Research articles for the 2020-10-06

A Case for Higher Corporate Tax Rates
Fox, Edward G.,Liscow, Zachary D.
In this report, Fox and Liscow argue that, while conventional wisdom holds that we should lower taxes on corporations because of international competition, two recent changes militate in favor of higher corporate taxes, which would close the deficit, fund social programs, and reduce inequality. First, changes in tax law have increasingly targeted the corporate tax at economic “rents,” the supersized returns that businesses receive when they enjoy advantages like market power. Because taxing rents is progressive and does little to harm economic activity, a higher rate is justified. Second, shifts in the American economy have allowed companies to earn more economic rents, increasing the revenue a tax on rents could raise â€" and increasing the appeal of the tax as a deterrent to harmful behaviors like lobbying government officials to get or maintain market power. Although the authors cannot say exactly what the corporate rate should be, principally because the international dimension remains so important, they offer reasons to favor a higher rate and describe reforms that could help ease the adoption of higher, but still efficient, taxes on corporate returns. Fox and Liscow suggest that, at minimum, proponents of lower corporate tax rates present an incomplete picture and that the “lower corporate tax rates” conclusion is a nonobvious one.

A Wholesale Insurance Executive's Guide To Smart Contracts
Mainelli, Michael,Manson, Bernard
An abundance of new technologies and new technology interactions has created the buzz surrounding ‘InsurTech’, the emerging combination of insurance and technology. Smart contracts are an increasingly popular point of discussion as people realise that computer code can be embedded in distributed ledger technology. Yet, smart contracts do not need distributed ledgers and could promote straight-through-processing (STP) in the London wholesale insurance Market with current technology.This guide aims to give insurance executives an overview of smart contracts that should aid them in discussions about the technology future of the Market. The guide tries to explain the concept, give a taste of the technology and applications, and look to the longer-term risks and rewards.

AHEAD : Ad-Hoc Electronic Auction Design
Joffrey Derchu,Philippe Guillot,Thibaut Mastrolia,Mathieu Rosenbaum

We introduce a new matching design for financial transactions in an electronic market. In this mechanism, called ad-hoc electronic auction design (AHEAD), market participants can trade between themselves at a fixed price and trigger an auction when they are no longer satisfied with this fixed price. In this context, we prove that a Nash equilibrium is obtained between market participants. Furthermore, we are able to assess quantitatively the relevance of ad-hoc auctions and to compare them with periodic auctions and continuous limit order books. We show that from the investors' viewpoint, the microstructure of the asset is usually significantly improved when using AHEAD.

An Empirical Investigation of the Turn-of-the-Year Effect in the Asia Pacific Stock Markets
Huynh, David Nhan
This thesis examines the Efficient Market Hypothesis in terms of the existence of the turn-of-the-year (TOY) effect in ten Asia Pacific stock markets. These market indices include five developed markets (Australia, Hong Kong, Japan, New Zealand, and Singapore) and five emerging markets (Malaysia, China, India, Taiwan, and Thailand). The analysis utilizes both daily and monthly dataset that spans from January 2009 to December 2018. Applying the Ordinary Least Square (OLS) regression and GARCH (1, 1) approach, the results of this paper suggest that the January effect does not exist in examined market indices except New Zealand stock market. However, the strong evidence for the TOY effect are marked for three developed markets with non-calendar financial year, including Australia, Hong Kong, and New Zealand. This study also provides evidence that TOY effect can be fundamentally rationalised by tax‐loss selling activities at the preceding year‐end in Australia and New Zealand stock markets. However, the small-cap phenomenon and institutional investors window dressing cannot rationalise the stock return patterns at the turn-of-the-year. The results obtained from this thesis relatively support the growing literature that suggests the reduction of the TOY effect in stock returns and it is still specifying challenges for the hypothesis of Efficient Market.

Backing Market Forces: How To Make Voluntary Standards Markets Work For Financial Services Regulation
Mainelli, Michael,Von Gunten, Chiara
This report is the outcome of a research project conducted between June and November 2013 which explored how voluntary standards markets might be applied to financial services regulation and sought to provide independent verification of their potential in the financial services sector. The central finding of this report is that voluntary standards could play a greater role in rebuilding a safer and more trusted financial services sector. The report illustrates the use of standards in other industries, the drivers behind their development, the application of existing standards in the financial services sector, other areas in financial services to which standards markets might also be applied, and who might be the potential users of new standards for areas of financial services.The report was well received and gained media attention, including the London Evening Standard, BBC 4 radio, Banking Technology and Reuters. The report was also discussed with regulators, most notably the FCA, Bank of England, Lloyd’s, and ESMA, and numerous trade bodies, e.g. BBA, LMG, ABI, IUA, Wealth Management Association.

