Research articles for the 2020-11-12

A Block-Chain Framework for Increased Trust in Green Bonds Issuance
Malamas, Vangelis,Dasaklis, Thomas,Arakelian, Veni,Chondrokoukis, Gregory
Bonds issuance is a highly technical and complicated process, entailing mutually untrusted stakeholders with sometimes conflicting objectives. Currently, the global bond market is faced with several pain points when it comes to bond issuance, like disparate regulatory frameworks, limited traceability and auditability, settlement failures, and inefficient issuance processes. Block-chain technology is capable of addressing some of the issues mentioned above. In this paper, we propose a block-chain-enabled green bond issuance architecture. In particular, we develop an adaptable and efficient system that reduces the intermediary costs and offers compliance, scalability, confidentiality, and security. The block-chain-enabled system also acts as a transparent yet fully controllable decentralized authority where the funds of qualified, environmentally friendly projects could be traced. Our proposed architecture considers the various aspects and the complexity of the bond issuance procedures and the special requirements of green bonds. The architecture is based on a five-step model from green bond initialization to archiving. To adjust the processes of bond issuance to a block-chain-enabled model, we use digital tokens based on the ERC-20 token standard. Within the smart contracts developed, we use various functions to handle the prerequisites of validators and regulators’ approval based on the documentation presented and the parameters of rate and maturity requested by the issuer. We use a separate smart contract to implemented forensic services. The overall system also considers various regulatory compliance instruments and enhances access of regulatory bodies to issuance records. We believe that the proposed architecture could be of significant value to researchers and practitioners from the financial domain.

A Macro-Financial Perspective to Analyse Maturity Mismatch and Default
Wang, Xuan
The Basel Committee proposed the Net Stable Funding Ratio (NSFR) to curb excessive maturity mismatch of the banking sector. However, it remains to be ascertained as to what are the financial and real effects of the NSFR on banks' credit quality, investment, and the pass-through of monetary policy. This paper develops a nominal dynamic general equilibrium featuring banks' maturity mismatch and the moral hazard due to costly monitoring. First, I show that a tightening of the NSFR to move loan maturity towards the long-run capital investment cycle would only increase real investment if it sufficiently improves banks' credit quality. Then in the numerical example calibrated with the US data, I show that such tightening of the NSFR can indeed increase real investment and also reduce the aggregate fluctuation of the economy. In the steady states, a 10% tightening in the NSFR can decrease net charge-offs of non-performing loans by about 0.06 pp annually, despite squeezing banks' interest margin. Moreover, the moral hazard stemming from banks' unobserved monitoring effort impairs the pass-through of monetary policy. However, a 10% tightening in the NSFR improves the pass-through of a 20-bp policy rate reduction by around 17% annually. Finally, the model simulates the stochastic dynamic equilibrium path to study the propagation of shocks, demonstrating that the NSFR complements monetary policy in reducing financial frictions.

AH Premium: A Natural Experiment
Zhang, Renbin,Zhang, Tongbin
A large portion of the Chinese twin stocks is traded both in the Shanghai (A-share) and Hong-Kong (H-share) markets. The A- and H-shares are different assets since they can not be exchanged one-to-one. A-shares have sold at a premium: the AH premium. This premium is large (20-50%) and persistent, it has been present since the two markets were connected in Nov 2014 until now. Since both shares pay the same dividends and traders can operate on both markets this provides a natural experiment to test asset pricing models. We show that various standard RE and Bayesian RE asset pricing models cannot explain the AH premium, but a model of internally rational learning where agents learn about stock prices provides a natural explanation. This emphasizes the importance of modeling investors who learn about equity prices. The premium survives the introduction of convergence traders: those who bet on the AH premium going to zero are highly likely to suffer big losses.

Adverse Selection in Insurance Markets: On-Demand Contracts As a Screening Device
Braun, Alexander,Haas, Markus,Hildebrand, Christian,Thistle, Paul D.
We show that on-demand insurance contracts, an innovative form of coverage recently introduced through the InsurTech sector, can serve as a screening device. To this end, we develop a new adverse selection model consistent with Wilson (1977), Miyazaki (1977) and Spence (1978). Consumers have private information on their risk profile and the frequency with which they activate coverage. We show that the emergence of on-demand providers alters known market equilibria as low-frequency users are drawn away from the standard policy, receiving more coverage. Thus, the new equilibrium exhibits a higher utilitarian welfare. Our theoretical predictions are supported by additional experimental evidence.

Aggregate Liquidity Premium and Cross-sectional Returns: Evidence from China
Liao, Cunfei,Luo, Qianlin,Tang, Guohao
In this paper, we employ the partial least squares (PLS) approach to aggregate information from 12 liquidity-related firm characteristics and construct a composite liquidity-related predictor in the Chinese stock market. The PLS-based liquidity predictor generates significantly subsequent higher stock returns than the individual characteristics. Compared with other information aggregation methods, such as principal component analysis, forecast combination, scaled PCA, and Fama-MacBeth regression, the PLS-based liquidity characteristic has the strongest predictive power. The behavioral mispricing theory helps explain the aggregate liquidity premium.

