Research articles for the 2020-09-04

125 Years of Time-Varying Effects of Fiscal Policy on Financial Markets
Marfatia, Hardik,Gupta, Rangan,Miller, Stephen M.
This paper examines the effect of fiscal policy on financial markets over a long span of 125 years. Unlike existing studies that mainly focus on monetary policy shocks and model-based identification of fiscal policy shocks, we use a time-varying parameter model to study the effect of fiscal policy with much cleaner and direct identification of fiscal policy shocks. In addition, we extend our analysis by measuring the response volatility in these markets and separately study the effects of good and bad components of volatility. We find significant time-variation in the response of stock and bond market returns and volatility. The overall response of the stock market exceeds that of bond markets, with more pronounced effects in the pre-1950 period than in the last six decades. Fiscal consolidation generates long-term benefits that positively affect financial markets in the latter part of the 20th century, thus providing new insights into the dynamic role of fiscal policy.

A Deep Learning Approach to Estimate Forward Default Intensities
Divernois, Marc-Aurèle
This paper proposes a machine learning approach to estimate physical forward default intensities. Default probabilities are computed using artificial neural networks to estimate the intensities of the inhomogeneous Poisson processes governing default process. The major contribution to previous literature is to allow the estimation of non-linear forward intensities by using neural networks instead of classical maximum likelihood estimation. The model specification allows an easy replication of previous literature using linear assumption and shows the improvement that can be achieved.

Advertising Arbitrage
Kovbasyuk, Sergey,Pagano, Marco
Arbitrageurs with a short investment horizon gain from accelerating price discovery by advertising their private information. However, advertising many assets may overload investors' attention, reducing the number of informed traders per asset and slowing price discovery. So arbitrageurs optimally concentrate advertising on just a few assets, which they overweight in their portfolios. Unlike classic insiders, advertisers prefer assets with the least noise trading. If several arbitrageurs share information about the same assets, inefficient equilibria can arise, where investors' attention is overloaded and substantial mispricing persists. When they do not share, the overloading of investors' attention is maximal.

COVID-19 Outbreak and US Economic Policy Uncertainty: An ARDL Approach
Matuka, Adelajda
The outbreak of COVID-19 is generating shock waves to financial markets and the real economy all over the world and the depth of the recession coming ahead depends on policy response. This paper investigates the impact of COVID-19 (measured by the number of new cases and deaths) and brent oil prices on the economic policy uncertainty of the United States. I use daily data from 1 January to 25 August 2020 and I use an Autoregressive Distributed Lag (ARDL) model to estimate the relation of COVID-19, oil price dynamics and policy uncertainty. The findings indicate that new infection cases in the US have a significant effect on the US EPU, while there is no significant impact of death cases on economic policy uncertainty. Further, there is an inverse relation between brent oil prices and policy uncertainty meaning that economic policy uncertainty will increase as brent oil prices decrease.

Causation in Australian Securities Class Actions: Searching for an Efficient but Balanced Approach
Duffy, Michael
The correct analysis of proof of causation of loss in securities market nondisclosure class actions (referred to as ‘shareholder class actions’) is hotly disputed. As well as being a matter of doctrinal significance, it has substantial relevance to the practicalities and costs of prosecuting these actions and to the related issue of court efficiency and case management. Traditionally, reliance-based causation is required but market-based causation was considered arguable at an interlocutory stage by the Full Federal Court in a class action. It has also been accepted by the NSW Supreme Court in a non-class action. It is suggested that final judicial acceptance of market-based causation in a class action at trial could be balanced by safeguards that would allow rebuttal of causation in some situations and some limiting of the class. This may allay somewhat the fears of those who see market based causation as contrary to policy and principle.

Comment Letter of Professors Max M. Schanzenbach and Robert H. Sitkoff on the Department of Labor’s Proposed Rulemaking on Financial Factors in Selecting Plan Investments
Schanzenbach, Max M.,Sitkoff, Robert H.
In June of 2020, the Department of Labor proposed a rule-making on financial factors in selecting ERISA plan investments (“Proposal”), in particular environmental, social, and governance factors (“ESG”). In general, we are supportive of the Proposal’s central purpose of subjecting ESG investing to the same fiduciary principles of loyalty and prudence that are applicable to any type or kind of investment. We do, however, have some criticisms. Our basic point is that the law neither favors nor disfavors ESG investing. Any investment decision by an ERISA trustee or other fiduciary â€" whether in the context of a direct investment, shareholder engagement (including proxy voting), or menu construction, and whether reliant on ESG factors or otherwise â€" is subject to the same fiduciary principles embodied in the duties of loyalty and prudence. Our chief criticisms, therefore, reflect instances in which the Proposal differentiates or could be construed as differentiating ESG investing from other types or kinds of investment strategies.First, the Proposal and accompanying commentary could be read to suggest that all manner of ESG investing is inherently suspect, presumably on fiduciary loyalty grounds, and therefore that ESG investing by an ERISA trustee or other fiduciary is always subject to enhanced scrutiny that requires extra process relative to other types of kinds of investment strategies. Such a position is inconsistent with law and sound policy. To be sure, an ERISA trustee or other fiduciary violates the duty of loyalty if she uses ESG factors to provide benefits for third parties (what we call “collateral benefits ESG”). However, use of ESG factors in pursuit of enhanced risk-adjusted returns (what we call “risk-return ESG”) is not suspect under the duty of loyalty. Instead, risk-return ESG is analyzed under the duty of prudence, which applies in the same manner to risk-return ESG as to any other type or kind of investment strategy. Departure from neutral application of fiduciary principles also requires drawing distinctions between ESG investing and other investing, a definitional morass that would create uncertainty and invite litigation.Second, portions of the commentary are unclear or phrased in a manner that could be construed as taking positions, such as with respect to active versus passive investing, that are not consistent with neutral application of the principles of fiduciary investment law. The commentary is also notable for not addressing certain other relevant matters, such as the use of ESG factors in shareholder engagement (sometimes called “stewardship” or “active shareholding”). We identify material instances of such language or omissions and urge appropriate clarification, particularly regarding the “tiebreaker” rule for purportedly economically equivalent investments.This comment letter is largely but not entirely based on “Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee,” 72 Stanford Law Review 381 (2020),

