Research articles for the 2020-06-22

A note on Almgren-Chriss optimal execution problem with geometric Brownian motion
Bastien Baldacci,Jerome Benveniste

We solve explicitly the Almgren-Chriss optimal liquidation problem where the stock price process follows a geometric Brownian motion. Our technique is to work in terms of cash and to use functional analysis tools. We show that this framework extends readily to the case of a stochastic drift for the price process and the liquidation of a portfolio.

An Individual Claims Reserving Model for Reported Claims
Gabrielli, Andrea
We present a claims reserving technique that uses claim-specific feature and past payment information in order to estimate claims reserves for individual reported claims. We design one single neural network allowing us to estimate expected future cash flows for every individual reported claim. We introduce a consistent way of using dropout layers in order to fit the neural network to the incomplete time series of past individual claims payments. A proof of concept is provided by applying this model to a data set for which the true outstanding payments for reported claims are known.

Bringing Connections Onboard: The Value of Political Influence
Green, Colin P.,HomRoy, Swarnodeep
In 2002, an amendment to UK parliamentary regulations removed restrictions on the participation of members of parliament (MPs) in parliamentary proceedings related to their corporate interests. Using this amendment as a quasi-natural experiment, we demonstrate gains in firm value and profitability for firms with prior connections to MPs. These benefits are higher for firms with family ownership and lower accounting transparency. Both firms and politicians to change their behaviour. Post-amendment, firms are more likely to appoint MPs and also reduce political donations. Politicians with corporate connections were more likely to both become members of, and conditional on this, attend meetings of parliamentary select and joint committee. Our results highlight mechanisms of returns from political influence in well-developed institutional contexts.

Carbon pricing design: Effectiveness, efficiency and feasibility: An investment perspective
Flues, Florens,van Dender, Kurt
Carbon pricing helps countries steer their economies towards and along a carbon-neutral growth path. This paper considers how the design of carbon pricing instruments affects their effectiveness, efficiency and feasibility. Design choices matter both for taxes and Emissions Trading Systems (ETSs). Considering the role of carbon price stability for clean investment, the paper shows how volatile carbon prices can cause risk-averse investors to forego clean investment that they would have undertaken with more stable prices. The paper then evaluates the effectiveness and efficiency of policy instruments to stabilise carbon prices in ETSs, which tend to produce more volatile carbon prices than taxes. The paper analyses the auction reserve price in California, the carbon price support in the UK, and the market stability reserve in the EU ETS. Considering feasibility, the paper discusses the tax (or emissions) base, how revenue use can affect support from households and firms, and administrative choices.

Constitutional Amendment and Stock Prices: Event Study Evidence from China
Yan, Chao
This paper examines whether and how the stock market reacts to China’s constitutional amendment in 2018, removing presidential term limits and cementing the leadership of the party. I document that stock prices rise due to the decrease in political uncertainty. I find that state-owned enterprises (SOEs) gain broadly, especially for SOEs controlled by the central government. In particular, the results show that SOEs with high R&D investment gain more, whereas non-SOEs lose in industries with high growth potential. I also find that stock prices increase more for firms belonging to the Belt and Road key industries and also for firms located in provinces used to be led by Xi Jinping. However, fixed investment and political connections play no role for both SOEs and non-SOEs. Overall, my study implies that, as a response to global uncertainty, the constitutional amendment in China creates certainty.

Decentralized Investment Management: Evidence from the Pension Fund Industry
Blake, David P.,Rossi, Alberto G.,Timmermann, Allan,Tonks, Ian,Wermers, Russ
The past few decades have seen a major shift from centralized to decentralized investment management by pension fund sponsors, despite the increased coordination problems that this brings. Using a unique, proprietary dataset of pension sponsors and managers, we identify two secular decentralization trends: sponsors switched (i) from generalist (balanced) to specialist managers across asset classes and (ii) from single to multiple competing managers within each asset class. We study the effect of decentralization on the risk and performance of pension funds, and find evidence supporting some predictions of recent theory on this subject. Specifically, the switch from balanced to specialist managers is motivated by the superior performance of specialists, and the switch from single to multiple managers is driven by sponsors properly anticipating diseconomies-of-scale within an asset class (as funds grow larger) and adding managers with different strategies before performance deteriorates. Indeed, we find that sponsors benefit from alpha diversification when employing multiple fund managers. Interestingly, competition between multiple specialist managers also improves performance, after controlling for size of assets and fund management company-level skill effects. We also study changes in risk-taking when moving to decentralized management. Here, we find that sponsors appear to anticipate the difficulty of coordinating multiple managers by allocating reduced risk budgets to each manager, as predicted by recent theory, which helps to compensate for the suboptimal diversification that results through an improved Sharpe ratio. Overall, our results indicate that pension fund sponsors, at least on average, rationally choose their delegation structures.

Distributionally Robust Profit Opportunities
Derek Singh,Shuzhong Zhang

This paper expands the notion of robust profit opportunities in financial markets to incorporate distributional uncertainty using Wasserstein distance as the ambiguity measure. Financial markets with risky and risk-free assets are considered. The infinite dimensional primal problems are formulated, leading to their simpler finite dimensional dual problems. A principal motivating question is how does distributional uncertainty help or hurt the robustness of the profit opportunity. Towards answering this question, some theory is developed and computational experiments are conducted. Finally some open questions and suggestions for future research are discussed.

Dynamic Programming with Recursive Preferences: Optimality and Applications
Guanlong Ren,John Stachurski

This paper provides new conditions for dynamic optimality in discrete time and uses them to establish fundamental dynamic programming results for several commonly used recursive preference specifications. These include Epstein-Zin preferences, risk-sensitive preferences, narrow framing models and recursive preferences with sensitivity to ambiguity. The results obtained for these applications include (i) existence of optimal policies, (ii) uniqueness of solutions to the Bellman equation, (iii) a complete characterization of optimal policies via Bellman's principle of optimality, and (iv) a globally convergent method of computation via value function iteration.

