Research articles for the 2020-08-03

A Novel Approach to Asset Pricing: Pair-Wise (or Janus) Equilibrium
Muralidhar, Arun
An effective asset pricing model should provide consistent recommendations for asset pricing, asset allocation and measuring risk-adjusted performance (or the “three facets of investing”). This paper incorporates three critical realities of investing (i.e., that investors have many stochastic goals, seek to delegate to skillful agents, and maximize risk-adjusted returns as opposed to expected utility), which in turn results in a pair-wise equilibrium, and a very different normative approach to asset pricing. The model uses observable assets for the asset pricing model (as opposed to a single factor or multiple factors), articulates an explicit return for the absolute risk free asset (as opposed to treating it as exogenous), captures the impact of substitutes and “complements” (in turn requiring inputs to be internally consistent), and provides consistent asset allocation recommendation and risk-adjusted performance measures. It also offers a new way to think about a heterogenous investor model for asset pricing.

A central bank strategy for defending a currency peg
Eyal Neuman,Alexander Schied,Chengguo Weng,Xiaole Xue

We consider a central bank strategy for maintaining a two-sided currency target zone, in which an exchange rate of two currencies is forced to stay between two thresholds. To keep the exchange rate from breaking the prescribed barriers, the central bank is generating permanent price impact and thereby accumulating inventory in the foreign currency. Historical examples of failed target zones illustrate that this inventory can become problematic, in particular when there is an adverse macroeconomic trend in the market. We model this situation through a continuous-time market impact model of Almgren--Chriss-type with drift, in which the exchange rate is a diffusion process controlled by the price impact of the central bank's intervention strategy. The objective of the central bank is to enforce the target zone through a strategy that minimizes the accumulated inventory. We formulate this objective as a stochastic control problem with random time horizon. It is solved by reduction to a singular boundary value problem that was solved by Lasry and Lions (1989). Finally, we provide numerical simulations of optimally controlled exchange rate processes and the corresponding evolution of the central bank inventory.

An Overview of Algorithmic Trading in Foreign Exchange Markets and Its Impacts on Market Liquidity
Fukuma, Noritaka,Kadogawa, Yoichi
In recent years, the foreign exchange market has seen a growing presence of algorithmic trading, that is, a process of automated transactions based on pre-determined programs. Concurrently, the need to better understand its characteristics has become more important. In this paper, we construct proxy indicators of algorithmic trading in the USD/JPY spot market by focusing on its general features - high-speed and high-frequency transactions. Based on the proxy indicators, algorithmic trading has been on an upward trend since around 2016 and is more active in European and U.S. time zones than in Japan. Our analysis shows that algorithmic trading on average helps improve market liquidity in normal times. Its liquidity-providing function was generally maintained under market stress triggered by the COVID-19 pandemic from late-February to end-March 2020, though it could have been dampened albeit temporarily in times of severe stress when the market experienced sudden and sharp price fluctuation.

Are Range Based Models Good Enough? Evidence From Seven Stock Markets
Dockery, Everton,Efentakis, Miltiadis,Al-Faryan, Mamdouh Abdulaziz Saleh
We study the performance of range-based models over varying market conditions and compare their performance against a set of alterative risk measurement models, including the more widely used techniques in practice for measuring the Value-at-Risk (VaR) of seven financial market indices. In particular, we focus on model accuracy in estimated VaRs over quiet and volatile moments utilizing loss functions and likelihood ratio tests for coverage probability. The empirical estimates based on these two criteria find that the range based-model of Yang and Zhang (2000) shows some success in estimated VaR risk measure, especially during quiet periods, than is the case for the other range based models considered. Also, we find that the EWMA and RiskMetrics models have an inconsistent marginal edge over the widely used GARCH and historical simulation specifications and that there is validity in the use of the EWMA and RiskMetrics models over range-based approaches as both capture and thus provide more accurate estimated VaR risk measure of market risk.

Bank Stress Test Results and Their Impact on Consumer Credit Markets
Agarwal, Sumit,An, Xudong,Cordell, Larry,Roman, Raluca A.
Using Federal Reserve (Fed) confidential stress test data, we exploit the gap between the Fed and bank capital projections as an exogenous shock to banks and analyze how this shock is transmitted to consumer credit markets. First, we document that banks in the 90th percentile of the capital gap reduce their new supply of risky credit by 13 percent compared with those in the 10th percentile and cut their overall credit card risk exposure on an annual basis. Next, we show that these banks find alternative ways to remain competitive and attract customers by lowering interest rates and offering more rewards and promotions to select groups of borrowers. Finally, we show that consumers at banks with a gap increase their credit card spending and debt payoff and at the same time experience fewer delinquencies. We also show that our results are generalizable to other lending products such as mortgages and home equity. Overall, our results demonstrate a positive feedback loop among credit supply, credit usage, and credit performance due to the stress tests.

Can Agents Add and Subtract When Forming Beliefs?
Kieren, Pascal,Müller-Dethard, Jan,Weber, Martin
Bayes' Theorem has an implicit, fundamental rule of how subjects should incorporate informationally equivalent signals of opposite direction: two opposite-directional signals should cancel out such that prior beliefs remain constant. In this study, we test whether agents always follow this simple counting heuristic. We find that this is not the case. Whenever a sequence of signals that go in the same direction is interrupted by a signal of opposite direction, agents violate the simple counting heuristic and strongly overreact to the signal of opposite direction. In contrast to that, subjects correctly follow the counting heuristic whenever opposite-directional signals alternate.

Climate Sentiments in the Financial Sector: How Financial Markets, Policies and Regulations Generate Barriers and Opportunities to Align Portfolios to Sustainability
Monasterolo, Irene,Glas, Natalie,Kunesch, Sabine
Investments are largely allocated to sectors of economic activities that are at odds with the climate targets, thus exposing countries’ economies and investors’ portfolios to the risk of carbon stranded assets. In this context, a main knowledge gap is represented by the poor understanding of financial actors’ perception of the climate-related financial risks and opportunities in the transition to a low-carbon economy, and of the barriers and enablers to manage climate-related financial risks in investors’ portfolios. We contribute to fill this knowledge gap by developing and applying a transdisciplinary approach to knowledge co-production engaging climate finance stakeholders (from public and private financial institutions, policy making, civil society and academia) in surveys, focus groups and dedicated workshops around main aspects of the climate finance debate, with a focus on Austria. Results show that climate-related financial risk understanding and perception are largely heterogeneous across financial actors. Lack of stable climate policies and regulations, of standardized sustainability scores of financial contracts, and of financial risk pricing tools represent main barriers to mainstream climate considerations in portfolios’ risk management. In contrast, role of disclosure, of policy coherence and social engagement contributes to overcome such barriers decreasing market uncertainty. These results are relevant for the implementation of the Austrian and European sustainable finance policy agenda, and for current debate on the alignment of COVID-19 recovery policies with the EU Green Deal agenda.

