Research articles for the 2020-07-16

A Capabilities Approach to Population Health and Public Policy-Making
Hall, Peter,Taylor, Rosemary C.R.,Barnes, Lucy
The objective of this study is to outline a capabilities approach to the social determinants of population health and to compare its explanatory power and implications for public policy-making with psychosocial approaches.

A Risk-based Perspective on the Presidential Puzzle
Mella, Javier
This paper investigates the presidential puzzle (Santa-Clara and Valkanov, 2003) -- the fact that the equity premium is 10% higher in years with Democratic governments than in years with Republican governments. I find the existence of a negative price reaction after Democratic victories in presidential elections. I also establish that the difference in the equity premium is significant only in the first year of the presidential cycle and that there is a negative equity premium in the fourth year of the cycle when the incumbent Republican loses the election. Moreover, the market reaction to changes in the likelihood of a candidate winning the election is significantly different for Republican and Democratic candidates. The evidence is consistent with a risk explanation and policy uncertainty.

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

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

Achieving Long-Term Value Through Stakeholder Theory: Proposed Amendments to the Companies Act 1993
Heath, Ashleigh
This paper begins by proposing that the objective of the company should be to maximise its long-term value. The paper then discusses Shareholder Value Theory, which requires directors to prioritise the short-term interests of shareholders over the goal of maximising the company’s long-term value. The paper considers how Shareholder Value Theory is supported in New Zealand by the Companies Act 1993 and the structure of the company itself. The paper then discusses the alternate theory known as Stakeholder Theory, which requires directors to consider the interests of all affected stakeholders. It postulates that Stakeholder Theory is consistent with long-term value maximisation and should be implemented into New Zealand’s legislation. Finally, the paper recommends two amendments to the Companies Act 1993 which would encourage directors to act in accordance with Stakeholder Theory. Firstly, broadening the definition of ‘entitled persons’ who may bring a derivative action against directors who breach their duty to further the interests of the company under s 131. Secondly, amending s 131 of the Act to include a list of stakeholders’ interests and guidance on how and when directors ought to consider them. These amendments, by encouraging directors to implement Stakeholder Theory, will lead to long-term value maximisation.

An Algorithm for Responsible Prosperity: A New Value Paradigm
Papazian, Armen
We need a value revolution, a radical rethink of our financial value framework.It is only after reinventing our value paradigm that we will be able to inspire and trigger the choices and actions necessary to ensure enhanced equality, welfare, and sustainability within countries and across the planet. Only then can we truly engage and pursue the qualitative and quantitative changes needed to cope with the unprecedented challenges we face today.We need a new core principle of finance that establishes our responsibility in space, similar to how Greenwich establishes 0° longitude. We also need to adjust our equations of value, to ensure we translate our new framework into a new set of tools that helps public and private entities design and execute their impact more responsibly. Indeed, the principle of space value of money and the associated metrics can help translate our vision of prosperity and justice into a daily tool for responsible value design, measurement, and creation, an algorithm for responsible prosperity.By requiring that we take responsibility for the space value impact of each pound invested in space, the space value tool allows us to design our impact into the future. When we collectively begin to design our impact in line with responsible value creation, we will be able to adjust our course and remedy for decades of financial education focused entirely on risk, time, and the interests of the mortal risk averse investor.The transformation proposed here does not just ensure the proper and effective deployment of the necessary investments for a green recovery, when applied to central banking and money creation, it also reveals the blueprints of the architecture that could be used to finance the global investment drive that is necessary to avoid a new series of sovereign debt crises following unprecedented levels of government borrowing.

Artificial Increasing Returns to Scale and the Problem of Sampling from Lognormals
Andres Gomez-Lievano,Vladislav Vysotsky,Jose Lobo

We show how increasing returns to scale in urban scaling can artificially emerge, systematically and predictably, without any sorting or positive externalities. We employ a model where individual productivities are independent and identically distributed lognormal random variables across all cities. We use extreme value theory to demonstrate analytically the paradoxical emergence of increasing returns to scale when the variance of log-productivity is larger than twice the log-size of the population size of the smallest city in a cross-sectional regression. Our contributions are to derive an analytical prediction for the artificial scaling exponent arising from this mechanism and to develop a simple statistical test to try to tell whether a given estimate is real or an artifact. Our analytical results are validated analyzing simulations and real microdata of wages across municipalities in Colombia. We show how an artificial scaling exponent emerges in the Colombian data when the sizes of random samples of workers per municipality are $1\%$ or less of their total size.