Bank Coordination and Monetary Transmission: Evidence from India
Dixit, Shiv,Subramanian, Krishnamurthy
We propose a new channel for the transmission of monetary policy shocks, the coordination channel. We develop a New Keynesian model in which bank lending is strategically complementary. Banks do not observe the distribution of loans but infer it using Gaussian signals. Under this paradigm, expectations of tighter credit conditions reduce banks’ lending response to monetary shocks. As a result, lack of coordination and information about other banks’ actions dampen monetary transmission. We test these predictions by constructing a dataset that links the evolution of interest rates to firms’ bank credit relationships in India. Consistent with our model, we find that the cross-sectional mean and dispersion of lending rates, which capture the expected value and the precision of the signals of credit extended by other banks, are significant predictors of monetary transmission. Our quantitative results suggest that lending complementarities reduce monetary transmission to inflation and output by about a third.

Bringing Evolutionary Thinking into Economics and Finance: Advice for an Aspiring Economist
Hirshleifer, David A.
This piece provides advice to an aspiring economist about why and how to bring evolutionary thinking into economics and finance. It was written as part of a series, “Advice for an aspiring economist,” for This View of Life. In this series scholars provide their informal perspectives about evolution and economics.

CEO Activism and Firm Value
Mkrtchyan, Anahit,Sandvik, Jason,Zhu, Vivi
We investigate the impact of CEO activism, the increasingly common practice of CEOs speaking out on social/political issues, on firm value. CEO activism may be beneficial for shareholders, as it can bolster firms’ relationships with customers and employees. Alternatively, CEO activism may be detrimental if it alienates stakeholders with opposing views. Consistent with the former, we find that CEO activism results in a positive market reaction and higher valuations. These results can be explained by increased employee productivity and innovation, suggesting that CEO activism may improve corporate reputation in labor markets. Additionally, activist CEOs benefit from more future directorships.

Chain of a Lifetime: How Blockchain Technology Might Transform Personal Insurance
Mainelli, Michael,Von Gunten, Chiara
"Chain Of A Lifetime: How Blockchain Technology Might Transform Personal Insurance" is the outcome of a research project conducted between August and December 2014 which explored how blockchain technology might transform personal insurance and in particular interactions among individuals and insurance companies over time.Blockchain technology's main innovation is an electronic public transaction record of integrity without central authority. Beside cryptocurrencies and distributed payment systems, blockchain applications could include areas of finance where a central, trusted third party has traditionally been used, trade reporting, depository receipts, escrow accounts or trade finance. Blockchains can contain set of documents, record assets and help to manage interconnected devices. Emerging applications, such as smart contracts and decentralised autonomous organisations, might in future also permit blockchains to act as automated agents.The report concludes that blockchain technology could transform the way people manage identities and personal information; blur even further the divide between global and local; influence consumer perception of time; drive honesty and transparency; and, influence consumer perceptions of risk that could change the way insurers support mutualisation. The report highlights how, at the time of writing, most insurance companies do not yet seem ready to experiment with blockchain technology. They find it difficult enough to understand Bitcoin or cryptocurrencies. Non-insurers are more likely to be the first to create insurance or insurance-related applications. Blockchain applications in insurance are likely to start with digital identity systems and management of personal data.

Confidence Accounting: A Proposal
Harris, Ian,Mainelli, Michael,Onstwedder, Jan-Peter
Confidence Accounting is a proposal to use distributions, rather than discrete values, where appropriate in auditing and accounting. In a world of Confidence Accounting, the end results of audits would be presentations of distributions for major entries in the profit & loss, balance sheet and cashflow statements. The proposed benefits of Confidence Accounting include a fairer representation of financial results, reduced footnotes, more measurable audit quality and a mitigation of mark-to-market perturbations. The landmark, free-to-download report was published on 5 July 2012.Andy Haldane, Executive Director for Financial Stability at the Bank of England welcomes the proposal and writes in the foreword, “My hope is that this proposal moves our thinking a step closer towards a set of accounting standards for major entities that put systemic stability centre stage. In the light of the crisis, anything less than a radical re-think would be negligent.”Responses to the July 2012 report are available online. The publication included a invitation to readers to comment on the content of the proposal. A questionnaire was circulated during events and was also available online. Read the Confidence Accounting Consultation Responses for more information.

