Research articles for the 2020-10-01

A Survey of the Distributed Ledgers Literature. A Ten-Year Commemoration
Koutsoupakis, Dimitrios
We accumulate the scattered pieces of Distributed Ledgers’ history and research in commemoration of the first decade of the literature produced from the advent of Bitcoin. On the grounds of this, this paper provides historical perspectives and inquires what economic elements embedded in cryptocurrencies and blockchains motivated the establishment of this growing area of research. Then, the paper reviews and categorizes the most sig- nificant extant literature. The emphasis is on research methods employed and results delivered relating to the conceptual, theoretical and empirical contributions through the ages that have influenced the chain of evolution of this still uncharted literature.

Alpha and Beta Information
Huang, Shiyang,Schneemeier, Jan,Subrahmanyam, Avanidhar,Yang, Liyan
We consider a setting where investors directly observe a signal about a component of cash flows, as well as a signal about the sensitivity of a firm's cash flows to a common factor. We obtain a closed-form solution for the case where informed agents are risk neutral and the market maker is risk averse. Market liquidity is non-linear in trader net demands and is also stochastic. Thus, liquidity risk is an endogenous parameter determined in equilibrium. Expected market liquidity, liquidity risk, and price informativeness are influenced by the moments of the market factor even though no one observes private signals about the factor. We show that expected market liquidity is lower and liquidity risk is higher when the ex ante volatility of beta and the mean market factor are higher. This is because private information about beta is more valuable when beta is more volatile and when the factor has a greater ex ante mean. We also derive several other results on price informativeness and trading costs, both with and without endogenous information acquisition.

Are Stable Cryptocurrencies exempted from Impossible Trinity?
Koutsoupakis, Dimitrios
This paper provides an empirical framework analogous to Impossible Trinity for exploring monetary arrangements across Stablecoins wherein reserves are held as price stability is targeted. While the hypothesis can be supported for all cryptocurrencies in question, the trade-off combination among exchange rate stability, capital openness and monetary independence varies with the categorical types of Stablecoins. This approach uncovers the varieties of Stablecoins with respect to their monetary constraints compared to the rest cryptocurrencies which independently float.

Asset Class Taxonomy: A New Construct for Assessing Balance in Portfolios
Whitwell, Stefan,Villalta, Thomas
Investment innovation and the proliferation of alternative investments have rendered the current asset class taxonomy ineffectual. Moreover, private equity and hedge funds muddle understandings of risk in portfolios. The starting place for assessing a useful taxonomy is determining what is most important to investors from a diversification perspective. We observe that investors are most concerned with extreme market environments where more classical constructs for asset taxonomy fall short. We suggest that a taxonomy that articulates the main “drivers” of significant downside returns would complement existing methods for assessing diversification and convey important information to stakeholders. We offer three broad groupings that we feel give a high-level assessment of balance. More importantly, we provide a pragmatic framework for determining which sub-asset grouping should fall into each broad grouping. In short, we live with a commonly used taxonomy that materially misrepresents the risks and degree of diversification in portfolios. It is time that we reflect on the taxonomy of asset classes given the impact it has on the management of large pools of capital.

CEO Chairman Controversy: Evidence from the Post Financial Crisis Period
Gontarek, Walter
Regulators generally discourage bank CEOs also holding the role of board Chairman, as this governance structure can hinder independent decision-making and effective risk oversight. This study examines the issue of CEO Duality, identifying a positive relation to greater risk-taking across a battery of sensitivity tests. In further analysis, the study controls for differences in supervisory monitoring levels to examine its impact. Banks led by CEO Chairmen which are subject to lower levels of supervision continue to report a robust association to risk-taking, as before. However, this association dissipates for banks which are subject to heightened supervisory monitoring. These findings indicate that agency costs related to Duality may be moderated by greater regulation. This paper weighs-in on the controversy relating to a single contentious governance structure (i.e., CEO Duality), thus informing boards, regulators and researchers of the need to consider the overall interplay of monitoring mechanisms.

COVID-19, Political Orientation and Residential Real Estate Prices
Alam, Zinat S.,Hossain, Md Miran
This paper investigates whether political orientation influences residential real estate prices and returns during COVID-19 pandemic. Using county level housing data from January to June 2020, we document that Democratic counties, politically aligned counties, counties with higher prosocial scores and greater liberal news viewership experience a significant decline in house prices and returns in response to COVID-19 cases and deaths. Overall, our findings suggest that political orientation is an important dimension that affect asset prices.

