Research articles for the 2020-07-01

(Why) Are Men Better in Real Estate Investing? Evidence from Administrative Data of Land Transactions in Taiwan
Chu, C. Y. Cyrus,Hsu, Po-Hsuan,Wang, Yi-Ting
Gender differences in investment styles and performance have remained an intriguing yet puzzling issue since the seminal work of Barber and Odean (Quarterly Journal of Economics, 2001) on stock market investment. In our study, we examine if similar gender differences exist in real estate investing by combining administrative databases of taxable assets (including lands and stocks) and personal incomes in Taiwan from 2006 to 2015. Our data capture the wealth of 10,566,464 individuals, which accounts for 46% of the total population. We find that men perform significantly better in real estate investment, which cannot be fully explained by risk preferences, experience, loss aversion, or optimism. We then propose a new explanation: sex discrimination derived from a patriarchal tradition. Taiwanese elders transfer more “promising” lands to their sons to avoid the rule of portio legitima in inheritance laws. Our empirical evidence shows that gender-specific differences in the rate of return of land investments concentrate in families with siblings of different genders.

A Theory of Social Impact Bonds
Tortorice, Daniel L.,Bloom, David E.,Kirby, Paige,Regan, John
Social impact bonds (SIBs) are an innovative financing mechanism for public goods. In a SIB, an investor provides capital to a service provider for a social intervention. The investor receives a return based on the outcome of the intervention relative to a predetermined benchmark. We describe the basic structure of a SIB and provide some descriptive statistics for these financial instruments. We then consider a formal model of SIBs and examine their ability to finance positive net present value projects that traditional debt finance cannot. We find that SIBs expand the set of implementable projects if governments are pessimistic (relative to the private sector) about the probability an intervention would succeed or if the government is particularly averse to paying costs associated with a project that does not generate offsetting benefits. As both these features are present in various public programs, we conclude that SIBs are a real innovation in public finance and should be considered for projects when traditional debt finance has been rejected.

All That Is Left to Say: Why Are CEOs Speaking on Social Issues?
HomRoy, Swarnodeep
CEO social activism is increasingly common, but little is known about the motivations and the economic consequences. In this paper, I show that CEO social activism is linked to political polarisation in the US. Social activism is concentrated in states with higher within state political polarisation. I show that Republican-donor CEOs are 88% more likely to speak on social issues with a Democrat-slant. Using a sample of CEO activism events from 2014-2019, I find that CEO activism is associated with a 1.3% increase in firm value and a short-term increase in sales in the next quarter. The gain in firm value and growth in sales are higher for firms selling consumer goods and in highly competitive industries. These results suggest that CEO social activism is motivated by strategic reasons.

An Elementary Approach to the Merton Problem
Herdegen, Martin,Hobson, David,Jerome, Joseph
In this article we consider the infinite-horizon Merton investment-consumption problem in a constant-parameter Black-Scholes-Merton market for an agent with constant relative risk aversion R. The classical primal approach is to write down a candidate value function and to use a verification argument to prove that this is the solution to the problem. However, features of the problem take it outside the standard settings of stochastic control, and the existing primal verification proofs rely on parameter restrictions (especially, but not only, R<1), restrictions on the space of admissible strategies, or intricate approximation arguments.The purpose of this paper is to show that these complications can be overcome using a simple and elegant argument involving a stochastic perturbation of the utility function.

Barriers to grid-connected battery systems: Evidence from the Spanish electricity market
Yu Hu,David Soler Soneira,María Jesús Sánchez

Electrical energy storage is considered essential for the future energy system to solve the intermittency problems caused by renewable energy sources such as wind and solar power. Among all the energy storage technologies, battery systems may provide flexibility in a more distributed and decentralized way. In countries with deregulated electricity markets, grid-connected battery systems should participate in the electric power system and interact with other market players. In this study, the market designs of both wholesale markets and ancillary services in Spain are introduced, and the barriers to grid-connected battery storage are investigated under its specific market and regulatory framework. Finally, the numerical and empirical analysis suggests that the high cycle cost for battery is still the main barrier for grid-connected battery systems, and the flexibility offered by such systems would be currently the most promising comparative advantage for this novel technology. Additionally, a correct recognition of the barriers and advantages by all the stakeholders, including the system/market operator, policy maker, investor, and project manager, is the key factor to promote battery storage technologies in grid-connected applications. For market and system regulators, more efforts are necessary to reduce the barriers from regulatory framework, promote pilot projects, and design appropriate market products or services that adequately address the flexibility provided by different technologies.

Bond Mutual Fund Flows, Fund Liquidity, and Broker-Dealer Inventories
Flannery , Mark J.
Some financial supervisors worry that liquidity transformation within the “shadow banking” sector might threaten financial stability. For example, a mutual fund promising overnight liquidity based on illiquid assets (such as corporate bonds) runs the risk of needing to “fire sale” some assets, with potentially deleterious external effects. One protection against this possibility would be a broker-dealer sector that stands ready to stabilize prices by buying (or selling) for its own inventory. I evaluate the extent to which bond mutual funds’ flows are reflected in broker-dealers’ inventories. Although brokers generally trade in the same direction as the mutual funds, high-yield corporate bonds present an exception. Flows out of high-yield bond funds are associated with a significant increase in dealers’ high-yield bond inventories. These results provide further information about how various types of bond mutual funds handle liquidity demands.

Bond Supply Expectations and the Term Structure of Interest Rates
Billio, Monica,Busetto, Filippo,Dufour, Alfonso,Varotto, Simone
We are the first to explore the empirical relationship between interest rates and debt supply expectations derived from Treasury press releases. We find that news on expected government bond supply affects bond yields, but only when the news is an accurate reflection of future supply. We exploit the difference in news accuracy between German and Italian press releases to illustrate our findings. Estimates of a macro term-structure model confirm that accurate expected supply is a significant factor behind the timevariation of bonds’ risk premia. Our findings support term-structure models that account for imperfect asset substitutability and preferred-habitat investors.

Can Firm-Specific Dividend Drop-Off Ratios be Used to Infer Shareholder Marginal Tax Rates?
Ainsworth, Andrew,Lee, Adrian D.,Walter, Terry S.
In a seminal study, Elton and Gruber (1970) argue that ex-dividend day pricing can be used toinfer the marginal tax rates of shareholders. If this view is correct, managers of individual firmswould be provided with information of relevance to major financing and distribution decisions.We examine ex-dividend day pricing for individual firms and ask whether their CFOs coulduse the history of a firm’s ex-dividend price-drop to dividend ratios to infer reasonableestimates of their shareholders’ marginal tax rates. We use TAQ data for 1,124 US firms thathave at least 30 ex-dividend days during a sample period from August 1993 to October 2012.Our results show that ex-dividend day pricing is so noisy as to prohibit sensible estimates ofshareholders’ marginal tax rates. In addition, the results indicate that drop-off ratios generallylie within transaction cost boundaries, consistent with a limits to arbitrage transactions’ costexplanation provided by Kalay (1982).

