Research articles for the 2020-10-28

ADHD, Financial Distress, and Suicide in Adulthood: A Population Study
Beauchaine, Theodore P.,Ben-David, Itzhak,Bos, Marieke
Attention-deficit/hyperactivity disorder (ADHD) exerts lifelong impairment, including difficulty sustaining employment, poor credit, and suicide risk. To date, however, studies have assessed selected samples, often via self-report. Using mental health data from the entire Swedish population (N = 11.55 million) and a random sample of credit data (N = 189,267), we provide the first study of objective financial outcomes among adults with ADHD, including associations with suicide. Controlling for psychiatric comorbidities, substance use, education, and income, those with ADHD start adulthood with normal credit demand and default rates. However, in middle age, their default rates grow exponentially, yielding poor credit scores and diminished credit access despite high demand. Sympathomimetic prescriptions are unassociated with improved financial behaviors. Last, financial distress is associated with fourfold higher risk of suicide among those with ADHD. For men but not women with ADHD who suicide, outstanding debt increases in the 3 years prior. No such pattern exists for others who suicide.

Are Passive Institutional Investors Engaged Monitors or Impatient Owners? Both!
Tian, Xuan,Yang, Yuanchen
We differentiate the effects of passive institutional investors on firms’ innovation activities and innovation strategies, and explore underlying economic channels. Relying on plausibly exogenous variation in passive institutional ownership generated by Russell 1000/2000 index reconstitutions, we find that, with larger passive institutional ownership, while firms’ countable innovation activities increase, they shift their innovation strategies by focusing more on exploitation of existing knowledge instead of exploring new technology. Enhanced monitoring by passive institutional investors through active votes could explain their positive effects on firms’ innovation activities. Short-termism on the part of passive institutional investors appears the underlying force that drives firms’ shift to incremental innovation. Our paper uncovers a subtle relation between institutional investors and innovation, which is largely ignored by earlier studies.

Blood in the Water: The Value of Antitakeover Provisions During Market Shocks
Guernsey, Scott,Sepe, Simone M.,Serfling, Matthew
We document that during market shocks that cause large drops in firm value (e.g., COVID-19), firms with more state-endorsed antitakeover provisions (ATPs) experience smaller declines in value. This higher relative valuation persists for up to three quarters after a shock, holds for firm-level ATPs, and is greater for firms that are more likely to become undervalued during a shock. Consistent with stronger takeover defenses preserving value by giving boards more bargaining power to fight shock-induced opportunistic bids, we also find that conditional on receiving a bid during a market shock, firms with more state-endorsed ATPs receive higher takeover premiums.

Connected Funds
Fricke, Daniel,Wilke, Hannes
Investment funds are highly connected with each other, but also with the broader financial system. In this paper, we quantify potential vulnerabilities arising from this connectedness. While previous work focused exclusively on indirect connections (overlapping asset portfolios) between investment funds, our framework also includes direct connections (cross-holdings of fund shares). In our application for German investment funds, we find that these direct connections are very important from a financial stability perspective. Our main result is that the German fund sector's aggregate vulnerability can be substantial and tends to increase over time, suggesting that the fund sector can amplify adverse developments in global security markets. We also highlight spillover risks to the broader financial system, since fund sector losses would be largely borne by fund investors from the financial sector. Overall, we make an important step towards a more financial-system-wide view on fund sector vulnerabilities.

Crypto Covered Interest Parity Deviations
Franz, Friedrich-Carl,Valentin, Alexander
Studying deviations from covered interest rate parity (CIP) in the Bitcoin/US-Dollar (BTC/USD) market, we find large CIP deviations of up to 15% until Q1/2018. Afterwards, CIP deviations have been subdued, which we attribute to the market entry of high-frequency traders (HFTs). We argue that these market entries have increased efficiency of cryptocurrency markets with respect to CIP as well as liquidity, volatility, and bid-ask spreads. Remarkably, these efficiency gains are larger for the less liquid cryptocurrency Litecoin. Employing a difference-in-differences design, we show that the launch of the BTC/USD future at the Chicago Mercantile Exchange (CME) did not affect market efficiency. Finally, remaining CIP deviations after Q1/2018 seem mostly related to increased credit risk of certain crypto exchanges.

Debt Stress and Debt Illusion: The Role of Consumer Credit, Reverse and Standard Mortgages
Haurin, Donald R.,Moulton, Stephanie,Loibl, Cäzilia,Brown, Julia
Objectives. This study examines the relationship of debt stress and reverse mortgage borrowing and compares it to stress from standard mortgages and consumer debt. Debt stress is measured as a self-reported response to the amount of debt.Method. Using a unique national data set of 1,026 homeowners who chose whether to obtain a reverse mortgage in 2010, we estimate the relationship of 2014 levels of debt stress with various types of debt, assets, and income. Using an ordered probit model, we address the endogeneity of our measures of mortgage and consumer debt using an instrumental variables regression model.Results. We find that consumer debt causes more stress per dollar of debt compared to mortgage debt. Reverse mortgages cause a relatively low level of stress per dollar of debt compared with standard mortgage debt. The average treatment effect of originating a reverse mortgage indicates statistically significantly higher probability of reporting no and not very much debt stress. Discussion. Reverse mortgage debt causes a complex stress response. Stress per dollar of debt is lower for reverse than standard mortgages four years after origination. However, reverse mortgages’ loan balance grows over time causing total stress to increase, while stress from a standard mortgage decreases as it is repaid. If an older adult uses reverse mortgage funds to repay consumer debt then total stress is reduced.

