Research articles for the 2020-06-18

A Healthier Way to De-Risk: The Introduction of Medical Underwriting to the Defined Benefit De-Risking Market
Harrison, Debbie,Blake, David P.
SSRN
The development of new underwriting techniques for bulk purchase annuities (BPAs) brings increased potential to the defined benefit pension de-risking market. As this report explains, an enhanced bulk buy-in is where the trustees buy a bulk annuity as an investment of the scheme, where some or all of the members covered by the policy are medically underwritten. Medical underwriting, which is now commonplace in the individual annuity market, has the potential to reduce the cost to the scheme of the annuity income match, compared with standard annuities, on the basis that certain members might have lower than average life expectancy.

A Non-Linear Approach to Measure the Dependencies Between Bitcoin and Other Commodity Markets.
Goutte, Stephane,Keddad, Benjamin
SSRN
[enter Abstract Body]In this paper we explore the relationship across cryptocurrencies and a set of commodities by using a Markov-Switching-VAR model. The parametric form of the model allows us to compute the regime-dependent impulse response functions during high and low volatility episodes and then to quantify bidirectional spillovers between both markets. Our main results show that responses to commodity shocks are more important in the high volatility regime for almost all commodities. However, we find a very moderate impact of the Bitcoin fluctuations on commodities, although situations seem to differ according to the commodity.

An Assessment of the Adequacy and Objectivity of the Information Provided by the Board of the Equitable Life Assurance Society in Connection with the Compromise Scheme Proposal of 6 December 2001
Blake, David P.
SSRN
This report provides an assessment of the adequacy and objectivity of the information provided by the Board of the Equitable Life Assurance Society in Connection with the Compromise Scheme Proposal of 6 December 2001

An Evaluation of Investment Governance in London Local Government Pension Schemes: A Discussion Paper for Stakeholders to the London Funds
Harrison, Debbie,Blake, David P.
SSRN
The purpose of this Report was to identify areas that might be considered in a full benchmarking study of the investment governance of the 34 London Local Government Pension Schemes (LGPSs). The preliminary results of our research indicated that in certain cases key decision-makers are influenced as much â€" and possibly more â€" by behavioural and political factors than by the current investment governance framework, which our research indicates can be poor. One possible conclusion from our research, therefore, is that there might be a connection between poor investment governance and the increasing trend for schemes to defer the costs of their liabilities into the future.

Annuities and Accessibility â€" How the Industry Can Empower Consumers to Make Rational Choices
Harrison, Debbie,Byrne, Alistair,Blake, David P.
SSRN
The purpose of ‘Annuities and Accessibility’ is very specific: to stimulate the debate in the defined contribution (DC) market with reference to the annuity purchase decision, which is and will remain the most common mechanism consumers use to convert a DC fund to an income stream in retirement. Our focus is mainly on mechanisms for distributing annuities to consumers and ensuring appropriate choices are made.

Approximate Maximum Likelihood for Complex Structural Models
Veronika Czellar,David T. Frazier,Eric Renault
arXiv

Indirect Inference (I-I) is a popular technique for estimating complex parametric models whose likelihood function is intractable, however, the statistical efficiency of I-I estimation is questionable. While the efficient method of moments, Gallant and Tauchen (1996), promises efficiency, the price to pay for this efficiency is a loss of parsimony and thereby a potential lack of robustness to model misspecification. This stands in contrast to simpler I-I estimation strategies, which are known to display less sensitivity to model misspecification precisely due to their focus on specific elements of the underlying structural model. In this research, we propose a new simulation-based approach that maintains the parsimony of I-I estimation, which is often critical in empirical applications, but can also deliver estimators that are nearly as efficient as maximum likelihood. This new approach is based on using a constrained approximation to the structural model, which ensures identification and can deliver estimators that are nearly efficient. We demonstrate this approach through several examples, and show that this approach can deliver estimators that are nearly as efficient as maximum likelihood, when feasible, but can be employed in many situations where maximum likelihood is infeasible.



Are Carbon Leader Indexes Related with Carbon Prices under Different Regimes?
Koy, Ayben
SSRN
With the rising importance of carbon markets, the new derived financial instruments and indicator indexes related to carbon markets have been raising researchers’ appetite. According to that aspect, to investigate the relationship between price formation in carbon markets and equity prices of these firms trading in carbon markets is one of the aims of this study. This study examines CO2 prices of European Union Emission Allowances and daily closing values of Morgan Stanley Capital International Low Carbon Leaders USD Dollar Price Indexes via Markov Regime Switching Models from a nonlinear perspective. Among the findings, there is a relationship between the index derived from the stock performances of North American firms trading in carbon markets and carbon prices. Furthermore, the strength of the relationship increases during periods of recession identified by the MRS models.

Asset Pricing In a World of Imperfect Foresight
Bossaerts, Peter,Fattinger, Felix,van den Bogaerde, Frans,Yang, Wenhao
SSRN
We consider a canonical asset pricing model, where agents with quadratic preferences are allowed to retrade a limited set of securities over multiple periods, after which these securities expire, and agents consume their liquidation values. A key assumption in this model is that agents have perfect foresight: for all future contingencies, they correctly foresee the corresponding equilibrium prices. We show that, under myopia, prices generically are as if agents had perfect foresight. Yet their choices are wrong, because of neglected re-trading opportunities. In an experiment, we find both prices and choices to be consistent with myopia.

