Research articles for the 2020-08-12

A Conceptual Model for the Integrated Policy Framework
Basu, Suman Sambha,Boz, Emine ,Gopinath, Gita,Roch, Francisco,Unsal, Filiz
In the Mundell-Fleming framework, standard monetary policy and exchange rate flexibility fully insulate economies from shocks. However, that framework abstracts from many real world imperfections, and countries often resort to unconventional policies to cope with shocks, such as COVID-19. This paper develops a model of optimal monetary policy, capital controls, foreign exchange intervention, and macroprudential policy. It incorporates many shocks and allows countries to differ across the currency of trade invoicing, degree of currency mismatches, tightness of external and domestic borrowing constraints, and depth of foreign exchange markets. The analysis maps these shocks and country characteristics to optimal policies, and yields several principles. If an additional instrument becomes available, it should not necessarily be deployed because it may not be the right tool to address the imperfection at hand. The use of a new instrument can lead to more or less use of others as instruments interact in non-trivial ways.

A Quantitative Model for the Integrated Policy Framework
Adrian, Tobias,Erceg, Christopher ,Lindé, Jesper,Zabczyk, Pawel,Zhou, Jianping
Many central banks have relied on a range of policy tools, including foreign exchange intervention (FXI) and capital flow management tools (CFMs), to mitigate the effects of volatile capital flows on their economies. We develop an empirically-oriented New Keynesian model to evaluate and quantify how using multiple policy tools can potentially improve monetary policy tradeoffs. Our model embeds nonlinear balance sheet channels and includes a range of empirically-relevant frictions. We show that FXI and CFMs may improve policy tradeoffs under certain conditions, especially for economies with less well-anchored inflation expectations, substantial foreign currency mismatch, and that are more vulnerable to shocks likely to induce capital outflows and exchange rate pressures.

ABB India Corporate Restructuring Process through Slump Sale
Ghosh, Kaushik,Mukhopadhyay, Mayukh
This case study discusses the corporate restructuring of ABB India Limited with Hitachi. The case delves into the details about the restructuring, restructuring motives and the benefits of the restructuring. Modalities of the deal with projected synergy gain has also been explored and explained via a typical slump sale process. We conclude the case using a brand versus burden analysis by summarizing post-deal market reaction.

Analysis of The Impact of Macroeconomic Shocks on Residential Property Price Index In Jabodebek-Banten
Endri, Endri
Increased demand has driven the property business to grow and expand more rapidly. This has a positive impact on the national economy because it can increase the rate of economic growth through the level of investment. Behind its rapid development, the property business is extremely vulnerable to economic shock.. With Vector Error Corection Model (VECM) method, this study aims to see what macroeconomic variables influence the Residential property prices index as well as the magnitude of their contribution and how residential property price index respond to macroeconomic shocks. Macroeconomic variables used in this study such as economic growth, inflation, interest rates, money supply, and exchange rates. The results of this study show interest rates and economic growth does not significantly affect residential property price index on Jabodebek-Banten. The responses generated from the Impulse Response Function is different in each category. Meanwhile from the Forecast Error Variance Decomposition shows that the Money Supply, Exchange Rate, and Inflation has a big contribution on the shocks that occur in residential property price index in Jabodebek-Banten in various categories.

Bank Liquidity and Exposure to Industry Shocks
Arias, Jose,Talavera, Oleksandr,Tsapin, Andriy
This paper examines the link between bank liquidity and exposure to industry-level shocks. Using a unique dataset of borrower industry affiliations, we propose a new measure of industry-level shocks calculated at bank-level. First, we construct bank-specific loan portfolio weights for each industry. Then, we apply these weights to two industry-level indices â€" cost-effectiveness and production â€" to calculate the bank shock exposure. Our estimates reveal the negative link between bank liquidity and industry shocks. This could be explained by precautionary reasons as large negative industry-level shocks are likely to induce banks to hoard liquid assets. The relationship is also channelized through the lending behaviour of banks. The sensitivity of liquidity to bank exposure is higher for more liquid, better capitalized and smaller banks, which might be explained by the capability of displacing funds either for precautionary reasons or for loan financing.

Bankers' Communication Know-how: An Analysis from Commercial Banks of Kathmandu valley
Devkota, Niranjan
Background: In the modern era, communication has changed the way of working styles, banking sectors are practicing banking communication in order to make work easier, faster, comfortable and accurate. Banking communication plays the role of mediator in between bank, customer, government, shareholder, suppliers, client, board of directors and employees which strengthen connection between them. Therefore, banker's experience on banking communication enhances banking system, employee's behavior and core banking service facilities management.Objective: This study analyses socio demographic, financial service management, human resource management, corporate influence, organizational regulator, communication culture, responsiveness, organizational culture, e-banking service facilities, organizational functioning and communication encounters.Methodology: This study is based on exploratory research design showing causal relationship between latent and observed variables. The research prepares systematic questionnaire to interview respondents where 355 employees are interviewed by using purposive sampling technique. The result is based on descriptive analysis and Awareness Index.Results: The Employees Awareness Index depicts 12% of employees are inadequately aware about banking communication followed by 46% of employees are moderately aware and 37% of employees are adequately aware about banking communication.Conclusion: This study revealed that, in order to improve banking system, the bank should focus on financial service management and organizational regulator. For smooth control on employee's behavior bank should concentrate on communication culture, responsiveness and organizational culture. Similarly, core banking service facilities management should overview on e-banking service facilities.

Bookmakers' mispricing of the disappeared home advantage in the German Bundesliga after the COVID-19 break
Christian Deutscher,David Winkelmann

The outbreak of COVID-19 in March 2020 led to a shutdown of economic activities in Europe. This included the sports sector, since public gatherings were prohibited. The German Bundesliga was among the first sport leagues realising a restart without spectators. Several recent studies suggest that the home advantage of teams was eroded for the remaining matches. Our paper analyses the reaction by bookmakers to the disappearance of such home advantage. We show that bookmakers had problems to adjust the betting odds in accordance to the disappeared home advantage, opening opportunities for profitable betting strategies.