Corporate Governance and Firm Performance: Empirical Evidence from India
G. C., Surya Bahadur
The paper attempts to analyze inter-linkages between corporate governance, ownership structure, capital structure and firm performance in India. The study employs a panel data of all CNX Nifty companies from 2008 to 2012. Using LSDV panel data models and 2SLS model the study reveals that that good corporate governance practices adopted by companies is positively related with financial performance. Board independence, number of board committees, and director remuneration are found to have positive relationship while larger board size, ownership by promoters and financial leverage have negative relationship with performance. There is existence of bi-directional relationship between corporate governance and financial performance. Companies with sound financial performance are more likely to conform to corporate governance norms and standards and implement sound corporate governance system. In addition, the findings reveal that corporate governance practices adopted by the listed firms depend on their ownership structure. Ownership concentration is found to effect corporate governance negatively.

Could the Altman Z-Score Model Detect the Financial Distress in Ghana? Multivariate Discriminant Analysis
MacCarthy, John
The purpose of this paper is to assess the effectiveness of the Altman Z-score model to discriminate between financially distressed and non-financially distressed manufacturing firms listed on the Ghana Stock Exchange. Eleven firms consisting of two financially distressed and nine non-financially distressed manufacturing firms were analysed. Independent descriptive statistics, independent sample t-test, and multivariate discriminant analysis were the analytical tools used to analyse the hypotheses of this study. The study revealed that working capital/total assets and sales/total assets were the major discriminators of financially distressed firms on the Ghana Stock Exchange. Multivariate discriminant analysis revealed an accuracy rate of 79.9% to detect financially distressed firms in Ghana.

Data-Driven Option Pricing using Single and Multi-Asset Supervised Learning
Anindya Goswami,Sharan Rajani,Atharva Tanksale

We propose three different data driven approaches for pricing European style call options using supervised machine-learning algorithms. The proposed approaches are tested on two stock market indices, NIFTY50 and BANKNIFTY from the Indian equity market. Although neither historical nor implied volatility is used as an input, the results show that the trained models have been able to capture the option pricing mechanism better than or similar to the Black Scholes formula for all the experiments. Our choice of scale free I/O allows us to train models using combined data of multiple different assets from a financial market. This not only allows the models to achieve far better generalization and predictive capability, but also solves the problem of paucity of data, the primary limitation of using machine learning techniques. We also illustrate the performance of the trained models in the period leading up to the 2020 Stock Market Crash, Jan 2019 to April 2020.

Debt Covenants and Investment: Response to Gulen, Jens, and Page (2020)
Chava, Sudheer,Roberts, Michael R.
In a recent working paper, ``An application of causal forest in corporate finance: How does financing affect investment?'' Gulen, Jens, and Page, April 23 2020, (GJP) challenge the analysis and several conclusions of our paper, “How Does Financing Impact Investment? The Role of Debt Covenants,” 2008, (CR). Specifically, GJP claim that our main results are not robust to a more recent machine learning estimation technique called ``causal forest,'' and that covenant violations only affect investment in a small number of distressed firms. Here we show that these, and other claims made by GJP concerning our study, are incorrect. GJP's results are internally inconsistent, inconsistent with other published studies, and unreproducible. We also provide new evidence using the latest econometric techniques, including that suggested by GJP, and more recent data, all of which show the robustness of our original findings.

Default Propensity Implicit in Pulled to Par V@r for Bonds
L. Esquível, Manuel,Gaspar, Raquel M.,Beleza Sousa, João
Using the pulled to par returns, proposed by [27] for computing historical V@R of bonds, we develop a way of extracting â€" at any reference date before maturity â€" implicit default propensities from observed bond quotes. This method is new to the literature and it has the advantage on focusing directly on loss given default. To illustrate the method we present two examples of actual computation with real data â€" on German and Portuguese bonds. The market data seems to support the proposed method. In the case of a very concrete simple Gaussian model, we establish the connection between our implicit default propensity and the more traditional notions of default probability and recovery given default of a bond.

Defining Influential Factors of Capital Adequacy Ratio: An Examination upon Turkish Banking Sector (2006/Q1-2019/Q1)
Kartal, Mustafa Tevfik
Capital adequacy ratio (CAR) of the Turkish Banking Sector decreased dramatically from 30.9% in 2003 to 17.1% as of 2019 May. This figure shows that although TBS has still relatively high CAR compared to many countries, unfortunately there is a decreasing trend. A downward trend in CAR constitutes risks due to the limiting of providing credits. Therefore, the level of CAR has importance for making a positive contribution to sustainable economic growth. So, influential factors of CAR should be determined first. In this context, Multivariate Adaptive Regression Splines (MARS) method, 14 explanatory variables, and quarterly data are used for the period of 2006/Q1-2019/Q1. It is determined that credits/total assets ratio, legal equities, risk weighted assets, nonperforming loans (NPL), NPL/total credits ratio, and credit/deposit ratio are influential factors on CAR in Turkey.

Derivative Trading and Structural Breaks in Volatility in India: An ICSS Approach
Shirodkar, Sanjeeta
Researchers argue that ignoring the structural breaks in the time-series variance can cause significant upward biases in the degree of persistence in estimated GARCH models. Against this backdrop, the present study empirically examines the effect of stock futures on the underlying stock’s volatility in India by incorporating the structural breaks with the help of ICSS test and AR (1)-GARCH (1, 1) model for 30 most liquid and actively traded underlying stocks and their associated futures contracts. The study period ranges from the 1st January 2000 or the listing date of the particular stock (whichever is prior) till 31st March 2019. The study contributes to the on-going debate regarding the effect of derivatives on the underlying stock market’s volatility in two ways. Firstly, by taking into consideration the breaks in the volatility and, secondly, studying the effect of single stock futures will allow us to evaluate company-specific response to futures trading directly. The study offers a mixed outcome for the stocks under consideration. However, there is evidence of a decline in unconditional volatility for the majority of the stocks. The overall findings indicate that trading in stock futures may not have any detrimental effect on the underlying stock’s volatility.