Digital Transformation and Financial Inclusion
Alexander, Kern,Karametaxas, Xenia
The paper explores some of the main regulatory concerns and market barriers created by the digital transformation of the financial services industry and the implications for a more socially-inclusive financial system, particularly in developing and emerging market countries. The paper considers the potential for financial technologies to enhance financial inclusion, whilst minimizing the unintended risks and consequences. In doing so, the paper discusses some of the major international initiatives to support policymakers and regulators in managing the risks associated with advances in financial technology. The paper addresses how financial inclusion has become an important public policy objective by exploring its potential to contribute to social sustainability. The paper examines fintech’s role as a driver for financial inclusion and highlights some of the main advantages and risks of the digital transformation of financial services. In considering these issues, we will analyse how the experience of some developing and emerging market countries illustrate some of the advantages and disadvantages in addressing these challenges. Finally, the paper discusses the potential for national policymakers and regulators to coordinate their efforts on a cross-border basis to take advantage of digital financial technologies whilst mitigating social inclusion risks.

Does A Bullish Stock Market Promote Risky Health Behavior?
Wisniewski, Tomasz Piotr,Lambe, Brendan John
Using an international dataset, this letter examines the consequences of stock market fluctuations for health outcomes. It is found that high returns are associated with increased death rate from alcohol consumption, smoking, obesity and drug use disorders. Although the out of pocket expenditure on healthcare also rises one year after the stock market surge, the net effect of stock index upswings on life expectancy is significantly negative.

Does Court Stringency Affect Restatement Decisions?
Cheng, C.S. Agnes,Huang, Henry He,Lei, Zhen,Lu, Haitian
This study examines how heterogeneous pleading standards among courts affect firms’ propensity for making voluntary restatements. We find robust evidence that misreporting firms headquartered in court jurisdictions with higher dismissal rates (more lenient to firms) are more likely to make voluntary restatements. Using the U.S. Supreme Court’s Tellabs decision as an exogenous shock to the pleading standard in some district courts, we find similar evidence in a difference-in-differences analysis. Our findings, that firms are more likely to admit misreporting when the legal environment is lenient, cannot be inferred from previous research, which suggests that firms disclose bad news when facing high litigation risk. Thus, we provide new evidence on the complex relationship between the legal environment and financial reporting decisions.

Does It Pay to Invest? The Personal Equity Risk Premium and Stock Market Participation
Merkoulova, Yulia,Veld, Chris
Individuals’ stock market participation depends on the riskâ€"return trade-off they expect to achieve from investing. We argue that the expected economic benefits from investing are highly heterogeneous. To capture these benefits, we define the personal equity risk premium (PERP) as the difference between an individual’s expected stock return and personal opportunity cost of capital. We find that the PERP is a significant determinant of stock market participation. Our results hold after we control for known factors, such as financial literacy, trust, and loss aversion. The results are stronger when we analyze the level of stock investment. Disentangling the PERP into its two components shows that both contribute to explain both stock market participation and the level of participation.

Does Working from Home Decrease Profitability and Productivity? Evidence from the Mutual Fund Industry
Xiao, Han
This paper studies the effect of remote working on the actively managed mutual fund returns and managerial skills. I use the staggered state-level stay-at-home orders in the U.S. as the difference-in-differences strategy. After implementing working from home, fund daily net excess returns decrease by 3.4%, corresponding to 25 million dollars economic loss than investing in market portfolios. The findings are relevant to deteriorate manager skills, which reduce by 2%. The results provide evidence that required remote working worsens the productivity and profitability in the mutual fund industry.

