# Research articles for the 2020-12-01

'Green Washingâ€™ or â€˜Authentic Effortâ€™? An Empirical Investigation of the Quality of Sustainability Reporting by Banks
Khan, Habib,Bose, Sudipta,, ABU MOLLIK,, Harun
SSRN
Purpose â€" This study explores the quality of sustainability reporting (QSR) and the impact of regulatory guidelines, social performance and a standardised reporting framework (using the Global Reporting Initiative [GRI] guidelines) on QSR in the context of banks in Bangladesh.Design/methodology/approach â€" Using a sample of 315 banking firm-year observations over 13 years (2002â€"2014), a content analysis technique is used to develop the 11-item QSR index. Regression analysis is used to test the research hypotheses.Findings â€" Initially, QSR evolved symbolically in Bangladeshâ€™s banks but, over our investigation period, with QSR indicators gradually improving, the trends became substantive. The influences on QSR were sustainable banking practice regulatory guidelines, social performance and use of the GRI guidelines. However, until banks improve reporting information, such as external verification and trends over time, QSR cannot be regarded as fully substantive. Research limitations/implications â€" This study advances QSR research and debate among academic researchers. With regulatory agencies and stakeholders increasingly using sustainability reporting information for decision making, the informationâ€™s reliability is vital.Originality/value â€" This study is the first on QSR in the banking industry context, with previous research mostly investigating the quantity of sustainability reporting. The current study also synthesises QSR with sustainability regulation and social performance factors which have rarely been used in the sustainability literature. To gain a holistic understanding of QSR, existing QSR measures are advanced by combining external reporting efforts with banksâ€™ internalisation initiatives.

An Analysis of the Variability of Outcomes for the Mandatory Components of the Australian Retirement System
Evans, John R.,Razeed, Abdul
SSRN
The outcome of the mandatory components of the Australian retirement system for both retirees and the Australian Government will vary over time based on a complex interrelationship of wage growth, investment returns, (un)employment, and longevity of retirees. This paper considers the impact of variations in these factors and concludes that for the mean income household, real investment returns are the critical determinant of retiree outcomes, whilst for the Australian Government, longevity of retirees is the critical factor.

Application of Text Mining to the Analysis of Climate-Related Disclosures
Moreno, Angel Ivan,Caminero, Teresa
SSRN
In this article we apply text mining techniques to analyse the TCFD recommendations on climate-related disclosures of the 12 significant Spanish financial institutions using publicly available corporate reports from 2014 until 2019. In our analysis, applying our domain knowledge, first we create a taxonomy of concepts present in disclosures associated with each of the four areas described in the TCFD recommendations. This taxonomy is then linked together by a set of rules in query form of selected concepts. The queries are crafted so that they identify the excerpts most likely to relate to each of the TCFDâ€™s 11 recommended disclosures. By applying these rules we estimate a TCFD compliance index for each of the four main areas for the period 2014-2019 using corporate reports in Spanish. We also describe some challenges in analysing climate-related disclosures. The index gives an overview of the evolution of the level of climate-related financial disclosures present in the corporate reports of the Spanish banking sector. The results indicate that the quantity of climate-related disclosures reported by the banking sector is growing each year. Besides, our study also suggests that some disclosures are only present in reports different than annual and ESG reports, such as Pillar 3 reports or reports on remuneration of directors.

Are Bigger Banks Better? Firm-Level Evidence from Germany
Huber, Kilian
SSRN
The effects of large banks on the real economy are theoretically ambiguous and politically controversial. I identify quasi-exogenous increases in bank size in postwar Germany. I show that firms did not grow faster after their relationship banks became bigger. In fact, opaque borrowers grew more slowly. The enlarged banks did not increase profits or efficiency, but worked with riskier borrowers. Bank managers benefited through higher salaries and media attention. The paper presents newly digitized microdata on German firms and their banks. Overall, the findings reveal that bigger banks do not always raise real growth and can actually harm some borrowers.