Debt and Transfer Pricing: Implications on Business Tax Policy
Comincioli, Nicola,Panteghini, Paolo M.,Vergalli, Sergio
In this article we introduce model to describe the behavior of a multinational company (MNC) that operates transfer pricing and debt shifting, with the purpose of incrementing its value, intended as the sum of equity and debt. We compute, in a stochastic environment and under default risk, the optimal shares of profit and debt to be shifted and show how they are affected by exogenous features of the market. In addition, by means of a numerical analysis, we simulate and quantify the benefit arising from the exploitation of tax avoidance practices and study the corresponding impact on MNC's fundamental indicators. A wide sensitivity analysis on model's parameters is also provided.

Diversification and Portfolio Theory: A Review
Koumou, Gilles Boevi
Diversification is one of the major components of investment decision-making under risk or uncertainty. However, paradoxically, as the 2007â€"2009 financial crisis revealed, the concept remains misunderstood. Our goal in writing this paper is to correct this issue by reviewing the concept in portfolio theory. The core of our review focuses on the following diversification principles: law of large numbers, correlation, capital asset pricing model and risk contribution or risk parity diversification principles. These four diversification principles are the DNA of the existing portfolio selection rules and asset pricing theories and are instrumental to the understanding of diversification in portfolio theory. We review their definition. We also review their optimality, with respect to expected utility theory, and their usefulness. Finally, we explore their measurement.

Does Social Interaction Spread Fear among Institutional Investors? Evidence from COVID-19
Au, Shiu-Yik,Dong, Ming,Zhou, Xinyao
We study how social connectedness affected fund manager stock holdings during the COVID-19 outbreak in the first quarter of 2020. Fund managers located in or socially connected to COVID hotspots sold more stock holdings during the quarter compared to a control group of unconnected managers. The economic impact of social connectedness on stock holdings is comparable to that of COVID hotspots. However, such reductions are panic driven as the unloaded stocks rebounded sharply in the subsequent quarter. Our evidence suggests that social connections can intensify salience bias for institutional investors, and policy makers should be wary of the destabilizing role of social networks during market downturns.

Does it Pay Off to Learn a New Skill? Revealing the Economic Benefits of Cross-Skilling
Fabian Stephany

This work examines the economic benefits of learning a new skill from a different domain: cross-skilling. To assess this, a network of skills from the job profiles of 4,810 online freelancers is constructed. Based on this skill network, relationships between 3,525 different skills are revealed and marginal effects of learning a new skill can be calculated via workers' wages. The results indicate that the added economic value of learning a new skill strongly depends on the already existing skill bundle but that acquiring a skill from a different domain is often beneficial. Likewise, the data illustrate how to reveal valuable skills required for new and opaque technology domains, such as Artificial Intelligence. As technological and social transformation is reshuffling jobs' task profiles at a fast pace, the findings of this study help to clarify skill sets required for mastering new technologies and designing individual training pathways. This can help to increase employability and reduce labour market shortages.

Economic Conditions for Innovation: Private vs. Public Sector
Tomáš Evan,Vladimír Holý

The Hicks induced innovation hypothesis states that a price increase of a production factor is a spur to invention. We propose an alternative hypothesis restating that a spur to invention require not only an increase of one factor but also a decrease of at least one other factor to offset the companies' cost. We illustrate the need for our alternative hypothesis in a historical example of the industrial revolution in the United Kingdom. Furthermore, we econometrically evaluate both hypotheses in a case study of research and development (R&D) in 29 OECD countries from 2003 to 2017. Specifically, we investigate dependence of investments to R&D on economic environment represented by average wages and oil prices using panel regression. We find that our alternative hypothesis is supported for R&D funded and/or performed by business enterprises while the original Hicks hypothesis holds for R&D funded by the government and R&D performed by universities. Our results reflect that business sector is significantly influenced by market conditions, unlike the government and higher education sectors.

Empirical Regularities in Stock Market Crashes
Egan, Edward J.
When a stock market crash is defined as the period from an index's prior peak until its recovery, crashes demonstrate empirical regularities in their scale and timing. For instance, measures of the duration, maximum decline, and lost value of crashes are very highly correlated. These correlations suggest that crashes belong to well-defined categories based on their size and become increasingly predictable as they progress. Accordingly, I advance four stock market crash categories, which are logarithmic in size. Crashes then range from small scale market disturbances like 'flash crashes' in Category 1 to the Wall Street Crash of 1929, America's sole Category 4. Furthermore, I find that U.S. stock markets are bimodal, switching between crashes and booms, and that this switching is regular. Specifically, I find that either a Category 2 or 3 crash occurs every four years, with a variance of just two years. Moreover, by definition, growth during a crash is close to zero. During boom periods, however, the average annual growth rate is 21.5%. Together, these results suggest a new foundation for examining patterns of returns and other characteristics of stock markets.