Dynamic Asymmetric Optimal Portfolio Allocation between Energy Stocks and Energy Commodities: Evidence from Clean Energy and Oil and Gas Companies
Asl, Mahdi Ghaemi ,Canarella, Giorgio,Miller, Stephen M.
This paper investigates returns and volatility transmission between SPGCE (index of clean energy stocks), SPGO (index of oil and gas stocks), two non-renewable energy commodities (natural gas and crude oil), and three products of crude oil distillation (heating oil, gasoline, and propane). We estimate a VAR(1) asymmetric BEKK-MGARCH(1,1) using daily U.S. data from March 1, 2010, to February 25, 2020. The empirical findings reveal a vast heterogeneity in spillover patterns of returns, volatilities, and shocks. We employ the empirical results to derive optimal portfolio weights, hedge ratios, and effectiveness measures for SPGCE and SPGO diversified portfolios. We find dynamic diversification advantages of energy commodities, especially heating oil, for energy-related stock markets. We also find that SPGCE and SPGO stocks possess the highest average optimal weight and hedging effectiveness for each other, implying that the positive performance of SPGCE stocks considerably compensates for the negative performance of SPGO stocks. For investors and regulators, the advancement and implementation of clean energy programs and policies, while reducing environmental debt and enhancing “green” growth and sustainable development, provide instruments and strategies to hedge the equity risks inherent in the oil and gas industry.

ESG Investing: Theory, Evidence, and Fiduciary Principles
Schanzenbach, Max M.,Sitkoff, Robert H.
Trustees and other investment fiduciaries of pensions, charities, and personal trusts, and those who advise them, face increasing pressure to rely on ESG factors in the investment management of tens of trillions of dollars of other people’s money. At the same time, however, confusion abounds about the intersection of fiduciary principles and ESG investing. This article cuts through that confusion to provide guidance about when and how ESG investing by trustees and investment fiduciaries is permissible. We make four interrelated points: (1) we provide a clarifying taxonomy on the meaning of ESG investing, differentiating between risk-return ESG (i.e., using ESG factors to improve risk-adjusted returns) and collateral benefits ESG (i.e., using ESG factors for third-party effects); (2) we discuss the subjectivity inherent to identifying and applying ESG factors, which complicates assessment of ESG investing strategies; (3) we summarize the current theory and evidence on whether ESG investing can improve risk-adjusted returns, finding the results to be mixed and contextual; and (4) we show that American trust fiduciary law generally prohibits collateral benefits ESG, but risk-return ESG can be permissible if supported by a reasoned and documented analysis that is updated periodically.

Emotional Engagement and Trading Performance
Bossaerts, Peter,Fattinger, Felix,Rotaru, Kristian,Xu, Katherine
Extensive research in neuroscience proves that rational decision-making depends on accurate anticipative emotions. We test this proposition in the context of financial markets. We replicate a multi-period trading game that reliably generates bubbles, while tracking participants’ heart rate and skin conductance. We find that participants whose heart rate changes in anticipation of trading at inflated prices achieve higher earnings. In contrast, when such trades precede heart rate changes, earnings decrease. Higher (lower) earnings accrue to participants whose skin conductance responds to the market value of stock (cash) holdings. Our findings demonstrate that emotions are integral to sound financial decision-making.

Engineering Lemons
Vokata, Petra
Recent complex financial products sold to households contradict the basic premise of canonical innovation theories: financial innovation benefits its adopters. In my 2006â€"2015 sample of over 28,000 yield enhancement products (YEP) the securities offer attractive yields but negative returns. The products lose money both ex ante and ex post due to their embedded fees: on average, YEPs charge 6â€"7% in annual fees and subsequently lose 6â€"7% relative to risk-adjusted benchmarks. Simple and cheap combinations of listed options often first-order dominate YEPs. Competition, disclosure, or learning do not eliminate this inferior financial innovation over my sample period.

Factor Exposures and Diversi Cation: Are Sustainably-Screened Portfolios Any Different?
Gougler, Arnaud,Utz, Sebastian
We analyze the performance, risk, and diversification characteristics of global screened and best-in-class equity portfolios constructed according to Inrate's sustainability ratings. The financial performance of sustainably high-rated portfolios is similar to the risk-adjusted market performance in terms of abnormal returns of a five-factor market model. In contrast, low-rated portfolios exhibit negative abnormal returns. Firms with high sustainability ratings show lower idiosyncratic risk, and higher exposure towards the high-minus-low and the conservative-minus-aggressive factor.

Fasten Your Value Belt: Growth Could Take You for a Wild Ride!
Henriksson, Roy,Sakoulis, Georgios,Hsu, Kenneth,Wheeler, Timothy,Johnson, Lorne D
We relate valuation multiples to fundamentals through a new framework. Starting with a standard Gordon dividend discount model and applying a Dupont decomposition, we investigate how changes in fundamentals affect pricing in the cross section of global equities. We find that changes in fundamentals affect value and growth companies in a different way; growth companies are more sensitive to net profit margins and growth expectations. Finally, we quantify the effect fundamentals might have in the style rotation from growth to value across different industry groups, given the challenges value investors have been faced with in the most recent past.