Avoiding Taxes: Banks' Use of Internal Debt
Reiter, Franz,Langenmayr, Dominika,Holtmann, Svea
SSRN
This paper investigates how multinational banks use internal debt to shift profits to low-taxed affiliates. Using regulatory data on multinational banks headquartered in Germany, we show that banks use this tax avoidance channel more aggressively than non-financial multinationals do. We find that a ten percentage points higher corporate tax rate increases the internal net debt ratio by 5.7 percentage points, corresponding to a 20% increase at the mean. Our study also takes into account the existence of conduit entities, which simply pass through financial flows. If conduit entities are systematically located in low-tax countries, previous studies may have underestimated the extent of debt shifting.

Bringing Black Box Thinking to the Pensions Industry
Blake, David P.,Roy, Matthew
SSRN
Based on interviews with pension scheme CEOs, senior trustees, senior policy advisers, actuaries and industry association leaders, our research applies Black Box Thinking to the UK defined benefit pensions sector and finds strong evidence that many schemes have a closed loop mindset towards failure.Although some DB schemes follow many of the best practices outlined in Black Box Thinking, by systematically attempting to identify and evaluate mistakes, interviewees report a wide divergence in the ability of boards to learn from past mistakes â€" because it depends so much on a particular scheme’s good fortune in forming the right constellation of board members and advisers.Less fortunate schemes exhibit the typical behavior of a closed loop mindset, including not setting strong measurable targets, inertia in decision making, herding behavior, shifting goal posts, failing to take ownership of mistakes and blaming others. Such schemes do not enjoy Black Box Thinking’s virtuous cycle whereby errors are reported and measured, the scheme’s culture allows introspection about mistakes, feedback loops are applied and processes to combat human biases are established â€" leading over time to better outcomes involving fewer errors.

Caveat Venditor: The brave new world of auto-enrolment should be governed by the principle of seller not buyer beware
Harrison, Debbie,Blake, David P.,Dowd, Kevin
SSRN
This report analyses the DC default funds used for auto-enrollment from two main perspectives. The first is qualitative and considers the impact of the behavioral traits of sellers (the providers, consultants and advisors that determine the fund design and the supply and distribution chain) and buyers (employers and trustees on behalf of the employees auto-enrolled). The second is a quantitative analysis of the impact of charges and asset allocations on the size of pension outcomes in different default funds. A number of existing and new schemes are modeled using appropriately calibrated stochastic simulation models.

Coming Early to the Party
Bellia, Mario,Pelizzon, Loriana,Subrahmanyam, Marti G.,Uno, Jun,Yuferova, Darya
SSRN
We examine the strategic behavior of High Frequency Traders (HFTs) during the pre-opening phase and the opening auction of the NYSE-Euronext Paris exchange. HFTs actively participate, and profitably extract information from the order flow. They also post “flash crash” orders, to gain time priority. They make profits on their last-second orders; however, so do others, suggesting that there is no speed advantage. HFTs lead price discovery, and neither harm nor improve liquidity. They “come early to the party”, and enjoy it (make profits); however, they also help others enjoy the party (improve market quality) and do not have privileges (their speed advantage is not crucial).

Contagion or Interdependence? Comparing Signed and Unsigned Spillovers
Islam, Raisul,Volkov, Vladimir
SSRN
Differentiating between `good' and `bad' spillovers we disentangle sources of potential crisis from the intricately complex web of connections across international equity markets. In particular, we analyze the behaviour of 30 global equity markets and compute multiple spillover measures, which encapsulate many large and small crises episodes. Instead of relying on exâ€"post-crisis information, our model identifies crises periods. Moreover, we are able to detect newly emerging contagion in the system.

Continuity of Utility Maximization under Weak Convergence
Erhan Bayraktar,Yan Dolinsky,Jia Guo
arXiv

In this paper we find tight sufficient conditions for the continuity of the value of the utility maximization problem from terminal wealth with respect to the convergence in distribution of the underlying processes. We also establish a weak convergence result for the terminal wealths of the optimal portfolios. Finally, we apply our results to the computation of the minimal expected shortfall (shortfall risk) in the Heston model by building an appropriate lattice approximation.



Cryptocurrency Trading-Pair Forecasting, Using Machine Learning and Deep Learning Technique
Osifo, Ernest,Bhattacharyya, Ritabrata
SSRN
With the volume of activities associated with trading, it has become a very tedious task. The advent of the algorithmic trading has brought with it some positive change such as reduced latency and increase in liquidity in the Financial Market. The Algorithmic Trading also came with some high demands for the technological know-how and the resources to run it. This has put the retail trader in a seemingly disadvantaged position as these algo-programs are carefully guided secrets by those that have access to it.Crypto-currency can no longer be ignored as the concept is forming the bedrock for future transactions. Although highly publicized, the concept of these smart contracts is not really known. Looking into the future where the cryptocurrencies dominates over the traditional currencies, it has become imperative to give the individual trader/ retailer an additional tool to demystify the “black-Box” of the trading crypto-pairs with algorithmic trading strategy. The techniques employed are: Long Short-Term Memory (LSTM), Auto-regressive integrated moving average (ARIMA), Moving Average (MA), Cumulative Moving Average (CMA), and Artificial Neural Networks (ANN). The models performance will be measured via correlation, Mean Percentage Error (MPE), Percentage Error (MAPE), Mean Square Error (RMSE) standard deviation and Sharpe ratio (for the trading models).