Can Health State-Contingent Assets Enable Greater Survival Rates?
Sachdeva, Kunal
This study empirically evaluates the relationship between health state-contingent assets and their ability to facilitate greater survival rates. Using transaction-level data from the life settlement market in a quasi-experimental setting, this study finds that wealth in particularly poor states of health leads to a significant increase in survival rates. This relationship is stronger for people in fragile health and those living furthest from hospitals. Improved survival rates are independent from the severity of the disease diagnoses and the social-economic status of the policyholders. These findings provide novel evidence in support of financial solutions aimed at the rising cost of healthcare.

Construction of confidence interval for a univariate stock price signal predicted through Long Short Term Memory Network
Shankhyajyoti De,Arabin Kumar Dey,Deepak Gauda

In this paper, we show an innovative way to construct bootstrap confidence interval of a signal estimated based on a univariate LSTM model. We take three different types of bootstrap methods for dependent set up. We prescribe some useful suggestions to select the optimal block length while performing the bootstrapping of the sample. We also propose a benchmark to compare the confidence interval measured through different bootstrap strategies. We illustrate the experimental results through some stock price data set.

Contracts Between Firms and Shareholders
Schoenfeld, Jordan
Theory predicts the existence of explicit bilateral contracts between firms and expert shareholders. I assemble and analyze a large‐scale data set of these contracts. Using block investments from 1996 to 2018, I find that these contracts involve mainly corporate owners and activist owners, and often specify covenants pertaining to financing, trading, directorships, dividends, joint ventures, corporate investment, financial reporting, and information access. I also find that some of the contract covenants are stated in terms of accounting information, and that the prevalence of these contracts is significantly positively associated with measures of information asymmetry between managers and shareholders. Overall, this study provides some of the first systematic evidence on explicit bilateral contracts between firms and shareholders.

Corporate Disclosure as a Tacit Coordination Mechanism: Evidence from Cartel Enforcement Regulations
Bourveau, Thomas,She, Guoman,Zaldokas, Alminas
We empirically study how collusion in product markets affects firms' financial disclosure strategies. We find that after a rise in cartel enforcement, U.S. firms start sharing more detailed information in their financial disclosure about their customers, contracts, and products. This new information potentially benefits peers by helping to tacitly coordinate actions in product markets. Indeed, changes in disclosure are associated with higher future profitability. Our results highlight the potential conflict between securities and antitrust regulations.

Diversification Potential
Papathanakos, Vassilios
In these working notes, we introduce the concept of the diversification potential, which expresses the maximum diversification premium available by rebalancing to fixed target weights for a collection of assets. We distinguish between two forms of diversification potential: the unconstrained (which allows portfolios with short positions) and the constrained (which only permits long-only portfolios).

Does Leverage-Performance Vary with Firm Size? Evidence from India
Kalyanaraman, Lakshmi
Purpose: This study evaluates if the relationship between leverage and firm performance is impacted by firm size with a sample of 900 listed non-financial Indian firms over the ten-year period, 2010 to 2019.Approach/Methodology/Design: Threshold panel regression method developed for non-dynamic panels with individual effects is applied. The advantage of this approach is that the number of thresholds and their location is determined endogenously.Findings: The study finds that firm size affects the relationship between leverage and firm performance. A single threshold level of firm size is found to split the sample into two, small firms with total assets of INR 1461.167 million or less and large firms with total assets of over INR 1461.167 million. Leverage is found to diminish firm performance for both small firms and large firms. But the negative impact is less severe on large firms though they employ higher level of leverage and more funds from short-term sources. Practical Implications: The study offers empirical findings to understand the relationship between leverage and firm performance in the context of an emerging market with less developed bond market. Both large and small firms are found to rely heavily on short-term funds. Leverage is found to have a negative association with firm performance for all firm sizes. But small firms that employ less leverage with a lower proportion of funds from short-term sources suffer a higher reduction in performance for leverage increases. The findings of this research call for immediate development of corporate bond market which can be easily accessed by firms of all sizes in order to avert the negative effect of expensive leverage on the growth and performance of these Indian firms. Originality/value: The study is an important contribution to the evolving literature that analyses if leverage-performance varies with firm size applying threshold panel regression method.

Does Private Country‐by‐Country Reporting Deter Tax Avoidance and Income Shifting? Evidence from BEPS Action Item 13
Joshi, Preetika
To combat tax avoidance by multinational corporations, the Organisation for Economic Co‐operation and Development introduced country‐by‐country reporting (CbCr), requiring firms to provide tax authorities with a geographic breakdown of their profitability and activities. Treating the introduction of CbCr in the European Union as a shock to private disclosure requirements, this study examines the effect on corporate tax outcomes. Exploiting the €750 million revenue threshold for disclosure and employing regression‐discontinuity and difference‐in‐differences designs, I document a 1â€"2 percentage point increase in consolidated GAAP effective tax rates among affected firms. I also find evidence consistent with a decline in tax‐motivated income shifting, starting in 2018. These results suggest that, although private geographic disclosures can deter corporate tax avoidance, so far, the regulations have had a limited effect on tax‐motivated income shifting. My findings have policy implications for the global implementation of private CbCr and extend the debate on public versus private disclosure of tax information.

Dynamic Portfolio Optimization with Real Datasets Using Quantum Processors and Quantum-Inspired Tensor Networks
Samuel Mugel,Carlos Kuchkovsky,Escolastico Sanchez,Samuel Fernandez-Lorenzo,Jorge Luis-Hita,Enrique Lizaso,Roman Orus

In this paper we tackle the problem of dynamic portfolio optimization, i.e., determining the optimal trading trajectory for an investment portfolio of assets over a period of time, taking into account transaction costs and other possible constraints. This problem, well-known to be NP-Hard, is central to quantitative finance. After a detailed introduction to the problem, we implement a number of quantum and quantum-inspired algorithms on different hardware platforms to solve its discrete formulation using real data from daily prices over 8 years of 52 assets, and do a detailed comparison of the obtained Sharpe ratios, profits and computing times. In particular, we implement classical solvers (Gekko, exhaustive), D-Wave Hybrid quantum annealing, two different approaches based on Variational Quantum Eigensolvers on IBM-Q (one of them brand-new and tailored to the problem), and for the first time in this context also a quantum-inspired optimizer based on Tensor Networks. In order to fit the data into each specific hardware platform, we also consider doing a preprocessing based on clustering of assets. From our comparison, we conclude that D-Wave Hybrid and Tensor Networks are able to handle the largest systems, where we do calculations up to 1272 fully-connected qubits for demonstrative purposes. Finally, we also discuss how to mathematically implement other possible real-life constraints, as well as several ideas to further improve the performance of the studied methods.

