Research articles for the 2020-08-13

A Second Chance? Labor Market Returns to Adult Education Using School Reforms
Salvanes, Kjell G.,Blundell, Richard W.,Bennett, Patrick
Roughly one third of a cohort drop out of high school across OECD countries, and developing effective tools to address prime-aged high school dropouts is a key policy question. We leverage high quality Norwegian register data, and for identification we exploit reforms enabling access to high school for adults above the age of 25. The paper finds that considerable increases in high school completion and beyond among women lead to higher earnings, increased employment, and decreased fertility. As male education remains unchanged by the reforms, later life education reduces the pre-existing gender earnings gap by a considerable fraction.

Asset Diversification Versus Climate Action
Hambel, Christoph,Kraft, Holger,der Ploeg, Rick van
Asset pricing and climate policy are analyzed in a global economy where consumption goods are produced by both a green and a carbon-intensive sector. We allow for endogenous growth and three types of damages from global warming. It is shown that, initially, the desire to diversify assets complements the attempt to mitigate economic damages from climate change. In the longer run, however, a trade-off between diversification and climate action emerges. We derive the optimal carbon price, the equilibrium risk-free rate, and risk premia. Climate disasters, which are more likely to occur sooner as temperature rises, significantly increase risk premia.

Bail-outs and Bail-ins are better than Bankruptcy: A Comparative Assessment of Public Policy Responses to COVID-19 Distress
van Zwieten, Kristin,Eidenmueller, Horst,Sussman, Oren
COVID-19 has severely disrupted the conduct of business around the globe. In jurisdictions that impose one or more ‘lockdowns’, multiple sectors of the real economy must endure prolonged periods of reduced trading or even total shutdowns. The associated revenue losses will push many businesses into bankruptcy. No public policy response can recover these losses. States can, however, act to reduce the amplification of the shock by the way in which they treat the cohort of newly bankrupt businesses. In jurisdictions where a well-functioning reorganisation procedure is capable of producing value-maximising outcomes in normal conditions, the temptation may be to subject this cohort to treatment by such procedures. This temptation should be resisted, not only because of the (significant) costs of these procedures, or because of concerns about institutional capacity to treat a high volume of cases, but also because such procedures are likely to be a poor ‘fit’ for the treatment of COVID-19 distress. In our view, the more attractive routes to relief are bail-ins (one-time orders to creditors or counterparties, or some class thereof, to forgive), bail-outs (offers to assume the debtor’s liabilities, or a class thereof), or some combination of the two. In this paper, we explain why a public policy response is necessary to mitigate the amplification of the shock caused by trading shut-downs, and compare treatment by the prevailing bankruptcy law with treatment by bail-ins or bail-outs along a range of dimensions. We conclude by tentatively suggesting some principles to help guide the choice between bail-ins and bail-outs, and the design of either form of intervention.

Comment Letter - Office of the Comptroller of the Currency: Warning of the Dangers Posed by the Shadow Payment System and Shadow Digital Money
Awrey, Dan,Menand, Lev,McAndrews, James
This comment letter was submitted in response to the Office of the Comptroller of the Currency (OCC) advance notice of proposed rule-making regarding the digital activities of National Banks and Savings Associations. For the reasons set out in this letter, we believe that the OCC’s proposed approach to regulating new financial technologies, institutions, and platforms is fundamentally flawed. Rather than focus on relaxing the regulatory framework governing banks, we believe that the OCC should consider how to strengthen the legal regime governing an emerging contingent of non-bank financial institutions that now compete with banks in the realm of money and payments. This comment letter describes the business models of these new institutions, the antiquated and inadequate legal regimes that currently govern them, and the serious and growing risks they pose. This letter suggests modest and straightforward reforms that the OCC should recommend to Congress that would require these firms to back their monetary liabilities 1:1 with bank deposits. These reforms would harmonize state and federal law, prevent a weakening of the prudential safeguards that ensure the safety and soundness of money institutions, and yet still allow both banks and non-bank payment platforms to offer innovative services. These reforms would also be superior to alternative approaches such as a federal payments charter, which would likely prompt a dangerous race to the bottom between state and federal regulators.

Competitive Quote Flipping and Trade Clusters
Fishe, Raymond P.H.,Roberts, John S.
We model the decision to deplete depth at the best quote, which either flips the best bid or ask quote to the opposite side or widens the spread. Such events are common and often revert to the previous best bid and ask levels. Using the order book for the S&P E-mini futures contract, we document quote changes and find on average 78% of these revert to previous best quote levels within 3 seconds and about one-third of these events are isolated over a 40 millisecond window from other quote changes. Our model considers that a strategic agent may gain from temporarily changing the best bid-ask quotes. The competitive solution implies a clustering of trades before a quote change, and we document that 18.1% of volume arises within 2 milliseconds of an isolated, reverting quote change. We find that this model explains at least as much quote change activity as does the liquidity replacement view.