Employee Sentiment and Stock Returns
Chen, Jian,Tang, Guohao,Yao, Jiaquan,Zhou, Guofu
We propose an employee sentiment index, which complements investor sentiment and manager sentiment indices, and find that high employee sentiment predicts a subsequent low market return, significant both in- and out-of-sample. The predictability of the employee sentiment index can also deliver sizable economic gains for mean-variance investors in asset allocation. The employee sentiment’s impact is stronger among employees who work in the headquarters state and among less experienced employees. The economic driving force of the predictability is distinct from those of investor sentiment and manager sentiment: high employee sentiment leads to high contemporaneous wage growth due to immobility, which in turn results in subsequently lower firm cash flow and lower stock return.

Enhancing Managerial Equity Incentives with Moving Average Payoffs
Tian, Yisong S.
Prior research suggests that Asian stock options provide stronger managerial equity incentives than traditional stock options do, holding the cost of the option grant constant. Although this is true on the grant date, it is not over the life of the option grant. Very little of the initial advantage remains after two years because Asian stock options have diminishing incentive effects over time. A simple solution is to replace averaging over the option’s life with averaging over a moving window. We show that moving average options do not have the diminishing incentive problem and are effective in preventing managerial gaming.

From the Black-Karasinski to the Verhulst model to accommodate the unconventional Fed's policy
A. Itkin,A. Lipton,D. Muravey

In this paper, we argue that some of the most popular short-term interest models have to be revisited and modified to reflect current market conditions better. In particular, we propose a modification of the popular Black-Karasinski model, which is widely used by practitioners for modeling interest rates, credit, and commodities. Our adjustment gives rise to the stochastic Verhulst model, which is well-known in the population dynamics and epidemiology as a logistic model. We demonstrate that the Verhulst model's dynamics are well suited to the current economic environment and the Fed's actions. Besides, we derive new integral equations for the zero-coupon bond prices for both the BK and Verhulst models. For the BK model for small maturities up to 2 years, we solve the corresponding integral equation by using the reduced differential transform method. For the Verhulst integral equation, under some mild assumptions, we find the closed-form solution. Numerical examples show that computationally our approach is significantly more efficient than the standard finite difference method.

Fund Flows, Manager Change and Performance Persistence
Bessler, Wolfgang,Blake, David P.,Lueckoff, Peter,Tonks, Ian
Most empirical studies suggest that mutual funds do not persistently outperform an appropriate benchmark in the long run. We analyze this lack of persistence in terms of two equilibrating mechanisms: fund flows and manager changes. Using data on actively managed U.S. equity mutual funds, we find that if neither mechanism is operating, winner funds (top-decile ranked in previous year) continue to significantly outperform loser funds (bottom-decile ranked in previous year) by 4.08 percentage points per annum. However, the difference between previous winner and loser funds declines to zero within one year if the two mechanisms are acting together. Thus, mutual fund out- and underperformance is unlikely to persist in well-functioning markets.

GDP-Linked Bonds as a New Asset Class
Papavassiliou, Ellie,Topaloglou, Nikolas,Zenios, Stavros A.
We show that GDP-linked bonds can provide diversification benefits to investors. We use a stochastic spanning methodology which makes no assumptions on the distributional characteristics of the returns of these innovative instruments and apply to test both floaters and linkers. We find that both types of GDP-linked bonds are not spanned by a benchmark set of stocks, bonds, and cash assets, thus providing a new asset class. Spanning is ruled out for a wide and reasonable range of bond design parameters. In out-of-sample testing we find significant diversification benefits for investors, with strongly statistically significant increases in Sharpe ratios in the range 0.10-0.43 for floaters and 0.05-0.17 for linkers over an optimal benchmark portfolio. The results for linkers depend on the risk premium that these instruments will trade, while floaters are less sensitive to the premium, but the benefits remain for the range of premia estimated in existing literature. Our finding are further explained by documenting the finance and macro factors that drive the performance of GDP-linked bonds, using generalized method of moments regressions.

Immobilien-Crowdinvesting: von Nachrangdarlehen zu Token-basierten Schuldverschreibungen â€" Eine Betrachtung der neuen Finanzierungsangebote am Beispiel der Immobilienfinanzierung â€" (Real Estate Crowdfunding: From Subordinated Loans to Token-Based Bonds - An Examination of the New Financing Offers Using the Example of Real Estate Financing)
Helmrich, Sebastian M.,Maume, Philipp
German Abstract: Crowdinvesting eröffnet für kleine und mittelständische Unternehmen neue digitale Perspektiven der Projektfinanzierung. Seit dem Start der ersten deutschen Crowdinvesting-Plattformen wächst das vermittelte Volumen und damit auch die Bandbreite der angebotenen Beteiligungsmodelle. Auf Basis eines umfassenden Datensatzes werden in diesem Beitrag die angebotenen Finanzierungsmodelle aus Sicht des Kapitalsuchenden und am Beispiel der Immobilienfinanzierung aufbereitet und verglichen.English Abstract: Crowdinvesting opens up new digital perspectives for small and medium-sized companies on project financing. Since the launch of the first German crowdfunding platforms, the mediated volume and thus also the range of offered participation and interest rate models has been growing. Based on a comprehensive data set, the financing models are prepared and compared in this article from the perspective of the capital-seeking market player and by the example of the real estate market.