Economic Uncertainty Before and During the COVID-19 Pandemic
Altig, David,Baker, Scott,Barrero, Jose Maria,Bloom, Nicholas,Bunn, Philip,Chen, Scarlet,Davis, Steven J.,Meyer, Brent,Mihaylov, Emil,Mizen, Paul,Parker, Nicholas,Renault, Thomas,Smietanka, Pawel,Thwaites, Gregory
We consider several economic uncertainty indicators for the US and UK before and during the COVID-19 pandemic: implied stock market volatility, newspaper-based economic policy uncertainty, twitter chatter about economic uncertainty, subjective uncertainty about future business growth, and disagreement among professional forecasters about future GDP growth. Three results emerge. First, all indicators show huge uncertainty jumps in reaction to the pandemic and its economic fallout. Indeed, most indicators reach their highest values on record. Second, peak amplitudes differ greatly â€" from a rise of around 100% (relative to January 2020) in two-year implied volatility on the S&P 500 and subjective uncertainty around year-ahead sales for UK firms to a 20-fold rise in forecaster disagreement about UK growth. Third, time paths also differ: Implied volatility rose rapidly from late February, peaked in mid-March, and fell back by late March as stock prices began to recover. In contrast, broader measures of uncertainty peaked later and then plateaued, as job losses mounted, highlighting the difference in uncertainty measures between Wall Street and Main Street.

Economic Uncertainty Before and During the Covid-19 Pandemic
Altig, David,Baker, Scott,Barrero, Jose,Bloom, Nicholas,Bunn, Philip,Chen, Scarlet,Davis, Steven J.,Leather, Julia,Meyer, Brent,Mihaylov, Emil,Mizen, Paul,Parker, Nicholas,Renault, Thomas,Smietanka, Pawel,Thwaites, Gregory
We consider several economic uncertainty indicators for the US and UK before and during the Covid-19 pandemic: implied stock market volatility, newspaper-based economic policy uncertainty, twitter chatter about economic uncertainty, subjective uncertainty about future business growth, and disagreement among professional forecasters about future GDP growth. Three results emerge. First, all indicators show huge uncertainty jumps in reaction to the pandemic and its economic fallout. Indeed, most indicators reach their highest values on record. Second, peak amplitudes differ greatly â€" from a rise of around 100% (relative to January 2020) in two-year implied volatility on the S&P 500 and subjective uncertainty around year-ahead sales for UK firms to a 20-fold rise in forecaster disagreement about UK growth. Third, time paths also differ: implied volatility rose rapidly from late February, peaked in mid-March, and fell back by late March as stock prices began to recover. In contrast, broader measures of uncertainty peaked later and then plateaued, as job losses mounted, highlighting the difference in uncertainty measures between Wall Street and Main Street.

Economics of disagreement -- financial intuition for the R\'enyi divergence
Andrei N. Soklakov

Disagreement is an essential element of science and life in general. The language of probabilities and statistics is often used to describe disagreements quantitatively. In practice, however, we want much more than that -- we want disagreements to be resolved. This leaves us with a substantial knowledge gap which is often perceived as a lack of practical intuition regarding probabilistic and statistical concepts.

Take for instance the R\'enyi divergence which is a well-known statistical quantity specifically designed as a measure of disagreement between probabilistic models. Despite its widespread use in science and engineering, the R\'enyi divergence remains a highly abstract axiomatically-motivated measure. Certainly, it offers no practical insight as to how disagreements can be resolved.

Here we propose to address disagreements using the methods of financial economics. In particular, we show how a large class of disagreements can be transformed into investment opportunities. The expected financial performance of such investments quantifies the amount of disagreement in a tangible way. The R\'enyi divergence appears connected to the optimized financial performance. The optimization takes into account individual opinions as well as attitudes towards risk. The result is a market-like social mechanism by which funds flow naturally to support a more accurate view. Such social mechanisms can help us with difficult disagreements (e.g., financial arguments concerning future climate).

In terms of scientific validation, we use findings of independent neurophysiological experiments as well as our own research on the equity premium.

Evidence on the Use and Efficacy of Internal Whistleblowing Systems
Stubben, Stephen,Welch, Kyle
Using a proprietary data set from a provider of internal whistleblowing (WB) systems, we analyze nearly two million internal WB reports submitted to over 1,000 publicly traded U.S. firms. We provide descriptive statistics, over time and across report types, on the amount and summary details of information provided, how extensively management reviews reports, the amount of time until reviews were completed, and the outcome of these reviews. Further, we examine the characteristics of firms with more actively used systems (i.e., a higher volume of reports, more information provided in reports, and reports that are more frequently reviewed by management). Finally, we show that internal WB report volume is associated with fewer and lower amounts of government fines and material lawsuits.

Extended Weak Convergence and Utility Maximization with Proportional Transaction Costs
Erhan Bayraktar,Leonid Dolinskyi,Yan Dolinsky

In this paper we study utility maximization with proportional transaction costs. Assuming extended weak convergence of the underlying processes we prove the convergence of the corresponding utility maximization problems. Moreover, we establish a limit theorem for the optimal trading strategies. The proofs are based on the extended weak convergence theory developed in [1] and the Meyer--Zheng topology introduced in [24].

Financial Statement Comparability, Earnings Smoothing and Loan-Loss Provisioning in Banking
Habib, Ahsan,Hasan, Mostafa Monzur,Mollah, Sabur,Molyneux, Philip
We investigate the effect of financial statement comparability on banks’ earnings smoothing behavior through loan-loss provisioning. Financial statement comparability makes information about peers accessible to outside investors and, thereby, improves transparency and the information environment. We, therefore, predict a negative association between financial statement comparability and earnings smoothing for opportunistic reasons. Based on a sample of 628 US banks (4,683 bank-years observations) for the period 1999-2013, we show that financial statement comparability constrains income smoothing through loan-loss provisioning. We further reveal that this constraining effect is more pronounced for larger banks and during the global financial crisis (GFC) period. These results are robust to alternative specifications of comparability and earning management, bank (firm) fixed effect regression, and also dealing with endogeneity issues. We contribute to the literature on the benefits of producing comparable financial statements, as well as to the literature on the determinants of earnings smoothing by banks. Our results are also relevant for standard setters who stress the importance of financial statement comparability for nurturing investor confidence.