Delivering DC? Barriers to Participation in the Company-Sponsored Pensions Market
Harrison, Debbie,Byrne, Alistair,Blake, David P.
SSRN
The report shows that pension providers and advisers are finding it increasingly uneconomic to market to small and medium-sized enterprises (SMEs) and are withdrawing rather than redoubling their efforts. This is an important and difficult issue for both government and private sector providers.

Do Remittances Enhance Financial Inclusion in Lmics and in Fragile States?
Ben Naceur, Sami,Chami, Ralph ,Trabelsi, Mohamed
SSRN
This paper explores the relationship between remittances and financial inclusion for a sample of 187 countries over the period 2004-2015, using cross-country as well as dynamic panel GMM regressions. At low levels of remittances-to-GDP, these flows act as a substitute to formal financial channels, thereby reducing financial inclusion. In contrast, when remittance-to-GDP ratio is high, above 13% on average, they tend to complement formal access and usage channels, thus enhancing financial inclusion. This 'U shaped' relationship highlights the role of remittance flows in financing household consumption at low levels, while raising formal household bank savings and allowing for more intermediation, at high levels of remittance-to-GDP.

Do the Socially Responsible Walk the Talk?
Raghunandan, Aneesh,Rajgopal, Shivaram
SSRN
Several companies and funds claim to be socially responsible. We confront these high-minded ideals with the data in two settings. In the first setting, we examine the August 2019 declaration by the Business Roundtable (BRT) that a corporation’s purpose is to deliver value to all stakeholders, rather than to solely maximize shareholder value. Relative to within-industry peer firms, publicly listed signatories of the BRT statement (i) commit environmental and labor-related compliance violations more often (and pay more in compliance penalties); (ii) have higher market shares; (iii) spend more on lobbying policymakers; (iv) report lower stock returns alphas and worse operating margins. Investors can vote with their feet to enforce managers’ statements on corporate purpose. Hence, in the paper’s second setting, we study the largest ESG ETF and mutual fund, respectively: the KLD 400 Social ETF and the FTSE4Good US Select index. There is barely any correlation between the initial list of stocks in these funds and additions thereto with “fundamental” ESG data, which we measure using federal environmental and labor-related compliance violations. A key takeaway of our study is that investors ought to be vigilant when assessing claims of stakeholder-oriented practices by firms and ESG funds.

Duality for optimal consumption under no unbounded profit with bounded risk
Michael Monoyios
arXiv

We give a definitive treatment of duality for optimal consumption over the infinite horizon, in a semimartingale incomplete market satisfying no unbounded profit with bounded risk (NUPBR). Rather than base the dual domain on (local) martingale deflators, we use a class of supermartingale deflators such that deflated wealth plus cumulative deflated consumption is a supermartingale for all admissible consumption plans. This yields a strong duality, because the enlarged dual domain of processes dominated by deflators is naturally closed, without invoking its closure. In this way we automatically reach the bipolar of the set of deflators. We complete this picture by proving that the set of processes dominated by local martingale deflators is dense in our dual domain, confirming that we have identified the natural dual space. In addition to the optimal consumption and deflator, we characterise the optimal wealth process. At the optimum, deflated wealth is a supermartingale and a potential, while deflated wealth plus cumulative deflated consumption is a uniformly integrable martingale. This is the natural generalisation of the corresponding feature in the terminal wealth problem, where deflated wealth at the optimum is a uniformly integrable martingale. We use no constructions involving equivalent local martingale measures. This is natural, given that such measures typically do not exist over the infinite horizon and that we are working under NUPBR, which does not require their existence. The structure of the duality proof reveals an interesting feature compared with the terminal wealth problem. There, the dual domain is $L^{1}$-bounded, but here the primal domain has this property, and hence many steps in the duality proof show a marked reversal of roles for the primal and dual domains, compared with the proofs of Kramkov and Schachermayer.



Duty of Fair Presentation after the Enactment of the Insurance Act 2015: The Case of Korea and China
Ahn, TaeKun,Kim, Sung Ryong,Peng, Tian
SSRN
Purpose â€" The purpose of this paper is to analyze the reformed duty of fair presentation provisions and related caselaw of the Insurance Act 2015 to gain a clearer understanding of the differences between the Act and the preceding legislation. Design/methodology â€" The authors analyzed caselaw from South Korea and China that involved breaches of the duty of disclosure. Cases highlighting differences between the duties of disclosure and fair presentation were selected. Findings â€" Changes in the practice of marine insurance laws are expected from the application of the reformed duty of presentation provisions. In particular, the rights of the insured are expected to increase, resulting in the fairer conduct of insurance contracts. Due to the fact that the Insurance Act 2015 has only recently taken effect, the provisions of existing caselaw have not yet been applied. This has limited the authors’ scope of analysis. Originality/value â€" This paper describes the implications of the duty of fair presentation by analyzing caselaw from South Korea and China that involves the duty of disclosure. To the best of the authors’ knowledge, this is the first paper that investigates the reformed duty of fair presentation provisions of the Insurance Act 2015 in the context of the legislation’s implications for trade practices.