Assessing the attraction of cities on venture capital from a scaling law perspective
Ruiqi Li,Lingyun Lu,Weiwei Gu,Shaodong Ma,Gang Xu,H. Eugene Stanley

Cities are centers for the integration of capital and incubators of invention, and attracting venture capital (VC) is of great importance for cities to advance in innovative technology and business models towards a sustainable and prosperous future. Yet we still lack a quantitative understanding of the relationship between urban characteristics and VC activities. In this paper, we find a clear nonlinear scaling relationship between VC activities and the urban population of Chinese cities. In such nonlinear systems, the widely applied linear per capita indicators would be either biased to larger cities or smaller cities depends on whether it is superlinear or sublinear, while the residual of cities relative to the prediction of scaling law is a more objective and scale-invariant metric. %(i.e., independent of the city size). Such a metric can distinguish the effects of local dynamics and scaled growth induced by the change of population size. The spatiotemporal evolution of such metrics on VC activities reveals three distinct groups of cities, two of which stand out with increasing and decreasing trends, respectively. And the taxonomy results together with spatial analysis also signify different development modes between large urban agglomeration regions. Besides, we notice the evolution of scaling exponents on VC activities are of much larger fluctuations than on socioeconomic output of cities, and a conceptual model that focuses on the growth dynamics of different sized cities can well explain it, which we assume would be general to other scenarios.

Award-Winning CEOs and Corporate Innovation
Pham, Mia,Merkoulova, Yulia,Veld, Chris
We examine the role of award-winning CEOs in corporate innovative activities. We find no significant difference in innovation outputs between firms of media award-winning CEOs and a matched sample of predicted winners. However, firms headed by winners of non-media awards generate significantly more patents and citations in the second and third year after the award. Firms led by CEO-winners of media awards attract more interest in Google and see an increase in the number of financial analysts that follow them. These effects likely exert more pressure on managers to meet short-term goals and hence impede the firms’ innovation. We do not find the same effects for firms that have CEOs who win non-media awards. The latter category sees an improvement in employee treatment following the award year. These different channels explain why innovation only increases for firms that are headed by CEOs who win non-media awards.

CDS Central Counterparty Clearing Default Measures: Road to Recovery or Invitation to Predation?
Tywoniuk, Magdalena
Following the 2008 financial crisis, regulation mandates the clearing of the CDS market through Central Clearing Counter-parties (CCPs). Large CCPs are now designated as ’Global Systemically Important Institutions’ (GSIIs), whose unlikely-but-plausible failure threatens global financial market stability. This work examines CCP resilience following a large dealer member’s default and the ensuing default contagion. In unwinding the defaulter’s positions, the CCP faces the price impact of constrained member liquidations and unconstrained members’ predatory selling. The variation margin captures the effect of price-mediated contagion and its amplification. A novel spatial measure captures the covariance between members’ CDS holdings and the CDS being unwound. Key results show: Liquidations by constrained members lower the CCP’s profits and make cds-spreads less informative. There exists a strong conflict between predatory competition and dealer distress, which inadvertently makes dealers prey on themselves. In turn, the adoption of a risk-sharing guarantee fund structure would provide a natural disciplinary mechanism for predation â€" minimizing overall CCP and member losses. A dynamic simulation, calibrated to OTC market data, supports these theoretical results with parameter magnitudes and sensitivities. Examination of three market liquidity scenarios provides intuition for effective liquidity injection by a Lender of Last Resort.

Capital Flows: the Role of Fund Manager Portfolio Reallocation
Bush, G.,Cañón, Carlos,Gray, Daniel
Global open-ended mutual funds are an increasingly important source of capital for emerging market economies (EMEs). Mutual funds, however, have a greater propensity than other overseas investors to change their holdings of EME bonds following changes in macroeconomic conditions. This paper considers why. We use a novel methodology â€" underpinned by data on individual security holdings â€" to distinguish between the two reasons why a fund's holdings of EME bonds might change: (i) the amount invested in the fund changes and (ii) the fund manager changes its portfolio allocations. We find that funds' responsiveness to changes in global macroeconomic conditions - "push factors'' - is explained by investor flow decisions. Conversely, funds' responsiveness to changes in local macroeconomic conditions â€" "pull factors'' â€" is explained by manager reallocation decisions. We also identify other institutional factors which impact reallocation decisions: changes in their leverage, changes to their benchmark, and changes in risk appetite (funds reallocate towards safer EMEs when global risk increases).

Capital Market Development Over the Long Run: The Portfolios of UK Life Assurers Over Two Centuries
Bogle, David,Coyle, Christopher,Turner, John D.
What shapes and drives capital market development over the long run? In this paper, using the asset portfolios of UK life assurers, we examine the role of regulation, historical contingency and political reactions to events on the long-run development of the UK capital market. Government response to events such as war, hegemony-secured peace, and the wider macroeconomic environment was the ultimate determinant of major changes in asset allocation since 1800. Furthermore, when we compare the UK with the United States, we find that regulation played a limited role in shaping the asset portfolios of the UK life assurance industry.

Climate Risk and Credit Availability
Islam, Emdad,Singh, Mandeep
We propose a novel climate risk measure that simultaneously accounts for location, seasonalities, and previous and current climates. A standard deviation increase in a bank's exposure to local climate risk leads to a decline of 5 to 14 percent in annual credit growth. Realizations of extreme disasters (the direct effect) and adaptation to climate change (the belief effect) drive the adverse effect of climate risk on credit availability. Our empirical evidence suggests that banks, ex-ante, act and adapt to avoid the actual or perceived adverse effects of climate change on small businesses, households, and large firms across their service regions.

