Research articles for the 2020-10-23

American Student Loans: Repayment and Valuation
Guasoni, Paolo,Huang, Yu-Jui,Khalili, Saeed
American student loans are fixed-rate debt contracts that may be repaid in full by a certain maturity. Alternatively, income-based schemes give borrowers the option to make payments proportional to their income above subsistence for a number of years, after which the remaining balance is forgiven but taxed as ordinary income. The repayment strategy that minimizes the present value of future payments takes two possible forms: For a small loan balance, it is optimal to make maximum payments until the loan is fully repaid, forgoing both income-based schemes and loan forgiveness. For a large balance, enrolling in income-based schemes is optimal either immediately or after a period of maximum payments. Overall, the benefits of income-based schemes are substantial for large loan balances but negligible for small loans.

Asses the Efficiency of Operational Risk Management in Russian Banks
Abu-Alrop, Jalal Hafeth
This study examines the efficiency of operational risk management of 85 Russian commercial banks during the period 2008â€"2017. This study uses data envelopment analysis (DEA) with financial ratios to assess the efficiency of operational risk management. The study adopts the basic indicator approach (BIA) to measuring operational risk. Also, the study adopts net interest margin (NIM), return on assets (ROA), and return on equity (ROE) for measuring banks performance. The study found that the small banks were the most effective in managing operational risk, while large banks were more efficient than medium banks.

Attention Induced Trading and Returns: Evidence from Robinhood Users
Barber, Brad M.,Huang, Xing,Odean, Terrance,Schwarz, Christopher
Consistent with attention-induced trading models’ predictions, we link episodes of intense buying by retail investors at the brokerage firm Robinhood to negative returns. Average five-day abnormal returns are -3% (-6%) for the top stocks purchased each day (more extreme herding) by Robinhood users. We find that herding episodes are related to the simplified display of information on the Robinhood app and to established proxies for investor attention. These factors lead to more concentrated trading by Robinhood users that can impact pricing. For example, during Robinhood outages, retail investor volume drops significantly among stocks that are likely to capture investor attention.

Bargaining Power and Outside Options in the Interbank Lending Market
Abbassi, Puriya,Bräuning, Falk,Schulze, Niels
We study the role of bargaining power and outside options with respect to the pricing of over-the-counter interbank loans using a bilateral Nash bargaining model, and we test the model predictions with detailed transaction-level data from the euro-area interbank market. We find that lender banks with greater bargaining power over their borrowers charge higher interest rates, while the lack of alternative investment opportunities for lenders lowers bilateral interest rates. Moreover, we find that when lenders that are not eligible to earn interest on excess reserves (IOER) lend funds to borrowers with access to the IOER facility, they do so at rates that are below the IOER rate; in turn, these borrowers put the funds in their reserve accounts to earn the spread. Our findings highlight that this persistent arbitrage opportunity is not merely a result of the lack of alternative outside options for some lenders, but rather it crucially depends on lenders’ limited bilateral bargaining power, leading to a persistent segmentation of prices in the euro-area interbank market. We examine the implications of these findings for the transmission of euro-area monetary policy.

Climate Risk Is Investment Risk
Scanlan, Melissa K.
In January 2020, BlackRock, the world’s largest asset manager, announced it was placing environmental sustainability at the center of its $7 trillion investment approach. Having concluded that climate risk was investment risk, BlackRock predicted a very rapid movement of capital toward “sustainable” businesses. This action reflects a broader rethinking of the purpose of multinational corporations and their exposure to climate-related risks in light of the unprecedented need to swiftly decarbonize the global economy and meet the United Nation’s Sustainable Development Goals (SDGs). To avoid the worst scenarios of a climate-disrupted world requires extensive investment in mitigation and adaptation strategies in this decade. Companies that sit idly in the bleachers, instead of aggressively planning for a zero-fossil-fuel reality, run a greater risk of obsolete investments in “stranded assets.”