Financial Advice and Robo Advice in the Investors' Perception. Evidence from a Qualitative Study
Caratelli, Massimo,Giannotti, Claudio,Linciano, Nadia,Soccorso, Paola
The ongoing institutional debate wonders whether robo advice may potentially bridge the advice gap, by reaching both ‘underserved' and ‘excluded' investors, who are unable to fully access the service. The present work aims to investigate the factors that may trigger both potential and actual interest in robo advice, thus contributing to widen the segment of investors receiving personalised recommendations. The study analyses the qualitative evidence gathered from two focus groups and four in-depth individual interviews, all involving investors. The participants in the focus groups are, respectively, investors supported by a human financial advisor (i.e., making decisions after receiving a customised recommendation by a dedicated advisor) and individuals interacting with bank staff only (i.e., making decisions without the support of a dedicated advisor). Individual interviews involve four users of one of the main providers of automated advice services active in the Italian market. Overall, the study highlights that the perceived objectivity of the algorithm and the customer experience granted by a digital platform may trigger (or have already triggered) interest in robo advice, mainly among financially and digitally literate investors. However, the hybrid model is always preferred to the pure automation, as the interaction with a human advisor is deemed as valuable both on educational grounds and in the occasion of key phases of the investment (e.g., portfolio monitoring or market turmoil). Given the evidence of this qualitative study, therefore, the hybrid robo advice can potentially bridge the advice gap for the more sophisticated investors, to the extent that they are willing to accept technology developments. To our knowledge, this is the first qualitative study that contributes to the debate on the advice gap by providing food for thought important for consumer protection policies and educational initiatives.

Hybrid ARFIMA Wavelet Artificial Neural Network Model for DJIA Index Forecasting
Boubaker, Heni,Canarella, Giorgio,Gupta, Rangan,Miller, Stephen M.
This paper proposes a hybrid modelling approach for forecasting returns and volatilities of the stock market. The model, called ARFIMA-WLLWNN model, integrates the advantages of the ARFIMA model, the wavelet decomposition technique (namely, the discrete MODWT with Daubechies least asymmetric wavelet filter) and artificial neural network (namely, the LLWNN neural network). The model develops through a two-phase approach. In phase one, a wavelet decomposition improves the forecasting accuracy of the LLWNN neural network, resulting in the Wavelet Local Linear Wavelet Neural Network (WLLWNN) model. The Back Propagation (BP) and Particle Swarm Optimization (PSO) learning algorithms optimize the WLLWNN structure. In phase two, the residuals of an ARFIMA model of the conditional mean become the input to the WLLWNN model. The hybrid ARFIMA-WLLWNN model is evaluated using daily closing prices for the Dow Jones Industrial Average (DJIA) index over 01/01/2010 to 02/11/2020. The experimental results indicate that the PSO-optimized version of the hybrid ARFIMA-WLLWNN outperforms the LLWNN, WLLWNN, ARFIMA-LLWNN, and the ARFIMA-HYAPARCH models and provides more accurate out-of-sample forecasts over validation horizons of one, five and twenty-two days.