Impact of national lockdown on COVID-19 deaths in select European countries and the US using a Changes-in-Changes model
Mudit Kapoor,Shamika Ravi

In this paper, we estimate the impact of national lockdown on COVID-19 related total and daily deaths, per million people, in select European countries. In particular, we compare countries that imposed a nationwide lockdown (Treatment group); Belgium, Denmark, France, Germany, Italy, Norway, Spain, United Kingdom (UK), and the US, to Sweden (Control group) that did not impose national lockdown using a changes-in-changes (CIC) estimation model. The key advantage of the CIC model as compared to the standard difference-in-difference model is that CIC allows for mean and variance of the outcomes to change over time in the absence of any policy intervention, and CIC accounts for endogeneity in the choice of policy intervention. Our results indicate that in contrast to Sweden, which did not impose a national lockdown, Germany, and to some extent, the US were the two countries where nationwide lockdown had a significant impact on the reduction in COVID-19 related total and daily deaths per million people. In Norway and Denmark, there was no significant impact on total and daily deaths per million people relative to Sweden. Whereas in other countries; Belgium, France, Italy, Spain, and the UK, the effect of the lockdown was in the opposite direction, that is, they experienced significantly higher COVID-19 related total and daily deaths per million people, post the lockdown as compared to Sweden. Our results suggest that the impact of nationwide lockdown on COVID-19 related total and daily deaths per million people varied from one country to another.

Investment Timing, Risk, Uncertainty, and Return: Evidence From Venture Capital Backed IPOs
Manigart, Sophie,Mulier, Klaas,Verplancke, Frederik
We explain the returns obtained on venture capital (VC) investments in all VC backed companies going public in the U.S. between 2003 and 2017. Using this unique data set of 1,921 investor-IPO returns, we show that later investments obtain higher returns, even after controlling for observed and unobserved IPO company and VC investor characteristics. This is counter-intuitive as later investments are believed to be less risky than early investments because business risk declines as firms mature. We show that the positive relationship between investment timing and return can be explained by risks and uncertainty related to the exit, in this case IPO. High returns for late investments are obtained on investments in more risky and uncertain IPOs and particularly by VC investors with high IPO reputation. We exclude other possible explanations, such as IPO ratchets for late investors, exit pressure due to short VC fund lifespan cycles, or unexpected funding needs before IPO that expropriate early investors.

Investor Emotions and Earnings Announcements
Vamossy, Domonkos F.
Armed with a decade of social media data, I explore the impact of investor emotions on earnings announcements. In particular, I test whether the emotional content of firm-specific messages posted on social media just prior to a firm's earnings announcement explains its earnings and announcement returns. I find that investors are typically excited about firms that end up exceeding expectations, yet their enthusiasm results in lower announcement returns. Specifically, a standard deviation increase in excitement is associated with an 8.9 basis points lower announcement return, which translates into an approximately 7.2% annualized loss. Motivated by this finding, I then construct a zero-cost portfolio leveraging social media emotions and opinions around earnings announcements, and show performance exceeding the market by a factor of 1.75 over the decade. My findings confirm that emotions and market dynamics are closely related and highlight the importance of considering investor emotions when assessing a firm's short-term value.

Longevity Hedge Effectiveness: A Decomposition
Cairns, Andrew J. G.,Blake, David P.,Dowd, Kevin,Coughlan, Guy
We use a case study of a pension plan wishing to hedge the longevity risk in its pension liabilities at a future date. The plan has the choice of using either a customised hedge or an index hedge, with the degree of hedge effectiveness being closely related to the correlation between the value of the hedge and the value of the pension liability. The key contribution of this paper is to show how correlation and, therefore, hedge effectiveness can be broken down into contributions from a number of distinct types of risk factors. Our decomposition of the correlation indicates that population basis risk has a significant influence on the correlation. But recalibration risk as well as the length of the recalibration window are also important, as is cohort effect uncertainty. Having accounted for recalibration risk, additional parameter uncertainty has only a marginal impact on hedge effectiveness. Finally, the inclusion of Poisson risk only starts to become significant when the smaller population falls below about 10,000 members over age 50. Our case study shows that, at least for medium and large pension plans, longevity risk can be substantially hedged using index hedges as an alternative to customised longevity hedges. As a consequence, when the hedger’s population involves more than about 10,000 members over age 50, index longevity hedges (in conjunction with the other components of an ALM strategy) can provide an effective and lower cost alternative to both a full buy-out of pension liabilities or even to a strategy using customised longevity hedges.

Low-Latency Trading and Price Discovery: Evidence from the Tokyo Stock Exchange in the Pre-Opening and Opening Periods
Bellia, Mario,Pelizzon, Loriana,Subrahmanyam, Marti G.,Uno, Jun,Yuferova, Darya
We study whether the presence of low-latency traders (including high-frequency traders (HFTs)) in the pre-opening period contributes to market quality, defined by price discovery and liquidity provision, in the opening auction. We use a unique dataset from the Tokyo Stock Exchange (TSE) based on server-IDs and find that HFTs dynamically alter their presence in different stocks and on different days. In spite of the lack of immediate execution, about one quarter of HFTs participate in the pre-opening period, and contribute significantly to market quality in the pre-opening period, the opening auction that ensues and the continuous trading period. Their contribution is largely different from that of the other HFTs during the continuous period.

Market Discipline and Bank Diversification
Park, Hyun Woong
Can banks be induced to adopt an efficient risk-taking via market discipline? We seek an answer to this question within the context of banks diversifying into the other bank’s asset, which may potentially intensify a systemic risk. The central results of the paper are as follows. When creditors punish the bank’s excessive risk exposure by demanding higher risk premium, the bank owners’ optimal diversification will coincide with the diversification that maximizes the combined value of debt and equity. However, market discipline is effective in aligning the bank shareholders’ interest to that of the creditors only when the bank leverage ratios are at some modest levels. In addition, the effectiveness improves when diversification through securitization is allowed since tranching bank debt into a senior and a junior tranches enables avoiding the dark side of diversification and hence ensures both the individual and social optimality. While supporting capital adequacy and disclosure requirements of Basel III, our analysis warns the consequence of public backstops, that feeds the notion of ‘too-big-to-fail’, in undermining creditors’ incentive to monitor the banks and hence encouraging the latter to adopt excessive and socially sub-optimal risk-taking.