Convergence of Deep Fictitious Play for Stochastic Differential Games
Jiequn Han,Ruimeng Hu,Jihao Long

Stochastic differential games have been used extensively to model agents' competitions in Finance, for instance, in P2P lending platforms from the Fintech industry, the banking system for systemic risk, and insurance markets. The recently proposed machine learning algorithm, deep fictitious play, provides a novel efficient tool for finding Markovian Nash equilibrium of large $N$-player asymmetric stochastic differential games [J. Han and R. Hu, Mathematical and Scientific Machine Learning Conference, 2020]. By incorporating the idea of fictitious play, the algorithm decouples the game into $N$ sub-optimization problems, and identifies each player's optimal strategy with the deep backward stochastic differential equation (BSDE) method parallelly and repeatedly. In this paper, under appropriate conditions, we prove the convergence of deep fictitious play (DFP) to the true Nash equilibrium. We can also show that the strategy based on DFP forms an $\epsilon$-Nash equilibrium. We generalize the algorithm by proposing a new approach to decouple the games, and present numerical results of large population games showing the empirical convergence of the algorithm beyond the technical assumptions in the theorems.

Deep Learning modeling of Limit Order Book: a comparative perspective
Antonio Briola,Jeremy Turiel,Tomaso Aste

The present work addresses theoretical and practical questions in the domain of Deep Learning for High Frequency Trading, with a thorough review and analysis of the literature and state-of-the-art models. Random models, Logistic Regressions, LSTMs, LSTMs equipped with an Attention mask, CNN-LSTMs and MLPs are compared on the same tasks, feature space, and dataset and clustered according to pairwise similarity and performance metrics. The underlying dimensions of the modeling techniques are hence investigated to understand whether these are intrinsic to the Limit Order Book's dynamics. It is possible to observe that the Multilayer Perceptron performs comparably to or better than state-of-the-art CNN-LSTM architectures indicating that dynamic spatial and temporal dimensions are a good approximation of the LOB's dynamics, but not necessarily the true underlying dimensions.

Director Overlap: Groupthink versus Teamwork
Coles, Jeffrey L.,Daniel, Naveen D.,Naveen, Lalitha
We address two aspects of board dynamics â€" group-think and teamwork â€" that both arise from increased director overlap. Overlap captures the extent of common service by board directors. Greater overlap can lead to excessive cohesiveness of the group and thus group-think, where the desire for consensus overrides critical thinking. Alternatively, greater overlap can promote better teamwork through lower coordination and communication costs. We find that director overlap negatively affects firm value in dynamic firms, which stand to lose more from group-think, and positively affects firm value in complex firms, which have higher coordination costs and hence benefit from better teamwork.