Bank Competition and Corporate Environmental Performance
Chen, Shiyi,Chen, Tao,Lou, Pingyi,Song, Hong,Wu, Chenyu
In this study, we use a unique dataset that contains rich information about firms’ water pollutant emissions and exploit bank branching deregulation in China as an exogenous positive shock on bank competition to study the causal effects of bank competition on corporate environmental performance. We find that firms more exposed to the bank deregulation improve their environmental performance, measured by lower chemical oxygen demand (COD) emissions, after the shock compared with firms with lower exposure. We further demonstrate that treated firms’ production efficiency increases and the ratio of tangible assets to total assets decreases, which suggests that upgrading technology and collateral are the main channels by which bank competition reduce firms’ toxic emissions after the deregulation.

Central Counterparty Default Waterfalls and Systemic Loss
Paddrik, Mark E.,Zhang, Simpson
Central counterparty default waterfalls act as a last line of defense in over-the-counter markets by managing and allocating resources to cover defaults of clearing members and clients. However, central counterparties face competing objectives in setting up their default waterfalls. In this paper we evaluate the trade-offs between default waterfall resiliency and central clearing, using a unique and comprehensive dataset containing all U.S. cleared and bilateral credit default swap positions. We evaluate the resiliency of different waterfall designs, accounting for the interconnectedness of payments in the system, the presence of client clearing obligations for members, and the distribution of losses among market participants.

Change of drift in one-dimensional diffusions
Sascha Desmettre,Gunther Leobacher,L.C.G. Rogers

It is generally understood that a given one-dimensional diffusion may be transformed by Cameron-Martin-Girsanov measure change into another one-dimensional diffusion with the same volatility but a different drift. But to achieve this we have to know that the change-of-measure local martingale that we write down is a true martingale; we provide a complete characterization of when this happens. This is then used to discuss absence of arbitrage in a generalized Heston model including the case where the Feller condition for the volatility process is violated.

Choosing Investment Managers
Goyal, Amit,Wahal, Sunil,Yavuz, M. Deniz
We study how plan sponsors choose investment management firms from their opportunity set when delegating $1.6 trillion in assets between 2002 and 2017. Two factors play an influential role in choice: pre-hiring returns, and pre-existing personal connections between personnel at the plan (or consultant advising the plan), and the investment management firm. Post-hiring returns for chosen firms are significantly lower than those for unchosen firms. The post-hiring returns of firms with relationships are, at best, indistinguishable from those without relationships, and often significantly worse. While relationships are conducive to asset gathering by investment managers, they do not appear to generate commensurate benefits for plan sponsors via higher gross returns or lower fees.

Designing a Main Street Lending Facility
Vardoulakis, Alexandros
Banks add value by monitoring borrowers. High funding costs make banks reluctant to lend. A central bank can ease funding by purchasing loans, but cannot distinguish which loans require more or less monitoring, exposing it to adverse selection. A multi-tier loan pricing facility arises as the optimal institutional design setting both the purchase price and banks' risk retention for given loan characteristics. This design dominates uniform (flat) structure for loan purchases, provides the right incentives to banks and achieves maximum lending at lower rates to businesses. Both the multi-tier and flat structures deliver welfare gains compared to no intervention, but the relative gain between the two depends on three sufficient statistics: the share of loans requiring monitoring, the risk-retention ratio, and the liquidity premium.

Director Networks and Initial Public Offerings
Feng, Yi,Song, Keke,Tian, Yisong S.
We investigate how director networks impact IPO characteristics and find that firms with better-connected directors have higher IPO market valuation, more positive offer price revisions, higher first-day returns, more pre-IPO media coverage, and superior post-IPO stock performance. Director networks are beneficial to the share offering because corporate directors help facilitate information exchange with prospective investors, attract their attention to the IPO, and maintain and grow their interest after the IPO.

