Research articles for the 2020-06-30

'Time Suspended' A Self-Organizing Solution to Ensure the Economic Recovery
Donà, Luca,Douady, Raphael
The crisis has affected different kinds of economic agents unequally: production engine businesses (those that deliver goods and services) have been affected much more than passive holders of financial or real capital assets. Economic time has essentially been “stopped” â€" with many businesses unable to collect revenues but still saddled with large time-based expenses that stress their liquidity jeopardizing their survival. We suggest declaring Time as Suspended and setting all interest rates on all financial assets and on all unproductive business real assets to 0% while the crisis perdures and concomitantly setting a grace period for any installment, while accordingly extending all contracts by the same amount of time â€" throughout the entire economy chains. In this paper we analyze the costs and benefits on various economy agents and the government and argue that everyone will be better off if an avalanche of closures, bankruptcies and legal expenses can be prevented.

A Theory of Equivalent Expectation Measures for Expected Prices of Contingent Claims
Sanjay K. Nawalkha,Xiaoyang Zhuo

This paper introduces a theory of equivalent expectation measures, such as the R measure and the RT1 measure, generalizing the martingale pricing theory of Harrison and Kreps (1979) for deriving analytical solutions of expected prices - both the expected current price and the expected future price - of contingent claims. We also present new R-transforms which extend the Q-transforms of Bakshi and Madan (2000) and Duffie et al. (2000), for computing the expected prices of a variety of standard and exotic claims under a broad range of stochastic processes. Finally, as a generalization of Breeden and Litzenberger (1978), we propose a new concept of the expected future state price density which allows the estimation of the expected future prices of complex European contingent claims as well as the physical density of the underlying asset's future price, using the current prices and only the first return moment of standard European OTM call and put options.

Accounting Measurement Intensity
Andreicovici, Ionela,van Lent, Laurence,Nikolaev , Valeri V.,Zhang, Ruishen
We propose an empirical measure of metering problems, i.e., the difficulties of measuring productivity and rewards in firms. We build on the insight that these metering problems are reflected in the intensity with which firms apply Generally Accepted Accounting Principles when preparing their financial statements to capture economic transactions. We adapt a simple computational linguistics algorithm to identify textual patterns that uniquely signify heightened use of accounting measurement in preparation of accounting reports. We validate the output of this algorithm before computing time-varying, firm-level scores of accounting measurement intensity (AMI). We then show that AMI is associated with the decisions of professional users of accounting information. We also document that AMI is correlated with the cross-section of expected equity returns and with the cost of debt and non-price terms in the private loan market. In CEO compensation contracts, we see lower pay-performance sensitivity to accounting performance metrics as AMI increases. Finally, we report that AMI correlates with investment and hiring decisions in firms; factor productivity, as well as the efficiency of resource allocation. Together, these findings are consistent with the predictions in Alchian and Demsetz (1972) about how metering problems affect the boundary of the firm.

Africa and Middle East Alternative Finance Benchmarking Report
Zhang, Bryan Zheng,Wardrop, Robert,Garvey, Kieran,Collings, Simon ,Ziegler, Tania,Rau, P. Raghavendra,Burton, John,Gray, Mia,Cogan, Davinia,Westerlind, Louise,Lui, Alexis
This report, jointly produced by the Cambridge Centre for Alternative Finance (CCAF) and Energy 4 Impact with the support of UKAid and CME Group Foundation, is the first study of its kind that systematically and comprehensively reports the size and growth of crowdfunding and peer-to-peer lending markets in Africa and the Middle East. This is the fifth in a series of impactful industry reports that the CCAF, based at the University of Cambridge, has published in 2016 together with its regional research partners, including those in the Asia-Pacific region, the Americas, Europe, and the UK. The new report, covering 46 countries in Africa and 12 countries in the Middle East, gathered survey data from over 70 alternative finance platforms between 2013- 2015. The study details the types of online alternative finance, ranging from reward-based crowdfunding to peer-to-peer business lending, that are prevailing in African and Middle Eastern countries. It captures the industry volumes in key markets, documents the growth of alternative funding for start-ups and SMEs, analyses the latest market trends and explores the changing regulatory landscape in Africa and the Middle East. Unlike our other regional reports, this study includes additional chapters on the emerging alternative payment systems (e.g. mobile payment and cryptocurrencies), crowdfunding and peer-to-peer lending regulatory landscapes in Africa and the Middle East (drawing on our recent regulatory research with the FSD Africa) and on renewable energy crowdfunding, with insights from the DIFD funded CrowdPower Programme, carried out by Energy 4 Impact.

Black Basket Analytics for Mid-Curves and Spread-Options
Antonov, Alexandre
To price mid-curve or spread options we need flexible joint distributions of two underlying rates with fixed marginals. A Copula approach is a standard method to produce such joint distributions.It has, however, several drawbacks, especially, a low number of free parameters. For example, the most popular Gaussian copula has one parameter -- correlation. Another complication with the Copulas is its numerical realization: a two dimensional numerical integration underlying the price can be slow and potentially noisy, eps. for sensitivities.In this paper we propose a new way to unify two marginal distributions such that it has a large number of parameters permitting to calibrate to mid-curve or spread options with multiple strikes. The method is based on a basket of log-normal processes (called Black Basket) having a fast analytical formulation and attractive simplicity.

Breaking New Ground: The Americas Alternative Finance Benchmarking Report
Zhang, Bryan Zheng,Ziegler, Tania,Rosenberg, Robert,Squire, Robert,Garvey, Kieran,Burton, John,Wardrop, Robert,Hernadez, Eduardo Arenas
Over the last few years, an array of crowdfunding, marketplace/peer-to-peer (P2P) lending and other online alternative finance platforms have emerged that use technological innovations to change the way people, businesses and institutions access and invest money. Increasing numbers of consumers - raised on ATMs, credit and debit cards and online money transfers - are embracing the speed, convenience and transparency offered by these platforms. Furthermore, businesses, limited by nearly a decade of tight credit and declining loan approvals from banks and traditional lenders, are turning to online alternative sources of commercial loans.The impact of alternative finance is rippling through the financial services industry and the economies of the Americas. While capital access via alternative finance platforms remains a small part of the overall markets for debt and equity, online alternative finance addresses demands unmet by traditional sources. Banks and other established players are feeling competitive pressures, recognising new opportunities and responding with technology investments and strategic partnerships. Over the last two years, an influx of institutional funding has prompted the growth of marketplace-originated securitisation of alternative finance assets in the United States (US), although the pace of marketplace/P2P lending securitisations is (at the moment) decelerating and spreads are widening. At the same time, leading alternative finance platforms are trying to attract more retail investors and diversify their funding base, for instance, by making it easier for online financial advisors to offer their loans. Changing SEC regulations in 2016 will also open up market participation to non-accredited investors and draw additional retail investment online. The Americas alternative finance market is going through a state of consolidation and transformation, dealing with new challenges in an uncertain macroeconomic environment, embracing institutionalisation and reconsidering its P2P and crowdsourcing roots. Online alternative finance continues to break new ground with market growth, product innovation, technological advancement, corporate partnerships, international expansion and regulatory recognition.Breaking New Ground: The Americas Alternative Finance Benchmarking Report is the first comprehensive study of this fast-evolving online alternative finance market in the Americas. Focusing on marketplace/P2P lending and crowdfunding activities, the report captures an estimated 80 per cent of the visible online alternative finance market (by transaction volumes) in the Americas. This report aims to provide independent, robust, reliable and up-to-date aggregate-level alternative finance market data for the reference of academics, industry, business communities, policymakers, regulators and the general public. Spanning eight months, this large-scale study was conducted by the Cambridge Centre for Alternative Finance, the University of Cambridge Judge Business School and the Polsky Center for Entrepreneurship and Innovation at the University of Chicago Booth School of Business (Chicago Booth), in partnership with KPMG and with the support of the CME Group Foundation, the Inter-American Development Bank (IDB), the Business Development Bank of Canada (BDC) and CPAmerica. Working with multiple leading industry research partners, the research team surveyed 257 online alternative finance platforms operating in the Americas, out of which, 178 were from the US and Canada.Market size & growthIn 2015, the Americas online alternative finance industry grew to $36.49 billion, a 212 per cent annual increase from the $11.68 billion in 2014. Between 2013 and 2015, alternative finance platforms across the Americas have delivered over $50 billion in funding to individuals and businesses, with the US market contributing 99 per cent of the total funding volume. With $36.17 billion in total transaction volume in 2015, the US is the world's second largest online alternative finance market behind Mainland China. The US has the highest total online alternative finance market volume per capita in the world at $113.43 in 2015 (China's per capita volume is $74.54), far higher than the $5.82 achieved in Canada - the second highest in the Americas region. The Latin American and the Caribbean regional market is small in comparison, but it achieved a 130 per cent average growth rate over the last three years to reach $110.46 million in 2015, with Chile accounting for nearly half of that total.Prevailing online alternative finance models in 2015Marketplace/P2P consumer lending is the largest market segment in the Americas, with $25.74 billion accrued in 2015. Balance sheet consumer lending is in second place with $3.09 billion, followed by marketplace/P2P business lending at $2.62 billion in 2015. Reward-based crowdfunding reached $658.37 million in 2015, narrowly beating equity-based crowdfunding which registered $598.05 million in the Americas.Real estate models are scaling rapidlyAlready developed in the US, real estate alternative financing models (including real estate crowdfunding and marketplace/P2P lending) have generated just over $1.26 billion in the US for 2015. Real estate crowdfunding is also a fast-growing segment of the Latin American and the Caribbean market, generating $14.86 million of transaction volume in 2015 and a total of $19.37 million between 2013 and 2015. Across the Americas, the marketplace/P2P real estate lending model grew at a rate of 471 per cent over the three-year period.Businesses are increasingly tapping alternative financeIn the US, between 2013 and 2015, online alternative finance platforms have facilitated over $10.81 billion worth of growth, expansion, working and venture capital to 268,524 small and medium enterprises (SMEs). In 2015 alone, online alternative business funding reached $6.88 billion in the US. In Latin America and the Caribbean, thanks to prevailing models such as marketplace/P2P business lending, over $120 million of business funding was facilitated by online alternative finance platforms over the last three years. In 2015, online alternative business lending reached $5.61 billion, which is equivalent to 1.26 per cent of all business lending from traditional sources in the US.Entrenched institutionalisation in the US marketBetween 2013 and 2015, over 72 per cent of marketplace/P2P business loans and 53 per cent of marketplace/P2P consumer loans were funded by institutional investors via online alternative finance platforms in the US. Furthermore, almost 83 per cent of the invoice trading model and 74 per cent of marketplace/P2P real estate loans were also funded by institutional investors, typically including mutual funds, pension funds, hedge funds, family offices, asset management firms and traditional banks. This level of institutionalisation stands in contrast to the UK market, where funding is primarily provided by retail investors. The dominance of retail investors relative to institutional investors on Latin American and Caribbean platforms, however, is very similar to the UK market.Market participation by women is growingWomen seem to be dominating both the funding and fundraising sides of donation-based and reward-based crowdfunding models, representing approximately 60 per cent of these marketplaces on average. Around 42 per cent of the consumer borrowers and 24 per cent of the SME borrowers on marketplace/ P2P lending platforms are women. In contrast, our data suggests that 20 per cent of the lenders on marketplace/P2P consumer lending platforms and 9 per cent of lenders on marketplace/P2P business lending platforms are women. Women appear to be less engaged in equity-based crowdfunding, given only 12 per cent of the fundraisers and 13 per cent of investors in this segment are women.No consensus on regulationAccording to the survey, 51 per cent of US lending platforms and 43 per cent of equity platforms consider current regulations "adequate and appropriate". However, 34 per cent of equity platforms and 15 per cent of lending platforms see current regulation as too strict or excessive. 40 per cent of lending platforms and 49 per cent of equity platforms in the US, favor the new regulations proposed by the SEC, while around a third of both debt and equity platforms perceive proposed regulations negatively. In Latin America, over three quarters of surveyed platforms perceive there to be no specific regulations in their respective countries.