Mergers/Acquisitions, and the Horizontal Propagation in Production Networks
Lan, Lan,Han, Xintong
This paper studies how the effects of mergers and acquisitions (M&As) spill over into the firm-level production network, using a nine-year firm level panel data set with supplier-customer links reported by the firms. After solving the endogeneity problem, successful M&As increase the revenues of target firms by more than 30%. We find that the impacts of M&As spread horizontally as negative effects to peer firms via upstream and downstream links. In particular, the spillover is amplified with an increasing number of common upstream or downstream links shared between the target firms and peer firms. Our point estimates are economically large, suggesting that the horizontal spillover effects of M&As are an important part of transmission, and ignoring them leads to a significant bias in understanding propagation in the production network.

Monetary Policy with Opinionated Markets
Caballero, Ricardo J.,Simsek, Alp
Central banks (the Fed) and markets (the market) often disagree about the path of interest rates. We develop a model that explains this disagreement and study its implications for monetary policy and asset prices. We assume that the Fed and the market disagree about expected aggregate demand. Moreover, agents learn from data but not from each other â€" they are opinionated and information is fully symmetric. We then show that disagreements about future demand, together with learning, translate into disagreements about future interest rates. Moreover, these disagreements shape optimal monetary policy, especially when they are entrenched. The market perceives monetary policy "mistakes" and the Fed partially accommodates the market's view to mitigate the financial market fallout from perceived "mistakes." We also show that differences in the speed at which the Fed and the market react to the data â€" heterogeneous data sensitivity â€" matters for asset prices and interest rates. With heterogeneous data sensitivity, every macroeconomic shock has an embedded monetary policy "mistake" shock. When the Fed is more (less) data sensitive, the anticipation of these mistakes dampen (amplify) the impact of macroeconomic shocks on asset prices.

Multivariate Bilateral Gamma, Copulas, CoSkews and CoKurtosis
Madan, Dilip B.,Wang, King
Correlation graphs are introduced to delineate the levels observed in data and models for return and squared return correlations. A sample of 2048 representative pairs of equity assets is selected from a possible collection of 381,501 pairs by quantization. Five copulas are estimated and simulated on these pairs of returns, the Gaussian, t-copula, Clayton, Gumbel and Frank. Additionally the multivariate bilateral gamma (MBG) model that introduces dependence via common time changes is also fit and simulated. Results of fit statistics on returns and CoSkew and CoKurtosis pairs are reported. The general ordering of the models is MBG, t-copula, followed by the Gaussian, Frank, Gumbel and Clayton copulas.

NDC v FDC: Pros, Cons and Replication
Blake, David P.
This paper examines the advantages and disadvantages of non-financial defined contribution (NDC) pension plans relative to financial defined contribution (FDC) pension plans. It also shows how an NDC outcome can be replicated in a FDC framework.

Online Appendix to 'Brexit' and the Contraction of Syndicated Lending
Berg, Tobias,Saunders, Anthony ,Schäfer, Larissa,Steffen, Sascha
This online appendix to "Brexit" and the Contraction of Syndicated Lending presents further robustness tests of the Brexit effect, cross-sectional results of the Brexit effect for UK firms, further results on the type of the shock the Brexit represents, the Siamese Twins matching methodology as well as the UK market share decomposition.

Optimal Bequest-Embedded Retirement Products
Chen, An,Rach, Manuel
In the present paper, we propose bequests be directly embedded in retirement products to promote their attractiveness, where annuities and tontines are used as representative retirement products. These bequest-embedded retirement products enable policyholders to leave a desirable proportion of money to their heirs. We find that both from the policyholders' and insurers' perspective, embedding bequests can increase the attractiveness of the retirement products and promote their sale. For the policyholders, we show that this way of leaving bequests is superior to setting aside a direct fraction of their wealth to their heirs. Furthermore, an analysis of safety loadings reveals that the inclusion of bequest benefits can make tontines and annuities more similar to each other. From the insurers' perspective, with no bequest benefits, the insurers play purely an administrative role in a tontine product, while adding the bequest benefits makes the tontines real insurance products and incentivizes the insurers to actively provide these innovative retirement products. Further, adding the bequest benefits upon the death of the policyholder, some natural hedging is incorporated in the survival payments, which reduces the solvency capital the insurers are required to set aside.

Optimal Investing after Retirement Under Time-Varying Risk Capacity Constraint
Tian, Weidong,Zhu, Zimu
This paper explores an optimal investing problem for a retiree facing longevity risk and living standard risk. We formulate the optimal investing problem as an optimal portfolio choice problem under a time-varying risk capacity constraint. Under the specific condition on model parameters, we show that the value function is a $C^2$ solution of the HJB equation and derive the optimal investment strategy in terms of second-order ordinary differential equations. The optimal portfolio is nearly neutral to the stock market movement if the portfolio's value is at a sufficiently high level; but, if the portfolio is not worth enough to sustain the retirement spending, the retiree actively invests in the stock market for the higher expected return. In addition, we solve an optimal portfolio choice problem under a leverage constraint and show that the optimal portfolio would lose significantly in stressed markets. This paper shows that the time-varying risk capacity constraint has important implications for asset allocation in retirement.

Optimizing Logistics Operations in a Country’s Currency Supply Network
Huang, Yiwei,Geismar, H. Neil,Rajamani, Divakar,Sethi, Suresh,Sriskandarajah, Chelliah,Carlos, Marcelo
We optimize a large country’s currency supply network for its central bank. The central bank provides currency to all branches (who in turn serve consumers and commerce) through its network of big vaults, regional vaults, and retail vaults. The central bank intends to reduce its total transportation cost by enlarging a few retail vaults to regional vaults. It seeks further reductions by optimizing the sourcing in the updated currency network.We develop an optimization model to select the retail vaults to upgrade, so that the total cost is minimized. Optimally choosing which retail vaults to upgrade is strongly NP-hard, so we develop an efficient heuristic that provides solutions whose costs average less than 3% above the optimum for realistic problem instances. An implementation of our methodology for a particular state has generated a total cost reduction of approximately 57% (equivalently, $2 million). To optimize the sourcing, we propose an alternative delivery process that further reduces the transportation cost by over 31% for the actual collecteddata and by over 38% for randomly generated data. This alternative optimizes the sourcing within the new currency network and requires significantly less computational effort.