Effects of Macroprudential Policy: Evidence from Over 6,000 Estimates
Araujo, Juliana,Patnam, Manasa,Popescu, Adina,Valencia, Fabián,Yao, Weija
SSRN
This paper builds a novel database on the effects of macroprudential policy drawing from 58 empirical studies, comprising over 6,000 results on a wide range of instruments and outcome variables. It encompasses information on statistical significance, standardized magnitudes, and other characteristics of the estimates. Using meta-analysis techniques, the paper estimates average effects to find i) statistically significant effects on credit, but with considerable heterogeneity across instruments; ii) weaker and more imprecise effects on house prices; iii) quantitatively stronger effects in emerging markets and among studies using micro-level data; and iii) statistically significant evidence of leakages and spillovers. Other findings include relatively stronger impacts for tightening than loosening actions and negative effects on economic activity in the near term.

Exchange Fees and Overall Trading Costs
Di Maggio, Marco,Liu, Jerry,Rizova, Savina,Wiley, Ryan
SSRN
In the US market, two popular exchange fee structures are “maker-taker” and “inverted” (also known as “taker-maker”). Maker-taker exchanges charge fees for taking liquidity and give rebates for providing liquidity, while inverted exchanges give rebates for taking liquidity and charge fees for providing liquidity. Using live trade data from an institutional investor that applies a flexible trading approach and seeks to participate in the natural market liquidity, we find that net of fees and rebates, trading costs are statistically indistinguishable between maker-taker and inverted exchanges. This finding has important implications for venue routing decisions in trading algorithms that do not demand immediacy, suggesting that the optimal routing strategy in terms of the tradeoff between cost and volume per unit of time is a pro-rata allocation across venues. It is also relevant to the recent discussions on legislation to fix fees across all trading venues.

Exchange Rate Risk and Business Cycles
Lloyd, Simon,Marin, Emile Alexandre
SSRN
We show that currencies with a steeper yield curve tend to depreciate at business cycle horizons, in violation of uncovered interest parity. The yield curve adds no explanatory power over and above spot yield differentials in explaining exchange rates at longer horizons. Analysing bond holding period returns, we identify a tent-shaped relationship between the exchange rate risk premium and the relative slope across horizons. We derive this relationship analytically within an asset pricing framework and show it is driven by differences in transitory innovations to investors’ stochastic discount factor, captured by the relative yield curve slope and consistent with business cycle risk. Our mechanism is robust to the inclusion of liquidity yields, which instead contribute to explaining cross-sectional differences across currencies and reflect permanent innovations to investors’ stochastic discount factor.

Financing With Investor Syndicates
Luo, Dan
SSRN
Projects and firms are often financed by investor syndicates. I study how investors acquire and share information in syndicates and solve the entrepreneur’s financial contracting problem. The key mechanism is that investors share information through strategic communication. Contracts determine whether investors have conflicts of interest and thus how they communicate strategically. When the project is not promising before the screening, the optimal contract intends to align investors’ interests and thus facilitate information sharing in the syndicate. When the project is promising before the screening, the optimal contract intends to differentiate investors, create conflicts of interest, and eventually impede information sharing. These results are consistent with the stylized facts about syndicate structures observed in reality. Welfare analysis implies that restricting investor differentiation in syndicates is not socially preferred. I develop a new theory for the formation and the structures of investor syndicates.

Fintech and Payments Regulation: Analytical Framework
Khiaonarong, Tanai,Goh, Terry
SSRN
Financial technology (Fintech) has prompted authorities to consider their potential financial stability benefits, risks, and effective regulation. Recent developments suggest that regulatory approaches and their legal foundations need to augment entity-based regulation with increasing focus on activities and risks as market structure changes. This paper draws on recent international experiences in modernizing legal and regulatory frameworks for payment services. An analytical framework based on a four-step process is proposed-(i) identifying payment activities; (ii) licensing entities and designating systems; (iii) analyzing and managing risks, and (iv) promoting legal certainty. As payment activities evolve and potential systemic risks heighten, adherence to international standards and additional regulatory requirements should be warranted.

Gender Inequality in Research Productivity During the COVID-19 Pandemic
Ruomeng Cui,Hao Ding,Feng Zhu
arXiv

We study the disproportionate impact of the lockdown as a result of the COVID-19 outbreak on female and male academics' research productivity in social science. We collect data from the largest open-access preprint repository for social science on 41,858 research preprints in 18 disciplines produced by 76,832 authors across 25 countries in a span of two years. We find that during the 10 weeks after the lockdown in the United States, although the total research productivity increased by 35%, female academics' productivity dropped by 13.9% relative to that of male academics. We also show that several disciplines drive such gender inequality. Finally, we find that this intensified productivity gap is more pronounced for academics in top-ranked universities, and the effect exists in six other countries.



Greatest Good 2: Response to the Department for Work & Pensions Green Paper 'Security and Sustainability in Defined Benefit Pension Schemes'
Blake, David P.,Roy, Matthew
SSRN
"Greatest Good 2" follows-up and repeats the findings of our earlier December 2015 discussion paper ("The Greatest Good for the Greatest Number") that 1,000 occupational defined benefit pension schemes are stressed as a result of having a financially weak sponsors. The slide of many these schemes into the Pensions Protection Fund (PPF) seems inevitable because policy and regulation demand that schemes adhere to the binary outcomes of paying full benefits or going into insolvency. We call for the government to pursue a policy of ‘second best’ outcomes allowing schemes with weak sponsors for whom insolvency is inevitable to negotiate settlements between full benefits and the benefits provided through the PPF.

