# Research articles for the 2020-08-05

A Computable General Equilibrium Model as a Banking Sector Regulatory Tool in South Africa
Beyers, Conrad,De Freitas, Allan,Essel-Mensah, Kojo,Seymore, Reyno,Tsomocos, Dimitrios P.
SSRN
A Computable General Equilibrium (CGE) model is used as a regulatory tool for the banking sector in South Africa. The model is used to determine the effects of regulatory penalties, capital adequacy requirements (CAR), and the monetary policy on the economy. Our results indicate that there is a trade off between the default and the CAR regulation. For example, reducing the default penalty the banks profits increase whereas reducing the CAR violation penalty banks profits decrease. The effects of changing the default penalty are stronger than the ones of changing the CAR violation penalty such that when both penalties are reduced the banks profits increase. Moreover, regulatory policies which are targeted at different banks produce asymmetric results as well capitalized banks with richer portfolios swiftly readjust their balance sheet and transfer the default externality to the more constrained banks and/or the private sector agents. Finally, during periods of adverse economic conditions, tightening regulatory requirements reduces the banks profitability and increases defaults, and hence increases financial fragility.

A New World Post COVID-19: Lessons for Business, the Finance Industry and Policy Makers
Billio, Monica,Varotto, Simone
SSRN
Pandemics are disruptive events that have profound consequences for society and the economy. This volume aims to present an analysis of the economic impact of COVID-19 and its likely consequences for our future. This is achieved by drawing from the expertise of authors who specialize in a wide range of fields including fiscal and monetary policy, banking, financial markets, pensions and insurance, artificial intelligence and big data, climate change, labor market, travel, tourism and politics, among others. We asked contributing authors to write their chapters for a non-technical audience so that their message could reach beyond academia and professional economists to policy makers and the wider society. The material in this volume draws from the latest research and provides a wealth of ideas for further investigations and opportunities for reflection. This also makes it an ideal learning tool for economics and finance students wishing to gain a deeper understanding of how COVID-19 could influence their disciplines.

Appraisal Waivers
Fisch, Jill E.
SSRN
A judicial determination of fair value in a private company can be a difficult and imprecise process. This difficulty coupled with variations in way mergers are negotiated and structured and the potential for conflicts of interest lend uncertainty to appraisal proceedings. As a result, corporate participants have powerful reasons to seek to limit the uncertainty associated with an appraisal proceeding ex ante. The response has been the growing use of shareholder agreements that limit appraisal rights.Appraisal waivers also offer a potentially attractive solution to a somewhat different concern, the growth of appraisal litigation in publicly traded companies. As with private companies, public companies face the problem that appraisal proceedings involve substantial cost and uncertainty. Although courts and commentators have grappled with how best to calculate fair value and the impact of that methodology on the incentives of participants in the merger process, they have failed to reach consensus. Appraisal waivers provide an alternative approach - a market-based mechanism to determine the efficient level of merger litigation.Public companies have not followed the lead of private companies, however, in using appraisal waivers. As this Article explains, the likely reason is the impracticality of using shareholder agreements in public companies and a concern that appraisal waivers in a charter or bylaw would be invalid.This Article considers both the normative and legal case for appraisal waivers. It argues that, with appropriate procedural protections â€" specifically the requirement that such waivers take the form of charter provisions -- appraisal waivers are normatively desirable. It then questions whether distinguishing between the use of appraisal waivers in private and public companies is appropriate and argues that it is not. The source of this distinction is a potential difference in the scope of private ordering available through shareholder agreements as opposed to the charter or bylaws, a difference that this Article critiques.The Article concludes that, under current law, the legal status of appraisal waivers is unclear. Given the potential value that such waivers provide, and the particular value that market discipline would bring to the scope and structure of such waivers, the Article argues for legislation validating a corporationâ€™s authority to limit or eliminate appraisal rights in its charter.

Assessing the Impact of Equity Derivatives Introduction in National Stock Exchange (NSE), India
Prabhu, Dinakar
SSRN
This article investigates the impact of introduction of equity derivatives in NSE, India, on price and liquidity characteristics of the underlying. First, the effect on price is examined following an event study methodology provided by Brown and Warner (1985), where the significance of the abnormal returns around the event day is examined. Next, the effect of these introductions on liquidity of the underlying is examined by determining the change in the mean levels of liquidity proxies. Five different liquidity proxies have been used for this purpose namely Relative Trading volume, Net Turn-over, Liquidity ratio, Price range and Trading frequency. These liquidity proxies are faced with the problem of serial-correlation. Therefore, the means are computed after fitting standard time-series ARMA (p,q) models. Further, Indian markets are also prone to â€œexpiration day effectâ€. This effect is caused when all the existing options and futures contracts are simultaneously executed on the expiration day, where a large number of trading activity is observed. We control for this effect and the change in liquidity is once again assessed. The result on price effect shows significant positive abnormal returns on few days around the event. While, the result on liquidity indicate a general improvement in the level of liquidity post introduction and this is persistent even after controlling for the expiration day effect.

