Research articles for the 2020-07-10

A Neural Learning on Indian Manufacturing Sector in Prognosticating Bankruptcy
Bankruptcy is a menacing situation, which the investors, businesses, and the economy are afraid of, due to its adverse effects. Prediction of bankruptcy can help the investors and businesses in formulating their strategies in order to improve their profits or at least avoid losses. Researchers around the world use different types of prediction methods and models. One of the promising and accurate methods for prediction is ANN or Artificial Neural Network. ANN resembles the neural network in our brain. So this study focuses on using the different variables of ROA, ROE to predict the bankruptcy of manufacturing sectors using Artificial Neural Network.

Aesthetics in Stock Investments: the Mediating Role of Investor's Attitude towards Investor Relation Websites
Rao, Rableen Kaur
Purpose: The purpose of this paper is to contribute to the existing literature in behavioral finance by investigating the role played by company's investor relations website/webpage in inducing the individual investor's intention to invest in the company. The study investigates the role of aesthetics and emotions in individual‟s investment behavior. Design/ Methodology/Approach: A set of hypotheses was developed, based on theory, and survey data were obtained from 357 retail investors in Delhi-NCR region in order to test the hypotheses. The data pertained to the individual‟s attitude towards the company's investor relations website/webpage and their willingness to invest. Structural Equation Modeling was used to test the proposed hypotheses. Findings: Results highlight the positive influence of relative advantage, credibility, ease of use, and trust on investor's attitude towards the investor relations website. The mediating influence of attitude towards investor relations website was influenced in some proposed relationships. It was also evidenced that credibility and trust have a greater influence on attitude towards website for low internet using experience investors as compared to investors with high internet using experience.Originality/Value: The study provides theoretical grounding and empirical evidence of the positive influence of individual‟s favourable attitude towards investor relations website on individuals' willingness to invest in company's shares. It is one of the pioneer studies in the Indian financial context and provides valuable insights to the companies to strategically design their investor relations website/webpage that deals with both functional and aesthetic aspect of information sharing and is emotionally appealing. Research limitations: The study pertains to attitudes and behavior of individual investors only. Institutional and professional investors are beyond the scope of the paper.

Assessment of the Situation in the Banking Sector
Zubarev, Andrey,Shilov, Kirill
The purpose of this study is to analyze the current status of Russian banks on the basis of their monthly balance sheets and to assess a number of risks that may arise for Russian banks and the banking system as a whole. Our analysis is based on data entered into Reporting Form 101 ‘Trial Balance Sheet on the Accounting Records of a Credit Institution’ posted by the Bank of Russia on a monthly basis to its official website. The data aggregation of first-order accounts in Reporting Form 101 is consistent with the banking analytics methodology suggested at KUAP.RU.1 We studied separately the two main risks that the banking system is prone to be exposed to during a crisis period (past due debt growth risk and foreign exchange risk). Using a number of prerequisites, we plotted the scenario-based forecast movement of the performance indicators of individual banks through each of the two risk channels, and then summarized the results. Thus we obtained the quantitative estimates of capital losses for several biggest banks under that scenario.

COVID-19 and Investor Sentiment Influence on Country and Sector Returns
Nogueira Reis, Pedro,Pinho, Carlos
The association of a pandemic such as the COVID-19 and the investor sentiment on country sector market returns is new in academic studies. This work creates a text media sentiment and combines its influence with the outbreak cases on the stock market sector returns of the US, Europe, and their main countries most affected with the outbreak. We apply a random-effects robust Panel estimation along with robust regression to conclude that US returns are more sensitive to sentiment than confirmed cases when compared to Europe. Hotel, Leisure (Tourism), and Real Estate are the most affected sectors. Country factors influence returns differently. Italy and Spain as the most punished countries in Europe apart from the UK, present sector indexes return that are more reactive to verified cases, namely the Tourism, Real Estate, and the Automobile (this last one in Italy). US has the biggest information industry providing financial and economic news with corporations such as the CNBC, Thomson Reuters, Bloomberg, Wall Street Journal, Moodys, S&P GMI, MSCI, Morningstar, Refinitiv, Market watch, etcetera. This mass production of information creates an atmosphere that leads to the forethought of future events and conditions investor sentiment and thus market returns, namely on periods of panic or fear. Europe has a different approach and despite the spillover effect and contagion with US markets, Europe returns responded in a more rational way and not so much for the investor sentiment.

Central Banks and the Governance of Monetary Space
Bieri, David S.
From regional redistribution through mortgage markets to the monetary policy effects on local house price dynamics, the Great Financial Crisis (GFC) has been a powerful reminder that money and credit matter for the evolution of the space economy. In addition to the spatially uneven impact of money and credit, the GFC has also underlined the crucial role of central banks as institutional pivot points on which the global financial system hinges. This chapter examines the evolving role and function of central banks in the post-crisis geography of money. Paying particular attention to François Perroux’s analysis of economic spaces, I argue that central banks form the institutional, operational, and functional apex in the inherent hierarchy of global monetary spaces. As such, central banks critically shape three fundamental relationships among constituent economic elements in the Perrouxian system, i.e. (i) monetary space as defined by a plan; (ii) monetary space as a field of forces; and (iii) monetary space as a homogeneous aggregate.The remainder of the paper further argues that, despite an enthusiastic re-engagement with the “economic geography of money and finance” in the decade after the GFC, central banks and monetary space plays no more than a perfunctory role in the current literature. Consequently, much of this rapidly expanding literature tends to remain singularly faithful to locational and agglomerational aspects of what Perroux termed “banal economic space” wherein the true monetary power of central banks is difficult to analyse.

