Research articles for the 2020-12-03

A Concern Analysis of FOMC Statements Comparing The Great Recession and The COVID-19 Pandemic
Luis Felipe Gutiérrez,Sima Siami-Namini,Neda Tavakoli,Akbar Siami Namin

It is important and informative to compare and contrast major economic crises in order to confront novel and unknown cases such as the COVID-19 pandemic. The 2006 Great Recession and then the 2019 pandemic have a lot to share in terms of unemployment rate, consumption expenditures, and interest rates set by Federal Reserve. In addition to quantitative historical data, it is also interesting to compare the contents of Federal Reserve statements for the period of these two crises and find out whether Federal Reserve cares about similar concerns or there are some other issues that demand separate and unique monetary policies. This paper conducts an analysis to explore the Federal Reserve concerns as expressed in their statements for the period of 2005 to 2020. The concern analysis is performed using natural language processing (NLP) algorithms and a trend analysis of concern is also presented. We observe that there are some similarities between the Federal Reserve statements issued during the Great Recession with those issued for the 2019 COVID-19 pandemic.

A Lawyers' Guide to Empirical Corporate Governance
Eldar, Ofer
Empirical studies in corporate law have proliferated in the last two decades, and had a major impact on legal practice and policy relating to corporate governance. As a result, lawyers increasingly engage with these studies in order to understand their implications for legal practice and policy. This is often challenging because most lawyers are not trained in econometrics and statistical methods, and thus, there is a risk that they misinterpret these studies and their implications. These studies, while critical for evaluating different corporate governance regimes, suffer from well-known weaknesses. The purpose of this guide is to provide an overview of the key empirical strategies for evaluating the relationship between shareholder value and governance, and demonstrate to lawyers how they can engage with their weaknesses. The main theme of the guide is that largely all empirical strategies are based on three key intuitive comparisons: comparing firms with and without the governance provisions, evaluating the value of firms before and after adoptions or removals of governance provisions, and finally evaluating what happens to shareholder value after a legal change. By identifying these basic comparisons and how they come into play in the key methodologies for evaluating shareholder value, lawyers will be better positioned to assess empirical studies and evaluate their implications for legal policy.

A Macroeconomic Model with Heterogeneous Banks
Jamilov, Rustam
I develop a non-linear, dynamic general equilibrium macroeconomic model with heterogeneous intermediaries, incomplete markets, monopolistic financial competition, bank default risk, and endogenous entry. The model nests the Gertler and Kiyotaki (2010) framework as a special case, breaks bank scale invariance, and generates a bank net worth fluctuation problem analogous to the canonical Bewley-Huggett-Aiyagari-Imrohoglu environment. Quantitatively, the model produces realistic, right-skewed cross-sectional distributions of bank assets, net worth, leverage, default risk, marginal costs, and interest margins. The impact of bank heterogeneity on the macroeconomy is disciplined with an endogenous distribution of the Marginal Propensity to Lend (MPL) - a sufficient statistic for macro elasticities with respect to a wide range of bank-level or aggregate shocks. In this environment, I study targeted credit policy experiments where monetary and fiscal authorities are allowed to affect any individual bank in the distribution. Macroeconomic effects depend on the instrument type and the region of the distribution which is being targeted. I find that the impact on aggregate demand is greater if equity injections are directed towards big banks. Direct lending and liquidity facilities are more effective if applied to small banks. I conclude by characterizing normative implications with size and income-dependent optimal bank regulation.

Bayesian Quantile-Based Portfolio Selection
Taras Bodnar,Mathias Lindholm,Vilhelm Niklasson,Erik Thorsén

We study the optimal portfolio allocation problem from a Bayesian perspective using value at risk (VaR) and conditional value at risk (CVaR) as risk measures. By applying the posterior predictive distribution for the future portfolio return, we derive relevant quantiles needed in the computations of VaR and CVaR, and express the optimal portfolio weights in terms of observed data only. This is in contrast to the conventional method where the optimal solution is based on unobserved quantities which are estimated, leading to suboptimality. We also obtain the expressions for the weights of the global minimum VaR and CVaR portfolios, and specify conditions for their existence. It is shown that these portfolios may not exist if the confidence level used for the VaR or CVaR computation are too low. Moreover, analytical expressions for the mean-VaR and mean-CVaR efficient frontiers are presented and the extension of theoretical results to general coherent risk measures is provided. One of the main advantages of the suggested Bayesian approach is that the theoretical results are derived in the finite-sample case and thus they are exact and can be applied to large-dimensional portfolios.

By using simulation and real market data, we compare the new Bayesian approach to the conventional method by studying the performance and existence of the global minimum VaR portfolio and by analysing the estimated efficient frontiers. It is concluded that the Bayesian approach outperforms the conventional one, in particular at predicting the out-of-sample VaR.

Bewley Banks
Jamilov, Rustam,Monacelli, Tommaso
We develop a non-linear, quantitative macroeconomic model with heterogeneous monopolistic financial intermediaries, incomplete markets, default risk, endogenous bank entry, and aggregate uncertainty. The model generates a bank net worth distribution fluctuation problem analogous to the canonical Bewley-Huggett-Aiyagari-Imrohoglu environment. Our framework nests Gertler and Kiyotaki (2010) and the standard Real Business Cycle model as special cases. We present four general results. First, relative to the GK benchmark, banks' balance sheet-driven recessions can be significantly amplified, depending on the interaction of endogenous credit margins, the cyclicality of a precautionary lending motive and the (counter-) cyclicality of intermediaries' idiosyncratic risk. Second, equilibrium responses to aggregate exogenous shocks depend explicitly on the conditional distributions of bank net worth and leverage, which are endogenous time-varying objects. Aggregate shocks to banks' balance sheets that hit a concentrated and fragile banking distribution cause significantly larger recessions. A persistent consolidation in the U.S. banking sector that matches the one observed over 1980-2020 generates a large economic contraction and an increase in financial instability. Third, we document, and match, novel stylized facts on both the cross-section of credit margins and the cyclical properties of the first three moments of the cross-sectional distributions of financial intermediary assets, net worth, leverage, loan margins, and default risk. We find that shocks to capital quality and to leverage constraint tightness ("financial shocks'') can match fluctuations in the U.S. financial sector very well. Finally, we use the model to identify and characterize episodes of systemic banking crises. Such events are associated with large economic recessions, spikes in bank leverage, and large drops in the number of intermediaries.