Bank Stress Test Results and Their Impact on Consumer Credit Markets
Agarwal, Sumit,An, Xudong,Cordell, Larry,Roman, Raluca A.
SSRN
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.

Board Reforms and the Cost of Equity: International Evidence
Li, Maoliang,Wu, Ji (George),Zhang, Liansheng,Zou, Liping
SSRN
We examine the impact of corporate board reforms on the COE using a sample of data in 41 countries for the period from 1992 to 2012. We find a significant increase in the COE after board reforms worldwide. This effect is eased for firms in countries under a comply-or-explain reform approach, as well as for firms in emerging countries. We further conclude that board reforms involving board independence, audit committee and auditor independence, and the separation of the CEO and Chairman positions, result increases in the COE. Our results suggest that board reforms are considered inefficient to mitigate agency problems.

COVID-19 and Fiscal Policy in the Euro Area
Busetto, Filippo,Dufour, Alfonso,Varotto, Simone
SSRN
In this chapter we document fiscal policy developments in the main euro area economies over the last two decades and highlight the dramatic changes triggered by the COVID-19 pandemic. We analyse how euro area yield curves respond to COVID-19 related expectations of fiscal expansion. We show how fiscal constraints may affect interest rates. Upward pressure on national yields from higher debt levels could compromise fiscal and financial stability in the long-term.

COVID-19 and the United States Financial Marketsâ€™ Volatility
Albulescu, Claudiu
SSRN
We empirically investigate the effect of the official announcements regarding the COVID-19 new cases of infection and fatality ratio, on the financial markets volatility in the United States (US). We consider both COVID-19 global and US figures and show that the sanitary crisis enhances the S&P 500 realized volatility. Our findings are robust to different model specifications and suggest that the prolongation of the coronavirus pandemic is an important source of financial volatility, challenging the risk management activity.

Calm Before the Storm: An Early Warning Approach Before and During the COVID-19 Crisis
SSRN
This paper develops a means of visualising the vulnerability of complex systems of financial interactions resulting from the changing risk tolerance of investors. The investors' risk behavior contributes to the buildup of vulnerability in crisis and in calm periods. We show how both time-varying risk tolerance and spillover indices can be translated into two-dimensional information transmission and crisis transmission maps, respectively. Taken together, the information transmission maps have the advantage of highlighting potential crisis transmission pathways in the crisis transmission maps. These maps provide clear visualization showing information transmission predates crisis transmission drawing from conditional signed spillover and risk tolerance indices computed from equity market data for 31 global markets between 1998 and 2020. We examine if investors' risk preference induces a crisis and to what extent such a predictor may be related to a pandemic. Furthermore, we take a special look at the COVID-19 pandemic and its impact on the dynamics of systemic crisis transmission.

Can Private Equity Funds Act as Strategic Buyers? Evidence from Buy-and-Build Strategies
SSRN
By holding assets longer and increasingly focusing on growth strategies private equity firms enter the territory of strategic buyers. In one such strategy, a private equity firm buys a company and then builds on that â€œplatformâ€ through add-on acquisitions. We ask whether such serial (buy-and-build) acquisition strategies deliver operating synergies, as expected from strategic buyers, or rather are a form of â€œwindow-dressing.â€ We collect a sample of buy-and-build strategies from seven major European markets and find that the profitability of these strategies improves more than that of the comparable strategies, constructed by us from stand-alone companies. We analyze a number of operating outcomes across various strategy sub-types and confirm that these operational improvements are consistent with the synergy interpretation.

Can Volatility Solve the Naive Portfolio Puzzle?
Michael Curran,Ryan Zalla
arXiv

We investigate whether sophisticated volatility estimation improves the out-of-sample performance of mean-variance portfolio strategies relative to the naive 1/N strategy. The portfolio strategies rely solely upon second moments. Using a diverse group of econometric and portfolio models across multiple datasets, most models achieve higher Sharpe ratios and lower portfolio volatility that are statistically and economically significant relative to the naive rule, even after controlling for turnover costs. Our results suggest benefits to employing more sophisticated econometric models than the sample covariance matrix, and that mean-variance strategies often outperform the naive portfolio across multiple datasets and assessment criteria.