Chapter 1: 'Introduction'
Blake, David P.
This Chapter is a scene-setter for the remainder of the Report. We begin by considering how pension schemes have traditionally been used and also how they are likely to be used in future following the introduction of the pension reforms announced in the 2014 Budget. These reforms furnish us with an opportunity to ask anew what a ‘good’ pension scheme should aim to achieve. There are also risks involved in the provision of pensions and we discuss the key ones. Unfortunately, widespread evidence shows that many if not most pension scheme members do not understand these risks and are unlikely ever to do so, however much guidance or education they receive. This will make it difficult for many of them to make informed choices about how they spend their retirement savings that takes these risks into account. This, in turn, raises the question about whether scheme members should be nudged (or even defaulted) into a well-designed decumulation product that has dealt with these risks in the most efficient and cost-effective ways possible â€" with the option to opt out, as in the case of auto-enrolment. We then consider the different types of pension member affected by the reforms. Finally, we discuss the attitudes of employers, consultants, providers, investment managers, and trade unions to the reforms.

Chapter 2: ‘How to Ensure That Savers Can Get the Best Products in Retirement’
Blake, David P.
In the past, most members of defined contribution (DC) pension schemes were required to buy a lifetime annuity at some point during their retirement. The Budget on 19 March 2014 has changed that requirement, as well as opened up the possibility that new types of retirement products will become available. Not all of these will be appropriate, especially if they can lead to people spending all their pension savings before they die. We will examine the new products to see which are most suitable, given the new pension flexibilities. We then consider the most effective way in which scheme members can access the best of these products. In particular, we will look at how ‘longevity insurance’ (e.g., in the form of an immediate or a deferred lifetime annuity) can be combined with ‘scheme drawdown’ to provide a cost-effective institutionally delivered retirement income solution that allows for flexibility in spending during retirement, while ensuring that savers do not run out of money before they die. We end by looking at the best way of helping people deal with stranded pots.

Chapter 3: ‘Supporting Savers to Make the Right Choice at Retirement for Them and Their Family and How to Build on the Lessons of Auto-Enrolment’
Blake, David P.
We will investigate whether it is possible to design a set of good decumulation defaults and default pathways at retirement which will be suitable for most savers, in the same way that a good default investment strategy in the accumulation phase can be designed. Even if this is possible, we accept that it is likely that more people might opt for a different retirement income plan than the estimated 10% of people who reject the default accumulation fund. For example, some retirees might be in poor health and so might choose to access their funds in full at the date of retirement â€" or over as short a period as possible (staggered to avoid paying unnecessary income tax). Given the complexities of retirement expenditure decision making, we will examine the support in terms of guidance, help and advice that savers need in order to make the right choices for them and their family. Building on the lessons of auto-enrolment, we will examine what nudges would be useful to move people towards making decisions that are in their best long-term interests. We will also consider the barriers, especially the regulatory barriers, to implementing a default. The overriding question that we seek to answer in this Chapter is this: Is it possible to design safe harbour retirement income plans which combine safe harbour products with financial help or guidance (that confirms the suitability of the product for the client) in order to provide retirement income journeys that are good enough for most of Middle Britain?

Chapter 4: ‘Helping Savers to Manage Longevity Risk’
Blake, David P.
A particularly important issue in retirement income provision is longevity risk. There are two components to longevity risk. The first is the uncertainty over how long any particular pension scheme member is going to live after retirement. This is known as idiosyncratic longevity risk. Both individuals and schemes face idiosyncratic longevity risk. The second is uncertainty over how long members of a particular age cohort are going to live after retirement. This is known as systematic longevity risk. Only schemes face systematic longevity risk. Individuals have a poor understanding of idiosyncratic longevity risk. Pension schemes can reduce idiosyncratic longevity risk by pooling the risk amongst a large number of scheme members, i.e., by taking advantage of the law of large numbers. Systematic longevity risk, however, cannot be reduced in this way: it needs to be hedged using a suitable hedging instrument.

Chapter 5: ‘The Role of the National Employment Savings Trust in Helping Savers to Access Good Quality Retirement Products’
Blake, David P.
The National Employment Savings Trust (NEST) has revolutionised the DC pension savings market in the UK by providing a high-quality benchmark for private-sector schemes to compare themselves against. We consider whether it can and should do something similar in DC decumulation, both for its own members and for the members of other schemes that do not offer DC decumulation products.

Chapter 6: ‘The Role of Collective Pension Schemes and How These Could Be Introduced in the UK’
Blake, David P.
Supporters of collective defined contribution (CDC) pension schemes claim that they can produce higher and more stable incomes than individual defined contribution (IDC) pension schemes. Broadly speaking, there are two types of CDC scheme in existence: one that is a form of DB replacement and one that is a form of DC replacement. Because CDC schemes claim to have economies of scale that are not available to IDC schemes, we will examine whether this model for collective schemes can also boost incomes in retirement or at least make such incomes more stable across different cohorts of members. We will investigate how their performance might compare with standard IDC schemes. We will examine overseas examples of collective schemes that pool and share risks and hence make incomes in retirement more predictable (at least in principle). We will also consider what effect the new flexibilities for drawing down the pension pot in retirement have for the feasibility of a CDC pension. Finally, we examine an alternative type of collective scheme that might be more compatible with the new pension freedoms, namely collective individual DC (CIDC) schemes.

Chapter 7: 'Conclusion: Developing a National Narrative'
Blake, David P.
The key lesson from our research and discussions is that we need a national narrative on pensions if we are going to build a consensus around retirement income provision. The alternative is to live in a Tower of Babel with any sensible messages drowned out by a cacophony of mixed and often contradictory signals that will just confuse the majority of pension scheme members in the retirement phase of their lives. The dream of a comfortable retirement could easily turn into a nightmare. We identify five key factors that need to make an appropriate contribution if the objective of a national consensus is to be achieved: the pensions industry itself, national media, the regulatory system, the political system, and the pension tax system (and the implications this has for the level of pension savings built up prior to retirement). We make a number of recommendations that will help support the objective.