Marketplace Lending. Verso Nuove Forme Di Intermediazione Finanziaria? (Marketplace Lending. Towards New Forms of Financial Intermediation?)
Sciarrone Alibrandi, Antonella,Borello, Giuliana,Ferretti, Roberto G.,Lenoci, Francesca,Macchiavello, Eugenia,Mattassoglio, Francesca,Panisi, Federico,Munafò, Pasquale
Italian Abstract: Il marketplace lending è uno fra i fenomeni più interessanti in ambito FinTech, non solo per la rapidità con cui negli ultimi anni, specie in Paesi diversi dall’Italia, è venuto ad espandersi in termini di volumi (sia pure ancora limitati quanto a valore assoluto), ma soprattutto per il carattere innovativo dei modelli di business in cui il fenomeno stesso si traduce: modelli in grado di mettere in discussione consolidate partizioni e categorie del settore finanziario, ponendo rilevanti questioni dal punto di vista della strategia regolatoria.Si tratta di una forma di finanziamento alternativa a quelle tradizionali e riconducibile, per un verso, all’applicazione al settore dei servizi finanziari di tecniche di intermediazione digitale sviluppate nell’e-commerce e, per un altro, al più ampio ambito del crowdfunding. Nel “genere” crowdfunding, e al di là delle scelte terminologiche, la “specie” in discorso si connota per l’essere imperniata sulla raccolta di finanziamenti da parte di soggetti privati (individui o imprese), effettuata tramite una piattaforma, normalmente accessibile via internet. Si è scelto di riferirsi al fenomeno in discorso con il termine marketplace lending perché esso ha il pregio di mettere l’accento sul profilo che può dirsi più peculiare di tale nuovo modello operativo: il trattarsi di una attività organizzata in modo tale da assemblare (in modo nuovo e originale rispetto ai modelli tradizionali grazie alla presenza della piattaforma) la prospettiva creditizia (lending) con quella del mercato (marketplace). Ci troviamo di fronte, infatti, a un modello di business nuovo, che - grazie all’innovazione tecnologica e, in particolare, all’utilizzo di tecnologie abilitanti quali la struttura di piattaforma e i big data analytics - consente il soddisfacimento di bisogni “classicamente” finanziari (come il bisogno di finanziamento, di singoli come di enti collettivi, e quello di investimento) ma con modalità differenti da quelle tradizionali. E, a giudicare dalle sempre maggiori dimensioni che il marketplace lending è andato negli anni assumendo a livello mondiale, sembra trattarsi, quantomeno prima facie, di modalità che rispondono in modo efficace a bisogni finanziari concreti, nel senso che la presenza delle piattaforme genera una serie di vantaggi sia per i crowd-borrower sia per i crowd-investor, producendo, tuttavia, anche potenziali nuovi rischi di lesione di quegli stessi interessi non da oggi alla base della regolazione del sistema finanziario (tutela del risparmio, degli investitori e, più in generale, dei clienti; riduzione di asimmetrie informative, azzardo morale e selezione avversa; stabilità, buon funzionamento e competitività del sistema finanziario; fiducia nel sistema medesimo). Ciò conduce alla necessità non solo di ricondurre questo tipo di attività a tale alveo, ma anche di farlo, date le peculiarità del modello di business in discorso, con una normativa dedicata e disegnata secondo un approccio activity-based, che risponda ad una logica funzionale (in ragione delle peculiari funzioni svolte dalle piattaforme), proporzionale (in considerazione dei volumi, complessità dell’attività e dei prodotti) e in grado di tutelare sia i crowd-investor che i crowd-borrower.Il Quaderno è articolato in tre parti.Nella Parte I è contenuto l’inquadramento generale del fenomeno, a partire dalla struttura portante del marketplace lending, ovvero la piattaforma digitale, di cui verranno messi in luce i tratti caratterizzanti e il dibattito in corso sull’opportunità di un intervento regolatorio riferibile in generale a tale modello operativo (cioè, indipendente dallo specifico mercato in cui esso opera), oltre che rivolto in modo puntuale alle piattaforme che offrono servizi di crowdfunding. Obiettivo della Parte II è, invece, offrire un’analisi in chiave economica del marketplace lending, attraverso un’analisi â€" distinta per il mercato internazionale e per quello domestico - dei principali modelli di business utilizzati dalle piattaforme e i loro volumi di attività. Dato il ruolo centrale e caratterizzante giocato dalla valutazione del merito creditizio dei richiedenti nel novero dei servizi offerti dai lending marketplace ai loro utenti, ad essa sarà riservata una analisi ad hoc (con particolare attenzione alle modalità innovative attraverso cui tale servizio viene reso). Nella Parte III, verrà poi svolta un’analisi in chiave giuridica della struttura e del funzionamento dei lending marketplace. Dapprima si vaglierà l’operatività delle piattaforme rispetto alle riserve di attività che presidiano, per lo più a livello europeo, il settore finanziario in senso lato (raccolta del risparmio e/o erogazione del credito, prestazione di servizi di pagamento; prestazione di servizi di investimento); ancora, si valuterà l’applicabilità ai lending marketplace di altre discipline relative al settore finanziario (antiriciclaggio e usura) come pure di normative di più ampia portata (ad es. la tutela dei consumatori e la protezione dei dati), verificandone la congruità con l’attività esercitata dalle piattaforme; in seguito, si svolgerà un approfondimento, in chiave giuridica, del servizio di valutazione del merito creditizio che si è detto assumere importanza centrale fra quelli offerti dalle piattaforme.L’analisi in chiave giuridica si sposterà poi sul piano internazionale attraverso l’esame di alcune normative speciali di recente adottate da alcuni Stati europei per disciplinare il fenomeno del marketplace lending (a volte congiuntamente con l’equity crowdfunding), nonché della recente Proposta di regolamento europeo relativo ai fornitori europei di servizi di crowdfunding per le imprese (ESCPs).Il Quaderno si chiuderà, infine, con alcune conclusioni in ordine all’opportunità di regolare il marketplace lending nel contesto di un più generale ripensamento delle attuali strategie normative di regolazione e di supervisione finanziaria, reso necessario per far fronte alle opportunità e ai rischi che l’innovazione tecnologica porta con sé.English Abstract: Marketplace lending is one of the most interesting phenomena in the FinTech area, not only for the registered growth rates in terms of volumes in the last few years, especially in countries other than Italy, but also and especially for the innovative character of the business models deployed: models able to cast doubts on the traditional sectorial separations and categories of the financial sector, therefore raising relevant issues from the point of view of regulatory strategies.It represents an alternative form of financing which can be reconnected, on the one hand, to the application of digital intermediation techniques developed in the e-commerce area and, on the other hand, to the more general crowdfunding phenomenon. In fact, marketplace lending is characterized, within the crowdfunding genus, by realizing the collection of financing by private entities (individuals or firms), through a digital platform (generally accessible by the internet). We have decided to refer to such phenomenon with the term ‘marketplace lending', which allows to underline the most peculiar feature of this business model, i.e. being an activity organized in such a way to put together (in a new and original way, compared to traditional intermediaries' models, thanks to the presence of platforms) the lending perspective with the one of capital markets and trading venues.. We are in fact observing a new business model, which - thanks to technological innovation and, in particular, to the use of enabling technologies (such as platform structures and big data analytics) â€" allows the fulfillment of classical financial needs (e.g. the financing needs of individuals or legal persons and investment needs), but with models and structures different from traditional ones. Furthermore, considering the incredible and constant growth in size of marketplace lending worldwide, such new models and structures seem, at least at first sight, to effectively respond to concrete financial needs, with the platform presence creating a range of advantages both for crowd-borrowers and for crowd-investors. Nonetheless, the same also creates potential new risks, endangering in particular the same interests traditionally grounding and protected by financial regulation (depositor and investor protection and, more generally, client protection; reduction of asymmetric information, moral hazard and adverse selection problems; stability, correct functioning and competitiveness of the financial system; trust in the financial system). This highlights the need, not only to place marketplace lending within the scope of financial regulation, but also to do so in consideration of the peculiar features of this business model, through an ad hoc regime, designed employing an activity-based approach and a functional (therefore, also reflecting the particular functions performed by digital platforms) and proportional perspective (in consideration of volumes, complexity of activities and products) as well as able to protect both crowd-investors and crowdborrowers.The present contribution is organized in three sections.In Section I, a first description of marketplace lending and overview of the main regulatory issues raised by the same are presented. It starts by analyzing, first, the digital platform model, which represents the fundamental structure of lending marketplaces, highlighting the peculiar features of the same and the current debate about the need to regulate such operative model per se (irrespective of the specific market and sector in which it operates), before moving more specifically to crowdfunding platforms.Section II, instead, aims at offering an analysis of marketplace lending from an economic perspective through the analysis of the main business models deployed by lending marketplaces and activity volumes, distinguishing between (and separately analyzing) international and national markets. Considering the central role played by the assessment of crowd-borrowers' creditworthiness among the services offered by lending marketplaces to their users, we will reserve to such topic an ad hoc paragraph, with special regard to the innovative instruments deployed.Section III will be dedicated to a comprehensive legal analysis of the structure and functioning of lending marketplaces. We will evaluate, first, the activities conducted by platforms in relation to the activities reserved to authorized operators â€" mostly in connection with a prescription in this sense at EU level â€" by financial regulation (e.g. collection of reimbursable funds and/or lending, payment services, investment services); second, we will assess the applicability to lending marketplaces of additional disciplines in the financial sector area (e.g. anti-money laundering and usury) as well as of rules of broader scope (e.g. consumer protection and data protection disciplines), verifying, moreover, the compatibility with the activity conducted by lending marketplaces; third, in consideration of its central relevance among platforms' services, we will focus again on the above mentioned service of creditworthiness assessment, this time from a legal perspective.The legal analysis will then move to the international sphere, examining the ad hoc regulations on marketplace lending (and often on equity crowdfunding, too) adopted by certain European Member States, as well as the recent Proposal for a regulation on European Crowdfunding Service Providers (ESCPs) for businesses.This contribution will conclude by presenting some thoughts and suggestions about the opportunity to regulate marketplace lending in the framework of a more general rethinking of existing regulatory and supervisory strategies in the financial sector, in order to adequately deal with the opportunities and risks entailed by technological innovation.

