Research articles for the 2020-08-07
Coronavirus: Case for Digital Money?
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We discuss the pros of adopting government-issued digital currencies as well as a supranational digital iCurrency. One such pro is to get rid of paper money (and coinage), a ubiquitous medium for spreading germs, as highlighted by the recent coronavirus outbreak. We set forth three policy recommendations for adapting mobile devices as new digital wallets, regulatory oversight of sovereign digital currencies and user data protection, and a supranational digital iCurrency for facilitating international digital monetary linkages.
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We discuss the pros of adopting government-issued digital currencies as well as a supranational digital iCurrency. One such pro is to get rid of paper money (and coinage), a ubiquitous medium for spreading germs, as highlighted by the recent coronavirus outbreak. We set forth three policy recommendations for adapting mobile devices as new digital wallets, regulatory oversight of sovereign digital currencies and user data protection, and a supranational digital iCurrency for facilitating international digital monetary linkages.
Gold, the Golden Constant, COVID-19, 'Massive Passives' and Déjà Vu
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Currently the real, inflation-adjusted, price of gold is almost as high as it was in January 1980 and August 2011. Since 1975, periods of high real gold prices have occurred during periods of elevated concern about high future price inflation. Five years after the real price peaks in January 1980 and August 2011 the nominal (real) prices of gold fell 55% (67%) and 28% (33%), respectively. Today’s high real price of gold suggests that gold is an expensive inflation-hedge with a low prospective real return. However, “massive passive†ETF financialization of gold ownership may introduce a period of “irrational exuberanceâ€.See our related work: The Golden Dilemma.
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Currently the real, inflation-adjusted, price of gold is almost as high as it was in January 1980 and August 2011. Since 1975, periods of high real gold prices have occurred during periods of elevated concern about high future price inflation. Five years after the real price peaks in January 1980 and August 2011 the nominal (real) prices of gold fell 55% (67%) and 28% (33%), respectively. Today’s high real price of gold suggests that gold is an expensive inflation-hedge with a low prospective real return. However, “massive passive†ETF financialization of gold ownership may introduce a period of “irrational exuberanceâ€.See our related work: The Golden Dilemma.
Monetary Policy Implementation in MBS Markets Through Heterogeneous Dealers
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We empirically study how the heterogeneity of primary dealers affects their strategic behaviors and equilibrium outcomes in auctions used by the Federal Reserve (Fed) to implement its $1.5 trillion purchases of agency mortgage-backed securities from 2011 through 2014. Guided by a simple asymmetric auction model in which dealers differ in the inventory acquired both before and after the auction, we show that a large dealer with a one-standard-deviation higher secondary market share than a small dealer wins 4.8% more of the auction winnings. The effects of heterogeneity in the pre-auction inventory and the post-auction inventory, which lead to distinct strategic behaviors, are of roughly equal importance in driving this variation in winnings across dealers. The large dealer also charges a higher markup to the Fed by about one basis point, which is 40%-50% of the average markup for all dealers.
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We empirically study how the heterogeneity of primary dealers affects their strategic behaviors and equilibrium outcomes in auctions used by the Federal Reserve (Fed) to implement its $1.5 trillion purchases of agency mortgage-backed securities from 2011 through 2014. Guided by a simple asymmetric auction model in which dealers differ in the inventory acquired both before and after the auction, we show that a large dealer with a one-standard-deviation higher secondary market share than a small dealer wins 4.8% more of the auction winnings. The effects of heterogeneity in the pre-auction inventory and the post-auction inventory, which lead to distinct strategic behaviors, are of roughly equal importance in driving this variation in winnings across dealers. The large dealer also charges a higher markup to the Fed by about one basis point, which is 40%-50% of the average markup for all dealers.