Pension Plan Decisions
Byrne, Alistair,Blake, David P.,Mannion, Graham
We examine the contribution and investment decisions made by members of a large UKbased DC pension plan. We find that many employees appear to be relatively financially sophisticated and follow approaches consistent with economic and financial theory in terms of savings rates and investment strategies. However, there are also many less sophisticated employees who stick with plan default arrangements and/or follow simple rules of thumb in saving and investing. The challenge for corporate sponsors of pension plans is in designing arrangements and communication strategies that reduce the chances of these less sophisticated plan members making mistakes â€" in the sense of systematic deviations from optimal behaviour.

Personality Traits and Its Impact on Financial Inclusion: A Study Among the Scheduled Tribes
Veluchamy, Ramanujam,Lingaraja, Kasilingam
Financial inclusion is gaining momentum both as a concept and as a policy solution, and, while it can do some good, it is not likely to change the economic fate of the world’s poor. Regardless of this, given the recent attention it is receiving, we ought to understand it and assess its feasibility and merit. Given that banks in India claimed successful comprehensive financial inclusion, we aimed to study the breadth and depth of financial inclusion in South India, and this study sheds light on the validity of claims of financial reach and breadth. Further, since the mere opening of bank accounts is not sufficient for inclusive growth, the study identifies the accessing of savings, credit and other financial services. Since the present study has made an attempt to explain the profile of the Scheduled Tribes in financial inclusion, their level of financial inclusion, the present study includes the analyzing and the interoperating the profiles, levels of financial inclusion and the factors affecting the access of financial inclusion of the Scheduled Tribes in Kerala. In this study is attempt to analysis the association between the various factors among the financial inclusion and to check the reliability and validity among factors that can be affect the financial inclusion among the scheduled trines in Kerala. The analysis of financial inclusion conclude that the level of perception on various service quality factors are not up to their level of expectation among the rural Scheduled Tribes than among the urban Scheduled Tribes.

Predicting cell phone adoption metrics using satellite imagery
Edward J. Oughton,Jatin Mathur

Approximately half of the global population does not have access to the internet, even though digital access can reduce poverty by revolutionizing economic development opportunities. Due to a lack of data, Mobile Network Operators (MNOs), governments and other digital ecosystem actors struggle to effectively determine if telecommunication investments are viable, especially in greenfield areas where demand is unknown. This leads to a lack of investment in network infrastructure, resulting in a phenomenon commonly referred to as the 'digital divide'. In this paper we present a method that uses publicly available satellite imagery to predict telecoms demand metrics, including cell phone adoption and spending on mobile services, and apply the method to Malawi and Ethiopia. A predictive machine learning approach can capture up to 40% of data variance, compared to existing approaches which only explain up to 20% of the data variance. The method is a starting point for developing more sophisticated predictive models of telecom infrastructure demand using publicly available satellite imagery and image recognition techniques. The evidence produced can help to better inform investment and policy decisions which aim to reduce the digital divide.

Regulator-based risk statistics for portfolios
Xiaochuan Deng,Fei Sun

Risk statistic is a critical factor not only for risk analysis but also for financial application. However, the traditional risk statistics may fail to describe the characteristics of regulator-based risk. In this paper, we consider the regulator-based risk statistics for portfolios. By further developing the properties related to regulator-based risk statistics, we are able to derive dual representation for such risk.

Reporting Bias When Traders Are Extrapolative
Niebuhr, Nikolaj Kirkeby
I model a signaling game of financial misreporting in a market where traders randomly sample parts of the manager's report and then extrapolate the value of the firm based on this. The manager's report is a distribution of signals whose mean can be biased to be above the profitability of the firm, are non-negative but can otherwise be arbitrarily disaggregated. Conditional on the mean of the distribution, the manager can abuse the extrapolative nature of the traders to inflate the stock price. This increases the gains to biasing the financial report, leading to a larger bias and lower price efficiency as traders do not foresee the increased bias.

Risk Exposure and Attention to the Macroeconomy
Settele, Sonja,Roth, Christopher,Wohlfart, Johannes
A basic premise of models of rational inattention is that people's demand for information depends on the expected benefits of getting informed. We test this premise using an experiment with a representative sample of the US population. In the experiment we examine how people's beliefs about their personal exposure to macroeconomic risk during recessions causally affect their demand for macroeconomic forecasts about the likelihood of a recession. Households who learn that they are more strongly exposed to unemployment risk during recessions increase their demand for macroeconomic forecasts about the likelihood of a recession, consistent with the predictions of rational inattention models. Our evidence highlights an important role for endogenous information acquisition in response to expected benefits of receiving the information in the formation of households' macroeconomic expectations.

Robust uncertainty sensitivity analysis
Daniel Bartl,Samuel Drapeau,Jan Obloj,Johannes Wiesel

We consider sensitivity of a generic stochastic optimization problem to model uncertainty. We take a non-parametric approach and capture model uncertainty using Wasserstein balls around the postulated model. We provide explicit formulae for the first order correction to both the value function and the optimizer and further extend our results to optimization under linear constraints. We present applications to statistics, machine learning, mathematical finance and uncertainty quantification. In particular, we provide explicit first-order approximation for square-root LASSO regression coefficients and deduce coefficient shrinkage compared to the ordinary least squares regression. We consider robustness of call option pricing and deduce a new Black-Scholes sensitivity, a non-parametric version of the so-called Vega. We also compute sensitivities of optimized certainty equivalents in finance and propose measures to quantify robustness of neural networks to adversarial examples.