Financial replicator dynamics: emergence of systemic-risk-averting strategies
Indrajit Saha,Veeraruna Kavitha

We consider a random financial network with a large number of agents. The agents connect through credit instruments borrowed from each other or through direct lending, and these create the liabilities. The settlement of the debts of various agents at the end of the contract period can be expressed as solutions of random fixed point equations. Our first step is to derive these solutions (asymptotically), using a recent result on random fixed point equations. We consider a large population in which agents adapt one of the two available strategies, risky or risk-free investments, with an aim to maximize their expected returns (or surplus). We aim to study the emerging strategies when different types of replicator dynamics capture inter-agent interactions. We theoretically reduced the analysis of the complex system to that of an appropriate ordinary differential equation (ODE). We proved that the equilibrium strategies converge almost surely to that of an attractor of the ODE. We also derived the conditions under which a mixed evolutionary stable strategy (ESS) emerges; in these scenarios the replicator dynamics converges to an equilibrium at which the expected returns of both the populations are equal. Further the average dynamics (choices based on large observation sample) always averts systemic risk events (events with large fraction of defaults). We verified through Monte Carlo simulations that the equilibrium suggested by the ODE method indeed represents the limit of the dynamics.

Getting Women on Board: Some Reflections on Research on Board Gender Diversity
Hardies, Kris,Breesch, Diane
Al-Shaer and Harakeh (2020) and Lopatta et al. (2020) study different aspects of the relationship between board gender diversity and corporate outcomes, respectively executive compensation and non-financial performance. In this discussion, we offer a broad overview of the main results of both studies, provide some points of discussion in relationship to these specific studies, and elaborate on a number of additional points that link the current studies to the broader literature on board gender diversity and gender research in accounting more generally. We conclude with some suggestions for future research.

Government Subsidies, Credit Allocation and the Investment Cycle
Surti, Jay,D'Souza, Errol
We present a model of banking with adverse selection and public guarantees extended to state-owned lenders. We find that while these guarantees induce the banking sector to lend to a larger proportion of firms with positive value, this occurs as a result of a reduction in prudential incentives to screen borrowers by state-owned banks which results in credit supply at a less than actuarially fair price. When the subsidy is tied to evergreening of non-performing loans as opposed to recapitalization post prompt loss recognition, it generates excessive credit allocation to low-productivity, legacy projects at the expense of higher-productivity firms. In the aggregate, this decreases investment, productivity growth and output while increasing financial stability risk. We apply our theoretical predictions to explain the coincidence of rising bank vulnerability and the investment slowdown in India over the last decade.

Heterogeneity in Bank Leverage: The Funding Channels of Complexity
Bussière, Matthieu,Meunier, Baptiste,Pedrono, Justine
This paper assesses the net impact of complexity on leverage, at the Bank Holding Companies (BHCs) level using unique French supervisory data from 2010 to 2017. Geographical and structural complexity introduce diversification benefits and agency problems that affect the risk of BHCs. Whether investors price this risk or not is decisive for the cost of equity and finally leverage. Our results show a negative impact of complexity on leverage. To explain this result, we then focus on the funding channels of complexity. We find that complexity goes hand in hand with additional capital surplus and increasing cost of equity. As a second major finding, our results show that the impact of complexity on leverage and the funding channels of complexity are heterogeneous across BHCs and depend on their systemic status. In fact, size, complexity and systemic status complement each other. Omitting one of these dimensions leads to misleading conclusions on bank stability

Innovation Spillovers from Trade Shocks
Urzúa I., Francisco
Do trade shocks affect non-manufacturing industries? Using China’s entry into the World Trade Organization in 2001 as a trade shock and an identification strategy based on manufacturers and non-manufacturers with common shareholders, I show that non-manufacturing firms become more innovative as a response to the shock. That is, they have more patents and are more likely to begin patenting. I find that my results rely on shareholders having large enough stakes in both firms and also on the presence of shared managers.

Institutional Investor Sentiment and Aggregate Stock Returns
gao, xiang,Gu, Chen,Koedijk, Kees
This paper examines the equity market return predictability of institutional investor sentiment, in comparison to individual investor sentiment. Our findings suggest that institutional traders are informed, and that their sentiment helps tilting stock prices towards the intrinsic value. This is because the sentiment of institutions encompasses news regarding expectations on future cash flows of underlying firms that impounds itself into future price expectations. In this research we add to the large amount of studies that investigate the role and implications of investor sentiment, which has long been viewed as a pure behavioral phenomenon, on market efficiency and price discovery.

Leakage of Rank-Dependent Functionally Generated Trading Strategies
Xie, Kangjianan
This paper investigates the so-called leakage effect of trading strategies generated functionally from rank-dependent portfolio generating functions. This effect measures the loss in wealth of trading strategies due to renewing the portfolio constituent stocks. Theoretically, the leakage effect of a trading strategy is expressed explicitly by a finite-variation term. The computation of the leakage is different from what previous research has suggested. The method to estimate leakage in discrete time is then introduced with some practical considerations. An empirical example illustrates the leakage of the corresponding trading strategies under different constituent list sizes.

Machine Learning-Based Profit Modeling for Credit Card Underwriting - Implications for Credit Risk
Krivorotov, George
Retail credit issuers traditionally rely on cutoffs derived from risk-based scorecards for acquisition and account management purposes. However, in recent years, advances in data and increased comfort with advanced modeling practices such as machine learning have given rise to more sophisticated behavioral and profit-based modeling approaches, which attempt to estimate the projected NPV of a customer instead of their likelihood of going delinquent or charging-off. Financial institutions can potentially adopt these profit-based models for underwriting and loan management purposes to more precisely target profitable but potentially risky consumers. Using a unique proprietary panel dataset of credit cards combining data from many major banks, I construct both traditional risk and ML-based profit models and find that, using only information known at customer acquisition, these models can rank-order customers according to their risk and profit reasonably well. I find that profit score cutoffs generally target wealthy, high spending, "revolving" customers, while risk score cutoffs target low-activity "transacting" customers. Absent risk-based guardrails, profit-based underwriting could potentially cause an increase in riskiness in a card portfolio. However, this is highly dependent on portfolio composition and increased risk would mostly be for portfolios concentrating on "revolvers" in the lower end of the credit spectrum, reinforcing the importance of risk guardrails in these portfolios for institutions utilizing such new modeling techniques.

Making Tweedie's Compound Poisson Model More Accessible
Delong, Lukasz,Lindholm, Mathias,Wuthrich, Mario V.
The most commonly used regression model in general insurance pricing is the compound Poisson model with gamma claim sizes. There are two different parametrizations for this model: the Poisson-gamma parametrization and Tweedie's compound Poisson parametrization. Insurance industry typically prefers the Poisson-gamma parametrization. We review both parametrizations, provide new results that help to lower computational costs for Tweedie's compound Poisson parameter estimation within generalized linear models, and we provide evidence supporting the industry preference for the Poisson-gamma parametrization.

Mean-Variance Portfolio Management with Functional Optimization
Ka Wai Tsang,Zhaoyi He

This paper introduces a new functional optimization approach to portfolio optimization problems by treating the unknown weight vector as a function of past values instead of treating them as fixed unknown coefficients in the majority of studies. We first show that the optimal solution, in general, is not a constant function. We give the optimal conditions for a vector function to be the solution, and hence give the conditions for a plug-in solution (replacing the unknown mean and variance by certain estimates based on past values) to be optimal. After showing that the plug-in solutions are sub-optimal in general, we propose gradient-ascent algorithms to solve the functional optimization for mean-variance portfolio management with theorems for convergence provided. Simulations and empirical studies show that our approach can perform significantly better than the plug-in approach.

