Research articles for the 2021-01-14

A Blockchain-based Forensic Model for Financial Crime Investigation: The Embezzlement Scenario
Zarpala, Lamprini,Casino, Fran
The financial crime landscape is evolving along with the digitization in financial services. In this context, laws and regulations cannot efficiently cope with a fast-moving industry such as finance, which translates in late adoption of measures and legal voids, providing a fruitful landscape for malicious actors. In parallel, blockchain technology and its promising features such as immutability, verifiability, and authentication, enhance the opportunities of financial forensics. In this paper, we focus on an embezzlement scheme and we provide a forensic-by-design methodology for its investigation. In addition, the feasibility and adaptability of our approach can be extended and embrace digital investigations on other types of schemes. We provide a functional implementation based on smart contracts and we integrate standardized forensic flows and chain of custody preservation mechanisms. Finally, we discuss the benefits and challenges of the symbiotic relationship between blockchain and financial investigations, along with future research directions.

A comparative study of scoring systems by simulations
László Csató

Scoring rules aggregate individual rankings by assigning some points to each position in each ranking such that the total sum of points provides the overall ranking of the alternatives. They are widely used in sports competitions consisting of multiple contests. We study the tradeoff between two risks in this setting: (1) the threat of early clinch when the title has been clinched before the last contest(s) of the competition take place; (2) the danger of winning the competition without finishing first in any contest. In particular, four historical points scoring systems of the Formula One World Championship are compared with the family of geometric scoring rules that have favourable axiomatic properties. The formers are found to be competitive or even better. The current scheme seems to be a reasonable compromise in optimising the above goals. Our results shed more light on the evolution of the Formula One points scoring systems and contribute to the issue of choosing the set of point values.

Applications of the Coase Theorem
Tatyana Deryugina,Frances Moore,Richard S.J. Tol

The Coase Theorem has a central place in the theory of environmental economics and regulation. But its applicability for solving real-world externality problems remains debated. In this paper, we first place this seminal contribution in its historical context. We then survey the experimental literature that has tested the importance of the many, often tacit assumptions in the Coase Theorem in the laboratory. We discuss a selection of applications of the Coase Theorem to actual environmental problems, distinguishing between situations in which the polluter or the pollutee pays. While limited in scope, Coasian bargaining over externalities offers a pragmatic solution to problems that are difficult to solve in any other way.

Are Bank Capital Requirements Optimally Set? Evidence from Researchers’ Views
Ristolainen, Kim
We survey 149 leading academic researchers on bank capital regulation. The median (average) respondent prefers a 10% (15%) minimum non-risk-weighted equity-to-assets ratio, which is considerably higher than the current requirement. North Americans prefer a significantly higher equity-to-assets ratio than Europeans. We find substantial support for the new forms of regulation introduced in Basel III, such as liquidity requirements. Views are most dispersed regarding the use of hybrid assets and bail-inable debt in capital regulation. 70% of experts would support an additional market-based capital requirement. When investigating factors driving capital requirement preferences, we find that the typical expert believes a five percentage points increase in capital requirements would “probably decrease” both the likelihood and social cost of a crisis with “minimal to no change” to loan volumes and economic activity. The best predictor of capital requirement preference is how strongly an expert believes that higher capital requirements would increase the cost of bank lending.

Are Global Exchange Traded Fund Pretentious on Exchange Rate Fluctuation? A Study Using GARCH Model
E, Geeta ,Hawaldar, Iqbal Thonse ,Bai G, Vidya,Suhan, Mendon,T.M., Rajesha
Investors invest in a foreign market to reap the benefits of currency differences. The change in the value of underlying assets affects these hedged funds and, at the same time, restricts investors from higher return possible in unhedged funds. This study aims to examine the performance of most actively traded shares in Exchange Traded Fund and any influence, along with tracking the information from the index. This study also analyzes the currency fluctuation and its impact on returns and volatility of ETF and index. The equity ETF, which tracks NASDAQ (NDX 100), is chosen for the study, and the data analysis is carried out using statistical methods such as correlation, regression, and GARCH model. The study utilizes the currency rate data from 2013 to 2018 of USD, GBP, and INR and examines its effect on the NDX (NASDAQ). The study emphasizes whether the ETF as a basket of securities is insensitive to currency rate fluctuations. It is found that the response of ETF to the currency movements is likely due to its underlying index. The study concludes that Motilal Oswal shares in NASDAQ 100 ETF are highly sensitive to the NDX 100 movements; thus, there is no direct impact between ETF and index performance through exchange rate fluctuation.

Attention, Lottery, or Salience? The Impact of Extreme Payoffs on Chinese Mutual Fund Flows
Hu, Shiyang,Xiang, Cheng,Quan, Xiaofeng
Using a sample of Chinese mutual funds from 2004 to 2019, we find that investors direct flows into (out of) funds with salient upsides (downsides), controlling for a set of known determinants of fund flows. This effect is robust to alternative measures of key variables and is more pronounced for funds with larger individual ownership. This effect is not explained by individuals’ attention-driven purchases of attention-grabbing funds, funds’ lottery-like features, or the characteristics of funds’ underlying stocks. The salience theory, which argues that extreme payoffs distort individuals’ decision weights on risky asset choices only if these payoffs stand out relative to available alternatives and thus are salient, offers a plausible explanation for this effect.

Bank Instability: Interbank Linkages and the Role of Disclosure
Trautmann, Stefan T.
We study the impact of disclosure about bank fundamentals on depositors’ behavior in the presence (and absence) of economic linkages between financial institutions. Using a controlled laboratory environment, we identify under which conditions disclosure is conducive to bank stability. We find that bank deposits are sensitive to perceived bank performance. While banks with strong fundamentals benefit from more precise disclosure, an opposing effect is present for solvent banks with weaker fundamentals. Depositors take information about economic linkages into account and correctly identify when disclosure about one institution conveys meaningful information for others. Our findings highlight both the costs and benefits of bank transparency and suggest that disclosure is not always stability enhancing.