COVID-19 and Emerging Markets: An Epidemiological Model with International Production Networks and Capital Flows
Cakmakli, Cem,Demiralp, Selva,Kalemli Ozcan, Sebnem,yesiltas, Sevcan,Yildirim, Muhammed A.
We quantify the macroeconomic effects of COVID-19 for a small open economy by calibrating a SIR-multi-sector-macro model. We measure sectoral supply shocks utilizing teleworking and physical job proximity, and demand shocks with credit card purchases. Both shocks are also affected from changing infection rates under different lockdown scenarios. Being an open economy amplifies the economic costs through two main channels. First, the demand shock has domestic and external components. Second, the initial shock is magnified due to domestic and international input-output linkages.

Can Private Equity Funds Act as Strategic Buyers? Evidence from Buy-and-Build Strategies
Bansraj, Dyaran,Smit, Han,Volosovych, Vadym
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 ``platform" 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 ``window-dressing." 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.

Counting the costs of COVID-19: a critique of Miles et al
Adrian Kent

Miles et al. [1] recently produced an analysis of the costs and benefits of lockdown policies in the face of COVID-19, focussing on the case of the U.K. They argue that the March-June UK lockdown was more costly than the benefit of lives saved, if the latter are evaluated using the NICE threshold of {\pounds}30000 for a quality-adjusted life year (QALY). Looking forwards, they argue that the costs of a lockdown for 13 weeks from mid-June would be vastly greater than the benefits under any plausible QALY costing, even in a scenario in which easing lockdown led to a second infection wave that caused more than 7000 deaths a week by mid-September. I note here two key problems that certainly significantly affect their estimates and cast doubt on their conclusions. Firstly, they cut off their calculations arbitrarily after 13 weeks, without costing the epidemic state at the end of the period. That is, they assume that we should be indifferent between mid-September states of 13 deaths a week and 7500 deaths a week, and corresponding infection rates. This seems indefensible unless one assumes that (a) there will be no future vaccine and no future improvements in treatment or in non-medical interventions, (b) that COVID-19 will inevitably continue to propagate until herd immunity is reached. Even under these assumptions it is very questionable. Secondly, they ignore the costs of serious illness, possible long-term lowering of life quality, and possible lowering of life expectancy for COVID-19 survivors. These are uncertain, but clearly not negligible, and plausibly comparable to or larger than the costs in lives lost.

Cross-Border Lending and the International Transmission of Banking Crises
Dieckelmann, Daniel
This paper introduces a new transmission channel of banking crises where sizable cross-border bank claims on foreign countries with high domestic crisis risk enable contagion to the home economy. This asset-side channel opposes traditional views that see banking crises originating from either domestic credit booms or from cross-border borrowing. I propose a combined model that predicts banking crises using both domestic and foreign factors. For developed economies, the channel is predictive of crises irrespective of other types of capital flows, while it is entirely inactive for emerging economies. I show that policy makers can significantly enhance current early warning models by incorporating exposure-based risk from cross-border lending.

Cross-Border Lending and the International Transmission of Banking Crises
Dieckelmann, Daniel
This paper introduces a new transmission channel of banking crises where sizable cross-border bank claims on foreign countries with high domestic crisis risk enable contagion to the home economy. This asset-side channel opposes traditional views that see banking crises originating from either domestic credit booms or from cross-border borrowing. I propose a combined model that predicts banking crises using both domestic and foreign factors. For developed economies, the channel is predictive of crises irrespective of other types of capital flows, while it is entirely inactive for emerging economies. I show that policy makers can significantly enhance current early warning models by incorporating exposure-based risk from cross-border lending.

Do the Rich Gamble in the Stock Market? Low Risk Anomalies and Wealthy Households
Bali, Turan G.,Gunaydin, A. Doruk,Jansson, Thomas,Karabulut, Yigitcan
We propose a low risk anomaly (LRA) index with high values indicating high-risk stocks with high-beta, high-volatility, and high-lottery-payoffs. We document a significantly negative cross-sectional relation between the LRA index and future returns on individual stocks trading in the U.S. and international countries. We show that the high-LRA stocks are subject to significant overpricing and primarily held by retail investors, whereas the degree of underpricing of low-LRA stocks is so small that the low risk anomaly is driven by retail investors’ demand for high-LRA stocks, leading to temporary overpricing and negative future abnormal returns for these high-beta, high-volatility stocks with large lottery payoffs. To understand how and why individual investors contribute to the low risk anomalies, we use a large-scale individual-level panel dataset from Sweden that allows us to directly observe the stock investments of the entire population at the individual security level. We find that the anomalous negative relation between risk and future abnormal returns is only confined to those stocks held by rich households, whereas there is no evidence of low risk anomaly for stocks held by non-rich households and institutional investors. Further tests also reveal that the skewness preferences of rich households have the potential to explain the demand of wealthy investors for high-risk stocks. In contrast, other potential explanations such as the overconfidence-based preferences, constraints on financial leverage, downside risk, and hedging demand receive little support from the data.

Expected Credit Loss Modeling from a Top-Down Stress Testing Perspective
Gross, Marco,Laliotis, Dimitrios,Leika, Mindaugas,Lukyantsau, Pavel
The objective of this paper is to present an integrated tool suite for IFRS 9- and CECL-compatible estimation in top-down solvency stress tests. The tool suite serves as an illustration for institutions wishing to include accounting-based approaches for credit risk modeling in top-down stress tests.