Hysteresis and Business Cycles
Cerra, Valerie,Fatas, A.,Saxena, Sweta
SSRN
Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history of shocks, what economists refer to as 'hysteresis,' argues for unifying the analysis of growth and cycles. In this paper, we review the recent empirical and theoretical literature that motivate this paradigm shift. The renewed interest in hysteresis has been sparked by the persistence of the Global Financial Crisis and fears of a slow recovery from the Covid-19 crisis. The findings of the recent literature have far-reaching conceptual and policy implications. In recessions, monetary and fiscal policies need to be more active to avoid the permanent scars of a downturn. And in good times, running a high-pressure economy could have permanent positive effects.

Improving Security and Flexibility in Retirement
Blake, David P.,Hudson, Robert
SSRN
This Report aims to identify ways in which the current compulsion to take annuities by age 75 might be amended. It examines the current provision of retirement income for members of defined contribution pension (DC) plans who are obliged to purchase such annuities, regardless of personal circumstances. It also looks at the shortcomings of existing annuities.

Information Management in Times of Crisis
Anderson, Haelim,Copeland, Adam M.
SSRN
How does information management and control affect bank stability? Following a national bank holiday in 1933, New York state bank regulators suspended the publication of balance of state-charter banks for two years, whereas the national-charter bank regulator did not. We use this divergence in policies to examine how the suspension of bank-specific information affected depositors. We find that state-charter banks experienced significantly less deposit outflows than national-charter banks in 1933. However, the behavior of bank deposits across both types of banks converged in 1934 after the introduction of federal deposit insurance.

Informed trading in government bond markets
Czech, Robert,Huang, Shiyang,Lou, Dong,Wang, Tianyu
SSRN
Using comprehensive regulatory data, we examine trading by different investor types in government bond markets. Our sample covers virtually all secondary market trading in gilts and contains detailed information on each transaction, including the identities of both counterparties. We find that hedge funds’ daily trading positively forecasts gilt returns in the following one to five days, which is then fully reversed in the following month. A part of this short-term return predictability is due to hedge funds’ ability to anticipate future demand of other investors. Mutual fund trading also positively predicts gilt returns, but over a longer horizon of one to two months. This return pattern does not revert in the following year and is partly due to mutual funds’ ability to forecast changes in short-term interest rates.

Investment Disputes and Abnormal Volatility of Stocks
Jozef Barunik,Zdenek Drabek,Matej Nevrla
arXiv

Dramatic growth of investment disputes between foreign investors and host states rises serious questions about the impact of those disputes on investors. This paper is the first to explain increased uncertainty of investors about the outcome of arbitration, which may or may not lead to compensation for damages claimed by the investor. We find robust evidence that investment disputes lead to abnormal share fluctuations of companies involved in disputes with host countries. Importantly, while a positive outcome for an investor decreases uncertainty back to original levels, we document strong increase in the volatility of companies with negative outcome for the investor. We find that several variables including size of the award, political instability, location of arbitration, country of origin of investor or public policy considerations in host country explain large portion of the investor's uncertainty.



Is Post-Matching DiD an Appropriate Method in Empirical Studies? The Research Design Matters
Shen, Chung‐Hua,Hsu, Hsing-Hua
SSRN
This study clarifies the model that should be applied when investigating the impact of an event on outcome variable for a perfectly-matched sample. Empirically, DiD regression is a widely used approach in analyzing exogenous shocks with imperfectly matched or unmatched sample. Results from the coefficient and graphic analyses show that only dummies that indicate the post-treatment effect shall be considered if exact matching in individual characteristics is conducted beforehand. The results can provide clear guidance for social science studies such as finance and economics.

Max Headroom: Discretionary Capital Buffers and Bank Risk
Lubberink, Martien Jan Peter
SSRN
This paper examines the association between discretionary capital buffers, capital requirements, and risk for European banks. The discretionary buffers are banks' own buffers, or headroom: the difference between reported and required capital. I exploit capital requirements data that banks started to disclose since the release of a 2015 European Banking Authority opinion. Results using detailed SREP and Pillar 2 data of the largest 99 European banks over 2013-2019 show that less headroom is associated with increased bank risk. An additional examination reveals a positive association between headroom and stress test results for banks subjected to the Single Supervisory Mechanism, a result that runs against supervisory requirements.

Network Sensitivity of Systemic Risk
Amanah Ramadiah,Domenico Di Gangi,D. Ruggiero Lo Sardo,Valentina Macchiati,Tuan Pham Minh,Francesco Pinotti,Mateusz Wilinski,Paolo Barucca,Giulio Cimini
arXiv

A growing body of studies on systemic risk in financial markets has emphasized the key importance of taking into consideration the complex interconnections among financial institutions. Much effort has been put in modeling the contagion dynamics of financial shocks, and to assess the resilience of specific financial markets - either using real network data, reconstruction techniques or simple toy networks. Here we address the more general problem of how shock propagation dynamics depends on the topological details of the underlying network. To this end we consider different realistic network topologies, all consistent with balance sheets information obtained from real data on financial institutions. In particular, we consider networks of varying density and with different block structures, and diversify as well in the details of the shock propagation dynamics. We confirm that the systemic risk properties of a financial network are extremely sensitive to its network features. Our results can aid in the design of regulatory policies to improve the robustness of financial markets.