Do Intra-day Auctions Improve Market Liquidity?
Gan, Quan,Leung, Henry,Zhou, Zhou
The intra-day auction launched by the London Stock Exchange (LSE) on 21 March 2016 was designed as a mechanism to boost midday liquidity. During the auction time, Multilateral Trading Facilities (MTFs) as competitors of the LSE, continue their normal trading. We examine the midday liquidity changes on both the LSE and MTFs and analyze their implications on platform competition. The intra-day auction in general improves liquidity at midday on both the LSE and MTFs. The intra-day auction helps consolidate the primary status of the LSE by increasing its market share at midday. Liquidity on MTFs drops considerably during the auction and bounces back toward the normal level when the auction ends. Overall, the midday liquidity patterns indicate the LSE’s competitive advantages over MTFs in providing market liquidity after the launch of the intra-day auction.

Does Herding Behavior Exist in the Mongolian Stock Market?
Batmunkh , Munkh-Ulzii,Choijil, Enkhbayar ,Vieito, João Paulo,Méndez, Christian Espinosa,Wong, Wing-Keung
This investigation is among the first to examine the presence of herd behavior in the Mongolian stock market. Herding behavior was analyzed for the full sample data (1999 to 2019) including during bull and bear market periods, as well as high and low volatility states of markets. Additionally, the impact of four important events which occurred during these period were also tested: the establishment of the Finance Regulatory Committee of Mongolia (FRCM), the Global Financial Crises, Mongolia's inclusion in the FTSE Russell Watch list and economic boom in 2011. Using a cross-sectional absolute deviation (CSAD) model evidence of herding behavior was found in all the situations.

Duality Theory for Robust Utility Maximization
Daniel Bartl,Michael Kupper,Ariel Neufeld

In this paper we present a duality theory for the robust utility maximization problem in continuous time for utility functions defined on the positive real axis. Our results are inspired by -- and can be seen as the robust analogues of -- the seminal work of Kramkov & Schachermayer [21]. Namely, we show that if the set of attainable trading outcomes and the set of pricing measures satisfy a bipolar relation, then the utility maximization problem is in duality with a conjugate problem. We further discuss the existence of optimal trading strategies. In particular, our general results include the case of logarithmic and power utility, and they apply to drift and volatility uncertainty.

Effective Boards of Directors: A New Approach
Belikov, Igor
The goal of this study is essentially twofold. First, it seeks to improve the efficiency of management in Russian companies through a revitalisation of perspectives on the makeup and activity of boards of directors. Second, it seeks to develop a motivation among controlling shareholders to strengthen the actual role of such boards in managing companies. This combined approach is intended to be applicable to both public and private companies.The objective of this study is to search for ways to refocus on standard recommendations for international best practice regarding the work of boards of directors. These recommendations should consider best practices in terms of general company control and supervision, the in-depth study of key business processes, management innovations, technologies, and tools to promote new management approaches. A feature of this investigation will be the identification of ideas to ensure the best paths towards overcoming psychological barriers that impede the adoption of innovative and novel ideas by management.This article provides a comparative analysis of the classic Anglo-US model of corporate governance (which features the role of boards of directors as the body exercising control and supervision over the company’s activities and its management), with the Russian model. The Russian model is characterised by a structure which nominally replicates the practice of developed countries, whereby the real power rests with the controlling shareholders and management, with the boards playing a secondary role by approving the plans of the company activities and their results.Given this situation, the boards of directors of Russian companies should prove their capability to contribute to the creation of economic value. Examples of essential management areas in which boards of directors should implement the function of management development are: strategic planning, creating and improving competitiveness, building up and developing the company’s human capital, risk management, and internal control. This article suggests efficient practices and tools which can be used by a board of directors for management development.

Financial Markets Under SVAR Approach for Middle East Economies
Deniz, Pinar
The relationships between monetary/financial variables have highly drawn attention in the literature using different techniques so as to observe whether the underlying theoretical mechanisms are compatible with the facts. In this study the scope is to investigate the relationship between exchange rate, money supply, inflation and interest rates for several Middle East economies, namely as Turkey, Pakistan, Iran and Egypt, using monthly data set. Due to the severe criticisms to a-theoretical formation of standard VAR model, structural VAR (SVAR) analysis has evolved as it enables the researcher to impose theoretical restrictions. Some of empirical findings display different results if the countries reflect diverse economic structures.