Catastrophe Insurance and Solvency Regulation
Goussebaïle, Arnaud,Louaas, Alexis
This paper provides a welfare analysis of solvency regulation for catastrophe insurance. We consider an economy with risk-averse agents exposed to a common source of risk and an insurer owned by risk-averse shareholders. We show that the optimal insurance contract features full coverage and is Pareto optimal if and only if it includes participation in the insurer’s profit. When such participation is not available (as is often the case in the real world), we demonstrate that solvency regulation allowing insurer default or limited liability in the most catastrophic states is Pareto improving. We use a numerical application to analyze the welfare benefits of different default rates for a wide range of risk lines, risk correlations, and ratios of insureds to insurer’s shareholders. While allowing a small probability of default yields some welfare gains, we show that an excessive default probability may be highly detrimental to welfare. We find that a good rule of thumb is to maintain a default probability lower than the individual probability of loss.

China’s No-bailout Reform: Impact on Bond Yields and Rating Standards
Mo, Guiqing,Gao, Zhi,Zhou, Lei
Chinese government broke its long-standing practice of bond bailouts in March 2014. The number and par value of bond defaults increased substantially in the following years. We investigate the Chinese bond defaults from 2014 to 2019 and examine the impact of the no-bailout reform. We find significantly higher yield spreads on lower-rated bonds over AAA bonds after the policy change. Further, we document much lower default rates for SOE bonds than non-SOE bonds and an increased funding advantage of SOEs after March 2014. Surprisingly, credit rating agencies loosened rating standards in response to the policy change, suggesting their caving in to demand for higher ratings.

Corporate Governance Reporting: Compliance with Upper Limits for Severance Payments to Members of Executive Boards in Germany
Dilger, Alexander,Schottmüller-Einwag, Ute
We examine how corporate governance reporting corresponds to actual conduct regarding severance payment caps for prematurely departing members of executive boards in Germany. Firstly, we evaluate the declarations of conformity for all companies listed in the CDAX between 2010 and 2014, which we use to determine conformity and deviation rates, and analyse the reasons for deviation, contributing to current research on comparative corporate governance, which focuses on when, why and how companies deviate from legitimate corporate governance goals (Aguilera, Judge, & Terjesen, 2018). Secondly, we assess the compensation amounts of all severance payments made and published by DAX companies to compare the respective severance ratio with the cap recommended by the German Corporate Governance Code (GCGC). We find that more than 20% of companies listed in the CDAX declared deviation in the declaration of conformity. Moreover, in 57% of actual severance cases where DAX companies had previously declared their conformity, the cap was exceeded. Yet, none of the companies that had exceeded the cap disclosed this in the following declaration of conformity. In most cases, the corporate reports deviated from reality and therefore could not serve as a suitable basis for decisions by the capital market.

DeFi Protocols for Loanable Funds: Interest Rates, Liquidity and Market Efficiency
Lewis Gudgeon,Sam M. Werner,Daniel Perez,William J. Knottenbelt

We coin the term *Protocols for Loanable Funds (PLFs)* to refer to protocols which establish distributed ledger-based markets for loanable funds. PLFs are emerging as one of the main applications within Decentralized Finance (DeFi), and use smart contract code to facilitate the intermediation of loanable funds. In doing so, these protocols allow agents to borrow and save programmatically. Within these protocols, interest rate mechanisms seek to equilibrate the supply and demand for funds. In this paper, we review the methodologies used to set interest rates on three prominent DeFi PLFs, namely Compound, Aave and dYdX. We provide an empirical examination of how these interest rate rules have behaved since their inception in response to differing degrees of liquidity. We then investigate the market efficiency and inter-connectedness between multiple protocols, examining first whether Uncovered Interest Parity holds within a particular protocol and second whether the interest rates for a particular token market show dependence across protocols, developing a Vector Error Correction Model for the dynamics.

Derivative Segment Exposure of Arbitrage Mutual Funds
Manda, Vijaya Kittu,Beatrice, Betsy Babu
Tightening mutual fund regulations, particularly those of debt mutual funds, by the Indian securities market regulator â€" the Securities and Exchange Board of India (SEBI) are making Arbitrage funds get attention. Low risk, attractive tax treatment, and convenience caught investor interest, and thereby, increased fund flow into these schemes. Fund managers can load their arbitrage schemes with a minimum of 65 percent exposure to equity and equity-equivalent exposure to explore arbitrage opportunities in the stock market for hedging or portfolio balancing. This paper examines if the fund managers of Indian arbitrage schemes form their equity and derivatives portion of their portfolio keeping in mind the Nifty Arbitrage 50 index. The market volatility factor Nifty VIX is examined against the scheme composition. This research finds that there exists a low degree of a positive correlation between the equity and derivative holdings of mutual fund schemes against the Nifty Arbitrage 50 Index and the Nifty VIX index. Further, only in the case of the HDFC Arbitrage Fund (equity holding) and Nippon India Arbitrage Fund (debt holding) make a significant impact based on the Nifty Arbitrage 50 Index and the Nifty VIX index. Results show that fund managers use their native or in-house methodology of formulating the portfolio and the weights independent of the Nifty Arbitrage 50 and Nifty VIX value. Further, fund managers prefer participating in the stock futures segment (over the options) of the Indian derivatives market.