Closed-form approximations with respect to the mixing solution for option pricing under stochastic volatility
Kaustav Das,Nicolas Langrené
arXiv

We consider closed-form approximations for European put option prices within the Heston and GARCH diffusion stochastic volatility models with time-dependent parameters. Our methodology involves writing the put option price as an expectation of a Black-Scholes formula and performing a second-order Taylor expansion around the mean of its argument. The difficulties then faced are simplifying a number of expectations induced by the Taylor expansion. Under the assumption of piecewise-constant parameters, we derive closed-form pricing formulas and devise a fast calibration scheme. Furthermore, we perform a numerical error and sensitivity analysis to investigate the quality of our approximation and show that the errors are well within the acceptable range for application purposes. Lastly, we derive bounds on the remainder term generated by the Taylor expansion.

Cross-sectional Variation of Option Implied Volatility Skew
Tian, Meng,Wu, Liuren
SSRN
The slope of the option implied volatility plot against the strike reflects the risk-neutral skewness of the underlying security's conditional return distribution. We identify two principal risk sources that contribute to the cross-sectional variation of individual stock options' implied volatility skew: the market risk exposure of the stock's return and the company's default risk. Once controlled for these two risk exposures and the implied volatility level, the remaining idiosyncratic variation of the implied volatility skew reflects more of investor expectation and sentiment on the stock's future price movement and can be used to predict future stock returns with more accuracy.

Discrete time portfolio optimisation managing value at risk under heavy tail return distribution
Subhojit Biswas,Diganta Mukherjee
arXiv

We consider an investor, whose portfolio consists of a single risky asset and a risk free asset, who wants to maximize his expected utility of the portfolio subject to the Value at Risk assuming a heavy tail distribution of the stock prices return. We use Markov Decision Process and dynamic programming principle to get the optimal strategies and the value function which maximize the expected utility for parametric as well as non parametric distributions. Due to lack of explicit solution in the non parametric case, we use numerical integration for optimization

Disentangling Anomalies: Risk Versus Mispricing
SSRN
Systematic mispricing primarily affects speculative stocks and tends to take the form of overpricing, predicting lower average returns. Because speculative stocks are typically deemed risky by rational models, failing to control for exposure to systematic mispricing can bias tests of risk-return tradeoffs. Controlling for the effects of systematic mispricing, we recover robust positive risk-return relations for a large number of cross-sectional risk proxies, including many low-risk and distress anomalies. We also recover robust positive illiquidity-return relations. We provide a unifying framework to explain a number of puzzles arising from the empirical failure of standard asset-pricing models and show that risk-return relations supporting rational models can be recovered from the data by accounting for the existence of time-varying common mispricing.

Do Firms Consider Economic Outlook When Determining Payout Policy?
Anderson, Benjamin,Faulkner, Matthew
SSRN
Payout policy is one of the most important policies set by firms and represents a major use of capital by publicly traded corporations. Firms should consider future economic activity and future firm performance when determining payout policy choices, given they are cash outflow commitments from the firm. We empirically examine whether firms use economic outlook when determining payout policy using publicly available data from the Chicago Federal Reserve Bank and Compustat. We find that economic outlook is positively related to firm payout policy. Specifically, we find that firms are more likely to pay out cash dividends and repurchase shares when economic outlook is positive. Furthermore, when examining only firms already paying dividends and/or repurchasing shares, firms pay greater amounts of cash dividends and repurchase more shares when economic outlook is positive. We are the first, to our knowledge, to examine whether firms use economic outlook to determine their payout policy. Our paper motivates future research in corporate finance to examine how firms use economic outlook when making capital planning decisions.