Nonbank Lending and Credit Cyclicality
Fleckenstein, Quirin,Gopal, Manasa,Gutierrez Gallardo, German,Hillenbrand, Sebastian
SSRN
We show that cyclicality in the syndicated lending market is driven by nonbank lenders. Lending by nonbanks in the syndicated lending market is nearly three times as cyclical as lending by banks, after controlling for loan and borrower characteristics. This cyclicality is explained by nonbanks’ access to financing. In busts, lack of CLO issuances and outflows from mutual funds lead to a drop in primary market originations of syndicated loans; and inflows to nonbanks during booms spur new loan originations. The higher cyclicality is not explained (nor offset) by bank behavior: banks cut originations when nonbank lenders exit the market, irrespective of their characteristics. Our paper brings forth an important reason for the decline in loan originations during both the Great Recession and the COVID-19 crisis.

Out of the GAR Frying Pan into the GIR Fire: An Independent Evaluation of the Current State of the With-Profits Fund of the Equitable Life Assurance Society
Blake, David P.
SSRN
This is an independent evaluation for policyholders of the current state of Equitable Life's with-profits fund and prospects in the light of the 15 April 2002 announcements and the 2001 Report and Accounts. This report also revisits the compromise scheme proposal documentation of December 2001 (and the 2001 interim accounts) in the light of this new information.

Portability and Preservation of Pension Rights in the United Kingdom
Blake, David P.,Orszag, J. Michael
SSRN
This study examines pensions portability and the preservation of pensions rights in the U.K. We review the economic theory underlying pension schemes and the arguments for and against more pensions portability. We show that the effect of current laws and actuarial practice is to penalize young early leavers heavily, so that they can lose up to 30% of the pension that they might have expected when they retire. We propose a policy to reduce this early leaver penalty according to a sliding scale that involves determining transfer values for younger workers on the basis of actual contributions paid rather than on notional accrued benefits, but with accrued benefits having a more significant weight in calculating the transfer values of older early leavers. The effects of the various actuarial valuation methods and assumptions used as well as the discretion allowed to actuaries are discussed in detail. We also compare the position of early leavers in the U.S., Canada, the Netherlands, and Japan.

Resource Allocation in the Brain and the Equity Premium Puzzle
Siddiqi, Hammad
SSRN
What happens when information reaches the human brain? In economics, a black box approach to information absorption is generally taken with an implicit assumption that, information, once it reaches the brain, is correctly processed. In sharp contrast, research in brain sciences has established that when information reaches the brain, a pre-existing knowledge structure or schema is first activated, which influences information absorption. The process through which these knowledge structures are created is resource intensive. It involves using a pre-existing schema as a starting point and attempting to adjust it appropriately by using finite brain resources. We apply this approach to the thinking process of investors trying to work out the worth of various stocks. We show that with a binding resource constraint, a new multiplicative term emerges on the right-hand-side of the standard Sharpe-ratio expression in asset pricing. This new term provides a unified explanation for the equity premium puzzle, generates countercyclical equity premia, and gives rise to size, value, and momentum effects. A novel prediction of the approach is negative correlation of momentum with value and size.

Short Selling Constraints and Politically Motivated Negative Information Suppression
Deng, Xiaohu,Jiang, Christine X.,Young, Danqing
SSRN
This study examines the causal effect of short selling constraints on politically motivated suppression of negative information. We use a unique setting in China, in which there are multiple exogenous changes in short selling constraints and firms have strong incentives to suppress negative information during politically sensitive periods. Results from Difference-in-Differences analyses and a regression discontinuity design show that removing short selling constraints can reduce politically motivated bad news hoarding. In addition, the effect of short selling on reducing bad news hoarding is more pronounced for more politically sensitive events and for firms with lower financial reporting quality.

Supporting Materials for ‘The Greatest Good for the Greatest Number: An Examination of Early Intervention Strategies for Trustees and Sponsoring Employers of Stressed Defined Benefit Schemes’
Harrison, Debbie,Blake, David P.
SSRN
Supporting Materials for "The Greatest Good for the Greatest Number: An examination of early intervention strategies for trustees and sponsoring employers of stressed defined benefit schemes"

The Effect of Regulatory Constraints on Fund Performance: New Evidence from UCITS Hedge Funds
Joenväärä, Juha,Kosowski, Robert
SSRN
This paper examines the effect of regulatory constraints on fund performance and risk by comparing conventional and UCITS hedge funds. Using a matching estimator approach, we estimate the indirect cost of UCITS regulation to be between 1.06% and 4.05% per annum in terms of risk-adjusted returns. These performance differences are likely to stem from UCITS constraints such as those governing eligible assets, diversification, and short selling, and cannot be explained by differences in redemption terms or level of leverage. We confirm that our performance results are not driven by management company characteristics, fund manager characteristics or unobserved confounder bias.