Mortgage Regulation and Financial Vulnerability at the Household Level
Aastveit, Knut Are,Juelsrud, Ragnar,Getz Wold, Ella
We evaluate the impact of mortgage regulation on credit volumes, household balance sheets and the reaction to adverse economic shocks. Using a comprehensive dataset of all housing transactions in Norway matched with buyers' balance sheet information from official tax records, we identify causal effects of mortgage loan-to-value (LTV) limits. Our results show that LTV-requirements have substantial effects on credit volumes, especially on the extensive margin. As a result, such requirements contribute to dampening aggregate credit growth. We find that affected households lower their debt uptake and face lower interest expenses, thereby reducing their vulnerability to adverse shocks. However, affected households also deplete liquid assets when purchasing a home, in order to meet the new requirement. This negative effect on liquid savings persists in the years following the house purchase, suggesting that the impact on financial vulnerability at the household level is in fact ambiguous. We illustrate this further by documenting that households affected by the regulation are more likely to sell their home when becoming unemployed compared to non-affected households.

Multi-objective Optimal Control of Dynamic Integrated Model of Climate and Economy: Evolution in Action
Mostapha Kalami Heris,Shahryar Rahnamayan

One of the widely used models for studying economics of climate change is the Dynamic Integrated model of Climate and Economy (DICE), which has been developed by Professor William Nordhaus, one of the laureates of the 2018 Nobel Memorial Prize in Economic Sciences. Originally a single-objective optimal control problem has been defined on DICE dynamics, which is aimed to maximize the social welfare. In this paper, a bi-objective optimal control problem defined on DICE model, objectives of which are maximizing social welfare and minimizing the temperature deviation of atmosphere. This multi-objective optimal control problem solved using Non-Dominated Sorting Genetic Algorithm II (NSGA-II) also it is compared to previous works on single-objective version of the problem. The resulting Pareto front rediscovers the previous results and generalizes to a wide range of non-dominant solutions to minimize the global temperature deviation while optimizing the economic welfare. The previously used single-objective approach is unable to create such a variety of possibilities, hence, its offered solution is limited in vision and reachable performance. Beside this, resulting Pareto-optimal set reveals the fact that temperature deviation cannot go below a certain lower limit, unless we have significant technology advancement or positive change in global conditions.

New Frontiers for Internal Audit Research
Christ, Margaret H.,Eulerich, Marc,Krane, Ronja,Wood, David A.
Internal audit provides useful and valuable services to organizations and research has established its importance in improving corporate governance. However, the body of internal audit research is still small. Further, there are many new and emerging topics for which little is known and practitioners would like guidance. Based on surveys, interviews, and discussions with practitioners, we identify three broad areas for additional research: information technology, staffing and personnel development, and agile auditing. In each area, we describe the current practices and discuss the relevant accounting literature, noting gaps where additional inquiry is needed. We also provide a list of testable research ideas to help inform academics about practice-relevant research questions that would not only add to the academic literature, but would benefit practitioners who seek guidance. Hopefully, this paper will inspire more academic research that investigates important internal audit questions.

One trade at a time -- unraveling the Equity Premium Puzzle
Andrei N. Soklakov

Financial markets provide a natural quantitative lab for understanding some of the most advanced human behaviours. Among them is the use of mathematical tools known as financial instruments. Besides money, the two most fundamental financial instruments are bonds and equities. More than 30 years ago Mehra and Prescott found the numerical performance of equities relative to government bonds could not be explained by consumption-based (mainstream) economic theories. This empirical observation, known as the Equity Premium Puzzle, has been defying mainstream economics ever since. The recent financial crisis revealed an even deeper need for understanding financial products. We show how understanding the rational nature of product design resolves the Equity Premium Puzzle. In doing so we obtain an experimentally tested theory of product design.

Persistent Negative Cash Flows, Staged Financing, and the Stockpiling of Cash Balances
Denis, David J.,McKeon, Stephen B.
Negative net cash flows have become substantially more pervasive, persistent, and greater in magnitude within US publicly-traded companies since 1971. Companies with negative cash flows, particularly those that also have high intangible capital, account for most of the rise in average cash balances in recent decades. These firms build cash balances through frequent equity offerings; however, the cash holdings are transitory as subsequent negative cash flows lead firms to rapidly burn through the cash. We conclude that funding needs and staged equity financing within negative cash flow firms are central features of the secular rise in average cash balances.

Rising Markups, Common Ownership, and Technological Capacities
Gibbon, Alexandra J.,Schain, Jan Philip
This paper analyses the impact of common ownership on markups and innovation and adds to the discussion of the recently observed patterns of a long term rise in market power. We shed light on the inconclusiveness of results regarding the effects of common ownership on markups in the existing literature by exploiting industry technology classifications by the European Commission. Using a rich panel of European manufacturing firms from 2005 to 2016, we structurally infer markups and construct a measure of common ownership. Combining propensity score matching with a difference-in-differences estimator, we find an increase of firm markups by 3.1% after the first exposure to common ownership. While this effect is strongly pronounced in low-tech industries, we find no effect on markups in high-tech industries. In contrast, we measure a positive effect of common ownership on innovation activity in high-tech industries and no effect in low-tech industries. Both findings are consistent with recent theoretical findings in Lopéz and Vives (2019).

Risk, Uncertainty, and Leverage
Istiak, Khandokar
Using mostly theoretical models and traditional risk/uncertainty measures (VIX index, panic, precaution, scary bad news, etc.), the current literature tries to clarify the risk/uncertainty-deleveraging pattern. The findings are not sufficient to explain the dynamic empirical relationship between modern risk/uncertainty indicators and leverage. We fill this gap in the literature by using US quarterly data, from 1985:1 to 2018:4, Granger causality tests, and a structural vector autoregression model. We find that commercial bank leverage rises when geopolitical risk and macroeconomic, policy, and equity uncertainty increase. Client-based business relationships of banks and high government borrowing from banks during crises periods are responsible for this relationship. We find that the leverage of broker-dealers and shadow banks declines when Chicago risk and macroeconomic, policy, financial, and equity uncertainty increase. We argue that the vulnerability of broker-dealers and shadow banks to the risk/uncertainty of the entire market system is responsible for this relationship.