Does Green Banking Performance Pay Off? Evidence from a Unique Regulatory Setting in Bangladesh
Bose, Sudipta,Khan, Habib,Monem, Reza
SSRN
Manuscript Type: EmpiricalResearch Question/Issue: A firmâ€™s choice to â€˜go greenâ€™ largely remains unregulated worldwide. This study uses an institutional setting in Bangladesh experiencing a green banking regulatory reform to examine whether banksâ€™ green performance translates into improved financial performance and whether this is moderated by banksâ€™ political connections. Research Findings/Insights: Results based on a sample of 172 firm-year observations from 2008â€"2014 suggest that green banking performance is positively associated with a bankâ€™s financial performance. Further analysis suggests that cost efficiency mainly drives this relationship. However, banksâ€™ political connections negatively affect this relationship by counterbalancing green bankingâ€™s non-financial benefits. Our findings are robust to sensitivity tests which examine endogeneity concerns using difference-in-differences (DiD) and propensity score matching (PSM) analyses and Heckmanâ€™s (1979) two-stage analysis.Theoretical/Academic Implications: Most prior studies on corporate social responsibility (CSR) were conducted in voluntary settings: however, our study utilises a unique regulatory setting in Bangladesh. With this exogenous shock to the banking industry, the regulatory setting helped to alleviate endogeneity concerns arising from voluntary motives behind CSR performance. To the best of our knowledge, this is the first study to examine any link between green banking performance in a regulatory setting and banksâ€™ financial performance.Practitioner/Policy Implications: This studyâ€™s findings suggest that sustainable business practices promoted through regulatory intervention can improve financial performance. A regulatory green banking initiative can be a win-win for all competing stakeholders. Our findings have significant policy implications for governments and regulatory agencies worldwide in the fight against global warming and climate change.

Environmental Risk and Green Innovation: Evidence From Evacuation Spills
Chu, Yongqiang,Liu, Alice (Yanguang),Tian, Xuan
SSRN
Exploring evacuation spill information from the U.S. Coast Guardâ€™s National Response Center database, we examine how firms alter their green innovation activities and strategies in response to environmental spills occurring near their headquarters. We find that, in response to nearby environmental spills, firms increase both environmental innovation input and output. Increases in managersâ€™ perceived risk and compliance cost, in part due to public outrage and reprobation, as well as redeployment of human capital are two plausible underlying economic channels through which environmental risk affects firm innovation activities.

Explicit approximations for option prices via Malliavin calculus for the Stochastic Verhulst volatility model
Kaustav Das,Nicolas Langrené
arXiv

We consider explicit approximations for European put option prices within the Stochastic Verhulst model with time-dependent parameters, where the volatility process follows the dynamics $dV_t = \kappa_t (\theta_t - V_t) V_t dt + \lambda_t V_t dB_t$. Our methodology involves writing the put option price as an expectation of a Black-Scholes formula, reparameterising the volatility process and then performing a number of expansions. The difficulties faced are computing a number of expectations induced by the expansion procedure explicitly. We do this by appealing to techniques from Malliavin calculus. Moreover, we deduce that our methodology extends to models with more general drift and diffusion coefficients for the volatility process. We obtain the explicit representation of the form of the error generated by the expansion procedure, and we provide sufficient ingredients in order to obtain a meaningful bound. Under the assumption of piecewise-constant parameters, our approximation formulas become closed-form, and moreover we are able to establish a fast calibration scheme. Furthermore, we perform a numerical sensitivity analysis to investigate the quality of our approximation formula in the Stochastic Verhulst model, and show that the errors are well within the acceptable range for application purposes.

Financial Inclusion and Household Financial Behavior
Herrerias, Renata
SSRN
I study the heterogeneity of individualâ€™s financial-management behavior and its relation to financial inclusion among households in Mexico using data from the 2018 national financial inclusion survey (ENIF). To measure individualâ€™s financial behavior, I create a score applying factor analysis to answers on questions about money management, savings and consumption habits that are related to financial well-being. I question whether households who are part of the formal financial system report better financial behavior than individuals outside the financial system, and which type of financial product is more relevant. I find that financial-management behavior is positively related to uses of financial services and products, particularly to having savings accounts and insurance. However, households using payroll accounts, accounts to receive government transfers, pensions or credit products do not report better financial behavior. Additionally, individuals using informal savings vehicles show better financial behavior, but those using informal credit report worst financial behavior. Formal education, financial literacy and income are also important factors in explaining financial behaviors related to financial well-being.

Governance Structure, Technical Change and Industry Competition
Guerini, Mattia,Harting, Philipp,Napoletano, Mauro
SSRN
AbstractWe develop a model to study the impact of corporate governance on firm investment decisions and industry competition. In the model, governance structure affects the distribution of shares among short- and long-term oriented investors, the robustness of the management regarding possible stockholder interference, and the managerial remuneration scheme. A bargaining process between firm's stakeholders determines the optimal allocation of financial resources between real investments in R&D and financial investments in shares buybacks. We characterize the relation between corporate governance and firm's optimal investment strategy and we study how different covernance structures shape technical progress and the degree of competition over the industrial life cycle. Numerical simulations of a calibrated set-up of the model show that pooling together industries characterized by heterogeneous governance structures generate the well-documented inverted-U shaped relation between competition and innovation.