COVID-19 and Non-Performing Loans: Lessons from past Crises
Ari, Anil,Chen, Sophia,Ratnovski, Lev
During crises, the number of loans that cannot be paid back increases. What are the lessons from past crises for non-performing loan resolution after COVID-19? In this article we use a new database covering non-performing loans (NPLs) in 88 banking crises since 1990 to find out. The data show that dealing with NPLs is critical to economic recovery. Compared with the 2008 crisis, some factors are conducive to NPL resolution this time: banks have higher capital, the forward-looking IFRS 9 accounting standards can help NPL recognition, and the COVID-19 crisis was not preceded by a credit boom. However, other factors could make NPL resolution more challenging: government debt is substantially higher, banks are less profitable, and corporate balance sheets are often weak.

Can institutional investors restrain stock market manipulation?--Empirical evidence from an emerging market
Liu, Jie,Wu, Chonglin,Yuan, Lin
This paper analyzes the relationship between the proportion of institutional investors’ shareholding and the probability of stock manipulation using 252 cases of manipulation disclosed in public administrative penalty decision of the China Securities Regulatory Commission (CSRC) from 2007 to 2019. The empirical results show that the higher the proportion of institutional investors’ shareholding, the lower the probability of market manipulation. Further analysis shows that the effect is mainly shown in non-shortable stocks. Moreover, controlling for the endogeneity using exogenous policy shocks, the effect of institutional investors on restraining market manipulation still exists. In the end, considering the fact that the cases of market manipulation detected by the CSRC are only a part of the real cases, this paper uses Bivariate Probit model with partial observability and finds that the higher the proportion of institutional investors’ shareholding, the lower the probability of stocks being manipulated and the higher probability of being detected after manipulation.

Complexity in Large U.S. Banks
Goldberg, Linda S.,Meehl, April
The structural complexity of the largest U.S. bank holding companies (BHCs) has been changing. Following the global financial crisis, the simplification of bank complexity was a policy priority. Using a variety of measures of organizational, business, and geographic complexity, the authors show that large U.S. BHCs nonetheless remain very complex. Organizational complexity has declined, as the average number of legal entities within large U.S. BHCs has fallen. By contrast, the range of industries spanned by legal entities within the BHCs has shifted more than it has declined, especially within the financial sector; nonfinancial entities within U.S. BHCs still tilt heavily toward real estateâ€"related businesses and span numerous other industries. Fewer large BHCs have global affiliates and the geographic span of the most complex has decreased. Locations with favorable tax treatment still attract a significant share of foreign bank and nonbank entities while informationally opaque locations are losing their share of such entities.

Corporate Social Responsibility in Fraud Firms
Ferrés, Daniel,Marcet, Francisco
We analyze whether fraud firms modify their Corporate Social Responsibility (CSR) activities in anticipation of the revelation of a corporate misconduct. Specifically, our results show that firms that participated in illegal price fixing schemes strategically increase their CSR initiatives around the time when they become the target of an antitrust prosecution and those CSR investments increase monotonically as the official investigation advances. Our evidence shows a temporary increase in CSR in price fixing firms that coincides with the timing of the regulatory investigations and that those CSR initiatives decline following the antitrust prosecution and the imposition of fines. The results suggest that fraud firms that participate in illegal price fixing schemes embark on preemptive efforts to improve their positive CSR actions as cartels break up and that those anticipatory CSR actions work as a mechanism to limit reputational costs of fraud revelation.

Crowdfunding in East Africa: Regulation and Policy for Market Development
Garvey, Kieran,Ziegler, Tania,Zhang, Bryan Zheng,Wardrop, Robert,Rau, P. Raghavendra,Gray, Mia,Ridler, Samantha
Earlier in 2016, DFID-funded FSD Africa partnered with the Cambridge Centre for Alternative Finance (CCAF) and Anjarwalla & Khanna to conduct a regulatory review of different crowdfunding models across Kenya, Tanzania, Uganda and Rwanda. Crowdfunding is fast taking shape across East Africa - particularly non-financial return based models such as rewards and donations crowdfunding. However, return-based equity and loan-based crowdfunding are really only starting to emerge. Such FinTech models require careful and considerate attention from financial regulators in East Africa to catalyse and harness their potential positive economic and social benefits whilst addressing systemic and consumer risks and challenges.This report highlights some key priority regulatory and policy areas necessary for market development in Kenya, Uganda, Rwanda and Tanzania while drawing on insights & experience from the UK, the USA, Malaysia, New Zealand and India.New crowdfunding regulations in East Africa are not recommended at this time. Instead, other regulator-led, market development initiatives should be considered including:A living database of all, existing, regulator-acknowledged platforms in East Africa.Regulator engagement opportunities - to bring together the East African crowdfunding industry, practitioners, experts, potential funders and fundraisers.Develop a regional regulatory laboratory or 'Sandbox' to guide crowdfunding businesses through the relevant regulatory processes and requirements.Regulators should encourage the East African crowdfunding platforms to build a regionally-focused industry association to undertake self-regulation and institute guidelines and principles to foster innovation while protecting investors. The report goes into a great deal of depth covering markets in East Africa and other more established crowdfunding markets. It also provides useful guidance for crowdfunding platforms that are seeking to establish operations in these countries as well as hopefully encouraging platforms operating elsewhere to consider East Africa as a market to provide their innovative financial crowdfunding services.We would like to thank the large number of contributors who have made this research possible including a wide array of regulators from the Capital Market Authorities, Central Banks and Communication Authorities of Kenya, Rwanda, Uganda and Tanzania as well as the host of experts, crowdfunding platforms and other policymakers that have generously provided their expertise and insight.

