development of a whole ex ante defined cryptocurrency universe and to mitigate possible survivorship biases in the data. According to Glas/Poddig (2018), this bias could have led to misleading results in some already existing studies. We find that cryptocurrencies can improve portfolio diversification in a few of the analyzed windows from our dataset (consisting of weekly observations from 2014-01-01 to 2019-05-31). However, we cannot confirm this pattern as the normal case. By including cryptocurrencies in their portfolios, investors predominantly cannot reach a significantly higher efficient frontier. These results also hold, if the non-normality of cryptocurrency returns is considered. Moreover, we control for changes of the results, if transaction costs/illiquidities on the cryptocurrency market are additionally considered.

Risk Attitudes and Human Mobility during the COVID-19 Pandemic
Ho Fai Chan,Ahmed Skali,David Savage,David Stadelmann,Benno Torgler

Behavioral responses to pandemics are less shaped by actual mortality or hospitalization risks than they are by risk attitudes. We explore human mobility patterns as a measure of behavioral responses during the COVID-19 pandemic. Our results indicate that risk-taking attitude is a critical factor in predicting reduction in human mobility and increase social confinement around the globe. We find that the sharp decline in movement after the WHO (World Health Organization) declared COVID-19 to be a pandemic can be attributed to risk attitudes. Our results suggest that regions with risk-averse attitudes are more likely to adjust their behavioral activity in response to the declaration of a pandemic even before most official government lockdowns. Further understanding of the basis of responses to epidemics, e.g., precautionary behavior, will help improve the containment of the spread of the virus.

SECure: A Social and Environmental Certificate for AI Systems
Abhishek Gupta,Camylle Lanteigne,Sara Kingsley

In a world increasingly dominated by AI applications, an understudied aspect is the carbon and social footprint of these power-hungry algorithms that require copious computation and a trove of data for training and prediction. While profitable in the short-term, these practices are unsustainable and socially extractive from both a data-use and energy-use perspective. This work proposes an ESG-inspired framework combining socio-technical measures to build eco-socially responsible AI systems. The framework has four pillars: compute-efficient machine learning, federated learning, data sovereignty, and a LEEDesque certificate.

Compute-efficient machine learning is the use of compressed network architectures that show marginal decreases in accuracy. Federated learning augments the first pillar's impact through the use of techniques that distribute computational loads across idle capacity on devices. This is paired with the third pillar of data sovereignty to ensure the privacy of user data via techniques like use-based privacy and differential privacy. The final pillar ties all these factors together and certifies products and services in a standardized manner on their environmental and social impacts, allowing consumers to align their purchase with their values.

Status hierarchy and group cooperation: A generalized model
Hsuan-Wei Lee,Yen-Ping Chang,Yen-Sheng Chiang

In a refreshing mathematical investigation, Mark (2018) shows that status hierarchy may facilitate the emergence of cooperation in groups. Despite the contribution, the present paper notes that there are limitations in Mark's model that makes it less realistic than it could in explaining real-world experiences. Consequently, we present a more generalized modified framework in which his model is a special case, by developing and introducing a new hierarchy measure into the model to estimate the cooperation level in a set of hierarchical structures omitted in Mark's work yet common in everyday life--those with multiple leaders. We derived the conditions under which cooperation can emerge in these groups, and verified our analytical predictions in agent-based computer simulations. In so doing, not only does our model elaborate on its predecessor and support Mark's general prediction. For theory, our work further reveals two novel phenomena of group cooperation: Both the relative number of cooperators to defectors in groups and the assortativity among these different roles can backfire; they are not always the higher, the better for cooperation to thrive. For methodology, the hierarchy measure developed and our model using the measure may also be applied in future research on a wide range of related topics.

Sustainable Investment - Exploring the Linkage between Alpha, ESG, and SDG's
Antoncic, Madelyn,Bekaert, Geert,Rothenberg, Richard V,Noguer, Miquel
Environmental, Social and Governance (ESG) investing has been one of the most important trends in the asset management industry over the past decade. Previously institutional asset owners believed that ESG issues, also known as nonfinancial risks and opportunities, were not relevant to portfolio value and therefore were nonessential, or even in conflict with their fiduciary duties to act in the best interest of their beneficiaries. In this paper, we analyze the relationship between alpha generation and ESG metrics. We also measure whether companies have an either positive or negative net influence on the U.N.’s Sustainable Development Goals (SDG´s) which are emerging as the new, broader standard to measure sustainability. First, we explore whether utilizing ESG factors can improve performance vis a vis the MSCI US index. By constructing a sector-neutral portfolio using MSCI ESG momentum scores from 2013 to 2018, we determine that it is feasible to generate positive alpha from an ESG momentum strategy. Second, we utilize structured and unstructured data to determine a company’s net influence on the SDGs, or what we call its SDG ‘footprint.’ Our research shows that an ESG momentum portfolio not only outperforms the MSCI US index but has a relatively better SDG footprint than that of the index. Third, we establish a positive contemporaneous connection between the sample portfolio’s ESG ratings change (its momentum) and its coinciding SDG footprint over the sample period. We conclude that a positive linkage exists between ESG, alpha, and the SDG’s.