Common Ownership and Minority Shareholding at the Intersection of Competition and Corporate Law: Looking Through the Past to Return to the Future?
Tzanaki, Anna
Common ownership is the talk of the town in antitrust land. Surrounded by mystery and noise, the competitive implications of rival firms being partially owned and controlled by a small set of overlapping owners are both fascinating and hotly contested. The fascination comes from the fact that the source of potential harm may be minority shareholder control in a setting of widely held companies . At the same time, skepticism among academics and policymakers abounds. Most notably, critics wonder about the quantum and mechanics of common owners’ influence driving any pro- or anticompetitive effects while it is often stressed that the antitrust analysis of common ownership is clearly distinguishable from that of cross-shareholding links between competitors. A comprehensive account of partial ownership, capturing the incentives of both individual and institutional investors and the competition dynamics of both cross- and common shareholding, is notoriously missing . Yet, the spirited debate between antitrust and corporate law and economics scholars centers on whether this “knowledge gap” is material, set to be filled by better understanding and experience as a matter of course or whether it is a fictional problem and an empty inquiry that is theoretically implausible and empirically unrealistic to unfold.Against this backdrop, this chapter aims to illuminate some of the latent connecting points in this debate, by looking back into the past and then fast forward into the future. Part II provides relevant background on the two-sided history of regulating shareholding acquisitions under corporate and competition laws. Part III illustrates antitrust’s embeddedness in pre-existing corporate laws and forms, documenting the early unity and progressive quiet disconnect of the two fields in regulating ownership structures and intercorporate links. Part IV presents the contemporary common ownership (hypo)thesis and the distinct challenges and opportunities that it poses for both antitrust and corporate law. Part V develops a working taxonomy of (minority) shareholding types and their (partial) control characteristics from a competition law analytical perspective, with particular emphasis on commonly thought passive and diversified investment holdings. Part VII concludes with an urge to competition and corporate governance and finance policymakers for harmonic progression in seeking regulatory solutions to address common ownership and offers a quantum theory of the corporate property “atom”, drawing cautionary tales about the dynamic and ambiguous qualities of minority common shareholding for antitrust enforcers.

Comparative Analysis of Customer Satisfaction & Its Effect on the Financial Growth Study on Privatized & State-Owned Banks in Pakistan
Bukhari, Ifrah,Khalid, Mubeen
According to The Global Competitiveness Report 2019 by World Economic Forum, the economy of Pakistan (the fifth largest country by population as reported by the United Nations) stands at number 110 out of 141 countries. One of the key objectives of the Privatization of SOEs, as per the Privatization Commission of Pakistan (n.d.), is to reduce the fiscal burden on the national exchequer and improve the economic condition of the country. This is a complete shift from the contemporary concept of "Welfare State," where the State was looked like the sole incharge for the economic and financial growth of the country. The research aims to look into customer satisfaction as one of the primary performance metrics of the financial growth of public banks, which were privatized in a quest to answer whether it is advisable for the governments to adopt the policy of Privatization or not. Customer satisfaction was measured using the snowball sampling technique via an online survey from Habib Bank Limited, United Bank Limited, and National Bank of Pakistan. The financial performance was calculated from the financial ratios data published in the annual financial reports of these banks. Pearson correlation and independent-sample t-test were computed using SPSS 22.0 to analyze the data. According to the findings of the study, there is no significant relationship between customer satisfaction and financial growth of the banks. No significant differences were found between the customer satisfaction score of privatized (HBL & UBL) and State-owned banks (NBP). There were no significant differences between the financial growths of NBP and HBL, but there were significant differences between the financial growths of NBP and UBL.

Constructing a Simple Valuation Method Based on a Value Relevance Model
Yoshinaga, Yuto
Prior valuation studies have developed and improved valuation models. However, these models are often difficult to use, because estimating their various factors requires lots of skills and experience. Thus, this study aims to provide a simple valuation method for the listed firms based on value relevance research. Using the annual data of the listed firms in 87 countries, we present the usefulness of the basic value relevance model for international investment. After confirming that market value of equity can be explained by book value and actual net income, we demonstrate that the explanatory power of this model is as high as the model using forecasted or residual income. Considering the higher availability of actual net income, this result supports the usefulness of actual earnings. Next, we demonstrate that the basic value relevance model with actual net income is useful for forecasting future annual returns and obtaining higher portfolio returns. To reduce the practical difficulty of our method, we propose a simple procedure, which requires inputting only three pieces of the accounting information of the target firm (sales, net income, and book value of equity) to estimate its intrinsic value. This valuation method should contribute to the international investment decision-making especially for practitioners without enough experience of valuation.

Contingent Capital with Stock Price Triggers in Interbank Networks
Anne G. Balter,Nikolaus Schweizer,Juan C. Vera

This paper studies existence and uniqueness of equilibrium prices in a model of the banking sector in which banks trade contingent convertible bonds with stock price triggers among each other. This type of financial product was proposed as an instrument for stabilizing the global banking system after the financial crisis. Yet it was recognized early on that these products may create circularity problems in the definition of stock prices - even in the absence of trade. We find that if conversion thresholds are such that bond holders are indifferent about marginal conversions, there exists a unique equilibrium irrespective of the network structure. When thresholds are lower, existence of equilibrium breaks down while higher thresholds may lead to multiplicity of equilibria. Moreover, there are complex network effects. One bank's conversion may trigger further conversions - or prevent them, depending on the constellations of asset values and conversion triggers.