Beta Forecasting with Realized Beta Estimators and Machine Learning Algorithms
Doan, Bao Huy,Jayasuriya, Dulani,Lee, John B.,Reeves, Jonathan J.
This paper applies machine learning algorithms to the modeling of realized betas for the purposes of forecasting stock systematic risk. Forecast horizons range from 1 week up to 1 month. The machine learning algorithms employed are ridge regression, decision tree learning, adaptive boosting, gradient boosting, random forests and neural networks. We also evaluate forecasts from these algorithms against the forecasts generated from simple constant realized beta estimators. We find that the machine learning algorithms can generate lower beta forecast error, relative to current benchmarks in beta forecasting.Presented at the 40th International Symposium on Forecasting, October 26-28, 2020.

Competition for Attention in the ETF Space
Ben-David, Itzhak,Franzoni, Francesco A.,Kim, Byungwook,Moussawi, Rabih
Exchange-traded funds (ETFs) are the most prominent financial innovation of the last three decades. Early ETFs offered broad-based portfolios at low cost. As competition became more intense, issuers started offering specialized ETFs that track niche portfolios and charge high fees. Specialized ETFs hold stocks with salient characteristics--high past performance, media exposure, and sentiment--that are appealing to retail and sentiment-driven investors. After their launch, these products perform poorly as the hype around them vanishes, delivering negative risk-adjusted returns. Overall, financial innovation in the ETF space follows two paths: broad-based products that cater to cost-conscious investors and expensive specialized ETFs that compete for the attention of unsophisticated investors.

Crisis Propagation in a Heterogeneous Self-Reflexive DSGE Model
Federico Guglielmo Morelli,Michael Benzaquen,Jean-Philippe Bouchaud,Marco Tarzia

We study a self-reflexive DSGE model with heterogeneous households, aimed at characterising the impact of economic recessions on the different strata of the society. Our framework allows to analyse the combined effect of income inequalities and confidence feedback mediated by heterogeneous social networks. By varying the parameters of the model, we find different crisis typologies: loss of confidence may propagate mostly within high income households, or mostly within low income households, with a rather sharp crossover between the two. We find that crises are more severe for segregated networks (where confidence feedback is essentially mediated between agents of the same social class), for which cascading contagion effects are stronger. For the same reason, larger income inequalities tend to reduce, in our model, the probability of global crises. Finally, we are able to reproduce a perhaps counter-intuitive empirical finding: in countries with higher Gini coefficients, the consumption of the lowest income households tends to drop less than that of the highest incomes in crisis times.

Debt Shifting and Transfer Pricing in a Volatile World
Comincioli, Nicola,Panteghini, Paolo,Vergalli, Sergio
In this article we introduce a stochastic model with a multinational company (MNC) that exploits tax avoidance practices. We focus on both transfer pricing (TP) and debt shifting (DS) activities and show how their optimal level is chosen by the shareholders. In addition, we perform an extensive numerical simulation, fine-tuned on empirical data, to measure the impact of tax avoidance practices on the MNC’s value and to study their sensitivity to exogenous variables. We will show that: an increase in risk sharply reduces leverage and slightly decreases a MNC’s value; the cost of TP leads to a sharp reduction in the MNC’s value, whereas it does not affect leverage; the impact on MNC’s decisions is increasing in the tax rate differential; finally, the cost of DS has always a relevant impact on both MNC’s value and leverage.

Development of Digitalization Mechanism of Institute of Financial Ombudsman on Example of Ukraine
Pozniakova, Olena,Dobosh, Nazar
The object of research is the problem of the rights violation of consumers of financial services. The institute of financial ombudsman is important for this function. This is the person who successfully performs the function of settling disputes in many countries around the world. The authors have developed a mechanism for digitalization of the institute of financial ombudsman, which will help in resolving disputes and preventing them through a special electronic platform of the financial ombudsman, which would optimize the cooperation of consumers of financial services with the ombudsman. This model of interaction with the mediator will be especially useful during a pandemic, COVID-19, in particular. Let’s believe that the process of appealing to the financial ombudsman through electronic systems for submitting and receiving the information will ensure the efficiency of service delivery, equal access to the procedure of consultation, and protection of all segments of the population. Analytical review of consumer protection violations was carried out based on statistical data of Ukraine, but the proposal to introduce a mechanism for the financial ombudsman digitalization is quite simple and universal for implementation in many countries. Statistics on complaints about violations in the provision of financial services in both the banking and non-banking financial sectors indicate the need to pay more attention to simplifying citizens' appeals to the regulator. The authors' survey of young people confirmed a low level of trust in banking and non-banking financial market institutions. It is important that the mediator actively participates not only in the stage of appealing disputes but also in preventing them in the form of dialogue with the consumer and the implementation of the rights and obligations of both parties. This will ensure a high level of financial inclusion, increase public confidence in the financial sector, as well as the level of financial literacy of the population.

Do Environmental Regulations Do More Harm Than Good? Evidence from Competition and Innovation
Dai, Rui,Duan, Rui,Ng, Lilian
This study examines whether and how competition affects corporate strategic responses to stringent environmental policies. Using the nonattainment status of U.S. counties as a source of exogenous variation in environmental regulation, we find that competition fosters green innovation as firms respond to stricter regulatory policy. Additional analyses using a subsample of firms in counties whose pollutant concentrations are marginally above or below EPA standards for regional air quality and exploiting exogenous variations in product market competition further reinforce our baseline evidence. The results suggest that the cost of relocation is a critical mechanism that compels firms to innovate when responding to tightened environmental policies and heightened competitive pressure. Regulation-induced green innovation helps competitive firms better achieve product differentiation and attract more corporate customers than their less competitive peers. Finally, competitive firms' strategic responses to stringent environmental regulations result in improved market share growth, markup, profit margin, and abnormal return.

Does Acquisition Trigger Follow-up Acquisitions? The Role of Relative Financial Constraints
Li, Dongxu
Relative financial constraints can affect firms’ aggressiveness in industry competition. This paper examines how firms’ acquisition decisions are shaped by their financial constraints relative to peer firms. Using eight alternative proxies for financial constraints, I find that in the three years following a preceding acquisition in the industry, the non-constrained rivals tend to become acquirers while the constrained rivals are more likely to get acquired in the three years. The effect is more pronounced in M&A-intensive industries, among rivals with more growth opportunities and lower operating efficiency. Based on the stylized fact that firms’ relative financial constraints persist over time, I use firms’ two-year lagged relative financial constraints as the instrument to identify the causality. In addition, this paper shows that firms may become worse off if they do not make follow-up acquisitions. For the preceding acquisitions, the acquirer would earn higher abnormal returns and profit margins if the rivals are more financially constrained on average, suggesting that acquirers may gain market power absent rivals’ financial capability to compete. Overall, these findings indicate that considering the non-merging rivals’ relative financial constraints can be an alternative way to detect anticompetitive acquisitions.