Financial Openness and Stability in the West African Economic and Monetary Union: A Multiple Time Scale Analysis
Gourène, Grakolet,Mendy, Pierre
This paper examines the causal relationship between financial openness and financial stability in the West African Economic and Monetary Union (WAEMU) from 1993 to 2011. We use two indicators of financial openness: the de jure financial openness and the de facto financial openness. We propose a new dynamic approach to instability measurement based on wavelet filters that provide a measure of financial instability at different time scales. Then, we apply the Feasible Generalizable Least-Squares (FGLS) model to study the panel causality at each time scale. The results show a causal relationship between financial openness and financial stability. However, the nature of the causality depends on the business cycle, the nature of financial instability and the financial openness indicator. Therefore, a more appropriate monetary policy and effective financial inclusion, exchange rate and banking policies could address the negative effects of financial openness on financial stability.

How Deep are Financial Models?
Nowaczyk, Nikolai,Kienitz, Joerg,Acar, Sarp Kaya,Liang, Qian
Deep learning is a powerful tool, which is becoming increasingly popular in financial modeling. However, model validation requirements such as SR 11-7 pose a significant obstacle to the deployment of neural networks in a bank's production system. Their typically high number of (hyper-)parameters poses a particular challenge to model selection, benchmarking and documentation. We present a simple grid based method together with an open source implementation and show how this pragmatically satisfies model validation requirements. We illustrate the method by learning the option pricing formula in the Black-Scholes and the Heston model.

How Integrated Are Credit and Equity Markets? Evidence From Index Options
Collin-Dufresne, Pierre,Junge, Benjamin,Trolle, Anders B.
In recent years, a liquid market for options on a broad credit default swap index (CDX) has developed. We study the extent to which these options are priced consistently with options on a broad equity index (SPX). We consider a rich structural credit risk model in which firm assets follow a jump-diffusion process with idiosyncratic and systematic risk, and we derive analytical expressions for CDX and SPX options. Calibrating the model, we find that it captures many aspects of the joint dynamics of CDX and SPX options. However, it cannot reconcile the relative levels of option implied volatilities, suggesting that credit and equity markets are not fully integrated. A strategy of selling CDX options yields significantly higher average excess returns and Sharpe ratios than selling SPX options.

Income Volatility and Portfolio Choices
Chang, Yongsung ,Hong, JaeHwa,Karabarbounis, Marios,Wang, Yicheng
Based on administrative data from Statistics Norway, we find economically significant shifts in households' financial portfolios around structural breaks in income volatility. When the standard deviation of labor-income growth doubles, the share of risky assets decreases by 4 percentage points. We ask whether this estimated marginal effect is consistent with a standard model of portfolio choice with idiosyncratic volatility shocks. The standard model generates a much more aggressive portfolio response than we see in the data. We show that Bayesian learning about the underlying volatility regime can reconcile the gap between the model and the data.

Innovation, Short-termism, and the Cost of Strong Corporate Governance
Keum, Daniel
Do the performance pressures of the capital market exacerbate short-termism and stifle innovation? This longstanding question has doggedly eluded a conclusive answer due to conflicting empirical findings. We revisit two studies that have been central to rejecting short-termism: Atanassov (2013) and its replication by Karpoff and Wittry (2018). After revising some of the empirical choices by Atanassov (2013), we find the opposite result: antitakeover laws that insulate managers from the market for corporate control enhance innovation, driven by firms with significant ownership by short-term oriented investors. However, antitakeover laws do exacerbate the pursuit of value-destroying acquisitions. Our findings highlight corporate governance as a strategic variable that imposes a tradeoff in disciplining different agency conflicts and weak governance as a necessary evil to stimulate innovation.

Islamic Finance Eclipsing Islamic Economics: Causes and Consequences
Farooq, Mohammad Omar
Islamic economics represents an important mid-20th century dimension of the revivalist Islamic discourse. By the 1970s its focus fundamentally shifted with the emergence of Islamic finance becoming the dominant theme, eclipsing the narrative on Islamic economics and subverting the original objective of an Islamic economy.An examination of the factors causing the eclipse, as well as its consequences, is required to fully explain the emergence of Islamic finance in the absence of a synergistic financial framework and to rechart a course of duly embedding financial institutions.

Liquidation Value and Loan Pricing: Evidence From Repo Markets
Barbiero, Francesca,Schepens, Glenn,Sigaux, Jean-David
We show that the liquidation value of collateral depends on who is pledging. Using transaction-level data on all overnight repurchase agreements (repo) of 52 large European banks, we find that a loan collateralized by a sovereign bond carries a 3.0 bps rate premium if the borrower is of the same country as the collateral issuer. The main driver is the decrease in liquidation value which occurs when borrower default correlates with collateral value. Accordingly, we show that repo rates increase in the correlation between the borrower's and the collateral issuer's CDS premia, and are high when the borrower is also the collateral issuer. Our results imply that lenders monitor the correlation between borrower default risk and collateral value, and uncover a channel through which the sovereign-bank nexus impacts funding costs.