The Blurring of Corporate Investor Nationality and Complex Ownership Structures
Alabrese, Eleonora,Casella, Bruno
Recent years have seen a significant increase in the complexity of multinational enterprise (MNE) ownership structures. Complex corporate structures raise concerns about the effectiveness of national and international investment policies, based on the notion of investors’ nationality. This motivates this research effort, aimed at analysing the ownership structures of some 700 000 foreign affiliates (FAs). A new methodology, the bottom-up approach, is introduced. The main objective is to empirically map the “shareholder space” of FAs, along the vertical dimension, from the direct shareholders to the ultimate owners. We find that FAs are often part of transnational investment chains; more than 40 per cent of foreign affiliates have direct and ultimate shareholders in different jurisdictions (“double or multiple passports”). Based on shareholders’ nationality, we then propose and empirically analyse the salient features of four main archetypes of FAs ownership structure: plain foreign, conduit structures, round-tripping and domestic hubs. Each poses specific challenges to policymakers.

The Effectiveness of Macroprudential Policies and Capital Controls Against Volatile Capital Inflows
Frost, Jon,Ito, Hiro,van Stralen, René
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 Cross-Border Cooperation on Disclosure Enforcement and Earnings Attributesd
Silvers, Roger
This study tests for changes in U.S.-listed foreign firms’ financial reporting properties and transparency when their home market regulators enter an arrangement that facilitates enforcement cooperation with the Securities and Exchange Commission. This arrangementâ€"the International Organization of Securities Commissions’ Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMoU)â€"has explicit disclosure-related provisions. I show that the MMoU is associated with improvements across various measures of accounting properties and transparency. Collectively, the findings help resolve enduring questions about why the earnings quality of U.S.-listed foreign firms diverged from that of U.S. firms during pre-MMoU periods.

The Epidemic-Driven Collapse in a System with Limited Economic Resource
S.P. Lukyanets,I.S. Gandzha,O.V. Kliushnychenko

We consider the possibility of social and economical collapse of population caused by epidemics. We exploit a simplest toy model with negative feedback for the dynamics of epidemic spreading in population with its mutual influence on some formal resource (economical, financial, etc). For epidemics spreading we use the simple SIS model, supplemented with the simplest equation for the dynamics of the resource whose generation is determined by the active labor resource. We note that the patient's characteristic rehabilitation rate or recovery time depends on the cost of health services, cost of the bare subsistence level of consumption, $E$, and the availability of some formal resource $\rho$, e.g. money. Since the cost of services is fixed, the service is terminated if there is not enough personal, private, or collective financial resource $\rho\ll E$, the service is absent. Therefore, we suppose that recovery rate should have an activation character $\sim\exp(-E/\rho)$. We show that depending on the rate of epidemics spreading and on the availability of formal resource, the system can come back to normal life, can overcome the stress or move to another stable but more "poor" state. Otherwise, the system can collapse. While collapsing, the system can pass through a number of quasi-stable states, its dynamics being resembling the so-called devil's staircase.

The Extended Holiday Effect on US Capital Market
Dumitriu, Ramona,Stefanescu, Razvan
Studies on the financial markets proved that not all calendar anomalies are persistent in time. Some of them experienced various types of changes, including passing from the classical form to an extended one, with an enlarged specific time interval. This paper approaches the Holiday Effect extended form on the United States capital market. In its classical form, the Holiday Effect refers to abnormal stock returns on a trading day before a public holiday and a trading day after. We study the behavior of stocks returns for a time interval that starts four trading days before a public holiday and it ends four trading days after. In this investigation we employ the daily closing values of four important indexes from the United States capital market: Dow Jones Industrial Average, Standard & Poor's 500, Russell 2000 and NASDAQ Composite. In order to capture the changes experienced in time by the Extended Holiday Effect we analyze the returns of these indexes for three periods: January 1990 - December 1999, January 2000 â€" December 2009 and January 2010 â€" April 2020. The investigation revealed, for some trading days from the enlarged specific time interval, returns that were, in average, significant larger or smaller than those of the days outside of this interval. We found especially high abnormal returns on four or three trading days before public holidays and low abnormal returns on one or two trading days after public holidays. The results also suggest that the Extended Holiday Effect was more visible in relative quiet periods than in the turbulent ones and it influences especially the stock returns of small cap companies.