Dynamics of contentment
Alexey A. Burluka

A continuous variable changing between 0 and 1 is introduced to characterise contentment, or satisfaction with life, of an individual and an equation governing its evolution is postulated from analysis of several factors likely to affect the contentment. As contentment is strongly affected by material well-being, a similar equation is formulated for wealth of an individual and from these two equations derived an evolution equation for the joint distribution of individuals' wealth and contentment within a society. The equation so obtained is used to compute evolution of this joint distribution in a society with initially low variation of wealth and contentment over a long period time. As illustration of this model capabilities, effects of the wealth tax rate are simulated and it is shown that a higher taxation in the longer run may lead to a wealthier and more content society. It is also shown that lower rates of the wealth tax lead to pronounced stratification of the society in terms of both wealth and contentment and that there is no direct relationship between the average values of these two variables.

Expectation Dispersion, Uncertainty, and the Reaction to News
Born, Benjamin,Dovern, Jonas,Enders, Zeno
Releases of key macroeconomic indicators are closely watched by financial markets. We investigate the role of expectation dispersion and economic uncertainty for the stock-market reaction to indicator releases. We find that the strength of the financial market response to news decreases with the preceding dispersion in expectations about the indicator value. Uncertainty, in contrast, increases the response. We rationalize our findings in a model of imperfect information. In the model, dispersion results from a perceived weak link between macroeconomic indicators and fundamentals that reduces the informational content of indicators, while higher fundamental uncertainty makes this informational content more valuable.

Firm Exports, Foreign Ownership, and the Global Financial Crisis
Eppinger, Peter,Smolka, Marcel
The exceptional export performance of foreign-owned firms is a well-established stylized fact, but the underlying mechanism is not yet fully understood. In this paper, we provide theory and empirical evidence demonstrating that this fact can be explained by ownership differences in access to finance. We develop a theoretical model of international trade featuring firm heterogeneity and credit market frictions in which foreign-owned firms can access foreign capital markets via their multinational parents. The model predicts a financial advantage of foreign ownership for exporting that gains importance as credit conditions deteriorate. To empirically identify this effect, we estimate a triple differences model using rich micro data from Spain that exploits the global financial crisis as an exogenous shock to credit supply. We find that foreign ownership significantly stabilized firm exports when liquidity dried out in the crisis, in particular among small and financially vulnerable firms.

Forecasting Expected and Unexpected Losses
Juselius, Mikael,Tarashev, Nikola
Extending a standard credit-risk model illustrates that a single factor can drive both expected losses and the extent to which they may be exceeded in extreme scenarios, ie “unexpected losses.” This leads us to develop a framework for forecasting these losses jointly. In an application to quarterly US data on loan charge-offs from 1985 to 2019, we find that financial-cycle indicators â€" notably, the debt service ratio and credit-to-GDP gap â€" deliver reliable real-time forecasts, signalling turning points up to three years in advance. Provisions and capital that reflect such forecasts would help reduce the procyclicality of banks’ loss-absorbing resources.

Frequency-Domain Information for Active Portfolio Management
Faria, Gonçalo,Verona, Fabio
We assess the benefits of using frequency-domain information for active portfolio management. To do so, we forecast the bond risk premium and equity risk premium using a methodology that isolates frequencies (of the predictors) with the highest predictive power. The resulting forecasts are more accurate than those of traditional forecasting methods for both asset classes. When used in the context of active portfolio management, the forecasts based on frequency-domain information lead to better portfolio performances than when using the original time series of the predictors. It produces higher information ratio (0.57 vs 0.45), higher CER gains (1.12% vs 0.81%), and lower maximum drawdown (19.1% vs 19.6%).

How Cyclical Are Stock Market Return Expectations? Evidence from Capital Market Assumptions
Dahlquist, Magnus,Ibert, Markus
We collect return expectations from the capital market assumptions of asset management firms that manage a combined USD 22.6 trillion in 2020. Consistent with rational expectations asset pricing models, asset managers' stock market return expectations are countercyclical and volatile: they are high when valuations are low and low when valuations are high. As U.S. equity valuations increased over the last decade, the ten-year expected U.S. equity premium declined from 4.6% per year at the beginning of the decade to 2.9% per year at the end of the decade and temporarily spiked by 2.0 percentage points during the COVID-19 induced market sell off in March 2020.

Information Processing Skills of Short Sellers: Empirical Evidence from the COVID-19 Pandemic
Schattmann, Levy,Strych, Jan-Oliver,Westerholm, P. Joakim
We aim to answer if superior performance by short sellers’ is generated by processing public information rather than by exploiting private information. To achieve this, we analyze if short sellers with healthcare expertise outperform in short selling of non-healthcare stocks compared to those with no healthcare expertise. Since we expect that any short sellers’ private information about healthcare stocks is unlikely to be material for non-healthcare stocks, we conclude that any observed outperformance in non-healthcare stocks is more likely caused by processing public information. As an identification strategy, we interpret the outbreak of the COVID-19 pandemic as a treatment to short sellers with healthcare expertise. Our measures of healthcare expertise are based on pre-COVID-19 performance related to either holding or covering a short position in healthcare stocks. Using a unique German sample of daily short selling data, we find that treated short positions identified by general shorting (covering) outperformance are associated with lower 10-day CARs for non-healthcare stocks by an economically significant magnitude of 4.3 percent (7.2 percent). Robustness test rule out that our results are also driven by the use of private information or non information-based trading advantages such as better funding or borrowing ability of observed short sellers.