Digital Currency and Economic Crises: Helping States Respond
Geoffrey Goodell,Hazem Danny Al-Nakib,Paolo Tasca

The current crisis, at the time of writing, has had a profound impact on the financial world, introducing the need for creative approaches to revitalising the economy at the micro level as well as the macro level. In this informal analysis and design proposal, we describe how infrastructure for digital assets can serve as a useful monetary and fiscal policy tool and an enabler of existing tools in the future, particularly during crises, while aligning the trajectory of financial technology innovation toward a brighter future. We propose an approach to digital currency that would allow people without banking relationships to transact electronically and privately, including both internet purchases and point-of-sale purchases that are required to be cashless. We also propose an approach to digital currency that would allow for more efficient and transparent clearing and settlement, implementation of monetary and fiscal policy, and management of systemic risk. The digital currency could be implemented as central bank digital currency (CBDC), or it could be issued by the government and collateralised by public funds or Treasury assets. Our proposed architecture allows both manifestations and would be operated by banks and other money services businesses, operating within a framework overseen by government regulators. We argue that now is the time for action to undertake development of such a system, not only because of the current crisis but also in anticipation of future crises resulting from geopolitical risks, the continued globalisation of the digital economy, and the changing value and risks that technology brings.

Disaster Insurance in Developing Asia: An Analysis of Market-Based Schemes
Surminski, Swenja,Panda, Architesh
In recent years, insurance against natural disasters has gained recognition as an important tool for climate risk management that could, if carefully implemented, help increase the resilience of those insured. In response, insurance solutions are increasingly tested and applied in many countries that have no prior experience with insurance or no existing market. This paper analyzes the status, types, and patterns of market-based disaster insurance schemes across emerging and developing countries in Asia. We provide a snapshot of the current use of insurance based on data from Grantham Research Institute on Climate Change and the Environment’s Disaster Risk Transfer Scheme Database (2012â€" 2018). Our analysis shows that although the use of insurance is expanding, there are many countries that still don’t have any kind of cover available. Where insurance mechanisms exist, they often rely on subsidies or bundling strategies. Although a mix of insurance schemes covering risks for governments (sovereign); or at meso (risk aggregators, cooperatives); and micro level currently operate to address a wide variety of climate and disaster risks, without demand-side support, many markets are likely to collapse or, at the very least, experience far lower penetration rates. We conclude with a discussion of the role of these insurance schemes in increasing resilience, which raises important questions for designing new and measuring and evaluating existing insurance schemes.

Discounting Damage: Non-Linear Discounting and Default Compensation. Valuation of Non-Replicable Value and Damage
Christian P. Fries

In this short note we develop a model for discounting.

A focus of the model is the discounting, when discount factors cannot be derived from market products. That is, a risk-neutralizing trading strategy cannot be performed. This is the case, when one is in need of a risk-free (default-free) discounting, but default protection on funding providers is not traded. For this case, we introduce a default compensation factor ($\exp(+\tilde{\lambda} T)$) that describes the present value of a strategy to compensate for default (like buying default protection would do).

In a second part, we introduce a model, where the survival probability depends on the required notional. This model is different from the classical modelling of a time-dependent survival probability ($\exp(-\lambda T)$). The model especially allows that large liquidity requirements are instantly more likely do default than small ones.

Combined the two approaches build a framework in which discounting (valuation) is non-linear.

The non-linear discounting presented here has several effects, which are relevant in various applications:

* If we consider the question of default-free valuation, i.e., factoring in the cost of default protection, the framework can will lead to over-proportional higher values (or cost) for large projects (or damages). The framework can lead to the effect that discount-factors for very large liquidity requirements or projects are an increasing function of time. It may even lead to discount factors larger than one. This may have relevance in the assessment of event like climate change.

* For the valuation of defaultable products, e.g., like a defaultable swap, the framework leads to the generation of a continuum of (defaultable) par rate curves (interest rate curve) and the valuation of a payer and a receiver swap differs by more than just a sign.

Does Finance Benefit Society? A Language Embedding Approach
Jha, Manish,Liu, Hongyi,Manela, Asaf
We measure popular sentiment toward finance using a computational linguistics approach applied to millions of books published in eight countries over hundreds of years. We document persistent differences in finance sentiment across countries despite ample time-series variation. Finance sentiment declines after epidemics and earthquakes, but rises following droughts, floods, and landslides. These heterogeneous effects of natural disasters suggest finance sentiment responds differently to the realization of insured versus uninsured risks. Using local projections, we find that positive shocks to finance sentiment have positive and persistent effects on economic growth. Our estimates predict a contraction in finance sentiment due to the COVID-19 pandemic that will exacerbate its long-term economic damage.

Does Venture Capital Syndication Affect Mergers and Acquisitions?
Nguyen, Giang,Vu, Le
We find that targets backed by venture capital (VC) syndication receive higher acquisition premiums and spend more time negotiating transaction terms. The acquirers of syndicate-backed targets experience lower cumulative abnormal returns surrounding the acquisition announcements; however, they outperform those of individual-backed targets over the long-term. We show that VC syndication creates value for entrepreneurial firms by appointing larger and more independent boards of directors prior to acquisitions. It aligns the incentive of acquirers’ CEO to their shareholders by increasing CEO equity and variable pay. Syndicate-backed targets prefer stock as the method of payment in acquisitions. Taken altogether, we show that VC syndication creates value for not only entrepreneurial firms but also their acquirers in the long-term.

Dynamic optimal reinsurance and dividend-payout in finite time horizon
Chonghu Guan,Zuo Quan Xu,Rui Zhou

This paper studies a dynamic optimal reinsurance and dividend-payout problem for an insurer in a finite time horizon. The goal of the insurer is to maximize its expected cumulative discounted dividend payouts until bankruptcy or maturity which comes earlier. The insurer is allowed to dynamically choose reinsurance contracts over the whole time horizon. This is a singular control problem and the corresponding Hamilton-Jacobi-Bellman equation is a variational inequality with fully nonlinear operator and with gradient constraint. A comparison principle and $C^{2,1}$ smoothness for the solution are established by penalty approximation method. We find that the surplus-time space can be divided into three non-overlapping regions by a ceded risk and time dependent reinsurance barrier and a time dependent dividend-payout barrier. The insurer should be exposed to higher risk as surplus increases; exposed to all risk once surplus upward crosses the reinsurance barrier; and pay out all reserves in excess of the dividend-payout barrier. The localities of these regions are explicitly estimated.

Equilibrium under TWAP trading with quadratic transaction costs
Eunjung Noh

We study how transaction cost affects to the equilibrium return and optimal stock holdings in equilibrium. To this end, we develop a continuous-time risk-sharing model where heterogenous agents trade toward terminal target holdings subject to a quadratic transaction cost. The equilibrium stock holdings and trading rate under transaction cost are characterized by a unique solution to a forward-backward stochastic differential equation (FBSDE). The equilibrium return is also characterized as the unique solution of a system of coupled but linear FBSDEs.