Cultivating Growth: The 2nd Asia Pacific Region Alternative Finance Industry Report
Garvey, Kieran,Chen, Hung-Yi,Zhang, Bryan Zheng,Buckingham, Edward,Ralston, Deborah,Katiforis, Yianni ,Deer, Luke,Ziegler, Tania,Kong, Ying,Maddock, Rodney,Shenglin, Ben,Zheng, Xinwei,Jenweeranon, Pawee,Li, Wenwei,Rui, Hao,Huang, Eva,Zhang, Jingxuan
Cultivating Growth - 2nd Asia Pacific Alternative Finance Industry Report, was produced by the Cambridge Centre for Alternative Finance at the University of Cambridge, and the Australian Centre for Financial Studies at the University of Monash Business School in Australia, Tsinghua University in China and Zhejiang University in China. Financial support for the Asia Pacific Alternative Finance Research was generously provided by KPMG Australia, HNA Capital and the CME Group Foundation.This 2017 Report builds on last year's Asia Pacific research, tracking emerging dynamics and developments within this fast changing industry at a macro-regional level, but also on a country-by-country basis. The findings contained within this report contribute to a wider research program conducted by the Cambridge Centre for Alternative Finance and its academic research partners to track the growth and development of alternative finance at a global level.Market size and growthIn 2016, the alternative finance market continued to grow across the Asia Pacific in China, Oceania, East Asia, South East Asia, South and Central Asia to a total market volume of US$245.28 billion. This was an annual growth of 136 per cent compared to 2015 when US$103.31 billion was raised from across the region.China maintains and strengthens its position as the global alternative finance market leader accounting for 99.2 per cent of the total Asia Pacific alternative finance market and an estimated 85 per cent of the total global market in 2016 with US$243.28 billion raised in mainland China alone.Across much of the wider Asia Pacific region, the alternative finance market continues to grow with a total of US$2.004 billion in 2016, up by 79 per cent compared to 2015 with US$1.12 billion.Outside of China, Australia was the second largest alternative finance market with US$609.6 million in 2016, followed by Japan in third with US$398.45 million and in fourth South Korea with US$376.31 million, New Zealand in fifth with US$223.25 million, Singapore in sixth with US$163.75 million and India in seventh with US$124.16 million. Leading online alternative finance modelsIn China, the largest alternative finance model was marketplace/peer-to-peer consumer lending with US$136.54 billion, equating to approximately 56 per cent of the total market in China. In second, was marketplace/peer-to-peer business lending with a total of US$58.18 billion which was around a quarter of the market in China. Balance sheet business lending totalled US$27.48 billion while balance sheet consumer lending amassed US$9.38 billion.In the wider Asia Pacific market, outside of China, again marketplace/peer-to-peer consumer lending was the largest alternative finance model with US$484.86 million (24 per cent of the Asia Pacific market outside of China), while balance sheet business lending accounted for around 23 per cent of the total market with US$466.08 million in 2016. Alternative business financeIn China, alternative finance for businesses continued to grow in 2016, with businesses raising $US93.53 billion in funding - a 107 per cent increase on the US$45.11 billion in 2015.China is currently dominated by non-business alternative finance which totalled US$146.8 billion in 2016 led by peer-to-peer consumer lending. However, it is likely that a sizable proportion of consumers in China are using personal loans for business purposes.In the Asia Pacific, outside of China, a total of US$1.46 billion was raised by businesses which was a 72 per cent increase on the US$0.85 billion raised in 2015 with an estimated 42,592 business entities utilising alternative channels of business finance in 2016.Institutional investmentIn China, as in 2015, the alternative finance market had distinctively low levels of institutional participation compared to other markets such as the USA and the UK. Peer- to-peer business lending platforms reported only five per cent of their funding coming from institutions in 2016, while peer-to-peer consumer lending had six per cent and peer-to-peer real estate lending, 15 per cent. These online lending models are currently driven by individual, retail lenders in China. In the wider Asia Pacific region, marketplace/peer-to-peer consumer lending had the highest level of institutional funding at 55 per cent of total funds while invoice trading had 46 per cent and balance sheet business lending had 44 per cent. Equity- based crowdfunding had much less at 15 per cent, while marketplace/ peer-to-peer business lending had seven per cent. Business model & product innovationIn China, less than one third of surveyed platforms across all types of alternative finance significantly altered their business model in 2016, while 46 per cent reported a slight alteration of their business model. Around a quarter of platforms did not make any changes to their business model in 2016. In terms of product innovation in China, 29 per cent of platforms surveyed across all types of alternative finance stated they had significantly altered their product in 2016 while just over half had made some slight changes in this year. Only 18 per cent of platforms in China had made no change to their products in 2016.Industry perceptions of risk & regulationIn China, more than 50 per cent of surveyed platforms across all online lending models perceived both existing and proposed regulatory norms to be adequate and appropriate in 2016.In China, 73 per cent peer-to-peer consumer lending platforms perceived cyber-attacks to be the biggest threat to the industry while 76 per cent of peer-to-peer business lending platforms perceived fraud to be the most serious industry risk. 99 per cent of balance sheet consumer & business lending platforms see changes to local regulation in China as the biggest risk.In the wider Asia Pacific outside of China, 69 per cent of platforms in Japan see existing regulation as inadequate or too relaxed while in Thailand, 80 per cent of surveyed platforms see no specific existing alternative finance regulation and that it is not needed. Conversely, in India, around a third of platforms see existing industry regulations as adequate while around half see no existing regulations currently. In Singapore, Australia and Malaysia around two thirds of platforms and three quarters of platforms in New Zealand, see existing regulations as adequate and appropriate.

Diversifying with Cryptocurrencies during COVID-19
Goodell, John W.,Goutte, Stephane
Literature suggests assets become more correlated during economic down- turns. The current COVID-19 crisis provides an unprecedented opportunity to investigate this considerably further. Further, whether cryptocurrencies provide a diversification for equities is still an unsettled issue. Additionally, the question of whether cryptocurrency futures are safe havens has received very little attention. We employ several econometric procedures, including wavelet coherence, copula principal component, and neural network analyses to rigorously examine the role of COVID-19 on the paired co-movements of six cryptocurrencies, as well as bitcoin futures, with fourteen equity indices and the VIX. We nd co-movements between cryptocurrencies and equity indices gradually increased as COVID-19 progressed. However, most of these co-movements are positively correlated, suggesting that cryptocurrencies do not provide a diversification benefit during downturns. Exceptions, however, are the co-movements of bitcoin futures and tether being negative with equities. Results are consistent with investment vehicles that attract either more informed or more speculative investors dierentiating themselves as safe havens.

Does GDP Manipulation Affect the Cost of Equity?
Cai, Guilong,Li, Xiaoxia,Luo, Danglun,Tang, Zhenyang
We use satellite night lights data to estimate the extent of provincial-level gross domestic product (GDP) manipulation in China and show that firms located in provinces with greater GDP manipulation have higher cost of equity. This effect is significant for local state-owned enterprises (SOEs) only; furthermore, it is more pronounced when local government officials face greater promotion pressure and when institutional ownership is lower. We also document a negative association between future earnings and GDP manipulation. Overall, our findings suggest that Chinese local governments intervene in local SOEs’ decisions to manipulate GDP figures which may cost shareholders.

Drivers of Financial Access: The Role of Macroprudential Policies
Deléchat, Corinne,Kiyasseh, Lama,MacDonald, Margaux,Xu, Rui
This study analyzes the drivers of the use of formal vs. informal financial services in emerging and developing countries using the 2017 Global FINDEX data. In particular, we investigate whether individuals' choice of financial services correlates with macro-financial and macro-structural policies and conditions, in addition to individual and country characteristics. We start our analysis on middle and low-income countries, and then zoom in on sub-Saharan Africa, currently the region that most relies on informal financial services, and which has the largest uptake of mobile banking. We find robust evidence of an association between macroprudential policies and individuals' choice of financial access after controlling for personal and country-level characteristics. In particular, macroprudential policies aimed at controlling credit supply seem to be associated with greater resort to informal financial services compared with formal, bank-based access. This highlights the importance for central bankers and financial sector regulators to consider the potential spillovers of monetary policy and financial stability measures on financial inclusion.

Dynamic Hedging using Generated Genetic Programming Implied Volatility Models
Fathi Abid,Wafa Abdelmalek,Sana Ben Hamida

The purpose of this paper is to improve the accuracy of dynamic hedging using implied volatilities generated by genetic programming. Using real data from S&P500 index options, the genetic programming's ability to forecast Black and Scholes implied volatility is compared between static and dynamic training-subset selection methods. The performance of the best generated GP implied volatilities is tested in dynamic hedging and compared with Black-Scholes model. Based on MSE total, the dynamic training of GP yields better results than those obtained from static training with fixed samples. According to hedging errors, the GP model is more accurate almost in all hedging strategies than the BS model, particularly for in-the-money call options and at-the-money put options.