Business and consumer uncertainty in the face of the pandemic: A sector analysis in European countries
Oscar Claveria

This paper examines the evolution of business and consumer uncertainty amid the coronavirus pandemic in 32 European countries and the European Union (EU).Since uncertainty is not directly observable, we approximate it using the geometric discrepancy indicator of Claveria et al. (2019).This approach allows us quantifying the proportion of disagreement in business and consumer expectations of 32 countries.We have used information from all monthly forward-looking questions contained in Joint Harmonised Programme of Business and Consumer Surveys conducted by the European Commission (the industry survey, the service survey, the retail trade survey, the building survey and the consumer survey).First, we have calculated a discrepancy indicator for each of the 17 survey questions analysed, which allows us to approximate the proportion of uncertainty about different aspects of economic activity, both form the demand and the supply sides of the economy.We then use these indicators to calculate disagreement indices at the sector level.We graphic the evolution of the degree of uncertainty in the main economic sectors of the analysed economies up to June 2020.We observe marked differences, both across variables, sectors and countries since the inception of the COVID-19 crisis.Finally, by adding the sectoral indicators, an indicator of business uncertainty is calculated and compared with that of consumers.Again, we find substantial differences in the evolution of uncertainty between managers and consumers.This analysis seeks to offer a global overview of the degree of economic uncertainty in the midst of the coronavirus crisis at the sectoral level.

Chartering the FinTech Future
Calomiris, Charles W.
Banks are intermediaries that either lend, execute payments, or do both. The specific means through which these functions are achieved varies over time. Unbundled FinTech shadow banks are often more profitable and efficient than traditional banks, and they are also pioneering new approaches to financial inclusion. Allowing, but not requiring, FinTech shadow banks to become chartered banks will permit those for which this is value-creating to thrive, which will bolster the efficiency and inclusiveness of the banking system.

China's Corporate Governance Development and ESG Evaluation
Zhang, Lyndsey
As the past few decades have seen China become the world’s second-largest economy and Chinese multinationals take leading roles in various sectors, China’s corporate governance (CG) has evolved and brought about new methods of Environmental, Social and Governance (ESG) evaluation. This paper examines China’s CG development status through case studies, looks at current Chinese ESG evaluation systems designed by MSCI and local Chinese institutes, and suggests four unique factors that should be integrated into future Chinese ESG evaluation system development. This is the first of a series of papers by Lyndsey Zhang that reviews current Chinese CG development and ESG implementation, identifies opportunities and challenges through case studies, and suggests areas for improvement for Chinese companies looking to accomplish the following: become more sustainable by increasing focus on corporate purpose and ESG considerations, and position themselves as industrial leaders in both the emerging market and global economy in the next few decades. This series also looks at other emerging market countries’ economic development and CG models, and explores how China’ success can be replicated by other emerging market countries to facilitate their economic growth and CG development.

Competition analysis on the over-the-counter credit default swap market
Louis Abraham

We study two questions related to competition on the OTC CDS market using data collected as part of the EMIR regulation.

First, we study the competition between central counterparties through collateral requirements. We present models that successfully estimate the initial margin requirements. However, our estimations are not precise enough to use them as input to a predictive model for CCP choice by counterparties in the OTC market.

Second, we model counterpart choice on the interdealer market using a novel semi-supervised predictive task. We present our methodology as part of the literature on model interpretability before arguing for the use of conditional entropy as the metric of interest to derive knowledge from data through a model-agnostic approach. In particular, we justify the use of deep neural networks to measure conditional entropy on real-world datasets. We create the $\textit{Razor entropy}$ using the framework of algorithmic information theory and derive an explicit formula that is identical to our semi-supervised training objective. Finally, we borrow concepts from game theory to define $\textit{top-k Shapley values}$. This novel method of payoff distribution satisfies most of the properties of Shapley values, and is of particular interest when the value function is monotone submodular. Unlike classical Shapley values, top-k Shapley values can be computed in quadratic time of the number of features instead of exponential. We implement our methodology and report the results on our particular task of counterpart choice.

Finally, we present an improvement to the $\textit{node2vec}$ algorithm that could for example be used to further study intermediation. We show that the neighbor sampling used in the generation of biased walks can be performed in logarithmic time with a quasilinear time pre-computation, unlike the current implementations that do not scale well.

Composite Administrative Procedures in the European Union
Eckes, Christina,D’Ambrosio, Raffaele
The two contributions in this legal working paper discuss the various aspects of composite administrative procedures in the context of both Single Supervisory Mechanism (SSM) and Single Resolution Mechanism (SRM) decision-making procedures. It addresses the definition of such procedures, their relevance in the SSM and SRM context, the allocation of powers in such procedures, differences between composite procedures in the SSM and SRM spheres and differences between composite procedures and mere cooperation or exchange of information procedures. They were originally presented at the ECB legal colloquium on ‘Composite administrative procedures in the European Union’, which took place in Frankfurt am Main in 2020.

Contract Rescission in the Real Estate Presale Market
Gan, Quan,Hu, Maggie,Wan, Wayne Xinwei
Presale is a popular method for selling residential properties and an important risk-sharing instrument for both homebuyers and developers. However, in Hong Kong’s presale housing market from 1996 to 2014, over 10% of the presale contracts were rescinded, resulting in an aggregate loss of HKD 436.67 million per year. In this study, we examine the rescission of presale contracts from a novel perspective with respect to option theory. We find that the moneyness of presale contracts, defined as the market price at settlement over the contract price, is negatively associated with the contract rescission rate. Specifically, contracts that are out of the money (i.e., the market price is less than the remaining payment) at settlement have a 12.2% higher rescission rate than the average. The presale call option delta and time to maturity at the purchase time positively predict rescission, which indicates a higher rescission rate when the buyer shares more of the price and time-induced risk. The Hong Kong government’s housing market macroprudential measures lead to significantly lower rescission rates. In addition, we find that lower moneyness at settlement leads to longer holding periods after settlement, which indicates that presale option features continue to influence the buyers’ behaviour after settlement due to the disposition effect. Overall, our findings shed light on understanding the presale market mechanism, the buyers’ strategic default behaviour, and the government’s role in curbing speculation and reducing the costs induced by presale rescission.