Role and Effectiveness of ASIC Compared with the SEC: Shedding Light on Regulation and Enforcement in the United States and Australia
Kavame Eroglu, Zehra G.,Powell, K.E.
Australian Securities and Investments Commission’s (ASIC) regulatory oversight of securities and financial markets has increased considerably over time. However, the wisdom of this model has recently been challenged by the Hayne Royal Commission as ASIC’s enforcement activities were found to be relatively toothless. Accordingly, many criticised the agency and called for further ASIC reform. After the Global Financial Crisis, the US Securities and Exchange Commission (SEC) faced similar criticisms of regulatory failure. As such, this paper analyses the SEC regulatory structure, enforcement activities, and governmental resources and compares certain indicators of effectiveness such as the number of employees, budgets, and enforcement activities with those of ASIC over the past quarter-century. By comparing ASIC with the world’s biggest capital market regulator, the SEC, this paper analyses the viability of further reform of ASIC, and argues that ASIC is woefully under-resourced to engage in increased enforcement action.

Sharing Longevity Risk: Why Governments Should Issue Longevity Bonds
Blake, David P.,Boardman, Tom,Cairns, Andrew J. G.
Government-issued longevity bonds would allow longevity risk to be shared efficiently and fairly between generations. In exchange for paying a longevity risk premium, the current generation of retirees can look to future generations to hedge their systematic longevity risk. Longevity bonds will lead to a more secure pension savings market, together with a more efficient annuity market. By issuing longevity bonds, governments can aid the establishment of reliable longevity indices and key price points on the longevity risk term structure and help the emerging capital market in longevity-linked instruments to build on this term structure with liquid longevity derivatives.

Shifting Policy Strategy in Keynesianism
Asahi Noguchi

This paper analyzes the evolution of Keynesianism making use of concepts offered by Imre Lakatos. The Keynesian "hard core" lies in its views regarding the instability of the market economy, its "protective belt" in the policy strategy for macroeconomic stabilization using fiscal policy and monetary policy. Keynesianism developed as a policy program to counter classical liberalism, which attributes priority to the autonomy of the market economy and tries to limit the role of government. In general, the core of every policy program consists in an unfalsifiable worldview and a value judgment that remain unchanged. On the other hand, a policy strategy with a protective belt inevitably evolves owing to changes in reality and advances in scientific knowledge. This is why the Keynesian policy strategy has shifted from being fiscal-led to one that is monetary-led because of the influence of monetarism; further, the Great Recession has even led to their integration.

Short-Selling Constraints and Supply Effects
Floros, Ioannis V.,Kato, Hideaki Kiyoshi,Singh, Ajai K.,Suzuki, Katsushi
Japanese markets have unique institutional attributes, which provide an ideal laboratory for investigating potential supply effects. These regulatory factors permit an examination of issue-day price effects, at the influx of additional shares from equity offerings, free of simultaneous release of new information. Moreover, Japanese regulations permit a clean identification of stocks with and without short-sales constraints. We posit that trading constraints engender a supply effect. Indeed, a supply effect is experienced by short-sale constrained stocks: Consistent with downward sloping demand curves, issue-day returns are significantly negative and, negatively related to the offers’ relative size, only for trading restricted stocks.

Simplified stochastic calculus via semimartingale representations
Aleš Černý,Johannes Ruf

We develop a stochastic calculus that makes it easy to capture a variety of predictable transformations of semimartingales such as changes of variables, stochastic integrals, and their compositions. The framework offers a unified treatment of real-valued and complex-valued semimartingales. The proposed calculus is a blueprint for the derivation of new relationships among stochastic processes with specific examples provided below.

Stablecoins 2.0: Economic Foundations and Risk-based Models
Ariah Klages-Mundt,Dominik Harz,Lewis Gudgeon,Jun-You Liu,Andreea Minca

Stablecoins are one of the most widely capitalized type of cryptocurrency. However, their risks vary significantly according to their design and are often poorly understood. In this paper, we seek to provide a sound foundation for stablecoin theory, with a risk-based functional characterization of the economic structure of stablecoins. First, we match existing economic models to the disparate set of custodial systems. Next, we characterize the unique risks that emerge in non-custodial stablecoins and develop a model framework that unifies existing models from economics and computer science. We further discuss how this modeling framework is applicable to a wide array of cryptoeconomic systems, including cross-chain protocols, collateralized lending, and decentralized exchanges. These unique risks yield unanswered research questions that will form the crux of research in decentralized finance going forward.

Stock Market Movements and Linkages between Emerging Markets in Asia and Developed Market Indices: Short Run and Long Run Analysis
Lingaraja, Kasilingam ,Selvam, Murgesan ,Veluchamy, Ramanujam,Kathiravan, Chinnadurai
This research paper investigates the stock market movements and linkages between the Asian emerging markets (China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan and Thailand) and two developed markets (i.e. USA and Japan). This study employs the statistical application of descriptive statistics, unit root test, correlation and pairwise granger causality test. The study used daily data from 01st January, 2005 to 31st December, 2014, to examine both short-run (year wise) and long-run (whole study period) movements and linkages between Asian emerging stock markets and two developed stock markets. The presence of short-run relationship and absence of a strong long-run relationship, among these markets, were found. The short run (year wise) and long run movements and linkages have important implications for investors, risk managers and regulators. It is found that Indian stock market experienced less movements with developed markets (USA and JAPAN). This study also suggested that India's stock market is largely protected from global events i.e., 2007-2008. The sample stock markets of these eight countries of Asian emerging markets provide attractive diversification opportunities, for international portfolio investors during the long run period. All the eight countries of Asian emerging markets provide attractive diversification opportunities for international portfolio investors, over a long period.