Evaluating the Underlying Components of High Frequency Financial Data: Finite Sample Performance and Microstructure Noise Effects
Hizmeri, Rodrigo,Izzeldin, Marwan
This paper examines the finite sample properties of novel theoretical tests that evaluate the presence of: a) Brownian motion, b) jumps; c) finite vs. infinite activity jumps. In allowing for Gaussian, t-distributed, and Gaussian-T mixture noise, our Monte Carlo experiment guides a search for optimal performance across sampling frequencies. Using 100 stocks and SPY, we find that: i) a Brownian and a jump component characterize 1-min stock data; ii) Jumps should allow for both finite and infinite activity; iii) Rejection rates are time-varying, such that more jump days are usually associated with an increase of infinite jumps vis-à-vis finite jumps.

Explicit expressions for joint moments of $n$-dimensional elliptical distributions
Baishuai Zuo,Chuancun Yin,Narayanaswamy Balakrishnan

Inspired by Stein's lemma, we derive two expressions for the joint moments of elliptical distributions. We use two different methods to derive $E[X_{1}^{2}f(\mathbf{X})]$ for any measurable function $f$ satisfying some regularity conditions. Then, by applying this result, we obtain new formulae for expectations of product of normally distributed random variables, and also present simplified expressions of $E[X_{1}^{2}f(\mathbf{X})]$ for multivariate Student-$t$, logistic and Laplace distributions.

Geometric Arbitrage Theory and Market Dynamics Reloaded
Simone Farinelli

We have embedded the classical theory of stochastic finance into a differential geometric framework called Geometric Arbitrage Theory and show that it is possible to:

--Write arbitrage as curvature of a principal fibre bundle.

--Parameterize arbitrage strategies by its holonomy.

--Give the Fundamental Theorem of Asset Pricing a differential homotopic characterization.

--Characterize Geometric Arbitrage Theory by five principles and show they they are consistent with the classical theory of stochastic finance.

--Derive for a closed market the equilibrium solution for market portfolio and dynamics in the cases where:

-->Arbitrage is allowed but minimized.

-->Arbitrage is not allowed.

--Prove that the no-free-lunch-with-vanishing-risk condition implies the zero curvature condition. The converse is in general not true and additionally requires the Novikov condition for the instantaneous Sharpe Ratio Dynamics to be satisfied.

How Crisis Contagiously Spreads Across Markets?
Yuan, Ying,Wang, Haiying,Wang, Tianyang
This research proposes a dynamic mixture copula-extreme value theory framework to investigate financial contagion and its inner evolution mechanism. The proposed framework simultaneously characterizes the complex and dynamic dependence characteristics for stock markets to detect the financial contagion effect, explores the possible explanation for financial contagion, and identifies the specific crisis transmission paths. We empirically investigate how crisis contagiously spreads across seven major stock markets, namely, the US, China, Japan, Korea, Germany, the UK, and France, for both the 2008 global financial crisis and the recent 2020 global financial crisis triggered by the COVID-19 pandemic. Our results show that the proposed framework outperforms alternative models in detecting evidence of financial contagion among markets, and different crisis transmission paths for both global financial crises.

Investors' Perception on Factors Causing Volatility at Indian Stock Market
G. C., Surya Bahadur
Study of volatility in the equity market is a crucial issue in economics and finance. Volatility change in the stock prices has many adverse effects on an economy and also investment. It has received great attention from both academicians and practitioners over the last two decades because it can be used as a measure of risk exposure in investments. This study examines the perception of investors to identify factors affecting volatility in Indian stock market. It employs a questionnaire survey of equity investors at BSE using a sample of 226 individual and institutional investors. The data collected is analyzed with factor analysis and multiple regression models. The study reveals that Indian stock market is perceived to exhibit high degree of volatility. It finds that external factors like macroeconomic situation, political condition and spillover effect from global markets have the highest influence in affecting volatility of the Indian stock market followed by the stock market factors like noise trading, market manipulation, foreign portfolio investment and derivative trading. Company factors like financial performance and other company specific information have been found to have the relatively lower effect on perceived riskiness of the stock market.

Investors’ Risk Attitudes in the Pandemic and the Stock Market: New Evidence Based on Internet Searches
Amstad, Marlene,Cornelli, Giulio,Gambacorta, Leonardo,Xia, Fan Dora
The sharp drop and subsequent rebound in global stock markets in the current pandemic focuses attention on changes in investors’ risk attitudes. A new COVID-19 risk attitude (CRA) index for 61 markets, based on internet searches in Google and Baidu, does a good job at capturing investors’ attitudes toward pandemic-related risks. Stock markets are more sensitive to changes in the CRA index in more financially developed economies. Stock markets are less sensitive in jurisdictions that have restricted mobility less and that have enacted other containment measures against the pandemic.

Islamic Securities in Corporate Financial Hierarchy
Al Balooshi, Sara,Iannino, Maria Chiara,Abedifar, Pejman
In this paper, we investigate the place of Islamic investment securities (sukuk) in firms' financial hierarchy using the modified pecking order theory. We study the external funding preferences of Malaysian firms using quarterly data of 112 firms for the period between 2005 and 2017. We find that when internal funds are exhausted, firms prefer to issue profit-loss sharing sukuk over bonds and fixed income sukuk is placed before equity. The results show that sukuk can widen the external finance spectrum which has important implications for policymakers in countries with dual financial systems.

Male Earnings Volatility in LEHD before, during, and after the Great Recession
Kevin L. McKinney,John M. Abowd

This paper is one of a collection of papers on prime-age male earnings volatility. Each paper produces a similar set of statistics for the same reference population using a different primary data source. Our primary data source is the Census Bureau's Longitudinal Employer-Household Dynamics (LEHD) infrastructure files. Using LEHD data from 1998 to 2016, we create a well-defined population frame to facilitate accurate estimation of temporal changes comparable to designed longitudinal samples of people. We show that earnings volatility, excluding increases during recessions, has generally declined over the analysis period, a finding robust to various sensitivity analyses. Although volatility is found to generally be declining, the effect is not homogeneous, particularly for workers with tenuous labor force attachment for whom volatility is increasing. These "not stable" workers have earnings volatility approximately 30 times larger than stable workers, but more important for earnings volatility trends we observe a large increase in the share of stable employment from 60% in 1998 to 67% in 2016, which we show to largely be responsible for the decline in overall earnings volatility. To further emphasize the importance of not stable and/or low earning workers we also conduct comparisons with the PSID and show how changes over time in the share of workers at the bottom tail of the cross-sectional earnings distributions can produce either declining or increasing earnings volatility trends.

Measuring Extreme Price Risks by Different Statistical Methods: An In-Depth Case Study in the Crude Oil Market
Nguyen, Quynh Trang
Crude oil prices are particularly volatile. Managing such price risks is vital for participants in financial markets, in particular the oil market. In the perspective of a long position, we conduct an in-depth study of popular existing statistical approaches as well as a recently developed method to estimate Value at Risk of the next day's oil price â€" a measurement of potential extreme price risks. We then validate the estimations via tests of accuracy, independence, and a combination of both criteria. The approaches that capture heteroscedasticity in the data, namely conditional Extreme Value Theory and Filtered Historical Simulation, perform considerably better than the pure bootstrapping method â€" Historical Simulation â€" and the (sub)asymptotic-target approach â€" Average Conditional Exceedance Rate.