Liquidity Creation, Investment, and Growth
Beck, Thorsten,Döttling, Robin,Lambert, Thomas,Van Dijk, Mathijs A.
Liquidity creation (the transformation of liquid liabilities into illiquid assets) is a key function of banks. We show that liquidity creation is positively associated with economic growth at both country and industry levels. In particular, liquidity creation helps growth by boosting tangible, but not intangible investment. Our results suggest an important non-linearity; liquidity creation does not contribute to growth in countries with a higher share of industries relying on intangible assets. We rationalize these results using a model in which banks increase aggregate investment by reducing liquidity risk, but low asset tangibility hampers liquidity creation by exacerbating moral hazard problems. Together, these findings provide new insights into the functions of banks, but also highlight their more limited role in supporting innovative industries.

Mean Field Exponential Utility Game: A Probabilistic Approach
Guanxing Fu,Xizhi Su,Chao Zhou

We study an $N$-player and a mean field exponential utility game. Each player manages two stocks; one is driven by an individual shock and the other is driven by a common shock. Moreover, each player is concerned not only with her own terminal wealth but also with the relative performance of her competitors. We use the probabilistic approach to study these two games. We show the unique equilibrium of the $N$-player game and the mean field game can be characterized by a novel multi-dimensional FBSDE with quadratic growth and a novel mean-field FBSDEs, respectively. The well-posedness result and the convergence result are established.

Nagging Predictors
Richman, Ronald,Wuthrich, Mario V.
We define the nagging predictor, which, instead of using bootstrapping to produce a series of i.i.d. predictors, exploits the randomness of neural network calibrations to provide a more stable and accurate predictor than is available from a single neural network run. Convergence results for the family of Tweedie's compound Poisson models, which are usually used for general insurance pricing, are provided. In the context of a French motor third-party liability insurance example, the nagging predictor achieves stability at portfolio level after about 20 runs. At a policy level, we show that for some policies up to 400 neural network runs are required to achieve stability. Since working with 400 neural networks is impractical, we calibrate two meta models to the nagging predictor, one unweighted, and one using the coefficient of variation of the nagging predictor as a weight, finding that these latter meta networks can approximate the nagging predictor well, only with a small loss of accuracy.

Objective Myopia
Marquez, Marionito
This is Chapter 3 and 4 from the first edition of the book 'The One Best Way to manage a business according to science: What Science tells us about how to secure the creation of maximum shareholder value. It presents the observed failure of management, primarily in the allocation of capital, that is going on for more than a century. The root of the problem comes from the top due to myopic understanding of many executives on the primary objective of the shareholders.

On the Conjoint Nature of Value and Profitability
Wahal, Sunil,Repetto, Eduardo
Novy-Marx (2013, 2014) argues that profitability and value are philosophically and economically related: buying highly productive firms at average prices is similar to buying average productivity firms at low prices. We investigate the risk and return of portfolios that hold the entire market but tilt towards the joint distribution of stocks that rank highly on both value and profitability. Over 1940-2019, such “tilted market portfolios” generate substantially higher returns than the pure market portfolio. Even in periods where value has delivered weak returns (2000-2019), tilted market portfolios offer attractive risk-reward ratios. For investors with long horizons, bootstrapped simulations of up to 30-year holding periods indicate that the entire distribution shifts further to the right, generating better outcomes for investors. We conclude that benefits to long-only investors come from targeting value and profitability jointly, rather than running them side-by-side or sprinkling one with the other.

Optimal Investment in Equity and VIX Derivatives
Yan, Xiangzhen,Zhu, Yunfan,Cui, Zhenyu,Zhang, Shuguang
In this paper, we solve in closed-form for the optimal investment strategies in both equity derivatives and VIX derivatives in a stochastic volatility model with jumps. This is motivated by the recent developments of the VIX derivatives market, and the increasing adoption of VIX derivatives in portfolio management practices. VIX derivatives allow for direct exposure to the volatility risk as compared to equity derivatives. Based on the closed-form formula. we determine explicitly the portfolio improvement brought by the inclusion of the VIX derivative, and establish that it is positive theoretically, which is consistent with intuition. This justifies the demand for VIX derivatives in a portfolio management setting. Numerical examples illustrate the results.