Securities Lending and Information Acquisition
Greppmair, Stefan,Jank, Stephan,Saffi, Pedro A. C.,Sturgess, Jason
We show that mutual funds use information acquired by participating in the equity lending market to make portfolio allocation decisions. Using data from German mutual funds on their stock-level lending decisions, we find that funds lending shares are more likely to exit positions relative both to stocks that they do not lend and to funds that do not lend. Lenders also avoid losses by better timing the closure of long positions than for stocks they do not lend. Finally, we show information acquisition in the lending market allows lenders to front-run public disclosure of large short positions. The results suggest that the securities lending market provides a mechanism for mutual funds to acquire information.

Shareholder Value Creation in Japanese Banking
Radic, Nemanja
This paper advances the study of Fiordelisi and Molyneux (2010) by examining the shareholder value efficiency and its determinants for a large sample of Japanese banks between 1999 and 2011. A new, specifically tailored measure of the Economic Value Added approach, based on the shadow price of equity, is developed in order to account for specific characteristics of the Japanese banking system. This new “shareholder value measure” is then used in a dynamic panel data model as a linear function of various bank-risk, bank-specific, and macroeconomic variables. This study finds that cost efficiency gains, credit risk and bank size are the most important factors in explaining the shareholder value creation in Japanese banking. Cost efficiency changes are also found to significantly influence cost of equity capital.

Sovereign Wealth Fund Issues and the National Fund(s) of Kazakhstan
Kemme, David
This paper first describes the major concerns associated with SWFs, mainly revolving around state ownership and lack of transparency. It then focuses on the National Fund for the Future of Kazakhstan (the “oil fund”, or NOF) and Samruk Kazyna (SK), the holding company for state owned enterprises. The NOF is funded predominately by corporate income taxes and royalties on natural resource production and is an instrument to provide financial stability and intergenerational equity. SK includes most large public monopolies and state owned enterprises not privatized in the 1990s with all of the accompanying issues related to state ownership and control of productive activities.

Spillover Effects of Peer-to-Peer Lending on the Loan Losses of Commercial Banks
Ng, Jeffrey,Rusticus, Tjomme O.,Zhang, Janus Jian
Financial technology (FinTech) companies are increasingly important in the financial system. We investigate the effect of peer-to-peer (P2P) lending on traditional banks’ loan losses by examining whether and how P2P lending activity in a state affects loan loss provisions of that state’s commercial banks. If P2P lending helps borrowers repay their bank loans, banks might report lower loan loss provisions. However, if P2P lending results in higher leveraged borrowers, banks might accrue higher loan loss provisions. Using a large sample of US single-state banks during 2009-2017, we find that banks in states where P2P lending volume is higher report higher loan loss provisions. This positive relation is stronger for banks with greater exposure to the consumer loan market and for banks whose consumer borrowers are already more leveraged. These findings support the overleveraging effect of P2P lending on banks’ consumer borrowers. We also find that P2P lending is associated with higher future loan charge-offs, which capture realized loan losses. Overall, our study offers new insights into the interaction between FinTech firms and traditional financial institutions.

Stock Recommendations from Stochastic Discounted Cash Flows
Bottazzi, Giulio,Cordoni, Francesco,Livieri, Giulia,Marmi, Stefano
Portfolio recommendations should include, beyond an estimate of the expected return on the investment, also an assessment of the associated level of risk. This paper introduces a simple methodology to assign stock recommendations based on a firm valuation procedure that replaces the conventional point estimate of the Discounted Cash Flow (DCF) approach with a probability distribution of fair values. We propose two different systems of recommendations that hinge on a mispricing indicator constructed with this distribution. Investment strategies based upon this buy/sell recommendations lead to positive abnormal profits, also when accounting for trading costs.

Stressing the Fed Stress Tests Against COVID-19
Potter, Simon,Schuermann, Til
COVID-19 is a new type of shock that is likely to produce losses on loans and financial assets higher and more correlated than historical adverse macroeconomic shocks unless policy stabilization efforts are successful. Further, the sudden economic stop caused by the need for social distancing requires bridge financing to support existing contractual arrangements for employment, debt service, and a range of other obligations. Society has resources in the form of taxation of future income that it can move to the present to provide bridge financing and absorb losses from defaulting loans and ensure that existing forms of capital (physical, human and intangible) remain available for production after the COVID-19 virus wanes. For the US this is taking the form of transfers, direct loans and equity from the US Treasury (UST), and UST “capital” used to back the Federal Reserve’s various lending facilities under its 13(3) authority. The goal of this note is to provide a simple framework to analyze how much UST capital is needed to back the Fed Facilities to achieve the stabilization goal. Simply put, what should be the aggregate capacity (leverage) of the facilities, and how much capital will be available in tail outcomes where the private banking system faces losses greater than its substantial capital buffer? We will bootstrap recent Federal Reserve stress test results to illustrate some possible answers to these questions. This is the notion of how we are stressing the stress tests.

The COVID-19 Crash in the US Stock Market
Ziemba, William T.
This paper studies the US equity market during the COVID-19 period in the first half of 2020. There is a record rise, then a record fall in prices and then a record recovery. Throughout the period there was extreme volatility and much short term momentum with fear and greed alternating. The VIX index signalled the market direction. The roles of the 10 year government bond, the S&P500, Apple Computer stock are studied as well as the massive Fed and government stimuli which fuelled the rebound, despite extremely weak fundamentals.