Copula-Based Factor Model for Credit Risk Analysis
Meng-Jou Lu,Cathy Yi-Hsuan Chen,Wolfgang Karl Härdle

A standard quantitative method to access credit risk employs a factor model based on joint multivariate normal distribution properties. By extending a one-factor Gaussian copula model to make a more accurate default forecast, this paper proposes to incorporate a state-dependent recovery rate into the conditional factor loading, and model them by sharing a unique common factor. The common factor governs the default rate and recovery rate simultaneously and creates their association implicitly. In accordance with Basel III, this paper shows that the tendency of default is more governed by systematic risk rather than idiosyncratic risk during a hectic period. Among the models considered, the one with random factor loading and a state-dependent recovery rate turns out to be the most superior on the default prediction.

Effects of Index Insurance on Demand and Supply of Credit: Evidence from Ethiopia
Belissa, Temesgen,Lensink, Robert,Winkel, Anne
Index‐based insurance offers a climate risk management strategy that can benefit the poor. This article focuses on whether adopting index insurance improves access to financial markets and reduces credit rationing, using empirical analyses focused on Ethiopia. With different identification strategies, including a newly developed method that leverages the varying availability of index insurance across areas, the authors control for potential selection biases by forecasting potential insurance adopters; they apply a cross‐sectional double‐difference method. Credit rationing can take the form of either supply‐side quantity rationing, in which case potential borrowers who need credit are involuntarily excluded from the credit market, or demand‐side rationing, such that borrowers self‐select and voluntarily withdraw to avoid transaction costs and threats to their collateral. By differentiating supply‐side and demand‐side forms and employing a direct elicitation method to determine credit rationing status, this study reveals that 38% of sample households are credit constrained. The preferred estimation techniques suggest that index insurance significantly reduces supply‐side rationing.

Essays on the Fallacy of Electricity Price Indeterminedness: Electricity Market Stylized Facts and Conjectures of Interest Part Ia
Vukovic, Ognjen
In this work, which represents the first part of a compendium of papers, author investigates and discusses a set of the most prominent electricity market stylized facts of price formation. Subsequently, the lack of theoretical underlying concerning the stylized set of facts is being dealt with a suggestion of a set of conjectures to be examined in the future parts of the set of essays on the fallacy of electricity price indeterminedness. Each of the conjectures is thoroughly discussed and will be dealt in subsequent parts of the following set of essays by examining mathematical and applicative basis of the conjectures itself which, at the same time, implies their viability and sustainability.

Exploring the Effects of COVID-19 Containment Policies on Crime: An Empirical Analysis of the Short-term Aftermath in Los Angeles
Gian Maria Campedelli,Alberto Aziani,Serena Favarin

This work investigates whether and how COVID-19 containment policies had an immediate impact on crime trends in Los Angeles. The analysis is conducted using Bayesian structural time-series and focuses on nine crime categories and on the overall crime count, daily monitored from January 1st 2017 to March 28th 2020. We concentrate on two post-intervention time windows - from March 4th to March 16th and from March 4th to March 28th 2020 - to dynamically assess the short-term effects of mild and strict policies. In Los Angeles, overall crime has significantly decreased, as well as robbery, shoplifting, theft, and battery. No significant effect has been detected for vehicle theft, burglary, assault with a deadly weapon, intimate partner assault, and homicide. Results suggest that, in the first weeks after the interventions are put in place, social distancing impacts more directly on instrumental and less serious crimes. Policy implications are also discussed.