Data driven partition-of-unity copulas with applications to risk management
Dietmar Pfeifer,Andreas Mändle,Olena Ragulina

We present a constructive and self-contained approach to data driven general partition-of-unity copulas that were recently introduced in the literature. In particular, we consider Bernstein-, negative binomial and Poisson copulas and present a solution to the problem of fitting such copulas to highly asymmetric data.

Dirichlet Policies for Reinforced Factor Portfolios
André, Eric,Coqueret, Guillaume
This article aims to combine factor investing and reinforcement learning (RL). The agent learns through sequential random allocations which rely on firms' characteristics. Using Dirichlet distributions as the driving policy, we derive closed forms for the policy gradients and analytical properties of the performance measure. This enables the implementation of REINFORCE methods, which we perform on a large dataset of US equities. Across a large range of implementation choices, our result indicates that RL-based portfolios are very close to the equally-weighted (1/N) allocation. This implies that the agent learns to be *agnostic* with regard to factors. This is partly consistent with cross-sectional regressions showing a strong time variation in the relationship between returns and firm characteristics.

Dirichlet policies for reinforced factor portfolios
Eric André,Guillaume Coqueret

This article aims to combine factor investing and reinforcement learning (RL). The agent learns through sequential random allocations which rely on firms' characteristics. Using Dirichlet distributions as the driving policy, we derive closed forms for the policy gradients and analytical properties of the performance measure. This enables the implementation of REINFORCE methods, which we perform on a large dataset of US equities. Across a large range of implementation choices, our result indicates that RL-based portfolios are very close to the equally-weighted (1/N) allocation. This implies that the agent learns to be agnostic with regard to factors. This is partly consistent with cross-sectional regressions showing a strong time variation in the relationship between returns and firm characteristics.

Does Currency Smirk Predict Foreign Exchange Return?
Hoque, Ariful
This study examines the predictive power of implied volatility smirk to forecast foreign exchange (FX) return. The volatility smirk contains critical information, especially when the market experiences negative news. The Australian dollar, Canadian dollar, Swiss franc, Euro, and British pound options traded in the opening, midday and closing periods of the trading day are selected to estimate the currency smirk. Research results reveal that the currency smirk outperforms in forecasting FX returns. In addition, the steeper slope in the middle of the trading day suggests that the predictive power of currency smirk in the midday period is higher compared to the opening and closing periods. However, currency smirks’ predictability lasts for a short period, as the FX market is highly adept at incorporating the vital information embedded in the currency smirk. These findings imply that the currency smirk is distinctive for forecasting very short-term FX fluctuations, and the day- or overnight FX traders can use its uniqueness to profit from quick price swings in the 24-hour global FX market.

Dynamic Term Structure Models for SOFR Futures
Skov, Jacob Bjerre,Skovmand, David
The LIBOR rate is currently scheduled for discontinuation by the end of 2021, and the replacement advocated by regulators in the US is the Secured Overnight Financing Rate (SOFR). The change has the potential to disrupt the \$200 trillion market of derivatives and debt tied to the LIBOR. The only SOFR linked derivative with any significant liquidity and trading history is the SOFR futures contract, traded at the CME since 2018. We use the historical record of futures prices to construct a dynamic arbitrage-free model for the SOFR term structure. The model allows you to construct forward-looking SOFR term rates, imply a SOFR discounting curve and price and risk and risk manage SOFR derivatives, not yet liquidly traded in the market. We find that a three-factor Gaussian arbitrage-free Nelson-Siegel model is particularly well suited for the SOFR futures market. For validation purposes we demonstrate that our model aligns very closely with the model-free methodology used by the Federal Reserve to publish indicative SOFR term rates.

Encuadre sistemático y conceptual de la financiación participativa (Systematic and Conceptual Framework for Crowdfunding Regulation)
Zunzunegui, Fernando
Spanish Abstract: El crowdfunding es un servicio financiero que conecta a los inversores con los promotores de negocios que buscan financiación a través de una plataforma. Hay dos formas: el crowdfunding de inversión (en sentido estricto), ya sea el crowdfunding de capital o deuda, y el crowdfunding de crédito, que incluye los préstamos como modelo más habitual. En este artículo se aborda el encuadre sistemático y conceptual para la regulación del crowdfunding. Lo hacemos desde una perspectiva funcional. La forma en que se ejecuta la captación de financiación, ya sea a través de valores o préstamos, no altera su función. La regulación del crowdfunding se rige por los mismos principios que el resto de los servicios financieros. Aplicar soluciones anticuadas a un mercado basado en las nuevas tecnológicas sería un error. La inicial diversidad de regulaciones locales está dando paso a un grado de confluencia del que se pueden extraer ciertas consideraciones. Las recientes reformas están guiando el marco jurídico del crowdfunding hacia el mismo tipo de soluciones.English Abstract: Crowdfunding is a financial service that connects investors with business developers seeking financing through a platform. There are two forms: investment crowdfunding in the strict sense, whether equity or debt crowdfunding, and credit crowdfunding, which includes loans as the most usual model. In this paper we deal with the systematic and conceptual framework for crowdfunding regulation. We do so from a functional perspective. The form in which raising financing is implemented, whether through securities or loans, does not alter its function. Regulation of crowdfunding is guided by the same principles as the rest of financial services. Applying outmoded solutions for a market not based on current technology would be a mistake. The diversity of local frameworks is giving way to a degree of confluence from which certain considerations can be extracted. Reforms are guiding the legal framework towards the same type of solutions.