The Impact of Brexit on Africa in Times of the Corona Crisis: The Case of South Africa, Nigeria, Ghana and Kenya (L'impact du Brexit sur l'Afrique en période de crise de Corona: le cas de l'Afrique du Sud, du Nigeria, du Ghana et du Kenya) (Die Auswirkungen des Brexit auf Afrika in Zeiten der Corona-Krise: Das Beispiel Südafrika, Nigeria, Ghana und Kenia)
Kohnert, Dirk
English Abstract: Although Britain has been so far the hardest hit among the EU member states by the corona pandemic, Johnson persists to leave the EU at the end of 2020, whatever the cost. Presumably, the pandemic will have a by far bigger impact on the UK African trade than a no-deal Brexit. In Sub-Saharan Africa, South Africa had been arguably the hardest hit country both by Brexit and Corona. However, the poor, mainly working in the informal sector, were more concerned about the economic impact of the pandemic than the disease itself. In Nigeria, many people envisaged Corona as a plague of the rich and the elite. President Buhari shared the hubris of many British that they are less vulnerable to the pandemic and could continue with high-flying Post-Brexit plans. Ghana counts among those countries in Sub-Sahara Africa which has been most severely hit by the corona pandemic. But unlike South Africa and Nigeria, the direct effects of the pandemic on the downturn of its economy are not as significant as in other African states. In Kenya the number of corona-death had been much lower than for the SARS pandemic of 2003, but the transmission of the COVID-19 virus had been significantly greater. Nevertheless, many Kenyan’s saw the Brexit as a disguised blessing because they pined their hope on massive FDI by UK investors. In any case, it is clear beyond doubt that those who are to suffer most by the combined effects of the corona-pandemic and Brexit in Africa (and presumably world-wide) are the poor and vulnerable. French Abstract: Bien que la Grande-Bretagne ait jusqu'à présent été la plus durement touchée par la pandémie corona parmi les États membres de l'UE, Johnson persiste à quitter l'UE fin 2020, quel qu'en soit le coût. Vraisemblablement, la pandémie aura un impact beaucoup plus important sur le commerce africain du Royaume-Uni qu'un Brexit sans accord. En Afrique subsaharienne, l'Afrique du Sud a probablement été le pays le plus durement touché par le Brexit et Corona. Cependant, les pauvres, travaillant principalement dans le secteur informel, étaient plus préoccupés par l'impact économique de la pandémie que par la maladie elle-même. Au Nigéria, beaucoup de gens considéraient Corona comme un fléau pour les riches et l'élite. Le président Buhari a partagé l'orgueil de nombreux Britanniques selon lesquels ils sont moins vulnérables à la pandémie et pourraient continuer avec des plans de haut vol après le Brexit. Le Ghana compte parmi les pays d'Afrique subsaharienne qui ont été les plus durement touchés par la pandémie de corona. Mais contrairement à l'Afrique du Sud et au Nigéria, les effets directs de la pandémie sur le ralentissement de son économie ne sont pas aussi importants que dans d'autres États africains. Au Kenya, le nombre de décès par effet corona a été beaucoup plus faible que pour la pandémie de SRAS de 2003, mais la transmission du virus COVID-19 a été nettement plus importante. Néanmoins, de nombreux Kenyans ont vu le Brexit comme une bénédiction déguisée car ils portaient leur espoir sur le IDE massif des investisseurs britanniques. En tout état de cause, il est clair, sans aucun doute, que ceux qui souffriront le plus des effets combinés de la pandémie corona et du Brexit en Afrique (et vraisemblablement dans le monde entier) sont les pauvres et les vulnérables. German Abstract:Obwohl Großbritannien unter den EU-Mitgliedstaaten bislang am stärksten von der Koronapandemie betroffen war, besteht Johnson weiterhin darauf, die EU Ende 2020 zu verlassen, unabhängig von den Kosten. Vermutlich wird die Pandemie einen weitaus größeren Einfluss auf den afrikanischen Handel im Vereinigten Königreich haben als ein No-Deal-Brexit. In Afrika südlich der Sahara war Südafrika sowohl vom Brexit als auch von Corona das vermutlich am stärksten betroffene Land. Die Armen, die hauptsächlich im informellen Sektor tätig sind, waren jedoch mehr besorgt über die wirtschaftlichen Auswirkungen der Pandemie als über die Krankheit selbst. In Nigeria stellten sich viele Menschen Corona als Plage der Reichen und der Elite vor. Präsident Buhari teilte die Hybris vieler Briten, dass sie weniger anfällig für die Pandemie sind und mit hochfliegenden Plänen nach dem Brexit fortfahren könnten. Ghana zählt zu den Ländern in Subsahara-Afrika, die ebenfalls mit am stärksten von der Koronapandemie betroffen sind. Im Gegensatz zu Südafrika und Nigeria sind die direkten Auswirkungen der Pandemie auf den wirtschaftlichen Abschwung jedoch nicht so bedeutend wie in anderen afrikanischen Staaten. In Kenia war die Zahl der Koronatoten viel geringer als bei der SARS-Pandemie von 2003, aber die Übertragung des COVID-19-Virus war signifikant höher. Dennoch sahen viele Kenianer den Brexit als verschleierten Segen an, weil sie ihre Hoffnung auf massive ausländische Direktinvestitionen britischer Investoren setzten. In jeden Fall ist klar, dass diejenigen, die am meisten unter den kombinierten Auswirkungen der Koronapandemie und des Brexit in Afrika (und vermutlich weltweit) leiden müssen, die Armen und Verletzlichen sind

The Impact of Tightly Contested Governance Proposals on Firms' Narrative Disclosures: Evidence from a Regression-Discontinuity Design (RDD)
Ganguly, Abhishek,Ganguly, Arup,Ge, Lin,Zutter, Chad J.
Corporate governance and firm disclosure are endogenously determined. We exploit locally exogenous variations in corporate governance created by "close-call" governance-related shareholder proposals, using a fuzzy RDD and the techniques developed in text analytics to examine whether better corporate governance causally impacts the narratives in corporate disclosures. We find that although better corporate governance in firms leads to more disclosure in their 10-K filings, the passage of "close-call" governance proposals also significantly increases the complexity and the boilerplate nature of such disclosures. These results are robust to several diagnostic tests, alternative RDD bandwidths, different specifications, and are more pronounced when the investors are not distracted.

The Influence of the 2012 Restructuring of the Greek Public Debt on the Economic Governance of the Eurozone and on Public Debt Law
Venizelos, Evangelos
The Greek public debt restructuring that took place in 2012 through the twin scheme of the Private Sector Involvement (PSI) and the Official Sector Involvement (OSI) has had a major impact on the institutional structure of the EU economic governance. The retroactive introduction of Collective Action Clauses (CACs) into the Greek legal order that formed the legal basis for restructuring was adopted in art. 12 (3) of the ESM Treaty and is now a legal obligation of all Member States. The 2012 intervention was a "workshop" in the fields of European Law, International Economic Law and Public Debt Restructuring Law. The legal structure of the 2012 intervention has successfully undergone multiple judicial reviews (Greek courts, Courts of other EU Member States, CJEU and EGC, ECtHR, ICSID). The Greek operation of 2012 was by far the largest restructuring of public debt and at the same time a restructuring that was carried out with legal certainty, despite the involvement of many legal orders. It is therefore a point of reference for the future.

The Pricing of Green Bonds: Are Financial Institutions Special?
Fatica, Serena,Panzica, Roberto,Rancan, Michela
The financial system plays a major role in the transition to a low-carbon economy. We investigate this issue analyzing the recent developments and challenges in the bond and debt markets. First, we study the pricing of green bonds at issuance. We find a premium when green bonds are issued by supranational institutions and corporates while there is no effect for financial institutions. We also document an effect for external review and repeated access to this market. Second, we investigate lending decisions by banks issuing green bonds. Our results show that these lenders reduce their funding towards more polluting segments of the economy but limited to the amount of loans they granted as lead bank in the deal. This mixed evidence about lending suggests that, at the time of issuance, investors may not identify a clear link between the greenbond issued by a financial institution and a green project, which would explain the absence of a green premium for financial issuers.