Common Analyst Networks and Corporate Disclosure Policy Choices
Huang, Jian,Jain, Bharat A.,Kini, Omesh,Xi, Yaoyi
SSRN
We study the propagation of corporate disclosure policy choices across firms connected by common analysts. We find strong similarities in disclosure policies among firms that share common analysts. We show that these similarities are attributable to both analyst coverage initiation decisions and managerial adaptive learning/analyst influence effects. Further, we find that firms are more likely to be influenced by the disclosure policies of their common analystsâ€™ network firms when they are covered by more influential analysts; and less likely when the firm is a more important player in its industry and the firmsâ€™ disclosure policies are generally considered to be relatively better than their network firms. Overall, our results suggest that common analyst networks facilitate the propagation of corporate disclosure policies.

ESTRUTURA DE CAPITAL EM COOPERATIVAS AGRÃCOLAS DO PARANÃ (Capital Structure in Agricultural Cooperatives of ParanÃ¡)
KÃ¶ppe MalaÅ„ski, Leonardo
SSRN

Econometric issues with Laubach and Williams' estimates of the natural rate of interest
Daniel Buncic
arXiv

Holston, Laubach and Williams' (2017) estimates of the natural rate of interest are driven by the downward trending behaviour of 'other factor' $z_{t}$. I show that their implementation of Stock and Watson's (1998) Median Unbiased Estimation (MUE) to determine the size of the $\lambda _{z}$ parameter which drives this downward trend in $z_{t}$ is unsound. It cannot recover the ratio of interest $\lambda _{z}=a_{r}\sigma _{z}/\sigma _{\tilde{y}}$ from MUE required for the estimation of the full structural model. This failure is due to an 'unnecessary' misspecification in Holston et al.'s (2017) formulation of the Stage 2 model. More importantly, their implementation of MUE on this misspecified Stage 2 model spuriously amplifies the point estimate of $\lambda _{z}$. Using a simulation experiment, I show that their procedure generates excessively large estimates of $\lambda _{z}$ when applied to data generated from a model where the true $\lambda _{z}$ is equal to zero. Correcting the misspecification in their Stage 2 model and the implementation of MUE leads to a substantially smaller $\lambda _{z}$ estimate, and with this, a more subdued downward trending influence of 'other factor' $z_{t}$ on the natural rate. Moreover, the $\lambda _{z}$ point estimate is statistically highly insignificant, suggesting that there is no role for 'other factor' $z_{t}$ in this model. I also discuss various other estimation issues that arise in Holston et al.'s (2017) model of the natural rate that make it unsuitable for policy analysis.

Equity Crowdfunding: Brave Market or Safe Haven for the Crowd During the COVID-19 Crisis?
Battaglia, Francesca,Busato, Francesco,Manganiello, Maria
SSRN
By analyzing a full dataset of 437 Italian equity crowdfunding campaigns over the period 2014-2020, and then by focusing on a sub-sample of 79 projects posted on the websites of platforms from January 2020 to June 2020, this chapter explores the impact of the COVID-19 pandemic on the Italian equity crowdfunding sector. In detail, we investigate whether and to what extent the key drivers (i.e. female founders, social capital and equity offered) that brought backers to finance a specific project before COVID-19 are the same nowadays, and which type of ventures backers are more prone to finance via equity crowdfunding in the aftermath of the crisis. We provide evidence that the strength of the effect of our key variables on the campaignâ€™s success has changed during the COVID-19 crisis. We also find that backers are more prone to finance companies with a high level of R&D expenditure and technological projects. Moreover, we point out that ventures not located in a red zone are more likely to be successfully financed by backers and that they are more willing to invest in projects launched in platforms implementing specific measures in response to COVID-19.

Financial Stability, Resolution of Systemic Banking Crises and COVID-19: Toward an Appropriate Role for Public Support and Bailouts
Arner, Douglas W.,Avgouleas, Emilios,Gibson, Evan
SSRN
A wide range of approaches has been applied to address banking and other financial crises. The nature of the approach depends on the nature of the crisis, its origins, evolution and context. Systemic banking crises are among the most common and costly to address. The experiences of the three major international financial crises of the past 25 years â€" the Asian Financial Crisis, the Global Financial Crisis, and the European Debt Crisis â€" offer critical lessons regarding the most effective approaches in tackling bank solvency during a systemic crisis. One of the most common and also effective methods has been the transfer of non-performing loans (NPLs) to an Asset Management Company (AMC) that performs workouts or liquidates stressed loan portfolios at a more opportune time to amortize losses. In most cases the use of AMCs has delivered positive results for the taxpayer. Contemporary consensus as regards tackling bank solvency during a systemic financial crisis focuses heavily on prevention of government bailouts in order to protect state finances and curb moral hazard. However, an overly dogmatic focus on preventing public financial support in the context of a systemic bank solvency crisis may place insurmountable obstacles to the use of state-backed AMCs and other forms of resolution of NPLs and bank recapitalization. This paper provides a new perspective on the common belief that public support in the context of systemic bank insolvency â€" i.e. bank bailouts â€" is an inefficient use of public funds or conducive to moral hazard. Our study finds that state-backed AMCs can be effective in recapitalizing banking systems, depending on the modus operandi of the restructuring, funding and the conditions attached to the fiscal backstop. With respect to systemic banking crises or those caused by exogenous factors, such as the unprecedented disruption of economic activity due the COVID-19 pandemic, preservation of financial stability and not containment of moral hazard should be policy-makersâ€™ predominant goal. Thus, we suggest that a combination of balance sheet restructuring and the use of AMCs to manage NPLs is the optimal approach.