Factor Momentum
Arnott, Robert D.,Clements, Mark,Kalesnik, Vitali,Linnainmaa, Juhani T.
Past industry returns predict the cross section of industry returns, and this predictability is at its strongest at the one-month horizon (Moskowitz and Grinblatt 1999). We show that the cross section of factor returns shares this property, and that industry momentum stems from factor momentum. Factor momentum is transmitted into the cross section of industry returns via variation in industries' factor loadings. Momentum in industry-neutral factors spans industry momentum; industry momentum is therefore a by-product of factor momentum, not vice versa. Factor momentum is a pervasive property of all factors; we show that factor momentum can be captured by trading almost any set of factors.

Financial Dependence and Intensive Margin of Trade
Jaud, Melise,Kukenova, Madina,Strieborny, Martin
We find that financial markets and institutions play distinctive roles in helping exporters survive in foreign markets. The relative importance of banks versus stock markets for export success shifts both across different groups of products and between short-term and long-term export survival. The distinction between large and active stock markets matters as well, especially when it comes to products requiring high levels of working capital. Our results also highlight the importance of deep stock markets for exporters lacking collateralizable assets and the necessity of well-established export links for the successful use of trade credit as a substitute for bank credit.

Financial Leverage and Stock Return Comovement
Do, Hung Xuan,Nguyen, Nhut H.,Nguyen, Quan M. P.
We find that leverage-initiating stocks experience an increase in return comovement with existing leveraged stocks and a decrease in return comovement with existing zero-leverage stocks in the year after the leverage initiation event. In contrast, stocks that fully deleverage comove more with their new peers of zero-leverage stocks and less with their old peers of leveraged stocks. These findings are robust after controlling for common factors and firm characteristics and using various time series and events as exogenous shocks to corporate leverage decisions. The shifts in return comovement are greater for larger absolute leverage changes and distinct from the dividend clientele effect. Our findings can be explained by the financial leverage clientele effect. We find that mutual funds adjust their holdings of leverage changing stocks around the event year and that funds have a propensity to invest their capital flows according to their investors’ preference for leveraged (zero-leverage) stocks.

Financial Profiles of Workers Most Vulnerable to Coronavirus-Related Earnings Loss in the Spring of 2020
Helppie-McFall, Brooke,Hsu, Joanne W.
In spring 2020, the COVID-19 pandemic and related shutdowns had huge effects on unemployment. Using data from the Survey of Consumer Finances, we describe the financial profiles of US families whose workers were most vulnerable to coronavirus-related earnings losses in the spring of 2020, based on whether a particular worker was deemed "essential" and whether a worker's job could be conducted remotely. We use descriptive analytic techniques to examine how families' baseline financial situations would allow them to weather COVID-shutdown-related earnings losses. We find that families with non-teleworkable workers who were most vulnerable to layoff also had both demographic and financial profiles that are associated with greater vulnerability to income shocks: non-teleworkable families were more likely to be people of color and single wage-earners, and also to have less savings. The median non-teleworkable family, whether in non-essential or essential occupations, held only three weeks of income in savings, underscoring the importance of policy measures to blunt the financial effect of the COVID crisis.

Forecasting and Analyzing the Military Expenditure of India Using Box-Jenkins ARIMA Model
Deepanshu Sharma,Kritika Phulli

The advancement in the field of statistical methodologies to economic data has paved its path towards the dire need for designing efficient military management policies. India is ranked as the third largest country in terms of military spender for the year 2019. Therefore, this study aims at utilizing the Box-Jenkins ARIMA model for time series forecasting of the military expenditure of India in forthcoming times. The model was generated on the SIPRI dataset of Indian military expenditure of 60 years from the year 1960 to 2019. The trend was analysed for the generation of the model that best fitted the forecasting. The study highlights the minimum AIC value and involves ADF testing (Augmented Dickey-Fuller) to transform expenditure data into stationary form for model generation. It also focused on plotting the residual error distribution for efficient forecasting. This research proposed an ARIMA (0,1,6) model for optimal forecasting of military expenditure of India with an accuracy of 95.7%. The model, thus, acts as a Moving Average (MA) model and predicts the steady-state exponential growth of 36.94% in military expenditure of India by 2024.

Generating unfavourable VaR scenarios with patchwork copulas
Dietmar Pfeifer,Olena Ragulina

The central idea of the paper is to present a general simple patchwork construction principle for multivariate copulas that create unfavourable VaR (i.e. Value at Risk) scenarios while maintaining given marginal distributions. This is of particular interest for the construction of Internal Models in the insurance industry under Solvency II in the European Union.