Extending Social Resource Exchange to Events of Abundance and Sufficiency
Jonas Bååth,Adel Daoud

This article identifies how scarcity, abundance, and sufficiency influence exchange behavior. Analyzing the mechanisms governing exchange of resources constitutes the foundation of several social-science perspectives. Neoclassical economics provides one of the most well-known perspectives of how rational individuals allocate and exchange resources. Using Rational Choice Theory (RCT), neoclassical economics assumes that exchange between two individuals will occur when resources are scarce and that these individuals interact rationally to satisfy their requirements (i.e., preferences). While RCT is useful to characterize interaction in closed and stylized systems, it proves insufficient to capture social and psychological reality where culture, emotions, and habits play an integral part in resource exchange. Social Resource Theory (SRT) improves on RCT in several respects by making the social nature of resources the object of study. SRT shows how human interaction is driven by an array of psychological mechanisms, from emotions to heuristics. Thus, SRT provides a more realistic foundation for analyzing and explaining social exchange than the stylized instrumental rationality of RCT. Yet SRT has no clear place for events of abundance and sufficiency as additional motivations to exchange resources. This article synthesize and formalize a foundation for SRT using not only scarcity but also abundance and sufficiency.

Green Asset Pricing
Jaccard, Ivan,Benmir, Ghassane,Vermandel, Gauthier
Climate change is one of the biggest economic challenges of our time. Given the scale of the problem, the question of whether a carbon tax should be introduced is hotly debated in policy circles. This paper studies the optimal design of a carbon tax when environmental factors, such as air carbon dioxide emissions (CO2), directly affect agents' marginal utility of consumption. Our first result is that the optimal tax is determined by the shadow price of CO2 emissions. We then use asset pricing theory to estimate this implicit price in the data and find that the optimal tax is pro-cyclical. It is therefore optimal to use the carbon tax to \cool down" the economy during periods of booms and to stimulate it in recessions. The optimal policy not only generates large welfare gains, it also reduces risk premiums and raises the average risk-free real rate. The effect of the tax on asset prices and welfare critically depends on the emission abatement technology.

Heterogeneity in Food Expenditure amongst US families: Evidence from Longitudinal Quantile Regression
Arjun Gupta,Soudeh Mirghasemi,Mohammad Arshad Rahman

Empirical studies on food expenditure are largely based on cross-section data and for a few studies based on longitudinal (or panel) data the focus has been on the conditional mean. While the former, by construction, cannot model the dependencies between observations across time, the latter cannot look at the relationship between food expenditure and covariates (such as income, education, etc.) at lower (or upper) quantiles, which are of interest to policymakers. This paper analyzes expenditures on total food (TF), food at home (FAH), and food away from home (FAFH) using mean regression and quantile regression models for longitudinal data to examine the impact of economic recession and various demographic, socioeconomic, and geographic factors. The data is taken from the Panel Study of Income Dynamics (PSID) and comprises of 2174 families in the United States (US) observed between 2001-2015. Results indicate that age and education of the head, family income, female headed family, marital status, and economic recession are important determinants for all three types of food expenditure. Spouse education, family size, and some regional indicators are important for expenditures on TF and FAH, but not for FAFH. Quantile analysis reveals considerable heterogeneity in the covariate effects for all types of food expenditure, which cannot be captured by models focused on conditional mean. The study ends by showing that modeling conditional dependence between observations across time for the same family unit is crucial to reducing/avoiding heterogeneity bias and better model fitting.

How Financial Institutions Force the EU to an Inevitable Enhancement of the AML Regulation
Rose, Kalle Johannes
Purpose: Recent research shows that due to money laundering risks, there has been an increase in the off-boarding of certain types of corporate clients in the financial sector. This phenomenon known as "de-risking" has been argued to have a negative impact on society, because it increases the possible risk of money laundering. In spite of increasing regulation within the prevention of money laundering in the EU, the de-risking effect is led by financial institutions throughout Europe. Furthermore, the financial institutions have argued that the compliance cost of the increasing money laundering regulation is a key factor for de-risking. The purpose of this article is to analyze whether the de-risking strategy of financial institutions can result in yet another expansion of the regulatory framework concerning anti-money laundering efforts focused on the off-boarding of clients and if so, is there a way to avoid further regulation by changing present behavior.Design/methodology/approach: This article applies functional methods to law and economics in order to achieve higher efficiency in combating money laundering.Findings: In this article it is found that the continuing of de-risking by financial institutions due to the avoidance strategy of money laundering risks, will inevitably result in further regulatory demands regarding the off-boarding process of clients. The legal basis for the introduction of further regulatory intervention is that some of the de-risking constitute a direct contradiction to the aim of the present regulatory framework.Originality/value: There has been very little research concerning de-risking related to money laundering. The present research has focused on the effect on society and not the relationship between the financial institutions and the regulator. This article raises an important and present problem, as the behavior of the financial institutions constitute a response from the regulator that is contradicting the thoughts behind the behavior of the financial institutions. It is found that the article is highly relevant if an expansion of regulation is to be hindered.