Finans Teorisi Kapsaminda Katilim Bankaciligi ve Yeniden Yapilanma Onerisi (Participation Banking in the Finance Theory and a Suggestion for Restructuring)
Eken, Mehmet Hasan,Ã–ZTÃœRK, Nurettin
SSRN
Turkish abstract: KatÄ±lÄ±m bankalarÄ±, Ä°slami prensipler Ã§erÃ§evesinde faaliyette bulunan ve temelinde kar-zarar ortaklÄ±ÄŸÄ± olan finansal kurumlardÄ±r. TÃ¼rkiyeâ€™de katÄ±lÄ±m bankalarÄ±nÄ±n, bankacÄ±lÄ±k sistemine gÃ¶re daha hÄ±zlÄ± bÃ¼yÃ¼me sergiledikleri fakat yeterli dÃ¼zeyde pazar payÄ±na ulaÅŸamadÄ±klarÄ± gÃ¶rÃ¼lmektedir. Ã‡alÄ±ÅŸmada, bu sorunun nedeni olarak mevcut katÄ±lÄ±m bankacÄ±lÄ±ÄŸÄ± sisteminin finans teorisine ve risk-getiri dengesine uyumsuz olmasÄ± ÅŸeklinde ortaya konulmaktadÄ±r.. KatÄ±lÄ±m bankacÄ±lÄ±ÄŸÄ±nda sermaye sahiplerinin elde ettiÄŸi Ã¶zkaynak karlÄ±lÄ±ÄŸÄ±, mevduat bankalarÄ±na gÃ¶re makul Ã¶lÃ§Ã¼lerdedir. DiÄŸer taraftan katÄ±lma hesabÄ± sahipleri ise mevduat bankasÄ± mudilerine kÄ±yasla daha yÃ¼ksek risk almakla beraber daha az getiri elde etmektedir. Mevcut durumdaki bu anomalinin dÃ¼zeltilmesi iÃ§in katÄ±lÄ±m bankalarÄ±nÄ±n yasal ve kurgusal yapÄ±sÄ±nÄ±n deÄŸiÅŸtirilmesi gerekmektedir. YapÄ±lacak dÃ¼zenlemelerle Ã¶zkaynak karlÄ±lÄ±ÄŸÄ± ile kar payÄ± getirisinin yakÄ±nlaÅŸtÄ±rÄ±lmasÄ±, hatta bu deÄŸerlerin mutlak olmasa bile birbirine eÅŸit dÃ¼zeyde olmasÄ±nÄ±n saÄŸlanmasÄ± gerekmektedir. Ã‡alÄ±ÅŸmada bu paralelde sistemin analizi ve eleÅŸtirisi yapÄ±lmakta, kavramlar farklÄ± bir bakÄ±ÅŸ aÃ§Ä±sÄ± ile irdelenmekte ve yeniden yapÄ±lanma iÃ§in bir model Ã¶nerisi sunulmaktadÄ±r. Bu baÄŸlamda Ã¶nerimiz, katÄ±lma hesaplarÄ±nÄ±n aÃ§Ä±k uÃ§lu fon olarak yeniden yapÄ±landÄ±rÄ±lmasÄ±dÄ±r. English abstract: Participation banks are financial institutions that operate on the basis of Islamic principles and are profit-loss sharing institutions. It appears that the participation banks in Turkey have grown faster than the conventional banks but have not reached a sufficient market share. In this study, it is stated that as the reason of this problem the participation banking system is incompatible with the finance theory and risk-return balance. for adjustment this anomaly legal and fictional nature of the participation banks must be changed. The return on equity obtained by the capital owners in participation banking is reasonable compared to the deposit banks. On the other hand, the holders of the participation account have a higher risk than deposit bank depositors, but have less return. Even if these values are not absolute, it is necessary that return on equity and profit share is should be equally. In this study, the system is analyzed and criticized, and concepts are examined from a different point of view and a model proposal for restructuring is presented. In this context, our proposal is to restructure the participation accounts as a open-ended funds.