Intergenerational transmission of culture among immigrants: Gender gap in education among first and second generations
Hamid NoghaniBehambari,Nahid Tavassoli,Farzaneh Noghani

This paper illustrates the intergenerational transmission of the gender gap in education among first and second-generation immigrants. Using the Current Population Survey (1994-2018), we find that the difference in female-male education persists from the home country to the new environment. A one standard deviation increase of the ancestral country female-male difference in schooling is associated with 17.2% and 2.5% of a standard deviation increase in the gender gap among first and second generations, respectively. Since gender perspective in education uncovers a new channel for cultural transmission among families, we interpret the findings as evidence of cultural persistence among first generations and partial cultural assimilation of second generations. Moreover, Disaggregation into country-groups reveals different paths for this transmission: descendants of immigrants of lower-income countries show fewer attachments to the gender opinions of their home country. Average local education of natives can facilitate the acculturation process. Immigrants residing in states with higher education reveal a lower tendency to follow their home country attitudes regarding the gender gap.

Internet Appendix to Large Dimensional Latent Factor Modeling with Missing Observations and Applications to Causal Inference
Xiong, Ruoxuan,Pelger, Markus
The Internet Appendix collects the proofs and additional results that support the main text. We show in simulations that our estimators perform well relative to alternative estimators and can be improved even further with an iterative approach. We also confirm that the distribution results, statistical power and robustness to misspecification hold under a variety of simulation setups. Lastly, we collect the detailed proofs for all the theoretical statements.

Internet Appendix: Does Wealth Play a Role in Socially Responsible Mutual Fund Investing?
Christiansen, Charlotte,Jansson, Thomas,Kallestrup Lamb, Malene,Noren, Vicke
Internet Appendix: Does Wealth Play a Role in Socially Responsible Mutual Fund Investing?The paper is available at SSRN:

Liquidity Shocks and Pension Fund Performance: Evidence From the Early Release Scheme
Brugler, James,Kim, Minsoo,Zhong, Zhuo
We study how expectations of fund flows causally affect fund performance by exploiting a quasi-natural experiment in the Australian pension system where an unexpected policy change temporarily allowed fund withdrawals from a pre-specified date in the future. Using fractions of young members, middle-aged members, and government co-contributions for low income earners as instrumental variables, we find an insignificant effect of expected fund outflows on fund performance. A potential explanation is that Australian superannuation funds preemptively engage in liquidity management in response to changes in expectations of future fund flows and that this helps to limit direct and indirect costs in the rebalancing process.

Longevity Perceptions and Saving Decisions During the Covid-19 Outbreak: An Experimental Investigation
Hurwitz, Abigail,Mitchell, Olivia S.,Sade, Orly
We experimentally study individuals’ perceptions about and advice to others regarding retirement savings and annuitization during the pandemic. Many people recommend that others save more for retirement, but those most affected by the pandemic tell others to save and annuitize less. We investigate two possible channels for this result and show that the pandemic does not substantially alter optimism regarding survival probabilities. Hence, we conclude that economic factors are driving our results. Consequently, some financial ramifications of the COVID-19 outbreak are yet to be revealed, as the pandemic is having longer-term effects on peoples’ willingness to save and annuitize.

Non-Equilibrium Skewness, Market Crises, and Option Pricing: Non-Linear Langevin Model of Markets with Supersymmetry
Halperin, Igor
This paper presents a tractable model of non-linear dynamics of market returns using a Langevin approach.Due to non-linearity of an interaction potential, the model admits regimes of both small and large return fluctuations. Langevin dynamics are mapped onto an equivalent quantum mechanical (QM) system. Borrowing ideas from supersymmetric quantum mechanics (SUSY QM), we use a parameterized ground state wave function (WF) of this QM system as a direct input to the model, which also fixes a non-linear Langevin potential. A stationary distribution of the original Langevin model is given by the square of this WF, and thus is also a direct input to the model. Using a two-component Gaussian mixture as a ground state WF with an asymmetric double well potential produces a tractable low-parametric model with interpretable parameters, referred to as the NES (Non-Equilibrium Skew) model. Supersymmetry (SUSY) is then used to find time-dependent solutions of the model in an analytically tractable way. The model produces time-varying variance, skewness and kurtosis of market returns, whose time variability can be linked to probabilities of crisis-like events. For option pricing out of equilibrium, the NES model offers a closed-form approximation by a mixture of three Black-Scholes prices, which can be calibrated to index options data and used to predict moments of future returns. The NES model is shown to be able to describe both regimes of a benign market and a market in a crisis or a severe distress.