Climate Risk and Credit Ratings
Tran, Nhu,Uzmanoglu, Cihan
We investigate whether credit rating agencies (CRAs), whose decisions affect entities’ cost of borrowing and access to capital, consider climate risk in their ratings. Since climate risk is not well defined, we implement several identification strategies using a sample of U.S. cities. We study the cross-sectional variation in cities’ credit ratings by their exposures to sea-level-rise and wildfires, compare the credit ratings of coastal and non-coastal cities, and run difference-in-difference tests around events that raise awareness about climate risk. These tests suggest that CRAs do not account for climate risk. Cities’ endogenous responses to climate risk cannot explain this finding.

Commodity Futures Return Predictability and Intertemporal Asset Pricing
Cotter, John,Eyiah-Donkor, Emmanuel,Potì, Valerio
We find out-of-sample predictability of commodity futures excess returns using forecast combinations of 28 potential predictors. Such gains in forecast accuracy translate into economically significant improvements in certainty equivalent returns and Sharpe ratios for a mean-variance investor. Commodity return forecasts are closely linked to the real economy. Return predictability is countercyclical, and the combination forecasts of commodity returns have significantly positive predictive power for future economic activity. Two-factor models featuring innovations in each of the combination forecasts and the market factor explain a substantial proportion of the cross-sectional variation of commodity and equity returns. The associated positive risk prices are consistent with the Intertemporal Capital Asset Pricing Model (ICAPM) of Merton (1973), given how the predictors forecast an increase in future economic activity in the time-series. Overall, combination forecasts act as state variables within the ICAPM, thus resurrecting a central role for macroeconomic risk in determining expected returns.

Economic Growth and Financial Performance of Islamic Banks: A CAMELS Approach
Ledhem, Mohammed Ayoub,Mekidiche, Mohammed
Purpose â€" The purpose of this paper is to investigate the link between the financial performance of Islamic finance and economic growth in all of Malaysia, Indonesia, Brunei, Turkey and Saudi Arabia within the endogenous growth model framework. Design/methodology/approach â€" This study applied dynamic panel system GMM to estimate the impact of the financial performance of Islamic finance on economic growth using quarterly data (2014:1-2018:4). CAMELS system parameters were employed as variables of the financial performance of Islamic finance and gross domestic product (GDP) as a proxy of economic growth. The sample contained all Islamic banks working in the five countries. Findings â€" The findings demonstrated that the only significant factor of the financial performance of Islamic finance, which affects the endogenous economic growth, is profitability through return on equity (ROE). The experimental findings also indicated the necessity of stimulating other financial performance factors of Islamic finance to achieve a significant contribution to economic growth. Practical implications â€" The analysis in this paper would fill the literature gap by investigating the link between financial performance of Islamic finance and economic growth, as this study serves as a guide for the academicians, researchers and decision-makers who want to achieve economic growth through stimulating Islamic finance in the banking sector. However, this study may well be extended to investigate the link between the financial performance of Islamic finance and economic growth over the Z-score model as another measure for the financial performance of Islamic finance. Originality/value â€" This paper is the first that investigates the link between financial performance of Islamic finance and economic growth empirically using CAMELS parameters within the endogenous growth model to provide robust information about this link based on a sample of the top pioneer Islamic finance countries.

Impact of Credit Risk on the Performance of Russian Commercial Banks
Abu-Alrop, Jalal Hafeth
This study examined the effect of credit risk on the performance of 85 Russian commercial banks during the period (2008â€"2017). This study used multiple regression to measure the effect of credit risk on the performance of Russian banks. The study found that the Performance indicators were affected by credit risk in five years out of ten. Credit risk contributed to the formation of performance indicators by 51 % in the case of return on assets and 50 % in return on equity. Also, the loan loss provisions to total loans ratio had a negative effect for 4 years because of the decline in credit quality in those years; the effect of total Loan to total assets was only positive in one year. Also, the study found that the effect of the ratio of loan loss provisions to total loans was negative and greater than the positive impact of the ratio of total loans to total assets because the impact of credit quality is greater and more important than the impact of its volume. The study concluded that the effect of credit risk on the performance of Russian banks is not a fixed effect but a changing one from one year to another, but in cases where credit leaves an impact on performance indicators this effect is often negative and significant. The study also concluded that the quality of credit has a significant and negative impact on performance indicators, but the volume of the credit has a limited impact.