Fighting for Not-So-Religious Souls: The Role of Religious Competition in Non-Religious Conflicts
Hector Galindo-Silva,Guy Tchuente

Many countries embroiled in non-religious civil conflicts have experienced a dramatic increase in religious competition in recent years. This study examines whether increasing competition between religions affects violence in non-religious conflicts. The study focuses on Colombia, a deeply Catholic country that has suffered one of the world's longest-running internal conflicts and, in the last few decades, has witnessed an intense increase in religious competition between the Catholic Church and new non-Catholic churches. The estimation of a dynamic treatment effect model shows that establishing the first non-Catholic church in a municipality substantially increases the probability of an attack by a left-wing guerrilla group. Further analysis suggests that the increase in guerrilla attacks is associated with the expectation among guerrilla groups that their membership will decline as a consequence of more intense competition with religious groups for followers.

Gittins' theorem under uncertainty
Samuel N. Cohen,Tanut Treetanthiploet

We study dynamic allocation problems for discrete time multi-armed bandits under uncertainty, based on the the theory of nonlinear expectations. We show that, under strong independence of the bandits and with some relaxation in the definition of optimality, a Gittins allocation index gives optimal choices. This involves studying the interaction of our uncertainty with controls which determine the filtration. We also run a simple numerical example which illustrates the interaction between the willingness to explore and uncertainty aversion of the agent when making decisions.

Hedging and machine learning driven crude oil data analysis using a refined Barndorff-Nielsen and Shephard model
Humayra Shoshi,Indranil SenGupta

In this paper, a refined Barndorff-Nielsen and Shephard (BN-S) model is implemented to find an optimal hedging strategy for commodity markets. The refinement of the BN-S model is obtained with various machine and deep learning algorithms. The refinement leads to the extraction of a deterministic parameter from the empirical data set. The problem is transformed to an appropriate classification problem with a couple of different approaches: the volatility approach and the duration approach. The analysis is implemented to the Bakken crude oil data and the aforementioned deterministic parameter is obtained for a wide range of data sets. With the implementation of this parameter in the refined model, the resulting model performs much better than the classical BN-S model.

Heterogeneity in the Information Content of 8-K Disclosures about Private Targets: Acquirer Size and Target Significance
Bayar, Onur,Das, Sougata,Kesici, Emre
In this paper, we empirically analyze the disclosures required by the Securities Exchange Commission (SEC) for acquisitions of privately-held target firms by public acquirers. We find that 8-K disclosures filed by public acquirers within a week after the announcement date of the takeover of a privately-held target firm have a material impact on the pricing and the trading of the acquirers’ shares around the event date, but only for large acquiring firms. Our empirical analysis of both abnormal returns and abnormal trading volumes supports these findings. We find that for large acquirers, this impact is economically significant for targets classified as “insignificant” by the SEC. However, this effect is insignificant for smaller acquirers, even when the relative deal size is above the threshold levels specified in the SEC’s disclosure requirements. Overall, our results suggest that it may be optimal to further reduce the disclosure costs faced by smaller acquirers in acquisitions of private targets.

How Do Linkages Between Major Exchange Rates Differ When the Daily Quotations Come From Different Times of Day? Analysis Using Bid and Ask Prices and DCC-Copula Models
Doman, Małgorzata,Doman, Ryszard
In the paper, we document how the dynamics of linkages between selected major exchange rates changes during a day, depending on the activity of different groups of traders, and show the impact of important events and news on the dependence structures. The exchange rates under scrutiny are EUR/USD, AUD/USD, GBP/USD, and NZD/USD. We consider dai-ly returns calculated using the exchange rates quoted at different times of day. The analysis is performed separately for bid and ask prices. The dynamics of the dependence is modeled by means of DCC-copula models, and the strength of the linkages is described using dynam-ic Spearman’s rho coefficients. Moreover, we obtain the results concerning quantile depend-ence probabilities. The approach used enables us to scrutinize changes in the dynamics of the conditional dependence structure, depending on the time of day, which can be useful in risk management.

How Does the Conditional Quantile Dependence in the FOREX Market Change Depending on the Time of Day? Analysis Based on Ask and Bid Prices
Doman, Małgorzata,Doman, Ryszard
In the paper, we show that estimates of the strength of linkages between the exchange rates EUR/USD, AUD/USD, GBP/USD, and NZD/USD below small or above large quantiles de-pend on the time of day, at which the daily returns are calculated. We argue that this is due to the activity of traders in different parts of the world, and the impact of the information flow. We use daily returns calculated for each hour of the day. The analysis is performed separately for bid and ask prices. We model the conditional dependence by means of bivari-ate Markov-switching copula models. Then, quantile dependence probabilities are calculated for the fitted conditional copulas. The models include copulas that can capture different types of asymmetry and tail behavior. Our results show that the applied dynamic dependence measures change significantly, depending on the hour of the day. The rankings of the strength of the dependence below small or above large quantiles, which we obtain using the model confidence set methodology, can be useful in portfolio risk management.

How Severe Are the EBA Macroeconomic Scenarios for the Italian Economy? A Joint Probability Approach
Bonucchi, Manuel,Catalano, Michele
Measures of the severity of macroeconomic scenarios have been widely used in the literature, but a consistent methodology for their calculation has not been developed yet. Against this background, we provide a general method for calculating the joint probability of observing a macroeconomic scenario, which can be applied to a wide variety of structural models. By doing so, we can attach probabilities to scenarios produced with multidimensional economic models to compare their severity and plausibility. We apply our methodology to the 2016 and 2018 EBA stress test scenarios and we provide also reverse stress tests applications. Our results show that for the Italian economy both the 2016 and 2018 EBA scenarios are unlikely, especially the 2016 one. The reverse stress tests allow us to identify the key variables that affect our probabilities.

Impact of High Non-Performing Loan Ratios on Bank Lending Trends and Profitability
Jing, Eric
The goal of this paper is to explore the relationship between the specific non-performing loan ratio (NPL ratio) and the corresponding impact on the bank’s profitability and lending behavior. It also seeks to investigate the macroeconomic impacts of economies with excessively high NPL ratios as well as the efficacy and impact of alleviation measures used by banks and governments around the world to help facilitate a decrease in high NPL ratios. The possible implications and effects of the COVID-19 pandemic on NPL ratios is also addressed in this paper. It is found that when excessively high NPL ratios go unaddressed, the economy tends to suffer. On the other hand, this study shows that when measures are taken to reduce or eliminate the high NPL ratios, economic performance improves, and the reduction has a clear positive impact on the economy.