Moral-hazard-free insurance contract design under rank-dependent utility theory
Zuo Quan Xu

Bernard et al. (2015) studied an insurance contract design problem under rank-dependent utility (RDU) theory. Their results, however, suffer from a moral hazard problem, namely, providing incentives for the insured to falsely report the actual loss. Xu et al. (2019) investigated the same problem, but took the {incentive compatibility} constraint into consideration to avoid that moral hazard. Mathematically speaking, the model reduces to a quantile optimisation problem with a compatibility constraint. They solved the problem by imposing assumptions on the loss and the probability weighting function. This paper solves the problem completely by a new quantile optimisation approach under general setting. The optimal solution is expressed by the solution of an obstacle problem for a semilinear second-order elliptic operator with mixed boundary conditions. Surprisingly, it is shown that every reasonable moral-hazard-free contract is optimal for infinitely many RDU maximisers with different utility functions and probability weighting functions.

Multigrid Iterative Algorithms based on Compact Finite Difference Schemes and Hermite interpolation for Solving Regime Switching American Options
Chinonso Nwankwo,Weizhong Dai

We present multigrid iterative algorithms for solving a system of coupled free boundary problems for pricing American put options with regime-switching. The algorithms are based on our recent developed compact finite difference scheme coupled with Hermite interpolation for solving the m coupled partial differential equations consisting of the asset, delta, gamma, and speed options. In the algorithms, we first use the Gauss-Seidel as a smoother, and then implement V-cycle and modified multigrid strategies for solving our discretized equations. Hermite interpolation with Newton interpolatory divided difference (as the basis) is used in estimating the coupled asset, delta, gamma, and speed options in the set of equations. A numerical experiment is performed with the two-regimes example and compared with other existing methods to validate the optimal strategy. Results show that these algorithms provide fast and efficient tools for pricing American put options with regime-switching.

Multivariate General Compound Point Processes in Limit Order Books
Qi Guo,Bruno Remillard,Anatoliy Swishchuk

In this paper, we focus on a new generalization of multivariate general compound Hawkes process (MGCHP), which we referred to as the multivariate general compound point process (MGCPP). Namely, we applied a multivariate point process to model the order flow instead of the Hawkes process. Law of large numbers (LLN) and two functional central limit theorems (FCLTs) for the MGCPP were proved in this work. Applications of the MGCPP in the limit order market were also considered. We provided numerical simulations and comparisons for the MGCPP and MGCHP by applying Google, Apple, Microsoft, Amazon, and Intel trading data.

My Fortune is the Work of Others: A Response to Prof. John C. Coffee, Jr. Regarding Lockstep Law Firm Partnerships and Tournament Theory
Rao, Jay
Recently, Prof. Coffee published a provocative opinion piece in slide form through the Columbia Law School Blue Sky Blog entitled "The Rise of the Mega-Law Firm: Some Reckless Reflections and Prickly Predictions" concerning the recent changes to the large law firm landscape. He makes several interesting points throughout his publication; however, the author respectfully disagrees with some of his contentions and also requests further clarification on certain points. To the extent the author understands Prof. Coffee’s choice of words, the author disagrees with Prof. Coffee that a lockstep compensation model might be appropriate at a law firm where all partners believe they are “equally gifted,” as the author contends a belief in equal giftedness should bear little relevance on a law firm’s decision to maintain a lockstep compensation model. Further, the author contends both lockstep law firm partnerships and nonlockstep law firm partnerships strongly benefit from partners who are “wholly committed to the firm.” Additionally, the response discusses the well-known tournament theory model, the up or out system employed by many major law firms, law firm performance reviews, and the legal academy.

Optimal Investment, Heterogeneous Consumption and Best Time for Retirement
Zuo Quan Xu,Harry Zheng

This paper studies an optimal investment and consumption problem with heterogeneous consumption of basic and luxury goods, together with the choice of time for retirement. The utility for luxury goods is not necessarily a concave function. The optimal heterogeneous consumption strategies for a class of non-homothetic utility maximizer are shown to consume only basic goods when the wealth is small, to consume basic goods and make savings when the wealth is intermediate, and to consume small portion in basic goods and large portion in luxury goods when the wealth is large. The optimal retirement policy is shown to be both universal, in the sense that all individuals should retire at the same level of marginal utility that is determined only by income, labor cost, discount factor as well as market parameters, and not universal, in the sense that all individuals can achieve the same marginal utility with different utility and wealth. It is also shown that individuals prefer to retire as time goes by if the marginal labor cost increases faster than that of income. The main tools used in analysing the problem are from PDE and stochastic control theory including viscosity solution, variational inequality and dual transformation.

Optimally stopping at a given distance from the ultimate supremum of a spectrally negative L\'evy process
Mónica B. Carvajal Pinto,Kees van Schaik

We consider the optimal prediction problem of stopping a spectrally negative L\'evy process as close as possible to a given distance $b \geq 0$ from its ultimate supremum, under a squared error penalty function. Under some mild conditions, the solution is fully and explicitly characterised in terms of scale functions. We find that the solution has an interesting non-trivial structure: if $b$ is larger than a certain threshold then it is optimal to stop as soon as the difference between the running supremum and the position of the process exceeds a certain level (less than $b$), while if $b$ is smaller than this threshold then it is optimal to stop immediately (independent of the running supremum and position of the process). We also present some examples.

Ownership Structure and Corporate Governance: What Does the Data Reveal About Saudi Listed Firms?
Al-Faryan, Mamdouh Abdulaziz Saleh,Dockery, Everton
In this paper we examine the ownership structure of 169 firms listed on the Saudi Arabian stock market from 2008 to 2014. The analysis uses the testing methodology described by Demsetz and Lehn (1985) to examine the effects of firm and market instability on Saudi ownership structure and additionally, the effect of systematic regulation that imposes constraints on the behavior of the selected listed firms. We find evidence, for the majority of the ownership structures considered, in favor of the view that firm size, regulation and instability affects ownership structure. The results suggest that the size variable has a positive effect on ownership concentration. Our analysis also shows that instability had some effect on ownership concentration and structure when using the non-linear specification, particularly when using firm specific instability, albeit the effect was stronger when the instability measure was accounting profit returns. Lastly, there is evidence that government-owned firms were mostly affected by regulation while diffused owned firms were affected most by instability than non-government owned firms.