Coronovirus Propagation and Its Impact on the World Economy
Chenguel, Mohamed Bechir,Derbali, Abdelkader
From the appearance of an unknown virus in China to a "black Monday" which has seen markets fall like never since the end of 2008: in two months, the COVID-19 epidemic has brought the world economy to its knees. The current coronavirus epidemic that has started in China is a real tragedy for individuals and communities not only in China, but around the world. The results for the Chinese are already terrible and are likely to worsen. To date, more than 80,000 infections have been reported, including thousands of fatal cases. In response to the spread of the virus, the world health organization declared an international health emergency on January 30. All global production chains are affected, and even blocked for certain sectors. A quasi-monopoly, China is not only the factory of the world, but also the supplier of components for all the other factories or industries on the planet. Hundreds of companies have therefore suffered the full force of this crisis and are struggling to preserve activities, on which millions of consumers and employees depend, directly impacted by their operation or by their disruption. The epidemic is infecting several Asian countries and little by little other continents, with more than 115,000 cases of infection to date, including more than 4,000 dead.

Corporate Governance, Islamic Governance and Financial Flexibility
Aljughaiman, Abdullah,Salama, Aly,Verousis, Thanos
In this paper, we investigate the relationship between corporate governance structures and financial flexibility for conventional and Islamic banks in the Middle East and North Africa region. We construct a novel financial flexibility index for the banking sector. We show that corporate governance has a significant effect on banks’ financial flexibility. However, Shari’ah governance rules determine how that relationship is manifested in Islamic banks. Our results show that Western corporate governance structures and one-size-fits-all approaches to corporate governance may lead to suboptimal financial flexibility positions. Importantly, we show that “soft policies” to banking regulation are value-enhancing for the banking sector.

Corruption, Terrorism and the Stock Market: The Evidence from Iraq
Asaad, Zeravan,Marane, Bayar
The current study explains how corruption, terrorism, political stability and oil price has an effect on on the Iraq stock exchange utilizing corruption perception index as a proxy of corruption, global terrorism index as proxy for terrorism, political stability and oil price with ISX60 index as proxy of stock market for the period (2005-2019) using Ordinary Least Square method. The results show that the level of corruption, terrorism activities and political stability coefficient is significantly positive with Iraq stock exchange. In contrast, the oil price coefficient is significantly negative with Iraq stock exchange, which means that lower levels of corruption, less terrorism activities and more stability in political system have strong influence on stock market development in Iraq. The study concludes that the explanatory variables are important for Iraq stock exchange. Hence, the study suggests the policy makers to develop stock market by implementing policies and strategies to overcome high level of corruption, terrorism activities especially after ISIS/ISIL announcement has been made public. There is a need for transparency and creating stable political environment through good governance practices in order to attract more foreign investment and promote economic development. Factors like terrorism and corruption make economic and political systems unstable and has an adverse effect on on Iraq’s stock exchange performance.

Do People Engage in Motivated Reasoning to Think the World Is a Good Place for Others?
Michael Thaler

Motivated reasoning is a bias in inference in which people distort their updating process in the direction of more attractive beliefs. Prior work has shown how motivated reasoning leads people to form overly "positive" beliefs that also serve to bolster one's self-image in domains such as intelligence, prosociality, and politics. In this paper, I study whether positivity-motivated reasoning persists in domains where self-image does not play a role. In particular, I analyze whether individuals motivatedly reason to think that the world is a better place for others. Building off of the design from Thaler (2020), I conduct a large online experiment to test for positivity-motivated reasoning on issues such as cancer survival rates, others' happiness, and infant mortality. I find no systematic evidence for positivity-motivated or negativity-motivated reasoning, and can rule out modest effects. Positivity is not a sufficient condition for motivated reasoning.

Dynamic Collusion, Vertical Competition, and Systematic Risk
She, Guoman,Wei, K.C. John,You, Haifeng
Building on dynamic collusion theories, we predict that firms with less concentrated upstream or downstream industries have lower systematic risk because their supply chain partners tend to compete more aggressively during recessions, absorbing more of the adverse effect of aggregate shocks. Consistent with this prediction, we find that these firms experience a smaller decrease in fundamental performance during recessions, have significantly lower fundamental and capital market risks, and enjoy a significantly lower cost of equity capital. The overall results highlight the importance of vertical competition in determining a firm’s systematic risk and cost of equity capital.

Entrepreneurial Wealth and Employment: Tracing Out the Effects of a Stock Market Crash
Ring, Marius Alexander Kalleberg
I provide evidence that adverse shocks to the wealth of business owners during the Financial Crisis had large effects on their firms’ financing, employment, and investment. My empirical ap- proach exploits the dispersion in stock returns during 2008â€"09 as a source of exogenous variation in the wealth of entrepreneurs who held listed stocks. Using Norwegian data on stock market holdings, I assign wealth shocks based on pre-crisis portfolio weights and trace out the effects of these shocks to the entrepreneurs’ private firms. I find that the adverse investment and employment effects are primarily driven by young firms who, relative to mature firms, obtain considerably less bank financing following an owner wealth shock. I find that shocked firms reduce employment growth primarily through hiring less and, conditional on hiring, shocked young firms hire significantly fewer college-educated workers. These findings underline the presence of important frictions in equity- financing relationships; provide a causal link from asset price shocks to the real economy; and demonstrate that the procyclicality of entrepreneurial wealth is an important amplifier of adverse economic shocks.

Estimating the Blood Supply Elasticity: Evidence from a Universal Scale Benefit Scheme
Sara R. Machado

I estimate the semi-elasticity of blood donations with respect to a monetary benefit, namely the waiver of user fees when using the National Health Service, in Portugal. Using within-county variation over time in the value of the benefitI estimate both the unconditional elasticity, which captures overall response of the market, and the conditional elasticity, which holds constant the number of blood drives. This amounts to fixing a measure of the cost of donation to the blood donor. I instrument for the number of blood drives, which is endogenous, using a variable based on the number of weekend days and the proportion of blood drives on weekends. A one euro increase in the subsidy leads 1.8% more donations per 10000 inhabitants, conditional on the number of blood drives. The unconditional effect is smaller. The benefit does not attract new donors, instead it fosters repeated donation. Furthermore, the discontinuation of the benefit lead to a predicted decrease in donations of around 18%, on average. However, I show that blood drives have the potential to effectively substitute monetary incentives in solving market imbalances.