Once Upon a Time in AMERIBOR
Macey-Dare, Rupert
October 2020 brought news of a pioneering first public issue of long term corporate debt with floating interest based on the AMERIBOR index, from Signature Bank. This was closely followed in December 2020 with the announcement that global bank Citi would begin market-making in AMERIBOR-based interest rate swaps, and then of the first publicized AMERIBOR-based interest rate swap between EDandF Mann and First Merchant Bank. Together this early evidence suggests that, AMERIBOR-based rates may well be becoming attractive to many market participants as replacements for USD Libor, in USD bond and derivative transactions, and after Libor's imminent decommissioning, AMERIBOR might well take over as the floating rate index of choice for many market participants, rather than say risk free alternative SOFR.N.B. AMERIBOR is a proprietary average interest rate calculated by AFX, the American Financial Exchange, as "the transaction volume weighted average interest rate of the daily transactions in the AMERIBOR overnight unsecured loan market on the AFX" and which "reflects the actual borrowing costs of thousands of small, medium and regional banks across America." It is thus highly relevant to US bank and corporate funding costs and hedging, and touted and designed to be a potential successor to USD Libor for these parties. Products provided or intermediated by AFX to its members include overnight and 30-day (1 month) and 90-day (3 month) unsecured loans and an indicative 30-day AMERIBOR-based forward rate. The Chicago Board of Exchange CBOE which has hosted AFX since AFX's inception in 2015, also provides additional exchange traded futures for simple and compounding average AMERIBOR rates over periods including: 7-day, 14-day, 30-day and 90-day, for contract periods starting out to a year or more.The first AMERIBOR-based public bond issue which settled on 6 October 2020, was a $375m 10-year fixed-floating (after 5 years) callable, subordinated bond (Section 3(a)(2) Note) for Signature Bank, ISIN USB2669GGCK85. For the 1st 5 years, i.e. until October 2025, the bond pays a fixed rate of 4% p.a. semi-annually. The bond can then be called at par after the 1st 5 years. However, for as long as it is not called over the floating period from years 5 to 10, the bond will pay "three month AMERIBOR" plus 389 basis points. This will give Signature Bank the option to continue this borrowing at 3.89% p.a. above its "three month AMERIBOR" index out as far as 2030 if advantageous at the time e.g. in terms of the market premia then applicable for risk, term, subordination, and liquidity.This October 2020 bond closely mirrored the structure of Signature Bank's two earlier funding bond issues. In April 2016 Signature had issued a $260m 10 year fixed-floating (after 5 years) callable, subordinated bond, which pays 5.3% interest p.a. semi-annually for the 1st 5 years until April 2021, and then 3m USD Libor + 3.92% for as long as not called over the next 5 year period until 2026. Then in November 2019 Signature had issued a $200m 10 year fixed-floating (after 5 years) callable, subordinated bond, which pays 4.125% interest p.a. semi-annually for the 1st 5 years until November 2024, and then 3m USD Libor + 2.559% for as long as not called over the next 5 year period until 2029. However as identified in the Risk Factors section of Signature Bank's end 2019 Form 10-K, all its Libor related transactions are exposed to Libor termination risk, and this plus Signature Bank's founder membership of AFX, no doubt contributed to it switching from USD Libor to AMERIBOR-based floating funding in its last bond issue. Indeed this might also pave the way for Signature Bank's earlier bonds to be amended in due course also to reference AMERIBOR rather than Libor, or alternatively to be swapped for AMERIBOR-based alternatives, and similarly for other bond issuersAn interesting point is that there is not currently a "three month AMERIBOR" rate fixing corresponding say to the daily 3m USD Libor fixing. Hence the "three month AMERIBOR" rate used in Signature Bank's latest bond may be a synthetic rate e.g. derived from traded futures or determined ex post or say from a function of current AMERIBOR. Thus the correlation between "three month AMERIBOR" rate used and 3m Libor fixings, may prove to be lower than the claimed historic 98-99% correlation between AMERIBOR and O/N Libor, but presumably will still be very high.The pioneering first publicized AMERIBOR-based swap in December 2020 was a 1 year $24m fixed-floating interest rate swap between EDandF Man and First Merchants Bank, with netted monthly payments and a floating "one month AMERIBOR" index, which may also be a synthetic rate. The relatively tiny, non-standard principal amount of this swap, plus the short 1 year maturity, and netted payments, together all mark this out as most probably a tentative, safe, "test-the-waters" first transaction, hedging specific AMERIBOR-based assets and liabilities. However likely future developments, if there are no glitches, include a developing AMERIBOR based interest rate swap market with broadening liquidity and market making from Citi and other banks, and longer term AMERIBOR-based interest rates both being quoted directly, and also being covered as standard in ISDA type Definitions for other derivatives transactions and bonds. Thus we may have just witnessed a critical tipping point from USD Libor towards AMERIBOR, and the moment when AMERIBOR-based yield curves, bond and derivative transactions all "took off"..."once upon a time in AMERIBOR."

Path-dependent Kyle equilibrium model
Giulia Di Nunno,José M. Corcuera

We consider an auction type equilibrium model with an insider in line with the one originally introduced by Kyle in 1985 and then extended to the continuous time setting by Back in 1992. The novelty introduced with this paper is that we deal with a general price functional depending on the whole past of the aggregate demand, i.e. we work with path-dependency. By using the functional It\^o calculus, we provide necessary and sufficient conditions for the existence of an equilibrium. Furthermore, we consider both the cases of a risk-neutral and a risk-averse insider.

Pension Deferral With Reference to Actuarial Fairness, Cost Neutrality, and Adverse Selection; a UK Perspective
Dagpunar, John
Persons who are eligible for a defined benefit social security pension may defer their pension and receive, through accruals, an extra pension or possibly a lump sum, on termination of deferral. In certain cases, partners of the deferrer may inherit such benefits. For such a scheme, the concept of actuarial fairness to a category of pensioners is defined. A scheme that is actuarially fair will not be cost neutral to the pension provider unless the discount rate is the same for both parties. In addition to this asymmetry, adverse selection will impact upon both actuarial fairness and cost to the provider. Expressions are derived for the cost penalty to the provider for attempting to achieve actuarial fairness both with and without an acknowledgement of adverse selection. Similarly, when the objective is to achieve cost neutrality for the provider, expressions for the cost to the deferrer are obtained. Some numerical examples are given in the case of the UK state pension scheme. Under present rules it is shown that there are significant departures from actuarial fairness, particularly for those who achieved state pension age before 6 April 2016 and those with partners eligible to inherit benefits. Even when a pension provider attempts to achieve either actuarial fairness or cost neutrality, if adverse selection is ignored, then significant departures from both are quite possible.

President’s Confidence and the Stock Market Performance
Bonaparte, Yosef
We show that the stock market pricing the presidential margin of victory in a nonlinear concave fashion, with a higher price for medium than slight or crushing victories. We conjecture that the margin of victory reflects president confidence and the ability to execute policies. A small margin sends instability signal to financial markets as a lack of confidence president, whereas a decisive victory provides excessive ‘political capital’ and a bold mandate to execute policies, which turns the president to be overconfident. Furthermore, margin of victory commoves with financial and political indicators: the greater the margin of victory the larger the policy uncertainty and partisan conflict. Our inference shed light on “the presidential puzzle,” as many Republican presidents won decisively (Raegan twice, Nixon, etc.), while more Democrats with medium victories. Collectively, president’s confidence affects the stock market and is a key exogenous determinant to consider.