Media Sentiment on Monetary Policy: Determinants and Relevance for Inflation Expectations
Picault, Matthieu,Pinter, Julien,Renault, Thomas
We construct a new indicator to capture media sentiment about the European Central Bank monetary policy and its relevant environment by analyzing 25,000 articles from five major international newspapers. Using named entity recognition and part-of-speech tagging, we propose a methodology to dissociate the dissemination of the central bank's official communications from the media comments. The resulting -daily- index correlates with some -monthly- standard measures of economic sentiment but reveals idiosyncratic information on monetary policy. Analyzing the determinants of our index, we find that both press conference and inter-meeting communications of the president significantly affect media sentiment. We then show that, controlling for a large range of factors, daily changes in media sentiment have predictive power on financial markets’ inflation expectations.

Navigating the Changing Landscape of Community Solar in Delaware: Policy Designs and Governance Frameworks to Support Community-Owned Sustainable Energy
Byrne, John,Nyangon, Joseph,Hegedus, Steven,Taminiau, Job,Li, Pengyu,de Paz, Oscar,Redhead, Karice
Using case studies of community-owned solar generating facilities in 11 states (namely California, Colorado, Connecticut, Hawaii, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, and Rhode Island) and the District of Columbia, this report investigates policy and governance processes for designing community solar strategies. For this report, we use the term ‘subscriber-based’ when the passive role of bill payers mostly defines the nature of the ‘community’ in a project. We use the term ‘community-active’ when communities and their members have active roles in governance and administration, normally expressed through local government sponsors. Our research finds that most programs and projects underway in the U.S. have a ‘passive’ concept of community. Importantly, while most states deploying community solar projects have adopted subscriber-based policies, installed community solar capacity based on community-active forms of development is fast-growing and appears to already exceed the volume of solar power generation created by nationwide subscriber-based community solar. In just three years (2016-18), the community-active model has grown by more than 350%. California has been a leader in the design and spread of this model with its community choice aggregation programs having installed 3.56 GWp of solar power in the state, which generated over 5.77 TWh of solar between 2012 and 2019. Massachusetts' Community Choice Energy (CCE) programs are estimated to have installed solar plant capacity of about 130.29 MW. This solar power capacity generated 182,406 MWh of solar electricity during 2012-2019. By contrast, non-CCE community programs installed 92.71 MW, which annually generates 129,794 MWh. Thus, community-active solar initiatives in just two states have outpaced solar power development by a factor of three in 36 states using subscriber-based approaches (which together have only built 1.3 GWp). Additionally, solar programs, including community-active solar, create a material number of jobs. Using experience in the community-active solar market to date, we estimate that if Delaware Senate Bill 250’s target of 40% renewable energy generated electricity, with 10% from solar that includes a community-active solar carveout, is met by 2035, it will result in 21,000 job years in 15 years of development. In other words, a new continuing solar workforce of about 1,400 employees statewide will exist as a result of the bill's new [solar + community solar] portfolio carveout.

Oil and Gas Companies - Transition towards Zero Emissions?
Baur, Dirk G.,Todorova, Neda
Companies increasingly announce goals to reduce carbon emissions. How do firms in the oil and gas industry achieve such goals without fundamentally changing their business model? We analyze this question and aim to identify any changes in firms' exposures to oil and to clean and renewable energy. We find a decreased systematic risk exposure and an increased exposure to oil and to clean and renewable energy. We also identify a substantially increased positive correlation of these exposures, i.e. the higher the oil exposure the higher the clean energy exposure suggesting that firms compensate their oil exposure with investments in clean and renewable energy.

Robust Distortion Risk Measures
Bernard, Carole,Pesenti, Silvana M.,Vanduffel, Steven
Robustness of risk measures to changes in underlying loss distributions (distributional uncertainty) is of crucial importance when making well-informed risk management decisions. In this paper, we quantify for any given distortion risk measure its robustness to distributional uncertainty by deriving its range of attainable values when the underlying loss distribution has a known mean and variance and furthermore lies within a ball - specified through the Wasserstein distance - around a reference distribution. We extend our results to account for uncertainty in the first two moments and provide an application to model risk assessment.