Divergence of House Prices in the United States: 2000 to 2015
Peng , Liang,Zhang, Lei
Housing is the largest component of most American households’ wealth. Divergence of house prices directly affects wealth inequality. Using 5.9 million repeat sales of single-family houses, we find strong evidence that pricier houses had higher price appreciation rates from 2000 to 2015. Across houses, when the log house price increased by one standard deviation, the price appreciation rate increased by 70 to 100 basis points per annum. The superior performance of pricier houses was more pronounced in periods when the housing market performed poorly. We also use a variety of specifications to document detailed temporal variation and non-linearity of the relationship between houses’ price appreciation and their prices.

Endogenous agglomeration in a many-region world
Takashi Akamatsu,Tomoya Mori,Minoru Osawa,Yuki Takayama

We study a general family of economic geography models that features endogenous agglomeration. In many-region settings, the spatial scale---"global" or "local"---of the dispersion force(s) in a model plays a key role in determining the resulting endogenous spatial patterns and comparative statics. A global dispersion force accrues from competition between different locations and leads to the formation of multiple economic clusters (or cities). A local dispersion force is caused by crowding effects within each location and induces the flattening of each city. By distinguishing local and global dispersion forces, we can define three prototypical classes, namely, models that have only global, only local, and both local and global dispersion forces. The three model classes engender qualitatively different spatial patterns. Multiple cities are formed only when a global dispersion force is at work; otherwise, only a unimodal distribution can be formed. A city can have its spatial extent only when a local dispersion force is at work. A wide variety of extant models are reduced into the three prototypical classes. Our framework adds consistent interpretations to the empirical literature and also provides general \Red{insights into} treatment effects in structural economic geography models.

Equilibrium concepts for time-inconsistent stopping problems in continuous time
Erhan Bayraktar,Jingjie Zhang,Zhou Zhou

A \emph{new} notion of equilibrium, which we call \emph{strong equilibrium}, is introduced for time-inconsistent stopping problems in continuous time. Compared to the existing notions introduced in ArXiv: 1502.03998 and ArXiv: 1709.05181, which in this paper are called \emph{mild equilibrium} and \emph{weak equilibrium} respectively, a strong equilibrium captures the idea of subgame perfect Nash equilibrium more accurately. When the state process is a continuous-time Markov chain and the discount function is log sub-additive, we show that an optimal mild equilibrium is always a strong equilibrium. Moreover, we provide a new iteration method that can directly construct an optimal mild equilibrium and thus also prove its existence.

Examining the Effect of COVID-19 on Foreign Exchange Rate and Stock Market -- An Applied Insight into the Variable Effects of Lockdown on Indian Economy
Indrajit Banerjee,Atul Kumar,Rupam Bhattacharyya

Since March 25, 2020, India had been under a nation-wide lockdown announced as a response to the spread of SARS-CoV-2 and COVID-19 and has resorted to a process of 'unlocking' the lockdown over the past couple of months. This work attempts to examine the effect of novel coronavirus 2019 (COVID-19) and its resulting disease, the COVID-19, on the foreign exchange rates and stock market performances of India using secondary data over a span of 112 days spanning between March 11 and June 30, 2020. The study explores whether the causal relationships and directions among the growth rate of confirmed cases (GROWTHC), exchange rate (GEX) and SENSEX value (GSENSEX) are remaining the same across different pre and post-lockdown phases, attempting to capture any potential changes over time via the vector autoregressive (VAR) models. A positive correlation is found between the growth rate of confirmed cases and the growth rate of exchange rate, and a negative correlation between the growth rate of confirmed cases and the growth rate of SENSEX value. However, on applying a vector autoregressive (VAR) model, it is observed that an increase in the confirmed COVID-19 cases causes no significant change in the values of the exchange rate and SENSEX index. The result varies if the analysis is split across different time periods - before lockdown, the four phases of lockdown, and the first phase of unlock. Nuanced and sensible interpretations of the numeric results indicate significant variability across time in terms of the relation between the variables of interest. The detailed knowledge about the varying patterns of dependence could potentially help the policy makers and investors of India in order to develop their strategies to cope up with the situation.

Factor Modeling: The Benefits of Disentangling Cross-Sectionally for Explaining Stock Returns
Jacobs, Ph.D., Bruce I.,Levy, Kenneth N.
More than three decades ago, Jacobs and Levy introduced in the Financial Analysts Journal the idea of disentangling returns across numerous factors via cross-sectional analysis, and examined the benefits of using the time-series of returns to disentangled factors for return forecasting. The disentangling approach has since been employed by several studies and implemented by a number of investment firms. Recently, Fama and French found that models using cross-sectional factors are better able to explain equity returns than models using time-series factors. This article revisits disentangling, critically compares the explanatory power of models that use cross-sectional factors with those that use time-series factors, and discusses the several benefits of the cross-sectional approach for investment management.