Impact of Intellectual Capital and Efficiency to the Profitability of Islamic Banking
Endri, Endri
This study aims to prove empirically the influence of intellectual capital, and efficiency to the profitability of shari’ah banks. The sample of this research is 11 Shari’ah Commercial Bank (BUS) in Indonesia with research period year 2013-2017, with sample selection with purposive sampling. The data used are secondary data obtained from BUS annual financial statements. Data analysis in this research using panel data regression analysis, with intellectual capital calculation approach of shari’ah bank iB-VAICTM. The findings of this study indicate that: 1) iB-VACA has significant negative effect on ROA, 2) iB-VAHU, and 3) iB-STVA has significant positive effect on ROA, 4) BOPO has significant negative effect on ROA, and 5) NOM have positive effect to ROA, and 6) variables iBVACA, iB-VAHU, iB-STVA, BOPO, and NOM together have a significant effect on ROA.

Impacts of Water Stress on Physical Assets Using REITs as a Case Study
Bertolotti, Andre,Luo, Tianyi,Suo, Yuxi
We find evidence that water stress of physical assets is an additional component of risk for investors. The World Resources Institute (WRI) found that 1 in 5 people are living in areas at high risk of water scarcity. Recently, the WRI Aqueduct 3.0 model provided new data and insights for measuring water stress globally. We leverage this framework to understand the connection between water risk exposure and financial risk using the global Real Estate Investment Trust (REIT) sector as a case study. We first develop a definition of water stress that incorporates changes in water supply and water demand. Next, we geolocate over 84,000 REIT properties and map them to over 590 publicly listed REITs. Finally, we study the impacts of water stress exposure on REIT financial measures. We find evidence that water stress is connected with market risk and financials of REITs. Using WRI water stress projections for 2030, we find that REITs will experience a substantial increase in exposure to water stress.

Implementing a European Bail-In Regime: Do BRRD & SRM-R Effectively Eliminate Implicit Government Guarantees in the European Banking Sector? An Empirical Analysis
Hahn, Sascha,Momtaz, Paul P.,Wieandt, Axel
During the last decade, policymakers have implemented a European bank resolution regime, which includes the Bank Recovery & Resolution Directive and the Single Resolution Mechanism Regulation, designed to make banks resolvable and to abolish bailout expectations, i.e. implicit government guarantees (IGGs). The regime strives to make banks’ debt bail-in-able and to make government bailouts of banks the rare exception. The overall research objective of this paper is to measure the effectiveness of this regime in terms of bailout expectations in the form of funding advantages. Specifically, we examine market reactions to regime implementation, using an event- study framework to quantify the impact of key legal events on credit default swap (CDS) spreads and equity returns. We control for a wide range of variables to address endogeneity concerns raised with regard to omitted variables in prior work. Our uni-variate and multivariate analysis results suggest that the European bail-in regime alone does not effectively eliminate IGGs. On the contrary, CDS spreads, especially among global systemically important banks, are tightening and equity returns are increasing. This indicates that the regime inadequately solves the systemic problem of bailout expectations in the market.

International Trade and Corporate Market Power
Gonzalez-Garcia, Jesus,Yang, Yuanchen
This paper examines the effect of international trade on corporate market power in emerging market economies and developing countries, with a special focus on sub-Saharan Africa. The analysis is based on a large firm-level dataset, tariff data by sector and aggregate indicators of international trade for the period 2000-17. Greater trade liberalization and trade integration are associated with significant declines in market power, with the effect being more pronounced for firms in the manufacturing and ICT sectors, private sector firms, and firms with higher initial markups. Firms in sub-Saharan Africa tend to experience significantly lower markups after allowing greater trade integration. The effects of trade liberalization on market power materializes over time, and there are significant complementarities between trade reforms and real sector reforms.

Law-invariant functionals beyond bounded positions
Fabio Bellini,Pablo Koch-Medina,Cosimo Munari,Gregor Svindland

We establish general versions of a variety of results for quasiconvex, lower-semicontinuous, and law-invariant functionals. Our results extend well-known results from the literature to a large class of spaces of random variables. We sometimes obtain sharper versions, even for the well-studied case of bounded random variables. Our approach builds on two fundamental structural results for law-invariant functionals: the equivalence of law invariance and Schur convexity, i.e., monotonicity with respect to the convex stochastic order, and the fact that a law-invariant functional is fully determined by its behaviour on bounded random variables. We show how to apply these results to provide a unifying perspective on the literature on law-invariant functionals, with special emphasis on quantile-based representations, including Kusuoka representations, dilatation monotonicity, and infimal convolutions.

Leaning Against the Wind: A Cost-Benefit Analysis for an Integrated Policy Framework
Brandao-Marques, Luis,Gelos, R.,Narita, Machiko,Nier, Erlend
This paper takes a new approach to assess the costs and benefits of using different policy tools-macroprudential, monetary, foreign exchange interventions, and capital flow management-in response to changes in financial conditions. The approach evaluates net benefits of policies using quadratic loss functions, estimating policy effects on the full distribution of future output growth and inflation with quantile regressions. Tightening macroprudential policy dampens downside risks to growth stemming from loose financial conditions, and is beneficial in net terms. By contrast, tightening monetary policy entails net losses, calling for caution in the use of monetary policy to 'lean against the wind.' These findings hold when policies are used in response to easing global financial conditions. Buying foreign-exchange or tightening capital controls has small net benefits.

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

This paper is part of a coordinated 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 declined over the analysis period, a finding robust to various sensitivity analyses. Although we find volatility is 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.