Impediments to the Schumpeterian Process in the Replacement of Large Firms
Faccio, Mara,McConnell, John J.
Using newly-assembled data encompassing up to 75 countries and starting circa 1910, we find that the Schumpeterian process of creative destruction aptly describes the replacement of large firms by other firms, but exceptions to the norm of replacement are not rare and replacement is often not by new firms. Initial firm size and political connections represent the main obstacles to the Schumpeterian process while board interlocks and a corporate culture of innovation play modest roles. Consistent with a theory of political capture, when accompanied by regulations that restrict entry, political connections play a formidable role in abetting large firms remaining large.

Investor Behavior in Manager Selection: Impact on Performance
Carvalho, Raul Leote de
Selecting managers on the basis of past performance is an intuitive strategy that seems trusted by investors. Indeed, many studies report a positive correlation between past fund returns and investor cash flows. Evidence also suggests that at least at shorter-term horizons investing with the top performing managers may generate future out-performance. This was initially dubbed the “smart money” effect, the idea that investors are capable of identifying manager skill. More recent studies suggest that manager exposure to momentum stocks, on one hand, and the persist-ency of fund flows, on the other hand, are the more likely explanations of the fact that past and future fund alphas seem to be positively correlated at shorter-term horizons in the pooled cross-section of funds. However, at longer-term horizons, e.g. over the standard investment evaluation horizon which is roughly three years for the average institutional investors, there is evidence of a negative correlation between past and future fund alpha. Managers with stronger performances seem more likely to under-perform subsequently over longer-term horizons. If there is mean reversion over the horizon of interest, then the modern hiring/firing practice should lead to worse outcomes than the apparently paradoxical strategy of investing in managers with poor performances and firing the successful ones. While such a contrarian approach to manager selection might seem counter intuitive and unreasonable, there is at least, a justification to it under this “dumb money” effect. A more practical approach consists on using other factors than performance for manager selection. Literature supports the use of factors such as the theoretical soundness of the “investment thesis” driving the fund’s strategy, the link between manager compensation and fund performance or the fund active share.

Italia Economia a Metà 2020 (Italy: Economy in Mid-2020)
Mazziero, Maurizio,Lawford, Andrew,Serafini, Gabriele
Italian Abstract: Ricerca sulla situazione economica italiana basata sui dati economici ufficiali; vengono analizzati e confrontati con il passato il debito pubblico, le riserve ufficiali, il PIL, l'inflazione e la disoccupazione. English Abstract: Research into the state of the Italian economy based on official economic data; the current Sovereign Debt, Official Reserves, GDP, Inflation and Unemployment situation is presented and and compared with the past.

Leverage Deviation from the Target Debt Ratio and Leasing
Rahman, Shofiqur,Sankaran, Harikumar,Chowdhury, Hasibul
We find a negative association between the leverage deviation and leasing intensity, implying that firms actively use leasing as a source of financing when faced with a leverage deviation. This negative relation is more pronounced for firms that are underleveraged, are financially constrained, and have a high likelihood of bankruptcy and weaker for firms with a greater need to preserve debt capacity. We attribute these incentives to distinct features of the lease contract that separate it from secured debt contracts. Overall, our results are consistent with the substitution effects of lease and debt.

Non-Fundamental Demand and Style Returns
Ben-David, Itzhak,Li, Jiacui,Rossi, Andrea,Song, Yang
We present causal evidence that non-fundamental correlated demand exerts a first-order impact on style returns. Mutual fund investors chase fund performance via Morningstar ratings, regardless of the rating methodology. Until June 2002, ratings depended on fund returns without any style adjustment, and thus mutual funds with the same investment style had highly correlated ratings. This methodology led rating chasing investors to direct capital into winning styles, exacerbating return chasing behavior. Capital flows exerted non-fundamental price pressure on the underlying stocks, creating style-momentum that reverted over time. In June 2002, Morningstar reformed its rating methodology so that ratings became equalized across styles. The reform demonstrates the causal impact of rating chasing: once the reform was implemented, style-level price pressures via the mutual fund channel immediately became muted. Furthermore, the dispersion in style performance declined sharply, and style momentum and reversal disappeared. We estimate that Morningstar rating chasing explains a substantial part of the size and value factors' time-series variation.

Nowhere to Hide: Corporate Restructuring Activities Response to Mandatory Segment Disclosure
Le, Trinh Hue,Tan, Kelvin Jui Keng,Oliver, Barry R.
We examine the effect of mandatory financial disclosures, specifically the segment disclosure SFAS 131, on corporate restructuring activities such as mergers and acquisitions (M&As) and spin-offs. After the implementation of the mandatory segment disclosure standard, we find that firms have less incentive to engage in M&A activities and to complete the M&A deals. However, conditional on engaging in acquisition activity, SFAS 131 drives firms to acquire large diversified targets. The market perceives these large diversified M&As as value- enhancing after the SFAS131. Similarly, we further show that the probability of a division being spun off is lower after the SFAS 131 adoption than that before the SFAS 131 adoption, suggesting that firms are more likely to spin off their different operating units ex-ante to avoid disclosing these unit’s information and to strengthen their public image ex-post. We also find a positive market reaction to spin-off events, especially after the SFAS 131 was mandated. Overall, our results suggest that the segment disclosure standard disciplines managers’ (value- enhancing) corporate restructuring activities.