Evaluating data augmentation for financial time series classification
Elizabeth Fons,Paula Dawson,Xiao-jun Zeng,John Keane,Alexandros Iosifidis

Data augmentation methods in combination with deep neural networks have been used extensively in computer vision on classification tasks, achieving great success; however, their use in time series classification is still at an early stage. This is even more so in the field of financial prediction, where data tends to be small, noisy and non-stationary. In this paper we evaluate several augmentation methods applied to stocks datasets using two state-of-the-art deep learning models. The results show that several augmentation methods significantly improve financial performance when used in combination with a trading strategy. For a relatively small dataset ($\approx30K$ samples), augmentation methods achieve up to $400\%$ improvement in risk adjusted return performance; for a larger stock dataset ($\approx300K$ samples), results show up to $40\%$ improvement.

Fintech in Financial Reporting and Audit for Fraud Prevention and Safeguarding Equity Investments
Roszkowska, Paulina
Purpose â€" The aim of this paper is to explore the audit-related causes of financial scandals and advise how emerging technologies can provide solutions thereto. Specifically, this study seeks to look at the facilitators of financial statement fraud and explain specific fintech advancements that contribute to financial information reliability for equity investments.Design/methodology/approach â€" The study uses the case studies of Enron and Arthur Andersen to document the evidence of audit-related issues in historical financial scandals. Then, a comprehensive and interdisciplinary literature review at the intersection of business, accounting, and engineering, provides a foundation to propose technology advancements that can solve identified problems in accounting and auditing. Findings â€" The findings show that blockchain, internet of things, smart contracts and artificial intelligence solutions have different functionality and can effectively solve various financial reporting and audit-related problems. Jointly, they have a strong potential to enhance the reliability of the information in financial statements and generally change how companies operate.Practical implications â€" The proposed and explained technology advancements should be of interest to all publicly listed companies and investors, as they can help safeguard equity investments, thus build investors’ trust towards the company. Social implications â€" Aside from implications for capital markets participants, the study findings can materially benefit various stakeholder groups, the broader company environment, and the economy. Originality/value â€" This is the first paper that seeks solutions to financial fraud and audit-related financial scandals in technology, and not in implementing yet another regulation. Given the recent technology advancements, the study findings provide insights into how the role of an external auditor might evolve in the future.

Firm Financing and the Relative Demand for Labor and Capital
ElFayoumi, Khalid
During both the 2008 and the COVID crises, aggregate employment in Europe and the US fell despite continuing growth in the aggregate capital stock. Using more than one million firm-year observations of small and medium European firms between 2003 and 2018, this paper introduces new stylized facts on how firms’ relative demand for labor and capital evolved as their capital structure adjusted to the events of the 2008 crisis. It also provides the first micro-level evidence that firms substitute capital for labor when financing costs rise. The empirical evidence lends support to the hypothesis that substitution is driven by an incentive to raise holdings of collateralizable capital. The analysis uses the heterogeneous effects of ECB monetary policy surprises across the firm distribution to identify exogenous firm-level external financing shocks. The results suggest that maintaining a well functioning credit market supports a higher labor share of economic growth.

Forecasting Value at Risk and Conditional Value at Risk using Option Market Data
Molino, Annalisa,Sala, Carlo
We forecast monthly Value at Risk (VaR) and Conditional Value at Risk (CVaR) using option market data and four different econometric techniques. Independently from the econometric approach used, all models produce quick to estimate forward-looking risk measures that do not depend from the amount of historical data used and that, through the implied moments of options, better reflect the ever-changing market scenario. All proposed option-based approaches outperform or are equally good to different “traditional” forecasts that use historical returns as input. The extensive robustness of our results shows that the real driver of the better forecasts is the use of option market data as inputs for the analysis, more than the type of econometric approach implemented.

Global Sensitivity and Domain-Selective Testing for Functional-Valued Responses: An Application to Climate Economy Models
Matteo Fontana,Massimo Tavoni,Simone Vantini

Complex computational models are increasingly used by business and governments for making decisions, such as how and where to invest to transition to a low carbon world. Complexity arises with great evidence in the outputs generated by large scale models, and calls for the use of advanced Sensitivity Analysis techniques. To our knowledge, there are no methods able to perform sensitivity analysis for outputs that are more complex than scalar ones and to deal with model uncertainty using a sound statistical framework. The aim of this work is to address these two shortcomings by combining sensitivity and functional data analysis. We express output variables as smooth functions, employing a Functional Data Analysis (FDA) framework. We extend global sensitivity techniques to function-valued responses and perform significance testing over sensitivity indices. We apply the proposed methods to computer models used in climate economics. While confirming the qualitative intuitions of previous works, we are able to test the significance of input assumptions and of their interactions. Moreover, the proposed method allows to identify the time dynamics of sensitivity indices.