Improving Access to Banking: Evidence from Kenya
Allen, Franklin,Carletti, Elena,Cull, Robert,Qian, Jun,Senbet, Lemma W.,Valenzuela, Patricio
We explore the relationship between bank branch expansion, financial inclusion and profitability for Equity Bank. Unlike traditional banks, including foreign and government owned banks in Kenya, Equity Bank targets less developed territories and less privileged households. Its presence increased financial inclusion by 31 percent of the adult population between 2006 and 2015, especially for Kenyans who were less educated, did not own their own home, and lived in less-developed areas. The bank’s business model proves to be highly effective, with branch-level profits rising in areas with a smaller number of operating banks. Overall, the growth of Equity Bank demonstrates that financial inclusion can be achieved and sustained through profitable branching and service strategies that also serve the needs of underserved regions and populations. Thus, financial inclusion need not come at the sacrifice of bank profitability.

Investment Funds, Monetary Policy, and the Global Financial Cycle
Kaufmann, Christoph
This paper studies the role of international investment funds in the transmission of global financial conditions to the euro area using structural Bayesian vector auto regressions. While cross-border banking sector capital flows receded significantly in the aftermath of the global financial crisis, portfolio flows of investors actively searching for yield on financial markets world-wide gained importance during the post-crisis “second phase of global liquidity” (Shin, 2013). The analysis presented in this paper shows that a loosening of US monetary policy leads to higher investment fund inflows to equities and debt globally. Focussing on the euro area, these inflows do not only imply elevated asset prices, but also coincide with increased debt and equity issuance. The findings demonstrate the growing importance of non-bank financial intermediation over the last decade and have important policy implications for monetary and financial stability.

Keep Your Lid On: A Financial Analyst's View Of The Cost & Valuation Of DB Pension Provision
Keating, Con,Settergren, Ole,Slater, Andrew
“Keep Your Lid On: A Financial Analyst’s View Of The Cost & Valuation Of DB Pension Provision”, is the third "Finance Short" on pensions by Con Keating. There has been growing discontent among the sponsors and trustees of defined benefit (DB) pension schemes over scheme valuation regulations and practices. This is evidenced by the calls for smoothing from the NAPF, CBI and Association of Member Nominated Trustees, and, indeed, by the DWP’s call for evidence on the subject of asset and liability smoothing and the Pension Regulators’ responsibilities. There is an ongoing debate about the use and relevance of market prices and yields in scheme valuations, as these form no part of the pension contract between employer and employee. Different ways are used and several have been proposed to evaluate the state of pension funds for reporting and management purposes. None is satisfactory.With this report, Con introduces a method, Internal Growth Rate (IGR), which is accurate, stable and entirely consistent with fair value accounting, though it does not rely on market prices or yields. In the paper the authors show that discounting using IGR meets reporting objectives. The many alternatives in current use (risk free rate, Gilts, expected asset return, …) are shown to lead to over or under estimates, bias and volatility. The IGR avoids over or under estimates by considering an element of the system overlooked in current arrangements, contributions. Contributions are primary inputs for the process that delivers the output, pensions. The IGR enables accurate and consistent evaluation of the state of the pension system when applied to the income and expense projections.

Leader Cultural Intelligence and Organizational Performance
Saeed Nosratabadi,Parvaneh Bahrami,Khodayar Palouzian,Amir Mosavi

One of the challenges for international companies is to manage multicultural environments effectively. Cultural intelligence (CQ) is a soft skill required of the leaders of organizations working in cross-cultural contexts to be able to communicate effectively in such environments. On the other hand, organizational structure plays an active role in developing and promoting such skills in an organization. Therefore, this study aimed to investigate the effect of leader CQ on organizational performance mediated by organizational structure. To achieve the objective of this research, first, conceptual models and hypotheses of this research were formed based on the literature. Then, a quantitative empirical research design using a questionnaire, as a tool for data collection, and structural equation modeling, as a tool for data analysis, was employed among executives of knowledge-based companies in the Science and Technology Park, Bushehr, Iran. The results disclosed that leader CQ directly and indirectly (i.e., through the organizational structure) has a positive and significant effect on organizational performance. In other words, in organizations that operate in a multicultural environment, the higher the level of leader CQ, the higher the performance of that organization. Accordingly, such companies are encouraged to invest in improving the cultural intelligence of their leaders to improve their performance in cross-cultural environments, and to design appropriate organizational structures for the development of their intellectual capital.