How cumulative is technological knowledge?
arXiv

Technological cumulativeness is considered one of the main mechanisms for technological progress, yet its exact meaning and dynamics often remain unclear. To develop a better understanding of this mechanism we approach a technology as a body of knowledge consisting of interlinked inventions. Technological cumulativeness can then be understood as the extent to which inventions build on other inventions within that same body of knowledge. The cumulativeness of a technology is therefore characterized by the structure of its knowledge base, which is different from, but closely related to, the size of its knowledge base. We analytically derive equations describing the relation between the cumulativeness and the size of the knowledge base. In addition, we empirically test our ideas for a number of selected technologies, using patent data. Our results suggest that cumulativeness increases proportionally with the size of the knowledge base, at a rate which varies considerably across technologies. At the same time we find that across technologies, this rate is inversely related to the rate of invention over time. This suggests that the cumulativeness increases relatively slow in rapidly growing technologies. In sum, the presented approach allows for an in-depth, systematic analysis of cumulativeness variations across technologies and the knowledge dynamics underlying technology development.

Tsai, Yi-Lin,Honka, Elisabeth
SSRN
We investigate the relationship between both advertising content and quantity and several stages of consumers' decision-making, namely, unaided and aided awareness, consideration, and purchase. Understanding how the amount and content of advertisements affect consumers' decision-making is crucial for companies to effectively and efficiently use their advertising budgets. Spanning a time period from 2010 to 2016, we combine a unique data set on TV advertising content and quantities with individual-level data containing information on purchases, consideration and awareness sets, demographic variables, and perceived prices. Our results reveal that advertising quantity significantly increases consumer (unaided and aided) awareness, but has no effect on conditional consideration and conditional purchase. However, when measuring the separate effects of different types of advertising content, we find a more nuanced set of results: advertising only containing non-informational content increases unaided awareness, while advertising only containing informational content increases aided awareness. Advertising with both informational and non-informational content affects shoppers' but not non-shoppers' awareness and the awareness of other groups of involved consumers.

Insiders and their Free Lunches: the Role of Short Positions
arXiv

Given a stock price process, we analyse the potential of arbitrage by insiders in a context of short-selling prohibitions. We introduce the notion of minimal supermartingale measure, and we analyse its properties in connection to the minimal martingale measure. In particular, we establish conditions when both fail to exist. These correspond to the case when the insider's information set includes some non null events that are perceived as having null probabilities by the uninformed market investors. These results may have different applications, such as in problems related to the local risk-minimisation for insiders whenever strategies are implemented without short selling.

Liquidity, Interbank Network Topology and Bank Capital
Mahdavi Ardekani, Aref
SSRN
By applying the interbank network simulation, this paper examines whether the causal relationship between capital and liquidity is influenced by bank positions in the interbank network. While existing literature highlights the causal relationship that moves from liquidity to capital, the question of how interbank network characteristics affect this relationship remains unclear. Using a sample of commercial banks from 28 European countries, this paper suggests that banksâ€™ interconnectedness within interbank loan and deposit networks affects their decisions to set higher or lower regulatory capital ratios when facing higher illiquidity. This study provides support for the need to implement minimum liquidity ratios to complement capital ratios, as stressed by the Basel Committee on Banking Regulation and Supervision. This paper also highlights the need for regulatory authorities to consider the network characteristics of banks.