Fat Tailed Factors
Jan Rosenzweig

Standard, PCA-based factor analysis suffers from a number of well known problems due to the random nature of pairwise correlations of asset returns. We analyse an alternative based on ICA, where factors are identified based on their non-Gaussianity, instead of their variance. Generalizations of portfolio construction to the ICA framework leads to two semi-optimal portfolio construction methods: a fat-tailed portfolio, which maximises return per unit of non-Gaussianity, and the hybrid portfolio, which asymptotically reduces variance and non-Gaussianity in parallel. For fat-tailed portfolios, the portfolio weights scale like performance to the power of $1/3$, as opposed to linear scaling of Kelly portfolios; such portfolio construction significantly reduces portfolio concentration, and the winner-takes-all problem inherent in Kelly portfolios. For hybrid portfolios, the variance is diversified at the same rate as Kelly PCA-based portfolios, but excess kurtosis is diversified much faster than in Kelly, at the rate of $n^{-2}$ compared to Kelly portfolios' $n^{-1}$ for increasing number of components $n$.

Financing Sustainable Development in Africa: Taking Stock, and Looking Forward
Adejumo, Oluwabunmi,Efobi, Uchenna,Asongu, Simplice
Financing sustainable development in Africa requires financing options that is best for development in the region without further escalating other societal problems. This chapter takes stock of financing options previously advocated for financing development in the African region such as development assistance and foreign investment. By considering its implication on development outcomes like poverty, inequality, and aggregate human development, some drawbacks still exist. Therefore, the chapter identifies, reconfigures and reinvents other financial flows such as mutual support networks, agricultural cooperatives, crowd funding, fiscal responsibility, other forms of informal banking, and remittances, among others to African countries for efficient provision of structures that can aid in the sustenance of development. We conclude that these alternative means of financing development could be a viable policy option to bridge income and development gaps; thereby mainstreaming the process for financial inclusion and sustainability.

Fire Sales, the LOLR and Bank Runs With Continuous Asset Liquidity
Bindseil, Ulrich,Lanari, Edoardo
Bank's asset fire sales and recourse to central bank credit are modelled with continuous asset liquidity, allowing to derive the liability structure of a bank. Both asset sales liquidity and the central bank collateral framework are modeled as power functions within the unit interval. Funding stability is captured as a strategic bank run game in pure strategies between depositors. Fire sale liquidity and the central bank collateral framework determine jointly the ability of the banking system to deliver maturity transformation without endangering financial stability. The model also explains why banks tend to use the least liquid eligible collateral with the central bank and why a sudden non-anticipated reduction of asset liquidity, or a tightening of the collateral framework, can trigger a bank run. The model also shows that the collateral framework can be understood, beyond its aim to protect the central bank, as financial stability and non-conventional monetary policy instrument.

Gender Differences in Motivated Reasoning
Michael Thaler

Men and women systematically differ in their beliefs about their performance relative to others; in particular, men tend to be more overconfident. This paper provides support for one explanation for gender differences in overconfidence, performance-motivated reasoning, in which people distort how they process new information in ways that make them believe they outperformed others. Using a large online experiment, I find that male subjects distort information processing to favor their performance, while female subjects do not systematically distort information processing in either direction. These statistically-significant gender differences in performance-motivated reasoning mimic gender differences in overconfidence; beliefs of male subjects are systematically overconfident, while beliefs of female subjects are well-calibrated on average. The experiment also includes political questions, and finds that politically-motivated reasoning is similar for both men and women. These results suggest that, while men and women are both susceptible to motivated reasoning in general, men find it particularly attractive to believe that they outperformed others.

Government Lending As a Tool to Mitigate the Effect of Asymmetric Information
Park, Sangkyun
This paper analyzes the effect of asymmetric information on investment efficiency and the ways in which government credit can mitigate the inefficiency caused by asymmetric information. The inefficiency caused by asymmetric information critically depends on the way in which the project return is related with the project risk. To produce more general results, I assume that the project return and the project risk are independently distributed random variables. Under this assumption, asymmetric information produces two type of inefficiency: exclusion of good borrowers and inclusion of bad borrowers. Asymmetric information results in investment inefficiency by making the borrower composition in the sector where information is opaque (opaque sector) suboptimal and under-allocating credit to the opaque sector. In the case of credit rationing, the government can improve the borrower composition and the sector allocation using a subsidy, thereby improving investment efficiency.The most interesting result is a positive effect of a higher lending rate on investment efficiency. Government credit is much more likely to improve investment efficiency when the lending rate is set at a level above the private lenders' profit-maximization level than when the lending rate is set at a level below it. When lenders raise the lending rate, borrowers with a higher repayment probability drop out because the borrowing rate adjusted for the repayment probability (adjusted borrowing rate) is higher, and borrowers with a lower project return drop out because they cannot afford to pay a higher borrowing rate. Thus, a higher lending rate is likely to improve the borrower composition in terms of the average project return. The best way to deal with credit rationing, therefore, is to set the lending rate at a high level (low adjusted lending rate) to weed out low-return projects, bid up the funding rate to increase the loan volume in the opaque sector, and make up the difference between the high funding rate and the low adjusted lending rate with a subsidy. In this way, the government loan can accommodate many high-risk, high-return projects. This result is a dramatic deviation from the conventional notion of a subsidized loan, which almost automatically means a lower lending rate. A subsidized loan guarantee covering a moderate portion of loan losses can deliver similar outcomes.

IT Shields: Technology Adoption and Economic Resilience During the COVID-19 Pandemic
Pierri, Nicola,Timmer, Yannick
We study the economic effects of information technology (IT) adoption during the COVID-19 pandemic. Using data on IT adoption covering almost three million establishments in the US, we find that technology adoption can partly shield the economy from the impact of the pandemic. In areas where firms adopted more IT the unemployment rate rose less in response to social distancing. Our estimates imply that if the pandemic had hit the world 5 years ago, the resulting unemployment rate would have been 2 percentage points higher during April and May 2020 (16% vs. 14%), due to the lower availability of IT. Local IT adoption mitigates the labor market consequences of the pandemic for all individuals, regardless of gender and race, except those with the lowest level of educational attainment.

Impact of COVID-19 on the trade of goods and services in Spain
Asier Minondo

The COVID-19 crisis has led to the sharpest collapse in the Spanish trade of goods and services in recent decades. The containment measures adopted to arrest the spread of the virus have caused an especially intense fall of trade in services. Spain's export specialization in transport equipment, capital and outdoor goods, and services that rely on the movement of people has made the COVID-19 trade crisis more intense in Spain than in the rest of the European Union. However, the nature of the collapse suggests that trade in goods can recover swiftly when the health crisis ends. On the other hand, COVID-19 may have a long-term negative impact on the trade of services that rely on the movement of people.