Nach 60 Jahren Baldwin-Zins: Das Modifizierte Modell ‚Future Yield After Taxes’ (After 60 Years of Baldwin Interest: The Modified Model ‘Future Yield After Taxes’)
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German abstract: Die Moderne Portfoliotheorie mit normativer Prägung und die Entwicklung von Faktormodellen kann bis heute nicht mit Empirie erklären, welche makroökonomischen und Unternehmen relevanten Fakto-ren erwartete Rendite unter adjustiertem Risiko signifikant beeinflussen. In der Praxis häufig eingesetz-te Kennzahlen der Performancemessung basieren auf der Methode der Kapitalkosten, werden als Verhältniszahlen ausgewiesen und beobachten überwiegend auf Ebene des Assets und nicht auf der der Kapitalgeber. Dieser Artikel untersucht daher generisch ganzzeitliches Kapitalanlageverhalten und entwickelt das Modell ‚Future Yield after Taxes‘, kurz FYT. Wesentliche Kapitalrückflussvariablen auf Ebene der Kapitalgeber ersetzen zum BALDWIN-Zins, auch bekannt als modifizierter Interner Zinsfuß der dynamischen Investitionsrechnung, Cashflow-Positionen auf Ebene der Assets. Das Verhältnis der Rückflüsse zum Anfangskapital erklärt Kapitalrentabilität. Auch die zeitstetige FYT-Funktion weist in einem Portfolio heterogener Kapitalanlageprodukte eindeutige, zinshomogene und mit alternativen Kapitalanlagezinsen vergleichbare Renditeergebnisse aus.English abstract: Modern Portfolio Theory with normative characteristics and the development of factor models cannot until today explain empirically which macroeconomic and company-relevant factors significantly influence expected returns under adjusted risk. Performance measurement indicators that are frequently used in practice are based on the cost of capital method, are shown as ratios and are mainly observed at the level of the asset and not at the level of the lender. This article therefore examines generically whole-time investment behavior and develops the model 'Future Yield after Taxes', or FYT for short. Significant capital return variables at the level of the capital providers replace cash flow positions at the level of the assets at the BALDWIN interest rate, also known as the modified internal rate of return of the dynamic investment calculation. The ratio of capital returns to initial capital explains the return oninvestment. The continuous FYT function also shows clear homogeneous interest rates and yieldscomparable to alternative investment interest rates in a portfolio of heterogeneous investment products.
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German abstract: Die Moderne Portfoliotheorie mit normativer Prägung und die Entwicklung von Faktormodellen kann bis heute nicht mit Empirie erklären, welche makroökonomischen und Unternehmen relevanten Fakto-ren erwartete Rendite unter adjustiertem Risiko signifikant beeinflussen. In der Praxis häufig eingesetz-te Kennzahlen der Performancemessung basieren auf der Methode der Kapitalkosten, werden als Verhältniszahlen ausgewiesen und beobachten überwiegend auf Ebene des Assets und nicht auf der der Kapitalgeber. Dieser Artikel untersucht daher generisch ganzzeitliches Kapitalanlageverhalten und entwickelt das Modell ‚Future Yield after Taxes‘, kurz FYT. Wesentliche Kapitalrückflussvariablen auf Ebene der Kapitalgeber ersetzen zum BALDWIN-Zins, auch bekannt als modifizierter Interner Zinsfuß der dynamischen Investitionsrechnung, Cashflow-Positionen auf Ebene der Assets. Das Verhältnis der Rückflüsse zum Anfangskapital erklärt Kapitalrentabilität. Auch die zeitstetige FYT-Funktion weist in einem Portfolio heterogener Kapitalanlageprodukte eindeutige, zinshomogene und mit alternativen Kapitalanlagezinsen vergleichbare Renditeergebnisse aus.English abstract: Modern Portfolio Theory with normative characteristics and the development of factor models cannot until today explain empirically which macroeconomic and company-relevant factors significantly influence expected returns under adjusted risk. Performance measurement indicators that are frequently used in practice are based on the cost of capital method, are shown as ratios and are mainly observed at the level of the asset and not at the level of the lender. This article therefore examines generically whole-time investment behavior and develops the model 'Future Yield after Taxes', or FYT for short. Significant capital return variables at the level of the capital providers replace cash flow positions at the level of the assets at the BALDWIN interest rate, also known as the modified internal rate of return of the dynamic investment calculation. The ratio of capital returns to initial capital explains the return oninvestment. The continuous FYT function also shows clear homogeneous interest rates and yieldscomparable to alternative investment interest rates in a portfolio of heterogeneous investment products.
Refining After-Tax Return and Risk Parameters
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Taxes introduce certain complexities, requiring proper adjustments to return and risk parameters. The author offers a refined set of after-tax return and risk equations for use in practice and validates them with a stochastic future value cash flow model. The refined after-tax return and risk parameters can be used in portfolio optimization, Monte Carlo simulation, and deterministic present/future value portfolio modeling with internally consistent results. The refinements improve the discovery of the optimal after-tax portfolio and enhance long-term wealth planning in the presence of risk.