Fast and Slow Arbitrage: Fund Flows and Mispricing in the Frequency Domain
Dong, Xi,Kang, Namho,Peress, Joel
Using spectral analysis, we document that hedge fund and mutual fund flows explain much of the persistence and cyclicality of anomaly returns. Indeed, they correct and amplify mis-pricing slowly, 24 and 4 times more, respectively, over horizons longer than one year compared with shorter horizons. Passive fund flows, in contrast, have no effect on mis-pricing. Over long horizons, hedge fund flows are most influential among fund types on a per-dollar basis. Hedge fund managers, rather than investors, helm this “slow-moving” effect, and frictions explain their behavior. We propose a model highlighting the horizon-dependent effects of capital on market efficiency.

Firm Uncertainty and Household Spending
Alfaro, Iván,Park, Hoonsuk
By mapping households to US employers traded in the stock market and using daily spending data, we provide novel evidence of household spending response to employer-specific forward-looking volatility shocks. A 10 percent change in firm uncertainty leads households to change their average monthly spending over the next 6-months by -0.95 percent. This negative second-moment firm uncertainty effect is larger than the positive first-moment effect of firm stock returns. The employer-specific effect is robust to both industry- and aggregate-level volatility effects. The intensity of the response increases in the forecast horizon window, lasting nine months. The response is pronounced for low-liquidity households, and for households that work at firms that recently had low employee growth, high CAPM Beta, and low Tobin's Q. Lastly, household spending shows an asymmetric response to `good' and `bad' uncertainty.

Global Versus Non-Global Banks: A Capital Ratios-Based Analysis
Drakos, Konstantinos,Malandrakis, Ioannis
This paper examines the Leverage Ratio and Total Capital Ratio of global versus non-global banks, in both the pre- and the post crisis period. A panel data set of 165 global and non-global financial institutions from 38 countries is used for the period 1999-2015 and a random effects model is employed to examine whether global banks perform better or not compared to their non-global counterparts. This study comes up with two important findings. First, global banks do not exhibit heterogeneous behavior with respect to both ratios neither in the pre- and especially nor in the post-crisis period. Second, the Leverage Ratio is crisis-insensitive, but the Total Capital Ratio is not. Our findings encourage further research on the topic of the contribution of global banks to the financial crisis propagation (at least as far as leverage is concerned).

How Do Independent Directors View Corporate Social Responsibility (CSR)? Evidence from a Quasi-Natural Experiment
Chintrakarn, Pandej,Jiraporn, Pornsit,Tong, Shenghui,Jiraporn, Napatsorn (Pom),Proctor, Richard
We investigate how independent directors view corporate social responsibility (CSR). Exploiting the passage of the Sarbanes-Oxley Act (SOX) and the associated exchange listing requirements as an exogenous regulatory shock, we document that independent directors view CSR activities unfavorably. In particular, firms forced to raise board independence reduce CSR engagement significantly relative to those not required to increase board independence. Our results are consistent with the risk-mitigation view and the agency cost hypothesis where managers over-invest in CSR to mitigate their own exposure to non-systematic risk. The over-investments in CSR are curbed in the presence of a stronger, more independent, board of directors. Several robustness checks confirm the results, including fixed-effects and random-effects regressions, dynamic panel data analysis, instrumental-variable analysis, and propensity score matching, Lewbel’s (2012) heteroscedastic identification, and Oster’s (2017) method for coefficient stability. We also confirm the risk-mitigation hypothesis by showing that CSR activities reduce firm risk significantly. Our research design is much less vulnerable to endogeneity and is therefore likely to show a causal effect of board independence on CSR.

How Macroeconomists Lost Control of Stabilization Policy: Towards Dark Ages
Jean Bernard Chatelain,Kirsten Ralf

This paper is a study of the history of the transplant of mathematical tools using negative feedback for macroeconomic stabilization policy from 1948 to 1975 and the subsequent break of the use of control for stabilization policy which occurred from 1975 to 1993. New-classical macroeconomists selected a subset of the tools of control that favored their support of rules against discretionary stabilization policy. The Lucas critique and Kydland and Prescott's time-inconsistency were over-statements that led to the "dark ages" of the prevalence of the stabilization-policy-ineffectiveness idea. These over-statements were later revised following the success of the Taylor rule.