Industrial Robots and Finance
Zhou, Tong,Lyandres, Evgeny,Zhou, Kaiguo,Cheng, Xin
We examine empirically the effects of industrial robot adoption on firms' financing using firm-level data on robot deployment in five Chinese provinces across multiple industries. Robot adoption leads to higher leverage and lower cost of debt, at both the extensive and intensive margins. The staggered nature of the introduction of robot-friendly policies across provinces and industries allows us to make causal claims. We propose a mechanism behind these relations using a model in which a firm chooses inputs into its production function - non-robot physical capital, labor, and robots - as well as its capital structure. Robots, being a substitute for labor, provide an operational hedge against labor price uncertainty. As a result, robot deployment reduces risk and increases debt capacity. Unique predictions of the model, concerning the effects of labor contribution and robot-labor substitution on the strength of the relation between robot adoption and corporate financing, are borne out in the data.

LGBTQ Workplace Inclusion before and after Obergefell V. Hodges: Association with Tobin’s Q and ROA
Foster, Benjamin P.,Manikas, Andrew,Preece, Dianna
Diversity and inclusion advocates claim organizations benefit from diversity. Diversity is purportedly associated with many positive outcomes such as increased creativity, reduced turnover, increased productivity, a broader talent pool from which to choose, improved employee performance, increased innovation, potentially new customers and, ultimately, higher profits. Many studies support that claim, finding evidence that diversity is associated with higher company returns and market values. We examine if the association of company LGBTQ-benefits and policies with corporate returns and market value changed in the years around the 2015 Supreme Court ruling in Obergefell v. Hodges that legalized same-sex marriage nationally. The Corporate Equality Index (CEI), calculated and reported by the Human Rights Campaign ( 2020a), is used as a proxy for the level of company LGBTQ inclusiveness and support. The CEI is meant to provide a tool to rate U.S. businesses on their treatment of LGBTQ employees, investors and consumers, thereby focusing on a different aspect of diversity than simply defining diversity based on gender and/or race and ethnicity. Results indicate that higher HRC CEI ratings appear to be associated with higher Tobin’s q, a measure of long-term corporate performance. We find similar results for three time periods, pre-Obergefell, during the Supreme Court decision year, and post-Obergefell. These results indicate that diversity policies toward the LGBTQ community are associated with higher company market value, regardless of how uniformly US law has regarded same-sex marriage.

Leveraged Loans: Is High Leverage Risk Priced in?
Newton, David,Ongena, Steven,Xie, Ru,Zhao, Binru
The economic downturn caused by the Covid-19 pandemic accentuates extant concerns about the leveraged loan market. Using a novel dataset, we show that leveraged loan spreads have declined for nonbank-facilities since the introduction of the Interagency Guidance on Leveraged Lending (IGLL) and the ensuing “frequently asked questions for implementing the March 2013 guidance”. The decline in leveraged loan spreads is significant for highly leveraged borrowers, especially when involving term loans. We further demonstrate that risk shifting issues associated with the high level of Collateralized Loan Obligations issuance strongly explain the decline of nonbank leveraged loan spreads. In addition, a higher degree of information asymmetry, driven by an increase in covenant-lite loan issuance and weaker investor protection, are strongly associated with the narrowed leverage risk premium.

Locked-in at Home: The Impact of COVID-19 School Closures on Female Analysts' Attention at Work
Du, Mengqiao
This paper explores the shock of school closures caused by the COVID-19 pandemic to study the effect of domestic burdens on female analysts' attention at work. Compared to male analysts, female analysts are 9% to 16% less likely to issue timely forecasts after school closures. School closures do not significantly influence the forecast timeliness of female analysts without children but reduce mothers' forecast timeliness by up to 20%. Consistent with the explanation of the gender imbalance in the allocation of domestic work, the gender difference in the effect of the COVID-19 school closures on forecast timeliness is more salient in states with conservative gender attitudes. In addition, female analysts shift the time of day they release analysts' forecasts to time periods without intensive childcare and tend to ask shorter and fewer questions at earnings conference calls after the school closures. The findings indicate that professional women are more likely to get distracted and have to reduce labor supply when the demand for childcare increases, compared to their male counterparts, which may eventually lead to the notable gender gap in competitive industries.

Maker-Taker Fees and Liquidity: The Role of Commission Structures
Brolley, Michael,Malinova, Katya
Equity exchanges typically subsidize liquidity providers through a rebate, and charge liquidity demanders a fee. We model the impact of this asymmetric fee structure in a setting where some traders pay fees directly to the exchange -- a "maker-taker trader" -- while others incur a flat fee per trade (e.g., through a broker commission). When the fraction of flat-fee traders is sufficiently small, only the total exchange fee per transaction has an economic impact. If sufficiently many investors face flat commissions, however, trading volume and investor welfare fall, with maker-taker traders assuming a de-facto market-maker role. Moreover, maker-taker traders earn higher average profits.

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.

Multi-portfolio Optimization: A Fairness-aware Target-oriented Model
Yu, Gen,Cai, Xiaoqiang,Long, Daniel Zhuoyu,zhang, lianmin
We consider a multi-portfolio optimization problem where nonlinear market impact costs result in a strong dependency of one account's performance on the trading activities of other accounts. We develop a novel target-oriented model that jointly optimizes the rebalancing trades and split of market impact costs. The key advantages of our proposed model include the consideration of clients' targets on investment returns and the incorporation of distributional uncertainty. The former helps the fund manager circumvent the difficulty in identifying clients' utility functions or risk parameters, while the latter addresses a practical challenge that the probability distributions of risky asset returns cannot be fully observed. Specifically, to evaluate multiple portfolios' investment payoffs achieving their targets, we propose a new type of performance measure, called the fairness-aware multi-participant satisficing (FMS) criterion. This criterion can be extended to encompass the distributional uncertainty and has the salient feature of addressing the fairness issue with the collective satisfaction level as determined by the least satisfied participant. We find that, structurally, the FMS criterion has a dual connection with a set of risk measures. For multi-portfolio optimization, we consider the FMS criterion with conditional value-at-risk, a popular risk proxy in financial studies, being the underlying risk measure to further account for the magnitude of shortfalls against targets. The resulting problem, although non-convex, can be solved efficiently by solving an equivalent converging sequence of tractable subproblems. The numerical study shows that our approach outperforms utility-based models in achieving targets and is more robust in out-of-sample performance.