Credit Default Swaps and CEO Compensation: A Long-Term Perspective
Hao, Jong-Yu Paula,Yur-Austin, Jasmine,Zhu, Lu
In this paper, we examine whether the onset of credit default swaps (CDSs) affects a firm’s executive compensation. The availability of CDSs allows lenders to transfer credit risk, but not control or monitoring rights, to CDS sellers. Hence, CDS-protected lenders’ incentives to monitor borrowing firms are curtailed, which could exacerbate the managerial agency problem. To mitigate the concern about the increased agency problem, we postulate that shareholders are more likely to demand greater long-term compensation for CEOs to compensate for their reduced ability to delegate monitoring to CDS-protected lenders. Consistent with our hypothesis, we find a positive CDS-incentive horizon relationship. Moreover, the positive relationship is more pronounced for institutional investors who have stronger incentives for monitoring. This study contributes to the literature by examining the impact of CDSs on executive compensation design, which has been largely overlooked in prior research.

Deep Learning Profit & Loss
Rossi, Pietro,Cocco, Flavio,Bormetti, Giacomo
Building the future profit and loss (P&L) distribution of a portfolio holding, among other assets, highly non-linear and path-dependent derivatives is a challenging task. We provide a simple machinery where more and more assets could be accounted for in a simple and semi-automatic fashion. We resort to a variation of the Least Square Monte Carlo algorithm where interpolation of the continuation value of the portfolio is done with a feed forward neural network. This approach has several appealing features. Neural networks are extremely flexible regressors. We do not need to worry about the fact that for multi assets payoff, the exercise surface could be non connected. Neither we have to search for smart regressors. The idea is to use, regardless of the complexity of the payoff, only the underlying processes. Neural networks with many outputs can interpolate every single assets in the portfolio generated by a single Monte Carlo simulation. This is an essential feature to account for the P&L distribution of the whole portfolio when the dependence structure between the different assets is very strong like the case where one has contingent claims written on the same underlying.

Determinants of small enterprise efficiency
Parkitna, Agnieszka
The theoretical bases for the efficiency of small enterprises, which are the substrate for building the model. It presents measures to assess the efficiency of these enterprises. The factors shaping the efficiency of small enterprises are distinguished and described, and an attempt is made to determine their typology and aggregation in various systems. Business objectives are presented as the overriding basis for building the efficiency of a small organisation. The issue of the economic efficiency of small enterprises is presented. The dilemmas concerning their growth and development were discussed, treating growth as a measure of manufacturing efficiency and development as a measure of effectiveness. The issue of efficiency management in a small enterprise is presented from the perspective of results, growth and development. This book contains detailed model solutions related to the adopted methodology of research on the efficiency of small enterprises. The book also contains the final conclusions of the study. As a whole, it is a statistical statement and model validation.

Does Corporate Diversification Retrench the Effects of Firm-Level Political Risk?
Hassan, M. Kabir,Karim, Md. Sydul,Mukherjee, Tarun K.
This study investigates the effects of firm-level political risk on corporate investments and operating efficiencies for industrially diversified and focused firms. Using firm-level political risk data from Hassan et al.(2019), we document that both political risk and diversification lead to reduced corporate investments and profitability. However, diversified firms are better able than focused firms in mitigating idiosyncratic political risk. We provide extensive evidence that diversified firms accomplish this feat via efficient use of the internal capital market that allows segments to alleviate the adverse effects of political uncertainty. Diversification increases investment relative to focused firms during the period of high economic uncertainties. When exposed to political risk, diversified firms do not spend more on lobbying and political donations than the focused firms in the subsequent period, implying that diversified firms do not manage political risk politically. Our main findings are robust to a battery of endogeneity tests and sensitivity measures.

ESG Disclosure and the Information Content of Stock Prices
Pereira da Silva, Paulo
This study examines whether ESG (environmental, social and governance) disclosure influences the capacity of stock prices to impound information about a firm’s future earnings realizations. Our main research hypothesis postulates that further information disclosure about ESG issues should weigh on the association between returns and future earnings if disclosure is accurate, complete and credible. An extension of the FERC model is employed in that greater FERC is expected for high-rated ESG disclosure firms. Our study covers six highly-developed countries (Australia, Canada, France, Germany, US and UK) and the period spanning 2007-2018. Overall, our findings cast doubt on the usefulness of ESG disclosure, for it hardly affects the information content of prices about future earnings. Indeed, we do not find a steady positive association between ESG disclosure and FERC. These results are robust to the inclusion of ESG performance in the analysis and controlling for self-selection in ESG disclosure. The findings also apply to the sub-components of ESG disclosure considered individually, namely environmental, social and governance disclosure and to the six countries included in the sample evaluated separately.

Financial System Requirements for Successful Pension Reform
Blake, David P.
This paper examines the financial system prerequisites needed for the successful delivery of funded private pensions. In particular, it examines the financial instruments and investment strategies required during both the accumulation and decumulation stages. It does so within the context of a specific developed economy with a mature pension system, namely the United Kingdom. The lessons learned can help to inform the debate in developing countries that are in the process of undertaking pension reform.

Forecasting Crash in Financial Market Using LPPL Model
LPPL is an application of power-law which states the pace at which bubble will form. Financial markets often witness powerful traces of Power Law. Each financial crash globally can be linked with the Power Law connection. Log-Periodic Power Law (LPPL) is a framework model to identify the speculative bubble or asset bubble in the financial market and forecast its most probable end. By fitting Log-Periodic Power Law (LPPL) equation to financial time series, it is possible to predict the event of a crash. The probable collapsing time of the asset bubble which is the critical time forecast the catastrophe of market crash. Thus, the LPPL framework model is used to predict the collapse of the speculative bubble which could lead to a crash in financial market.