Martingale Difference Hypothesis in Asia â€" Pacific Foreign Exchange Market
Selvam, Murugesan
This study examines whether the Asia â€" Pacific Foreign Exchange Market was in a weak form of efficiency against USD, during the period from 02/01/2010 to 31/12/2019. This study employed various linear measures, to examine the martingale behaviour of Asia â€" Pacific Foreign Exchange Market. The analysis found that two currencies (Australian Dollar and Chinese Renminbi), out of ten currencies, rejected MDH and behavior patterns of those two currencies were more unpredictable than other sample currencies during the study period. It was found that majority of sample currencies, including Singapore Dollar, had fallen under the weak form of efficiency.

On Valuing Nature-Based Solutions to Climate Change: A Framework with Application to Elephants and Whales
Submitter, Duke University - Economics,Chami, Ralph ,Fullenkamp, Connel,Berzaghi, Fabio,Español-Jiménez, Sonia,Marcondes, Milton,Palazzo, Jose
We develop a framework for natural resource valuation that directly addresses the fundamental collective action problem in environmental protection. Our framework uses the lessons of behavioral economics to create values that individual decision makers find credible and relatable, in addition to stimulating excitement or concern that is essential to prompting action. We then apply this framework to value forest elephants in Africa and great whales that are found off the coasts of Brazil and Chile. The values we estimate for individual members of these species are significant: $1.75 million per forest elephant and an average of $2 million per whale. We discuss how our valuations lead to new designs for environmental preservation and restoration policies.