Indian Online Retail Ecosystem - a Study on Flipkart Deal with Walmart
Polisetty, Aruna,Manda, Vijaya Kittu,R.V., Naveenan
US retail giant Walmart acquisition of 77% controlling stake in Flipkart in May 2018 has set a new chapter in the Indian online retail market. The deal gave the much-needed confidence to online retail stores who are already cash starving after giving away highly competitive deals and offers for the Indian shoppers. Walmart wishes to use this opportunity to enter the India market where its global competitor Amazon is already present. On the other hand, Flipkart wishes to use the much-needed cash infusion to smoothen out its operations and to get access to international markets. This research article is an attempt to study the dynamics of the Indian online retail industry and factors contributing and determinantal for its growth. The Walmart style of going global is examined and why this Indian acquisition is important. The Flipkart story is examined to understand how it rose from being a simple online bookseller to become gigantic challenging even global giants. This study is of significance in understanding the dynamics of the online retail sector and derives implications for various stakeholders.

Investors’ Preference and Regulatory Aspects in the Indian Derivatives Market
Dassani, Preksha,Manda, Vijaya Kittu,S Kumar, Vishnu
The Indian Stock market undoubtedly experienced tremendous growth in the trading activity in the last twenty-five years. The Derivatives segment of the market began its operations with the launch of Index Futures by the National Stock exchange of India (NSE) in the year 2000. The Derivatives, as a financial product, derives its value from an underlying asset and is primarily designed to reduce the risk which businesses and individuals face due to the fluctuations in the asset prices. It helps individuals and companies to undertake risky projects with high returns and use derivatives as a tool to hedge risk, which can potentially lead to wealth creation. The popular instruments of equity derivatives market are- Forward, Future, Option, and swaps. This paper presents the legal framework and regulatory aspects by the market regulator Securities and Exchange Board of India (SEBI) involving derivatives that is based on the recommendations of the L.C. Gupta Committee. SEBI laid its objectives in regulating derivative markets to ensure transparent trading environment, safety, and integrity.

Long-range memory test by the burst and inter-burst duration distribution
Vygintas Gontis

It is empirically established that order flow in the financial markets is positively auto-correlated and can serve as an example of a social system with long-range memory. Nevertheless, widely used long-range memory estimators give varying values of the Hurst exponent. We propose the burst and inter-burst duration statistical analysis as one more test of long-range memory and implement it with the limit order book data comparing it with other widely used estimators. This method gives a more reliable evaluation of the Hurst exponent independent of the stock in consideration or time definition used. Results strengthen the expectation that burst and inter-burst duration analysis can serve as a better method to investigate the property of long-range memory.

Momentum, Reversals, and Investor Clientele
Chui, Andy C.W.,Subrahmanyam, Avanidhar,Titman, Sheridan
The identical cash flow rights of Chinese A and B shares provide a natural experiment that allows us to explore how investor clienteles affect stock return patterns. Chinese domestic retail investors are responsible for the majority of trades in A shares, while foreign institutional investors have a significant presence in B shares. We find that B shares exhibit strong momentum while their corresponding A shares do not. In contrast, A shares exhibit significant short-term reversals while their B share counterparts do not. Furthermore, we document that institutional ownership strengthens momentum in B shares. These return patterns are consistent with a simple model where the trades of overconfident informed investors generate momentum and the trades of uninformed noise traders generate reversals.

Performance of Characteristics-Based Portfolio Choice
Gehrig, Thomas,Sögner, Leopold,Westerkamp, Arne
We compare the performance of the characteristics-based parametric portfolio approach introduced by Brandt, Santa Clara and Valkanov (RFS 2009) with standard optimal portfolio investments on the basis of S&P-500 stocks. We establish that the characteristics-based parametric portfolio approach can only be exactly justified as optimal investment under exceedingly strong assumptions. Moreover, we find that the empirical implementation of the parametric portfolio policy approach to US-data (for 1995-2013) runs into difficulties at moderate levels of relative risk aversion. Without refinements an interior maximum of the expected utility functional need not exist. Finally, and despite the strong implicit assumptions required by theory, the characteristics-based approach compares reasonably well with optimal portfolio investment for absolute risk aversion even in the absence of transactions costs, when we run horse-races in simulated and empirical data.

Predicting the Equity Premium with the Implied Volatility Spread
Cao, Charles,Simin, Timothy T.,Xiao, Han
We show that the call-put implied volatility spread (IVS) outperforms many well-known predictors of the U.S. equity premium at return horizons up to six months over the period from 1996:1 to 2017:12. The predictive ability of the IVS is unrelated to the dividend yield and is useful in explaining the cross-section of returns. Decomposing the IVS, we find the longer run predictive ability of the IVS operates primarily through a cash flow channel. We also find the IVS is significantly related to indicators of aggregate market direction and expected market conditions. Our results are consistent with the IVS reflecting market sentiment as well as information about informed trading.