Government Lending in a Crisis
Brown, James R.,Martinsson, Gustav,Thomann, Christian J.
The economic disruption from the COVID-19 pandemic prompted governments around the world to initiate an unprecedented number of temporary lending and tax deferment programs. Which firms will benefit from these programs? What are the implications for firm balance sheets and post-crisis survival? We provide some novel insights on these questions by studying one of the first government programs of this type, which Sweden launched at the height of the 2008-2009 financial crisis. The Swedish program allowed firms to temporarily suspend payment of all labor-related taxes and fees, treating these deferred amounts as a short-term loan from the government. Firms participating in the program are younger, less profitable, hold fewer cash reserves, are more leveraged, and have less unused slack in their credit lines when the crisis hits. Given the structure of the Swedish program, it provided more liquidity to firms with relatively larger ex ante wage bills. Exploiting this feature of the policy, we find that firms use the program to increase overall debt levels rather than to substitute for other borrowing. Firms use the funds to avoid making even deeper cuts to current assets. Despite the increase in leverage, access to the lending program is unrelated to the likelihood a firm files for bankruptcy and is negatively related to the likelihood a firm encounters severe financial distress in the years immediately following the crisis.

Improving Collegiate Financial Literacy via Financial Education Seminars
Smythe, Tom
This paper overviews a personal finance program (PFP) developed for seniors at a private liberal arts university targeted at improving financial literacy. We provide an overview of the program, including details about the recruitment process, program structure, and curriculum. Using a multi-variate framework, we empirically examine the program’s effectiveness at improving students’ financial knowledge and confidence in their financial futures, and our findings demonstrate that financial knowledge and confidence improve relative to a control group. Additionally, women (minorities) narrow their financial knowledge and confidence gaps considerably when compared to men (whites) and the control group.

Indirect Costs of Government Aid and Intermediary Supply Effects: Lessons From the Paycheck Protection Program
Balyuk, Tetyana,Prabhala, Nagpurnanand,Puri, Manju
The $669 billion Paycheck Protection Program (PPP) provides highly subsidized financing to small businesses. The PPP is a positive shock in financing supply to the small, highly constrained publicly listed firms in our sample and has average positive treatment effects. Yet, uptake is not universal. In fact, several firms return PPP funds before use, and curiously, experience positive valuation effects when they do so. These firms desire and the markets value the release from government oversight even if it means giving up cheap funding. The PPP is also a demand shock to the banks making PPP loans. Intermediary supply effects shape PPP delivery. Larger borrowers enjoy earlier PPP access, an effect that is more pronounced in big banks and does not seem mitigated by prior banking relationships. The results have implications for policy design, the costs of being public, and bank-firm relationships.

Institutions, Financial Development, and Small Business Survival: Evidence from European Emerging Markets
Iwasaki, Ichiro,Kočenda, Evžen,Shida, Yoshisada
In this paper, we traced the survival status of 94,401 small businesses in 17 European emerging markets from 2007â€"2017 and empirically examined the determinants of their survival, focusing on institutional quality and financial development. We found that institutional quality and the level of financial development exhibit statistically significant and economically meaningful impacts on the survival probability of the SMEs being researched. The evidence holds even when we control for a set of firm-level characteristics such as ownership structure, financial performance, firm size, and age. The findings are also uniform across industries and country groups and robust beyond the difference in assumption of hazard distribution, firm size, region, and time period.

Ireland's Credit Institutions (Eligible Liabilities Guarantee) Scheme (Ireland GFC)
Simon, Claire
Following the failure of Lehman Brothers in September 2008, Irish banks found themselves unable to roll over their significant foreign borrowings on the interbank lending market. With the banks facing a liquidity crisis, the Irish government decided to issue a blanket guarantee of all liabilities of six banks through the Credit Institutions Financial Support Scheme (CIFS). As the crisis worsened, and it became clear that Irish banks were facing a solvencyâ€"not just liquidityâ€"crisis, the Irish government was forced to provide additional support to the financial system, which took the form of capital injections and a national asset management company for troubled assets. Notwithstanding these measures, Irish banks continued to face significant liquidity pressures, with a substantial portion of their funding still with maturities under one month. In December 2009, Irish authorities introduced a new, narrower guarantee scheme, the Credit Institutions (Eligible Liabilities Guarantee) Scheme (ELG Scheme) intended to lengthen the maturities of banks’ funding. The ELG Scheme moved away from the blanket guarantee and created an opt-in guarantee for Irish financial institutions and their subsidiaries. The guarantee covered deposits not already covered by existing deposit protection schemes and certain eligible debt securities. Sixteen financial institutions participated in the ELG Scheme, which was extended multiple times before the issuance window expired on March 28, 2013. At its peak in 2010, the ELG Scheme covered around €150 billion in liabilities. The guarantee was triggered only once, upon the default and liquidation of IBRC, a new entity resulting from the merger of two nationalized banks. As of June 30, 2015, €934 million had been paid out to IBRC guaranteed bondholders and €138 million had been paid to depositors.

Liquidity Constraints and Demand for Healthcare: Evidence from Danish Welfare Recipients
Frederik Plesner Lyngse

Are low-income individuals relying on government transfers liquidity constrained by the end of the month to a degree that they postpone medical treatment? I investigate this question using Danish administrative data comprising the universe of welfare recipients and the filling of all prescription drugs. I find that on transfer income payday, recipients have a 52% increase in the propensity to fill a prescription. By separating prophylaxis drugs used to treat chronic conditions, where the patient can anticipate the need to fill the prescription, e.g. cholesterol-lowering statins, I find an increase of up to 99% increase on payday. Even for drugs used to treat acute conditions, where timely treatment is essential, I find a 22% increase on payday for antibiotics and a 5-8% decrease in the four days preceding payday. Lastly, exploiting the difference in day the doctor write the prescription and the day the patient fill it, I show that liquidity constraints is the key operating mechanism for postponing antibiotic treatment.