Multilevel and Tail Risk Management
SSRN
e introduce backtesting methods to assess Value-at-Risk (VaR) and Expected Shortfall (ES) that require no more than desktop VaR violations as inputs. Maintaining an integrated VaR perspective, our methodology relies on multiple testing to combine evidence on the frequency and dynamic evolution of violations, and to capture more information than a single threshold can provide about the magnitude of violations. Contributions include a formal finite sample analysis of the joint distribution of multi-threshold violations, and limiting results that unify discrete and continuous definitions of cumulative violations across thresholds. Simulation studies demonstrate the power advantages of the proposed tests, particularly with small samples and when underlying models are unavailable to assessors. Results also reinforce the usefulness of CaViaR approaches not just for VaR but also as ES backtests. Empirically, we assess desktop data by Bloomberg on exchange traded funds. We find that tail risk is not adequately reflected via a wide spectrum of models and available measures. Results provide useful prescriptions for empirical practice and, more generally, reinforce the recent arguments in favor of combined tests and forecasts in tail risk management.

On the Effects of Continuous Trading
Indriawan, Ivan,Pascual, Roberto,Shkilko, Andriy
SSRN
The continuous limit order book, in which messages are processed one by one in the order of receipt, is a prominent design feature of modern securities markets. Theoretical models show that this design imposes a cost on liquidity providers and suggest that this cost may be reduced by switching to batch auctions. We examine a recent opposite move, whereby a stock exchange switches from batch auctions to continuous trading. The move leads to a significant increase in adverse selection, which is partly offset by a reduction in inventory costs. The net liquidity effect of the switch is negative.

Optimal Payoff under the Generalized Dual Theory of Choice
Xue Dong He,Zhaoli Jiang
arXiv

We consider portfolio optimization under a preference model in a single-period, complete market. This preference model includes Yaari's dual theory of choice and quantile maximization as special cases. We characterize when the optimal solution exists and derive the optimal solution in closed form when it exists. The payoff of the optimal portfolio is a digital option: it yields an in-the-money payoff when the market is good and zero payoff otherwise. When the initial wealth increases, the set of good market scenarios remains unchanged while the payoff in these scenarios increases. Finally, we extend our portfolio optimization problem by imposing a dependence structure with a given benchmark payoff and derive similar results.

Portfolio Optimization Managing Value at Risk under Heavy Tail Return, using Stochastic Maximum Principle
Subhojit Biswas,Mrinal K.Ghosh,Diganta Mukherjee
arXiv

We consider an investor, whose portfolio consists of a single risky asset and a risk free asset, who wants to maximize his expected utility of the portfolio subject to managing the Value at Risk (VaR) assuming a heavy tailed distribution of the stock prices return. We use a stochastic maximum principle to formulate the dynamic optimisation problem. The equations which we obtain does not have any explicit analytical solution, so we look for accurate approximations to estimate the value function and optimal strategy. As our calibration strategy is non-parametric in nature, no prior knowledge on the form of the distribution function is needed. We also provide detailed empirical illustration using real life data. Our results show close concordance with financial intuition.We expect that our results will add to the arsenal of the high frequency traders.

Predicting cell phone adoption metrics using satellite imagery
Edward J. Oughton,Jatin Mathur
arXiv

Approximately half of the global population does not have access to the internet, even though digital access can reduce poverty by revolutionizing economic development opportunities. Due to a lack of data, Mobile Network Operators (MNOs), governments and other digital ecosystem actors struggle to effectively determine if telecommunication investments are viable, especially in greenfield areas where demand is unknown. This leads to a lack of investment in network infrastructure, resulting in a phenomenon commonly referred to as the 'digital divide'. In this paper we present a method that uses publicly available satellite imagery to predict telecoms demand metrics, including cell phone adoption and spending on mobile services, and apply the method to Malawi and Ethiopia. A predictive machine learning approach can capture up to 40% of data variance, compared to existing approaches which only explain up to 20% of the data variance. The method is a starting point for developing more sophisticated predictive models of telecom infrastructure demand using publicly available satellite imagery and image recognition techniques. The evidence produced can help to better inform investment and policy decisions which aim to reduce the digital divide.

Preference Robust Optimization for Quasi-concave Choice Functions
Jian Wu,William B. Haskell,Wenjie Huang,Huifu Xu
arXiv

In behavioural economics, a decision maker's preferences are expressed by choice functions. Preference robust optimization (PRO) is concerned with problems where the decision maker's preferences are ambiguous, and the optimal decision is based on a robust choice function with respect to a preference ambiguity set. In this paper, we propose a PRO model to support choice functions that are: (i) monotonic (prefer more to less), (ii) quasi-concave (prefer diversification), and (iii) multi-attribute (have multiple objectives/criteria). As our main result, we show that the robust choice function can be constructed efficiently by solving a sequence of linear programming problems. Then, the robust choice function can be optimized efficiently by solving a sequence of convex optimization problems. Our numerical experiments for the portfolio optimization and capital allocation problems show that our method is practical and scalable.