Market Impact in a Latent Order Book
Ismael Lemhadri

The latent order book of Donier et al. is one of the most promising agent-based models for market impact. This work extends the minimal model by allowing agents to exhibit mean-reversion, a commonly observed pattern in real markets. This modification leads to new order book dynamics, which we explicitly study and analyze. Underlying our analysis is a mean-field assumption that views the order book through its average density. We show how price impact develops in this new model, providing a flexible family of solutions that can potentially be calibrated to real data. While no closed-form solution is provided, we complement our theoretical investigation with extensive numerical results, including a simulation scheme for the entire order book.

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.

New Corporate Play In India Amidst Pandemic
Chhabra, Tanvi
This paper makes an attempt to analyze the recent investments made in the Indian market by major corporates during this pandemic period. It further seeks to establish the link between these investments and confrontations between India and China. It provides wholesome research on these investments in coherence with its Impact on the Indian economy, soaring competition between US firms for the Indian market and which company has been majorly benefitted by them.

Option Pricing in Markets with Informed Traders
Yuan Hu,Abootaleb Shirvani,Stoyan Stoyanov,Young Shin Kim,Frank J. Fabozzi,Svetlozar T. Rachev

The objective of this paper is to introduce the theory of option pricing for markets with informed traders within the framework of dynamic asset pricing theory. We introduce new models for option pricing for informed traders in complete markets where we consider traders with information on the stock price direction and stock return mean. The Black-Scholes-Merton option pricing theory is extended for markets with informed traders, where price processes are following continuous-diffusions. By doing so, the discontinuity puzzle in option pricing is resolved. Using market option data, we estimate the implied surface of the probability for a stock upturn, the implied mean stock return surface, and implied trader information intensity surface.

Patterns in Invoicing Currency in Global Trade
Boz, Emine ,Casas, Camila,Georgiadis, Georgios,Gopinath, Gita,Le Mezo, Helena,Mehl, Arnaud,Nguyen, Tra
This paper presents the most comprehensive and up-to-date panel data set of invoicing currencies in global trade. It provides data on the shares of exports and imports invoiced in US dollars, euros, and other currencies for more than 100 countries since 1990. The evidence from these data confirms findings from earlier research regarding the globally dominant role of the US dollar in invoicing - despite the comparatively smaller role of the US in global trade - and the overall stability of invoicing currency patterns. The evidence also points to several novel facts. First, both the US dollar and the euro have been increasingly used for invoicing even as the share of global trade accounted for by the US and the euro area has declined. Second, the euro is used as a vehicle currency in parts of Africa, and some European countries have seen significant shifts toward euro invoicing. Third, as suggested by the dominant currency paradigm, countries invoicing more in US dollars (euros) tend to experience greater US dollar (euro) exchange rate pass-through to their import prices; also, their trade volumes are more sensitive to fluctuations in these exchange rates.

Political Openness and Armed Conflict: Evidence from Local Councils in Colombia
Hector Galindo-Silva

In this paper, I empirically investigate how the openness of political institutions to diverse representation can impact conflict-related violence. By exploiting plausibly exogenous variations in the number of councillors in Colombian municipalities, I develop two sets of results. First, regression discontinuity estimates show that larger municipal councils have a considerably greater number of political parties with at least one elected representative. I interpret this result as evidence that larger municipal councils are more open to diverse political participation. The estimates also reveal that non-traditional parties are the main beneficiaries of this greater political openness. Second, regression discontinuity estimates show that political openness substantially decreases conflict-related violence, namely the killing of civilian non-combatants. By exploiting plausibly exogenous variations in local election results, I show that the lower level of political violence stems from greater participation by parties with close links to armed groups. Using data about the types of violence employed by these groups, and representation at higher levels of government, I argue that armed violence has decreased not because of power-sharing arrangements involving armed groups linked to the parties with more political representation, but rather because armed groups with less political power and visibility are deterred from initiating certain types of violence.

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

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.

Prime Time to Re-examine Prime Money Market Funds: Floating NAVs and Liquidity Risk During Economic Crises
Casavecchia, Lorenzo,Ge, Georgina,Li, C. Wei,Tiwari, Ashish
Investor concerns surrounding the COVID-19 pandemic triggered large fund outflows from prime institutional money market funds (PIFs) during March 2020. This episode highlights the continued susceptibility of such funds to financial market stress. In this paper we present novel evidence on the effectiveness of the recent money market fund reforms in ensuring the funds' stability and liquidity during periods of stress. In particular, we provide evidence on the effectiveness of floating net asset values (NAVs) in mitigating the investor run-like behavior during crises. Our evidence covers two distinct periods of nancial stress: (1) the COVID-19 related shock of March 2020, and (2) the near-default of U.S. government debt during the debt ceiling crisis of December 2017 - February 2018.Our results suggest that the introduction of floating NAVs has not eliminated the strategic complementarities in the redemption decisions of institutional investors - investors still have an incentive to redeem early, especially during periods of low secondary market liquidity. Consistent with a theoretical model, we find that funds which offer multiple intraday NAVs and redemption windows (multiple strikes) are subject to significantly larger outflows during periods of market stress, compared to funds offering a single end-of-day NAV (single strike funds).

Private Inequity: Private Markets and the Death of the Micro-Cap Stock
Blecher, Robert
This paper examines the decline in publicly listed equities in the United States by reviewing factors in both the public and private markets. Public equities have halved in count in the U.S. between the mid-1990s and today, with a paucity of small stocks limiting access to high-growth opportunities for common investors. The paper finds that the decrease in listed equities is more likely to be attributable to a lack of new entrants via IPOs than it is to be due to increased de-listing activity via mergers and acquisitions, liquidations, and involuntary de-listing. Furthermore, this shift is shown to be driven by micro-cap stocks, which once drove initial public offering volume. The second half of the paper reviews the role of the private markets in abetting micro-caps’ abstention of the public markets, identifying growth in follow-on funding and secondary liquidity as potential factors for further analysis.