Original Sin and Deviations from Covered Interest Parity
Zheng, Huanhuan
Foreign holdings of sovereign debt in emerging markets (EMs) shift from foreign currency (FC) to local currency (LC), especially after the global financial crisis. We show that such a dissipation of original sin enlarges deviations from covered interest rate parity (CIP) in EMs, as FC debt is more important in transmitting global financial cycles to EMs than LC debt. We further provide evidence that FC debt is more efficient in tapering CIP deviations because it bypasses capital controls, circumvents high inflation, weak institution and asymmetric information, and enhances price discovery.

Proprietary Day Traders and Their Performance at Bursa Malaysia
Song, Saw-Imm,Chu, Ei Yet,Thominathan, Santhanamery
Proprietary trading has gained much attention in the emerging markets such as Malaysia in the recent years. However, there is a lack of studies for emerging markets that can provide a clear picture on the performance of the proprietary traders and factors that determine their success. Little research has been done in this area mainly due to data constraints. This study employed a set of self-collected data from a major investment bank in Malaysia and traced the daily performance of the traders from Oct 2016 â€" Jan 2017. The demographic backgrounds of the proprietary stock traders are studied to shed lights on the traits and factors required to make consistent profits. Approximately 50% of the day traders in our sample were profitable and earning more than RM5000 a month with some top performance gaining an average of more than RM200000 per month. The study found that the determining factor for profitability is not so much on the background of the candidates but more on the capital provided to the traders and also their years of service with the bank. The study also reveals that the more seasoned traders who get more capital from the investment banks will have more opportunity to make more profitable income.

Relationship between Corporate Social Performance, Corporate Financial Performance and Financial Risk in Indian Firms
Dhamotharan, Dhanasekar,Selvam, Murugesan,P, Amrutha
This study examines the relationship between Corporate Social Performance and Corporate Financial Performance and Financial Risk of BSE top 10 companies in India. The variables of Corporate Social Performance and Financial Performance and Financial Risk were used in this study. There was positive relationship between Corporate Social Performance, Corporate Financial Performance and Financial Risk, at Bajaj Finance Ltd, Reliance Industries Ltd, Bajaj Auto Ltd, State Bank of India, Hindustan Unilever Ltd, Asian Paints Ltd and Bharathi Airtel Ltd. The novelty of the study is that the analysis of this study focuses on CSP, CFP and Financial Risk in respect of Indian firms.

Syndicated Bank Lending and Rating Downgrades: Do Sovereign Ceiling Policies Really Matter?
Hasan, Iftekhar,Kim, Suk-Joong,Politsidis, Panagiotis N.,Wu, Eliza
We examine the effect of firm credit rating downgrades on the pricing and structure of syndicated bank loans following rating downgrades in the firms’ countries of domicile. We find that the sovereign ceiling policies used by credit rating agencies create a disproportionally adverse impact on the bounded firms’ borrowing costs relative to other domestic firms following their sovereign’s rating downgrade. Moreover, the loans extended tend to be more concentrated and funded by fewer lead arrangers. Forming borrowing relationships with local- as well as foreign-banks and maintaining financial strength ameliorates bounded firms’ bank financing costs.

Tennis Betting Strategies Based on Neural Networks
Flahault, Jeremy,Le Roger, Nicolas,Frunza, Marius
The aim of this paper is to explore betting strategies for tennis matches using neural networks. We used public data and we implemented a neural network prediction model, with an accuracy of 85% on the validation and testing sets. Based on the predictive model we tested several investment strategies which incorporates investor's risk profile. The optimal strategy is to place bets on games where our model indicates a high likelihood of victory and an appropriate bookmaker's odds.

The Development of FinTech. Opportunities and Risks for the Financial Industry in the Digital Age - With Preface to the FinTech Series
Schena, Cristiana,Tanda, Alessandra,Arlotta, Carlo,Potenza, Gianluca,Giuseppe, D'Agostino,Munafò, Pasquale
The research analyses the operation of FinTech companies, highlighting the benefits and risks that their development generates in terms of competitive stimulus within the financial system and streamlining its operating mechanisms, broadening the accessibility of financial services for customers and improving the satisfaction of their financial needs, the correct and efficient allocation of financial resources to the benefit of economic growth, as well as the correct and transparent management of information and risks linked to financial services, especially when directed at retail investors.First of all, the work qualifies the type of FinTech companies, clarifying the fact that they are a fully-fledged new component of the financial industry, since they perform financial activities using innovative technological solutions. FinTech, therefore, is a phenomenon that is developing within the financial services industry, in the wake of the more general process of creation of the digital economy.In particular, the work highlights the product and process innovations introduced by these new financial operators, as well as the extensive areas of overlap or affinity identified on the operating plane for intermediation performed by traditional intermediaries and financial markets subject to supervisory rules. In addition, the analysis reveals the different business models adopted by FinTech companies, through the development of direct and indirect digitalised financial intermediation channels. Particular attention is also paid to the examination of risks linked to FinTech operation, as well as the critical aspects that may be identified with regard to both the management of the services offered and the fairness and transparency towards customers.Overall, this paper makes a series of considerations that contribute to the on-going international debate on the opportunities and methods of regulating FinTech and that support the definition of a regulatory architecture that is more activity-based than today's more prevalent entity-based structure, which is not sufficient to ensure, on the one hand, neutral rules for the technological solutions adopted by individual financial operators and, on the other, equal protection for customers.The regulatory decisions that are to be made may have as yet unpredictable effects on the development of market shares and the range of offering of new operators, on the degree of competitiveness of the financial industry and on its evolution in the different countries.However, considering that the digitalisation of financial activities is an incontrovertible process and a structural feature of the new financial industry, the final part of the paper highlights the strategic choices that financial intermediaries (namely banks) are making in this changed market scenario.