Employment and Earnings of African Americans Fifty Years After: Progress?
Lazonick, William,Moss, Philip,Weitz, Joshua
The Equal Employment Opportunity Commission (EEOC) was established in 1965 to implement Title VII of the Civil Rights Act of 1964, which made it illegal to discriminate against an individual in employment on the basis of race, color, religion, sex or national origin. Coming into the 1960s, the employment opportunity that privileged the white male was much more than a job. By the 1960s, growing numbers of white men had employment that gave them steadily rising real earnings, often with decades of tenure at one organization. The “career-with-one-company” (CWOC) that had become the employment norm by the beginning of the 1960s included health insurance and a defined-benefit pension, both funded by the employee’s business corporation or government agency. CWOC is what, in the decades immediately after World War II, turned much of white America into a growing and thriving middle class.This was a white middle class made up of, at the lower end, blue-collar workers with no more than a high-school education. Union representation in collective bargaining enforced the unions’ firsthired, last fired “seniority” principle while securing wage increases in step with productivity growth, with “cost-of-living allowances” that adjusted wages for inflation usually built into the contracts. Aided by government subsidies such as the federal GI Bill and tuition-free higher education at state “land grant” colleges, the male offspring of the white blue-collar worker had ample opportunity to transition to higher incomes, superior benefits, and even more employment security as a white-collar worker. In the 1950s, the white male who had recently ascended to the upper echelons of the middle class became known as “the organization man.”In the immediate aftermath of the 1964 Civil Rights Act, African Americans with no more than a high-school education gained access to CWOC employment at the blue-collar level. Owing to strong demand for production workers in the 1960s and 1970s and affirmative-action support under the EEOC, Blacks were making inroads into white-male privilege by gaining substantial access to well-paid and secure operative and craft occupations; big steps up from the common-laborer jobs into which they had previously been segregated. In the first Working Paper of this series , we outlined how the decline of unionized jobs from the beginning of the 1980s decimated an emergent African American blue-collar middle class. Over the decades it became clear, however, that, while African Americans were hit earlier and harder than whites, they were not the only ones to fall out of the middle class. Increasingly, white blue-collar workers with no more than a high-school education also lost their middle-class status as the ideology that companies should be run to “maximize shareholder value” put a permanent end to the CWOC norm. Over subsequent decades and up to the present, growing numbers of American workers with only a high-school education, regardless of race, have experienced stagnating incomes, downward socioeconomic mobility, and even, at certain times, declining life expectancy.In this, the second working paper of our Fifty Years After book manuscript, we provide a statistical overview of the changes in employment and earnings of Blacks since the mid-1960s. If Title VII of the Civil Rights Act of 1964, along with other anti-discrimination laws from that period, and the formation of the Equal Employment Opportunity Commission promised progress toward racial equality in employment and general well-being, the current situation shows a very troubling picture. Across all dimensions of economic well-being that are dependent on access to decent paying, secure jobs, Blacks fare worse than whites. We present the most recent available data on the occupations (for 2019) and the industries (for 2018) in which the different Black, white, Hispanic, and Asian members of the U.S. labor force are employed. Then, using the decennial censuses, we examine the distributions of Blacks across aggregate categories of occupations from 1960 to 2010 to see the changing pattern of jobs held by Blacks, in broad terms, from the time of the Civil Rights Act to the present. We then look at the differences in Black and white unemployment and wage rates, with and without accounting for differences in education. The racial gap in wages, after accounting for education level, has widened.Stable jobs that enable employees to share in productivity gains and hence increase their real earnings over time facilitate the accumulation of wealth. In its various forms, wealth influences the current and future well-being of families and their children by enabling investments in education and training, providing savings to offset unforeseen circumstances, and funding retirement. Although manifest progress has been made by a portion of better-educated Blacks, the overall picture for wealth accumulation by Blacks in comparison with whites is grim. A race-based wealth gap should be no surprise, as access of African Americans to stable, well-paid jobs has always been much less than for whites. Yet, the size of wealth disparities is extremely large and has worsened over the last fifty years. Currently the median family wealth for whites is ten times that of Blacks. We examine the wealth gap within separate categories, including housing equity, housing stability measured by delinquency on mortgages and foreclosure, retirement savings and liquid savings, corporate shareholding, and student-loan debt. We also look at health insurance coverage because it functions, in part, like savings that can be called upon to deal with unanticipated events. And lack of health insurance can wipe out one’s accumulated wealth should one require hospitalization and/or expensive drugs. In every one of these components of wealth, Blacks trail whites by large and increasing amounts. Each of these indicators reflects the persistent and even growing Black-white disparities in earnings, employment security, and career patterns over time.Which leaves us with the question that the “Fifty Years After” project seeks to answer: What happened to equal employment opportunity? For a quest for economic equality to become a reality, the pay and stability of employment for Blacks must be improved far more than for whites. But in view of the downward mobility of white workers, even a substantial closing of the Black-white income gap will not solve the problems of poverty and injustice in the United States. Contrary to the situation in the 1960s, in the presence of the impoverished and vulnerable American working class of the 2020s, “equal employment opportunity” will not yield the upward socioeconomic mobility for Blacks that was possible in the 1960s and 1970s. The Covid-19 crisis is having an especially devastating impact on people of color, but workers of every race and ethnicity are feeling immense pain. Even when the public-health crisis has abated, the gargantuan political task for the years and decades ahead will be the restoration of employment opportunity that will enable all Americans to live healthy, secure, and happy lives.

Financial Sector Readiness to Support Economic Actives under COVID-19: The Case of African Continent
Winful (PhD), Ernest Christian,Sarpong, David,Dondjio, Irenee
The magnitude of COVID-19 is yet to estimated and felt by countries. The pandemic has posed a major disruption to economic activity across the world. Using the model by Battese, G.E., Coelli, T.J. (1995) the translog production frontier was adopted to estimate technical efficiency of the financial sector of the continent. The 24 countries selected were based on the availability of data to cover our variables of interest. The findings were that generally the financial sector in the continent have performed above average (72%) over the period of study. Also lower middle income countries are relatively going to have more problems with pandemic. However, the probability of the continent not plunging into economic depression with the support of the financial sector is 0.42 which is not encouraging. It is recommended that policies to address interest rate margin, liquidity and market concentration should be managed properly to improve technical efficiency of the financial sectors of the continent. This will ensure that relief packages and grants are managed properly.