Optimal Trading with Differing Trade Signals
Donnelly, Ryan Francis,Lorig, Matthew
We consider the problem of maximizing portfolio value when an agent has a subjective view on asset value which differs from the traded market price. The agent's trades will have a price impact which affect the price at which the asset is traded. In addition to the agent's trades affecting the market price, the agent may change his view on the asset's value if its difference from the market price persists. We also consider a situation of several agents interacting and trading simultaneously when they have a subjective view on the asset value. Two cases of the subjective views of agents are considered, one in which they all share the same information, and one in which they all have an individual signal correlated with price innovations. To study the large agent problem we take a mean-field game approach which remains tractable. After classifying the mean-field equilibrium we compute the cross-sectional distribution of agents' inventories and the dependence of price distribution on the amount of shared information among the agents.

Owe a Bank Millions, the Bank Has a Problem: Credit Concentration in Bad Times
Agarwal, Sumit,Correa, Ricardo,Morais, Bernardo,Roldán, Jessica,Ruiz Ortega, Claudia
How does a bank react when a substantial share of its borrowers suffer a large negative shock? To answer this question we exploit the 2014 collapse of energy prices using the universe of Mexican commercial bank loans. We show that, after the drop in energy prices, banks exposed to the energy sector increased their exposure to these borrowers even more, relaxing credit margins to their larger debtors in the sector. An increase of one standard deviation in a bank's ex-ante exposure to the energy sector increased the loan volume to borrowers in the sector by 18 percent and reduced interest rates by 6 percent, even though borrower's credit default swap spreads were widening. Highly exposed banks amplified this sector-specific shock to the rest of the economy by contracting lending to other sectors, with important real effects, as the borrowers could not switch credit suppliers. Finally, the energy price shock had a large negative impact on macro outcomes, especially in the capital-intensive secondary sector. Quantitatively, a one standard deviation increase in the exposure of a state's banks to the energy sector reduced its GDP by 1.8 percent.

Owners and CEOs of Startups: Evidence from Russia
Guseva, Olga,Stepanova, Anastasia
In this paper, the authors focus on two primary governance mechanisms which can be considered as sources of support for startup companies: the company’s ownership contingent and the company’s management personnel. Based on descriptive statistics from a sample of 416 Skolkovo start-ups from the ‘Nuclear’ and ‘Space’ clusters, and a Start-up-Barometer survey of 300 IT-entrepreneurs, this work provides new insights into ownership and management characteristics of Russian startups and the interplay between these dynamics.The Russian venture market presents an interesting case of an emerging market with a number of successful startups in a challenging economic environment. The supply of venture capital for Russian startups is restricted by the presence of sanctions and legal restrictions on the investments of financial institutions such as pension funds and banks. Therefore, similar to other developed and developing markets, the most significant source of investments for Russian startups is bootstrapping.In this paper we show that startups with different characteristics attract different kinds of investors, which is reflected in the companies ownership structures. In particular, government development institutes are more interested in investing in nuclear-focused startups, while corporate investors tend to keep a higher level of control over startups compared to other investors. We also confirmed the presence of correlations between different types of owners: government development institutions, corporate investors, venture funds, and family members. Additionally, the size of equity share for all types of owners (except family members) was found to be negatively correlated with the CEO’s share in the ownership structure. Although the purpose of the article is descriptive, it motivates further research on the sources of support of startup growth, including relative importance of such sources and their effects on startup performance.

Portfolio Construction with LASSO
Thiruvengadasamy, Balaji
It is well known that standard Markowitz portfolio optimization suffers from empirical instability. Brodie, Daubechies, De Mol, Giannone, and Loris (2009) show that inclusion of an L1 penalty term in the optimization leads to sparse and stable solutions. The L1 penalty term can be used to model transaction costs and gross leverage and offers a way to control the trade-off between Sharpe ratio and implementation constraints such as turn over, transaction costs and gross leverage. The methodology can be useful to institutional investors in construction of target-return portfolios and replication of illiquid assets. I compare Standard Markowitz optimization, LASSO optimization and equal volatility weighting approaches to portfolio construction using a practical case study and show that LASSO optimization is superior to the other two approaches.