Printing, Spoofing, Calling, and Flying â€" Some of the Perils of Exchange Rate FX Option Broking
Macey-Dare, Rupert
The recent UK Financial Conduct Authority FCA Final Notice 206018 of November 2020 imposed a fine of more than £3m against broking [Firm X] under FSMA 2000 s.206, for the abusive practice of so-called "printing" of fake trades in exchange rate (FX) options markets. "Printing" according to the FCA "involves a broker communicating to clients that a trade has been executed at a specified price and/or size when no such trade has taken place" and hence "trading decisions which factor in this information, amongst other sources of data, may therefore be made on an incorrect view of the market." To illustrate its case, the FCA provided 4 extremely high level examples of bogus "printed" Latin American (LATAM) exchange rate option trades, on 3 different dates in 2014, but without even specifying the particular exchange rate pairs, principal currency amounts, or purported transaction rates in its Final Notice. Much more granular related information has however previously been detailed in the US Commodity Futures Trading Commission CTFC's published complaint of 28 September 2018 against [Firm X group] companies and others, alleging violations, inter alia, of the US Commodity Exchange Act, and which is still subject to ongoing US proceedings. For example, the CTFC complaint alleged that: "Non-existent LATAM FX option trades flashed on New York-based clients’ [proprietary trading system] screens" and "In 2013 and 2014, this occurred over 200 times in LATAM currency pairs." including in USD v BRL (Brazilian Real) and USD v MXN (Mexican Peso) exchange rate options. The CTFC complaint also alleged an extensive underlying practice of "Flying prices" (also “known in the industry as “spoofing” or “calling” a trade”) whereby: "From January 2013 through December 2014, [the group's] LATAM brokers in New York posted over 25,000 LATAM FX option bids and offers using a [specific] alias. The vast majority, if not all, of these prices were "flown" â€" they did not represent an actual bid or offer from a trading institution." Similarly, the CTFC complaint alleged that "From approximately January 2014 to June 2014, a number of brokers from [the group's] London desk assisted in broking LATAM FX options for U.S.-based clients. During this period alone, [the group's] brokers posted over 6,900 LATAM FX option prices using a [specific] alias. The vast majority, if not all, of these prices were "flown" â€" they did not represent an actual bid or offer from a trading institution." Furthermore, CTFC alleged that "From at least 2008 and continuing through at least 2015, [the group's] brokers flew bids and offers to clients over voice (phone), instant message (“IM”), and [the proprietary trading system] on a daily basis. These brokers would fly bids and offers on [the proprietary trading system] by posting them under one of the various [group] aliases ..... Because the platform was anonymous, [counterparty] traders could not tell the difference between bids and offers that were flown by the brokers and bids and offers that were made by an actual trading institution." Any such practice of "flying prices" or "flying rates" on the broker screens would thus inevitably risk misleading specific market participants about the liquidity and concentration of trading interest, if any, at given levels in specific exchange rate option markets. This in turn could induce market participants to trade exchange rate options at times and rates when they otherwise would not, and so inevitably potentially sometimes also to incur losses that they otherwise would not. Printed trades, according to the CTFC allegation, would occur when 2 bogus bid and offers were matched up together by brokers on the [the proprietary trading system] screen system, which then automatically signaled to counterparties using [the proprietary trading system] that genuine exchange rate option trades had occurred at these rates and times. A related occurrence was the inadvertent acceptance of a single flying bid or flying offer price on [the proprietary trading system] by a counterparty. In such cases according to the CTFC allegation: "If a [group] broker got “paid” or “given” on a flown price, [then] the [group's] brokers would scramble to find an actual counterparty to step into the trade. If the broker was unable to find a counterparty he would... make up an excuse â€" to the trader to cover up the fact that the original bid or offer was not real." However even if a replacement real 2nd counterparty were found, this would still be later and ex post after the original actual trade time. According to the CTFC allegation therefore, the practice of "printing" bogus trades, which was the subject of the FCA Final Notice, was actually much less extensive than the underlying practice of "flying" bogus prices or rates. This is not surprising since in traded derivatives markets, such as exchange traded futures, there can for some less liquid contracts and months be large numbers of indicative quoted price levels at any time amongst which a smaller flow of discrete actual trades occurs. An added technicality in these examples above is that actual transaction prices were typically not being directly quoted and traded, but rather price-like "implied volatilities". This is because in a Black-Scholes type exchange rate option pricing model, the fair market value of a "call" on one currency in a currency pair and "put" on the other currency in the same currency pair, depends inter alia on: i) the original exchange rate level, ii) the option exchange rate strike level, iii) the time to maturity for the option, and iii) the implied volatility which is the key theoretical parameter estimated by traders. Other factors equal, as the implied volatility increases so the probability of any exchange rate moving by diffusion from its original level to the exchange rate option strike level before option maturity also increases and so the fair market option price also increases and can be backed out and calculated from the relevant equations accordingly. It still remains to be seen what will be the final outcomes of CTFC's published complaint of 28 September 2018, which is currently just unproven assertion, but the FCA Final Notice 206018 of November 2020 is likely to strengthen CTFC's hand, and CTFC clearly believe that they have extensive evidence on their side.

Renewable Power Trades and Network Congestion Externalities
Nayara Aguiar,Indraneel Chakraborty,Vijay Gupta

Integrating renewable energy production into the electricity grid is an important policy goal to address climate change. However, such an integration faces economic and technological challenges. As power generation by renewable sources increases, power transmission patterns over the electric grid change. Due to physical laws, these new transmission patterns lead to non-intuitive grid congestion externalities. We derive the conditions under which negative network externalities due to power trades occur. Calibration using a stylized framework and data from Europe shows that each additional unit of power traded between northern and western Europe reduces transmission capacity for the southern and eastern regions by 27% per unit traded. Such externalities suggest that new investments in the electric grid infrastructure cannot be made piecemeal. In our example, power infrastructure investment in northern and western Europe needs an accompanying investment in southern and eastern Europe as well. An economic challenge is regions facing externalities do not always have the financial ability to invest in infrastructure. Power transit fares can help finance power infrastructure investment in regions facing network congestion externalities. The resulting investment in the overall electricity grid facilitates integration of renewable energy production.

Scared into Action: How Partisanship and Fear are Associated with Reactions to Public Health Directives
Mike Lindow,David DeFranza,Arul Mishra,Himanshu Mishra

Differences in political ideology are increasingly appearing as an impediment to successful bipartisan communication from local leadership. For example, recent empirical findings have shown that conservatives are less likely to adhere to COVID-19 health directives. This behavior is in direct contradiction to past research which indicates that conservatives are more rule abiding, prefer to avoid loss, and are more prevention-motivated than liberals. We reconcile this disconnect between recent empirical findings and past research by using insights gathered from press releases, millions of tweets, and mobility data capturing local movement in retail, grocery, workplace, parks, and transit domains during COVID-19 shelter-in-place orders. We find that conservatives adhere to health directives when they express more fear of the virus. In order to better understand this phenomenon, we analyze both official and citizen communications and find that press releases from local and federal government, along with the number of confirmed COVID-19 cases, lead to an increase in expressions of fear on Twitter.