The Effects of Borrowers’ Accounting Conservatism on Lenders’ Loan Loss Provisions: Evidence from China Banking Industry
Yuxiang, Zhong
SSRN
In this paper, I investigate how borrowers’ accounting conservatism affects lenders’ loan loss provisions in Chinese setting. I predict that when borrowers’ financial statements are more conservative, lenders receive borrowers’ bad news in a more timely manner, which in turn induces more loan loss provisions. Empirical results confirm that lenders account more loan loss provisions when borrowers’ accounting conservatism is higher (I refer to this effect as information transfer effects). Additional tests find that the information transfer effects are stronger when borrowers experience negative shocks and lenders are more likely to shift normal loans to non-performances loans when borrowers’ accounting conservatism is higher. Furthermore, cross-sectional tests show that the information transfer effects are stronger if borrowers have higher default risk, information asymmetry, and agency conflicts, if loans are unsecured, without collateral, and short-term, if lenders are not state-owned, listed firms, and with lower reputation.

The Greatest Good for the Greatest Number: An Examination of Early Intervention Strategies for Trustees and Sponsoring Employers of Stressed Defined Benefit Schemes
Harrison, Debbie,Blake, David P.
SSRN
Freeing an employer from the burden of its pension fund, whilst avoiding insolvency can create extra value which can be shared with the members to achieve a better outcome.

The Laplace transform of the integrated Volterra Wishart process
Eduardo Abi Jaber
arXiv

We establish an explicit expression for the conditional Laplace transform of the integrated Volterra Wishart process in terms of a certain resolvent of the covariance function. The core ingredient is the derivation of the conditional Laplace transform of general Gaussian processes in terms of Fredholm's determinant and resolvent. Furthermore , we link the characteristic exponents to a system of non-standard infinite dimensional matrix Riccati equations. This leads to a second representation of the Laplace transform for a special case of convolution kernel. In practice, we show that both representations can be approximated by either closed form solutions of conventional Wishart distributions or finite dimensional matrix Riccati equations stemming from conventional linear-quadratic models. This allows fast pricing in a variety of highly flexible models, ranging from bond pricing in quadratic short rate models with rich autocorrelation structures, long range dependence and possible default risk, to pricing basket options with covariance risk in multivariate rough volatility models.



The MFN Principle at Peril in Investment Treaties - With Particular References to Ansung Housing and Beijing Urban Construction
Chung, Chan-Mo
SSRN
Purpose â€" This paper investigates the theories and practices of Most-Favored-Nation (MFN) clauses. The MFN clause became a controversial issue during the past two decades, especially in the context of investment arbitration. This paper aims to clarify a reasonable way to apply MFN clauses. It in particular focuses on the territoriality requirements and the scope of investment activity which are common features included in most of investment treaties. Design/methodology â€" This paper analyses two investment arbitration cases, Ansung Housing and Beijing Urban Construction. Through the case study, this paper reveals limitations of the currently dominant views on the operation of MFN clauses. It then tries to reconstruct the system of MFN application within the relevant arbitration principles. Findings â€" Tribunals of recent investment arbitration as represented in the two cases above employed strict literal interpretation of the treaty provisions, especially of the phrase “in its territory”. This paper finds a more functional interpretation is appropriate and consistent with theories of public international law and developments of global economy. Originality/value â€" Existing studies either stuck to literal interpretation or suggested more flexible interpretation of the phrase “in its territory” without full explanation. This paper tries to fill the gap in the existing discussion by analyzing legal foundations and theoretical structure for an effective interpretation of MFN clauses.

The Meaning of Life: An Uncertain Future for the Traditional Life Company Business Model in the UK’s Private Sector Pensions Market
Harrison, Debbie,Blake, David P.
SSRN
This report sets out the results of an independent investigation of the UK’s life company business model in the context of the dramatic changes to the private sector pensions market. The main focus is the defined contribution (DC) market, including the back books of the pre-2001 era and the books of more recent workplace schemes and individual plans for the periods of accumulation (contributions) and decumulation (withdrawals of cash and regular retirement income). We also consider insurance solutions in the defined benefit (DB) pensions market, namely, bulk-purchase annuities (BPAs).

The Portfolio Composition Effect
Müller-Dethard, Jan,Weber, Martin
SSRN
Does the evaluation of a portfolio of stocks depend on its composition of winner and loser stocks? To test this, we define a simple, counting-based measure of performance â€" the number of winner relative to the number of loser stocks in a portfolio â€" and examine how this composition measure affects individuals’ willingness to invest in a portfolio. We derive testable predictions for the proposed composition measure from a framework which combines category-based thinking with mental accounting. Consistent with our predictions, we find across all experiments that individuals allocate larger investments to portfolios with more winner than loser stocks relative to alternative portfolios with more loser than winner stocks, although both portfolios (1) have realized identical overall portfolio returns and (2) show identical expected risk-return characteristics. Building on our experimental findings, we analyze fund flows of exchange-traded funds on leading equity market indices. We identify that the proposed portfolio composition measure is positively related to future net fund flows.