How the Disappearance of Unionized Jobs Obliterated an Emergent Black Middle Class
Lazonick, William,Moss, Philip,Weitz, Joshua
In this introduction to our project, “Fifty Years After: Black Employment in the United States Under the Equal Employment Opportunity Commission,” we outline the socioeconomic forces behind the promising rise and disastrous fall of an African American blue-collar middle class. During the 1960s and 1970s, blacks with no more than high-school educations gained significant access to well-paid unionized employment opportunities, epitomized by semi-skilled operative jobs in the automobile industry, to which they previously had limited access. Anti-discrimination laws under Title VII of the 1964 Civil Rights Act with oversight by the Equal Employment Opportunity Commission supported this upward mobility for blacks in the context of a growing demand for blue-collar labor. From the late 1970s, however, the impact of global competition and the offshoring of manufacturing combined with the financialization of the corporation to decimate these stable and well-paid blue-collar jobs. Under the seniority provisions of the now beleaguered industrial unions, blacks tended to be last hired and first fired. As U.S.-based blue-collar jobs were permanently lost, U.S. business corporations and government agencies failed to make sufficient investments in the education and skills of the U.S. labor force to usher in a new era of upward socioeconomic mobility. This organizational failure left blacks most vulnerable to downward mobility. Instead of retaining corporate profits and reinvesting in the productive capabilities of employees, major business corporations became increasingly focused on downsizing their labor forces and distributing profits to shareholders in the form of cash dividends and stock buybacks. Legitimizing massive distributions to shareholders was the flawed and pernicious ideology that a company should be run to “maximize shareholder value.” As the U.S. economy transitioned from the Old Economy business model, characterized by a career with one company, to the New Economy business model, characterized by interfirm labor mobility, advanced education and social networks became increasingly important for building careers in well-paid white-collar occupations. Along with non-white Hispanics, blacks found themselves at a distinct disadvantage relative to whites and Asians in accessing these New Economy middle-class employment opportunities. Eventually, the downward socioeconomic mobility experienced by blacks would also extend to devastating loss of well-paid and stable employment for whites who lacked the higher education now needed to enter the American middle class. By the twenty-first century, general downward mobility had become a defining characteristic of American society, irrespective of race, ethnicity, or gender. Since the 1980s, the enemy of equal employment opportunity through upward socioeconomic mobility has been the pervasive and entrenched corporate-governance ideology and practice of maximizing shareholder value (MSV). For most Americans, of whatever race, ethnicity, and gender, MSV is the not-so-invisible hand that has a chokehold on the emergence of the stable and well-paid employment opportunities that are essential for sustainable prosperity.