Should the government reward cooperation? Insights from an agent-based model of wealth redistribution
Frank Schweitzer,Luca Verginer,Giacomo Vaccario

In our multi-agent model agents generate wealth from repeated interactions for which a prisoner's dilemma payoff matrix is assumed. Their gains are taxed by a government at a rate $\alpha$. The resulting budget is spent to cover administrative costs and to pay a bonus to cooperative agents, which can be identified correctly only with a probability $p$. Agents decide at each time step to choose either cooperation or defection based on different information. In the local scenario, they compare their potential gains from both strategies. In the global scenario, they compare the gains of the cooperative and defective subpopulations. We derive analytical expressions for the critical bonus needed to make cooperation as attractive as defection. We show that for the local scenario the government can establish only a medium level of cooperation, because the critical bonus increases with the level of cooperation. In the global scenario instead full cooperation can be achieved once the cold-start problem is solved, because the critical bonus decreases with the level of cooperation. This allows to lower the tax rate, while maintaining high cooperation.

Skill versus Reliability in Venture Capital
Khanna, Naveen,Mathews, Richmond D.
We study competition for startups among VCs with heterogeneous skill. Those with established skill face two impediments. First, less established VCs compete aggressively for new startups in order to establish a reputation. Second, startups also value reliability in their VCs, which imposes a high cost on established VCs because they have better outside options. As a result, startups sometimes "over-experiment" by excessively partnering with less established VCs, which crowds out established skill and reduces social welfare. Established VCs are hurt because they pay more for relationships they form, lose profitable startups, and face competition from more newly established VCs.

Social Media, Content Moderation, and Technology
Yi Liu,Pinar Yildirim,Z. John Zhang

This paper develops a theoretical model to study the economic incentives for a social media platform to moderate user-generated content. We show that a self-interested platform can use content moderation as an effective marketing tool to expand its installed user base, to increase the utility of its users, and to achieve its positioning as a moderate or extreme content platform. The optimal content moderation strategy differs for platforms with different revenue models, advertising or subscription. We also show that a platform's content moderation strategy depends on its technical sophistication. Because of imperfect technology, a platform may optimally throw away the moderate content more than the extreme content. Therefore, one cannot judge how extreme a platform is by just looking at its content moderation strategy. Furthermore, we show that a platform under advertising does not necessarily benefit from a better technology for content moderation, but one under subscription does. This means that platforms under different revenue models can have different incentives to improve their content moderation technology. Finally, we draw managerial and policy implications from our insights.

Staged Equity Financing
Magnus, Blomkvist,Korkeamäki, Timo,Takalo, Tuomas
We propose a rationale for why firms often return to the equity market shortly after their initial public offering (IPO). We argue that hard to value firms conduct smaller IPOs, and that they return to the equity market conditional on positive valuation signal from the stock market. Thus, information asymmetry is not a necessary condition for staged financing. We find strong support for these arguments in a sample of 2,143 U.S. IPOs between 1981-2014. Hard to value firms conduct smaller IPOs, and upon positive post-IPO returns, they tend to return to the equity market quickly, following the IPO.

The English Patient: Evaluating Local Lockdowns Using Real-Time COVID-19 & Consumption Data
John Gathergood,Benedict Guttman-Kenney

We find UK 'local lockdowns' of cities and small regions, focused on limiting how many people a household can interact with and in what settings, are effective in turning the tide on rising positive COVID-19 cases. Yet, by focusing on household mixing within the home, these local lockdowns have not inflicted the large declines in consumption observed in March 2020 when the first virus wave and first national lockdown occurred. Our study harnesses a new source of real-time, transaction-level consumption data that we show to be highly correlated with official statistics. The effectiveness of local lockdowns are evaluated applying a difference-in-difference approach which exploits nearby localities not subject to local lockdowns as comparison groups. Our findings indicate that policymakers may be able to contain virus outbreaks without killing local economies. However, the ultimate effectiveness of local lockdowns is expected to be highly dependent on co-ordination between regions and an effective system of testing.

The Ideological Use and Abuse of Freiburg's Ordoliberalism
Dold, Malte F.,Krieger, Tim
In the aftermath of the Eurozone crisis, a battle of ideas emerged over whether ordoliberalism is part of the cause or the solution of economic problems in Europe. While German ordoliberals argued that their policy proposals were largely ignored before, during and after the crisis, critics saw too much ordoliberal influence, especially in form of austerity policies. We argue that neither view is entirely correct. Instead, we observe that the battle of ideas is largely independent of the countries’ actual responses to the Eurozone crisis: pragmatic self-interest on behalf of governments rather than their ideological convictions played a crucial role in political reactions. We explain this dynamic game-theoretically and highlight a number of reasons for the decoupling of the political-pragmatic debate from the ideological-academic discourse. In addition, we argue that ordoliberals themselves contributed to the ideological misuse of their own program: the ordoliberal Freiburg School ceased to be an active research program and instead grew to resemble a tradition which all too often disregarded the international academic discourse, in particular in macroeconomics. As a result, ordoliberal thinking was abused by its proponents and critics alike to emphasize their preconceived Weltanschauung (worldview).We end our paper with some thoughts on how a contemporary ordoliberalism can be constructively used to react to some of the challenges of the ongoing Eurozone crisis.

The Life and Death of Zombies â€" Evidence from Government Subsidies to Firms
Nurmi, Satu,Vanhala, Juuso,Virén, Matti
We analyze the demographics of zombie firms and durations of zombie spells as well as their determinants, including an application on public subsidies using firm level population panel data from Finland. Firm-level analysis of firm demographics reveals that zombie-firms, as commonly defined in the literature, are often not truly distressed firms but rather companies with temporarily low revenues relative to interest payments. More importantly, we find that roughly a third of these firms are in fact growing companies and two thirds recover from the zombie status to become healthy firms. We also show that the increase of zombie firms over the past 15 years has mainly been driven by cyclical factors, as opposed to a secular trend. In our policy application on government subsidies to firms, estimation results strongly suggest that subsidy-receiving firms are less likely to die, regardless of the type of subsidy. However, with regard to recovery there is heterogeneity in the effects depending on the type of firm and the type of subsidy received. Thus, we do not find a robust positive association of subsidies with zombie recovery.