Liquidity and Risk Management with Ambiguity
Niu, Yingjie,Yang, Jinqiang,Zhao, Siqi
We formulate a robust theory of liquidity and risk management based on two fundamental frictions: 1) the entrepreneur cannot alienate his human capital, and 2) the entrepreneur worries about model uncertainty and seek robust decisions. In line with max-min expected utility, a robust entrepreneur makes decisions under some endogenous worst case, which generates significant distortions for risk-sharing, corporate investment, and consumption. With regard to concern for ambiguity aversion, the entrepreneur optimally responds by lowering the maximal debt capacity, under-investing and under-consuming. However, the impacts of ambiguity on risk hedging is ambiguous due to the interactions between robustness and limited commitment constraints. These distortions are greater the more financially constrained the firm is. Furthermore, we show that the optimal consumption rule is no longer deterministic but stochastic when taking the preference for robustness into account. Implications for implied ambiguity premium and persistent productivity shocks are also studied.

Making the Case for a Rome V Regulation on the Law Applicable to Companies
Gerner-Beuerle, Carsten,Mucciarelli, Federico M.,Schuster, Edmund,Siems, Mathias
There is significant legal variation and uncertainty in the conflict of laws rules applicable to companies in the EU. While the case law of the Court of Justice on the freedom of establishment has clarified some questions, it is evident that case law cannot provide for an adequate level of legal certainty. The main recommendation of this paper is that private international company law in the EU should be harmonised. The paper discusses the main challenges that a future regulation to this effect â€" called here ‘Rome V Regulation on the Law Applicable to Companies’ â€" would have to overcome. Some of those are of a political nature: for instance, countries may fear that it may become easier for companies to evade domestic company law (eg, rules of employee co-determination), and there are specific considerations that concern companies established in third countries. Another challenge is that a future regulation on the law applicable to companies has to be consistent with existing EU conflict of laws rules as regards, for example, insolvency and tort law, while also complying with the freedom of establishment of the Treaty. It is the aim of this paper to discuss these questions in detail, notably the general considerations for harmonisation in this field, a potential harmonisation based on the ‘incorporation theory’, how it may be possible to overcome some contentious issues such as the definition of the lex societatis or the relationship between the lex societatis and other areas of law, and the prospects of future international harmonisation.

Maximum Spectral Measures of Risk with given Risk Factor Marginal Distributions
Mario Ghossoub,Jesse Hall,David Saunders

We consider the problem of determining an upper bound for the value of a spectral risk measure of a loss that is a general nonlinear function of two factors whose marginal distributions are known, but whose joint distribution is unknown. The factors may take values in complete separable metric spaces. We introduce the notion of Maximum Spectral Measure (MSP), as a worst-case spectral risk measure of the loss with respect to the dependence between the factors. The MSP admits a formulation as a solution to an optimization problem that has the same constraint set as the optimal transport problem, but with a more general objective function. We present results analogous to the Kantorovich duality, and we investigate the continuity properties of the optimal value function and optimal solution set with respect to perturbation of the marginal distributions. Additionally, we provide an asymptotic result characterizing the limiting distribution of the optimal value function when the factor distributions are simulated from finite sample spaces. The special case of Expected Shortfall and the resulting Maximum Expected Shortfall is also examined.

McKean-Vlasov equations involving hitting times: blow-ups and global solvability
Erhan Bayraktar,Gaoyue Guo,Wenpin Tang,Yuming Zhang

This paper is concerned with the analysis of blow-ups for two McKean-Vlasov equations involving hitting times. Let $(B(t); \, t \ge 0)$ be standard Brownian motion, and $\tau:= \inf\{t \ge 0: X(t) \le 0\}$ be the hitting time to zero of a given process $X$. The first equation is $X(t) = X(0) + B(t) - \alpha \mathbb{P}(\tau \le t)$. We provide a simple condition on $\alpha$ and the distribution of $X(0)$ such that the corresponding Fokker-Planck equation has no blow-up, and thus the McKean-Vlasov dynamics is well-defined for all time $t \ge 0$. Our approach relies on a connection between the McKean-Vlasov equation and the supercooled Stefan problem, as well as several comparison principles. The second equation is $X(t) = X(0) + \beta t + B(t) + \alpha \log \mathbb{P}(\tau > t)$, whose Fokker-Planck equation is non-local. We prove that for $\beta > 0$ sufficiently large and $\alpha$ no greater than a sufficiently small positive constant, there is no blow-up and the McKean-Vlasov dynamics is well-defined for all time $t \ge 0$. The argument is based on a new transform, which removes the non-local term, followed by a relative entropy analysis.

Minimum Wage, Labor Equilibrium, and the Productivity Horizon: A Visual Examination
John R. Moser

In this paper, I present a visual representation of the relationship between mean hourly total compensation divided by per-capita GDP, hours worked per capita, and the labor share, and show the represented labor equilibrium equation is the definition of the labor share. I also present visual examination of the productivity horizon and wage compression, and use these to show the relationship between productivity, available employment per capita, and minimum wage. From this I argue that wages are measured in relation to per-capita GDP, and that minimum wage controls income inequality and productivity growth.