Market Dominance in the Digital Age: Online Feedback Loops and Rising Industry Concentration
Emery, Logan P.
I document that online feedback loops, such as search engines, drive customers and revenues to prominent firms. This creates barriers to entry, weakening competition and contributing to rising industry concentration. To identify prominent firms online, I measure centrality in a network of firm websites covering more than 100,000 public and private firms. Industries with firms that are more central become more concentrated and central firms increase their market share during the sample period. This appears to be due to firms' ability to generate revenues. Central firms become more profitable and peripheral firms earn negative risk-adjusted returns and underperform earnings forecasts. Evidence from the COVID-19 shutdown, which drove economic activity online, supports these conclusions. Central firms received the vast majority of the influx of web traffic and had significantly higher returns during the shutdown. My results highlight the difficulties of maintaining competition in an increasingly digital economy.

Modelling Temperature Variation of Mushroom Growing Hall Using Artificial Neural Networks
Sina Ardabili,Amir Mosavi,Asghar Mahmoudi,Tarahom Mesri Gundoshmian,Saeed Nosratabadi,Annamaria R. Varkonyi-Koczy

The recent developments of computer and electronic systems have made the use of intelligent systems for the automation of agricultural industries. In this study, the temperature variation of the mushroom growing room was modeled by multi-layered perceptron and radial basis function networks based on independent parameters including ambient temperature, water temperature, fresh air and circulation air dampers, and water tap. According to the obtained results from the networks, the best network for MLP was in the second repetition with 12 neurons in the hidden layer and in 20 neurons in the hidden layer for radial basis function network. The obtained results from comparative parameters for two networks showed the highest correlation coefficient (0.966), the lowest root mean square error (RMSE) (0.787) and the lowest mean absolute error (MAE) (0.02746) for radial basis function. Therefore, the neural network with radial basis function was selected as a predictor of the behavior of the system for the temperature of mushroom growing halls controlling system.

New Evolutionary Finance: Social Transmission Bias and Cultural Evolution in Financial Markets
Akcay, Erol,Hirshleifer, David A.
The thoughts and behaviors of financial market participants depend upon adopted cultural traits, including information signals, beliefs, strategies, and folk economic models. Financial traits compete to survive in the human population, and are modified in the process of being transmitted from one agent to another. These cultural evolutionary processes shape market outcomes, which in turn feed back into the success of competing traits. This evolutionary system is studied in an emerging paradigm, new evolutionary finance. In this paradigm, social transmission biases determine the evolution of financial traits in the investor population. It considers an enriched set of cultural traits, both selection on traits and mutation pressure, and market equilibrium at different frequencies. Other key ingredients of the paradigm include psychological bias, social network structure, information asymmetries, and institutional environment.

Predicting Loss Severities for Residential Mortgage Loans: A Three-step Selection Approach
Do, Hung Xuan,Roesch, Daniel,Scheule, Harald (Harry)
This paper develops a novel framework to model the loss given default (LGD) of residential mortgage loans which is the dominant consumer loan category for many commercial banks. LGDs in mortgage lending are subject to two selection processes: default and cure, where the collateral value exceeds the outstanding loan amount. We propose a three-step selection approach with a joint probability framework for default, cure (i.e., zero-LGD) and non-zero loss severity information. The proposed methodology dominates widely used ordinary least squares regressions for LGDs in terms of out-of-time predictions.

Pricing and Hedging the No-Negative-Equity Guarantee in Equity-Release Mortgages
Kevin Engelbrecht,Saul Jacka

We provide a practical superhedging strategy for the pricing and hedging of the No-Negative-Equity-Guarantee (NNEG) found in Equity-Release Mortgages (ERMs), or reverse mortgages, using a discrete-time model. In contrast to many papers on the NNEG and industry practice we work in an incomplete market setting so that deaths and property prices are not independent under most pricing measures. We give theoretical results and numerical illustrations to show that the assumption of market completeness leads to a considerable undervaluation of the NNEG. By introducing an Excess-of-Loss reinsurance asset, we show that it is possible to reduce the cost of the superhedge for a portfolio of ERMs with the average cost decreasing rapidly as the number of lives in the portfolio increases. All the hedging assets, with the exception of cash, have a term of one year making the availability of a property hedging asset from over-the-counter derivative providers more realistic. We outline how a practical multi-period ERM pricing and hedging model can be built. Although the prices identified by this model will be higher than prices under the completeness assumption, they are considerably lower than those under the Equivalent Value Test mandated by the UK's Prudential Regulatory Authority.