How “Maximizing Shareholder Value” Minimized the Strategic National Stockpile: The $5.3 Trillion Question for Pandemic Preparedness Raised by the Ventilator Fiasco
Lazonick, William,Hopkins, Matt
With just 4.2 percent of the world’s population, the United States had, as of June 23, 2020, 25.3 percent of its confirmed Covid-19 cases and 25.5 percent of its deaths. The magnitude of the tragedy raises the obvious, and critically important, counterfactual question of how the United States as a nation would have fared had there been competent and committed political leadership in place when, during January 2020, intelligence indicating the severity of the unfolding pandemic became available. A partial answer to this question lies in identification of the organizational and technological capabilities to develop, produce, and distribute “countermeasures”â€"personal protective equipment (PPE), ventilators, diagnostic tests, therapies, and vaccinesâ€"that a competent and committed federal administration would have been able to mobilize to respond to the pandemic. Main repositories of the necessary capabilities are government agencies and business firms, with the development, production, and distribution of countermeasures relying heavily on government-business collaborations (GBCs). We contend that the success of projects for public-health preparedness and response depends on the strength of the relevant intersectoral collaborations, and in particular GBCs.In this essay, we focus on the particular case of the development, production, and delivery of ventilators to the Strategic National Stockpile (SNS). We trace the historical evolution within the U.S. federal government of the current system of public-health preparedness for and response to a pandemic through the end of the Obama administration. Then, we analyze the particular GBCs to develop ventilators for the SNS that were initiated and implemented by the Biomedical Research and Development Authority (BARDA), under the Assistant Secretary for Preparedness and Response (ASPR) within the U.S. Department of Health and Human Services (HHS). BARDA initiated two successive GBCs, one beginning in 2010 and the second in 2014, with two different business firms, for the purpose of developing portable, easy-to-use, and affordable ventilators for the SNS. We show that the strength of these collaborations lay with the innovative ventilator manufacturers with which BARDA contracted. The weakness of these GBCs appeared when these innovative manufacturers fell under the control of business corporations committed to the ideology of “maximizing shareholder value” (MSV). In each case, the financialized business corporation undermined development and delivery of ventilators to the SNS. We then explain why, in general, we should expect that business firms driven by MSV will be unreliable partners in GBCsâ€"at the expense of the nation’s preparedness for and response to a national emergency, such as the Covid-19 pandemic. This lack of reliability is rooted in the strategic orientation of those U.S. corporations which have put the stock-market valuation of the company ahead of innovative performance producing goods and services. The Covid-19 economic crisis has already revealed the extent to which, in the U.S. economy, the stock market functions not to support value creation but rather as the prime means of value extraction. The most overt form of value extraction is the corporate practice of open-market repurchases of the company’s own sharesâ€"aka stock buybacksâ€"typically done in addition to copious distributions to shareholders in the form of cash dividends.In view of this “predatory value extraction,” we conclude this essay with an urgent question for executives and directors of corporations who, in their embrace of MSV ideology, must bear significant responsibility for the failure of the United States to respond to not only the Covid-19 pandemic but also climate change and income inequity. The question: Why does the company that you head do stock buybacks? In particular, we direct this question to the executives and directors of three corporations that, as of the year 2020, are the biggest repurchasers of their own stock in history: Microsoft at number three, ExxonMobil at number two, and Apple at number one. We also pose this question to the senior executives and board members of any company engaged in the practice who, in August 2019, signed the Business Roundtable (BRT) Statement of the Purpose of the Corporation, which explicitly rejected the BRT’s 1997 pronouncement that “corporations exist principally to serve shareholders,” replacing it with a redefinition of “the purpose of the corporation to promote ‘an economy that serves all Americans’.”

IPO Regulation and Initial Capital Structure: Evidence from the JOBS Act
Alsabah, Khaled,Moon, S. Katie
We examine capital structure implications of newly public firms' availing themselves of regulatory exemptions. Title I of the Jumpstart Our Business Startups (JOBS) Act provides newly public firms broad-scale regulatory relief but limits the benefits to a certain subset of firms named "Emerging Growth Companies (EGCs)." One of the EGC criteria is based on a $700 million public float threshold. We find evidence that firms appear to bunch up their public float at IPO issuances below the $700 million threshold and repurchase their shares after the issuances to be eligible for the EGC status. Firms staying below the threshold are more likely to substitute public equity with debt. We further find that the leverage effect persists over time (the leverage ratchet effect) even when EGCs lose their status.

Image Processing Tools for Financial Time Series Classification
Bairui Du,Paolo Barucca

Time series prediction is a challenge for many complex systems, yet in finance predictions are hindered by the very nature of how financial markets work. In efficient markets, the opportunities for stock price predictions leading to profitable trades are supposed to rapidly disappear. In the growing industry of high-frequency trading, the competition over extracting predictions on stock prices from the increasing amount of available information for performing profitable trades is becoming more and more severe. With the development of big data analysis and advanced deep learning methodologies, traders hope to fruitfully analyse market information, e.g. price time series, through machine learning. Spot prices of stocks provide a simple snapshot representation of a financial market. Stock prices fluctuate over time, affected by numerous factors, and the prediction of their changes is at the core of both long-term and short-term financial investing. The collective patterns of price movements are generally referred to as market states. As a paramount example, when stock prices follow an upward trend, it is called a bull market, and when stock prices follow a downward trend is called a bear market

Assa, Hirbod
This paper introduces a new insurance paradigm, called insurance-by-credit (hence IBC), that is based on the idea of running insurance on deficit. We believe that IBC can better cope with the macro-level risks such as the COVID-19 outbreak, compared with the standard insurances. As we will discuss, the standard insurance approach towards risk is an ex-ante approach, meaning that by primarily setting the premiums at the present, it is planning to compensate for the uncertain or contingent losses in the future. The new risk management paradigm is motivated by the state policies such as the fiscal and monetary policies, to introduce an ex-post risk management tool. This means that risk management is happening after the damage is observed or started to be observed. This will give rise to a new concept, contingent premium, and introduces a new risk to the insurance industry, the credit risk.We compare an IBC product with a standard insurance product in a simple risk management framework to cover the risk of income loss. For the comparison, we use five quantitative indicators including three economic and two decision-making indicators, in addition to one qualitative indicator, which is the moral hazard risk.As we will discuss, due to fact that an insurance market with systemic risk coverage is an example of the market failure, for any insurance covering systemic risk, the government must be the entity that offers such products. For insurance covering systemic risk, IBC outperforms a standard insurance contract in the indicators that have more priority for the government.