Public Sector Balance Sheet Database: Overview and Guide for Compilers and Users
Alves, Miguel,De Clerck, Sage,Gamboa-Arbelaez, Juliana
This paper provides an overview of the Public Sector Balance Sheet (PSBS) Database, a dataset developed in the context of the October 2018 Fiscal Monitor. The dataset provides a comprehensive picture of public wealth for 38 countries, and a narrower picture for further 37 countries and territories. Comprehensive PSBSs bring together all the accumulated assets and liabilities that governments control, including public corporations, natural resources, and pension liabilities. They therefore account for the entirety of what the state owns and owes, offering a broader fiscal picture beyond debt and deficits. This is particularly relevant in the current context of record and still rising debts and heightened risks to the balance sheet of the public sector. PSBSs bring about greater transparency and allow closer scrutiny of government's financial position. They also allow better balance sheet management, thereby potentially increasing return on assets, reducing risks and the costs of borrowing, and improving fiscal policymaking. The paper also elaborates on the conceptual framework and methodology used in compiling the data, and provides some practical guidelines on the compilation, validation, and dissemination of such data.

Regulatory Capital and Incentives for Risk Model Choice under Basel 3
Liu, Fred,Stentoft, Lars
In response to the Subprime Mortgage crisis, the Basel Committee on Banking Supervision (BCBS) has spent the previous decade overhauling the regulatory framework that governs how banks calculate minimum capital requirements. In 2019, the BCBS finalized the Basel 3 regulatory regime, which changes the regulatory measure of market risk and adds new complex calculations based on liquidity and risk factors. This paper is motivated by these changes and seeks to answer the question of how regulation affects banks' choice of risk-management models, whether it incentivizes them to use correctly specified models, and if it results in more stable capital requirements. Our results show that, although the models that minimize regulatory capital for a representative bank portfolio also result in the most stable requirements, these models are generally rejected as being correctly specified and tend to produce inferior forecasts of the regulatory risk measures.

Renegotiation in Debt Chains
Glode, Vincent,Opp, Christian C.
The COVID-19 pandemic has dramatically affected businesses worldwide, prompting a search for interventions aimed at avoiding default waves. We develop a tractable model of debt renegotiation under private information to shed light on a key challenge to these efforts: businesses are sequentially interconnected through their liabilities. This financing structure, which we refer to as a debt chain, implies that a lender's willingness to provide concessions to a borrower depends on how this lender's own liabilities are expected to be renegotiated. Our analysis reveals how targeted government subsidies, mandated debt reductions, and incentives for early renegotiation can affect default risk throughout the whole debt chain.

Repayment under Flexible Loan Contracts: Evidence from Tanzania
Grohmann, Antonia,Herbold, Steffen,Lenel, Friederike
We study repayment and delinquency in an innovative loan contract that offers borrowers a wide range of flexibility. Using a large administrative dataset, we perform unsupervised pattern analysis to study how borrowers repay within the framework of this loan. We identify eight clusters that can be grouped into three distinct repayment types. We show that borrowers with fluctuating incomes and limited consumption smoothing resources use the loan’s flexibility more and that farmers in particular adjust their repayment to cash flow. Finally, we show that high use of the loan’s flexibility is associated with repayment difficulties, yet typically does not result in eventual default; whereas borrowers who face repayment difficulties that are likely driven by economic shocks face a high probability of default.

Risk management with machine-learning-based algorithms
Simon Fécamp,Joseph Mikael,Xavier Warin

We propose some machine-learning-based algorithms to solve hedging problems in incomplete markets. Sources of incompleteness cover illiquidity, untradable risk factors, discrete hedging dates and transaction costs. The proposed algorithms resulting strategies are compared to classical stochastic control techniques on several payoffs using a variance criterion. One of the proposed algorithm is flexible enough to be used with several existing risk criteria. We furthermore propose a new moment-based risk criteria.

Social Networks and Household Incomes: Evidence from China
Wu, Kai,Lai, Seiwai,Sun, He
We evaluate the association between social networks and household incomes using a panel dataset of representative households in China constructed from the 2011 and 2013 waves of the China Household Financial Survey (CHFS). The results show that social networks are positively associated with the probability and proportion of the various types of incomes. In addition, the positive association is greater for households in rural areas or western regions. Moreover, social networks mainly affect various types of incomes through improved financial sophistication, higher job position level, close government connections, and great accessibility to operating loans. Our findings highlight the importance of social networks in poverty alleviation and household welfare in China.

Social Optimal Search Intensity in Over-the-Counter Markets
Liu, Shuo
This paper analyzes OTC market participants' endogeneous search intensity in competitive equilibrium and social optimal cases. We develop a random search-and-match model where agents (market participants) are allowed to choose and adjust their search intensities based on two idiosyncratic states: asset position and liquidity need. We find that: [1] in competitive equilibria with different market parameters, agents can switch between the core and periphery on the trading network. [2] it is the social optimal case that there is no inter-mediation, in the sense that no agent searches at positive speeds on both the buy and sell sides of the market. In competitive equilibrium, there always exist some agents over-searching and some other agents under-searching. We also discuss related policy implications.

Social Trust and Institutional Investment Biases
Drobetz, Wolfgang,Mönkemeyer, Marwin,Requejo, Ignacio,Schröder, Henning
Using a comprehensive international dataset of institutional investor holdings, we study social trust as a source of institutional investment biases. Our findings indicate that national trust-levels affect the investment allocation of institutional investors between domestic and foreign equity markets. Specifically, we document that institutional investors from low-trust countries hold disproportionally larger fractions of their portfolio in domestic equities. This relation holds after controlling for institutional, political, and cultural factors that are known to affect institutional investment choice. Exploiting the heterogeneity in information cost across investor groups as well as events of exogenous variation in information asymmetries at the global level, we show that information asymmetries are the primary channel linking trust and investment decisions. In fact, trust seems to be of particular importance if information asymmetries on the international equity markets are high. Consistent with these findings, we further document that trust also affects the foreign bias in institutional equity portfolios. All findings are robust to alternative measures of social trust.