Total Return (TR) and Total Return for All Shareholders (TRAS). Difference for the Companies in the S&P 100
Fernandez, Pablo
SSRN
The Total Return (TR), also called “return including dividends” and “Total Index Return” provides the theoretical return of a share, assuming that dividends are re-invested to purchase additional shares.The Total Return for All Shareholders (TRAS) is the return that all the shareholders of a company had in a period. It is also the return of a shareholder that always had a constant proportion (ie. 0,1%) of the shares. It takes into account not only the dividends, but also the share repurchases and the capital increases.We calculate both returns for the S&P 100 companies in the period December 2004 â€" April 2020. For 18 companies, annual TR exceeded annual TRAS in more than 1% (i.e. Blackrock 3,9%, Microsoft 2%). For 19 companies, annual TRAS exceeded annual TR in more than 1% (i.e. Citigroup 7,8%, Altria 5,4%).Most databases provide the Total Return (TR) valid for a shareholder that reinvested 100% of the dividends, did not sell any share in repurchases and did not subscribe any new share when the company increased capital.

Whom to Educate? Financial Literacy and Investor Awareness
Gui, Zhengqing,Huang, Yangguang,Zhao, Xiaojian
SSRN
Investors may be unaware of the high risk associated with a high-return financial product and thus may purchase risky products inconsistent with their risk attitudes. We conducted an experiment and survey in Shenzhen, China, to measure individuals' risk preferences, financial literacy, and the effect of a financial education program. Participating in our education program significantly reduced individuals' tendency to invest in high-risk products, especially for those who are risk-averse. Chinese individuals in our survey possess inadequate financial knowledge as in the United States but exhibit a lower degree of self-confidence about their knowledge of finance. Surprisingly, the responses to standard financial literacy questions are not related to individuals' awareness of the link between high risk and high return, calling for designing a new question of financial literacy as proposed in our study.

Why Has the Equal Weight Portfolio Underperformed and What Can We Do About It?
Taljaard, Byran,Mare, Eben
SSRN
It is widely noted that market capitalization weighted portfolios are inefficient and underperform an equal weighted portfolio over the long-term. However, at least since 2016, an equal weighted portfolio of stocks in the S&P500 has significantly underperformed the market capitalization weighted portfolio. In this paper we analyse this underperformance using stochastic portfolio theory. We show that the equal weighted portfolio does appear to outperform the market capitalization weighted portfolio over the long-term but with periods of significant short-term underperformance. We find the concentration in the market capitalization weighted portfolio has increased in recent years and has contributed to the recent underperformance together with a significantly lower level of diversification benefits. Furthermore, we highlight one approach to improving the performance of a portfolio by dynamically selecting a market cap or an equal weighting using a simple linear regression model.

中国影子é"¶è¡Œçš„经济学分析:å'展驱动因素 (Economics of China’s Shadow Banking: Driving Growth Factors)
Li, Wenzhe
SSRN
Chinese Abstract: è¿'年来,中国影子é"¶è¡Œçš„迅速å'展吸引了学术界å'Œæ"¿ç­–制订者的广泛关注。在传统的é"¶è¡Œè¡¨å†…贷款å'Œå€ºåˆ¸æŠ•èµ„之外,存量高达50万亿元的影子é"¶è¡Œå¦‚何å'展起来?本文系统性回顾了影子é"¶è¡Œè‡ª2002年以来的å'展历程,认为其本质上是地方æ"¿åºœèžèµ„平台å'Œæˆ¿åœ°äº§ä¼ä¸šçš„融资工具,来自这两类企业的旺盛融资需求为影子é"¶è¡Œå'展提供了根本动力。为影子é"¶è¡Œå'展助力的是商业é"¶è¡Œé™ä½Žäº¤æ˜"è´¹ç"¨çš„动机,把表内业务挪到表外、内部交æ˜"外部化,资é‡'成本高了一些,但显è'—降低了制度成本,从而降低了总交æ˜"è´¹ç"¨ã€‚此外,ç›'管æ"¿ç­–对影子é"¶è¡Œçš„å'展也有影å"ã€‚æˆ'们据此建立了局部均衡理论模型,并解出影子é"¶è¡Œçš„存量方程å'Œä»·æ ¼æ–¹ç¨‹ï¼Œé¦–次采ç"¨æŽæ–‡å–†ï¼ˆ2019)测算的ç¿"实的影子é"¶è¡Œæ€»é‡æ•°æ®è¿›è¡Œäº†å®žè¯æ£€éªŒã€‚经工具变量法、广义矩估计、å'量自回å½'等方法检验,å'现本文的解释框架在较高的显è'—性下成立,模型解释力较强。 English Abstract: In recent years, the spectacular expansion of China’s shadow banking attracts broad attention from both academia and policy makers. Beyond traditional on-balance sheet bank loans and bond investment, how did shadow banking develop to a scale as high as RMB 5 trillion yuan? This paper systematically reviews development of shadow banking since 2002, and comes to conclude that shadow banking essentially is the financing vehicle of local government and real estate enterprises. Financing needs of these two types of enterprises are the essential driving factor of shadow banking growth. Incentive of commercial banks to lower transaction costs is also very important. Although shifting business off balance sheet, and externalizing internal transactions elevate funding cost, they substantially lower institutional cost and reduce total transaction cost. Besides, during this process, regulation policy also exerts influences. Based on the above analysis, we build partial equilibrium theoretical model and solve to obtain stock and price equations of shadow banking. For the first time, we utilize detailed aggregate data of China’s shadow banking from Li (2019) to conduct empirical tests of above analysis. The results from Instrumental Variable method, Generalized Method of Moments, and Vector Autoregression show that this explanatory framework stands at high significance level, and has strong explanatory power.