Pricing under Fairness Concerns
Erik Eyster,Kristof Madarasz,Pascal Michaillat

This paper proposes a theory of pricing premised upon the assumptions that customers dislike unfair prices---those marked up steeply over cost---and that firms take these concerns into account when setting prices. Since they do not observe firms' costs, customers must extract costs from prices. The theory assumes that customers infer less than rationally: when a price rises due to a cost increase, customers partially misattribute the higher price to a higher markup---which they find unfair. Firms anticipate this response and trim their price increases, which drives the passthrough of costs into prices below one: prices are somewhat rigid. Embedded in a New Keynesian model as a replacement for the usual pricing frictions, our theory produces monetary nonneutrality: when monetary policy loosens and inflation rises, customers misperceive markups as higher and feel unfairly treated; firms mitigate this perceived unfairness by reducing their markups; in general equilibrium, employment rises. The theory also features a hybrid short-run Phillips curve, realistic impulse responses of output and employment to monetary and technology shocks, and an upward-sloping long-run Phillips curve.

RFAs’ Financial Structures and Lending Capacities: A Statutory, Accounting and Credit Rating Perspective
Cheng, Gong,Lennkh, Alvise
This paper documents the diverse financial structures â€" including capital structures and funding strategies â€" of Regional Financing Arrangements (RFAs) and offers an analysis of RFAs’ lending capacity from a statutory, accounting and credit rating perspective. Using credit rating agencies’ methodologies, the paper presents the dynamic relationship between RFAs’ financial structures, the support from their member states and their resulting creditworthiness. A stylised model is developed to demonstrate how the relative size of an institution’s paid-in and callable capital, together with its member states’ support, could have an impact on the overall credit rating and lending capacity of an RFA. This paper contributes to the growing policy discussions on the heterogeneity of RFAs and their rising importance in the Global Financial Safety Net.

SRISKv2 - A Note
Migueis, Marco,Jiron, Alexander
SRISK is a very influential metric of the systemic risk posed by financial firms. However, SRISK suffers from a conceptual flaw in its capital shortfall calculation. This note proposes a modified version of this metric, SRISKv2, which corrects this flaw and provides a more sensible metric of the systemic risk posed by financial firms.

Solving High-Order Portfolios via Successive Convex Approximation Algorithms
Rui Zhou,Daniel P. Palomar

The first moment and second central moments of the portfolio return, a.k.a. mean and variance, have been widely employed to assess the expected profit and risk of the portfolio. Investors pursue higher mean and lower variance when designing the portfolios. The two moments can well describe the distribution of the portfolio return when it follows the Gaussian distribution. However, the real world distribution of assets return is usually asymmetric and heavy-tailed, which is far from being a Gaussian distribution. The asymmetry and the heavy-tailedness are characterized by the third and fourth central moments, i.e., skewness and kurtosis, respectively. Higher skewness and lower kurtosis are preferred to reduce the probability of extreme losses. However, incorporating high-order moments in the portfolio design is very difficult due to their non-convexity and rapidly increasing computational cost with the dimension. In this paper, we propose a very efficient and convergence-provable algorithm framework based on the successive convex approximation (SCA) algorithm to solve high-order portfolios. The efficiency of the proposed algorithm framework is demonstrated by the numerical experiments.

Sovereign Bond Market Spillovers from Crisis-Time Developments in Greece
Clancy, Daragh,Gabriele, Carmine,Zigraiova, Diana
The systemic importance of a country is a crucial component in the European Stability Mechanism's assessment of financial assistance requests. However, disentangling the effect of developments in one country on other countries in real time is fraught with difficulties. Using empirical methods that provide ex-ante measures of risk exposure, we find that changes in the tail risks of Greek sovereign bond returns resulted in immediate and significant cross-market spillovers to other euro area sovereign bond returns. Our approach provides real-time insights on evolving cross-market interdependencies, such as Germany gradually becoming a safe haven from Greece. We confirm that developments in Greece drive our tail-risk results by linking them to a newly developed intra-day event database. This approach also allows us to provide a more intuitive quantification of the spillovers emanating from Greece. Taken together, our findings demonstrate that developments in Greece significantly affected other euro area sovereign bond markets over and beyond global, euro area and country-specific factors. Our results provide evidence for the systemic importance of Greece throughout the European sovereign debt crisis.

Strategic Risk Management: Out-of-Sample Evidence from the COVID-19 Equity Selloff
Harvey, Campbell R.,Hoyle, Edward,Rattray, Sandy,Van Hemert, Otto
Over the 2016-2019 period, we released a series of research papers on the topic of “strategic risk management”, or the embedding of risk management into investment strategy design. We show that key risk controls that we introduced materially helped during the sharp equity market selloff in February-March 2020, when the COVID-19 pandemic accelerated. First, faster trend following and long-short profitability stock strategies performed well during the equity market selloff. Second, responsive volatility targeting reduced positions dramatically ahead of the most volatile period in March 2020, and so improved both the return and risk profile at that time. Third, strategic rebalancing rules helpfully called for keeping an underweight in equities (not rebalancing back to target) at the end of February 2020, regardless of using 1-, 3-, or 12-month trend systems to base the rebalancing rule on.

Systematic vs. Idiosyncratic Liquidity: Cross-section of Stock Returns
Ince, Baris
This paper decomposes firm-specific monthly-varying Amihud (2002) illiquidity measure into two components: (i) systematic illiquidity; (ii) idiosyncratic illiquidity. While there is a positive and significant relationship between systematic illiquidity and one-month-ahead stock returns, the observed relationship disappears when very small stocks are excluded. On the other hand, investors tend to underreact to idiosyncratic (il)liquidity. Hence, stocks with positive (negative) idiosyncratic liquidity generate positive (negative) subsequent returns. More specifically, high-low idiosyncratic liquidity strategy generates around 11% annualized value-weighted risk-adjusted return. Investor inattention, illiquidity, and sentiment-driven irrational investors are the main drivers of underreaction to idiosyncratic liquidity component.

Systemic Importance of Central Bank Communication: ECB Policy Announcements and Systemic Risk in the Eurozone
Möller, Rouven
This paper studies central bank communication of the ECB as a potential factor that explains the contribution to systemic risk for a panel of large banks in the Eurozone between 2002 and 2018. The empirical evidence suggests that the ECB is able to use central bank communication to effectively steer private sector expectations in such a way that it has a robust and significant impact on banks' contribution to systemic risk. However, the results indicate that this influence varies over time, implying that the ECB uses monetary policy surprises and the associated language to steer market expectations in line with its own policy objectives at time. Additional analyses show that banks that contribute more to systemic risk tend to be more sensitive towards the effects of central bank communication. More specifically, larger banks and highly leveraged banks react more strongly to central bank communication. Furthermore, requirements of prudential regulation tend to mitigate the effects of central bank communication which is additional evidence on the topic of policy coordination between macroprudential policy and monetary policy.