Forecasting Multinomial Stock Returns Using Machine Learning Methods
Nevasalmi, Lauri
In this paper, the daily returns of the S&P 500 stock market index are predicted using a variety of different machine learning methods. We propose a new multinomial classification approach to forecasting stock returns. The multinomial approach can isolate the noisy fluctuation around zero return and allows us to focus on predicting the more informative large absolute returns. Our in-sample and out-of-sample forecasting results indicate significant return predictability from a statistical point of view. Moreover, all the machine learning methods considered outperform the benchmark buy-and-hold strategy in a real-life trading simulation. The gradient boosting machine is the top-performer in terms of both the statistical and economic evaluation criteria.

Fraud and Abuse in the PPP? Evidence from Investment Advisory Firms
Beggs, William,Harvison, Thuong
This study investigates instances of potential fraud and abuse in the Paycheck Protection Program (PPP or the Program) by analyzing 1,104 large PPP loans made to investment advisory firms registered with the U.S. Securities and Exchange Commission (SEC). We first estimate a model for PPP loan allocations based on economic need using operational data disclosed on each firm’s Form ADV regulatory filings. We next examine loans in which the amount the firm received was far from the model prediction (abnormal loans). Abnormal loan allocations appear to be asymmetric in nature, i.e., smaller firms were more likely to procure outsized loan amounts rather than large firms gaining undue access to the PPP at the expense of smaller firms. We next test several explanations for abnormal loan allocations. Our results suggest investment advisors did not use affiliated banking relationships to gain greater access to the Program, but may have used political connections. The results are also consistent with misbehavior or potential fraud. We find that abnormal loan amounts are significantly related to overstated job loss impact by advisors on loan applications. We also show that several known predictors of investment manager fraud (i.e., Dimmock and Gerken 2012) are associated with the receipt of abnormal loan amounts. Of particular note, we find that firms receiving abnormal loan allocations are more likely to have a history of past legal and/or regulatory infractions.

How Do Risk and Mispricing Contribute to Anomalies?
Li, Yuan
This study quantifies the contributions of risk and mispricing to a comprehensive set of anomalies identified in the literature. Overall, risk and mispricing contribute equally to these anomalies; however, there is a wide variation across different categories. Mispricing is solely responsible for momentum anomalies, whereas risk is solely responsible for anomalies associated with accounting-to-market ratios. Profitability and investment anomalies are due to both risk and mispricing, while other anomalies based on information from financial statements and the stock market are mainly due to mispricing. The study highlights the importance of considering risk and mispricing together in asset-pricing research, especially when the two causes are likely to have opposite effects, as in the case of anomalies relating to financial distress and constraints.

Iluzii financiare, Partea întâi (Financial Illusions, Part 1)
Dumitriu, Ramona,Stefanescu, Razvan
Romanian Abstract: În fundamentarea deciziilor financiare pot surveni percepţii eronate asupra unor aspecte esenţiale precum riscul sau profitabilitatea. Iluziile asociate deciziilor asupra îndatorării au unele particularităţi, cauzate în special de cunoştinţele financiare precare ale unor debitori. Uneori, aceştia estimează incorect costul creditului şi îşi supraestimează capacitatea de plată. În plus, ei pot ignora riscul valutar sau riscul ratei dobânzii asociate unor împrumuturi. English Abstract: In the financial decision-making there could occur wrong perceptions over some essential aspects such as risk or profitability. The illusions associated to the indebtedness decisions have some particularities, caused especially by the insufficient financial knowledge of some debtors. Sometimes, they wrongly estimate the credit cost or overestimate their ability to repay the loans. Moreover, they could ignore the currency risk or the interest rate risk associated to some loans.

Incorporating Financial Development Indicators Into Early Warning Systems
Ponomarenko, Alexey,Tatarintsev, Stas
We set up an early warning system for financial crises based on the Random Forrest approach. We use a novel set of predictors that comprises financial development indicators (e.g. levels of credit to GDP ratio) in addition to conventional imbalances measures (e.g. credit gaps). The evaluation of the model is conducted using a three-step procedure (i.e. training, validation and testing sub-samples). The results indicate that combining financial imbalances and financial development indicators helps to improve the out-of-sample accuracy of the early warning system.

Investment Advisers and Broker-Dealers
Hung, Angela,Clancy, Noreen,Dominitz, Jeff,Talley, Eric L.,Berrebi, Claude,Suvankulov, Farrukh
The financial service industry is becoming increasingly complex and more difficult to regulate. This brief describes broker-dealers and investment advisersâ€"their numbers, size, assets, clients, services, and affiliationsâ€"and examines whether individual investors understand the differences between them. It reports that the industry is increasingly heterogeneous, with thousands of firms taking many different forms and bundling diverse services. As a result, the average investor is confused about financial professionals’ titles, duties, and fees.

Investor and Industry Perspectives on Investment Advisers and Broker-Dealers
Hung, Angela,Clancy, Noreen,Dominitz, Jeff,Talley, Eric L.,Berrebi, Claude,Suvankulov, Farrukh
This PDF document was made available as a public service of the RAND Corporation. In recent years, the evolution of the financial service industry has blurred traditional distinctions between broker-dealers and investment advisers and made it difficult to design appropriate regulatory schemes for their professional services. To better understand the industry’s dynamics and its effects on individual investors, the U.S. Securities and Exchange Commission (SEC) commissioned RAND to conduct a study of broker-dealers and investment advisers from two perspectives: first, examine investment advisers’ and broker-dealers’ practices in marketing and providing financial products and services to individual investors; and second, evaluate investors’ understanding of the differences between investment advisers’ and brokerdealers’ financial products and services, duties, and obligations.