Early Lessons on Regulatory Innovation to Enable Inclusive FinTech: Innovation Offices, Regulatory Sandboxes and RegTech
Zhang, Bryan Zheng,Rowan, Philip,Duff, Schan,Homer, Matthew,Schizas, Emmanuel,Soriano, Miguel,Cloud, Katherine,Umer, Zain,Garvey, Kieran,Ziegler, Tania,Wardrop, Robert,Blandin, Apolline,Gray, Mia,Chen, Hung-Yi,Yerolemou, Nikos,Calabia, Christopher ,Chantramonklasri, Thunj ,Dasgupta, Paolo S. ,Jenweeranon, Pawee,Lin, Lin,Li, Shuang
Technology-enabled innovation in financial services (FinTech) can extend the benefits of financial inclusion to millions of unbanked and underbanked people around the world. However, the rise of FinTech presents many regulatory challenges - for emerging and developing economies in particular. Consequently a number of regulators in advanced, emerging, and developing economies have responded to such challenges by innovating on their own. These innovative regulatory initiatives include innovation offices, regulatory sandboxes, and RegTech for regulators.Against this backdrop, the Early Lessons on Regulatory Innovations to Enable Inclusive FinTech Report aims to provide readers with key insights on how regulators are innovating to better respond to financial innovation. This empirical study provides independent and comprehensive insights on the inter-relationships between financial and regulatory innovation and financial inclusion, together with lessons learned from early examples of regulatory innovation. The report also provides practical considerations for those regulators seeking to develop their own initiatives.This report has been produced by the Cambridge Centre for Alternative Finance at Cambridge Judge Business School in partnership with the FinTech Working Group of the United Nations Secretary-General's Special Advocate for Inclusive Finance for Development (UNSGSA). It would not have been possible without the support of the Monetary Authority of Singapore (MAS) and the supervision and coordination of the Office of the UNSGSA.Global interest in innovative regulatory initiatives is strong, with regulatory sandboxes now live or planned in over 50 jurisdictions. There are also innovation offices in operation in over 30 jurisdictions, while 20 jurisdictions are pioneering RegTech models. Some jurisdictions have established innovation offices as a first step in the regulatory innovation journey. They are a particularly compelling initial option for capacity-constrained regulators in emerging and developing economies. They require no protracted changes to legislation or regulation, or related resource implications. Key lessons learned from innovation offices underscore the importance of early, and close, engagement with innovators. Executive buy-in and inter-agency coordination can ensure their effective functioning, and they can be a powerful support to regulators with a financial inclusion remit. Innovation offices are also only as good as the quality of their resources, such as the technical capacity of their staff. Regulatory sandboxes have been widely adopted as an innovative regulatory initiative, including several with a specific financial inclusion focus. Sandboxes can help regulators gain a better understanding of FinTech and develop evidence-based regulations that promote inclusive FinTech.Key lessons learned from early regulatory sandboxes highlight that they are neither necessary nor sufficient for promoting financial inclusion. Sandboxes do offer benefits but are complex to set up and costly to run. Experience shows that most regulatory questions raised in connection with sandbox tests can be effectively resolved without a live testing environment. Similar results may be more affordably achieved through innovation offices and other tools.RegTech (regulatory technology) is a distinct innovative regulatory initiative, which focuses on how to monitor and enforce compliance against relevant regulations. RegTech can support a more responsible delivery of innovative financial services, which may directly impact financial inclusion. It also allows regulators to swiftly respond to market developments, better protect consumers, and enhance institutional supervision.There are currently limited examples of RegTech solutions being deployed in emerging and developing economies. Lessons learned from initiatives that do exist highlight the merits of beginning with a problem that will likely gain broad support and has a high likelihood of successful resolution. Crowdsourcing potential solutions to regulatory problems, paired with strong executive sponsorship, has also proven rewarding. Finally, multi-disciplinary teams with complementary skill sets can help foster long-term regulatory transformation.It is clear that no single initiative is a "silver bullet" for effective regulation. Many are resource intensive and require careful cost-benefit analysis. However there are a number of considerations for regulators who do seek to implement their own innovative regulatory initiatives. An internal mindset and culture which is supportive of innovation within the regulator is crucial, while direct engagement between regulators and innovators has also proven to be mutually beneficial, regardless of the form which this takes. Regulators have also benefited from close inter-agency collaboration and opportunities for mutual learning. Regulators in emerging and developing economies need to remain agile and open as they innovate and create regulatory initiatives. When effectively carried out, innovative regulatory initiatives enable inclusive FinTech and support regulators in long-term capacity building.

Expectation and Price in Incomplete Markets
Paul McCloud

Risk-neutral pricing dictates that the discounted derivative price is a martingale in a measure equivalent to the economic measure. The residual ambiguity for incomplete markets is here resolved by minimising the entropy of the price measure from the economic measure, subject to mark-to-market constraints, following arguments based on the optimisation of portfolio risk. The approach accounts for market and funding convexities and incorporates available price information, interpolating between methodologies based on expectation and replication.

FinTech in Uganda: Implications For Regulation
Rowan, Philip,Garvey, Kieran,Zhang, Bryan Zheng,Soriano, Miguel,Umer, Zain,Cloud, Katherine,Cracknell, David J,Singh, Anup,Kutosi, Sam,Ahimbisibwe, Doreen
FinTech holds great potential for both financial inclusion and economic development in a wider sense. Digital financial solutions have been expanding access and reach to consumers, especially the unbanked and under-banked. They have been significantly lowering the costs of providing financial services, making it possible to serve the base of the pyramid in a more profitable way. Fintechs have also enabled new business models that offer expanded services to customers and continue to generate new revenue streams for financial service providers.FSD Uganda, the Cambridge Centre for Alternative Finance (CCAF), and MicroSave collaborated to assess FinTech in Uganda, and its implications for policymakers and regulators. This study outlines key priority areas necessary for regulatory and policy development in Uganda to address the challenge of facilitating responsible development of inclusive digital finance. It draws upon insights, experiences, and best practices with respect to the regulatory and policy developments of FinTech from a number of other leading regulators and standard-setting bodies around the world, including the UK, Kenya, Australia, South Africa, the Financial Stability Board, and the International Monetary Fund.

Forecasting volatility with a stacked model based on a hybridized Artificial Neural Network
E. Ramos-Pérez,P.J. Alonso-González,J.J. Núñez-Velázquez

An appropriate calibration and forecasting of volatility and market risk are some of the main challenges faced by companies that have to manage the uncertainty inherent to their investments or funding operations such as banks, pension funds or insurance companies. This has become even more evident after the 2007-2008 Financial Crisis, when the forecasting models assessing the market risk and volatility failed. Since then, a significant number of theoretical developments and methodologies have appeared to improve the accuracy of the volatility forecasts and market risk assessments. Following this line of thinking, this paper introduces a model based on using a set of Machine Learning techniques, such as Gradient Descent Boosting, Random Forest, Support Vector Machine and Artificial Neural Network, where those algorithms are stacked to predict S&P500 volatility. The results suggest that our construction outperforms other habitual models on the ability to forecast the level of volatility, leading to a more accurate assessment of the market risk.

Foreign Exchange Market, Energy and Gold Price Influencing Conventional and Islamic Indices (Pakistan Stock Exchange)
Rehan, Muhammad,Alvi, Jahanzaib,Ibraheem Hussein, Hanaa
The main purpose of this research is to find out the relationship between stock indices i.e. Conventional and Islamic index which is taken as dependent variables and foreign exchange commodities. A further specific objective is to find out that selected variables are useful to predict each other or not. The sample is taken all conventional indices i.e. KSE_100, KSE_All, KSE_30 foreign exchange i.e. (USD, UK and EURO) commodities (gold and cured oil) from January 2008 to December 2019 as Islamic Index i.e. KMI-30 has started from October 2008 so data has been taken from October 2008 to December 2019 of Pakistan stock exchange. The unit root test has performed to check whether data is stationary or not and which test is appropriate for the specific data. OLS and Granger Causality test is performed with the help of Eviews10 to find the relationship between Stock Indices, Foreign Exchange and Commodities. This research determines that all conventional indices have a significant and negative relation with USD and KSE_100 index the only have a positive and significant impact with Cured oil, Islamic Index has only significant and positive relationship with Cured oil. Further, Granger Causality shows that the only variable is useful to predict the conventional and Islamic index which is USD.

Forests, Cumulants, Martingales
Friz, Peter,Gatheral, Jim,Radoicic, Rados
This work is concerned with forest and cumulant type expansions of general random variables on a filtered probability spaces. We establish a “broken exponential martingale” expansion that generalizes and unifies the exponentiation result of Alòs, Gatheral, and Radoičić ́ (SSRN’17; [AGR20]) and the cumulant recursion formula of Lacoin, Rhodes, and Vargas (arXiv; [LRV19]). Specifically, we exhibit the two previous results as lower dimensional projections of the same generalized forest expansion, subsequently related by forest reordering. Our approach also leads to sharp integrability conditions for validity of the cumulant formula, as required by many of our examples, including iterated stochastic integrals, Lévy area, Bessel processes, KPZ with smooth noise, Wiener-Itô chaos and “rough” stochastic (forward) variance models.

Getting Tired of Your Friends: The Dynamics of Venture Capital Relationships
Du, Qianqian,Hellmann, Thomas F.
Does doing more deals together always strengthen investor relationships? Based on the relationships of the top 50 US venture capital firms, this paper focuses on the strengths of relationships and their dynamic evolution. Empirical estimates indicate that having a deeper relationship leads to fewer, not more future coinvestments. Moreover, deeper relationships lead to lower exit performance, even after controlling for endogeneity. Interestingly, deeper relationships first lead to lower performance, and subsequently lead to a slowdown in the relationship intensity. Relationship effects are more negative for VC firms with less central network positions, and for deals made in “hot” investment markets.

Global Well-posedness of Non-Markovian Multidimensional Superquadratic BSDE
Kihun Nam

Using a purely probabilistic argument, we prove the global well-posedness of multidimensional superquadratic backward stochastic differential equations (BSDEs) without Markovian assumption. The key technique is the interplay between the local well-posedness of fully coupled path-dependent forward backward stochastic differential equations (FBSDEs) and backward iterations of the superquadratic BSDE. The superquadratic BSDE studied in this article includes quadratic BSDEs appear in stochastic differential game and price impact model. We also study the well-posedness of superquadratic FBSDEs and FBSDEs with measurable coefficients using the corresponding BSDE results. Our result also provides the well-posedness of a system of path-dependent quasilinear partial differential equations where the nonlinearity has superquadratic growth in the gradient of the solution.