Investor Monitoring, Money-Likeness and Stability of Money Market Funds
Jarvenpaa, Maija,Paavola, Aleksi
An asset is money-like if investors have no incentives to acquire costly private information on the underlying collateral. However, privately provided money-like assetsâ€"like prime money market fund (MMF) sharesâ€"are prone to runs if investors suddenly start to question the value of the collateral. Therefore, for risky assets, lack of money-likeness is a necessary condition for lack of run incentives. But is it a sufficient one? This paper studies the effect of the U.S. money market fund reform of 2014--2016 on investor monitoring, money-likeness and stability of institutional prime MMFs. Using the number of distinct IP addresses accessing MMFs' regulatory reports as a proxy for investor monitoring, we find that the reform increased monitoring and thus decreased money-likeness of institutional prime funds. However, we also show that after the reform, institutional prime funds that are more likely to impose the newly introduced redemption restrictions are more monitored, suggesting that investors may monitor in order to avoid being hit by the restrictions. In line with this view, we find that a high probability of redemption restrictions amplifies the run on institutional prime MMFs during the Covid-19 related market panic in March 2020. Overall, our results indicate that despite decreased money-likeness, the reform has not made institutional prime MMFs run-free, and it may have actually created a new source of fragility for MMFs.

Macroprudential Policy and the Role of Institutional Investors in Housing Markets
Muñoz, Manuel
Since the onset of the Global Financial Crisis, the presence of institutional investors in housing markets has steadily increased over time. Real estate funds (REIFs) and other housing investment firms leverage large-scale buy-to-rent investments in real estate assets that enable them to set prices in rental housing markets. A significant fraction of this funding is being provided in the form of non-bank lending (i.e., lending that is not subject to regulatory LTV limits). I develop a quantitative two-sector DSGE model that incorporates the main features of the real estate fund industry in the current context to study the effectiveness of dynamic LTV ratios as a macroprudential tool. Despite the comparatively low fraction of total property and debt held by REIFs, optimized LTV rules limiting the borrowing capacity of such funds are more effective in smoothing property prices, credit and business cycles than those affecting (indebted) households â€" borrowing limit. This finding is remarkably robust across alternative calibrations (of key parameters) and specifications of the model. The underlying reason behind such an important and unexpectedly robust finding relates to the strong interconnectedness of REIFs with various sectors of the economy.

Monetary Policy and Asset Price Overshooting: A Rationale for the Wall/Main Street Disconnect
Caballero, Ricardo J.,Simsek, Alp
We analyze optimal monetary policy when asset prices influence aggregate demand with a lag (as is well documented). In this context, as long as the central bank's main objective is to minimize the output gap, the central bank optimally induces asset price overshooting in response to the emergence of a negative output gap. In fact, even if there is no output gap in the present but the central bank anticipates a weak recovery dragged down by insufficient demand, the optimal policy is to preemptively support asset prices today. This support is stronger if the acute phase of the recession is expected to be short lived. These dynamic aspects of optimal policy give rise to potentially large temporary gaps between the performance of financial markets and the real economy. One vivid example of this situation is the wide disconnect between the main stock market indices and the state of the real economy in the U.S. following the Fed's powerful response to the COVID-19 shock.

Syndicate Structure, Primary Allocations, and Secondary Market Outcomes in Corporate Bond Offerings
Bessembinder, Hendrik,Jacobsen, Stacey E.,Maxwell, William F.,Venkataraman, Kumar
We describe and test hypotheses regarding underwriting syndicate structure, primary placement transactions, and secondary market outcomes for Corporate Bond offerings. We document that perceived deal risk and complexity are determinants of syndicate structure. Consistent with the reasoning that the syndicate obtains valuable information regarding investor interest during book-building, we show that the syndicate “over-allocates”, thereby entering short positions, deals with weaker or more uncertain secondary market demand. We show that while the syndicate incurs trading losses on the short-covering secondary market purchases that support over-allocated deals, these issues are less under-priced, i.e., appreciate less in the aftermarket. We find secondary market spreads are narrower for over-allocated issues, and investigate relations between syndicate structure, primary market allocations, and secondary market pricing.