The Smart Beta Mirage
Huang, Shiyang,Song, Yang,Xiang, Hong
We document sharp performance deterioration of smart beta indexes after the corresponding smart beta ETFs are listed for investments. Adjusted by aggregate market return, the average return of smart beta indexes drops from 2.77% per year “on paper” before ETF listing to âˆ'0.44% per year after ETF listing. This performance deterioration cannot be explained by strategic timing in ETF listing nor explained by time trend in factor premia. We find evidence of data mining in constructing smart beta indexes as the post-ETF-listing performance decline is much sharper for indexes that are more susceptible to data mining in backtests. Our results caution the risk of data mining in the proliferation of ETF offerings as investors respond strongly to the stellar performance in backtests.

The Stock Market Is not the Economy? Insights from the COVID-19 Crisis
Capelle-Blancard, Gunther,Desroziers, Adrien
During the COVID-19 pandemic, while the world economy suffered the worst crisis since the Great Depression, the response of stock markets has raised concerns. Several economists (including some Nobel laureates) have seen these reactions as evidence that stock markets are not fully efficient, while others have emphasized the difficulty of assessing the dramatic flow of information about the pandemic and its economic consequences. In this paper, we assess how stock markets have integrated public information about the COVID-19, the subsequent lockdowns and the policy reactions. Although the COVID-19 shock has been global, not all countries have been impacted in the same way, and they have not reacted in the same way. We take advantage of this strong heterogeneity. We consider a panel of 74 countries with daily information about the health and economic crisis, from January to April 2020. Stock market reaction can be summarized as follows. 1) Stock markets initially ignored the pandemic (until Feb. 21), before reacted strongly to the growing number of infected people (Feb. 23 to Mar. 20), while volatility surged and concerns about the pandemic arose; following the intervention of central banks (Mar. 23 to Apr. 30), however, shareholders no longer seemed troubled by news of the health crisis, and prices rebound all around the world. 2) Country-specific characteristics appear to have had no influence on stock market response. 3) Investors were sensitive to the number of COVID-19 cases in neighbouring but mostly wealthy countries. 4) Credit facilities and government guarantees, lower policy interest rates, and lockdown measures mitigated the decline in domestic stock prices. Overall, these results suggest that stock markets have been less sensitive to each country’ macroeconomic fundamentals prior the crisis, than to their short-term reaction during the crisis. However, our selected variables explain only a small part of the stock market variations, so it is hard to deny that the link between stock price movements and fundamentals have been anything other than loose.

This Crisis is Different (Presentation Slides)
Azis, Iwan Jaya
This webinar materials reflect the broader implications of my paper about the financial vulnerability in EME during COVID-19 compared to the two previous crises: 2008 GFC and 2013 Taper Tantrum, (also submitted in this SSRN) using the case of Emerging Asia. The paper is titled: "A Tale of Three Crises: Financial Contagion in Emerging Asia" Abstract for the webinar: The ongoing crisis in emerging market economies (EME) has been severe during the COVID-19, partly because they were actually already vulnerable even before COVID-19 strike. Lots of the vulnerability were "hidden" not captured by standard "measured risk" indicators. This applies to both economic-financial indicators and institutional measures. It is therefore not unlikely that the recovery shape in many EMEs will be of either U shape, W shape, or even L shape The presentation covers:1. How we got here: EME Vulnerability2. COVID-19 Crisis is different3. External conditions & post COVID-19 scenarios

U.S. Banks and Global Liquidity
Correa, Ricardo,Du, Wenxin,Liao, Gordon
We characterize how U.S. global systemically important banks (GSIBs) supply short-term dollar liquidity in repo and foreign exchange swap markets in the post-Global Financial Crisis regulatory environment and serve as the "lenders-of-second-to-last-resort". Using daily supervisory bank balance sheet information, we find that U.S. GSIBs modestly increase their dollar liquidity provision in response to dollar funding shortages, particularly at period-ends, when the U.S. Treasury General Account balance increases, and during the balance sheet taper of the Federal Reserve. The increase in the dollar liquidity provision is mainly financed by reducing excess reserve balances at the Federal Reserve. Intra-firm transfers between depository institutions and broker-dealer subsidiaries within the same bank holding company are crucial to this type of "reserve-draining" intermediation. Finally, we discuss factors that contributed to the repo spike in September 2019 and the subsequent response of U.S. GSIBs to recent policy interventions by the Federal Reserve.

U.S. Shale-Oil Hubbert Production Peak: Civilization's Ultimate Energy Forecast
Reynolds, Douglas B.
This paper, in the form of a treatise, estimates a U.S. shale-oil production trend forecast and explores potential consequences of that trend on U.S. and World macroeconomic conditions and growth prospects. It explains the economics of the Hubbert curve including a literature review both pro and con. It explains the relationship of shale-oil and shale-gas. It falsifies various U.S. shale-oil trend hypotheses using logic and econometrics. It then presents oil price expectations based on an analyses of entropy-economic relationships, physical energy characteristics, new-institutional economic theories of OPEC, and OPEC+ game-theoretic plays. Covid-19, OPEC+ and macro-economic principles are analyzed for their potential market changing effects using Schwartzian futurology methodology. A comparison of the current global civilization to past civilizations is also carried out.

Why Do Politicians Intervene in Accounting Regulation? The Role of Ideology and Special Interests
Bischof, Jannis,Daske, Holger,Sextroh, Christoph J.
Politicians frequently intervene in the regulation of financial accounting. Evidence from the accounting literature shows that regulatory capture by special interests helps explain these interventions. However, many accounting rules have broad economic or social consequences, such as their effects on income distribution or private sector subsidies. The perception of these consequences varies with a politician's ideology. Therefore, if accounting rules produce those consequences, ideology plausibly spills over and explains a politician's stance on the technical accounting issue, beyond special interest pressure. We use two prominent U.S. political debates about fair value accounting and the expensing of employee stock options to disentangle the role of ideology from special interest pressure. In both debates, ideology explains politicians’ involvement at exactly those points when the debate focuses on the economic consequences of accounting regulation (i.e., bank bailouts and top management compensation). Once the debates focus on more technical issues, connections to special interests remain the dominant force.

iConVis: Interactive Visual Exploration of the Default Contagion Risk of Networked-Guarantee Loans
Zhibin Niu,Runlin Li,Junqi Wu,Dawei Cheng,Jiawan Zhang

Groups of enterprises can serve as guarantees for one another and form complex networks when obtaining loans from commercial banks. During economic slowdowns, corporate default may spread like a virus and lead to large-scale defaults or even systemic financial crises. To help financial regulatory authorities and banks manage the risk associated with networked loans, we identified the default contagion risk, a pivotal issue in developing preventive measures, and established iConVis, an interactive visual analysis tool that facilitates the closed-loop analysis process. A novel financial metric, the contagion effect, was formulated to quantify the infectious consequences of guarantee chains in this type of network. Based on this metric, we designed and implement a series of novel and coordinated views that address the analysis of financial problems. Experts evaluated the system using real-world financial data. The proposed approach grants practitioners the ability to avoid previous ad hoc analysis methodologies and extend coverage of the conventional Capital Accord to the banking industry.