On the modelling of multivariate counts with Cox processes and dependent shot noise intensities
Benjamin Avanzi,Gregory Clive Taylor,Bernard Wong,Xinda Yang

In this paper, we develop a method to model and estimate several, _dependent_ count processes, using granular data. Specifically, we develop a multivariate Cox process with shot noise intensities to jointly model the arrival process of counts (e.g. insurance claims). The dependency structure is introduced via multivariate shot noise _intensity_ processes which are connected with the help of L\'evy copulas. In aggregate, our approach allows for (i) over-dispersion and auto-correlation within each line of business; (ii) realistic features involving time-varying, known covariates; and (iii) parsimonious dependence between processes without requiring simultaneous primary (e.g. accidents) events.

The explicit incorporation of time-varying, known covariates can accommodate characteristics of real data and hence facilitate implementation in practice. In an insurance context, these could be changes in policy volumes over time, as well as seasonality patterns and trends, which may explain some of the relationship (dependence) between multiple claims processes, or at least help tease out those relationships.

Finally, we develop a filtering algorithm based on the reversible-jump Markov Chain Monte Carlo (RJMCMC) method to estimate the latent stochastic intensities and illustrate model calibration using real data from the AUSI data set.

On the optimality of joint periodic and extraordinary dividend strategies
Benjamin Avanzi,Hayden Lau,Bernard Wong

In this paper, we model the cash surplus (or equity) of a risky business with a Brownian motion. Owners can take cash out of the surplus in the form of "dividends", subject to transaction costs. However, if the surplus hits 0 then ruin occurs and the business cannot operate any more.

We consider two types of dividend distributions: (i) periodic, regular ones (that is, dividends can be paid only at countable many points in time, according to a specific arrival process); and (ii) extraordinary dividend payments that can be made immediately at any time (that is, the dividend decision time space is continuous and matches that of the surplus process). Both types of dividends attract proportional transaction costs, and extraordinary distributions also attracts fixed transaction costs, a realistic feature. A dividend strategy that involves both types of distributions (periodic and extraordinary) is qualified as "hybrid".

We determine which strategies (either periodic, immediate, or hybrid) are optimal, that is, we show which are the strategies that maximise the expected present value of dividends paid until ruin, net of transaction costs. Sometimes, a liquidation strategy (which pays out all monies and stops the process) is optimal. Which strategy is optimal depends on the profitability of the business, and the level of (proportional and fixed) transaction costs. Results are illustrated.

Optimal periodic dividend strategies for spectrally negative L\'evy processes with fixed transaction costs
Benjamin Avanzi,Hayden Lau,Bernard Wong

Maximising dividends is one classical stability criterion in actuarial risk theory. Motivated by the fact that dividends are paid periodically in real life, $\textit{periodic}$ dividend strategies were recently introduced (Albrecher, Gerber and Shiu, 2011). In this paper, we incorporate fixed transaction costs into the model and study the optimal periodic dividend strategy with fixed transaction costs for spectrally negative L\'evy processes.

The value function of a periodic $(b_u,b_l)$ strategy is calculated by means of exiting identities and It\^o's excusion when the surplus process is of unbounded variation. We show that a sufficient condition for optimality is that the L\'evy measure admits a density which is completely monotonic. Under such assumptions, a periodic $(b_u,b_l)$ strategy is confirmed to be optimal.

Results are illustrated.

Pandemic Tail Risk
Breugem, Matthijs,Corvino, Raffaele,Marfè, Roberto,Schoenleber, Lorenzo
This paper shows that tail risk in US equity markets increased in advance of the COVID-19 outbreak in February 2020. While tail risk of the market index did not move much before the outbreak, we document that tail risk of less pandemic-resilient economic sectors boomed in advance. This result is robust to alternative specifications of tail risk, measured from either option or credit default swap contracts. Long-horizon tail risk measures provide information about investors' perception of pandemic risk persistence and economic recovery.

Reviving Austerity: Populist Support for Unpopular Economics in Canada
Ufodike, Akolisa
Critics of austerity argue that it is a failure, yet there remains a high level of political and public support for it as economic policy. Using evidence from Alberta, Canada, a neoliberal democratic economy, this paper aims to explain the apparent paradox of the popularity of austerity by disaggregating the publics into the government, the opposition party, organized interests, public sector employees, and the Public. We find that the organizations opposed to austerity measures often purport to advocate in the public interest but have a conflict of interest and ethical dilemma as the Public believes that there is a time for austerity, just as there is a time for consumption. Moreover, governments that implement “unpopular” austerity measures while maintaining popular political support may simply be reflecting public sentiment about the appropriateness of austerity for that time. Reviving austerity is relevant to policy-makers who need to manage economic policy in periods of sustained fiscal crises and cycle shocks, as has been the case in Alberta and many other jurisdictions in the past decade.

Short-Selling Threats and Corporate Tax Policy: Evidence from Regulation SHO
Maharjan, Johan,Omer, Thomas C.,Zhao, Yijiang
This study examines the effect of short-selling threats on tax aggressiveness. The SEC’s Regulation SHO pilot program relaxed short-selling constraints for a sample of U.S. stocks, thus leading to an exogenous increase in short-selling threats for these pilot stocks. After controlling for non-randomization of treatment and control firms, we find that pilot firms experienced a significant decrease in tax aggressiveness in the during-pilot period, relative to non-pilot firms. We further find that the effect is stronger when firms are more opaque, when CEOs have greater job-security concerns, and when CEOs’ equity portfolios are more sensitive to share prices. Our findings suggest that short-selling threats, which facilitate the flow of bad news into share prices and thus dampen the price inflation, reduce managers' incentive to use aggressive tax policies as an earnings manipulation tool to inflate share prices.

Spillover Effects between Greece and Cyprus: A DCC Model on the Interdependence of Small Economies
Samitas, Aristeidis,Kampouris, Elias,Polyzos, Stathis,Spyridou, Anastasia
This paper discusses the volatility spillovers between the Greek Debt crisis and the Cypriot financial crisis. Cyprus was in the spotlight of financial markets due to significant problems stemming from the banking sector, which were dealt with by EU regulators with a bail-in on bank deposits. The current analysis aims to shed light on the reasons behind the implementation of this novel approach to bank distress. The study uses a Dynamic Conditional Correlation model on the returns of the stock markets of the two countries, which shows strong spillover effects during the period leading up to the 2013 Cypriot crisis, but a significant decrease of these effects from then on. The results confirm the close interdependence of the Greek and Cypriot economies before 2013 but also show that this interdependence was limited from that point onwards. This would indicate that since the risk of contagion to the Eurozone had diminished, regulators were able to test the bail-in solution in Cyprus in 2015. The current work contributes to the discussion on the interdependence of European economies. The paper’s findings can also be applied to other emerging European economies.