Soft-balancing: SADC Former Liberation Movements’ Responses to the Imposition of Sanctions on Zimbabwe 2002-2015
Panganayi, More
Background: This paper addresses a popular dichotomous African nationalist and independentist approaches to foreign policy mainly characterised by soft balancing and quiet diplomacy. This dichotomous approach has been dominated by the need to maintain independence from resurgent neo-colonial claws by promoting African agenda. The African nationalist and independentist prism are used to interrogate the misconceptions created by the resurgence of meetings of former liberation movements in Southern Africa.Objective: This paper aims to proffer alternative political survival tools that can be adopted by the weak global south states against resurgent neo-colonialism.Methods: Using the work of Machiavelli on international anarchy complemented by the soft balancing as a real-power politics theory, the paper offers alternative lenses to interpretation of impact of sanctions and subsequent strategic alliances formed after 2002 in Southern Africa.Findings: Depending on the dominant realist paradigm to analyse sanctions imposed on Zimbabwe, the paper confirms the anarchic nature of international society and that the formation of alliances was not an ad hoc reaction.Conclusions: Arguing that the world is anarchic and there is no international arbiter, the paper recommends soft balancing as a political survival strategy.Implications: This paper can be useful to concerned authorities of Zimbabwe in planning appropriate policies post sanction. For that purpose this study can serve as reference.

Stability properties of Haezendonck-Goovaerts premium principles
Niushan Gao,Cosimo Munari,Foivos Xanthos

We investigate a variety of stability properties of Haezendonck-Goovaerts premium principles on their natural domain, namely Orlicz spaces. We show that such principles always satisfy the Fatou property. This allows to establish a tractable dual representation without imposing any condition on the reference Orlicz function. In addition, we show that Haezendonck-Goovaerts principles satisfy the stronger Lebesgue property if and only if the reference Orlicz function fulfills the so-called $\Delta_2$ condition. We also discuss (semi)continuity properties with respect to $\Phi$-weak convergence of probability measures. In particular, we show that Haezendonck-Goovaerts principles, restricted to the corresponding Young class, are always lower semicontinuous with respect to the $\Phi$-weak convergence.

Tail risk forecasting using Bayesian realized EGARCH models
Vica Tendenan,Richard Gerlach,Chao Wang

This paper develops a Bayesian framework for the realized exponential generalized autoregressive conditional heteroskedasticity (realized EGARCH) model, which can incorporate multiple realized volatility measures for the modelling of a return series. The realized EGARCH model is extended by adopting a standardized Student-t and a standardized skewed Student-t distribution for the return equation. Different types of realized measures, such as sub-sampled realized variance, sub-sampled realized range, and realized kernel, are considered in the paper. The Bayesian Markov chain Monte Carlo (MCMC) estimation employs the robust adaptive Metropolis algorithm (RAM) in the burn in period and the standard random walk Metropolis in the sample period. The Bayesian estimators show more favourable results than maximum likelihood estimators in a simulation study. We test the proposed models with several indices to forecast one-step-ahead Value at Risk (VaR) and Expected Shortfall (ES) over a period of 1000 days. Rigorous tail risk forecast evaluations show that the realized EGARCH models employing the standardized skewed Student-t distribution and incorporating sub-sampled realized range are favored, compared to a range of models.

Technology, Adaptation and the Efficient Market Hypothesis
Grabowski, Daniel
Tests of the efficient market hypothesis (EMH) suffer from a known flaw that has nevertheless received insufficient attention in the literature. Just as in Zeno’s famous paradox of Achilles and the tortoise, while we are testing market efficiency the measure of efficiency has already moved on. Prediction technology and data availability perpetually improve beyond the level that was available to market participants during the sample period. This introduces a bias into the tests. If one believes in the existence of deterministic patterns and of technological progress, one has to expect to discover inefficiencies in historical data. We can only expect prices to reflect all available in- formation to the degree that current technology enables. From this argument follows a necessity to adjust the EMH. This article discusses possible adjustments and develops the concept of technological efficiency. Based on a review of empirical evidence, this concept is shown to resolve many anomalies and to help bridge the gap between the financial economics literature and the rapidly advancing machine learning literature.

The Credit Card Act and Consumer Debt Structure
Dou, Yiwei,Jagtiani, Julapa,Maingi, Ramain Quinn,Ronen, Joshua
We investigate whether the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 influenced the debt structure of consumers. By debt structure, we mean the proportion of total available credit from credit cards for each consumer.The act enhances disclosures of contractual and related information and restricts card issuers’ ability to raise interest rates or charge late or over-limit fees, primarily affecting non-prime borrowers. Using the credit history via the Federal Reserve Bank of New York/Equifax Consumer Credit Panel during 2006â€"2016, we find that the average ratio of credit limit on cards to total consumer debt declined for non-prime borrowers in comparison to prime borrowers after the introduction of the CARD Act. The decline did not occur before the bill was first introduced in Congress; it took place afterward and continued through the end of our sample period. The results suggest that the CARD Act likely had an adverse effect on non-prime borrowers.

The Dynamics of Linkages Between Major Currencies: How Does It Change Depending on the Time of Day?
Doman, Małgorzata,Doman, Ryszard
In this paper we document how the dynamics of linkages between major exchange rates changes during a day, depending on the activity of different groups of traders, and show the impact of important events and news on the dependence structures. The subject of analysis are linkages between the exchange rates EUR/USD, AUD/USD, GBP/USD and NZD/USD. For each hour of the day, we model the conditional dependence between the daily returns calculated at that time. The analysis is performed separately for bid and ask prices, which enables us to obtain some results concerning the sellers and buyers behavior. The dynamics of the conditional dependence is modeled by means of bivariate Markov-switching copula models, and the strength of the linkages is described by means of dynamic Spearman’s rho coefficients. The rankings of the strength of the linkages, depending on the hour, which we obtain using the model confidence set methodology, can be useful in trade decision-making in the FOREX market.