Rise of the Kniesians: The professor-student network of Nobel laureates in economics
Richard S.J. Tol
arXiv

The paper presents the professor-student network of Nobel laureates in economics. 74 of the 79 Nobelists belong to one family tree. The remaining 5 belong to 3 separate trees. There are 350 men in the graph, and 4 women. Karl Knies is the central-most professor, followed by Wassily Leontief. No classical and few neo-classical economists have left notable descendants. Harvard is the central-most university, followed by Chicago and Berlin. Most candidates for the Nobel prize belong to the main family tree, but new trees may arise for the students of Terence Gorman and Denis Sargan.

Smart Retail Traders, Short Sellers, and Stock Returns
Boehmer, Ekkehart,Song, Wanshan
SSRN
Using short sell transactions data from 2010 to 2016, this paper is the first to provide a comprehensive sample of short selling initiated by retail investors. We find that retail short selling can predict negative stock returns. A trading strategy that mimics weekly retail shorting earns an annualized risk-adjusted value-(equal-) weighted return of 6% (12.25%). Their predictive power is beyond that coming from retail investors as a group or from off-exchange institutional short sellers. Our results suggest that retail short sellers can profitably exploit public information, especially when it is negative. Retail short sellers also tend to be contrarians who provide liquidity when the market is one-sided due to (institutional) buying pressure.

The Distortionary Effects of Central Bank Direct Lending on Firm Quality Dynamics
Li, Wenhao,Li, Ye
SSRN
Bypassing the banking systems, central banks around the world lent to nonfinancial firms on an unprecedented scale during the Covid-19 crisis. Effective and necessary as it is, direct lending is subject to credit mispricing given central banks' lack of information on individual borrowers. Our dynamic model characterizes a downward bias in firm quality distribution that is self-perpetuating: Direct lending in the current crisis necessitates a greater scale of interventions in future crises, which in turn cause more severe distortion of firm quality distribution. Such effects are amplified by firms' forward-looking investment decisions in normal times. Low-quality firms overinvest to take advantage of underpriced central bank credit in future crises while, on a relative basis, high-quality firms underinvest. The distortionary effects can be mitigated by central banks' use of market information, collaboration and regulation of informed banks, and coordination of direct lending and conventional monetary policy.

The Virtuous Cycle of Innovation and Capital Flows
Hausman, Naomi,Fehder, Daniel C.,Hochberg, Yael V.
SSRN
Does local innovation attract venture capital? Using a regime change in the commercialization of university innovation in 1980 that strongly increased university incentives to patent and license discoveries, we document the complement to Kortum and Lerner (2000)â€™s finding that financing leads to future innovation. Because universities have different technological strengths, each local area surrounding a university experienced an increase in innovation relevant to particular sets of industries after 1980â€"industries which differ widely across university counties. Comparing industries within a county that were more versus less related to the local universityâ€™s innovative strengths, we show that venture capital dollars after 1980 flowed systematically towards geographic areas and industries with the greatest sudden influx of innovation from universities. In contrast, the geographic and industry distribution of corporate patenting and prior venture financing in the pre-period does not predict a differential increase in future venture financing, suggesting that our findings are not solely driven by the 1979 pension fund reform that increased financing available to VCs across the board. The results support the notion of a â€œvirtuous cycleâ€ wherein innovation serves to draw capital investment that then funds future innovation.