Harnessing Potential: The Asia-Pacific Alternative Finance Benchmarking Report
Garvey, Kieran,Zhang, Bryan Zheng,Deer, Luke,Wardrop, Robert,Grant, Andrew R.,Thorp, Susan,Ziegler, Tania,Kong, Ying,Zheng, Xinwei,Huang, Eva,Burton, John,Chen, Hung-Yi,Lui, Alexis
Online alternative finance is developing rapidly in the Asia-Pacific region. It is characterised by innovative financial instruments and channels that fall outside the traditional avenues of capital raising and financial intermediation. From reward-based crowdfunding to peer-to-peer consumer and business lending (i.e. marketplace lending), to invoice trading and equity-based crowdfunding, these online alternative finance activities are directly connecting lenders to consumer and small business borrowers, raising venture capital for start-ups, funding the creative industries and creating new ways for individuals and institutions to choose how and to whom money is distributed, lent and invested. This benchmarking research is the first comprehensive study of the Asia-Pacific online alternative finance market. It has been conducted by an international research team from the Cambridge Centre for Alternative Finance at Cambridge Judge Business School, the Tsinghua University Graduate School at Shenzhen, the University of Sydney Business School, in partnership with KPMG and with the support of the ACCA and CME Group Foundation. Working with over 20 industry research partners, together we have systematically collected survey data from 503 leading alternative finance platforms operating in 17 Asia-Pacific countries and regions, out of which, 376 were from mainland China. Our definition of online alternative finance focuses on the provision of finance to individuals and businesses through alternative channels via online marketplaces outside of the banking system. It excludes activities such as peer-to-peer insurance, online money market funds or third-party payments. The report captures an estimated 70% of the visible market, and estimates that the total Asia-Pacific online alternative finance market grew 323% year-on-year to reach $102.81 billion USD in 2015.Market size & growthChina is the world's largest online alternative finance market by transaction volume, registering $101.7 billion (or RMB 638.79 billion) in 2015. This constitutes almost 99% of the total volume in the Asia-Pacific region. In comparison, the total size of the UK online alternative finance market was $4.5 billion (or £3.2 billion) in 2015. The Chinese online alternative finance market grew from a relatively low base of $5.56 billion in 2013 to reach $24.30 billion in 2014 and then went on to reach $101.7 billion in 2015 - an average growth rate of 328% between 2013 and 2015. Marketplace/peer-to-peer consumer lending is the largest market segment in China with $52.44 billion lent, followed by marketplace/peer-to-peer business lending ($39.63 billion) and real estate lending ($5.51 billion). Online invoice trading reached $1.46 billion, equity-based crowdfunding recorded $948.26m and reward-based crowdfunding rose to $829.52m in 2015.Excluding mainland China, the rest of the Asia-Pacific region recorded a volume of USD $1.12 billion in 2015 with a 313% year-on-year growth rate from the $271.94 million raised in 2014. Japan's online alternative finance market accrued $360.23m in 2015, followed by $348.37m originated in Australia, $267.77m in New Zealand, $41.18m in South Korea, $39.91m in India and $39.76m in Singapore. However, New Zealand has the highest alternative finance volume on a per capita basis outside of China with $59.37 per capita, followed by Australia ($14.83), Singapore ($7.27), Japan ($2.83) and Hong Kong ($1.28). China's alternative finance market volume per capita stands at $74.54 in 2015.In terms of prevailing market segments outside of China, marketplace/peer-to-peer business lending was the largest with $355.51m, followed by market/peer-to-peer consumer lending ($326.22m), balance sheet business lending ($120.62m), invoice trading ($116.95m), reward-based crowdfunding ($81.22m) and equity-based crowdfunding ($64.13m).

Hitting Stride: The 2nd Americas Alternative Finance Industry Report
Ziegler, Tania,Reedy, E. J.,Zhang, Bryan Zheng,Kroszner, Randall S. ,Le, Annie ,Garvey, Kieran
The Cambridge Centre for Alternative Finance at Cambridge Judge Business School and the Polsky Center for Entrepreneurship and Innovation at the University of Chicago jointly publish the 2017 Americas Alternative Finance Industry Report. The study shows the online alternative finance market continued to grow in the United States, Canada, Latin America and the Caribbean in 2016 to reach $35.2 billion. The report is supported by CME Group Foundation and the Inter-American Development Bank.Market size and growthThe alternative finance market continued to grow across the United States (US), Canada and Latin America and the Caribbean (LAC) in 2016 to a total market volume of $35.2 billion. The 23 per cent increase from last year was driven by growth across all regions and most market segments of the Americas.The US continues to be one of the world’s top markets for advanced, technology-enabled, online alternative finance channels and instruments. The 2016 US market volume of $34.5 billion marked a 22 per cent year-on-year increase from 2015.Rapid organic growth led LAC alternative finance markets to grow by 209 per cent to $342.1 million in 2016. LAC, collectively as a regional market, surpassed Canada’s national market in 2016, led by high volume markets in Mexico, Chile and Brazil.Canada’s alternative finance market grew to $334.5 million, a 62 per cent year-on-year increase from 2015.Prevailing online alternative finance modelsLooking at the US, Marketplace/ P2P Consumer Lending continued to account for the largest share of market volume with $21 billion recorded in the US in 2016 (up 17 per cent). Balance Sheet Business Lending became the second largest model in the US in 2016 with $6 billion originated, surpassing Balance Sheet Consumer Lending which had $3 billion.For LAC, Marketplace/P2P Business Lending remained the largest alternative finance market segment with $188.5 million registered in 2016, an increasing of 239 per cent over 2015.In Canada, Donation-based Crowd- funding remained the top alternative finance model with $105.9 million, but Balance Sheet Business Lending rose at a rate of 282 per cent to $103.3 million in 2016.Businesses tapping alternative financeAn estimated 218,188 businesses raised funds across the Americas from online alternative finance channels in 2016, led by the US (143,344), but with business users increasingly common in LAC (67,499).A total of $9.2 billion in alternative business funding was raised in 2016, which is distributed largely to the US ($8.8 billion) and to a lesser extent to LAC ($233.8 million), and Canada ($169.7 million).The emerging RegCF-enabled platforms are a key component of Equity-based Crowdfunding in the US. However, with many not emerging until late 2016, Equity-based Crowdfunding remained at year- on-year and reached $569.5 million. Revenue-Sharing/Pro t-Sharing Crowdfunding, also enabled by recent changes, emerged with $28.5 million in total funding to businesses.Over two-thirds (71 per cent) of LAC online alternative business finance came from Chile ($97.1 million) and Mexico ($69.5 million). Chile led in debt-based finance ($92.9 million) and non-investment-based business finance ($2.8 million). Mexico led in equity-based business finance ($4.9 million).Market dynamicsIn 2016, approximately $19 billion,
or 55 per cent of the total US alternative finance volume, was provided by institutional investors, up in real terms from 2015 from $17.3 billion but down in relative contribution from 66 per cent.The number of newly incorporated platforms continued to decrease in 2016.In LAC, 52 per cent of surveyed platforms reported that they have introduced "significant new product or service" in 2016. In the US, 44 per cent of surveyed platforms reported introduction of significant new products or services in 2016.RegulationIn the Americas, equity-based platforms are divided between those who view the existing regulations as excessive and too strict (36 per cent) and those who regard current regulations as adequate and appropriate (36 per cent).Most platforms on both the equity side (59 per cent) and debt side (36 per cent) seem to agree that the proposed national regulations of their respective jurisdictions are adequate and appropriate.State-level regulations in the US were perceived differently by debt-based and equity-based platforms. Fifty-one percent of debt-based platforms and 55 per cent of equity-based platforms found existing state regulations to be adequate. However, accounts of excessive regulation rise from 18 per cent in debt-based platforms to 41 per cent in equity platforms at the state level.RisksSelf-reported risk perceptions of the alternative finance industry are surprisingly similar across markets in the Americas, with the largest reported risk being cyber-security breach. Seventy-six percent of platform operators believe there is medium to very high risk of cyber-security breach.The "collapse of one or more well-known platforms due to mal- practice" ranked second highest in perceived risks to platforms, likely reflecting some of the repercussions of high-pro le incidents within the industry in the last 12 months. Sixty-nine percent of platforms viewed this as a medium to very high risk."Fraud" and "notable increase in default or business failure" were both regarded by 64 per cent of surveyed plat- forms to be medium to very-high risk.Looking at the market trends illustrated in this industry report, we see a fledgling industry that is growing up fast, and experiencing both pleasures and pains associated with adultescence. We hope this report will provide value to the industry and market data to inform evidence-based policymaking and regulations.

How Did the Fed Funds Market Change When Excess Reserves Were Abundant?
McGowan, John,Nosal, Ed
Prior to the 2007-2008 financial crisis, excess reserves in the U.S. banking system were scarce. After the financial crisis and up until early 2018, excess reserves were abundant. In this article, the authors document, analyze, and explain the differences in the performance of the federal funds market under the two different excess reserves frameworks.

How Does Bank Capital Influence Lending and Securities Holdings? Evidence From Asian Banks
Boungou, Whelsy
This study provides empirical evidence on the impact of bank capital on lending and securities holdings in Asian banks. Using a panel data set of 370 banks from 15 Asian countries over the period 2010-2018, our findings suggest that the increase in bank capital reduces lending supply, especially lending with a maturity between 1 and 5 years. Conversely, we highlight that the incentives to hold more securities (such as investment and trading securities) increase as banks' capital increases.

Identifying Indicators of Systemic Risk
Hartwig, Benny,Meinerding, Christoph,Schüler, Yves S.
We operationalize the definition of systemic risk provided by the IMF, BIS, and FSB and derive testable hypotheses to identify indicators of systemic risk. We map these hypotheses into a two-stage hierarchical testing framework, combining insights from the early-warning literature on financial crises with recent advances on growth-at-risk. Applying this framework to a set of candidate variables, we find that the Basel III credit-to-GDP gap does not indicate systemic risk coherently across G7 countries. Credit growth and house price growth also do not pass our test in many cases. By contrast, a composite financial cycle signals systemic risk consistently for all countries except Canada. Overall, our results suggest that systemic risk may be consistently measured only once the turning points of indicators have been observed. Therefore, pre-emptive countercyclical macroprudential policy may smooth the financial cycle in boom phases, which then indirectly mitigates the amount of systemic risk in the future.