Monetary Policy Effects in Times of Negative Interest Rates: What do Bank Stock Prices Tell Us?
Bats, Joost,Giuliodori, Massimo,Houben, Aerdt
Do negative interest rates matter for bank performance? This paper investigates whether monetary policy surprises impact bank stock prices differently in times of positive and negative interest rates. The analysis controls for broad stock market movements and finds that an unanticipated downward shift in the yield curve and a flattening of the shorter-end of the yield curve resulting from monetary policy announcements reduce bank stock prices in a low and especially negative interest rate environment. The effects persist in the days after the monetary policy announcement and are larger for banks relatively dependent on deposit funding. By contrast, a surprise movement in the slope of the longer-end of the yield curve does not impact bank stock prices in a negative interest rate environment. The results indicate that when market interest rates are negative but deposit rates stuck at zero, monetary policy instruments that target the longer-end of the yield curve are less detrimental to bank performance than those that target the shorter-end of the yield curve.

Monetary Policy, Ownership Discrimination and Leverage Differentiation of Non-financial Enterprises
Han, Xun,Ma, Sichao,Hsu, Sara,Jiang, Yuyan
This paper systematically analyzes the impact of monetary policy on non-financial enterprises’ leverage differentiation under bank credit discrimination, taking advantage of data provided by non-financial listed companies from 2007 to 2017. The results show that bank credit discrimination will enlarge the leverage differentiation between state-owned enterprises and non-financial enterprises, and this effect is more significant in the enterprises with political connections and government subsidies, in the regions with low market-oriented allocation of economic resources, inefficient government administration and high financing costs. Compared with moderately loose monetary policy, tightening monetary policy will enlarge the degree of leverage differentiation between state-owned enterprises and non-state-owned enterprises; however, the moderation of monetary policy, increase in the bankers’ confidence index and greater effectiveness of the central bank will weaken the positive effect of monetary policy on the leverage differentiation of state-owned enterprises and non-state-owned enterprises to some extent. Further discussions find that bank credit discrimination will enlarge the degree of financial leverage differentiation between state-owned enterprises and non-state-owned enterprises whether in the period of loose monetary policy or tightening monetary policy, but has no significant effect on operational leverage differentiation. Hence, we identify the phenomenon of non-financial enterprises’ financialization and disassociation of finance from the real economy at this stage from the perspective of fund usage. Policy implications are that monetary policy should be accounted for in the process of de-leveraging, central bank communication should be strengthened and public expectations stabilized. At the same time, regulators should pay attention to the structural leverage differentiation among heterogeneous enterprises.

Monetary-fiscal interactions under price level targeting
Guido Ascari,Anna Florio,Alessandro Gobbi

The adoption of a "makeup" strategy is one of the proposals in the ongoing review of the Fed's monetary policy framework. Another suggestion, to avoid the zero lower bound, is a more active role for fiscal policy. We put together these ideas to study monetary-fiscal interactions under price level targeting. Under price level targeting and a fiscally-led regime, we find that following a deflationary demand shock: (i) the central bank increases (rather than decreases) the policy rate; (ii) the central bank, thus, avoids the zero lower bound; (iii) price level targeting is generally welfare improving if compared to inflation targeting.

Mortality Improvements in South Africa: Insights from Pensioner Mortality
Richman, Ronald,Velcich, Gary
The study of mortality improvements in South Africa has been complicated by data limitations: from a population perspective, the data are incomplete and misreported whereas pooled data collected from insurance companies for industry studies often span short time periods and exhibit significant heterogeneity. Notwithstanding these issues, accurate quantification of mortality improvement is critical for actuarial valuations of life insurers and pension funds. In this study, we analyse a unique pensioner dataset, covering the years 2000-2019, through the dual lenses of traditional actuarial analysis and deep learning techniques. We report on aggregate mortality improvements, as well as how mortality improvements differ depending on gender and pension amount. We investigate whether the observed mortality improvements might be attributed to changes in the composition of the pensioner dataset by contrasting these results with those derived from a more complex model that allows for these changes over time. Finally, we show the estimated impact of the observed improvements on pension liabilities and calibrate models to provide uncertainty around the estimated mortality improvement rates, to benchmark the SAM longevity stress and provide a basis for IFRS 17 risk adjustment calculations.

On the Continuity of the Root Barrier
Erhan Bayraktar,Thomas Bernhard

We show that the barrier function in Root's solution to the Skorokhod embedding problem is continuous and finite at every point where the target measure has no atom and its absolutely continuous part is locally bounded away from zero.

Price response functions and spread impact in correlated financial markets
Juan C. Henao-Londono,Sebastian M. Krause,Thomas Guhr

Recent research on the response of stock prices to trading activity revealed long lasting effects, even across stocks of different companies. These results imply non-Markovian effects in price formation and when trading many stocks at the same time, in particular trading costs and price correlations. How the price response is measured depends on data set and research focus. However, it is important to clarify, how the details of the price response definition modify the results. Here, we evaluate different price response implementations for the Trades and Quotes (TAQ) data set from the NASDAQ stock market and find that the results are qualitatively the same for two different definitions of time scale, but the response can vary by up to a factor of two. Further, we show the key importance of the order between trade signs and returns, displaying the changes in the signal strength. Moreover, we confirm the dominating contribution of immediate price response directly after a trade, as we find that delayed responses are suppressed. Finally, we test the impact of the spread in the price response, detecting that large spreads have stronger impact.