Tax Avoidance, Tax Risk, and the Volatility of Stock Returns
Krapl, Alain A.,Salyer, Robert,White, Reilly S.
We explore the effects of tax avoidance and tax risk on stock return volatilities of U.S. firms. We find that firms with very low and very high levels of tax avoidance and firms with high levels of tax risk have more volatile stock returns. We observe that tax avoidance primarily affects stock return volatility through changes in investors’ cash flow expectations; in contrast, tax risk seems to affect stock returns through cash flow and discount rate channels. Furthermore, we find that changes in expected cash flows and discount rates are less offsetting for firms with extreme levels of tax avoidance and high levels of tax risk.

The Economic Costs of Containing a Pandemic
Asahi Noguchi

The coronavirus disease (COVID-19) has caused one of the most serious social and economic losses to countries around the world since the Spanish influenza pandemic of 1918 (during World War I). It has resulted in enormous economic as well as social costs, such as increased deaths from the spread of infection in a region. This is because public regulations imposed by national and local governments to deter the spread of infection inevitably involves a deliberate suppression of the level of economic activity. Given this trade-off between economic activity and epidemic prevention, governments should execute public interventions to minimize social and economic losses from the pandemic. A major problem regarding the resultant economic losses is that it unequally impacts certain strata of the society. This raises an important question on how such economic losses should be shared equally across the society. At the same time, there is some antipathy towards economic compensation by means of public debt, which is likely to increase economic burden in the future. However, as Paul Samuelson once argued, much of the burden, whether due to public debt or otherwise, can only be borne by the present generation, and not by future generations.

The Economic Incentive for Risk Taking in Professional Partnerships
Jennergren, L. Peter
Professional service firms are common in some areas, in particular auditing and law. They are organized as partnerships, private corporations, or public corporations. This paper mainly discusses the first one of these three. When a partner leaves the partnership, her/his shares are redeemed. Two alternatives for redemption are at book value, the traditional alternative, or at fair market value. By means of a discounted dividends model that includes risk taking, it is shown that there may be an economic incentive for risk taking when the redemption value is equal to book value. There may also be an incentive for risk taking when the redemption value is equal to fair market value. However, the level of risk taking in the latter alternative is never higher than the level of risk taking in the former alternative.

The Effect of Central Bank Liquidity Support during Pandemics: Evidence from the 1918 Influenza Pandemic
Anderson, Haelim,Chang, Jin-Wook,Copeland, Adam
The coronavirus outbreak raises the question of how central bank liquidity support affects financial stability and promotes economic recovery. Using newly assembled data on cross-county flu mortality rates and state-charter bank balance sheets in New York State, we investigate the effects of the 1918 influenza pandemic on the banking system and the role of the Federal Reserve during the pandemic. We find that banks located in more severely affected areas experienced deposit withdrawals. Banks that were members of the Federal Reserve System were able to access central bank liquidity, enabling them to continue or even expand lending. Banks that were not System members, however, did not borrow on the interbank market but rather curtailed lending, suggesting that there was little-to-no pass-through of central bank liquidity. Further, in the counties most affected by the 1918 pandemic, even banks with direct access to the discount window did not borrow enough to offset large deposit withdrawals and so liquidated assets, suggesting limits to the effectiveness of liquidity provision by the Federal Reserve. Finally, we show that the pandemic caused only a short-term disruption in the financial sector.

The Effects of Decarbonizing Institutional Portfolios on Stock Prices and Carbon Emissions
Rohleder, Martin,Wilkens, Marco,Zink, Jonas
This study gives the first consistent answer to the important question, whether decarbonizing institutional equity portfolios has an impact on stock prices of carbon intensive companies and whether it contributes measurably to the reduction of carbon emissions. We develop a novel method to identify decarbonization trades in a comprehensive dataset of US and European equity mutual fund holdings and firm level carbon emissions. Carefully controlling for endogeneity, we find that decarbonization pressures stock prices downwards over several periods. In extension, affected firms reduce their carbon emissions relative to non-decarbonized firms. This confirms the decarbonization movement’s hope that a critical mass of institutional investors is able to positively influence firms’ carbon emitting behavior.

The Pricing of Volatility Risk in the US Equity Market
Hitz, Lukas,Mustafi, Ismail,Zimmermann, Heinz
We analyze whether the pricing of volatility risk depends on the asset pricing framework applied in the tests, the specified volatility proxies, and the portfolio sorts used for spanning the asset universe. For this purpose, we compare the results using a macroeconomic and fundamental based asset pricing model using three proxies of volatility and uncertainty, using size/value sorted and industry sector portfolios. Our results reveal that the marginal pricing effect of the VIX volatility factor is strong and statistically significant throughout the models and specifications, while the effect of an EGARCH-based volatility factor is mixed, mostly smaller but with the correct sign. In most cases, the EGARCH factor does not impair the pricing effect of the VIX. The portfolio sorts have a substantial impact on the volatility premiums in both model frameworks. The size of the volatility risk premium is more uniform across the models if the industry sector portfolio sort is used. Finally, the size/value portfolio sort generates larger volatility risk premiums for both models.

The Quest for Multidimensional Financial Immunity to the COVID-19 Pandemic: Evidence from International Stock Markets
Zaremba, Adam,Kizys, Renatas,Tzouvanas, Panagiotis,Aharon, David Y.,Demir, Ender
What determines a country's financial immunity to a global pandemic? To answer this question, we investigate the behavior of 67 equity markets around the world during the COVID-19 outbreak in 2020. We consider a multidimensional data set that includes factors from finance, economic, demographics, technological development, healthcare, governance, culture, and law. Our study also accounts for government interventions, such as containment and closure policies, and economic stimuli. We apply machine learning techniques, panel regression, and factor analysis to ascertain sources of resiliency to the coronavirus pandemic. Our findings demonstrate that stock markets in countries with low unemployment rates and populated with firms with conservative investment policies and low valuations relative to expected profits tend to be more resilient to the healthcare crisis. We also find that firm government policy responses tend to support stock markets in times of the pandemic.