Protectionism and economic growth: Causal evidence from the first era of globalization
Niklas Potrafke,Fabian Ruthardt,Kaspar Wüthrich

We investigate how protectionist policies influence economic growth. Our empirical strategy exploits an extraordinary tax scandal that gave rise to an unexpected change of government in Sweden. A free-trade majority in parliament was overturned by a comfortable protectionist majority in the fall of 1887. We employ the synthetic control method to select control countries against which economic growth in Sweden can be compared. We do not find evidence suggesting that protectionist policies influenced economic growth and examine channels why. Tariffs increased government revenue. However, the results do not suggest that the protectionist government stimulated the economy in the short-run by increasing government expenditure.

Size and Investment Performance: Defined Benefit vs. Defined Contribution Pension Plans
Jang, Donghyeok,Wu, Youchang
We examine the investment performance of over 160 thousand U.S. private pension plans. We find significant economies of scale in performance and administrative expenses, which are more prominent for defined benefit (DB) plans than for defined contribution (DC) plans. DC plans outperform size-matched DB plans in most size ranges in benchmark-adjusted returns. Size also drives the plan termination probability, especially among DB plans, and the sponsor's choice between the DB and DC structures. Our results suggest a size-based explanation for the great shift toward DC plans centering on the relative efficiency of these two organizational forms in pension asset management.

State of the Art Survey of Deep Learning and Machine Learning Models for Smart Cities and Urban Sustainability
Saeed Nosratabadi,Amir Mosavi,Ramin Keivani,Sina Ardabili,Farshid Aram

Deep learning (DL) and machine learning (ML) methods have recently contributed to the advancement of models in the various aspects of prediction, planning, and uncertainty analysis of smart cities and urban development. This paper presents the state of the art of DL and ML methods used in this realm. Through a novel taxonomy, the advances in model development and new application domains in urban sustainability and smart cities are presented. Findings reveal that five DL and ML methods have been most applied to address the different aspects of smart cities. These are artificial neural networks; support vector machines; decision trees; ensembles, Bayesians, hybrids, and neuro-fuzzy; and deep learning. It is also disclosed that energy, health, and urban transport are the main domains of smart cities that DL and ML methods contributed in to address their problems.

Supplement to "Erratum: Higher Order Elicitability and Osband's Principle"
Tobias Fissler,Johanna F. Ziegel

This note corrects conditions in Proposition 3.4 and Theorem 5.2(ii) and comments on imprecisions in Propositions 4.2 and 4.4 in Fissler and Ziegel (2016).

The Effect of Familyâ€"Work and Workâ€"Family Conflict on Call Center Workers’ Emotional Exhaustion With Personâ€"Job Fit as Antecedent (Efecto del conflicto familia-trabajo y trabajo-familia en el agotamiento emocional de los trabajadores en centros de llamadas considerando la compatibilidad persona-trabajo como antecedente)
Dwi Lestari, ,Yuwono,
In accordance with the government’s regulations in Indonesia, all financial services institutions are obliged to implement a customer complaint handling mechanism, which has contributed to the rapid growth of the call center industry. As a benchmark for managing service quality, call center workers are required to always keep their emotions stable despite the continuous pressures and unpleasant responses from customers. For this reason, working at call centers is now considered a job with a high emotional burden. Few studies have specifically examined the level of emotional exhaustion among call center workers in Indonesia. Therefore, this work aims to investigate the effect of familyâ€"work and workâ€"family conflict on such workers’ emotional exhaustion, with personâ€"job fit as antecedent. For this purpose, we collected data from 154 questionnaires completed by call center workers at financial services institutions in Indonesia. We analyze the relationship among the variables under study using structural equation modeling (SEM). The results show that the level of compatibility between employees’ and their job reduces both familyâ€"work and workâ€"family conflict. In terms of workâ€"family conflict, call center workers will feel emotionally exhausted only when faced with a dilemma between work and family responsibilities. The call centers’ management should thus create a family-friendly work environment to ensure excellent care for employees.