Finans Teorisi Kapsaminda Katilim BankaciliÄŸi Ve Yeniden Yapilanma Ã–nerisi (Participation Banking in the Finance Theory and a Suggestion for Restructuring)
Ã–ZTÃœRK, Nurettin
SSRN
Turkish Abstract: KatÄ±lÄ±m bankalarÄ±, Ä°slami prensipler Ã§erÃ§evesinde faaliyette bulunan ve temelinde kar-zarar ortaklÄ±ÄŸÄ± olan finansal kurumlardÄ±r. TÃ¼rkiyeâ€™de katÄ±lÄ±m bankalarÄ±nÄ±n, bankacÄ±lÄ±k sistemine gÃ¶re daha hÄ±zlÄ± bÃ¼yÃ¼me sergiledikleri fakat yeterli dÃ¼zeyde pazar payÄ±na ulaÅŸamadÄ±klarÄ± gÃ¶rÃ¼lmektedir. Ã‡alÄ±ÅŸmada, bu sorunun nedeni olarak mevcut katÄ±lÄ±m bankacÄ±lÄ±ÄŸÄ± sisteminin finans teorisine ve risk-getiri dengesine uyumsuz olmasÄ± ÅŸeklinde ortaya konulmaktadÄ±r. KatÄ±lÄ±m bankacÄ±lÄ±ÄŸÄ±nda sermaye sahiplerinin elde ettiÄŸi Ã¶zkaynak karlÄ±lÄ±ÄŸÄ±, mevduat bankalarÄ±na gÃ¶re makul Ã¶lÃ§Ã¼lerdedir. DiÄŸer taraftan katÄ±lma hesabÄ± sahipleri ise mevduat bankasÄ± mudilerine kÄ±yasla daha yÃ¼ksek risk almakla beraber daha az getiri elde etmektedir. Mevcut durumdaki bu anomalinin dÃ¼zeltilmesi iÃ§in katÄ±lÄ±m bankalarÄ±nÄ±n yasal ve kurgusal yapÄ±sÄ±nÄ±n deÄŸiÅŸtirilmesi gerekmektedir. YapÄ±lacak dÃ¼zenlemelerle Ã¶zkaynak karlÄ±lÄ±ÄŸÄ± ile kar payÄ± getirisinin yakÄ±nlaÅŸtÄ±rÄ±lmasÄ±, hatta bu deÄŸerlerin mutlak olmasa bile birbirine eÅŸit dÃ¼zeyde olmasÄ±nÄ±n saÄŸlanmasÄ± gerekmektedir. Ã‡alÄ±ÅŸmada bu paralelde sistemin analizi ve eleÅŸtirisi yapÄ±lmakta, kavramlar farklÄ± bir bakÄ±ÅŸ aÃ§Ä±sÄ± ile irdelenmekte ve yeniden yapÄ±lanma iÃ§in bir model Ã¶nerisi sunulmaktadÄ±r. Bu baÄŸlamda Ã¶nerimiz, katÄ±lma hesaplarÄ±nÄ±n aÃ§Ä±k uÃ§lu fon olarak yeniden yapÄ±landÄ±rÄ±lmasÄ±dÄ±r.English Abstract: Participation banks are financial institutions that operate on the basis of Islamic principles and are profit-loss sharing institutions. It appears that the participation banks in Turkey have grown faster than the conventional banks but have not reached a sufficient market share. In this study, it is stated that as the reason of this problem the participation banking system is incompatible with the finance theory and risk-return balance. for adjustment this anomaly legal and fictional nature of the participation banks must be changed. The return on equity obtained by the capital owners in participation banking is reasonable compared to the deposit banks. On the other hand, the holders of the participation account have a higher risk than deposit bank depositors, but have less return. Even if these values are not absolute, it is necessary that return on equity and profit share is should be equally. In this study, the system is analyzed and criticized, and concepts are examined from a different point of view and a model proposal for restructuring is presented. In this context, our proposal is to restructure the participation accounts as a open-ended funds.

Flattening the Illiquidity Curve: Retail Trading During the COVID-19 Lockdown
SSRN
This paper studies retail investorsâ€™ impact on stock liquidity during the Coronavirus pandemic lockdown. Retail trading exhibits a sharp increase, especially among stocks with high COVID-19-related media coverage. Retail trading attenuated the rise in illiquidity on average, but significantly less so for high-media-attention stocks. Causality is verified utilizing the staggered implementation of â€œstay-at-homeâ€ advisory across US states. The results suggest that fintech innovations to trading platforms ease retailersâ€™ access to equity markets, allowing them to provide liquidity in times of stress, while reducing the need for government intervention. Yet, this access might also carry some unintended risks.