Price and probability: decomposing the takeover effects of anti-takeover provisions
Cuñat, Vicente,Giné, Mireia,Guadalupe, Maria
We study the effects of anti-takeover provisions (ATPs) on the takeover probability, the takeover premium, and target selection. Voting to remove an ATP increases both the takeover probability and the takeover premium, that is, there is no evidence of a trade-off between premiums and takeover probabilities. We provide causal estimates based on shareholder proposals to remove ATPs and address the endogenous selection of targets through bounding techniques. The positive premium effect in less protected firms is driven by better bidder-target matching and merger synergies.

Protecting Investors in Equity Crowdfunding: An Empirical Analysis of the Small Investor Protection Act
Goethner, Maximilian,Hornuf, Lars,Regner, Tobias
During the past decade, equity crowdfunding (ECF) has emerged as an alternative funding channel for startup firms. In Germany, the Small Investor Protection Act became binding in July 2015, with the legislative goal to protect investors engaging in this new asset class. Since then, investors pledging more than 1,000 EUR now must self-report their income and wealth. Investing more than 10,000 EUR in a single ECF issuer is only possible through a corporate entity. We examine how the Small Investor Protection Act has affected investor behavior at Companisto, Germany's largest ECF portal for startup firms. The results show that after the new law became binding, sophisticated investors invest less on average while casual investors invest more. Moreover, the signaling capacity of large investments has disappeared.

Replicating CTA Positioning: An Improved Method
Kestner, Lars N.
Analysis of systematic strategies is a current topic of focus, centering on the impact these strategies have on various financial markets. Risk parity, option overwriting, volatility targeted equity indices, and trend following strategies receive the majority of this attention. In this paper, we focus on the dynamic trading of trend following strategies and detail an improved method for estimating their actions across markets.A simple replication model employed on 16 futures markets explains over 75% of the variation in a trend following benchmark.This replication model is able to estimate trend follower positions without lag.Using estimates of total funds allocated to trend following managers, we can use our replication model to estimate positions by specific market and the expected trading flows when individual markets move.

Resilient Urban Housing Markets: Shocks vs. Fundamentals
Amine Ouazad

In the face of a pandemic, urban protests, and an affordability crisis, is the desirability of dense urban settings at a turning point? Assessing cities' long term trends remains challenging. The first part of this chapter describes the short-run dynamics of the housing market in 2020. Evidence from prices and price-to-rent ratios suggests expectations of resilience. Zip-level evidence suggests a short-run trend towards suburbanization, and some impacts of urban protests on house prices. The second part of the chapter analyzes the long-run dynamics of urban growth between 1970 and 2010. It analyzes what, in such urban growth, is explained by short-run shocks as opposed to fundamentals such as education, industrial specialization, industrial diversification, urban segregation, and housing supply elasticity. This chapter's original results as well as a large established body of literature suggest that fundamentals are the key drivers of growth, and that the shocks considered in this paper have not had historically a measurable long-term impact on metropolitan population growth. The chapter illustrates this finding with two case studies: the New York City housing market after September 11, 2001; and the San Francisco Bay Area in the aftermath of the 1989 Loma Prieta earthquake. Both areas rebounded strongly after these shocks, suggesting the resilience of the urban metropolis.

Rules vs. Discretion in Market Surveillance: Evidence From India
Aggarwal, Nidhi,Bhatia, Surbhi,Zaveri, Bhargavi
This paper examines the manner of implementation and the impact of a new surveillance measure, called the Graded Surveillance Measure (GSM) jointly implemented by the Indian securities exchanges and the Securities and Exchange Board of India (SEBI). Unique to the Indian securities market, the measure temporarily restricts trading activity in securities whose prices are not commensurate with the financial health of the firm, as pre-defined by the exchange. Using a unique hand compiled data-set of all the securities that were subjected to this surveillance action, we find that nearly a third of such securities did not satisfy the pre-specified criteria. More than half of the securities that exited the surveillance continued to exhibit the characteristics that subjected them to the restrictions in the first place, raising critical questions on the effectiveness of the measure. We find considerable ambiguity on the extent of trading restrictions imposed on such securities and the manner in which the restrictions are eased or tightened. We also find that securities which are subjected to this surveillance measure, experience a decline in stock prices and trading activity. Our paper contributes to a growing line of literature on the discretion applied by exchanges in surveillance practices and the quality of enforcement of rules.

Taming the Megabanks: Why We Need a New Glass-Steagall Act
Wilmarth, Arthur E.
This blog post was published in The FinReg Blog (hosted by Duke’s Global FinancialMarkets Center) on September 24, 2020. It provides an overview of my book of the same title,published by Oxford University Press on October 2, 2020.available at

Technology is Changing Lending: Implications for Research (A Discussion of Costello, Down, and Mehta (2020))
Sutherland, Andrew
Costello, Down, and Mehta (2020) trace their slider intervention to deviations from the credit line amount recommended by a credit scoring model. The deviations are followed by larger delinquency declines and bigger sales orders, and Costello et al. interpret these results using discretion-based theories. However, incremental deviations are concentrated on newer clients rather than those the lender has accumulated soft information about. Deviations also appear larger for public than private borrowers. My discussion evaluates whether these results align with discretion-based theories, and explores alternative interpretations based on salience and unique aspects of the trade credit setting. Differences in interpretation aside, the evidence is informative about technological advances in commercial lending. I conclude with an overview of several recent advances and discuss the implications for lending research.