SynthETIC: an individual insurance claim simulator with feature control
Benjamin Avanzi,Gregory Clive Taylor,Melantha Wang,Bernard Wong

A simulator of individual claim experience called SynthETIC is described. It is publicly available, open source and fills a gap in the non-life actuarial toolkit. It simulates, for each claim, occurrence, notification, the timing and magnitude of individual partial payments, and closure. Inflation, including (optionally) superimposed inflation, is incorporated in payments. Superimposed inflation may occur over calendar or accident periods. The claim data are summarized by accident and payment "periods" whose duration is an arbitrary choice (e.g. month, quarter, etc.) available to the user. The code is structured as eight modules (occurrence, notification, etc.), any one or more of which may be re-designed according to the user's requirements. The default version is loosely calibrated to resemble a specific (but anonymous) Auto Bodily Injury portfolio, but the general structure is suitable for most lines of business, with some amendment of modules. The structure of the simulator enables the inclusion of a number of important dependencies between the variables related to an individual claim, e.g. dependence of notification delay on claim size, of the size of a partial payment on the sizes of those preceding, etc. The user has full control of the mechanics of the evolution of an individual claim. As a result, the complexity of the data set generated (meaning the level of difficulty of analysis) may be dialled anywhere from extremely simple to extremely complex. At the extremely simple end would be chain-ladder-compatible data, and so the alternative data structures available enable proposed loss reserving models to be tested against more challenging data sets. Indeed, the user may generate a collection of data sets that provide a spectrum of complexity, and the collection may be used to present a model under test with a steadily increasing challenge.

The COVID-19 Shock and Equity Shortfall: Firm-Level Evidence from Italy
Carletti, Elena,Oliviero, Tommaso,Pagano, Marco,Pelizzon, Loriana,Subrahmanyam, Marti G.
We employ a representative sample of 80,972 Italian firms to forecast the drop in profits and the equity shortfall triggered by the COVID-19 lockdown. A 3-month lockdown generates an aggregate yearly drop in profits of about 10% of GDP, and 17% of sample firms, which employ 8.8% of the sample’s employees, become financially distressed. Distress is more frequent for small and medium-sized enterprises, for firms with high pre-COVID-19 leverage, and for firms belonging to the Manufacturing and Wholesale Trading sectors. Listed companies are less likely to enter distress, whereas the correlation between distress rates and family firm ownership is unclear.

The Proposed DOL ESG ERISA Regulation and the Public Reaction
Feuer, Albert
ERISA plan fiduciaries select investments to make (1) directly on behalf of plan participants and beneficiaries, or (2) indirectly on behalf of plan participants and beneficiaries by selecting investment options to offer them. The DOL describes ESG investments as including socially responsible investing, responsible investing, and sustainable investing (ESG/sustainable investing). The DOL proposed regulation would direct those fiduciaries to look askance at ESG/sustainable investments. In particular, the proposed regulation would provide that(1) ESG/sustainable investments are only permitted if the plan fiduciary overcomes burdens not applicable to other investing approaches regardless of the economic value of the investment, and (2) ESG/sustainable investment alternatives for self-directed plans, regardless of their economic values, may not (a) be a qualified default investment alternative or a component of such an alternative, or (b) include alternatives if the fiduciary acknowledges having used any ESG/sustainable investment considerations that are not “objective risk-return criteria.” Many of the public comments suggested that the proposed regulations be significantly revised, and there appeared to be broad agreement on two revisions: • The regulation should permit an investment alternative may be a qualified default investment alternative for a self-directed plan regardless of whether the alternative makes any use of ESG/Sustainable consideration, such as using the S&P® index; and • The regulation should distinguish between the use of ESG/Sustainable considerations to determine the economic value of an investment, i.e., the incorporation approach, which may be judged in the same manner as any other valuation tool, and cases in which consideration are used for other purposes.There was a strong factual disagreement about whether ESG considerations are only used to value investments, including as a risk-management tool, in which case there is no reason for any special scrutiny of those considerations. If those considerations are ever used for other purposes, such as to have positive effects for the environment, society, or enterprise governance, some argue ERISA not only prohibits such consideration, but special scrutiny is needed to avoid these so-called abuses. even if the pursuit of those goals does not reduce the economic value of the plan’s investment or plan’s choice of an investment alternative to make available to plan participants and beneficiaries. There was also a strong legal disagreement about whether the regulation should, as it does in very narrow circumstances, ever permit fiduciaries to use any ESG/sustainable considerations that do not determine an investment’s economic value to decide between direct investments which have the same expected economic value. The paper argues that it is advisable for the DOL to revise the proposed regulation to be consistent with ERISA, the usual practice of prudent ERISA fiduciaries exercising due diligence in making plan investment decisions, prior DOL guidance, and the reasonable preferences of many ERISA plan fiduciaries, participants, and beneficiaries to follow two principles: • No additional reporting or review requirements need to be imposed on plan fiduciaries to fulfill their ERISA obligations to determine the economic value of the available alternatives in the relevant asset class, regardless of the name of the investment or the investment approach, to determine the option or options with the greatest economic values, whether the investment is directly or indirectly made; and • ERISA plan fiduciaries need not and, often, cannot make investment decisions by only looking at the investment’s economic value. When, as if often the case, plan fiduciaries determine that multiple investment choices within the same investment asset class provide the same best expected economic value, the fiduciaries may, must, and do choose one or more of those options for reasons other than the choice’s economic value, such as ESG/sustainable factors or a fiduciary’s' personal comfort with the managers of the different options.