Stewardship Activities and Agency Problems after Japanese Corporate Governance Reform
Omura, Hiroyasu
Japanese corporate governance reform is implemented by an introduction of corporate governance code and stewardship code, in which stewardship activities by institutional investors play an important role in terms of reduction of agency cost. In this report, stewardship activities are focused based upon the idea that agency theory, newly introduced as principal cost theory, could support a conceptual framework of governance reform and analyzed that as an important function for agency cost reduction. In order to make governance reform more effective, I make several proposals, cost sharing of stewardship activities by asset owners and full disclosure of those activities based on investment strategies, such as actively managed strategies and/or passively managed ones, for stewardship activities of both engagement and proxy voting, especially by index fund managers.

Supranational Rules, National Discretion: Increasing versus Inflating Regulatory Bank Capital?
Gropp, Reint,Mosk, Thomas C.,Ongena, Steven,Wix, Carlo,Simac, Ines
We study how higher capital requirements introduced at the supranational level affect the regulatory capital of banks across countries. Using the 2011 EBA capital exercise as a quasi-natural experiment, we find that treated banks exploit discretion in the calculation of regulatory capital to inflate their capital ratios without a commensurate increase in their book equity and without a reduction in bank risk. Regulatory capital inflation is more pronounced in countries where credit supply is expected to tighten, suggesting that national authorities forbear their domestic banks to meet supranational requirements, with a focus on short-term economic considerations.

The "Fake News" Effect: Experimentally Identifying Motivated Reasoning Using Trust in News
Michael Thaler

Motivated reasoning posits that people distort how they process information in the direction of beliefs they find attractive. This paper creates a novel experimental design to identify motivated reasoning from Bayesian updating when people enter into the experiment with endogenously different beliefs. It analyzes how subjects assess the veracity of information sources that tell them the median of their belief distribution is too high or too low. A Bayesian would infer nothing about the source veracity from this message, but a motivated reasoner would believe the source were more truthful when it reports the direction that he is more motivated to believe. Experimental results show evidence for politically-motivated reasoning about immigration, income mobility, crime, racial discrimination, gender, climate change, and gun laws. Motivated reasoning from these messages leads people's beliefs to become more polarized and less accurate, even though the messages are uninformative.

The Causal Effect of the Dollar on Trade
Ma, Sai,Schmidt-Eisenlohr, Tim,Zhang, Shaojun
This paper establishes a causal link between the dollar exchange rate and international trade flows, employing a new instrument for the U.S. Dollar that is based on domestic U.S. housing activity (Ma and Zhang (2019)). In line with the dominant currency paradigm (Gopinath et al. (2020)), import prices and quantities respond strongly to a country’s exchange rate with the U.S. dollar. Once we instrument the dollar, we find evidence for perfect pass-through of the dollar exchange rate to import prices. A dollar appreciation of 1 percent lowers import quantities by 1.5 percent for countries that fully invoice in dollars.

The Diplomacy Discount in Global Syndicated Loans
Ambrocio, Gene,Gu, Xian,Hasan, Iftekhar,Politsidis, Panagiotis N.
We investigate whether state-to-state political ties with a global superpower affects the pricing of international syndicated bank loans. We find statistically and economically significant effects of stronger state political ties with the United States, arguably the most dominant global superpower of our times, on the pricing of global syndicated loans. A one standard deviation improvement in state political ties between the U.S. and the government of a borrower's home country is associated with 14 basis points lower loan spread. This is equivalent to a cumulative savings in loan interest payments of about 10 million USD for the average loan in our sample. The effect of political ties on loan pricing is also stronger when lead arrangers are U.S. banks, during periods in which the U.S. is engaged in armed conflicts such as in the Afghan, Iraq and Syrian wars, when the U.S. president belongs to the Republican Party, and for borrowers with better balance sheets and prior lending relationships. Notably, we find that not all firms exploit this mechanism, as cross-listed firms and firms in countries with strong institutional quality and ability to attract institutional investors are much less reliant on political ties for lowering their borrowing costs.

The Efficacy of the Conditional CAPM: Improved Tests in an International Context
Owen, Stephen R.
Using a machine learning model known as a Long-Short Term Memory model to overcome high dimensionality obstacles, I jointly predict the conditional second moments of eight international indices and test the conditional Capital Asset Pricing Model (CAPM). My results indicate that the world price of covariance risk is equal across eight world equity markets according to the conditional CAPM. Strengths and weaknesses of the estimation process are studied. All results are assessed and reported using out-of-sample tests.

Thermodynamics Formulation of Economics
Burin Gumjudpai

We consider demand-side economy. Using Caratheodory's approach, we define empirical existence of equation of state (EoS) and coordinates. We found new insights of thermodynamics EoS, the {\it effect structure}. Rules are proposed as criteria in promoting and classifying an empirical law to EoS status. Four laws of thermodynamics are given for economics. We proposed a method to model the EoS with econometrics. Consumer surplus in economics can not be considered as utility. Concepts such as total wealth, generalized utility and generalized surplus are introduced. EoS provides solid foundation in statistical mechanics modelling of economics and finance.

Towards a Better Fed Model
Micaletti, Raymond
We present an alternative to the widely known and much-maligned "Fed model." The proposed alternative makes a coherent comparison between equities and bonds that eliminates the theoretical and empirical flaws of the original (as well as any need for ad hoc asset-class volatility adjustments). The output of the model is a time-series value factor, which is then used to develop a tactical asset allocation strategy. Historical simulations suggest the resulting strategy is superior not only to the original Fed model, but to tactical strategies based on other popular time-series value factors as well. Beyond its forecasting and tactical allocation performance, the proposed model also provides significant insight into equity market dynamics--insight that has been validated by recent historical events.

Wealth Taxation and Household Saving: Evidence from Assessment Discontinuities in Norway
Ring, Marius Alexander Kalleberg
I use a quasi-experiment in Norway to examine how households respond to capital taxation. The introduction of a new wealth assessment methodology in 2010 led to geographic discontinuities in household exposure to wealth taxes, along both the extensive and intensive margins. I exploit this novel variation using a Boundary Discontinuity approach. I find that exposure to wealth taxes has a positive effect on both saving and labor earnings. These results imply that income effects may dominate substitution effects in household responses to rate of return shocks, which has important implications for both optimal capital taxation and macroeconomic modeling.