Temporary Workers and Cash Holdings
Hahn, Jaehoon,Klasa, Sandy,Lim, Hyuksoon,Moon, S. Katie
We investigate the effect of a firm’s reliance on temporary workers on its corporate cash holdings. To identify this effect, we exploit the quasi-natural experiment created by the adoption of a temporary worker protection law in South Korea which requires firms to change a worker’s status to full-time once the worker has been employed at the firm for two years. We find that firms that relied more on temporary workers prior to the adoption of the law lower their cash holdings after its adoption. This evidence supports a bargaining power hypothesis whereby because the adoption of this law increases union bargaining power, firms react to this by strategically lowering their cash holdings to raise their bargaining advantages relative to unions. Consistent with the bargaining power hypothesis, the negative effect of the adoption of the law on cash holdings is driven by firms with a union, firms that do not have a credit rating, and firms with lower ex-ante operating leverage. Further, after the adoption of the law, stock market participants value cash holdings less highly for firms that were more reliant on temporary workers. Lastly, we show that lowering cash holdings and the use of subcontracting are complement mechanisms that firms in South Korea use to decrease union bargaining power subsequent to the law adoption.

The Effect of International Takeover Laws on Corporate Resource Adjustments: Market Discipline And/Or Managerial Myopia?
Cannon, James N.,Hu, Bingbing,Lee, Jay Junghun,Yang, Daoguang
Practitioners often claim that takeover pressure induces managerial myopia (short-termism), but academic research provides limited empirical evidence supporting this assertion. This study fills this void by investigating how takeover threat influences managers’ resource adjustment decisions. Specifically, we exploit the staggered enactments of merger and acquisition laws across countries as exogenous shocks that facilitate takeover transactions and increase takeover threat. While we find some evidence that takeover laws deter managers from acquiring and retaining excess resources (market discipline), we find more prevailing evidence that such law enactments induce managers to pursue short-term profits through underinvesting in resources meant to create long-term value (managerial myopia). Cross-country analyses reveal that the effect of takeover legislation on resource adjustments is concentrated in countries with weak investor protection and in countries with short-term-oriented culture. Consistent with managerial myopia, we also find that corporate resources contribute less to the long-term value in the post-enactment period and that firm profitability improves immediately after the enactment but then gradually reverts to the pre-enactment level. Collectively, our evidence suggests that policymakers, corporate boards, investors, and researchers, when assessing the net effects of takeover threats, should consider both the downside of inciting myopic behavior and the upside of tightening managerial discipline.

The Effect of Option Listing on Financing Decisions
Hong, Eunpyo,Park, Min,King, Tao-Hsien Dolly
This paper investigates the effect of option listing on corporate financing decisions. Firms experience a significant drop in leverage, which is mainly driven by an increase in equity issues. This effect is concentrated in firms with low profitability, high information asymmetry, and active option trading. Following the option listing, newly listed firms hold more cash and engage in more acquisitions which are mainly funded by new equity issues. These findings suggest that option listing has a significant impact on financing decisions due to lower information asymmetry and that firms use the post-listing equity to build up financial slack and support a larger investment set.

The Effects of Technological Similarity and Diversity on Merger and Innovation
Kang, Gu Sang
This paper examines drivers of merger partner selection and impacts of those factors on post-merger innovation outcomes analyzing 1,432 merger transactions in U.S. ICT industries. Throughout the paper, technological similarity between merging firms and technological diversity of an individual firm are important factors affecting firms' merger partner choice. In order to show their impacts on merger partner selection, we use a two-sided matching model as a theoretical framework and employ a maximum score estimation as an empirical methodology. With these empirical strategies, our findings are summarized as follows. First, technological similarity between merging firms has positive effects on merger value creation. This implies that similar technologies between merging firms plays an important role in choosing their merger partners. Second, technological diversity of an individual firm increases expected merger values. This means that firms tend to choose their deal partners with diverse technologies for the purpose of maximizing their expected merger values. Lastly, we estimate post-merger innovation impacts for actual merger transactions. As a result, estimated merger values created by technological similarity and diversity increase the number of merged firms' patents after merger. This implies that expected merger values are realized through the channel of post-merger innovation outputs.