Liquidity in the Cross Section of OTC Assets
Uslu, Semih,Velioglu, Guner
We construct a dynamic model of a multi-asset over-the-counter (OTC) market that operates via search and bargaining and empirically test its implications using data from the US corporate bond market. The key novelty in our model is that investors can hold and manage portfolios of OTC-traded assets. We characterize the stationary equilibrium in closed form which includes investors' valuations, terms of trade, and the characteristic function of the distribution of investors' asset positions. Tractability of the model allows us to derive natural proxies for important measures of market liquidity such as trade volume, price dispersion, and price impact. Among other within-market and cross-market comparative statics, we find that the alleviation of search frictions in one market may lead to opposite observations regarding liquidity in other markets depending on which liquidity measure is used. For example, a reduction of search frictions in one market decreases trade volume in other markets implying lower liquidity. At the same time, it decreases price dispersion and price impact implying higher liquidity. We test empirically these key liquidity equations, which uncover the determinants of endogenous liquidity differentials across OTC assets. Overall, our empirical results indicate significant support for the search-and-bargaining framework. Finally, we argue that, among the liquidity measures we analyze, price impact can serve as a good measure of welfare loss caused by OTC frictions, while other measures overstate or understate this deadweight loss.

Longevity Hedging 101: A Framework for Longevity Basis Risk Analysis and Hedge Effectiveness
Coughlan, Guy,Khalaf-Allah, Marwa,Ye, Yijing,Kumar, Sumit,Cairns, Andrew J. G.,Blake, David P.,Dowd, Kevin
Basis risk is an important consideration when hedging longevity risk with instruments based on longevity indices, since the longevity experience of the hedged exposure may differ from that of the index. As a result, any decision to execute an index-based hedge requires a framework for (1) developing an informed understanding of the basis risk, (2) appropriately calibrating the hedging instrument, and (3) evaluating hedge effectiveness. We describe such a framework and apply it to a U.K. case study, which compares the population of assured lives from the Continuous Mortality Investigation with the England and Wales national population. The framework is founded on an analysis of historical experience data, together with an appreciation of the contextual relationship between the two related populations in social, economic, and demographic terms. Despite the different demographic profiles, the case study provides evidence of stable long-term relationships between the mortality experiences of the two populations. This suggests the important result that high levels of hedge effectiveness should be achievable with appropriately calibrated, static, index-based longevity hedges. Indeed, this is borne out in detailed calculations of hedge effectiveness for a hypothetical pension portfolio where the basis risk is based on the case study. A robustness check involving populations from the United States yields similar results.

Machine Learning in a Dynamic Limit Order Market
Philip, Richard
Microstructure theory has made significant strides in modeling the way traders manage their limit orders. However, to make the models tractable, the literature has been forced to make restrictive assumptions, which cannot capture the full complexity of a dynamic limit order market. We use a novel machine learning approach to tackle the problem of limit order management. Applying our model to data, we empirically test several theoretical predictions and offer new insights. For example, we find that the most important variable for a limit order trader to consider is the price level of their order, followed by the queue sizes of the order book, then volatility and finally queue position. This paper takes an important step towards describing pervasive features and dynamics that exist in financial markets.

Macroeconomic Factors Explaining Stock Volatility: Multi-Country Empirical Evidence from the Auto Industry
Vychytilova, Jana,Pavelkova, Drahomira,Ha, Pham Thu,Urbanek, Tomas
This paper aims to explore which macroeconomic factors affect the volatility of the automakers stock prices by employing a multifactor model. The study uses quarterly panel data of 39 automakers quoted on the stock exchanges in the eleven countries. It studies the effects of 19 macroeconomic variables from January 2000 to December 2017, and proposes the mixed-effect model constructed based on employing genetic algorithm and AIC criterion, and compares its explanatory power with the existing multifactor model (El Khoury, 2015). This paper suggests that the proposed model can shed more light on explaining the variability of stock prices of the quoted automakers. The findings show there are positive linkages between automaker´s stock return volatility and explanatory variables such as stock market development, GDP and unemployment. Conversely, an inverse linkage between the dependent variable and money supply and IPI was found. The study demonstrates that selected macroeconomic factors can also be used as predictors.

Measuring the Systemic Importance of Banks
Moratis, George,Sakellaris, Plutarchos
We provide a new methodology to measure the systemic importance of banks based on the intensity of spillovers of daily CDS movements. We apply this to all banks that issue publicly traded CDS contracts among the world’s biggest 150 and identify which of these may trigger instability in the global financial system. Our new empirical tool uses Bayesian VAR to address the dimensionality problem in large networks. Our novel methodology provides measures that are relatively stable across time, contain persistent information, have strong explanatory power for standard variables of systemic risk, and provided early warning signals in the case study of Deutsche Bank in mid-2016. Using our measure, we demonstrate which bank- and country-specific characteristics are related to bank systemic importance. We find higher systemic importance for banks that are relatively larger, less profitable, have GSIB status, and are headquartered in economies with fiscally strong sovereigns. We also show that there is a negative relationship between concentration in the domestic banking sector and the systemic importance of a bank.

Mergers and Labor Market Outcomes in the US Airline Industry
Ge, Qi,Kim, Donggeun,Kim, Myongjin
This paper examines US airline mergers between 1993 and 2018 and studies the labor market impact of mergers in the context of the airline industry. Our difference-in-differences estimates indicate a significant reduction in the acquiring airlines’ long term wage and fringe benefits following the mergers. The effect is particularly salient among mergers involving major airlines and low cost carriers. The results also suggest a negative short term employment impact of mergers that varies with occupation types. Our findings are consistent with the impact of merger-induced monopsony power discussed in recent studies and offer important policy implications toward the ongoing discussions regarding how to account for employer monopsony power during mergers and acquisitions.