Pricing Decisions of FinTech Firms
Neubert, Michael
The purpose of this study is to analyze the pricing strategies of French FinTech Firms (FFFs) using quantitative descriptive and correlational research methods. Based on a representative sample of 246 FFF, the study provided consistent support for the hypotheses, which argues that FFFs with high price-setting power may implement a combination of the price-setting strategy (PSS) “skimming” and the price-setting practice (PSP) “value-informed”. FFFs applying “market-based” PSSs tend to use “competition-informed” PSP preferring “pay-per-use” price-setting model (PSM). Whilst FFFs who apply “penetration” PSS tend to use “cost-informed” PSP and “pay-per-use” PSM. The findings support founders and senior management in their pricing decisions. This paper contributes to the existing literature on pricing strategies of early-stage high-tech companies. There is a need for further research about the change of pricing strategies during the lifecycle of a firm using for example a longitudinal quantitative study.

Rational Models for Inflation-Linked Derivatives
Henrik Dam,Andrea Macrina,David Skovmand,David Sloth

We construct models for the pricing and risk management of inflation-linked derivatives. The models are rational in the sense that linear payoffs written on the consumer price index have prices that are rational functions of the state variables. The nominal pricing kernel is constructed in a multiplicative manner that allows for closed-form pricing of vanilla inflation products suchlike zero-coupon swaps, year-on-year swaps, caps and floors, and the exotic limited-price-index swap. We study the conditions necessary for the multiplicative nominal pricing kernel to give rise to short rate models for the nominal interest rate process. The proposed class of pricing kernel models retains the attractive features of a nominal multi-curve interest rate model, such as closed-form pricing of nominal swaptions, and it isolates the so-called inflation convexity-adjustment term arising from the covariance between the underlying stochastic drivers. We conclude with examples of how the model can be calibrated to EUR data.

Research Topics from Across the Commodity Markets
Till, Hilary
In this working paper, we concisely summarize five research papers on: (1) metals hedging; (2) energy policy; (3) the logistical planning of a grain-trading firm; (4) commodity pricing; and (5) the development of commodity exchanges.

Risk-Taking Incentives and Earnings Management: New Evidence
Mayberry, Michael,Park, Hyun Jong,Xu, Tian
We re-examine the association between equity-based risk-taking incentives and earnings management based on three, potential theoretical and methodological shortcomings of prior work: (1) risk-taking incentives and earnings management are endogenously determined by growth opportunities, (2) monitoring is a correlated, omitted variable, and (3) executives endogenously match to firms based on compensation. Consistent with first two motivations, we fail to find a positive association between risk-taking incentives and earnings management after controlling for growth opportunities and monitoring. Consistent with our third motivation we also fail to document a significant association when using FAS 123R as a shock to risk taking incentives or instrumentation to alleviate concerns about endogenous matching. Overall, we fail to find a robust association between risk-taking incentives and earnings management as they are commonly measured.

Social capital and resilience make an employee cooperate for coronavirus measures and lower his/her turnover intention
Keisuke Kokubun,Yoshiaki Ino,Kazuyoshi Ishimura

An important theme is how to maximize the cooperation of employees when dealing with crisis measures taken by the company. Therefore, to find out what kind of employees have cooperated with the company's measures in the current corona (COVID-19) crisis, and what effect the cooperation has had to these employees/companies to get hints for preparing for the next crisis, the pass analysis was carried out using awareness data obtained from a questionnaire survey conducted on 2,799 employees of Japanese companies in China. The results showed that employees with higher social capital and resilience were more supportive of the company's measures against corona and that employees who were more supportive of corona measures were less likely to leave their jobs. However, regarding fatigue and anxiety about the corona felt by employees, it was shown that it not only works to support cooperation in corona countermeasures but also enhances the turnover intention. This means that just by raising the anxiety of employees, even if a company achieves the short-term goal of having them cooperate with the company's countermeasures against corona, it may not reach the longer-term goal by making them increase their intention to leave. It is important for employees to be aware of the crisis and to fear it properly. But more than that, it should be possible for the company to help employees stay resilient, build good relationships with them, and increase their social capital to make them support crisis measurement of the company most effectively while keeping their turnover intention low.