The FIN and PEAD Factors: Motivation, Construction, and Availability
Daniel, Kent D.,Hirshleifer, David A.,Sun, Lin
This document provides an overview of the FIN and PEAD factors of Daniel, Hirshleifer, and Sun (2020) and describes their motivations, constructions, and availability. Based on investor psychology, Daniel, Hirshleifer, and Sun (2020) propose a theoretically motivated factor model that augments the market factor with two factors that capture long- and short-horizon mis-pricing. The long-horizon financing factor (FIN) exploits the information in managers’ decisions to issue or repurchase equity in response to persistent mis-pricing. The short-horizon earnings surprise factor (PEAD) is motivated by investor inattention and evidence of short-horizon under-reaction, and captures short-horizon mis-pricing. The 3-factor risk-and-behavioral model outperforms other proposed models in explaining a broad range of return anomalies. Daniel, Hirshleifer, and Sun (2020) is available at

The Market Data Infrastructure, the Duty of Best Execution, and Off-Exchange Market Makers: Connecting Regulatory Reforms and Enforcement Implications
Dolgopolov, Stanislav
This Article discusses the proposed reform of the market data infrastructure and recent enforcement actions in connection with the reach of the duty of best execution to off-exchange market makers.

The Power of the Narrative in Corporate Lawmaking
Roe, Mark J.,Shapira, Roy
The notion of stock-market-driven short-termism relentlessly whittling away at the American economy’s foundations is widely accepted and highly salient. Presidential candidates state as much. Senators introduce bills assuming as much. Corporate interests argue as much to the Securities and Exchange Commission and the corporate law courts. Yet the academic evidence as to the problem’s severity is no more than mixed. What explains this gap between widespread belief and weak evidence? This Article explores the role of narrative power. Some ideas are better at being popular than others. The concept of pernicious stock market short-termism has three strong qualities that make its narrative power formidable: (1) connotation â€" the words themselves tell us what is good (reliable long-term commitment) and what is not (unreliable short-termism); (2) category confusion â€" disparate types of corporate misbehavior, such as environmental degradation and employee mistreatment, are mislabeled as being truly and primarily short-termism phenomena emanating from truncated corporate time horizons (when they in fact emanate from other misalignments), thereby making us view short-termism as even more rampant and pernicious than it is; and (3) confirmation â€" the idea is regularly repeated, because it is easy to communicate, and often boosted by powerful agenda-setters who benefit from its repetition. The Article then highlights the real-world implications of narrative power â€" powerful narratives can be more certain than the underlying evidence, thereby leading policymakers astray. For example, a favorite remedy for stock-market-driven short-termism is to insulate executives from stock market pressure. If lawmakers believe that short-termism is a primary cause of environmental degradation, anemic research and development, employee mistreatment, and financial crises â€" as many do â€" then they are likely to focus on further insulating corporate executives from stock-market accountability. Doing so may, however, do little to alleviate the underlying problems, which would be better handled by, say, stronger environmental regulation and more astute financial regulation. Powerful narratives can drive out good policymaking.

The Quiet Insurer: Mobility Of The 'Other' Financial Service
Beglinger, Shirley
Insurance is one of the longer-term financial sectors. As our author, Shirley Beglinger, points out, insurance thinks long-term about finance but also about location.Insurers have clustered around London since the 16th century. Continental financiers were attracted to Sir Thomas Gresham’s homage to their bourses when he opened the Royal Exchange (Byrsa Londinensis) in London in 1571, as wars on the Continent forced them to decamp from the bourses of Antwerp and Bruges.Despite the surprising nimbleness and jitteriness of some insurers, Shirley has a positive view of insurance clustering and London’s global role. She puts her finger accurately on the weaknesses of North American markets, Chinese markets, Middle Eastern markets and others. One might point to London’s decades of downward-drifting market share or the ‘Spanish practices’ of a market that seems to feel revulsion towards much technology, but Shirley argues it’s only London’s market to lose. To paraphrase Johnson, “when an insurer is tired of London, he is tired of [life] insurance.”Londoners will hope that future decisions over regulation and tax only strengthen their insurance cluster. Other financial centres will always examine an opportunity to poach business, and Shirley highlights perhaps Singapore as the leading long-term contender. London is heading toward a half-a-millennia run of success. Shirley wills London a good ten centuries. That’s what Long Finance is about.