Testing Semi-Strong Form Efficiency of the Prewar Japanese Stock Market
Kenichi Hirayama,Akihiko Noda

This paper examines Fama's (1970) semi-strong form efficient market hypothesis (EMH) in the prewar Japanese stock market using a new dataset. We particularly focus on the relationship between the prewar Japanese stock market and several government policy interventions to explore whether the semi-strong form stock market efficiency evolves over time. To capture the long-run impact of government policy interventions against stock markets, we measure the time-varying joint degree of market efficiency and the time-varying impulse responses based on Ito et al.'s (2014; 2017) generalized least squares-based time-varying vector autoregressive model. The empirical results reveal that (1) the joint degree of market efficiency in the prewar Japanese stock market fluctuated over time because of external events such as policy changes and wars, (2) the semi-strong form EMH is almost supported in the prewar Japanese stock market, and (3) the markets rapidly reflect the information of the external events through time. Therefore, we conclude that Lo's (2004) adaptive market hypothesis is supported in the prewar Japanese stock market even if we consider that the public information affects the stock market.

The Determinants of Main Stock Exchange Index Changes in Emerging Countries: Evidence from Turkey in COVID-19 Pandemic Age
Kartal, Mustafa Tevfik,Depren, Özer,Depren, Serpil Kilic
With the emergence and spreading of COVID-19 pandemic all over the world, the uncertainty has been increasing for countries. Depending on this condition, especially emerging countries have been affected negatively by foreign portfolio investment outflows from stock exchanges, and main stock exchange indices have been collapsed. The study examines the causes of the main stock exchange index changes in Turkey in the COVID-19 period. In this context, 14 variables (3 global, 6 country-level, 5 market-level) are analyzed by employing random forest and support vector machine algorithms and using daily data between 01.02.2020 and 05.15.2020, which includes the pre-pandemic and the pandemic periods. The findings prove that (i) the most important variables are the retention amount of foreign investors in the equity market, credit default swap spreads, government bonds interest rates, Morgan Stanley Capital International (MSCI) emerging markets index, and volatility index in the pre-pandemic period; (ii) the importance of variables changes as MSCI emerging markets index, the volatility index, retention amount of foreign investors in the equity market, amount of securities held by the Central Bank of Republic of Turkey (CBRT), equity market traded value in the pandemic period; (iii) support vector machine has superior estimation accuracy concerning random forest algorithms in both pre-pandemic and pandemic period.

The Economics of Cryptocurrencies - Why Does It Work?
Kishore Jain, Divij
The impact of the introduction of cryptocurrencies in all economies are discussed here. The advantages of using cryptocurrencies as well as the drawbacks of traditional digital payments are covered. Cryptocurrency aimed to revolutionize the digital payments market; however, it does give rise to many questions as to its cost, reliability, and the future competition amongst the cryptocurrencies as well. In this paper, I try to answer the basic questions arising due to the introduction of cryptocurrencies, as well as the economic problems it presents.

The Effect of Corporate Governance and Ownership Structure on Financial Performance of Listed Companies in Nepal
G. C., Surya Bahadur
The paper attempts to analyze relationships among corporate governance, ownership structure and firm performance in Nepal. The study comprises of panel data set of 25 firms listed at Nepal Stock Exchange (NEPSE) covering a period of five years from 2012 to 2016. The econometric methodology for the study consists primarily of least squares dummy variable (LSDV) model, fixed and random effects panel data models and two-stage least squares (2SLS) model. The study finds bi-directional relationship between corporate governance and performance. Among corporate governance internal mechanisms; smaller board size, higher proportion of independent directors, reducing ownership concentration, improving standards of transparency and disclosure, and designing appropriate director compensation package are important dimensions that listed firms and regulators in Nepal should focus on. Ownership concentration is found to have positive effect on performance; however, it affects corporate governance negatively. This study raises understanding and provides empirical evidence for endogenous relationship between corporate governance and performance and offers support for principal-principal agency relationship. The results of this study lead to several practical implications for listed firms as well as policymakers of Nepal in promoting sound corporate governance practices and codes. For listed companies, the improvement in compliance with a code of corporate governance or voluntary adoption of best practices can provide a means of achieving improved performance.

The Financing of Investment: Firm Size, Asset Tangibility and the Size of Investment
LÉ, Mathias,Vinas, Frédéric
How do firms finance their investment? To what extent does the financing mix depends on the nature or the size of investment? To what extent does the funding mix of investment vary along firm size? Relying on a unique database of firms covering 72% of the value added in France over three decades, this paper addresses those questions and provides a comprehensive picture of the financial resources used by firms to finance their investment.We uncover significant cross-sectional heterogeneity in the financing mix of investment along firm size, asset tangibility and investment size. In particular, we show that the commonly held view that "firms strongly rely on bank credit in a bank-based economy" weakens significantly as we consider larger firms or when it comes to finance intangible investments or relatively small investments.

The Pre-FOMC Announcement Drift and Private Information: Kyle Meets Macro-Finance
Ying, Chao
This paper proposes and tests the private information explanation for the time series of pre-FOMC announcement drift. I document the abnormal order imbalances are in the direction of the realized returns in the 24-hour window before FOMC announcements, coinciding with the pre-FOMC uncertainty reduction. I integrate Kyle's (1985) model into a standard consumption-based asset pricing framework where the market makers are compensated for the risk of holding assets. Observing aggregate order flow, they update the belief about the marginal utility-weighted asset value, which resolves uncertainty gradually and results in an upward drift in market prices before announcements. I demonstrate that there is a strictly positive pre-FOMC drift if and only if the market makers require risk compensation.