The Effectiveness of Borrower-Based Macroprudential Measures: A Quantitative Analysis for Slovakia
Jur?a, Pavol,Klacso, Ján,Tereanu, Eugen,Forletta, Marco,Gross, Marco
We develop a semi-structural quantitative framework that combines micro and macroeconomic data to assess the effectiveness of combinations of borrower-based macroprudential measures in Slovakia. We expand on the integrated dynamic household balance sheet model of Gross and Poblaci�n (2017) by introducing an endogenous loan granting feature, in turn to quantify the potential (ex-ante) impact of macroprudential measures on resilience parameters, compared with a counterfactual no-policy scenario, under adverse macroeconomic conditions. We conclude that (1) borrower-based measures can noticeably improve household and bank resilience to macroeconomic downturns, in particular when multiple measures are applied; (2) those measures tend to complement each other, as the impact of individual instruments is transmitted via different channels; and (3) the resilience benefits are more sizeable if the measures effectively limit the accumulation of risks before an economic downturn occurs, suggesting that an early, preemptive implementation of borrower-based measures is indeed warranted.

The European Crowdfunding Service Providers Regulation and the Future of Marketplace Lending and Investing in Europe: the ‘Crowdfunding Nature’ Dilemma (UPDATED JULY 2020)
Macchiavello, Eugenia
The European Commission’s Proposal for a Regulation on European Crowdfunding Service Providers (ECSPs) for businesses, since its presentation, has faced difficult trilateral negotiations among the European Commission, the European Parliament and the Council of the European Union. The length of the legislative process can be explained not only by the insurgence of nationalisms, the uncertainty related to Brexit negotiations and the COVID-19 pandemic outbreak, but also because of the different views of the three European Institutions about crowdfunding and on how to regulate it. Nonetheless, they eventually reached an agreement in December 2019 and the Regulation is finally close to its formal adoption. The present paper, after briefly describing crowdfunding main features, will critically and analytically analyze the main aspects of the ECSPs Regulation, with respect to the approved text and to the pre-existing versions, evaluating the available alternatives, their pros and cons and proposing adjustments to reach a functional, tiered and proportional regulation and shed light on the nature and future of financial-return crowdfunding in Europe.The present paper is an updated version of my previous one here:

The Importance of Spillovers during the COVID-19 Pandemic
Hoang, Lai T.,Baur, Dirk G.
This paper proposes a simple framework to distinguish lagged effects (spillovers) from contemporaneous effects and to estimate their relative importance. We use an eclectic sample of assets from five different asset classes and find that spillovers have low explanatory power of returns and volatility on average but high explanatory power during the COVID-19 pandemic and that volatility spillovers have higher explanatory power than return spillovers. The results indicate that past information is more efficiently incorporated in stock prices in normal times than in crisis times.

The Stagnation-Financialization Paradox? Macro-Finance Agent-Based Model with Heterogeneous Expectations
Turco, Enrico Maria
Building a macro-finance agent-based model with credit and stock market, we investigate how the increasing role of speculative investors in the ownership structure affects managers’ planning horizons and R&D investment-buybacks decisions and, consequently, the resulting macro-economic dynamics in terms of growth, instability and crisis. Drawing on Keynes’s (1936) characterization of financial market and Minsky’s (1992) notion of money manager capitalism, the idea is that when the stock market is dominated by a speculative sentiment, managers tend to internalize the short-term view of speculative investors and accommodate their demand for high equity returns, by diverting corporate resources from R&D investment towards share buybacks in order to boost the stock price. Simulation results show that the increasing orientation towards shareholder value leads to a lower and less volatile growth in the real sec- tor, but a higher growth in the financial sector, giving rise to what we call a ‘stagnation-financialization paradox’. Yet, in order for this scenario to manifest, it is necessary that the configuration of ownership structure and the degree of market concentration are such that the corporate sector can generate and then distribute a sufficient amount of profits to support the stock price, despite a slowing real economy. Conversely, if the fraction of speculators is too large, the economic growth is so low that the fall in profits drags buybacks spending down, and so does the stock market.

Three Eras of Endowment Performance Between 1974 and 2019
Ennis, Richard
Three eras define the performance of endowments since 1974. Large funds under-performed by the approximate margin of their costs in the first and third eras. In the middle era, they outperformed by a wide margin. Over the full period, large endowment fund managers, collectively, added value for their institutions. Small endowment funds under-performed over the three eras. These assets should be managed passively at next to no cost.

Trading Disclosure Requirements and Market Quality Tradeoffs
Mele, Antonio,Sangiorgi, Francesco
We analyze the effects of trading disclosure requirements in markets with insider traders and professional investors. The insiders garble their trading throughout a mixed strategy. A number of differentially informed professional investors acquire information and contribute to increased mar- ket efficiency. A “reform” introducing post-trade transparency leads these professional investors to acquire less information and, then, to trade less, contributing to less price discovery. This information crowding-out may be so strong to neutralize the generally positive effects related to public disclosure or to harm market quality, resulting in diminished liquidity and informationally less efficient market.

Trustworthiness in the Financial Industry
Gill, Andrej,Heinz, Matthias,Schumacher, Heiner,Sutter, Matthias
The financial industry has been struggling with widespread misconduct and public mistrust. Here we argue that the lack of trust into the financial industry may stem from the selection of subjects with little, if any, trustworthiness into the financial industry. We identify the social preferences of business and economics students, and follow up on their first job placements. We find that during college, students who want to start their career in the financial industry are substantially less trustworthy. Most importantly, actual job placements several years later confirm this association. The job market in the financial industry does not screen out less trustworthy subjects. If anything the opposite seems to be the case: Even among students who are highly motivated to work in finance after graduation, those who actually start their career in finance are significantly less trustworthy than those who work elsewhere.