The p-Innovation ecosystems model
R. Church,J. C. Duque,D. E. Restrepo

In this paper, we propose a spatially constrained clustering problem belonging to the family of "p-regions" problems. Our formulation is motivated by the recent developments of economic complexity on the evolution of the economic output through key interactions among industries within economic regions. The objective of this model consists in aggregating a set of geographic areas into a prescribed number of regions (so-called innovation ecosystems) such that the resulting regions preserve the most relevant interactions among industries. We formulate the p-Innovation Ecosystems model as a mixed-integer programming (MIP) problem and propose a heuristic solution approach. We explore a case involving the municipalities of Colombia to illustrate how such a model can be applied and used for policy and regional development.

Transmission of market orders through communication line with relativistic delay
Peter B. Lerner

The notion of "relativistic finance" became ingrained in public imagination and has been asserted in many mass-media reports. Yet, despite an observed drive of the most reputable Wall Street firms to establish their servers ever closer to the trading hubs, there is surprisingly little "hard" information related to relativistic delay of the trading orders. In this paper, the author uses modified M/M/G queue theory to describe propagation of the trading signal with finite velocity.

Understanding Gambling Behavior and Risk Attitudes Using Cryptocurrency-based Casino Blockchain Data
Jonathan Meng,Feng Fu

The statistical concept of Gambler's Ruin suggests that gambling has a large amount of risk. Nevertheless, gambling at casinos and gambling on the Internet are both hugely popular activities. In recent years, both prospect theory and lab-controlled experiments have been used to improve our understanding of risk attitudes associated with gambling. Despite theoretical progress, collecting real-life gambling data, which is essential to validate predictions and experimental findings, remains a challenge. To address this issue, we collect publicly available betting data from a \emph{DApp} (decentralized application) on the Ethereum Blockchain, which instantly publishes the outcome of every single bet (consisting of each bet's timestamp, wager, probability of winning, userID, and profit). This online casino is a simple dice game that allows gamblers to tune their own winning probabilities. Thus the dataset is well suited for studying gambling strategies and the complex dynamic of risk attitudes involved in betting decisions. We analyze the dataset through the lens of current probability-theoretic models and discover empirical examples of gambling systems. Our results shed light on understanding the role of risk preferences in human financial behavior and decision-makings beyond gambling.

Valuation of VIX and Target Volatility Options with Affine GARCH Models
Cao, Hongkai,Badescu, Alex,Cui, Zhenyu,Jayaraman, Sarath Kumar
In this paper we propose semi-closed-form solutions, subject to an inversion of the Fourier transform, for the price of VIX options and target volatility options (TVOs) under affine GARCH models based on Gaussian and Inverse Gaussian distributions. We illustrate the advantage of the proposed analytic expressions by comparing them with those obtained from benchmark Monte-Carlo simulations. The empirical performance of the two affine GARCH models is tested using different calibration exercises based on historical returns and market quotes on VIX and SPX options.

Venture Capitalists and COVID-19
Gompers, Paul A.,Gornall, Will,Kaplan, Steven N.,Strebulaev, Ilya A.
We survey over 1,000 institutional and corporate venture capitalists (VCs) at more than 900 different firms to learn how their decisions and investments have been affected by the COVID-19 pandemic. We compare their survey answers to those provided by a large sample of VCs in early 2016 and analyzed in Gompers, Gornall, Kaplan, and Strebulaev (2020). VCs have slowed their investment pace (71% of normal) and expect to invest at 81% of their normal pace over the coming year. Not surprisingly, they have devoted more time to guiding the portfolio companies through the pandemic. VCs report that 52% of their portfolio companies are positively affected or unaffected by the pandemic; 38% are negatively affected; and 10% are severely negatively affected. Overall, they expect the pandemic to have a small negative effect on their fund IRRs (-1.6%) and MOICs (-0.07). Surprisingly, we find little change in the allocation of their time to helping portfolio companies relative to looking for new investments. In general, we find only modest differences between institutional and corporate VCs.