The Premises of the Proposed Regulation for Selecting ERISA Plan Investments
Feuer, Albert
ERISA plan fiduciaries select investments to make (1) directly on behalf of plan participants and beneficiaries, or (2) indirectly on behalf of plan participants and beneficiaries by selecting investment options to offer them. The proposed regulation directs those fiduciaries to look askance at ESG investments, which the DOL describes as including socially responsible investing, responsible investing, and sustainable investing (ESG/sustainable investing). In particular, ERISA plan fiduciaries would not be able to choose (1) an ESG/sustainable investment, regardless of the economic value of the investment, unless the fiduciaries overcome burdens not applicable to other investments and (2) an ESG/sustainable investment for a self-directed plan, regardless of its economic value, as (a) a qualified default investment alternative (QDIA)or a component of such a QDIA, or (b) an investment alternative if the fiduciary applied any ESG/sustainable investment considerations, such as ESG ratings, that are not “objective risk-return criteria.”Participants and beneficiaries, like other investors often want their ERISA plans to seek and make (or offer) ESG/sustainable investments, not only because such investments, like other investments, are perceived as good economic investments, but because, unlike other investments these investments are also perceived to have positive effects for the environment, society, or enterprise governance. Thus, the proposal would no longer permit fiduciaries to choose or retain an ESG/sustainable-friendly version of an asset classes that provides at least the economic value of the other available members of an asset class, such as the selection of an S&P 500® ESG Index fund rather than an S&P 500® Index fund.The proposed regulations rely on incorrect premises.The most important incorrect premise is that careful, prudent, skillful, and diligent ERISA plan fiduciaries will, like the DOL and unsophisticated investors, rely on slogans, such as those denigrating or praising ESG/sustainable investing, to make direct or indirect plan investments. Instead, plan fiduciaries fulfilling their ERISA obligations review the economic value of the options in the relevant asset class, regardless of the name of the investment or the investment approach, to determine the investment option or options with the greatest economic values.The second most important incorrect premise is that plan fiduciaries may only use pecuniary factors to select and monitor investment options for participants and beneficiaries. None of the court decisions cited in the proposal made such a holding. Instead, as suggested in the proposal’s preamble, plan fiduciaries would determine the economic value of the options in the relevant asset class and thereby identify the alterantive or alternatives with the greatest economic value.Thus, it is advisable for the DOL to revise the proposed regulation to be consistent with ERISA, the usual practice of prudent ERISA fiduciaries exercising due diligence in making plan investment decisions, prior DOL guidance, and the reasonable preferences of many ERISA plan fiduciaries, participants, and beneficiaries.

The Real Effects of Bank Branch Closings and Restructurings
Martín‐Oliver, Alfredo,Toldrà-Simats, Anna,Vicente, Sergio
We study the effect of the reform of the banking system in Spain on the economic activity and survival of small and medium firms. We include both the effects of branch closings and restructurings that result from banks' M&As. By including branch restructurings, we are able to explicitly account for the transition from traditional systems for evaluating credit risk based on soft information to automatized credit scoring systems that are typical in consolidated banks. We find that both branch closings and restructurings have a significant negative impact on the operational activities and the probability of survival of SMEs. The effects are larger and more significant in the short-term but also persist in the long-term, specially for those firms that have a low number of bank relationships to start with. We also find that firms with larger credit scores are more able to maintain their relationship with the restructured branch or to replace a branch after it is restructured or closed. In this way, these firms are able to mitigate or even eliminate the negative effects of the reform.

Towards a Sustainable Agricultural Credit Guarantee Scheme
Reason Lesego Machete

Since 1986, Government of Botswana has been running an Agricultural Credit Guarantee Scheme for dry-land arable farming. The scheme purports to assist dry-land crop farmers who have taken loans with participating banks or lending institutions to help them meet their debt obligations in case of crop failure due to drought, floods, frost or hailstorm. Nonetheless, to date, the scheme has focused solely on drought. The scheme has placed an unsustainable financial burden on Government because it is not based on sound actuarial principles. This paper argues that the level of Government subsidies should take into account the gains made by farmers during non-drought years. It is an attempt to circumvent the challenges of correlated climate risks and recommends a quasi self-financing mechanism, assuming that the major driver of crop yield failure is drought. Moreover, it provides a novel subsidy and premium rate setting method.

Trust in Finance: Values Matter.
Adams, Renee B.
Moralistic trust arises when people believe others share their moral values. I examine whether trust in the finance industry has a moral foundation by comparing values and attitudes of finance professionals with those of the general population in two data sets: a unique data set on values of CFAs in 2016 paired with the World Value Survey and the European Social Survey. Across countries, finance value gaps are more aligned with ethical values when trust in finance is greater. Over time, finance value gaps are less aligned with ethical values when trust in finance is greater. I show that differences in education appear to be a primary explanation for the differences in the cross-sectional and time-series results: in periods of high trust in the finance industry, e.g. the pre-crisis period, finance professionals in the sample are less educated. While many are asked what they think about finance professionals, my results suggest that asking finance professionals what they think can provide insights into how trust evolves with selection into the industry.

Volatility Spillover Effect in Indian Stock Market
G. C., Surya Bahadur
The study aims to empirically examine the transmission of volatility from global stock markets to Indian stock market. The study is based on time series data comprising of daily closing stock market indices from National Stock Exchange (NSE), India and major foreign stock exchange of the three countries one each from America, Europe and Asia making the highest portfolio investment in Indian stock market. The study period covers 11 years from 1st January, 2005 to 31st December, 2015 comprising a total of 2731 observations. The Indian stock index used is CNX Nifty 50 and the foreign indices are S & P 500 from USA, FTSE 100 from UK, and Nikkei 225 from Japan. The results reveal that the Indian stock market return is co-integrated with market returns of US, UK and Japanese stock markets. Therefore, the return and hence volatility of Indian stock market is associated with global markets which depicts that it is getting integrated with global financial markets. The results provide empirical evidence for volatility transmission or volatility spillover in the Indian stock market from global markets. There exists inbound volatility transmission from US market to Indian stock market. The Indian and UK stock market have bi-directional volatility transmission. However, there exists presence of only outbound volatility transmission from Indian stock market to Japanese stock market. The volatility transmission from global markets to India is rapid with the spillover effect existing for up to three days only.

Wall Street Watches Washington: Asset-Pricing Implications of Policy Uncertainty
verhoeks, ralph,Verschoor, Willem F. C.,Zwinkels, Remco C. J.
We study the effect of economic policy uncertainty (EPU) on sell-side analysts’ forecasts, and how it interact with the stock-market response to a firm’s earnings news. We find that analysts tend to disagree more when faced with higher levels of EPU, and that their forecasts tend to be less precise and more conservative. The lower forecast accuracy can be attributed to distraction: during higher EPU, analyst attention is attracted to the overall stock market, while distracted to firm-specific earning news. In addition, we find that higher EPU mutes the trading volume reaction to earnings surprises and that investors do not unravel biases in analyst forecasts. Our results suggest that during high EPU regimes investors naively follow analysts’ forecasts, independent of their accuracy and credibility.

When Attention Is Away, Analysts Misplay: Distraction and Analyst Forecast Performance
Bourveau, Thomas,Garel, Alexandre,Joos, Peter R.,Petit-Romec, Arthur
We construct a measure of analyst-level distraction based on analysts’ exposure to exogenous attention-grabbing events affecting firms under coverage. We find that temporarily distracted analysts achieve lower forecast accuracy, revise forecasts less frequently, and publish less informative forecast revisions relative to non-distracted analysts. Further, at the firm level, analyst distraction carries real negative externalities by increasing information asymmetry for stocks that suffer from a larger extent of analyst distraction during a given quarter. Our findings thus augment our understanding of the determinants and effects of analyst effort allocation and broaden the literature on distraction and information spillover in financial markets.