Price-Setting in the Foreign Exchange Swap Market: Evidence from Order Flow
Syrstad, Olav,Viswanath-Natraj, Ganesh
This paper investigates price discovery in foreign exchange (FX) swaps. Using data on inter-dealer transactions, we find a 1 standard deviation increase in order flow (i.e. net pressure to obtain USD through FX swaps) increases the cost of dollar funding by up to 4 basis points after the 2008 crisis. This is explained by increased dispersion in dollar funding costs and quarter-end periods. We find central bank swap lines reduced the order flow to obtain USD through FX swaps, subsequently affecting the forward rate. In contrast, during quarter-ends and monetary announcements we observe high frequency adjustment of the forward rate.

Regulation and Performance of Ghana’s Multi-tiered Rural and Microfinance Industry
Steel, William F.
This chapter describes how Ghana’s savings-based and multi-tiered rural/microfinance industry has evolved and performed under a relatively flexible and adaptive regulatory framework to provide access to financial services to a growing share of Ghana’s population. Ghana has been an innovator in financial institutions and regulation. Regulatory and legislative changes permitting new types of institutions serving different market niches have responded to initial problems in performance and supervision. Performance has been generally good in terms of growth, outreach and sustainability. Government has played a dual role, funding capacity-building and supporting apex institutions that have helped to improve performance, but also engaging in directed, subsidized credit schemes that have tended to undermine repayment. Apex organizations play an important role in service delivery, capacity building and self-regulation.

Sectoral Labor Mobility and Optimal Monetary Policy
Alessandro Cantelmo,Giovanni Melina

How should central banks optimally aggregate sectoral inflation rates in the presence of imperfect labor mobility across sectors? We study this issue in a two-sector New-Keynesian model and show that a lower degree of sectoral labor mobility, ceteris paribus, increases the optimal weight on inflation in a sector that would otherwise receive a lower weight. We analytically and numerically find that, with limited labor mobility, adjustment to asymmetric shocks cannot fully occur through the reallocation of labor, thus putting more pressure on wages, causing inefficient movements in relative prices, and creating scope for central banks intervention. These findings challenge standard central banks practice of computing sectoral inflation weights based solely on sector size, and unveil a significant role for the degree of sectoral labor mobility to play in the optimal computation. In an extended estimated model of the U.S. economy, featuring customary frictions and shocks, the estimated inflation weights imply a decrease in welfare up to 10 percent relative to the case of optimal weights.

Systemic Risk and the COVID Challenge in the European Banking Sector
Borri, Nicola,Di Giorgio, Giorgio
This paper studies the systemic risk contribution of a set of large publicly traded European banks. Over a sample covering the last twenty years and three different crises, we find that all banks in our sample significantly contribute to systemic risk. Moreover, larger banks and banks with a business model more exposed to trading and financial market volatility, contribute more. In the shorter sample characterized by the COVID-19 shock, sovereign default risks significantly affected the systemic risk contribution of all banks. However, the ECB announcement of the Pandemic Emergency Purchasing Programme restored calm in the European banking sector.

The Growth of Finance is Not Remarkable
Brown, James R.,Martinsson, Gustav,Petersen, Bruce C.
Financial sector income grew rapidly after World War II relative to the full economy and the services sector, but these are poor benchmarks because they mask a broad structural shift from low- to high-skill services. The finance income share closely tracks the income share of other high-skill service industries throughout the 20th century; overall, finance grows slower than the rest of the high-skill service sector. The finance share of high-skill service income has also fallen in most European economies over the past 50 years. The rise of modern finance is not nearly as unique or remarkable as prior research suggests.

The Influence of Management’s Internal Audit Experience on Earnings Management
Ege, Matthew,Seidel, Timothy A.,Sterin, Mikhail,Wood, David A.
We examine whether firms with managers that have prior internal audit experience are less likely to manage earnings. We find that firms with managers that have internal audit experience are associated with less overall earnings management, driven by lower real earnings management. Importantly, these firms do not trade-off reduced real earnings management with increased accruals-based earnings management. Further tests reveal that this effect is generally strongest when managers with internal audit experience currently hold financial roles or roles with higher power within the company. We also confirm that real earnings management is negatively correlated with future firm performance, as measured by Tobin’s Q and abnormal returns. Overall, these results point to a potentially important benefit of manager internal audit experience, as research suggests that real earnings management is common, difficult to detect, not always within the scope of financial reporting regulators, and detrimental to future performance.