What Determines Initial Coin Offering Success: A Cross-Country Study
Ahmad, Muhammad Farooq,Kowalewski, Oskar,Pisany, Paweł
We investigate the determinants of ICO campaigns' presence and success using data on 503 initial coin offerings (ICOs) from 60 countries that took place between 2015 and 2018. We took individual project perspective and country-wide perspective into account. Our findings show that expert ratings, insider retention, and resource-related signals, such as the number of team members and advisors, contribute positively to ICO funding success and post-ICO activity. Conversely, organizing presale and bonuses contribute negatively. Moreover, we established that countries' financial system development and ICO-related legal certainty boost the crypto-market. More importantly, we also document that countries' cultures foster ICO market development.

Which Asset Pricing Model Do Firms Use? A Revealed Preference Approach
Cho, Thummim,Salarkia, Amirabas
Market timing is a primary factor in firm managers’ equity issuance decision. However, since the firm is a monopolist in the supply of its own shares, mispricing is not eliminated by corporate arbitrage. We take this insight and use a revealed preference approach to ask which asset pricing model firm managers use to estimate the equity market mispricing of its shares and make net issuance decisions. We find that the CAPM is the closest risk model to that of firm managers. We show that our results are not driven by the need of external funds or a change in the level ofrisk after equity issuance.

Who Is Unhappy for Brexit? A Machine-Learning, Agent-based study on Financial Instability
Polyzos, Stathis,Samitas, Aristeidis,Katsaiti, Marina-Selini
In this paper, we assess the happiness cost of Brexit in the UK and the EU, using data from the Gallup World Poll. We implement a two-stage learning machine, using a naive Bayes classifier to extract happiness preferences of the population and then passing these onto an artificial neural network of attributes to generate dynamic happiness functions for each household, on an agent-based modelling framework. We find that there is a significant long-run cost in terms of both happiness and unemployment, which primarily affects the most vulnerable portion of the population. In addition, despite the expected instability in City’s financial centre, the UK financial sector seems to be well equipped to deal with the repercussions, thus minimising the welfare costs for the country. Our findings extend the discussion of the economic costs of Brexit, by adding the welfare cost of the ensuing financial instability.

Who Stays and Who Goes? Aggregate Shocks and Firm Employment
Hamdi, Naser,Kalda, Ankit,Moser, Rodrigo,Sovich, David
We use administrative payroll data to examine how firms adjust employment in response to aggregate shocks. We use the COVID-19 pandemic as a laboratory. Exploiting within firm-state variation, we find that firms are more likely to lay off low-income and high-tenure employees before other classes of workers. This pattern disappears a few weeks into the pandemic, after which layoffs are more uniformly distributed. This pecking order of layoffs is most pronounced in low-skilled industries (e.g., retail trade) and in firms with high turnover costs. Our results are consistent with theories which document that reputational costs and search frictions play an important role in determining firms' responses to aggregate shocks. To further evaluate these frictions in our setting we examine whether expansion of unemployment benefits under the CARES Act increased the likelihood of layoffs. Consistent with both frictions, we find that even within the same income bucket, firms are more likely to lay off employees in states with more generous benefits.

Пенсионните Фондове в Ð'ългария: резултати и перспективи (Pension Funds in Bulgaria: Performance and Prospects)
Christoff, Lubomir
Bulgarian Abstract: Представям резултатите от функциониране на пенсионните фондове в Ð'ългария между 2001 и 30.06.2020 г. Наблюдавам, че:• пенсионните фондове се управляват прекалено консервативно, в разрез с дългосрочните цели на осигурените лица; • доходността, реализирана при активно управление на пенсионните фондове в периода 30.06.2004-30.06.2020 г. изостава значително от представянето на портфейл-еталон с по-нисък риск и по-ниски такси. Осигурените плащат такси над пазарните за доходност под пазарната. • реалната доходност, получена от осигурените в периода 2001-30.06.2020 г. е отрицателна. Пенсионните доходи не натрупват, а разрушават покупателната способност на осигурителните вноски. • пенсията от универсален пенсионен фонд (УПФ) не е в състояние да замести намалението на държавната пенсия при 40 години непрекъснато осигуряване. Така е, защото доходността, получавана от осигурените изостава безнадеждно от темпа на средния осигурителен доход за страната. Така, за мнозинството две пенсии са по-малко от една.Изтъквам пороци на пенсионните фондове, вградени в Кодекса за социално осигуряване, които увреждат интереса на осигурените лица. Това превръща пенсионните фондове в:• негодни да осигурят допълнителни пенсии, • неизгодни - с такси над пазарните и • неподходящи тъй като не са съобразени с индивидуалния профил на осигурените, пенсионни продукти. Капиталовите пенсионни схеми у нас имат бъдеще при две условия, че: • са в състояние да осигурят допълнителни пенсии и • се управляват с оглед реализиране на положителна реална доходност за осигурените. За постигане на тези резултати е необходимо като минимум: • финансиране на капиталовите схеми с наистина допълнителни осигурителни вноски и • отстраняване вродените пороци в регулирането на пенсионните фондове. English abstract: I analyze the Bulgarian pension funds’ performance between end-2001 and end-June 2020 and observe that:* pension funds in Bulgaria are managed overly conservatively and not according to the best long-term interests of pension savers; * actively managed pension portfolios underperform by a wide margin a simple passive benchmark with lower risk and lower fees. Bulgarian savers in pension funds overpay for underperformance; * the real return credited to the pension savers’ accounts in 18.5 years (31.12.2001-30.06.2020) is negative. Bulgarian pension funds destroy value. * a DC scheme (universal pension fund) pension fails to compensate the pension saver for the reduction of the state pension and thus two pensions in Bulgaria are less than one. This is due to: a) investments in universal pension funds are financed at the expense of the mandatory contribution to the state pension fund. In effect the DC scheme is a partial privatization of the public pension scheme. As a result the state pension of those contributing to universal pension funds is reduced pro rata; b) very low (negative in real terms) returns of universal pension funds, substantially lower than the rate of wage growth.I analyze the pension fund regulation and find important flaws in it, which turn Bulgarian pension funds into pension products: * not fit for purpose (unable to deliver supplemental pension) * disadvantageous due to above market fees and charges and * unsuitable as not aligned with the investment profile of individual pension savers. As a whole, the partial privatization of the public pension scheme has failed pension savers in Bulgaria. I recommend to: - completely reverse pension privatization and - eliminated pension funds’ flaws, embedded in the regulation.Privately managed pension funds in Bulgaria have a role to play under two conditions: - truly supplementary contributions and - capacity to deliver positive real returns in the long run.