Managing Power System Flexibility in India via Coal Plants
Shrimali, Gireesh
The Government of India plans to install 175 GW of renewable energy projects by 2022, and 275 GW by 2027. In meeting these goals, the Indian power sector faces twin challenges: first, managing renewable energy will require increased flexibility in the system; second, there will be under-utilization of existing coal-based plants, which would stress the economics of not only individual plants but also the overall power sector. This creates a need to explore the conversion of existing base-load coal plants as flexible resources. Our analysis shows the following: first, the incremental costs for converting base-load coal plants to flexible ones would be only 5%-10% of the total costs of base-load plants in net present value terms or 8%-22% in levelized terms; second, flexible coal may be the most cost-effective flexible solution in the near-term, by a factor of 4-20, when compared to lithium ion batteries or pumped hydro. Finally, while we have provided an indicative analysis of additional costs of converting base-load coal plants into flexible ones, we recommend that flexible coal be procured cost-effectively using appropriate market mechanisms, such as capacity auctions.

Maximum Entropy approach to multivariate time series randomization
Riccardo Marcaccioli,Giacomo Livan

Natural and social multivariate systems are commonly studied through sets of simultaneous and time-spaced measurements of the observables that drive their dynamics, i.e., through sets of time series. Typically, this is done via hypothesis testing: the statistical properties of the empirical time series are tested against those expected under a suitable null hypothesis. This is a very challenging task in complex interacting systems, where statistical stability is often poor due to lack of stationarity and ergodicity. Here, we describe an unsupervised, data-driven framework to perform hypothesis testing in such situations. This consists of a statistical mechanical approach - analogous to the configuration model for networked systems - for ensembles of time series designed to preserve, on average, some of the statistical properties observed on an empirical set of time series. We showcase its possible applications with a case study on financial portfolio selection.

More Risk, More Information: How Passive Ownership Can Improve Informational Efficiency
Buss, Adrian,Sundaresan, Savitar
We identify a novel economic mechanism through which passive ownership positively affects informational efficiency in the cross-section of firms. Passive ownership lowers the cost of capital, encouraging firms to invest more aggressively in risky growth opportunities. The resultant higher cash flow volatility induces active investors to acquire more information, implying higher price informativeness for firms with high passive ownership. These firms also have higher stock prices and higher stock-return variances. In aggregate, a rise in passive ownership can also improve informational efficiency if uninformed investors are crowded out. We document that our mechanism applies more generally to benchmarked institutional investors.

On the Efficiency of Foreign Exchange Markets in Times of the COVID-19 Pandemic
Aslam, Faheem,Aziz, Saqib,Nguyen, Duc Khuong,Mughal, Khurrum,Khan, Maaz
We employ multifractal detrended fluctuation analysis (MF-DFA) to provide the first look at the efficiency of forex markets during the initial period of ongoing COVID-19 pandemic, which has disrupted the financial markets globally. We use high frequency (5-min interval) data of six major currencies traded in the forex market for the period from 01 October 2019 to 31 March 2020. Prior to the application of MF-DFA, we examine the inner dynamics of multifractality using seasonal-trend decompositions using loess (STL) method. Overall, the results confirm the presence of multifractality in forex markets, which demonstrates, in particular: (i) a decline in the efficiency of forex markets during the period of COVID-19 outbreak, and (ii) the heterogeneity in the effects on the strength of multifractality of exchange rate returns under investigation. The largest effect is observed in the case of AUD as it shows the highest (lowest) efficiency before (during) COVID-19 assessed in terms of low (high) multifractality. During COVID-19 period, CAD and CHF exhibit the highest efficiency. Our findings may help policymakers in shaping a comprehensive response to improve the forex market efficiency during such a black swan event.

Optimal Group Size in Microlending
Protter, Philip,Quintos, Alejandra
This paper uses a mathematical model with appropriate assumptions, to model and to determine the optimal group size for microfinance loans. An optimal size is defined to be the size which maximizes the probability of no default of the group.

Patterns of Foreign Exchange Intervention Under Inflation Targeting
Adler, Gustavo,Chang, Kyun Suk,Wang, Zijiao
The paper documents the use of foreign exchange intervention (FXI) across countries and monetary regimes, with special attention to its use under inflation targeting (IT). We find significant differences between advanced and emerging market economies, with the former group conducting FXI limitedly and broadly symmetrically, while the use of this policy instrument in emerging market countries is pervasive and mostly asymmetric (biased towards purchasing foreign currency, even after taking into account precautionary motives). Within emerging markets, the use of FXI is common both under IT and non-IT regimes. We find no evidence of FXI being used in response to inflation developments, while there is strong evidence that FXI responds to exchange rates, indicating that IT central banks in EMDEs have dual inflation/exchange rate objectives. We also find a higher propensity to overshoot inflation targets in emerging market economies where FXI is more pervasive.

Pengaruh Working Capital Management Terhadap Profitabilitas Perusahaan (Working Capital Management on Firm Profitability: A Literature Review)
Supiyadi, Dedi
Indonesian Abstract: Tujuan studi ini adalah untuk mereview penelitian tentang pengruh working capital management (WCM) terhadap profitabilitas perusahaan. Metode yang digunakan yaitu traditional review, dengan mereview 25 jurnal intenasional yang diterbitkan pada jurnal internasional bereputasi. Dari ulasan yang dilakukan diketahui bahwa sebagian besar peneliti menggunakan metode empiris dalam menganalisis pengaruh working capital management dengan profitabilitas. Hasil yang diperoleh dari sebagian besar penelitian mengungkapkan bahwa WCM memiliki peranan penting bagi profitabilitas perusahaan.English Abstract: The purpose of this study is to review research on the effect of working capital management (WCM) on firm profitability. The method used is traditional review, by reviewing 25 international journals published in reputable international journals. From the reviews conducted, most researchers use empirical methods in analyzing the effect of working capital management on firm profitability. The result indicate that working capital management has important role to firm’s profitability.

Portfolio Selection with Contrarian Strategy
Xu, Yuhong
Compared with extensive empirical literature on contrarian strategy, we build a dynamic mean-variance model with geometric mean reversion stock price which implies a contrarian strategy. Our model suggests that the investor should buy distressed stocks, and sell them after the company recovers. Simulation and empirical test demonstrate that our model often yields a significant return in a volatile market.

Pre-Selection Methods for Cointegration-Based Pairs Trading
Brunetti, Marianna,De Luca, Roberta
Pairs trading is hardly applied to high-dimensionality datasets. The first step for its implementation, required to identify co-moving assets and usually based on cointegration-tests, comes with a remarkable computational burden. This paper compares seven different preselection measures that, while preserving the profitability for the pairs trading strategy, help in reducing the number of cointegration tests required to identify the most co-moving assets. Among the measures investigated, log-Prices Correlation and Sum of Squared Deviations are the ones providing the most significant results in terms of expected excess returns, whereby the latter is found to be less sensitive to periods of market turbulence.

Predictive Density Aggregation: A Model for Global GDP Growth
Caselli, Francesca,Grigoli, Francesco,Lafarguette, Romain,Wang, Changchun
In this paper we propose a novel approach to obtain the predictive density of global GDP growth. It hinges upon a bottom-up probabilistic model that estimates and combines single countries' predictive GDP growth densities, taking into account cross-country interdependencies. Specifically,we model non-parametrically the contemporaneous interdependencies across the United States,the euro area, and China via a conditional kernel density estimation of a joint distribution. Then, we characterize the potential amplification effects stemming from other large economies in each region-also with kernel density estimations-and the reaction of all other economies with para-metric assumptions. Importantly, each economy's predictive density also depends on a set of observable country-specific factors. Finally, the use of sampling techniques allows us to aggregate individual countries' densities into a world aggregate while preserving the non-i.i.d. nature of the global GDP growth distribution. Out-of-sample metrics con?rm the accuracy of our approach.

QuantNet: Transferring Learning Across Systematic Trading Strategies
Adriano Koshiyama,Sebastian Flennerhag,Stefano B. Blumberg,Nick Firoozye,Philip Treleaven

Systematic financial trading strategies account for over 80% of trade volume in equities and a large chunk of the foreign exchange market. In spite of the availability of data from multiple markets, current approaches in trading rely mainly on learning trading strategies per individual market. In this paper, we take a step towards developing fully end-to-end global trading strategies that leverage systematic trends to produce superior market-specific trading strategies. We introduce QuantNet: an architecture that learns market-agnostic trends and use these to learn superior market-specific trading strategies. Each market-specific model is composed of an encoder-decoder pair. The encoder transforms market-specific data into an abstract latent representation that is processed by a global model shared by all markets, while the decoder learns a market-specific trading strategy based on both local and global information from the market-specific encoder and the global model. QuantNet uses recent advances in transfer and meta-learning, where market-specific parameters are free to specialize on the problem at hand, whilst market-agnostic parameters are driven to capture signals from all markets. By integrating over idiosyncratic market data we can learn general transferable dynamics, avoiding the problem of overfitting to produce strategies with superior returns. We evaluate QuantNet on historical data across 3103 assets in 58 global equity markets. Against the top performing baseline, QuantNet yielded 51% higher Sharpe and 69% Calmar ratios. In addition we show the benefits of our approach over the non-transfer learning variant, with improvements of 15% and 41% in Sharpe and Calmar ratios. Code available in appendix.