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Taxes introduce certain complexities, requiring proper adjustments to return and risk parameters. The author offers a refined set of after-tax return and risk equations for use in practice and validates them with a stochastic future value cash flow model. The refined after-tax return and risk parameters can be used in portfolio optimization, Monte Carlo simulation, and deterministic present/future value portfolio modeling with internally consistent results. The refinements improve the discovery of the optimal after-tax portfolio and enhance long-term wealth planning in the presence of risk.
Stable Count Distribution for the Volatility Indices and Space-Time Generalized Stable Characteristic Function
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This paper collects statistical and mathematical properties of the stable count distribution, with dispersed treatises on economic regime related to volatility. It is hypothesized that the stable count distribution is the marginal distribution of the volatility indices, such as CBOE VIX and VXTYN. Mathematically, its PDF is a special case of the Wright function. Analytical solutions for its moments and moment-generating function are carried out in terms of the Fox-Wright function. We show that it can be the kernel of a product distribution in fractional dynamics and quantitative finance. In the second half of the paper, the stable distribution family is generalized. A novel mathematical approach is taken by defining a space-time generalized stable characteristic function via the Mittag-Leffler function. The fractional PDF it produces is shown to be consistent with the fractional calculus of Riesz-Feller space derivative and Caputo-Mainardi time derivative. Small deviations in both time-fractional and space-fractional scenarios are studied to explain the ultra-high volatility tail observed in the VIX data during bear markets. The solutions match VIX data up to the last one percentile in the right tail, which corresponds to the largest market crashes in financial history.
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This paper collects statistical and mathematical properties of the stable count distribution, with dispersed treatises on economic regime related to volatility. It is hypothesized that the stable count distribution is the marginal distribution of the volatility indices, such as CBOE VIX and VXTYN. Mathematically, its PDF is a special case of the Wright function. Analytical solutions for its moments and moment-generating function are carried out in terms of the Fox-Wright function. We show that it can be the kernel of a product distribution in fractional dynamics and quantitative finance. In the second half of the paper, the stable distribution family is generalized. A novel mathematical approach is taken by defining a space-time generalized stable characteristic function via the Mittag-Leffler function. The fractional PDF it produces is shown to be consistent with the fractional calculus of Riesz-Feller space derivative and Caputo-Mainardi time derivative. Small deviations in both time-fractional and space-fractional scenarios are studied to explain the ultra-high volatility tail observed in the VIX data during bear markets. The solutions match VIX data up to the last one percentile in the right tail, which corresponds to the largest market crashes in financial history.
The Effects of Financial Reporting and Disclosure on Corporate Investment: A Review
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A fundamental question in accounting is whether and to what extent financial reporting facilitates the allocation of capital to the right investment projects. Over the last two decades, a large and growing body of literature has contributed to our understanding of whether and why financial reporting affects investment decision-making. We review the empirical literature on this topic, provide a framework to organize this literature, and highlight opportunities for future research.
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A fundamental question in accounting is whether and to what extent financial reporting facilitates the allocation of capital to the right investment projects. Over the last two decades, a large and growing body of literature has contributed to our understanding of whether and why financial reporting affects investment decision-making. We review the empirical literature on this topic, provide a framework to organize this literature, and highlight opportunities for future research.
What is Certain About Uncertainty?
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Researchers, policymakers, and market participants have become increasingly focused on the effects of uncertainty and risk on financial market and economic outcomes. This paper provides a comprehensive survey of the many existing measures of risk, uncertainty, and volatility. It summarizes what these measures capture, how they are constructed, and their effects, paying particular attention to large uncertainty spikes, such as those appearing concurrently with the outbreak of COVID-19. The measures are divided into three types: (1) news-based, survey- based, and econometric; (2) asset market based; and (3) Knightian uncertainty. While uncertainty has significant real and financial effects and spills over across countries, the size and persistence of these effects depend crucially on the source of uncertainty.
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Researchers, policymakers, and market participants have become increasingly focused on the effects of uncertainty and risk on financial market and economic outcomes. This paper provides a comprehensive survey of the many existing measures of risk, uncertainty, and volatility. It summarizes what these measures capture, how they are constructed, and their effects, paying particular attention to large uncertainty spikes, such as those appearing concurrently with the outbreak of COVID-19. The measures are divided into three types: (1) news-based, survey- based, and econometric; (2) asset market based; and (3) Knightian uncertainty. While uncertainty has significant real and financial effects and spills over across countries, the size and persistence of these effects depend crucially on the source of uncertainty.