Time-Series Variation in the Efficacy of Executive Risk-Taking Incentives: Evidence From Macroeconomic Uncertainty
Cadman, Brian D.,Campbell, John L.,Johnson, Ryan G.
SSRN
We examine the relation between macroeconomic uncertainty and the efficacy of compensation features that encourage risk-taking. We focus on two forms of risk-taking incentives: (1) the convexity of stock option payoffs (Vega) and (2) the protection against bad outcomes through severance agreements. We find that stock option convexity is less effective at encouraging risk-taking as macroeconomic uncertainty increases. In contrast, we find that severance agreements are more effective in the same circumstances. We also find that compensation committees respond to macroeconomic uncertainty by adjusting the level of equity compensation. Overall, our results suggest that the effectiveness of incentives to take risk varies with macroeconomic uncertainty and that boards of directors consider this in annual compensation design.

Unsecured Credit Supply Risk and Bond Prices
Mabille, Pierre
SSRN
Changes in credit supply induce large and frequent variations in households' access to unsecured debt. They generate a novel financial precautionary motive, which compounds the classical motive associated with idiosyncratic income risk, as borrowers accumulate risk-free bonds to hedge against them. Using a structural model, I estimate that this motive is an important driver of Treasury rates over the business cycle. It explains the historically low level of real rates in the last decade despite consumption growth, solving a "post-Great Recession risk-free rate puzzle". It is also critical for the volatility and comovement of household balance sheet and macroeconomic moments.

Wealth concentration in systems with unbiased binary exchanges
Ben-Hur Francisco Cardoso,Sebastián Gonçalves,José Roberto Iglesias
arXiv

Aiming to describe the wealth distribution evolution, several models consider an ensemble of interacting economic agents that exchange wealth in binary fashion. Intriguingly, models that consider an unbiased market, that gives to each agent the same chances to win in the game, are always out of equilibrium until the perfect inequality of the final state is attained. Here we present a rigorous analytical demonstration that any system driven by unbiased binary exchanges are doomed to drive the system to perfect inequality and zero mobility.

What Drives the Shortâ€Term Fluctuations of Banks' Exposure to Interest Rate Risk?
Memmel, Christoph
SSRN
We investigate whether banks actively manage their exposure to interest rate risk in the short run. Using bankâ€level data of German banks for the period 2011Q4â€"2017Q2, we find evidence that banks actively manage their interest rate risk exposure in their banking books. Specifically, they adjust their exposure to the earning opportunities presented by this risk, take account of their regulatory situation, and manage this exposure using interest swaps. We also find that the fixedâ€interest period of housing loans has an impact on the banks' overall exposure to interest rate risk. This last finding, in combination with the empirical evidence that customer preferences predominantly determine the fixedâ€interest period of these loans, is not in line with active interest rate risk management.

What Drives the Willingness to Pay for Insurance Contracts with Nonperformance Risk? Experimental Evidence
Hillebrandt, Marc-Andre
SSRN
An insurance contract may be nonperformingâ€"resulting in a situation in which the insured might be worse off than without insurance since the insured also loses the premium. This study analyzes different drivers influencing the willingness to pay for insurance contracts with inherent contract nonperformance risk. In an incentive-compatible laboratory experiment, subjects state their maximum willingness to pay for three different insurance contracts, which only differ in their risk of insurer nonperformance. While the median willingness to pay for no-default contracts is above the actuarially fair premium, both the mere existence of default risk (only 0.1 percent) and an increase in default risk sharply decrease participantsâ€™ median willingness to pay below the actuarially fair premia. Individuals, thus, are willing to pay considerably more for default-free insurance policies. Among others, the willingness to pay is influenced by framing, age, self-assessed risk attitude, and gender.

mlOSP: Towards a Unified Implementation of Regression Monte Carlo Algorithms
Mike Ludkovski
arXiv

We introduce mlOSP, a computational template for Machine Learning for Optimal Stopping Problems. The template is implemented in the R statistical environment and publicly available via a GitHub repository. mlOSP presents a unified numerical implementation of Regression Monte Carlo (RMC) approaches to optimal stopping, providing a state-of-the-art, open-source, reproducible and transparent platform. Highlighting its modular nature, we present multiple novel variants of RMC algorithms, especially in terms of constructing simulation designs for training the regressors, as well as in terms of machine learning regression modules. At the same time, mlOSP nests most of the existing RMC schemes, allowing for a consistent and verifiable benchmarking of extant algorithms. The article contains extensive R code snippets and figures, and serves the dual role of presenting new RMC features and as a vignette to the underlying software package.