Stablecoins: Implications for Monetary Policy, Financial Stability, Market Infrastructure and Payments, and Banking Supervision in the Euro Area
Echelpoel, Fiona,Chimienti, Maria Teresa,Adachi, Mitsutoshi,Athanassiou, Phoebus,Balteanu, Irina,Barkias, Thomas,Ganoulis, Ioannis,Kedan, Danielle,Neuhaus, Holger,Pawlikowski, Adam,Günther, Günther,Poignet, Raphael,Sauer, Stephan,Schneeberger, Doris,Tapking, Jens,Toolin, Colm
This paper summarises the outcome of an analysis of stablecoins undertaken by the ECB Crypto-Assets Task Force. At the time of writing, the stablecoin debate lacks a common taxonomy and unambiguous terminology. This paper applies a definition that distinguishes stablecoins from existing forms of currencies â€" regardless of the technology used â€" and characterises stablecoin arrangements based on the functions they fulfil. This approach emphasises the role of technology-neutral regulation in preventing arbitrage, as well as comprehensive Eurosystem oversight, irrespective of stablecoins’ regulatory status. Against this background, this paper assesses stablecoins’ implications for the euro area based on three scenarios for the uptake of stablecoins: (i) as a crypto-assets accessory function; (ii) as a new payment method; and (iii) as an alternative store of value. While the first scenario is merely the continuation of the current state of the market and, thus far, has not posed concerns for the financial sector and/or central bank tasks, stablecoins of the type envisaged in the second scenario may reach a scale such that financial stability risks can become material, and the safety and efficiency of the payment system may be affected. The third scenario is both the least plausible and the most relevant from a monetary policy perspective. The paper concludes that the Eurosystem relies on appropriate regulation, oversight, and supervision to manage the implications of stablecoins (and the risks that stem from them) on its mandate and tasks under plausible scenarios. The Eurosystem continues monitoring the evolution of the stablecoin market and stands ready to respond to rapid changes in all possible scenarios.

The Determinants of Sukuk Issuance in GCC Countries
imene, imene guermazi
Purpose â€" This paper focuses on Sukuk issuance determinants in Gulf Cooperation Council (GCC) countries. Given the dual characteristic of debt and equity of Sukuk as well as their unique benefits of social responsibility, the author questions whether the theories of capital structure, the trade-off and the pecking order are able to well explain the Sukuk issuance. Design/methodology/ approach â€" First, the author verifies these theories using capital structure determinants and regresses the Sukuk change on these determinants. Second, the author tests the trade-off theory with the target debt model and third, verifies the pecking order theory using the fund flow deficit model. Findings â€" The empirical results show that capital structure determinants fail to explain both theories. The author confirms that the Sukuk change is significatively linked to the deviation from a Sukuk target. So, issuing firms balance the marginal costs of Sukuk and their benefits of religiosity and social responsibility toward a target debt. The author finds no evidence of the pecking order theory. Research limitations/implications â€" This study contributes to corporate finance theory and corporate social responsibility. It verifies if capital structure theories proved in conventional financing can well explain Islamic bonds issuance given their social responsibility benefits. Practical implications â€" Managers and investors would pay attention to the social factors explaining Sukuk issuance in their finance and investment decisions. They would be enhanced to use this financing tool knowing its social unique benefits. This also should encourage governments to enhance this socially responsible financing. Rating agencies would be motivated to evaluate Sukuk and firms would improve the quality and relevance of disclosure to get the best rating. Social implications â€" The author highlights the social factors explaining Sukuk issuance and enhances corporate social responsibility (CSR). Originality/value â€" The author extends the few literature testing capital structure theories for Islamic bonds and highlights the specific social responsible features of Sukuk that would bridge their issuance to capital structure theories. So the author enhances the concept of Islamic CSR. Tying capital structure theories to CSR would also help developing Islamic finance theory as a unique social responsible framework.