Identifying Opportunities to Improve the Network of Immigration Legal Services Providers
Vasil Yasenov,David Hausman,Michael Hotard,Duncan Lawrence,Alexandra Siegel,Jessica S. Wolff,David D. Laitin,Jens Hainmueller
arXiv

Immigration legal services providers (ISPs) are a principal source of support for low-income immigrants seeking immigration benefits. Yet there is scant quantitative evidence on the prevalence and geographic distribution of ISPs in the United States. To fill this gap, we construct a comprehensive, nationwide database of 2,138 geocoded ISP offices that offer low- or no-cost legal services to low-income immigrants. We use spatial optimization methods to analyze the geographic network of ISPs and measure ISPs' proximity to the low-income immigrant population. Because both ISPs and immigrants are highly concentrated in major urban areas, most low-income immigrants live close to an ISP. However, we also find a sizable fraction of low-income immigrants in underserved areas, which are primarily in midsize cities in the South. This reflects both a general skew in non-governmental organization service provision and the more recent arrival of immigrants in these largely Southern destinations. Finally, our optimization analysis suggests significant gains from placing new ISPs in underserved areas to maximize the number of low-income immigrants who live near an ISP. Overall, our results provide vital information to immigrants, funders, and policymakers about the current state of the ISP network and opportunities to improve it.

Improving the Robustness of Trading Strategy Backtesting with Boltzmann Machines and Generative Adversarial Networks
Lezmi, Edmond,Roche, Jules,Roncalli, Thierry,Xu, Jiali
SSRN
This article explores the use of machine learning models to build a market generator. The underlying idea is to simulate artificial multi-dimensional financial time series, whose statistical properties are the same as those observed in the financial markets. In particular, these synthetic data must preserve the probability distribution of asset returns, the stochastic dependence between the different assets and the autocorrelation across time. The article proposes then a new approach for estimating the probability distribution of backtest statistics. The final objective is to develop a framework for improving the risk management of quantitative investment strategies, in particular in the space of smart beta, factor investing and alternative risk premia.

Insurance Coverage for Droughts, Due to Climate Change: The Case for â€˜Loss of Business Incomeâ€™ and â€˜Loss of Useâ€™
Kornfeld, Itzchak E.
SSRN

Interacting Anomalies
MÃ¼ller, Karsten,Schmickler, Simon
SSRN
An extensive literature studies interactions of stock market anomalies using double-sorted portfolios. But given hundreds of known candidate anomalies, examining selected interactions is subject to a data mining critique. In this paper, we conduct a comprehensive analysis of all possible double-sorted portfolios constructed from 102 underlying anomalies. We find hundreds of statistically significant anomaly interactions, even after accounting for multiple hypothesis testing. An out-of-sample trading strategy based on double-sorted portfolios performs on par with state-of-the-art machine learning strategies, suggesting that simple combinations of characteristics can capture a similar amount of variation in expected returns.

Market Valuation and Capital Structure Decisions: Evidence from Indian Public Limited Manufacturing Firms
Dhananjaya, K
SSRN
The study attempts to examine the impact of market valuation on capital structure decision of Indian public limited manufacturing firms. Particularly, it attempts to answer whether the market value affects firms leverage through equity issues and whether market valuation has a long term impact on firmsâ€™ leverage ratio. The findings show that there is a significant negative relationship between the change in debt ratio and MB ratio which suggests that a firmâ€™s debt ratio decreases as market value increases. This indicates that firms time the market, i.e., they prefer to issue equity when the market value is high. Also, the study shows that the negative impact of market value on debt ratio is indeed traced to changes in equity issues than changes in retained earnings or debt retirement. Further, the result shows that market value has a persistent effect on capital structure, which is consistent with the prediction of the market timing theory.

More is Less: Publicizing Information and Market Feedback
Bird, Andrew,Karolyi, Stephen A.,Ruchti, Thomas,Truong, Phong
SSRN
We study how information acquisition costs affect the informativeness of prices in guiding firm investment decisions. Using the SEC's staggered rollout of the EDGAR web platform as a shock to the cost of acquiring public information, we find that EDGAR reduced investment-Q sensitivity by 35%, despite increasing overall price efficiency. These findings are robust to tests addressing potential non-random assignment to adoption waves and treatment effect heterogeneity. Consistent with a crowding-out channel, any price efficiency gains failed to reveal decision-relevant information to managers. Our findings cast doubt on whether recent innovations in information acquisition and processing will improve allocative efficiency.