The Innovation Arms Race
Ahmad, Muhammad Farooq,de Bodt, Eric,Harford, Jarrad
Economists have long recognized that competition and innovation interact as key drivers of economic growth (Schumpeter, 1943; Arrow, 1962; Aghion and Howitt, 1992). Acknowledging this, regulators carefully scrutinize competitive behaviors that potentially affect innovation incentives, in particular in the field of M&A (Shapiro, 2012). Do acquisitions of innovative targets spur or stifle innovation? To address this question, we test the Innovation Arms Race hypothesis, providing a first large scale empirical investigation of M&A effects on acquirer rivals’ incentives to innovate and the equilibrium outcome resulting from this competitive process. Our results are consistent with the Innovation Arms Race hypothesis predictions: acquisitions of innovative targets push acquirer rivals to invest more in innovation, both internally through research and development (R&D) and externally through acquisition of innovative targets (the correlated investment prediction) and this increase in innovation investment under pressure of rivals leads to a decrease in firm market valuation (the value decrease prediction). These results are robust to endogeneity and are driven by High-Technology and (to some extent) Healthcare industries. This arms race process appears stronger for leaders and (to some extent) firms under strong competitive pressure (so-called neck-and-neck firms). Initial patents and patent citations based evidence shows no sign of innovation investment efficiency decline, suggesting that the Innovation Arms Race generates a transfer of economic rent favorable to consumers.

Understanding the dynamics emerging from infodemics: A call to action for interdisciplinary research
Stephan Leitner,Bartosz Gula,Dietmar Jannach,Ulrike Krieg-Holz,Friederike Wall

Research on infodemics, i.e., the rapid spread of (mis)information related to a hazardous event, such as the COVID-19 pandemic, requires the integration of a multiplicity of scientific disciplines. The dynamics emerging from infodemics have the potential to generate complex behavioral patterns. In order to react appropriately, it is of ultimate importance for the fields of Business and Economics to understand the dynamics emerging from it. In the short run, dynamics might lead to an adaptation in household spending or to a shift in buying behavior towards online providers. In the long run, changes in investments, consumer behavior, and markets are to be expected. We argue that the dynamics emerge from complex interactions among multiple factors, such as information and misinformation accessible for individuals and the formation and revision of beliefs. (Mis)information accessible to individuals is, amongst others, affected by algorithms specifically designed to provide personalized information, while automated fact-checking algorithms can help reduce the amount of circulating misinformation. The formation and revision of individual (and probably false) beliefs and individual fact-checking and interpretation of information are heavily affected by linguistic patterns inherent to information during pandemics and infodemics and further factors, such as affect, intuition and motives. We argue that, in order to get a deep(er) understanding of the dynamics emerging from infodemics, the fields of Business and Economics should integrate the perspectives of Computer Science and Information Systems, (Computational) Linguistics, and Cognitive Science into the wider context of economic systems (e.g., organizations, markets or industries) and propose a way to do so.

VC Participation and Failure of Startups: Evidence from P2p Lending Platforms in China
Li, Xiaoyang,Hasan, Iftekhar
We investigate how VC participation affects the failure of startups. Using a unique data set of the survival of peer-to-peer (P2P) platforms in China, we identify two types of failures, bankruptcy, and run off with investors’ money. The Competing Risk Model results show that while VC participation reduces bankruptcy hazard, it has little impact on the runoff failures. The findings are robust to the use of matched sub-samples that disentangle the influence of pre-investment screening by VC. Further analysis of exit routes reveals that conditional on failure, VC participation is associated with a higher chance of running for the exit.

What Should Investors Care About? Mutual Fund Ratings by Analysts vs. Machine Learning Technique
Cheng, Si,Lu, Ruichang,Zhang, Xiaojun
We examine two forward-looking mutual fund ratings provided by Morningstar: the analyst rating and the quantitative rating based on the machine learning technique. The analyst rating identifies outperforming funds, while the quantitative rating fails to do so â€" such a difference is mostly due to the selection of analyst coverage. Moreover, the tone in the analyst report contains incremental information in predicting fund performance. Finally, retail investors do not follow analyst recommendations, but instead chase the quantitative rating. The overall evidence highlights the importance of mutual fund analysts in information production and implies a capital mis-allocation problem in mutual fund investment.

`Regression Anytime' with Brute-Force SVD Truncation
Christian Bender,Nikolaus Schweizer

We propose a new least-squares Monte Carlo algorithm for the approximation of conditional expectations in the presence of stochastic derivative weights. The algorithm can serve as a building block for solving dynamic programming equations, which arise, e.g., in non-linear option pricing problems or in probabilistic discretization schemes for fully non-linear parabolic partial differential equations. Our algorithm can be generically applied when the underlying dynamics stem from an Euler approximation to a stochastic differential equation. A built-in variance reduction ensures that the convergence in the number of samples to the true regression function takes place at an arbitrarily fast polynomial rate, if the problem under consideration is smooth enough.