Reduced-form setting under model uncertainty with non-linear affine processes
Francesca Biagini,Katharina Oberpriller

In this paper we extend the reduced-form setting under model uncertainty introduced in [5] to include intensities following an affine process under parameter uncertainty, as defined in [15]. This framework allows to introduce a longevity bond under model uncertainty in a consistent way with the classical case under one prior, and to compute its valuation numerically. Moreover, we are able to price a contingent claim with the sublinear conditional operator such that the extended market is still arbitrage-free in the sense of "No Arbitrage of the first kind" as in [6].

Retirement Planning: From Z to A
Estrada, Javier
Retirement planning is an issue that must be tackled early and solved backward. It must be tackled early because with a few working years to go there is little that can be done if an individual is not on the right path; and it must be solved backward because it makes little sense to aim for a portfolio that may not be able to sustain the desired lifestyle in retirement. This article introduces an approach that integrates the working period and the retirement period; leads the individual to consider all the relevant variables at the beginning of his journey; and enables him to start saving early to build a target portfolio specifically designed to sustain a desired retirement. The analytical framework introduced yields closed-form solutions for the target retirement portfolio and the contributions that need to be made during the working years to hit that target. The framework proposed is illustrated with an empirical base case, sensitivity analysis, and Monte Carlo simulations.

Russia and USA Scenario Planning â€" Trump and Putin Meeting â€" Business Boom or Lonely to Prove that They are Right?
ul Haq, Bina
Summary • Putin and Trump, leaders arguably with hostile powers. Their meeting holds significant importance in history, requiring scenario planning to structure long-term business relationships and a defense playground for both countries.• It will provide assurances; to the operating companies both in Russia and USA soil, promote new ventures. The sanctions imposed for underlying reasons could be lifted as issues are addressed.• Trump, a businessman and Putin, ex-KGB, hence potential benefactors are both oligarchs and political actors Impending chances of joint ventures in research, Artificial Intelligence, and military activities exist.• Potentially advantaged USA companies: Exxon, Mondelez International Inc, PepsiCo, McDonald’s, Johnson & Johnson, KAZAN (Sputnik), Boeing Co, Ford Motor, Microsoft Corp, Cisco Systems Inc’s., Abbott Laboratories.• Advantage to Russian companies: Rosoboronexport, KrEnergo, Basic Element Company, Central European Aluminum Company, GAZ Group, Russian Machines Corporation, Basel Aero, Insurance company IJSCIngosstrakh, Soyuz Bank, Non-state pension fundSocium, Glavstroy Corporation and alcoholic beverages, BasEl Real Estate, Glavstroy-Management, Kuban AgroHolding, AquaDin (LLC).

Searching for Approval
Agarwal, Sumit,Grigsby, John,Hortaçsu, Ali,Matvos, Gregor,Seru, Amit,Yao, Vincent
We study the interaction of search and application approval in credit markets. We combine a unique dataset, which details search behavior for a large sample of mortgage borrowers, with loan application and rejection decisions. Our data reveal substantial dispersion in mortgage rates and search intensity, conditional on observables. However, in contrast to predictions of standard search models, we find a novel non-monotonic relationship between search and realized prices: borrowers, who search a lot, obtain more expensive mortgages than borrowers' with less frequent search. The evidence suggests that this occurs because lenders screen borrowers' creditworthiness, rejecting unworthy borrowers, which differentiates consumer credit markets from other search markets. Based on these insights, we build a model that combines search and screening in presence of asymmetric information. Risky borrowers internalize the probability that their application is rejected, and behave as if they had higher search costs. The model rationalizes the relationship between search, interest rates, defaults, and application rejections, and highlights the tight link between credit standards and pricing. We estimate the parameters of the model and study several counterfactuals. The model suggests that overpayment may be a poor proxy for consumer unsophistication since it partly represents rational search in presence of rejections. Moreover, the development of improved screening technologies from AI and big data (i.e., fintech lending) could endogenously lead to more severe adverse selection in credit markets. Finally, place based policies, such as the Community Reinvestment Act, may affect equilibrium prices through endogenous search responses rather than increased credit risk.

Social Consequences of the Oil Price Shock in the Resource Rich Post-Soviet Countries
Research Group, CESD
This study seeks to determine the impact the fall in global oil prices post-2014 had on the welfare of the populations of three resource-rich post-Soviet states: Russia, Kazakhstan, and Azerbaijan. Changes in welfare will be explored through the analysis of several socio-economic indicators affected by the local currencies’ devaluations. It will be suggested that the single-commodity export dependence of the countries concerned, and the domestic development of non-trade-able sectors faltered in the face of external shocks. Several policy suggestions are offered to mitigate the effects of the economic downturns observed.

Stock Connect: Integration, Internationalisation and Implementation
Huang, Flora
Stock Connect is a stock exchange collaboration between China and international bourses such as Hong Kong and London. In contrast to existing literature mostly focusing on economic analysis, this article explores the legal issues in Stock Connect and makes practical contributions by appraising the successes and failures of this scheme.

Sustaining Momentum: The 2nd European Alternative Finance Industry Report
Zhang, Bryan Zheng,Ziegler, Tania,Garvey, Kieran,Wardrop, Robert,Lui, Alexis,Burton, John
This report presents the research findings from the 2nd Annual European Alternative Finance Industry Survey, which aims to systematically track and comprehensively benchmark the growth and development of the pan-European crowdfunding and peer-to-peer lending markets in 2015. This research was carried out by the Cambridge Centre for Alternative Finance at the University of Cambridge Judge Business School, with the support of 17 major European industry associations and research partners, in partnership with KPMG and supported by CME Group Foundation. Building on the success of the preceding benchmarking report, Moving Mainstream, this study gathered data from 367 crowdfunding, peer-to-peer lending and other online alternative finance intermediaries from across 32 countries in geographic Europe, out of which 273 platforms are currently operating outside of the United Kingdom. Utilising this unprecedented industry dataset, which captures an estimated 90% of the visible market, we hope to shed some light on the state of online alternative finance in Europe. This study shows that the total European online alternative finance market, which includes crowdfunding, peer-to-peer lending and other activities, grew by 92% to reach €5,431m in 2015. Excluding the United Kingdom, the largest market by a considerable margin, the European online alternative finance industry grew 72% from €594m in 2014 to €1,019m in 2015. Although the absolute year-on-year growth rate slowed by 10% (the growth rate between 2013-14 was 82%), the industry is still sustaining momentum with substantive expansion in transaction volumes recorded across almost all online alternative finance models.France, Germany and the Netherlands are the top three countries for online alternative finance by market volume in Europe, excluding the United Kingdom. The French market reached €319m in 2015, followed by Germany (€249m), the Netherlands (€111m), Finland (€64m), Spain (€50m), Belgium (€37m) and Italy (€32m). The Nordic countries collectively pulled in €104m, while Eastern & Central European countries registered a total of €89m. The UK still dominated the European online alternative finance landscape, increasing its overall market share of Europe to 81% in 2015 with €4,412m.Estonia ranked first for alternative finance volume per capita with €24 followed by Finland (€12) and Monaco (€10) outside of the United Kingdom. Estonia was also ranked first by market volume per capita in 2014 (€17). This year, Latvia (€7.68) and the Netherlands (€6.53) ranked 4th and 5th respectively, replacing Sweden and France in the top five. \Peer-to-peer consumer lending is the largest market segment of alternative finance, with €366m recorded for 2015 in Europe. Peer-to-peer business lending is the second largest segment with €212m, with equity-based crowdfunding in third with €159m and reward-based crowdfunding, forth, with €139m in 2015. However, invoice trading is the fastest-growing alternative finance model in Europe registering €81m in 2015, up significantly from the low base of just €7m in 2014. Online alternative business funding increased considerably, with €536m raised for over 9,400 start-ups and SMEs across Europe in 2015, up 167% year-on-year from the total of €201m in 2014. Total debt-based funding for SMEs reached €349m in 2015 with 156% year-on-year growth, driven largely by the growth of peer-to-peer business lending. Equity-based crowdfunding increased by 93% year-on-year to reach €159m in 2015. Institutionalisation took off in mainland Europe in 2015 with 26% of peer-to-peer consumer lending and 24% of peer-to-peer business lending funded by institutions such as pension funds, mutual funds, asset management firms and banks. 8% of the investment in equity-based crowdfunding was also funded by institutional investors such as venture capital firms, angels, family offices or funds. Excluding the UK, 44% of the surveyed European platforms reported some level of institutional funding in 2015 and just under 30% of peer-to-peer consumer lending platforms reported having a majority institutional shareholder (e.g. a VC, corporate or a bank). There is now a high degree of automation in peer-to-peer lending with 82% of consumer loans, 78% of traded invoices (i.e. receivables) and 38% of business loans now funded by automatic selection or automatic bidding processes on European alternative finance platforms. The average deal size in equity-based crowdfunding is now approximately €459,000, in contrast to just under €100,000 for peer-to-peer business loans and just under €10,000 for peer-to-peer consumer loans. Real-estate crowdfunding has the second largest average deal size with approximately €370,000, - a new model recorded in 2015. Donation-based and reward-based crowdfunding models have the highest levels of female participation. 54% of the fundraisers in donation-based crowdfunding are women. 40% of the fundraisers and 45% of the backers in reward-based crowdfunding are also women. In contrast, only 17% of the fundraisers in equity-based crowdfunding and 12% of SME borrowers in peer-to-peer business lending are women. However, 44% of the individual borrowers and 23% of the lenders in peer-to-peer consumer lending were women. Across Europe, perceptions of existing national regulations in alternative finance are divided. 38% of surveyed platforms felt their national regulations for crowdfunding and peer-to-peer lending were adequate and appropriate. Nevertheless, 28% of surveyed platforms perceived their national regulations to be excessive and too strict, with a further 10% stating that current regulations were too relaxed. When it came to proposed national regulations, however, 47% of the surveyed platforms perceived them as adequate and appropriate. The biggest risks perceived by the alternative finance industry are increasing loan defaults or business failure rates, fraudulent activities or the collapse of platforms due to malpractice. Our survey asked platforms what they saw as the most detrimental risks to the future growth of the alternative finance industry. 42% of the surveyed platforms indicated that a 'notable increase in default rates (for loans) or business failure (for equity deals)' are either 'very high risk' or 'high risk'. 46% of the surveyed platforms perceive 'platform collapse due to malpractice' as being 'very high risk' or 'high risk', whilst 40% of the platforms viewed 'fraud involving one or more high-profile campaigns, deals or loans' as either being 'very high risk' or 'high risk'.