O IMPACTO DA INTEGRAÃ‡ÃƒO VERTICAL E DIFERENTES NÃVEIS DE GOVERNANÃ‡A CORPORATIVA SOBRE A LUCRATIVIDADE DE EMPRESAS DO SETOR DE ENERGIA ELÃ‰TRICA (Impact of Vertical Integration and Different Levels of Corporate Governance in Electricity Sector Companiesâ€™ Profitability)
KÃ¶ppe MalaÅ„ski, Leonardo
SSRN

Operating Leverage and Stock Returns: International Evidence
Jansen, Benjamin,GarcÃ­a-FeijÃ³o, Luis
SSRN
We use an international sample of 20 developed countries to test theories predicting an association between operating leverage with stock returns and the value premium. Results suggest that operating leverage is related to stock returns and the value premium across the sampled countries. These results are robust to multiple definitions of operating and financial leverage, and the endogeneity of operating and financial leverage. Results on the association between financial leverage and the value premium are sensitive to variable definitions. Consistent with recent theories, we also find that a countryâ€™s labor share is positively associated with the value premium. Overall, we find support for the notion that the value premium reflects compensation for exposure to systematic operating risk.

Portfolio Optimization on the Dispersion Risk and the Asymmetric Tail Risk
Young Shin Kim
arXiv

In this paper, we propose a market model with returns assumed to follow a multivariate normal tempered stable distribution defined by a mixture of the multivariate normal distribution and the tempered stable subordinator. This distribution is able to capture two stylized facts: fat-tails and asymmetry, that have been empirically observed for asset return distributions. On the new market model, we discuss a new portfolio optimization method, which is an extension of Markowitz's mean-variance optimization. The new optimization method considers not only reward and dispersion but also asymmetry. The efficient frontier is also extended to a curved surface on three-dimensional space of reward, dispersion, and asymmetry. We also propose a new performance measure which is an extension of the Sharpe Ratio. Moreover, we derive closed-form solutions for two important measures used by portfolio managers in portfolio construction: the marginal Value-at-Risk (VaR) and the marginal Conditional VaR (CVaR). We illustrate the proposed model using stocks comprising the Dow Jones Industrial Average. First, perform the new portfolio optimization and then demonstrating how the marginal VaR and marginal CVaR can be used for portfolio optimization under the model. Based on the empirical evidence presented in this paper, our framework offers realistic portfolio optimization and tractable methods for portfolio risk management.

Private Ordering and the Role of Shareholder Agreements
Fisch, Jill E.
SSRN
Corporate law has embraced private ordering -- tailoring a firmâ€™s corporate governance to meet its individual needs. Firms, particularly venture-capital backed start-ups, are increasingly adopting firm-specific governance provisions such as dual-class voting structures, arrangements to create stable shared control rights among a coalition of minority shareholders, and provisions that limit the permissible fora for shareholder litigation. Courts have broadly upheld these provisions as consistent with the contractual theory of the firm. Commentators too, while finding some governance provisions objectionable, nonetheless support a private ordering approach as facilitating innovation and enhancing efficiency.Although most analyses of private ordering focus on provisions in a corporationâ€™s charter and bylaws, private corporations are increasingly turning to an alternative governance mechanism â€" shareholder agreements. Shareholder agreements have largely escaped both judicial and academic scrutiny, but language in a handful of judicial opinions suggests that corporate participants have greater latitude to engage in private ordering through a shareholder agreement and even that shareholder agreements can be used to avoid otherwise-mandatory provisions of corporate law.This Article offers the first broad-based analysis of shareholder agreements, detailing the scope of issues to which they are addressed and identifying the challenges that they pose for corporate governance. Although shareholder agreements are a natural component of the small closely-held corporations that essentially operate as incorporated partnerships, they rely on principles of contract that are in tension with the fundamental structure of corporate law. This tension is particularly problematic for the increasing number of large privately-held corporations whose governance structures are shielded from the transparency and price discipline of the public capital markets.The Article challenges the growing use of shareholder agreements and maintains instead that corporations should engage in private ordering exclusively through their charter and bylaws. It further critiques efforts to use shareholder agreements to evade statutory or common law limits on private ordering and argues that, to the extent such limits are undesirable, they should be the subject of legislative reform.