Mortgage Relief: Who CARES?
Letdin, Mariya,McCollum, Meagan
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides mortgage forbearance relief to qualifying borrowers, whose loans are placed in a government backed mortgage pool. We analyze the effects of being ineligible for the program by examining the aftermath of the same requirement in the Home Affordable Refinance Program (HARP). Using a comparable sample of borrowers with Freddie Mac loans and privately securitized loans (Bbx) we compare loan performance and quantify potential wealth, consumption, and credit consequences for prime borrowers whose loans were placed in private securitization pools and who were thus ineligible for a government relief program. We show that restricting modification benefits to include only borrowers in federally backed mortgage pools results in significant loss in wealth (through reduced prepayment and increased default) for those otherwise similar borrowers whose loans are placed outside of GSE pools. The greatest detriment is documented in CBSAs with the largest housing price declines.

Mutual Fund Performance and Flows During the COVID-19 Crisis
Pastor, Lubos,Vorsatz, Blair
We present a comprehensive analysis of the performance and flows of U.S. actively-managed equity mutual funds during the COVID-19 crisis of 2020. We find that most active funds underperform passive benchmarks during the crisis, contradicting a popular hypothesis. Funds with high sustainability ratings perform well, as do funds with high star ratings. Fund outflows largely extend pre-crisis trends. Investors favor funds that apply exclusion criteria and funds with high sustainability ratings, especially environmental ones. Our finding that investors remain focused on sustainability during this major crisis suggests they view sustainability as a necessity rather than a luxury good.

Mutual Funds and Risk Disclosure: Information Content of Fund Prospectuses
Krakow, Nils Jonathan,Schäfer, Timo
Mutual funds are mandated by the Securities and Exchange Commission (SEC) to disclose information on their investment objectives and risks. In this paper, we study the informational value of U.S. mutual funds’ qualitative disclosures by analyzing the content of funds’ prospectuses. First, we find that funds disclosed risks increase with their exposed risk. They inform, in particular, extensively about their idiosyncratic risks and less about their systematic risks. Second, using methods from textual analysis, we document that around one-third of the variation in the content of funds’ risk disclosures is fund-specific, while a substantial part of a fund’s risk disclosures is determined at the fund group level. Our findings suggest that the relative informativeness in funds’ prospectuses has been, on average, decreasing over time. Third, we show that regular content-based updates of the disclosed risks provide relevant information in predicting future fund performance. Investors, however, do not react to this new information but rather to the content’s informativeness. Finally, using an event study framework relying on matching techniques, we document that investors also do not respond to the provision of additional simplified disclosure.

On the Characteristics of Dynamic Correlations between Asset Pairs
Jacobs, Michael,Karagozoglu, Ahmet K
Recent research provides considerable evidence that correlations between assets change significantly over time and diversification benefits of correlations may vary substantially based on the time-varying measure of correlation used for different asset types. Our study evaluates and compares alternative time-series correlation modeling techniques according to both statistical and economic metrics, focusing specifically on individual asset pairs. We identify the moving correlation structure that best tracks the dynamic conditional correlation estimates using a large set of different financial time series encompassing 467 asset pairs in nine different asset classes. Results from our direct, statistical loss function based, and indirect, portfolio mean-variance based, forecast evaluations provide optimal window-length ranges for 36 asset-class pairs which should help in portfolio construction as well as risk management. Furthermore for robustness tests, we implement the model confidence set approach which, without a benchmark specification, produces a set of models constructed to contain the best models with a given level of confidence among competing forecast evaluations.

Parameterizing ‘Return Effort’ and ‘Return Effort Cost’ Within Venture Capital Markets
Obrimah, Oghenovo A.
Typically, studies of efforts of economic agents do not distinguish between efforts that directly generate returns (`return effort') and efforts that facilitate demonstration of return effort, that is, `return effort cost'. This study provides formal theoretical evidence that a distinguishing of return effort from return effort cost produces rational explanations for two seemingly contradictory effects, namely, that venture capitalists (VCs) simultaneously are characterized by each of `too much effort' or `too little effort'. In stated respect, the formal theoretical model demonstrates that whereas VCs' portfolio returns are strictly convex in return effort, simultaneously, they are, in relation to return effort cost, strictly concave. In aggregate then, portfolio returns are, in relation to effort, characterized by strict concavity. In presence of rationality of ubiquity of a `too much money chasing deals' phenomenon, VCs overinvest, yet simultaneously, arrive at portfolio returns that are lower than first-best; hence arrival at inference of `too much effort'. This is a unilateral `level effect' that induces a second-best performance-effort curve, which resides just below the unattainable first-best curve. Cross-sectionally, with VCs located on the second-best curve, return effort is shown to be confluent with `richness' of VCs' investment opportunity sets. The model explicitly rules out increase of effort with riskiness of projects, establishes effort increases with richness of investment opportunity sets. Under the erroneous assumption that optimal effort is conditioned on project-specific risk, as opposed to the continuum of investment opportunity set risk, VCs appear to exert `too little effort'. Given, however, that `too little effort' is ubiquitous, every optimal realization for effort is characterized by `too little effort'. Study findings provide evidence for importance of adoption of equilibrium approaches to modeling of efforts of economic agents within different markets.