The 2nd Annual Middle East & Africa Alternative Finance Industry Report
Ziegler, Tania,Suresh, Krishnamurthy ,Garvey, Kieran,Rowan, Philip,Zhang, Bryan Zheng,Obijiaku, Akachi,Rui, Hao,alqahtani, fatimah
Now in its second year, this benchmarking report covers online alternative finance activity from the Middle East and African region in 2016. The total alternative finance market volume across the region grew by 48 per cent, accounting for $358.87 million. Africa alone accounted for $181.56m (51 per cent of this volume) having grown by 118 per cent against the previous year. The Middle East accounted for $177.3m, with volume driven by online alternative finance activity in Israel and the United Arab Emirates. The new report covers data from platform activity in 52 countries in Africa and the Middle East, and includes survey data from over 77 alternative finance platforms reporting activity in the 2016 calendar year.

The Evolution of Private Equity Fund Value
Brown, Gregory W.,Hu, Wendy,Zhang, Jian
This paper provides the first large-sample analysis of buyout and venture capital fund values over their lifetimes. Specifically, we examine interim fund investment multiples (TVPIs), internal rates of return (IRRs), and direct-alphas based on the current reported net asset values (NAVs) at each quarter of a fund’s life. Using a sample of 1,400 mature buyout and VC funds, we find that the typical fund experiences a fall-off in returns after it is about 7 to 8 years old. However, the remaining performance is highly variable for funds of all ages and the dispersion in returns also tends to increase after funds are about 8 years old. We examine the cross-sectional determinants of remaining fund value and find that several fund-specific and market-wide factors determine future performance and that these vary by type and age of fund. For example, young funds tend to be harmed by high levels of market-wide dry powder whereas older funds appear to benefit.

The Impact of Misvaluation on REITs’ Liquidity Management
Nguyen, Linh
Using three different approaches to measure misvaluation, we analyse the impact of misvaluation on liquidity management of REITs. Our analysis reveals that misvaluation increases cash holdings because misvaluated REITs issue new equity to low costs of equity. In addition, REITs with higher misvaluation are more likely to establish a bank credit line and receive higher capacity of credit lines because they want to quickly finance acquisitions. Finally, we find that the share of the bank credit line component relative to the cash component in the total liquidity increases with the increase in misvaluation. Taken together, our results suggest that misvaluation has a significant impact on liquidity management in the REIT sector.

The Long and Short of It: The Post-Crisis Corporate CDS Market
Boyarchenko, Nina,Costello, Anna M.,Shachar, Or
The authors establish key stylized facts about the post-crisis evolution of trading and pricing of credit default swaps. Using supervisory contract-level data, they show that dealers became net buyers of credit protection starting in the second half of 2014, both through reducing the amount of protection they sell in the single-name market and switching to buying protection in the index market. More generally, they argue that considering simultaneous positions in different types of credit derivatives is crucial for understanding institutions’ decisions to participate in these markets and how these decisions affect prices.

The Use of the Eurosystem's Monetary Policy Instruments and its Monetary Policy Implementation Framework between the First Quarter of 2018 and the Fourth Quarter of 2019
Sylvestre, Sylvestre
This paper provides a comprehensive overview of the use of the Eurosystem’s monetary policy instruments and the operational framework, from the first quarter of 2018 to the last quarter of 2019. It reviews the context of Eurosystem market operations; the design and operation of the Eurosystem’s counterparty and collateral frameworks; the fulfilment of minimum reserve requirements; participation in credit operations and recourse to standing facilities; and the conduct of outright asset purchase programmes. The paper also discusses the impact of monetary policy on the Eurosystem's balance sheet, excess liquidity and money market liquidity conditions.

Turbulence on the Global Economy influenced by Artificial Intelligence and Foreign Policy Inefficiencies
Kwadwo Osei Bonsu,Jie Song

It is said that Data and Information are the new oil. One, who handles the data, handles the emerging future of the global economy. Complex algorithms and intelligence-based filter programs are utilized to manage, store, handle and maneuver vast amounts of data for the fulfillment of specific purposes. This paper seeks to find the bridge between artificial intelligence and its impact on the international policy implementation in the light of geopolitical influence, global economy and the future of labor markets. We hypothesize that the distortion in the labor markets caused by artificial intelligence can be mitigated by a collaborative international foreign policy on the deployment of AI in the industrial circles. We, in this paper, then proceed to propose a disposition for the essentials of AI-based foreign policy and implementation, while asking questions such as 'could AI become the real Invisible Hand discussed by economists?'.

When Banks Punch Back: Macrofinancial Feedback Loops in Stress Tests
Catalan, Mario,Hoffmaister, Alexander
In the presence of adverse macroeconomic shocks, simultaneous capital losses in multiple banks can prompt them to contract their balance sheets. These bank responses generate externalities that propagate in the form of macro-financial feedback loops. This paper develops a credit response and externalities analysis model (CREAM) that integrates a disaggregated banking sector into an otherwise standard macroeconomic structural vector autoregressive model. It shows that accounting for macro-financial feedback loops can significantly affect macroeconomic outcomes and bank-specific stress tests results. The heterogeneity in bank lending responses matters: it determines how each bank fares under adverse conditions and the external effects that banks impose on each other and on economic activity. The model can thus be used to assess the contributions of individual banks to systemic risk along the time dimension.

파산금융회사의 불완전판매 보상체계 개선방안 연구 A Study on the Financial Institution Bankruptcy and Misselling Compensation Scheme
Cho, Daehyoung,Jung, Sun-seop
Korean Abstract:금융회사가 파산한 경우 금융소비자의 예금과 보험계약 ë"±ì€ 예금자보호제도를 통해 보호를 받을 수 있다. 하지만 불완전판매로 금융소비자에게 í"¼í•´ë¥¼ 입힌 금융회사가 파산한 경우 금융소비자에 대한 배상재원으로 활용할 책임재산을 확보하기 위한 제도ëŠ" 현재 마련되어 있지 않다. 이러한 제도의 도입방안을 제시하고 있ëŠ" 연구ë"¤ë„ 일반적인 차원에서의 투자자를 대상으로 하ëŠ" 투자자보상제도로 제한하고 있어 구체적인 쟁점사항을 포함한 입법방안을 다루지 못한 한계가 있다. 이에 본고ëŠ" 금융상í'ˆ 전반을 대상으로 하ëŠ" 금융 소비자보상제도의 주ìš" 쟁점사항과 정책과제를 ì¤'심으로 도입방안을 제시하고 있다. 먼저 금융소비자보상제도의 적용 ë²"위를 정하ëŠ" 기준으로서 보상대상 금융소비자 및 금융상í'ˆ, 그리고 금융회사의 ë²"위를 검토하고 보상금 지급ìš"ê±´ê³¼ 결정방안, 운영 주체 및 기금조성 방안 ë"±ì„ 검토하였다. 특히 보상대상 채권의 ë²"위와 베일인(Bail-in) ë"± 손실분담구조와의 관계를 검토하고, 금융회사의 퇴출절차를 고려할 ë•Œ 보상의 지급ìš"건을 법원의 파산선고로 하ëŠ" 것이 ë°"람직하다ëŠ" 점을 제시하였다. 금융소비자보상제도의 입법방안은 현행 예금자 보호법을 개정하ëŠ" 방안과 특별법을 제정하ëŠ" 방안이 있으며, 금융소비자보상제도의 단계적인 도입방안을 검토할 í•„ìš"ê°€ 있다고 판단된다.English Abstract:This study examines the legislative measures and key issues related to the introduction of the financial consumer compensation scheme and proposes policy tasks for future legislation. First of all, the scope of protection covered by the financial consumer compensation scheme, the scope of financial consumers and claims for damage, and the scope of financial institutions are reviewed. The requirements for compensation payment, decision models, operating body and fund raising plans are also reviewed and then summarized. In particular, this study examines the relationship between the scope of protected claims and loss burden-sharing structures such as a bail-in, and discusses in detail, the requirements for accident compensation in consideration of financial institutions exit procedures, indicating the desirability to include compensation requirements as part of the bankruptcy sentence. Introduction of the financial consumer compensation scheme are proposed with legislative measures for the financial consumer compensation scheme categorized into measures for the amendment of the current depositor protection act and measures for the enactment of a special law. A step-by-step introduction of a financial consumer compensation scheme should be reviewed as a long-term legislative measure.