The Tax Cuts and Jobs Act: Which Firms Won? Which Lost?
Wagner, Alexander F.,Zeckhauser, Richard J.,Ziegler, Alexandre
The Tax Cut and Jobs Act (TCJA) slashed corporations’ median effective tax rates from 31.7% to 20.8%. Nevertheless, 15% of firms experienced an increase. One fifth of firms recorded nonrecurring tax costs or benefits exceeding 3% of total assets. Proxies that existing studies employ to assess the TCJA’s impacts account for just half of actual impacts. Stock prices impounded those proxies during the legislative process. Total impacts were impounded the following year, once firms published their financials. These results indicate that investors find it hard to predict even large and immediate changes to company cash flows due to unfamiliar events.

The Value of Luck in the Labor Market for CEOs
Amore, Mario Daniele,Schwenen, Sebastian
It is well-known that luck increases the compensation of CEOs at their current firm. In this paper, we explore how luck affects CEOs’ outside options in the labor market, and the performance of firms that hire lucky CEOs. Our results show that luck at their current firm makes CEOs move to a new firm and be appointed as both CEO and chairman. Lucky CEOs tend to match with firms subject to low analyst coverage and operating in less competitive industries. Moreover, lucky CEOs are able to obtain a higher pay at the new firm (both in absolute terms and compared to new industry peers). Finally, difference-in-differences results show that hiring lucky CEOs hurts firm performance, mostly due to a surge in operating costs and a poorer usage of corporate assets.

Tri-criterion model for constructing low-carbon mutual fund portfolios: a preference-based multi-objective genetic algorithm approach
A. Hilario-Caballero,A. Garcia-Bernabeu,J. V. Salcedo,M. Vercher

Sustainable finance, which integrates environmental, social and governance (ESG) criteria on financial decisions rests on the fact that money should be used for good purposes. Thus, the financial sector is also expected to play a more important role to decarbonise the global economy. To align financial flows with a pathway towards a low-carbon economy, investors should be able to integrate in their financial decisions additional criteria beyond return and risk to manage climate risk. We propose a tri-criterion portfolio selection model to extend the classical Markowitz mean-variance approach in order to include investors preferences on the portfolio carbon risk exposure as an additional criterion. To approximate the 3D Pareto front we apply an efficient multi-objective genetic algorithm called ev-MOGA which is based on the concept of e-dominance. Furthermore, we introduce an a posteriori approach to incorporate the investor's preferences into the solution process regarding their sustainability preferences measured by the carbon risk exposure and his/her loss-adverse attitude. We test the performance of the proposed algorithm in a cross section of European SRI open-end funds to assess the extent to which climate related risk could be embedded in the portfolio according to the investor's preferences.

Turning Pension Plans Into Pension Planes: What Investment Strategy Designers of Defined Contribution Pension Plans Can Learn From Commercial Aircraft Designers
Blake, David P.
Many, if not most, individuals cannot be regarded as ‘intelligent consumers’ when it comes to understanding and assessing different investment strategies for their defined contribution pension plans. This gives very little incentive to plan providers to improve the design of their pension plans. As a consequence, pension plans and their investment strategies are still currently in a very primitive stage of their development. In particular, there is very little integration between the accumulation and decumulation stages. It is possible to produce well-designed DC plans but these need to be designed from back to front (that is, from desired outputs to required inputs) with the goal of delivering an adequate targeted pension with a high degree of probability. We use the analogy of designing a commercial aircraft to explain how this might be done. We also investigate the possible role of regulators in acting as surrogate ‘intelligent consumers’ on behalf of plan members.

Unconventional Monetary Policy and the Portfolio Choice of International Mutual Funds
Cenedese, Gino,Elard, Ilaf
This paper analyses how unconventional monetary policy by the major central banks in developed markets affects the geographical portfolio choice of international mutual fund managers. We find that large-scale asset purchases have significant international spillover effects, in contrast to unconventional monetary policy announcement surprises. Specifically, we document that mutual fund managers rebalance their portfolios away from the developed country conducting large-scale asset purchases and towards other developed markets. We find little evidence for fund managers contributing to QE-induced capital flows to emerging markets.

V-, U-, L-, or W-shaped recovery after COVID? Insights from an Agent Based Model
Dhruv Sharma,Jean-Philippe Bouchaud,Stanislao Gualdi,Marco Tarzia,Francesco Zamponi

We discuss the impact of a Covid-like shock on a simple toy economy, described by the Mark-0 Agent-Based Model that we developed and discussed in a series of previous papers. We consider a mixed supply and demand shock, and show that depending on the shock parameters (amplitude and duration), our toy economy can display V-shaped, U-shaped or W-shaped recoveries, and even an L-shaped output curve with permanent output loss. This is due to the existence of a self-sustained "bad" state of the economy. We then discuss two policies that attempt to moderate the impact of the shock: giving easy credit to firms, and the so-called helicopter money, i.e. injecting new money into the households savings. We find that both policies are effective if strong enough, and we highlight the potential danger of terminating these policies too early. While we only discuss a limited number of scenarios, our model is flexible and versatile enough to allow for a much wider exploration, thus serving as a useful tool for the qualitative understanding of post-Covid recovery. We provide an on-line version of the code $\href{}{\textrm{here}}$.

What Matters for Consumer Sentiment? World Oil Price or Retail Gasoline Price?
Clerides, Sofronis,Krokida, Styliani Iris,Lambertides, Neophytos,Tsouknidis, Dimitris A.
This paper examines the impact of oil supply and demand shocks on gasoline prices and consumer sentiment in the Euro Area. Results reveal that aggregate consumer sentiment and its components deteriorate notably as a response to positive shocks to real gasoline prices. On the contrary, positive oil-specific demand shocks do not trigger a deterioration of consumer sentiment. In other words, consumer sentiment is affected primarily by unexpected changes in gasoline prices at the pump rather than unexpected changes in crude oil prices. The analysis is further refined to analyze the effects of these shocks to six sub-components of consumer sentiment.