Optimal Simple Objectives for Monetary Policy when Banks Matter
Laureys, Lien,Meeks, Roland,Wanengkirtyo, Boromeus
We reconsider the design of welfare-optimal monetary policy when financing frictions impair the supply of bank credit, and when the objectives set for monetary policy must be simple enough to be implementable and allow for effective accountability. We show that a flexible inflation targeting approach that places weight on stabilising inflation, a measure of resource utilisation, and a financial variable produces welfare benefits that are almost indistinguishable from fully-optimal Ramsey policy. The macro-financial trade-off in our estimated model of the euro area turns out to be modest, implying that the effects of financial frictions can be ameliorated at little cost in terms of inflation. A range of different financial objectives and policy preferences lead to similar conclusions.

Out-Performing Corporate Bonds Indices With Factor Investing
Heckel, Thomas,Amghar, Zine,Haik, Isaac,Laplenie, Olivier,Carvalho, Raul Leote de
We considered a large number of factors from value, quality, low risk and momentum styles and show that these factors can be used to select the corporate bonds with the highest risk-adjusted returns. Our results were confirmed for the three largest corporate bond universes, namely those defined by U.S. Investment Grade, Euro Investment Grade and U.S. High Yield benchmark indices. The factors we investigated can be used to create investment strategies designed to out-perform these benchmark indices by over-weighting the cheapest bonds with the strongest performance trends from the most profitable, better managed and less risky companies.

Political Leadership and Governance Structure
Zhou, Yifan
This paper examines how changes in local political leadership affects firms’ governance structure. Using a novel data set, I document that following the appointment of a new city-level Chinese Communist Party (CCP) secretary, local firms increase (decrease) the fraction of directors who share a common birthplace with the incoming (departing) secretary. This appears to be a channel through which Chinese firms establish political connections. Firms with a higher percentage of birthplace-connected directors exhibit higher abnormal returns around secretary appointments. These firms enjoy superior accounting performances and attract institutional fund flows. I reject an alternative hypothesis that these directors are appointed to company boards on the "orders" of the politician, rather than actively recruited by firms. Evidence suggest that firms do not consider the sharing of a common jiguan (ancestral home) to be a valid form of political connection.

Prospects and challenges of quantum finance
Adam Bouland,Wim van Dam,Hamed Joorati,Iordanis Kerenidis,Anupam Prakash

Quantum computers are expected to have substantial impact on the finance industry, as they will be able to solve certain problems considerably faster than the best known classical algorithms. In this article we describe such potential applications of quantum computing to finance, starting with the state-of-the-art and focusing in particular on recent works by the QC Ware team. We consider quantum speedups for Monte Carlo methods, portfolio optimization, and machine learning. For each application we describe the extent of quantum speedup possible and estimate the quantum resources required to achieve a practical speedup. The near-term relevance of these quantum finance algorithms varies widely across applications - some of them are heuristic algorithms designed to be amenable to near-term prototype quantum computers, while others are proven speedups which require larger-scale quantum computers to implement. We also describe powerful ways to bring these speedups closer to experimental feasibility - in particular describing lower depth algorithms for Monte Carlo methods and quantum machine learning, as well as quantum annealing heuristics for portfolio optimization. This article is targeted at financial professionals and no particular background in quantum computation is assumed.

Reel Stock Analysis for an Integrated Paper Packaging Company
Constantine Goulimis,Gaston Simone

The production of corrugated paper boxes accounts for roughly one third of the world's total paper production and, as a result of both COVID-19 and the rise of e-commerce, is a growing market. We provide a fresh approach to determining near-optimal stock policies for integrated paper companies. The new approach shows that existing policies can be improved by a significant margin. In a case study we saw a reduction in total waste by 9%, with a simultaneous decrease in logistics costs.

Sentiment Diffusion in Financial News Networks and Associated Market Movements
Xingchen Wan,Jie Yang,Slavi Marinov,Jan-Peter Calliess,Stefan Zohren,Xiaowen Dong

In an increasingly connected global market, news sentiment towards one company may not only indicate its own market performance, but can also be associated with a broader movement on the sentiment and performance of other companies from the same or even different sectors. In this paper, we apply NLP techniques to understand news sentiment of 87 companies among the most reported on Reuters for a period of seven years. We investigate the propagation of such sentiment in company networks and evaluate the associated market movements in terms of stock price and volatility. Our results suggest that, in certain sectors, strong media sentiment towards one company may indicate a significant change in media sentiment towards related companies measured as neighbours in a financial network constructed from news co-occurrence. Furthermore, there exists a weak but statistically significant association between strong media sentiment and abnormal market return as well as volatility. Such an association is more significant at the level of individual companies, but nevertheless remains visible at the level of sectors or groups of companies.

Supplement to 'Ensemble Sub-sampling for Imbalanced Multivariate Two-Sample Tests'
Chen, Lisha,Dou, Winston,Qiao, Zhihua
In this supplemental article, we provide detailed proofs for the propositions and theorems in the main paper.