The Price of Carbon Risk: Evidence from the Kyoto Protocol Ratification
Nguyen, Justin Hung,Truong, Cameron,Zhang, Bohui
This paper examines the impact of carbon risk on firms’ financing costs. We exploit the Kyoto Protocol ratification (hereafter KPR) committed by the Australian government in December 2007 as an exogenous increase in carbon risk. We find that, in the post-KPR period, firms with high carbon emissions (carbon emitters) experience a substantial increase in the costs of debt and equity relative to those firms with a lower carbon footprint. We further identify higher cash flow risk and lower investor recognition as the two channels through which carbon risk affects the financing costs. Moreover, after the KPR, carbon emitters are less likely to be financed by major banks and more likely to borrow from new lenders. When conducting seasoned equity offerings, carbon emitters are more willing to use underwriting services rather than rights offerings. Our findings suggest that capital providers incorporate firms’ exposure to carbon risk into their decisions and charge them a corresponding risk premium.

The Role of Labor-Income Risk in Household Risk-Taking?
Hubar, Sylwia,Koulovatianos, Christos,Li, Jian
In fifteen European countries, China, and the US, stocks and business equity as a share of total household assets are represented by an increasing and convex function of income/wealth. A parsimonious model fitted to the data shows why background labor- income risk can explain much of this risk-taking pattern. Uncontrollable labor-income risk stresses middle-income households more because labor income is a larger fraction of their total lifetime resources compared with the rich. In response, middle-income households re-duce (controllable) financial risk. Richer households, having less pressure, can afford more risk-taking. The poor take low risk because they avoid jeopardizing their subsistence consumption.

The Time-Varying Nature of Risk Aversion: Evidence from 60 Years of U.S. Stock Market Data
Pépin, Dominique,Miller, Stephen M.
We investigate the time variations of the relative risk aversion parameter of a U.S. representative agent using 60 years of stock market data. We develop a methodology to identify the variables that explain the variations of risk aversion, based on an asset pricing model without valuation (or preference) risk. In this framework, the variables that predict the excess return of a market index (but not the second moments) also explain the variations of risk aversion. To wit, the variables include the price-dividend ratio and the short-term interest rate. A shock on the dividend-price ratio exerts a positive, highly persistent, though modest, effect on risk aversion, while a shock on the short-term interest rate exerts a highly negative, less persistent effect. The resulting measure of risk aversion follows a macroeconomically and financially countercyclical pattern.

When Do Firms Go Public? Stock and Bond IPOs in Belgium, 1839-1935
Deloof, Marc,de Jong, Abe,Legierse, Wilco
This paper investigates the timing of a firm’s first security issue in public capital markets. We explain fluctuations over time in initial public offerings of bonds and stocks. We study Belgium in the period 1839-1935, a setting with poor investor protection, no tax distortions and changing governmental regulations. We find that economic growth leads to stock and bond IPOs and that both types of issues are timed to coincide with favorable market conditions. These effects are the strongest when the securities market has reached a mature level of development. We also find that bond IPOs coincide with more stock IPOs. Finally, our results suggest that a deregulation shock in 1873, which deregulated security markets and made it much easier to set up a firm and list securities, did not directly affect the number of IPOs, but facilitated a booming securities market in later years.

Zero Lower Bound Monetary Policy's Effect on Financial Asset's Correlations
Rogers, Karl
We investigate the hypothesis that zero lower bound monetary policy has an effect on the correlations of financial assets. Using an event-study approach, we evaluate the impact of the zero lower bound monetary policies of the Bank of Japan, the Bank of England, and the Federal Reserve on the bond and equity markets in Japan, the UK, the US, and the Eurozone. We evaluate the bond markets using the Japanese 10-year Sovereign bond (JGB), UK 10-year bond (Gilt), US 10-year Treasury note (Tnote), and German 10-year bond (Bund). For the equity markets we use the Nikkei 225, FTSE 100, S&P 500, and Euro STOXX 600 as proxies for each regional market. We also include gold and silver as control commodities. Our analyses demonstrate significant changes not only in the evaluated assets’ correlations with each other, but also in their general behavior. This has major implications for investment portfolio construction and provides useful insight for financial service regulators and the central banks themselves in monitoring the fragility and stability of the financial system.