The Inside Information Regime of the MAR and the Rise of the ESG Era
Mülbert, Peter O.,Sajnovits, Alexander
The rise in ESG investing has been characterized as an “investor revolution” and a manifestation of “social change”. The current coronavirus pandemic will arguably intensify the impact of such social change, with the “S” and “G” components of ESG, in particular, having been brought into sharper focus during the crisis. The issue of the extent to which ESG factors are (currently) of considerable importance â€" and, in particular, are likely to become even more so in the future â€" for the performance of share prices remains a highly controversial one in financial economics. However, where an empirically substantiated effect of ESG-related information on the prices of financial instruments can be shown, the question of whether such information is also of relevance to the inside information regime of the Market Abuse Regulation (“MAR”) arises and must be answered. This article explores the potential effect of ESG-related information and an increase in ESG-compliant investments on the prohibition on insider dealing and the obligation to publicly disclose inside information. We believe that the ESG preferences of a critical mass of real-life investors and, as a corollary, ESG-related information, are and will continue to be of great importance to the inside information regime. However, the intense debate regarding the precise depiction of the ‘reasonable investor’ within the meaning of Art. 7 MAR indicates that the relevance of ESG-related information to the inside information regime of the MAR is by no means clear. In light of these uncertainties, and given its efforts to promote sustainable finance, the EU legislature would be well advised to further specify the concept of inside information with a particular focus on ESG-related information.

The Spanish Guarantee Scheme for Credit Institutions (Spain GFC)
Engbith, Lily
Given Spanish banks’ heavy investment in the housing and construction markets in the lead-up to the global financial crisis (GFC), the collapse of the subprime mortgage market and Lehman Brothers’ bankruptcy on September 15, 2008, impelled the government to implement stabilization measures to calm, recapitalize, and restructure its domestic banking sector. The Spanish Guarantee Scheme for Credit Institutions (the Guarantee Scheme) was one of the first interventions to be enacted, announced by Spain’s Ministry of Economy and Finance on October 13, 2008, by Royal Decree-Law 7/2008 on “Urgent Economic and Financial Measures in relation to the Concerted Action Plan of the Countries in the Euro Zone.” The scheme entered into force upon the signing of Ministerial Order EHA/3364/2008 on November 21, 2008. The program, funded from Spain’s annual budget, initially committed up to €100 billion for the state guarantee of new and senior unsecured debt instruments issued by credit institutions, consolidated groups of credit institutions, and pools of credit institutions registered in Spain. Later it was expanded to €164 billion. Per the terms of the original Ministerial Order, debt with maturities ranging from three months to three yearsâ€"or between three years and five years under special circumstancesâ€"was covered under the Guarantee Scheme. Between November 21, 2008, and December 31, 2011, the Spanish government guaranteed €69.7 billion in debt issuances. No defaults occurred.

The Standards and Practices of Corporate Governance: Relevant Current Trends
Apevalova, Elena,Polezhaeva, Natalia,Radygin, Alexander
An analysis of corporate governance practices would be impossible without understanding the corporate governance development in the context of Russian and world practices. With a certain degree of arbitrariness, the following main phases of its development can be distinguished.

Twelve Years after the Financial Crisis â€" Too-big-to-fail is still with us. Comments on the Financial Stability Board’s Consultation Report ‘Evaluation of the Effects of Too-big-to-fail Reforms’
Hellwig, Martin F.
The paper contains comments made on the Financial Stability Board’s (FSB) Consultation Report concerning the success of regulatory reforms since the global financial crisis of 2007-2009. According to these comments, the FSB’s assessment of the role of equity is too narrow, being phrased in terms of bankruptcy avoidance and risk taking incentives, without attention to debt overhang creating distortions in funding choices, as well as the systemic impact of ample equity reducing deleveraging needs after losses and equity contributing to smoothing of lending and asset purchases over time. The FSB’s treatment of systemic risk pays too little attention to mutual interdependence of different parts of the system that is not well captured by linear causal relationships. Finally, the comments point out that bank resolution of systemically important institutions is still not viable, for lack of political acceptance of single-point-of-entry procedures, for lack of funding of banks in resolution (in the EI), for lack of fiscal backstops (in the EU), and for lack of political acceptance of bank resolution with bail-in.

Volatility in International Sovereign Bond Markets: The Role of Government Policy Responses to the COVID-19 Pandemic
Zaremba, Adam,Kizys, Renatas,Aharon, David Y.
Effective government policies may reduce uncertainty in sovereign bond markets. Can policy responses help to curb bond market volatility during the COVID-19 pandemic? To answer this, we examine data from 31 developed and emerging markets for the coronavirus outbreak in 2020. We demonstrate that government interventions substantially reduce local sovereign bond volatility. The effect is mainly driven by economic support policies; the containment and closure regulations and health system interventions play no major role.

When Should Retirees Tap Their Home Equity?
Hambel, Christoph,Kraft, Holger,Meyer-Wehmann, André
This paper studies a household’s optimal demand for a reverse mortgage. These contracts allow homeowners to tap their home equity to finance consumption needs. In stylized frameworks, we show that the decision to enter a reverse mortgage is mainly driven by the differential between the aggregate appreciation of the house price and principal limiting factor on the one hand and the funding costs of a household on the other hand. We also study a rich life-cycle model that can explain the low demand for reverse mortgages as observed in US data. In this model, we analyze the optimal response of a household that is confronted with a health shock or financial disaster. If an agent suffers from an unexpected health shock, she reduces the risky portfolio share and is more likely to enter a reverse mortgage. On the other hand, if there is a large drop in the stock market, she keeps the risky portfolio share almost constant by buying additional shares of stock. Besides, the probability to take out a reverse mortgage is hardly affected.