Symmetry and financial Markets
Jørgen Vitting Andersen,Andrzej Nowak

It is hard to overstate the importance that the concept of symmetry has had in every field of physics, a fact alluded to by the Nobel Prize winner P.W. Anderson, who once wrote that physics is the study of symmetry. Whereas the idea of symmetry is widely used in science in general, very few (if not almost no) applications has found its way into the field of finance. Still, the phenomenon appears relevant in terms of for example the symmetry of strategies that can happen in the decision making to buy or sell financial shares. Game theory is therefore one obvious avenue where to look for symmetry, but as will be shown, also technical analysis and long term economic growth could be phenomena which show the hallmark of a symmetry

Three Decades of International Financial Crises: What Have We Learned and What Still Needs to be Done?
Buckley, Ross P.,Avgouleas, Emilios,Arner, Douglas W.
Fragility that periodically erupts into a full-blown financial crisis appears to be an integral feature of market-based financial systems in spite of the emergence of sophisticated risk management tools and regulatory systems. If anything, the increased frequency of modern crises underscores how difficult it is to diversify away systemic risk and that perceptions of perfectly stable financial systems are normally flawed, even if the source of the next crisis remains well concealed to the expert eye.Although it is impossible to forecast a financial crisis with a high degree of accuracy and certainty, earlier crises always leave lessons useful in preparation for future crises, from whatever source. It is thus clear that the best way to deal with preventing and addressing major financial crises is to build the defenses of the financial system, including effective institutions, while at the same time trying to identify potential sources of crisis. We should take every opportunity to learn and work to build stronger and more effective financial systems. This paper compares and contrasts the three major crises of the past 3 decades, both to distill the lessons to be learned from them and to identify what more can be done to strengthen our financial systems. As the world addresses the financial impact of the COVID-19 pandemic, the centrality of these lessons is clear.

Total Factor Productivity and Idiosyncratic Volatility Trends
Abdoh, Hussein,Liu, Yu
Firms’ idiosyncratic stock return volatility has become more volatile in the US since the 1960s. This paper investigates why individual stocks became more volatile over the 1964â€"2013 period using firm-level total factor productivity (TFP). On average, the volatility of idiosyncratic TFP growth rate has increased, being associated with higher idiosyncratic return volatility. The connection between TFP growth and economic profits provides an explanation for the increase in the idiosyncratic volatility of fundamental cash flows. The results are robust when using time-series and panel regressions and controlling for cash flow and earnings variability, size, book-to-market, leverage, profitability, age, dividend yield, and stock illiquidity.

Transaction Costs in Execution Trading
David Marcos

In the present work we develop a formalism to tackle the problem of optimal execution when trading market securities. More precisely, we introduce a utility function that balances market impact and timing risk, with this last being modelled as the very negative transaction costs incurred by our order execution. The framework is built upon existing theory on optimal trading strategies, but incorporates characteristics that enable distinctive execution strategies. The formalism is complemented by an analysis of various impact models and different distributional properties of market returns.

Uncovering a factor-based expected return conditioning structure with Regression Trees jointly for many stocks
Vassilis Polimenis

Given the success and almost universal acceptance of the simple linear regression three-factor model, it is interesting to analyze the informational content of the three factors in explaining stock returns when the analysis is allowed to consider non-linear dependencies between factors and stock returns. In order to better understand factor-based conditioning information with respect to expected stock returns within a regression tree setting, the analysis of stock returns is demonstrated using daily stock return data for 5 major US corporations. The first finding is that in all cases (solo and joint) the most informative factor is always the market excess return factor. Further, three major issues are discussed: a) the balance of a depth=1 tree as it relates to properties of the stock return distribution, b) the mechanism behind depth=1 tree balance in a joint regression tree and c) the dominant stock in a joint regression tree. It is shown that high skew values alone cannot explain the imbalance of the resulting tree split as stocks with pronounced skew may produce balanced tree splits.

What is Fueling FinTech Lending? The Role of Banking Market Structure
Balyuk, Tetyana,Berger, Allen N.,Hackney, John
FinTech growth raises questions about its competitive advantages vis-à-vis traditional providers, the relative risks of FinTech products, and real economic effects. We study FinTech platform small business lending, yielding new answers that may apply to FinTech more generally. Findings suggest that FinTech tends to replace loans by large/out-of-market banks more than small/in-market banks. This is consistent with FinTech advantages in more efficient processing of hard information, rather than hardening of soft information. Additional results suggest that FinTech loans are relatively risky, but become safer after replacing bank loans. Both FinTech and bank loans are found to benefit the real economy.