The Identification of Portfolio Attraction (Customer) Approaches; Case Study: Iran Insurance Company - Tabriz City
Yeganegi, Kamran
The companies active in the insurance industry market play the role of a supportive collection for the economy and the various industries of the country in line with the main tasks and missions expected from the insurance industry. The nature of the insurance companies requires them to move in the direction of the client, and if they succeed in attracting and retaining the customer, they will cause the continuity and stability of the company. The purpose of the insurance companies is to identify the customer's need, and his satisfaction and the meet of these needs in order to be able to to have more sale. The statistical population of this research includes all managers and insurance agents of Tabriz city. The statistical sample of this research is 150. The research instrument was a researcher-made questionnaire and interviews with managers and insurance agents of Iran Insurance and experts. The validity of the questionnaire was confirmed due to standardization. The reliability of the questionnaire was measured using Cronbach's alpha. The results show that the reliability level of the questionnaire was calculated to be 80.25%, which has a desirable level. To analyze the data, data analysis and hypotheses are analyzed using spss18 and Expert Choose software. The main statistics used in this study are the central measurements (mean, median, and index) and the dispersion index of the standard deviation and the interval between the quarter and the Delphi method. The results of the test indicated that based on the results of the above table, the group places the most important for the strategy of market segmentation system design in order to determine the market (S3) as the most important factor affecting the attraction of portfolio with the priority coefficient (0.467); the market identification and identification of policy capacity (s2) and market segmentation (s1) are prioritized in the next categories .

Transmission of US and EU Economic Policy Uncertainty Shock to Asian Economies in Bad and Good Times
Balcilar, Mehmet,Ozdemir, Zeynel Abidin,Ozdemir, Huseyin,Wohar, Mark E.
This study empirically examines the fragility of five major Asian economies (China, Hong Kong, India, Japan, and South Korea) to economic policy uncertainty (EPU) of US and EU, and oil prices in different state of the economies. To investigate these dynamics, we use the relative tail dependence by means of the spillover index of Diebold and Yilmaz (2009, 2012) obtained from Quantile Vector Auto-regressive (QVAR) model, a robust and semi-parametric model, which does not require specification of the full distribution of error terms. The distinguishing feature of our approach from the previous studies is the determination of sign and intensity of asymmetric spillover dynamics from external shocks to Asian economies and variables covering a wide range of macroeconomic aspects. Our results indicate that the spillover indices from EPU and oil price shocks to Asian economies significantly vary across quantiles. The results from sub-sample analysis show that the US EPU has an asymmetric effect on macro variables of China, Hong Kong, and South Korea during the quantitative easing period (QE) and the reverse QE (RQE) periods while the EU EPU makes Asian markets vulnerable during the Eurozone debt crisis. The large-scale asset purchases (LSAPs) of ECB and BoJ seem to reduce Asian market fragilities after 2015. Last but not least, we get partial evidence to support an asymmetric effect of the crude oil shocks on some Asian markets.

Using Interest Rates to Predict Economic Growth: Are Corporate Bonds Better?
McMillan, David G.
We consider whether government bonds, through the term structure, or corporate bonds, through the default yield, provide predictive power for output, consumption and investment growth. Such predictive power will allow policy-makers to use the information as a leading indicator for macroeconomic performance and improve our understanding of the links between real and financial markets. Full sample results suggest that both interest rate series exhibit predictive power for output and investment growth, while only the default yield has a significant relation with consumption growth. Time-variation in the predictive coefficient reveals the waning influence of the term structure and the rising influence of the default yield. Forecast results, which are obtained from a rolling window approach, likewise suggest both series have information content for macroeconomic conditions, but there is a change in their relative strengths. These results may arise as interest rates have declined since the highs of the early to mid-1980s thus reducing the information content of government yield, whereas corporate bonds respond more to investor views of macroeconomic risk, which affects a firm’s ability to repay its debt. Furthermore, short-term rates are held unprecedently low since the dotcom crash.

Value Creation in Private Equity
Biesinger, Markus,Bircan, Cagatay,Ljungqvist, Alexander
We open up the black box of value creation in private equity with the help of confidential information on value creation plans and their execution. Plans are tailored to each portfolio company’s needs and circumstances, have become more hands-on, and vary with deal type, ownership, growth strategy, and geographic focus. Successful execution is subject to resource constraints, economies of specialization, and diminishing returns, and varies systematically across funds. Successful execution is a key driver of investor returns, especially in growth, buyout, and secondary deals. Company operations and profitability improve in ways consistent with successful execution, even beyond PE funds’ exit.