Positive and Negative Impact of FDI (Foreign Direct Investment) on a Country’s Economic Development
Islam, Md Saiful
Over the past three decades, the world has witnessed massive growth in Financial markets both in terms of their scale and scope. The global value of financial assets including equities, government and private debt, and bank deposits increased from mere US$ 12 trillion during 1980 to US$ 64 trillion in 1995, and further, it has grown to US$ 140 trillion by 2005. The global financial assets have grown more than ten-fold within a quarter-century. The growth of financial assets has far outstripped the global GDP growth which has increased from US$ 10.1 trillion to US$ 44.5 over this period. The increase in cross-border financial activity has been increased even more unprecedentedly for the last few decades. Worldwide cross-border capital flows â€"which include foreign purchases of equity and debt securities, cross-border lending, and foreign direct investment (FDI)-have grown at an average annual rate of 10.7% since 1990 and reached a level exceeding US$ 6 trillion in 2005 (Farrell cited in anon 2011). As Escaleras (2011) argued that in order to appreciate the dynamism of FDI it is important to recognize that total net foreign direct investment inflows rose from about $10 billion in 1975 to an astonishing $532 billion in 2004. Natural disasters around the globe also increased dramatically during the past half-century. Exhibit-3 depicts the growth in major, destructive natural disasters such as earthquakes, floods, volcanoes, landslides, and windstorms for the period 1935-2004 (Escaleras 2011). In this paper, we will explore the mechanism of Foreign Direct Investment, how it is contributing towards the development of a country’s economy, and moreover improving the standard of living of the particular countries. We will also examine why FDI is important for the developing world for eliminating poverty. Also, we will critically analyze the negative side of FDI and its negative influences on a country’s economy and cultural aspects. Finally, we will examine and correlate the increase in natural disasters and the FDI flow of the respective countries.

Protecting Financial Stability: Lessons from the Coronavirus Pandemic
Jackson, Howell E.,Schwarcz, Steven L.
The coronavirus pandemic has produced a public health debacle of the first-order. But, the virus has also propagated the kind of exogenous shock that can precipitateâ€"and to a certain degree has precipitatedâ€"a systemic event for our financial system. This still unfolding systemic shock comes a little more than a decade after the last financial crisis. In the intervening years, much as been written about the global financial crisis of 2008 and its systemic dimensions. Considerable scholarly attention has focused on first devising and then critiquing the macroprudential reforms that ensued, both in the Dodd-Frank Act and the many regulations and policy guidelines that implemented its provisions. In this essay, we consider the coronavirus pandemic and its implications for the financial system through the lens of the frameworks we had developed for the analysis of systemic financial risks in the aftermath of the last financial crisis. While today’s pandemic differs in many critical respects from the events of 2008, systemic events in the financial sector have a common structure relevant to both crises. Reflecting back on responses to the last financial crisis also affords us an opportunity both to understand how financial regulators are currently responding to the coronavirus pandemic and also to speculate how the pandemic might lead to further reforms of financial regulation and other areas of public policy in the years ahead.

Relative Performance of Bid-Ask Spread Estimators: Futures Markets Evidence
Anand, Amber,Karagozoglu, Ahmet K
The issue of transaction costs is the mainstay of the equity market microstructure. Research in the microstructure of futures markets has lagged behind. A primary reason is that futures exchanges in the U.S. do not record bidâ€"ask quotes, requiring these costs to be imputed from transaction price data. A reliable estimator of bidâ€"ask spreads would significantly enhance microstructure research in futures markets. Unique intraday data from the Sydney Futures Exchange (SFE) that include both transaction prices and bidâ€"ask spreads allow us to compare bidâ€"ask spread estimation techniques proposed in the literature against the benchmark of actual spreads in a futures market, and thus identify the best-performing estimator. To maximize relevance, we impose all the constraints that apply in U.S. futures data to perform our estimations. We find that the four bidâ€"ask spread estimators considered significantly underestimate the actual spreads. However, simple moments-based estimators perform better in predicting spreads.

Statement on Evidence-Based Regulation and the Limits of Pilot Studies
Harris, Lawrence ,Kahn, Charles M.,McDonald, Robert L.,Spatt, Chester S.
Financial regulators, when pursuing the goals of evidence-based decision making, should recognize both the benefits and limitations of the use of regulatory pilot studies. While pilot studies have potential to generate new knowledge about financial markets, regulators often can effectively evaluate the potential impact of a proposed regulation by analyzing archival data obtained from other markets or from similar situations in the past. They also can apply theory based on well-accepted economic principles.We discuss why regulators and industry participants sometimes call for pilot studies that have little scientific value. We discuss some limitations of pilot studies that regulators should consider before proposing them. Finally, we conclude with a set of recommendations concerning the use of pilot studies in financial regulation.

Support for Small Businesses Amid COVID-19
Goodhart, Charles,Tsomocos, Dimitrios P.,Wang, Xuan
A sizeable proportion of enterprises, especially SMEs, in receipt of financial assistance from the government, will fail to repay. In this paper we asked whether, and to what extent, it may be beneficial to apply a screening mechanism to deter those mostly likely to fail to repay from seeking such financial assistance in the first place. The answer largely turns on the relative weights attached for the objectives of stabilisation as compared with allocative efficiency. For this purpose, we develop a two-sector infinite horizon model featuring oligopolistic small businesses and a screening contract in the presence of a pandemic shock with asymmetric information. The adversely affected sector with private information can apply for government loans to reopen businesses once the pandemic has passed. First, we show that a pro-allocation government sets a harsh default sanction to deter entrepreneurs with bad projects from reentering and improves aggregate productivity in the long run, but the economy suffers persistent unemployment in the near term. However, a pro-stabilisation government sets a lenient default sanction or provides full guarantees to reach full employment in the short term, but the economy will be shifted to a lower equilibrium in the long run. The optimal default sanction balances the trade-off between allocation and stabilisation. Then, we derive an analytic measure of "Stabilisation Proclivity" and characterise the parameter space and the macro-financial frictions that render the government either more pro-allocation or more pro-stabilisation. Finally, we solve for the optimal default sanction numerically and conducts comparative statics for various policy analyses.