Sécurité Routière Des Flottes Et Des Conducteurs De Véhicules Lourds (Road Safety for Fleets and Drivers of Trucks)
Dionne, Georges,Desjardins, Denise,Angers, Jean-François
French Abstract: La sécurité routière des flottes et des conducteurs de véhicules lourds a été fortement négligée dans la littérature de l’assurance. Cette lacune est principalement expliquée par la non-disponibilité de données adéquates. Notre contribution consiste à : 1) inventorier les infractions les plus courantes commises par les conducteurs de véhicules lourds (CVL) et les propriétaires et exploitants des véhicules lourds (PEVL); 2) établir un lien statistique entre les infractions CVL et PEVL et les accidents routiers des flottes de véhicules; 3) identifier et catégoriser les profils des CVL et des PEVL et déterminer les plus à risque sur le plan de la sécurité routière. Nos résultats indiquent qu’il y a beaucoup d’hétérogénéité entre les risques des PEVL et ceux des CVL. La politique de tarification des droits de permis des conducteurs en fonction des points d’inaptitude semble inciter ces derniers à une plus grande prudence, alors que la menace de perte de permis n'est pas incitative, possiblement parce que les conducteurs professionnels ont accès au permis restreint.English Abstract: Road safety for fleets and drivers of trucks has been neglected in the insurance literature. This lack is mainly explained by the non-availability of appropriate data. Our contribution has three components: 1) produce statistics on the more current drivers’ and fleets’ road safety offences using a panel of 20 years of data from Quebec; 2) relate these offences to fleets’ accidents; 3) identify and classify the most risky fleets and drivers. Our results show a substantial heterogeneity between fleets and professional drivers in terms of road safety.

The Comparison and the Reality of German and the UK Takeover Law
Watanabe, Hiroyuki
This is the transcript of a discussion meeting held with German and UK M&A lawyers on takeover rules and practices. Dr. Burian, a German lawyer, and Mr. Robinson, an English lawyer, are both specialized in M&A and corporate affairs. Also, they have worked as registered foreign lawyers in Japan and have been familiar with Japanese corporate law practices. The meeting was held on June 2, 2009, at Waseda University in Tokyo.The Issues discussed in this interview are as follows.1. “Shareholder decision-making” and “Maximizing shareholder value”2. EU Takeover Directive3. Reality of the defensive measures in the UK4. Reality of the defensive measures in Germany5.“Cold shouldering” and “self regulation under the shadow of statutory rules” in the UK6. Role of the financial adviser and cash confirmation in Germany7. Change of control clause8. Equity derivatives and “hidden ownership”9. Recent movement on the case of Schaeffler/Continental and the case of Porsche/Volkswagen in Germany10. Threshold for a mandatory offer11. Principle of whole solicitation and the strategy for adjusting the ratio of acquiring target shares12. Schemes of arrangements in the UK

The Low Volatility Anomaly in Equity Sectors â€" 10 Years Later!
Bellone, Benoit,Carvalho, Raul Leote de
Ten years after showing that the low volatility anomaly in the performance of stocks is a phenomenon that should be considered in each sector as opposed to on an absolute basis ignoring sectors, we present evidence that this observation has held up well, and that if anything, has become even more valid.

The Power of Firm Fundamental Information in Explaining Stock Returns
Shao, Shuai,Stoumbos, Robert C.,Zhang, Frank
Prior literature shows that earnings have come to explain less stock price movement over time, suggesting that firm fundamental information has become less important. In this paper, we replace earnings with earnings announcement returns as a measure of firm fundamental news and find that these firm fundamentals have come to explain more price movement over time. In the years after 2003, earnings announcement returns explain roughly 20% of the annual returnâ€"almost twice as much as they did before, indicating that fundamental information has become more important, not less, in explaining stock returns. This pattern occurs for other forms of firm fundamental information. Collectively, the returns around earnings announcements, management guidance, analyst forecasts, analyst recommendations, and 8-K filings went from explaining 17% of annual returns on average in the late 1990s to 39% on average in the early 2010s. In exploring possible explanations for the increase in the explanatory power of fundamental information, we find evidence consistent with regulatory changes, such as new 8-K filing requirements and Sarbanes-Oxley, collectively making disclosures more informative.

The Private Value of Entrepreneurial Control: Evidence from a Discrete Choice Experiment
Berger, Marius,Doherr, Thorsten,Gottschalk, Sandra,Pellens, Maikel
We study how much entrepreneurs value being in control over their ventures. Even though control and independence are widely believed to be an important reward to entrepreneurship, and despite the importance of control rights for venture capital contract design, how much entrepreneurs value being in control remains unknown. In this article, we perform a discrete choice experiment with a representative sample of entrepreneurs in Germany to estimate the value of control in the setting of venture capital investment. We find that entrepreneurs highly value control: entrepreneurs are willing to pay an additional 38% of equity to avoid the highest level of control, a voting majority, in a hypothetical VC contract. We also find that entrepreneurs are willing to pay more equity when the VC can offer support in the development in the firm, up to 12% of equity when the investor offers market access support. Our findings hint that control requirements form important entry barriers for entrepreneurs to venture capital financing.

Why Stock Prices are Mostly Right Most of the Time
Van Sant, John d
Seven financial and macroeconomic ratios explain 85% to 90% of the variation in the level of stock prices in relation to fundamental values. The predictor ratios represent profitability, income concentration, inflation, interest rates, economic stability, default risk and tax rates. Of these, inflation, default risk and economic stability are the dominant predictors. Almost all of the time the market responds rationally to the mix of stimuli provided by the predictors. In this sense, the market is efficient. On occasion market participants en masse act irrationally, and these occasions are evidenced by the outsize residual errors in the price-to-fundamental regressions.