Reinforcement Learning for Optimal Market Making with the Presence of Rebate
Zhang, Ge,Chen, Ying
SSRN
We propose a reinforcement learning (RL) framework to solve the HJB equations of optimal market making with the presence of rebate. As a numerical solution, the RL algorithm successfully mirrors the analytical solutions under the scheme of no rebate and constant rebate. Under the time-dependent rebate scheme, there is no closed form and RL provides a plausible solution. We investigate the numerical performance of the RL solutions in simulations, which show that the RL solutions deliver stable accuracy in various situations and are robust to estimation errors. Moreover, the RL solutions demonstrate the impact of rebate on the behaviour of market makers (MMs) and the quality of market. In particular, the presence of a rebate stimulates MM to quote with narrower spreads on both sides of order books and the rebate is fully transferred to the end customers, which is consistent with the theoretical results in the analytical solutions. It also improves market quality by increasing the total trading volume and providing more terminal wealth to MMs. Finally, the time-dependent rebate scheme is found to be more cost efficient than a constant rebate.

Short Term Stress of COVID-19 on World Major Stock Indices
SSRN
The main objective of this study is to check short term stress of COVID-19 on the American, European, Asian, and Pacific stock market indices, furthermore, the correlation between all the stock markets during the pandemic. Secondary data of 41 stock exchange from 32 countries have been collected from investing.com website from 1st July 2019 to 14th May 2020 for the stock market and the COVID-19 data has been collected according to the first cases reported in the country, stocks market are classified either developed or emerging economy, further divided according to the subcontinent i.e. America, Europe, and Pacific/Asia, the main focus in the data is the report of first COVID-19 cases. The study reveals that there is volatility in the all the 41 stock market (American, Europe, Asia, and Pacific) after reporting of the first case and volatility increase with the increase of COVID-19 cases, moreover, there is a significant negative relationship between the number of COVID-19 cases and 41 major stock indices of American, Europe, Asia and Pacific, European subcontinent market found more effected from the COVID-19 than another subcontinent, there is Clustering effect of COVID-19 on all the stock market except American's stock market due to smart capital investing.

Strong convergence rates for Markovian representations of fractional processes
Philipp Harms
arXiv

Many fractional processes can be represented as an integral over a family of Ornstein-Uhlenbeck processes. This representation naturally lends itself to numerical discretizations, which are shown in this paper to have strong convergence rates of arbitrarily high polynomial order. This explains the potential, but also some limitations of such representations as the basis of Monte Carlo schemes for fractional volatility models such as the rough Bergomi model.

The impact of financial risks on economic growth in EU-15
arXiv

This paper examines the impact of financial risks on economic growth in the first 15 Member States of the European Union, considering 1995-2014 period and aims to lay down a new explanatory model of economic growth, based mainly on the behavioral reactivity of the financial disruptions mentioned above. The model was estimated through the panel estimated generalized least squares method and included additional control variables in order to strengthen the research conducted. Our goal consists in the examination of the financial risks in the European Union and in the estimation of their impact on economic growth.

Towards a Sustainable Agricultural Credit Guarantee Scheme
Reason Lesego Machete
arXiv

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.

Understanding the Relationship between Social Distancing Policies, Traffic Volume, Air Quality, and the Prevalence of COVID-19 Outcomes in Urban Neighborhoods
Daniel L. Mendoza,Tabitha M. Benney,Rajive Ganguli,Rambabu Pothina,Benjamin Krick,Cheryl S. Pirozzi,Erik T. Crosman,Yue Zhang
arXiv

In response to the COVID-19 pandemic, governments have implemented policies to curb the spread of the novel virus. Little is known about how these policies impact various groups in society. This paper explores the relationship between social distancing policies, traffic volumes and air quality and how they impact various socioeconomic groups. This study aims to understand how disparate communities respond to Stay-at-Home Orders and other social distancing policies to understand how human behavior in response to policy may play a part in the prevalence of COVID-19 positive cases. We collected data on traffic density, air quality, socio-economic status, and positive cases rates of COVID-19 for each zip code of Salt Lake County, Utah (USA) between February 17 and June 12, 2020. We studied the impact of social distancing policies across three periods of policy implementation. We found that wealthier and whiter zip codes experienced a greater reduction in traffic and air pollution during the Stay-at-Home period. However, air quality did not necessarily follow traffic volumes in every case due to the complexity of interactions between emissions and meteorology. We also found a strong relationship between lower socioeconomic status and positive COVID-19 rates. This study provides initial evidence for social distancing's effectiveness in limiting the spread of COVID-19, while providing insight into how socioeconomic status has compounded vulnerability during this crisis. Behavior restrictions disproportionately benefit whiter and wealthier communities both through protection from spread of COVID-19 and reduction in air pollution. Such findings may be further compounded by the impacts of air pollution, which likely exacerbate COVID-19 transmission and mortality rates. Policy makers need to consider adapting social distancing policies to maximize equity in health protection.

Weighted Accuracy Algorithmic Approach In Counteracting Fake News And Disinformation