The Agency of Greenwashing
Ghitti, Marco,Gianfrate, Gianfranco,Palma, Lorenza
As climate change increasingly challenges business models, the disclosure of firm environmental performance casts growing attention by corporate stakeholders. This creates wider opportunities and incentives for greenwash behaviours. We propose a novel measure of greenwashing and investigate its determinants and consequences for US firms. We find that companies with larger boards are less prone to greenwashing. Board independence is positively associated with greenwash behaviours, while the percentage of women in the board has no detectable impact. Finally, we show that greenwashing reduces firm value.

The Analysis of the Russian Money Market In the Wake of the Epidemiological Crisis
Bozhechkova, Alexandra,Trunin, Pavel
In March â€" the first decade of May 2020, amidst the acute phase of the epidemiological crisis the banking sector’s need in liquid funds increased considerably. It was justified by growth in the money supply volume, credit institutions’ correspondent account balances, as well as commercial banks’ mandatory reserves. However, as the economic situation commenced to stabilize from the second decade of May and the uncertainties were clearing up, the liquidity surplus began to grow again. To stabilize further the market, the Central Bank of Russia supplemented the list of instruments of ruble liquidity provision to credit institutions with one-month and one-year REPO auctions, however, amid the recovery of the level of liquidity they are not much in demand yet.

The Good, the Bad and the Healthy: The Medical Underwriting Revolution in the Defined Benefit De-Risking Market
Hunt, Andrew,Blake, David P.
This report attempts to assess the advantages and disadvantages of medical underwriting and its potential impact on the bulk annuity market generally.We start by looking at the theoretical justifications for using underwriting, in terms of whether more data leads to lower prices on average, both in the wider context of insurance and then as applied to medical underwriting in bulk annuity policies in particular.The rest of the report then discusses the evolution of medically-underwritten bulk annuities to date and the competitive pressures currently operating in the marketplace; the factors needing to be considered when deciding whether to purchase a medically-underwritten bulk annuity; the processes involved in a medically-underwritten transaction, in terms of collecting the data and deciding which insurer to work with; and the potential evolution of the bulk annuity market generally in the foreseeable future, and the impact of medical underwriting within that.

The Simple Economics of Funded and Unfunded Pension Systems
Blake, David P.,Orszag, J. Michael
This article reviews the economic theories of funded and unfunded pension systems and examines the advantages and disadvantages of each type of system; these theories help to explain the current interest in funded systems as well as the difficulties associated with the transition towards them.

Thinking Ahead of the Next Big Crash: Clues From Athens in Classical Times
Bitros, Georgios (George) C.
Credible analyses and evidence submitted by experts from universities, international organizations and independent think tanks show that the trends which led to the 2008 worldwide financial crisis remain intact. As a result, central for responsible leaderships should be the concern how to forestall the next big one which might prove uncontrollable. Given the world dominance of the U.S. dollar, in a 2015 paper I discussed two paths of possible reforms: One bold but gradual, which would entail altering the present institutional setup of the U.S. Federal Open Market Committee (“the Fed”), provided that it maintains control over the Federal Funds Rate (FFR); and, if not, a radical one, which would entail replacing the Fed with a monetary regime based on free banking. In this paper I go a step further in the latter direction by drawing on the model of free banking that emerged in Athens in classical times and enabled the Athenian “empire” to turn the Attic drachma into the dollar of today, throughout the eastern Mediterranean and beyond, without causing major financial crises for over two centuries. More specifically, I argue that, even if the said model had not proved its potential as a highly successful historical precedent, as banker of the world, the U.S. ought to consider it as a benchmark for reference and adaptation, before an unexpected international financial crisis and/or the revolutionary technological developments in the front of gold-like digital currencies, precipitate a monetary regime change.

Trajectory Monitoring in Portfolio Management and Issuer Intentionality Scoring
Le Guenedal, Théo,Girault, Julien,Jouanneau, Mathieu,Lepetit, Frédéric,Sekine, Takaya
Two-degrees alignment has become a major issue for climate-aware portfolio management. There are sophisticated initiatives aiming to predict corporate emission intensities from 2030 up to 2100. In this paper, we focus on the significance of the ‘current policy scenario’, where corporates would simply stay on their current trajectories for their emission intensities. UNEP has illustrated how far the global current policy scenario is from a global two-degrees scenario. We want to understand this ‘current policy scenario’, broken down asset-by-asset within the significant emission sectors, and from a global index point of view. We will address choices of emission intensity metrics and of weighting schemes. Enabling the low-carbon transition while maintaining a long-term focus in investment decision-making is a relevant approach. In this paper, we intend to illustrate the virtue of the long-term choice with a simple three-year observation gap in the power generation sector’s intensities. To complement our ‘current policy’, which focuses on the emissions track-record of firms, we illustrate a mosaic theory approach to quantifying the intentionality of a firm to green itself. Anticipating positive impacts requires that investors have identified their key questions for firms' intentions.

What Is So Special About KOSPI 200 Index Futures Contract? An Analysis of Trading Volume and Liquidity
Ciner, Cetin,Karagozoglu, Ahmet K,Kim, Wi Saeng
The Korean Stock Exchange's (KSE) KOSPI 200 Index futures and options have been the fastest growing derivatives contracts in the world in recent years. This paper presents an analysis of the factors contributing to the success, as measured by trading volume, of the KOSPI 200 Index futures contract. Both contract and market specific factors are investigated to distinguish between alternative explanations. Although contract specifications are not unusual, an analysis of variables connected to market activity indicate lack of hedging-motivated trades on Korean index futures market. Formal tests conducted within the context of a GMM-based structural model, as well as a dynamic model of price changes and trading volume, further support the contention that speculation seems to be the primary motive to trade. The findings offer insights into the surge in trading volume, which could be useful for the design and development of new derivatives contracts, especially in emerging markets.