The Role of Creditor Protection in Lending and Tax Avoidance
De Vito, Antonio,Jacob, Martin
We examine how creditor rights affect the trade-off between non-debt and debt tax shields. Using four bankruptcy reforms, a panel of private and public firms, and tax return data from Italy, we show that laws empowering creditors reduce tax avoidance and increase debt financing, consistent with firms substituting non-debt tax shields with debt tax shields. We corroborate the validity of our findings using a panel of public firms across 33 countries. We document that the impact of creditor protection laws is mitigated by tax system characteristics, which significantly reduce the incentives to substitute tax avoidance with debt.

The Role of the Duty of Best Execution in Off-Exchange Market Making: Persistent Issues and Their Emerging Iterations
Dolgopolov, Stanislav
This Article discusses the role of the duty of best execution in off-exchange market making and covers such issues as systematic internalisers under MiFID II, payment for order flow, zero-commission trades, IEX’s D-Limit order type, and price improvement.

The Vulnerability of Tourism Firms’ Stocks to the Terrorist Incidents
Hadi, Dlawar M.,Katircioglu, Salih Turan,Adaoglu, Cahit
This study investigated the effects of terrorist attacks on the stock performance of tourism, travel, and leisure industries. The major tourist countries have been selected for this purpose. The novelty of this research is that not only it focuses on the relationship between terrorism and tourism stock performance and volatility but also uses an event study to examine this relationship. The results of this study revealed the significant effects of terrorist attacks on tourism firms’ performance and stock volatility in France, Spain, Thailand, Turkey, the United Kingdom, and the United States, while no significant effects were obtained for China and Germany. The overall panel event study analysis as well as the event study for individual countries illustrated the considerable adverse effects of terrorist attacks on firms’ performance in tourism, travel, and leisure industries.

Time-Frequency Forecast of the Equity Premium
Faria, Gonçalo,Verona, Fabio
Any time series can be decomposed into cyclical components fluctuating at different frequencies. Accordingly, in this paper we propose a method to forecast the stock market's equity premium which exploits the frequency relationship between the equity premium and several predictor variables. We evaluate a large set of models and find that, by selecting the relevant frequencies for equity premium forecasting, this method significantly improves in both statistical and economic sense upon standard time series forecasting methods. This improvement is robust regardless of the predictor used, the out-of-sample period considered, and the frequency of the data used.

Türk Bankacılık Sektöründe Kovid-19 Döneminde Alınan Tedbirler Bağlamında Aktif Rasyosu Düzenlemesinin Muhtemel Etkileri: Mevduat Bankaları Üzerine Bir İnceleme (Possible Effects of Asset Ratio Regulation in the Context of Measures Taken in the COVID-19 Period in the Turkish Banking Sector: An Examination upon Deposit Banks)
Kartal, Mustafa Tevfik
Turkish Abstract: Ülkeler, tüm dünyayı etkisi altında alan Kovid-19 pandemisinin ekonomiler, reel ve finansal kesim üzerindeki negatif etkilerinin azaltılmasına yönelik çeşitli önlemler almaktadırlar. Bu kapsamda, ilk vakanın 11 Mart 2020 tarihinde tespit edildiği Türkiye’de de para ve maliye politikaları ile idari tedbirleri içeren önlemler alınmaktadır. Bankacılık Düzenleme ve Denetleme Kurulu (BDDK) tarafından 18 Nisan 2020 tarihinde alınan kararla 1 Mayıs 2020 tarihinde yürürlüğe girecek olan aktif rasyosu, bankacılık sektörü açısından son dönemde alınan önemli tedbirlerden birisini oluşturmaktadır. Hedef aktif rasyosu, mevduat bankaları için ilk etapta %100 olarak belirlenmiş, daha sonra ise bazı değişiklikler yapılmıştır.Bu çalışma, söz konusu düzenlemesinin mevduat bankaları üzerindeki muhtemel etkilerinin değerlendirilmesi amacıyla hazırlanmıştır. 2019 Eylül finansal verilerine göre yapılan incelemede, mevcut durumda kamu mevduat bankalarının hedef aktif rasyosunu sağladıkları, aktif rasyosunu tutturmada ise çoğunlukla yabancı mevduat bankalarının geride olduğu belirlenmiştir. Diğer taraftan, düzenlemenin içeriğinde çeşitli açılardan eksiklikler olduğu belirlenmiştir. Bu hususlar dikkate alınarak, aktif rasyosu düzenlemesinin süratli bir şekilde revize edilerek iyileştirilmesi, Türk bankacılık sektörü üzerinde olumsuz etkilere neden olmaması açısından kritik önem taşımaktadır. Bu kapsamda, yapılan ek düzenlemelerle bazı eksiklikler giderilmiş olup diğer hususlarda da aksiyon alınması önerilmektedir. English Abstract: Countries have been disclosing various measures to reduce the negative effects of the COVID-19 pandemic on economies, the real and the financial sector, which has influenced the whole world. In this context, Turkey also has been taking measures including administrative measures with monetary and fiscal policies at where the first case was detected on March 11, 2020. Active ratio, which will come into force on May 1, 2020 with the decision taken by the Banking Regulation and Supervision Board (BRSB) on April 18, 2020, is one of the most important measures taken recently for the banking sector. The target asset ratio is determined as 100% for deposit banks in the first stage and some changes have been made in later times.This study is prepared to evaluate the possible effects of the regulation on deposit banks. According to the examination that consider 2019 September data, it is determined that public deposit banks currently maintain target asset ratio while foreign deposit banks are lagging behind in the target asset ratio. On the other hand, it has been determined that there are deficiencies in the content of the regulation from various aspects. Taking these issues into consideration, it has the critical importance to revise the asset ratio regulation rapidly in order not to cause adverse effects on Turkish banking sector. In this context, some deficiencies have been completed with the additional regulations, and it is recommended that additional measures should be taken for remaining deficiencies.